Canadian Imperial Bank of Commerce : 2024 Q2 financial reportsQ1 financial reports Transcript

CIBC Q1 2024 Earnings Conference Call

February 29, 2024

Disclaimer

The information contained in this transcript is a textual representation of the Canadian Imperial Bank of Commerce ("CIBC") Q1 2024 earnings conference call and while efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. In no way does CIBC assume any responsibility for any investment or other decisions made based upon the information provided on CIBC's web site or in this transcript. Users are advised to review the webcast (available at https://www.cibc.com/en/about-cibc/investor-relations/quarterly-results.html)itself and CIBC's regulatory filings before making any investment or other decisions.

Forward Looking Information

From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including in this site, in filings with Canadian securities regulators or the U.S. Securities and Exchange Commission and in other communications. These statements include, but aren't limited to, statements about potential events and about our financial condition, priorities, targets, ongoing objectives, strategies and outlook. A variety of factors, many of which are beyond our control, affect our operations, performance and results and those of our business lines, and could cause actual results to differ materially from the expectations expressed in any of our forward-looking statements. We don't undertake to update any forward-looking statement except as required by law. For further details, refer to "A Note About Forward-Looking Statements" in our most recent Annual Report and Quarterly Report to Shareholders located at https://www.cibc.com/en/about-cibc/investor-relations/quarterly-results.html.

Corporate Participants

Geoff Weiss

Senior Vice-President, Investor Relations & Performance Measurement

Victor G. Dodig

President and Chief Executive Officer

Hratch Panossian

Senior Executive Vice-President and Chief Financial Officer

Frank Guse

Senior Executive Vice-President and Chief Risk Officer

Jon Hountalas

Senior Executive Vice-President and Group Head, Canadian Banking

Shawn Beber

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CIBC Q1 2024 Earnings Conference Call Transcript - February 29, 2024

Senior Executive Vice-President and Group Head, U.S. Region; President and Chief Executive Officer, CIBC Bank USA

Harry Culham

Senior Executive Vice-President and Group Head, Capital Markets and Direct Financial Services, Canada

Other Participants

Ebrahim H. Poonawala

Analyst, BofA Securities, Inc.

Gabriel Dechaine

Analyst, National Bank Financial, Inc.

Meny Grauman

Analyst, Scotiabank

Lemar Persaud

Analyst, Cormark Securities Inc.

Mario Mendonca

Analyst, TD Securities, Inc.

Nigel D'Souza

Analyst, Veritas Investment Research Corp.

Darko Mihelic

Analyst, RBC Dominion Securities, Inc.

Sohrab Movahedi

Analyst, BMO Capital Markets Corp. (Canada)

Doug Young

Analyst, Desjardins Securities, Inc. (Canada)

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CIBC Q1 2024 Earnings Conference Call Transcript - February 29, 2024

Management Discussion Section

Operator

Good morning, and welcome to the CIBC Quarterly Financial Results Call. Please be advised that this call is being recorded.

I would like to turn the meeting over to Geoff Weiss, Senior Vice President, Investor Relations. Please go ahead, Geoff.

Geoff Weiss, Senior Vice-President, Investor Relations & Performance Measurement

Thanks very much, and good morning, everyone. We will begin this morning with opening remarks from Victor Dodig, our President and Chief Executive Officer. Followed by Hratch Panossian, our Chief Financial Officer; and Frank Guse, our Chief Risk Officer.

Also on the call today are a number of our group heads including Shawn Beber, US Region; Harry Culham, Capital Markets and Direct Financial Services; and Jon Hountalas, Canadian Banking. They're all available to take questions following the prepared remarks.

Once again, this quarter, we have a hard stop at 8:30. To give everyone an opportunity to participate, please limit your questions to one. As noted on slide 2 of our investor presentation, our comments may contain forward-looking statements which involve assumptions and have inherent risks and uncertainties. Actual results may differ materially.

With that, I will now turn the call over to Victor.

Victor G. Dodig, President and Chief Executive Officer

Thank you, Geoff, and good morning, everyone. On today's call, I'll provide a brief high level overview of our Q1 results, followed by an update on the progress we're making against key strategic initiatives. Building on the growth momentum we've established over the last few years, we delivered a strong start to this fiscal 2024 year.

We continue to successfully navigate through a fluid economic backdrop and execute on our client centric strategy supported by the addition of 700,000 net new clients over the last 12 months. Our performance this quarter was a reflection of our diversified business model and a strategy that is working.

Turning to our adjusted results for the first quarter, we reported net earnings of CAD 1.8 billion, an earnings per share of CAD 1.81. These results were driven by record revenue and prudent expense management, resulting in 8% pre-provisionpre-tax earnings growth, and 2% positive operating leverage.

Our capital position remains strong with a CET1 ratio of 13%. This positions us comfortably above regulatory requirements and internal targets, allowing us to continue deploying capital in support of our clients. Our adjusted return on equity was 13.8% during the quarter.

Helping our clients realize their ambitions is our north star. As we've articulated in the past, our strategy is supported by four key priorities that are aligned to long-term market opportunities and competitive advantages that we have built within our bank.

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CIBC Q1 2024 Earnings Conference Call Transcript - February 29, 2024

Our first strategic priority is to grow our mass affluent franchise in Canada, as well as our private wealth franchise on both sides of the border to drive growth in deposits, investments and enhanced returns. To enable this, we've made important investments in our unique Imperial Service and Private Wealth businesses to elevate our platform capabilities.

As an example, we're leveraging our predictive client analytics to deepen relationships and accelerate high value client introductions from Personal Banking to Imperial Service, resulting in robust inflows of client assets.

In Canadian Private Wealth, financial plans completed by our clients were up 54% year-over-year. This is a great example of how we're leveraging modern financial planning technology and our strong advice capabilities to deliver improved client experience and build deeper, longer term relationships.

Finally, in the US we're building on our industry leading CIBC Private Wealth platform for high net worth client segments because during the quarter we continued to invest in our talent and our physical presence in strategic growth markets, including Boston, South Florida and San Francisco.

Our second priority is to attract and deepen relationships with our Personal Banking clients by leveraging our CIBC digital capabilities, including through our Simplii Financial platform. Improvements in our digital channels meet our clients evolving needs for self-service capabilities. This quarter we were the first of our competitors to introduce a new digital banking solution bundle, leveraging AI to streamline the application process for newcomers to Canada into a single digital application.

In our Canadian Personal Banking platform, we're seeing a digital adoption rate of 86%. While improvements in our retail offering have resulted in 38% of product sales originated digitally.

In Simplii Financial, our direct digital bank, we're also seeing strong momentum with 180,000 net new clients added over the last 12 months. We will continue to expand our digital channels and capabilities to build our pipeline of clients for future growth.

The third priority of our strategy centers on our highly connected platform across the bank to drive referrals, to generate recurring revenue and to enhance relationship returns. It's something our clients say differentiates us, and it provides us with a competitive advantage in a world where capital requirements and costs continue to increase.

On both sides of the border, we have a unique organizational structure that combines Commercial Banking with Wealth Management. In Canada, 31% of our commercial clients have a CIBC Private Wealth relationship. In the US, that number is 17%. While we've been making progress on both sides of the border, there is room to grow.

Also, core to the strategic priority is our differentiated Capital Markets business, which delivered record revenues in the first quarter. Global markets client activity was seasonally higher this quarter and is likely to normalize, but we expect a continued recovery in M&A activity and a pickup in corporate bond issuances through the year to provide a tailwind to this business. We're excited about the opportunity ahead, as we continue to leverage a connected approach across our bank to deliver a seamless and holistic client experience, to deepen our relationships and enhance returns.

Finally, our fourth priority is to enable, simplify and protect our bank to ensure that we maintain operational resilience and improve the efficiency with which we deliver for our clients.

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CIBC Q1 2024 Earnings Conference Call Transcript - February 29, 2024

Over the past few years, we've made significant technology investments across our businesses to improve client experience, enhance revenue growth, increase productivity, and generate positive operating leverage. As we look forward, we are increasingly leveraging AI to drive this strategy and have already unlocked high impact use cases across our bank.

This kind of innovation presents tremendous opportunity and we will continue to be responsible as we adopt these tools to create sustainable benefits for all stakeholders.

A review of our strategy would not be complete without highlighting our commitment to supporting a more sustainable world through our focus on the environment, social investment in our communities, and delivering on high standards of governance.

During the quarter, we were selected by the Government of Canada as the Sole Structuring Advisor on its recently updated Green Bond Framework. We also issued our own €500 million CIBC Green Bond to fund eligible projects aligned with our sustainability strategy.

Putting it all together, our disciplined execution will lead to growth in our client franchise and improved returns for our shareholders as we focus on targeted client segments, advance our digital capabilities, and deepen connectivity all while maintaining a laser focus on efficiency. And we expect the relative outperformance we've demonstrated to continue supported by the positive outcomes of our strategy.

And with that, I'll turn the call over to Hratch. Over to you.

Hratch Panossian, Senior Executive Vice-President and Chief Financial Officer

Thank you, Victor. And good morning, to you all. As Victor said, we're pleased to deliver another strong quarter to kick off fiscal 2024 as laid out on slide 7.

Our team's consistent and strong execution against the strategic priorities Victor described, continues to drive sustainable growth and profitability in line with our targets. This quarter, solid client activity across our diversified business, margin expansion and productivity gains contributed to diluted earnings per share of CAD

1.77 and ROE of 13.5% on a reported basis. Excluding the items of note, adjusted EPS was CAD 1.81 and adjusted ROE was 13.8%.

Strong capital generation and liquidity further bolstered our resilient balance sheet, ending the quarter with a CET1 ratio of 13%, and average LCR of 137%, both of which exceed our normal course of operating targets.

The balance of my presentation will refer to adjusted results which exclude items of note, starting with slide 8. Adjusted net income of CAD 1.8 billion decreased 4% year-over-year due to the impact of the credit cycle on credit losses, which Frank will discuss in more detail. Supported by the strategic investments we've made in recent years, we delivered a record revenue of CAD 6.2 billion this quarter, up 5% from a year ago.

We also continued to successfully balance ongoing investments in our business with efficiency gains to contain expense growth and generate positive operating leverage of over 2%. Resulting record pre-provisionpre-tax earnings of CAD 2.9 billion increased 8% year-over-year aligned with our medium-term earnings growth target.

Slide 9 and 10 highlight key trends and drivers of net interest income. Excluding trading, NII was up 6% over the year, driven by continued balance sheet growth and improving margins.

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CIBC Q1 2024 Earnings Conference Call Transcript - February 29, 2024

Total bank NIM, excluding trading, was up 6 basis points from the prior quarter and year, partly helped by classification changes associated with the implementation of FRTB, which contributed 3 basis points. The balance of the increase was from continued margin expansion consistent with our guidance.

Canadian P&C NIM of 268 basis points was up 1 basis point sequentially, largely due to balance sheet repricing to higher rates net of higher interest expense on deposits.

In the US segment NIM of 349 basis points was up 5 basis points from the prior quarter, mainly due to improved loan margins and deposit growth in excess of earning assets.

As we've often communicated, we position our balance sheet to stabilize margins and drive sustainable NII growth. While we continue to expect some upwards momentum, margins will start stabilizing over the next few quarters based on current rate forecast.

With that, let's turn to further detail on our balance sheet on slide 10. Average client loans and deposits continued to grow, but slowed in line with industry trends. Average loans and deposits grew 2% year-over-year and sequentially our stable, well-diversified deposit base grew 3% and experienced a modest mix shift to higher cost term deposits during the quarter. We expect continued growth in client loans and deposits at healthy margins to support NII going forward.

Turning to slide 11, non-interest income of CAD 3 billion was up 9% from the prior year due to growth in trading revenues as well as market related and transactional fees. Excluding trading, market related fees increased

3% year-over-year as higher underwriting, advisory and investment management and custodial revenues were partly offset by a lower mutual fund fees and FX related to treasury funding activities.

Transaction related fees were up 4% year-over-year, driven by growth in credit, as well as deposit and payment fees.

Slide 12 highlights our continued success in balancing investments with productivity gains to manage overall expense growth. Year-over-year expense growth of 3% continued to moderate in line with our guidance.

Over the last year, we crystallized almost 2% in efficiencies while maintaining a higher level of strategic investment across our bank. This allowed us to deliver positive operating leverage of over 2%, as investments made over the last few years supported the revenue growth in excess of our net expense growth.

For fiscal 2024, we continue to expect expense growth at the low-end of mid-single-digits and we're targeting positive operating leverage barring a material change in the revenue outlook.

Slide 13 highlights the strength of our balance sheet. We improved our CET1 ratio to 13% over the quarter, driven by organic capital generation, share issuance and RWA reductions driven by the implementation of methodology changes net of organic growth in the quarter.

Methodology changes this quarter included the adoption of the internal ratings based approach for the majority of our US bank portfolio and the implementation of new regulatory approaches related to FRTB, CVA and negative amortization mortgages.

Based on the strength of our capital position and current outlook, we intend to eliminate the discount on our DRIP program after the payment of our Q2 dividend on April 29.

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CIBC Q1 2024 Earnings Conference Call Transcript - February 29, 2024

Our liquidity position improved further during the quarter, helped by deposit growth in excess of loans, resulting in the average LCR of 137%. With both our capital and liquidity ratios ahead of normal course operating targets, we are well-positioned to withstand any potential macro headwinds while deploying balance sheet to support our clients and drive growth when market activity picks up.

Starting on slide 14, we highlight our strategic business unit results. Net income in Personal & Business Banking was CAD 655 million, up 10% year-over-year, supported by core business momentum, offset by higher credit provisions.

Benefiting from recent investments and strong execution, this segment delivered a 25% increase in pre- provision pre-tax earnings supported by revenue momentum and strong operating leverage.

Revenues of CAD 2.5 billion were up 10% year-over-year, helped by a 25 basis point increase in margins, along with volume growth on both sides of the balance sheet.

Expenses of CAD 1.3 billion were down modestly from the prior year, as the business redirected resources over the last year to support its current strategic priorities. We expect expenses to increase over the year and maintain our guidance for a full year growth in the low- to mid-single-digit range.

Turning to slide 15, net income in Commercial Banking & Wealth Management for the quarter was CAD 498 million. Pre-provisionpre-tax earnings of CAD 705 million were up 3% from a year ago, largely supported by the Wealth Management business. Revenues of CAD 1.4 billion were up 2% from the prior year, as Wealth Management revenues increased 3% while commercial banking revenues were comparable to last year.

Our combined Canadian personal and commercial franchise continues to exhibit strong momentum, delivering revenue growth of 8%, operating leverage of 7% and pre-provisionpre-tax earnings growth of 15% over the prior year. Additional details on our best-in-class Canadian franchise have been included in the appendix.

Turning to US Commercial Banking and Wealth Management, net income of $48 million was down from the prior year, largely due to higher credit provisions in the office portfolio.

Revenues were down 4% from last year, partly due to a lower annual performance fee in Wealth Management. Excluding these performance fees in both periods, revenues were up 1% from core business momentum.

Expenses were up 4% year-over-year, reflecting investments across our business and infrastructure which we expect to sustain. We remain focused on scaling our US business and are positioned to drive long-term profitable growth across both Commercial Banking and Wealth Management.

Turning to slide 17, net income of CAD 575 million in Capital Markets and DFS was down 6% year-over-year. Revenues of CAD 1.5 billion were up 2% over the prior year, driven by strength across all business lines, which more than offset the impact of the federal budget proposal in our markets business.

Excluding the impact of this budget proposal, reported revenues were up 5%, supported by a 14% increase in Corporate & Investment Banking and a 5% increase in Direct Financial Services.

Expenses of CAD 712 million were up 10% compared to the prior year, largely due to continued investments in growth and higher employee related compensation.

Finally, slide 18 reflects the results of the corporate and other business units. Net loss of CAD 23 million compared with a net loss of CAD 47 million in the prior year as higher revenue from a lower TEB offset and

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CIBC Q1 2024 Earnings Conference Call Transcript - February 29, 2024

lower credit provisions were partly offset by higher expenses. This quarter's expenses included one-time costs related to the outsourcing of our cheque processing operations, as we've taken yet another step to simplify our bank.

In closing, we're proud of the results our team delivered this quarter. Record revenues in pre-provisionpre-tax earnings reflect strong execution against our strategy and momentum across our diversified but connected franchise. Combined with our strong balance sheet, this momentum positions us well to navigate an environment that continues to be fluid, as we remain intensely focused on achieving our medium-term strategic and financial targets.

With that, I'll turn the call over to Frank.

Frank Guse, Senior Executive Vice-President and Chief Risk Officer

Thank you, Hratch. And good morning, everyone. Our credit portfolio has performed within our expectations this quarter and in line with the current macroeconomic environment. In the US, we've made good progress managing through the stressed office environment and are now through the majority of substantive issues in this portfolio.

All other commercial real estate sectors within our Canadian and US portfolios have been performing well with no systemic issues. Our allowance levels remain robust for expected changes in the economy.

Turning to slide 22. Our total provision for credit losses was CAD 585 million in Q1, compared to CAD 541 million last quarter. Over the past 12 months, our allowance levels have grown by over CAD 800 million, or 14 basis points, creating further resilience for future changes in the macro economy.

Our performing provision was CAD 93 million in Q1, mainly attributable to an increase in provisions for the US office sector, model parameter updates and credit migration.

Provision on impaired loans was CAD 492 million, which is up slightly CAD 14 million quarter-over-quarter. And this was largely due to higher impairments in the Canadian real estate portfolios and was offset by lower impairments in the US commercial portfolios.

Slide 23 summarizes our gross impaired loans and formations. Gross impaired balances were up slightly in Q1, mainly driven by our Canadian retail portfolio, as well as the commercial real estate sector in the US, partially offset by write-offs in business and government loans. Overall, new formations remained relatively stable quarter-over-quarter, with the increase in retail offset by a reduction in business and government.

Slide 24 summarizes the net write-offs and 90+ day delinquency rates of our Canadian consumer portfolios. We've seen 90+ day delinquency rates trending higher over the past 12 months, reflecting the impact of higher rates and cost pressures our clients are facing. However, the overall credit quality and portfolio health of our clients remains strong. Our credit card and mortgage delinquency rates continue to remain below 2019 levels.

Slide 25 provides an overview of our Canadian real estate secured personal lending portfolio. The 90+ day delinquency rates trends reflect the continued seasoning of prior vintages coupled with the slower housing market. We remain comfortable with this portfolio given the overall reasonable loan-to-value metrics and do not expect to see material losses in this portfolio.

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CIBC Q1 2024 Earnings Conference Call Transcript - February 29, 2024

Consistent with last quarter, our analysis on clients who are renewing in the next 12 months demonstrates that only 1% of these renewal balances are clients at higher risk from a credit perspective.

We've included an updated version of the previous stressed mortgage disclosure slide on page 42 of this presentation.

Turning to slide 26, we are providing an updated view of our US office portfolio. Our team's focus has reduced the portfolio by more than 10% year-over-year. This quarter we also increased the performing allowance from 9.1% to 13.7%.

Assuming market conditions don't materially deteriorate, we expect to see more muted P&L and capital impacts in office for the remainder of the year. We've managed through the majority of stressed loans. In line with the comments made in prior quarters, we expect impaired levels to decline in the back half of 2024.

This quarter we've also included incremental disclosures in the appendix on our multi-family exposures, both in Canada and the US. Multi-family continues to exhibit strong credit performance with very limited watchlist and impaired exposures. We've also not seen any losses in this portfolio in the last 12 months.

In closing, while loan losses trended marginally higher in Q1, the portfolio continues to perform well within our expectations. The economy evolves, our allowance levels remain strong and provide us prudent levels of coverage. We expect our office portfolio to have the vast majority of issues well provisioned with impairment levels reducing in the quarters ahead.

I will now turn the call back to the operator.

Question and Answer Section

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions] Thank you for your patience. The first question is from Gabriel Dechaine, National Bank Financial. Please go ahead.

Gabriel Dechaine, Analyst, National Bank Financial

Hi. Good morning. Yeah, I just want to go back to that CRE commentary. So, can you maybe explain a bit more why you believe the most problematic loans have been dealt with or are in the rearview mirror?

And at a high level, that portfolio has been about one-third of your impaired loan losses over the past four quarters. As that moderates, is it your expectation that there'll be - that'll be a natural offset to higher impaired loans across the rest of the bank portfolios like the Canadian consumer, et cetera, so that you're going to stick within your expected loss guidance, loss ratio guidance?

Frank Guse, Senior Executive Vice President and Chief Risk Officer

Yeah, sure. So I'll tackle them one by one. So on the US office, specifically, we have done and we've said that in prior quarters, we have done a very thorough assessment of the portfolio. We have a team of specialists working on that portfolio on an ongoing basis. And with that, we feel comfortable that we have identified, provisioned all of the stressed loans that we expect in that portfolio.

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CIBC Q1 2024 Earnings Conference Call Transcript - February 29, 2024

And with that, when I said more muted P&L impact, what we should expect to see is some migration into impaired, but that should be largely offset by a reduction in our performing allowances. And then if we take one step further, once we get into the recovery and resolution of those files, we should also see a release from an RWA perspective, given the amount of capital we hold from an unexpected loss perspective against those loans.

And to your second question, as we always guided, yeah, there will be a moderation in that and that will offset some of the expected gradual increases that we should or could see in other portfolios. And all of that well within our guidance of mid-30s that we provided earlier.

Gabriel Dechaine, Analyst, National Bank Financial

Perfect. Thanks.

Operator

Thank you. The next question is from Meny Grauman from Scotiabank. Please go ahead.

Meny Grauman, Analyst, Scotiabank

Hi. Another credit related question. Obviously, we're seeing some stress across the group in terms of unsecured credit cards specifically. Frank, I'm curious if you're seeing any sort of interesting patterns in how these portfolios are performing. Specifically, I'm wondering, the Costco portfolio relative to the other card portfolios that you have, is there any divergence in performance there? And then also in terms of single product clients versus multiproduct clients, anything there that you would note?

Frank Guse, Senior Executive Vice President and Chief Risk Officer

Well, I mean, overall, I would say the portfolio in cards specifically is performing as expected, so well within our expectations. We always expected it to trend up. We call it normalization. We are still favorable to what we would have seen pre-pandemic.

You touched on some of the trends. So our co-brand card portfolio is exhibiting and we expect that better credit quality and that is, of course, supporting the overall portfolio. But we also continue to invest in business strategies, risk strategies to improve that and those are proving to be quite successful as well.

In all of that, I wouldn't say there's any other trends to call out specifically. I mean, one maybe we have always talked about a deeper franchise client is usually performing better from a credit perspective. So, that's something we have seen and something that we continue to expect. And that is well in line with our strategy of going deeper after client relationships and driving those shares up of those clients that have those relationships. But outside of that, as I said, we continue to be quite happy with the credit performance and it is well within our expectations.

Meny Grauman, Analyst, Scotiabank

Thanks for that. And then maybe just related, just a bigger picture question in terms of the - when do we expect to see improvement here? Is it driven by rate cuts or is there something else that's important here? Or is rate cuts really the key variable that's going to see the pressure on these unsecured portfolios really start to ease?