Canadian Imperial Bank of Commerce (CM) Earnings Call Transcript & Summary

I'd like to invite Victor Dodig up from CIBC.

Darko?

Good morning, Victor.

How are you?

Good. Thank you. How are you?

Good. Morning, everyone.

Okay. So before we begin, I've been asked to tell you that Victor's comments today may include forward-looking statements. Actual results could differ materially from forecasts, projections or conclusions in these statements. Listeners can find additional details in the public filings of CIBC.

Okay. So with that formality out of the way, Victor, let's start off with -- let's talk about the earnings per share growth that we saw last year and your thoughts. I mean it was, what -- it was down 4%, ROE of around 14.5%. I think you're targeting higher on both metrics. And on the Q4 call, you said that you expect to see low single-digit earnings growth. So consensus, though, looks like it's looking for a decline in EPS next year. So is there any reason that you could actually see an EPS decline from your point of view, you as the CEO? And what do you think -- maybe we could turn this on its head in such a gloomy morning. Is there anything positive on the horizon? Is there some reason for optimism in the earnings per share growth over at CIBC?

Is it a gloomy morning?

It was so far. A little, yes.

All right. Well, let me shed some light on how we look at our business. I mean last year, we put a bit of a pause on earnings growth which wasn't something that we're proud of. Pre-provision earnings growth was 4%. It was really a credit-driven story last year. There was clearly some softness in our Personal & Small Business banking franchise here in Canada, where we had a 1.5% revenue gap relative to the peer group, and we're looking at closing that. So as we go forward into the year ahead, we clearly plan to grow our earnings in the low single-digit range given the current economic backdrop that we're in. And that's a GDP environment that's kind of in the 1.5% range here in Canada and slightly higher in the U.S. And given the geopolitical tensions that we have today as they currently stand, we believe we can deliver against that. And it really is a multipronged story in terms of how to do that, rejuvenating the Personal & Small Business banking franchise, which I'm happy to elaborate on in the context of our conversation; maintaining the level of growth that we've seen in our commercial banking franchise in the United States and Canada, which has been -- which has seen double-digit growth in both deposits and loans in both markets; and a continued robust delivery of financial performance in our Capital Markets business.

Okay. So let's dive into some of those comments, and let's start first with the U.S. business.

Sure.

So really strong growth. It's similar to the question I had earlier with Darryl up here from Bank of Montreal, very strong growth relative to competitors in the U.S. What can you say about the quality of the loans that you're putting on? How are you competing? And also, how are you competing on the deposit side? So I think it's an interesting angle as well for your U.S. business. So maybe touch on that and the outlook for 2020 and specifically for the U.S. business.

Sure. So the U.S. business is -- as we categorize, it's Commercial Banking and Wealth Management. The Wealth Management business -- the Commercial Banking business continues to grow robustly. And really, it's winning market share from competitors through relationship management, through expanding into new markets. So we're seeing growth come from our existing footprint, but we have also opened up offices in Dallas and Miami and Tampa and Boston, and we plan to open more as we drive organic growth. Part of the deposit story is really around the credit rating of CIBC. We brought that to the table. That continues to play a prominent role. On the wealth side, we're also seeing deposits come in from our wealth clients to drive our deposit franchise. So all of those in total delivered 22% earnings growth year-over-year in the U.S. Now I don't think that 22% is a sustainable number. I think something in this high single-digit range is something that we're aiming for in the year ahead. That's imminently doable. We're confident about that. We're confident about our position in the market.

Dallas, Miami, Tampa, Boston, and there's others coming.

Yes.

So how -- so maybe discuss this growth that you have and going into new territories and how you're doing it without taking on risk or having to compete against irrational competitors. What's the strategy there and...

Well, all of our geographic expansion has been through the lift-out of banking teams from competitors. So that's -- it's always start with a good market, but more importantly, start with good bankers who understand credit and understand credit risk. And that's why we've picked the 4 markets that we're in today. We're not in any rush to expand into the next few markets because we want to get some depth and some scale in the markets that we're in. But it really is driven by who are the bankers that we can attract to CIBC.

And it's primarily lending-driven. So the deposit side must be interesting, right? You have to fund all of this growth. So maybe touch on your deposit strategy a little bit.

Sure. So if you look at our numbers in aggregate in the U.S., you'd say that it's 130% loan-to-deposit ratio. If you actually break it apart and look at the legacy CIBC business that was there in the real estate side, that's 100% is wholesale funded. So if you look at the legacy private bank side, it's 90% loan-to-deposit ratio. We are growing deposits. We are growing loans. In some instances, we grow through -- some clients through loan-led business and other clients, in certain sectors that are cash-rich, we do it through deposit-led business. But we're very, very mindful of that ratio and keeping that balanced.

And when I look back at 2019, U.S. operations were about 17.3, just over.

Yes.

And that's surpassing the target that you would set a year ahead of schedule. So as we sit here today, do you expect -- is there a new objective we should be thinking about? Is there -- what's -- what would be your new target, if any, for the U.S. business?

Well, 17.3 is always a function of how everything else is growing, too, right? So being in that 25% range over time is something that we've expressed. And as we -- we're going to have an Investor Day toward the end of this year, and we'll put out those new targets in terms of how to think about the U.S. But keeping at that current level is important.

And you recently completed a couple of acquisitions in the U.S., U.S. Cleary and Lowenhaupt. Maybe you can talk a little bit about them and just give us an idea of those and what it is that you look for and what you're targeting in terms of acquisitions in the U.S.

We have all the capabilities to compete and to continue to grow our earnings stream and our franchise in the U.S. based on what we have today. We strengthen it by bringing certain capabilities. So Cleary Gull was a boutique mid-market investment banking franchise that had a very good reputation that's really, really targeted at our current client base. So we feel good about what they'll bring to our franchise in terms of growing our investment banking capabilities. Tuck-in wealth management acquisitions are something that we believe are highly accretive initially right away. In the Lowenhaupt instance, it was just adding to our St. Louis office a couple of billion dollars of assets and some high connectivity and some family office capabilities that we didn't have. So it's the tuck-in capabilities that we're looking to complement. We're not looking to do anything dramatic. We've got a good franchise. We're looking to focus on the organic growth of our existing footprint and some geographic expansion where it makes most sense. And I think you'll probably see tuck-in acquisitions on the wealth management front as we go forward as well.

Rate environment is pretty tough in the U.S.

Yes.

We've had a lot of rate cuts. We've seen some pretty significant NIM compression. What's your outlook for 2020?

You tell me. I don't know if Jay Powell knows. I think you're looking to -- I think the Fed's gone on pause, and I think at worst, it'll stay on pause. I don't foresee any rate cuts in the 2020 period.

So what would that mean for your NIM and interest...

NIM will be relatively stable for us.

In the U.S. in particular?

Yes.

Okay. And so then let's turn to Canada, bigger business. Revenue growth last year was below peer average, and I think mortgage balances were still in decline. So maybe you could talk a little bit about your loan growth expectations. Well, maybe to start, we wouldn't go maybe by product by product, but I think everybody here is very interested in the mortgage outlook for 2020.

Of course. So our 1.5% growth gap relative to our peer group is attributable to 2 specific areas largely. One is the mortgage growth that we've seen -- the mortgage decline, in fact, that we've seen. And we've worked to remedy that, and what we see in the early fiscal year is a return on those decisions. It's a positive return. So what have we done? We've committed to a more diversified origination model rather than focusing on the GVA and GTA market, which delivered a significant amount of our growth previously. We've grown from 840 to 920 mobile advisers. We used to have 1,200, but they're highly productive mobile advisers. We've put technology in place that's both paperless and allows them approval of a mortgage within minutes when working with a client on the road, which is really, really important to them. And you see an uptick in that. We've worked within the branch network, our banking center network, to look at those financial advisers and financial service representatives that aren't doing the mortgage business that we would have expected they'd be doing to ignite that. And all of that has delivered some pretty positive results in the months of November and December that we believe will continue to deliver into the year so that as we indicated to you earlier, our growth over the course of the year will look more market-like on the mortgage front. On the credit card side, we've had more tepid growth on the credit card side. There, we've taken some action on our Aventura portfolio. We've added some feature functionality to our clients in terms of shop with points, the Student Price Card, our relationship with Parkland Fuels in terms of card origination. We're looking forward to the new Air Canada card. And while we have a little more restrictions in terms of our marketing ability than our competitor does, we think that, that will be a good card for our clients going forward. And we see credit card growth in a category that I think is starting to slow a little bit, us keeping up with the category as opposed to lagging the category over the course of the year. And the last area that we lagged was in long-term investments in mutual funds. We had a real good, robust growth in deposits. But on the mutual fund side, for the first 2 months of last year, we were minus -- I think it was about minus $1.7 billion and, this year, a positive $360 million. So it's been a big change in terms of our focus. And we've launched some new funds, some low-cost funds to better compete with the competitive set there. So what I'm seeing in terms of our retail business overall in the personal side is some very encouraging trends. On the small business front, we've been piloting a new relationship model in certain parts of the country that we are starting to roll out. We're also seeing some very positive trends. So that's all very, very encouraging in terms of our Personal & Small Banking business where candidly, last year, we missed. We knew where the problems are -- were, and we've addressed them. And we're starting to see the rewards from that, and we intend to lean in on that as we go into the year.

And so if I can just return to the mortgage discussion for a moment, so we're seeing a turn because of the actions that you've just mentioned. But we've also been hearing that competition in mortgages is actually pretty stiff and pricing is pretty tough.

It's been stiff, yes.

Is it possible that you may be in there pricing mortgages aggressively to gain back share? Or...

No. We've put in some policies that allow our team to match the big 5, the big 6. And we try not to deal with the irrational behavior that we see from some financial institutions.

And so then all in, let's touch a little bit on the commercial side because there, you are actually outperforming, it looked like, and certainly in Q4, your growth was outperforming peers. And similar question there is, what are we seeing there on the health of the commercial borrower, the pricing? How is it that CIBC is growing faster than market? And should we be happy or should we be concerned?

I think on the credit side, we're growing kind of in line with market, and some players are growing faster than we are. We've been a little more tentative in certain situations. On the deposit side, we've been growing faster than the market. And that's really a function of -- if I looked at the deposit growth on the commercial bank last year, 55% of our deposit growth came from new clients. We've been winning market share. We're winning market share in the non-profit space. In certain sectors that are more cash-rich, we've put in a cash management technology that I think has put us at least to market parity today that -- and that plus relationship management has delivered that type of growth, robust double-digit growth in deposits. So deposits are growing faster than loans, and loans are growing robustly, which is exactly what we want to see. And we think we can continue, on the commercial banking side, seeing loan growth in the high single digits over the course of the year and deposit growth in the low double digits. In terms of the quality of the book, we're feeling comfortable with the quality of the book as well.

Some of -- we've heard some concerns come through on commercial borrowers getting more levered, on holds at the banks being higher than in -- than recent history suggests. All of it's suggesting it's late cycle activity. You're not seeing any of that? Or you're not concerned...

No, we've been trying to veer away from that, taking too much of a larger hold in instances, yes.

Okay. So you touched on credit card growth. Interestingly, you also touched on the Air Canada and some, I guess, limited amount of enthusiasm for the card. What about the other side...

I'm enthusiastic enough.

What about the Aventura card?

I think the Aventura card that we have -- the Aventura card portfolio that we have is market-leading in terms of reward and redemption features for clients and flexibility for clients. And that -- if you look at what we've been able to do with Aventura over the last number of years, it's been significant growth if you uncover it. We just recently launched the Aventura Infinite Privilege card, competing with a few players that are in the very, very high end of that card market. We see some very encouraging results out of that card as well in the early days.

I guess clients are a little nervous with the cannibalization on the Air Canada card with Aventura with the news flash. Is it -- should we be concerned on that? Or...

I don't think you should be concerned about cannibalization. I think in the end, what we're trying to do at CIBC is take that relationship approach to banking. So when it comes to the core relationship that we have with our clients, they always say it starts with checking accounts, some people say it starts with the mortgage. We've launched a Smart Plus Account, which used to be an account that charged $14.95 a month or $8.95 a month depending on which tranche you're at, and you had to pay $120 a year for a credit card. Today, you come to our bank. If you have $6,000 in the bank or $100,000 in investments or savings, there are no checking account fees, and you get that $120 credit card for free. The annual fee is waived. So that's really fundamentally what we're trying to do, is build relationships. In the early going, we see encouraging results on that Smart Plus Account. Conversions and new account acquisition, we have 100,000 new accounts. That's encouraging. Now the challenge is the fees don't grow, but in the end, the relationships do. And our goal is, longer term, to build those deep solid relationships with our clients because I think that's what really meaningfully adds to shareholder value.

So I think with respect to that, I think in your Investor Day, you provided a lot of targets. You provided 2020 targets, in fact. So maybe we can just revisit some of those targets. You talked about $3 billion to $4 billion in Personal & Small Business referrals, $4 billion to $5 billion in CIBC Wood Gundy referrals and $4 billion to $6 billion in commercial banking referrals. So are we on track or...

Yes. We had kind of -- we have 4 targets. EPS, 5% to 10% a year, we kind of missed last year. But the other 3 years, we did well, and we plan on getting back to that, lower end of that over time. This year, it will be low single digit, as I described. ROE of 15% plus, we're kind of within that zone. A NIX ratio of 55%, we got to 55.5%, and the referral activity. So we have a unique structure in that we've put together commercial banking and wealth management in one strategic business unit because we see a significant amount of monetization activity in the commercial bank, where flows are going to our private wealth business for those clients. And that referral activity that you're seeing, those targets have been met on the Commercial Banking side and within our Personal & Small Business bank. So we're very encouraged by that target. The one target that we missed was the earnings per share target this year.

I was going to say, I mean if you're hitting all of these targets, why would we not be more -- why we would not see more flow to the bottom line? I guess if you think...

Well, I think this year, it was a credit -- a bit of a credit story mostly, Darko. Like I said, pre-provision earnings went up 4%, so that's what drove some of that. And there's some elevated level of investment, right?

So let's talk about credit.

Sure.

So we have -- we've seen some one-offs last year, some idiosyncratic events. So how should we think about 2020? And how should we think about your position, your reserve level, the comfort that you have that in 2020, we -- and especially given the insolvency information that we're starting -- some bankruptcy insolvencies in Canada rising, how should we think about 2020 from a credit perspective and CIBC's overall preparedness for potential weakness on the credit side?

Right. So during our last call, I think Laura did a good job of articulating how we see the year ahead. And we -- that hasn't changed since our call in December. Our provision, our PCL rate last year was 29 basis points. We see it being similar to this year. If you remove the one-offs and even have some normalization in credit, we think we're okay there. We think that's the kind of rate that we're planning for. We have no reason to believe otherwise.

And some banks got a little more negative, a little more pessimistic towards year-end. You guys did, too, a little bit with your reserve coverage. As you move forward from here, is there a thought that maybe you should be getting a little more conservative, a little more pessimistic with scenarios, build the stage 1 and the stage 2? Or is it really just business as usual from here on?

It's business as usual in a model-driven approach, and that's the approach we're going to take going forward.

Okay. All right. So turning then to your pretax pre-provision earnings growth that you talked about just recently, part of that was efficiency expenses. You did mention you hit the 55.5%, but you are targeting 52% by 2022. Now you said that was in an old revenue environment. I think that's the way you sort of described it. So let's talk about...

How would you have described it?

A challenged revenue. I don't know if I could say old. I would say challenged.

Challenged. A different revenue environment.

Yes, tough on the NII. Capital markets was brutal, too. Well, let's be -- call a spade a spade. But there's no reason to think that capital markets should really continue to be challenged going forward. NIMs should be compressed. But we've seen restructuring charges in other banks. We're seeing a move towards a longer-term view that costs have to come in line and come down. Are you abandoning the 52% efficiency target? Or is it just that it's the revenue environment, even with a little bit of slippage, is just very difficult to get there?

I think the revenue environment makes it difficult to get there within the next 2 years. But if I could just take you back to our journey, we started back in 2016 with a plan of taking our NIX ratio from 58% to 55%. We took a charge in 2016. We ended up with a 55.5% number. And so we missed it by 50 basis points partly due to the revenue environment, right? I think the next wave of cost transformation is something that we're absolutely focused on at CIBC. We know that, that is the only way for us to kind of deliver strong financial performance, is that we continue to transform our cost base particularly if you believe we're in a benign revenue environment. And even if the revenue environment turns to be more robust, our shareholders will benefit through the transformation of that cost base. So right now, we're going to go through that next generation of cost transformation to get to what we hope to be a 53.5% to 54% in that kind of new environment, if you -- new revenue environment, if you will.

And as part of that tech spending, I think the way you guys sort of bucket the tech spend, I think you say there's client user experience, branch transformation, which is interesting, and then there's the migration to the cloud. So is there any -- of those 3 buckets, is there any bucket where you can pull back on or you can help get to? Or is this really just a function of having to continue to spend? Like I thought for a while, maybe we had tech spending cresting. And certainly, if you read some shareholder annual reports, some banks are suggesting the tech spend is cresting. What's your view on that from CIBC's perspective? By the way, last night was an interesting tech demo presentation from CIBC. We did see that, by the way, the mobile thing as well that you're talking about for your small business, which was pretty cool. Over to you...

Thanks for that. Thank you. Was that a plug? I'll take it.

So over to you, though, on tech spend, whether or not you can moderate any of that to help you.

I think we're all trying to be more prudent in terms of our tech spending. I think we also recognize that if you don't spend, you don't get the savings down the road. So I look at our tech investments that we're making at the bank, and they fall under 3 broad categories. One category is the continued modernization of the bank, whether it's moving things to the cloud or being much more agile in terms of delivering projects in a more cost-efficient and timely fashion. That's part of modernizing the bank. CIBC SQUARE, by the way, is part of modernizing the bank. That's a significant initiative for us that will change the face of our bank from a headquarters level. The third -- the second bucket is defense, whether it's cybersecurity or whether it's AML. That isn't abating anytime soon, and that will be the last area that we'd look for savings in terms of protecting and defending the bank. I think over time, you'll see benefits that will come to the bottom line. And I think the third is consumer-facing. We're about to launch digital goal planning. We've launched Pace It in terms of the credit cards. We've got other consumer-facing technologies. These are the things that continue to drive and innovate our business and build client relationships. So all of them are important. If we had a revenue environment where we said, "You know what, things are really, really slowing down out there macroeconomically speaking. Can we pull a few levers?" Yes, we can. We absolutely can. Do I think tech spending will continue to grow at double digits? I think from our perspective, we're trying to be much more sensible and prudent in terms of that growth level.

So what is the underlying core expense growth rate at CIBC do you think that we should be thinking about irrespective of the revenue environment? So one that is a normal-course sort of expense growth.

This year, we said it's 4% to 5%.

4% to 5%.

Yes.

That sounds high relative to some of the other banks.

3% to 4% makes you feel better, right?

Fair enough.

4% to 5% is the right level for what we want to achieve for our bank. And we obviously try and achieve positive operating leverage in that context, right? And we try and get to a lower level of expense growth as we go out into the out years. Sometimes you need to invest in your bank and in your platform to be able to deliver that growth in the out years.

So I've flipped a coin outside to find which banks were going to get the capital question. Your bank came up, so you're going to get a question on capital. When we think about OSFI is increasing the Domestic Stability Buffer 3 times, possible fourth increase coming in June, I'm banking on it, your ratio is up 20 years -- 20 basis points year-over-year. So thinking about that, where do you think you should be operating given that there's another potential for increase in many...

Well, let's just work on the presumption that there's another increase. So you're at 10.5%, right? On a pro forma basis, we're at 12% today with the sale of our FirstCaribbean asset, which I would -- and what we have done with that is we've started to be much more active in terms of our buyback program. We intend to complete our buyback program over the course of its existence. And there may be another opportunity to do another one into the future depending on how the market evolves, right? In terms of where we want to operate from, I think, 11% to 11.5% is the right range for a CET1. We're obviously at the high end of that today. Even with the buybacks and earnings this year, we'll still be at the high end of that today.

And the high end is appropriate in the context of a Domestic Stability Buffer, which means 10.5% overall? Or is...

Domestic Stability Buffer is one factor input into our decision-making. The other one is what does the business environment look like and what do the opportunities out there look like. But I'd say that 11% to 11.5% is the right level to operate at, yes.

Okay. All right. So we're going to turn to some of the questions that have been asked out there. And I apologize, I'm going to sneak forward a bit here because my eyesight isn't that great. So the #1 question is, could you please talk about the trends in fraud-related evidence you're seeing in the loan book? One of the banks earlier today talked about an uptick. You had a charge related to fraud in Q4. So just generally, is fraud on the rise in credit?

Well, we had one situation in Q4, and it was idiosyncratic. It was external. We combed everything, and we've kind of isolated it. I haven't seen anything notable on the loan book outside of that, that would indicate a significant uptick in fraud. I think you see the frauds that are occurring are mostly on the Interac side, consumer-oriented fraud. That's the kind of stuff that I see more of.

And how do you think about -- I mean you mentioned that in 2016, you took a restructuring charge.

Yes.

The other question here is, how do you think about possibly taking another restructuring charge to accelerate cost saves?

Look, it's always a possibility for us. I mean I don't think it's the modus operandi of who we are as a bank. I think you want to do it on a business-as-usual basis. But if we look at it in its entirety and say there's an opportunity for us to take a charge that makes sense that we can clearly communicate to our investors, then we may consider that.

And what is the strategy to accelerate growth in Canadian P&C base?

I talked about that already.

Yes, you kind of did, and we touched on that. So why don't we circle back, though, on one of those questions that I didn't ask you on the Canadian side. And that is on -- where did I leave it here? So deposits. So when we think about the deposit environment, rates went down. It's competitive out there. We're seeing some online competition for deposits in terms of pricing. How should we think about that? And specifically, maybe talk about Simplii and the deposit strategy there and how it differs from the bank.

Sure. So the deposit story and the deposit results of 2019 were a real silver lining for our bank. We saw deposit growth across all of our businesses: Personal & Small Business banking, Commercial Banking in Canada and the United States, Wealth Management and in corporate banking. And it's just a real focus on how we fund the bank, how we build relationships with clients and doing so in a cost-effective fashion. So that's been part of our strategy, and that will be part of our strategy going forward. You could see that in the deposit side, we're growing robustly everywhere. On the Personal & Small Business banking side, we grew deposits more robustly than we did long-term investments, and we're trying to just balance that out. And you see that nearly going into fiscal 2020 numbers. When it comes to Simplii, it is our direct bank. It is the only -- well, it's one of the 3 direct banks of substance in the country. We spent the better part of the first 1.5 years separating it from the previous relationship, and now we've got it on its own legs. We look at how we price it relative to the competition and not so much relative to the bank so that we maintain our market share. We actually have seen deposit inflows into Simplii. The issue with Simplii has been the mortgage outflows without the physical presence. That's been more of the issue there. So...

And that ties into your relationship model really. So that's the curious part of the whole CIBC story, which is a relationship for the modern...

Relationship bank for the modern world.

For a modern world.

Yes.

So how do you build the relationship through Simplii on the mortgage...

Well, we're thinking through what that physical presence might have to be going forward. But it is an asset that delivers a fairly sizable amount of profitability. I believe that the direct banking sector will continue to grow in both Canada and the United States, particularly with the millennial adoption of kind of banking on their own without a branch for the most part. So we're going to think through that and invest some money in that business.

Not the way I bank, I can say.

No. You're a high-touch bank -- high-touch banking client.

So we've touched on a lot of things here. Maybe we can just revert back and hand the floor over to you to really give us the sense of the key messages that you'd like to leave for shareholders today for CIBC as we look into 2020.

Sure. So as we look into 2020, the management team, the leadership team of CIBC was very mindful of where we had revenue softness, in particular in the Personal & Small Business bank and a little bit in Canadian Wealth Management. We've addressed those issues. We believe that those issues will be addressed and be reflected in a more positive financial performance as we head into the rest of 2020. We believe that banking continues to transform, and we want to be at the cutting-edge of that transformation, both in terms of the cost base and the use of technology in delivering banking services to our clients. We think that, that done right will deliver both positive operating leverage and a lower NIX ratio. And we think we can do that and deliver a 15% return on equity over time. It's really all about organic growth, organic growth, a focus on organic growth, a focus on remedying those areas where we had some issues and doing so both in Canada and the United States. In a nutshell, that's it.

In a nutshell. That's great.

Building a relationship bank for the modern world. And I want to thank you for your time, and I want to thank you for your investment in our bank. And I want to assure you that we're focused on delivering that single-digit earnings growth, the lower single end of that digit to begin with, and then we'll work our way back to that 5% to 10% band that we've indicated to you at our Investor Day a few years ago. And we'll have an Investor Day toward the end of this year to shed some additional light on that.

Okay. Look forward to that.

All right.

Thanks very much.

Thank you, thank you.

Appreciate it.