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

Hello again, and we're back. My next guest this morning is Mr. Victor Dodig, President and Chief Executive Officer of the Canadian Imperial Bank of Commerce. Victor, good to see you.

Good to see you, too, Meny. And good to hopefully hear from everybody else or note that they're there.

We're all here, and we're all listening.

All right.

I'll jump into it because there's a lot to talk about. But as you can probably imagine, the first thing that I wanted to discuss really was Canadian banking and the bank's strategy in the mortgage market in more detail, definitely, we're seeing good signs. We saw good signs in Q2, the momentum continuing into Q3. And one thing specifically that I wanted to better understand was the -- Laura talked about the retention opportunity in the mortgage business on the call. And I wanted to better understand how big that opportunity can be? What it looked like in the past? And where do you think it can get to?

Okay. Great. It's a great question to start with, and thank you again for having me here today. I'd say a couple of things. One is that 3 of our 4 businesses have got tailwinds. U.S. region, our Canadian commercial business or capital markets business. And we recognize that we need to create tailwinds in our Canadian consumer or personal banking franchise. And I think we're well on the way to doing that. Under Laura's leadership, we're focused on a couple of key things. One is just getting to market growth in our portfolio overall. And I think you're seeing, as you've noted earlier, the green shoots in doing that. It's not only mortgages. It's across our entire portfolio. So in our mortgage portfolio, we've had robust growth, then we pulled back, and now we're aiming, as we've given the narrative before to grow at market rates and above-market rates where it makes sense. And what you've seen in the last quarter is a 3% year-over-year growth in our mortgage balances, driven by a couple of things. One is an important investment in our mobile adviser for us on a more diversified basis and focusing on more than just to large urban markets, which was the case previously, an implementation of mobile mortgage technology and electronic signatures that have made it much easier to process mortgages and get them closed, particularly during the pandemic, this was implemented before the pandemic, which has also been encouraging. And just a greater focus on making sure that the relationships are deeper, which kind of gets to the point around what Laura was talking about in retention. We're all too conscious of the fact that we had robust growth in 16' and '17, and some of those mortgages mature today. So at the forefront of our strategy is important client engagement to make sure that those clients continue to remain and build their relationships with CIBC. The second thing I'd say, Meny, is just looking at our managed money focus. We're looking at noninterest income growth in this world of compressed NIMs, and we're seeing very good growth there relative to our peer group, and that is being partially driven by the launch of our, what we call, our smart portfolios, which are well structured, smartly priced portfolios that our clients find are right for them in this day and age. And the third thing is a focus on our cards portfolio and making sure that we can compete in an era where nontravel rewards matter as much as travel awards. We could talk about that in a little more detail. But all in all, that focus on our Canadian consumer franchise, our Canadian personal bank is something that you're starting to see green shoots on, and we're very encouraged by the early results. There's still a long way to go, but we're on the right path.

One thing that I wanted to get into more detail on was execution risk. And frequently, when I speak to investors, they acknowledge the progress that you're making but they highlight the fact that they're unsure about how smoothly the execution can go. And so I'm wondering if you could address that head on, if you have any sort of examples that you can provide there? And as a related point, how you kind of see things in terms of -- are there any technological limitations that need to be overcome or that are being overcome? And then in terms of just culture as well, is that part of the story here and part of what's changing in...

Yes. I don't see -- I see on the spectrum of execution risk, I think this is a very, very manageable program that we're putting in place. I think there's a couple of key components to note. One is the team that Laura has assembled, is a team that is very focused on execution. There are people with it from within our bank and from outside our bank that we've built around the team to make sure that we can deliver. The second thing is to make the loading in terms of what we're asking our front-line relationship management, Salesforce, to focus on is loaded appropriately, not overloading them, but making sure they get quality leads in front of them, making sure that we're using our data in a very smart way so that it could both be advanced to our relationship managers, measured and monitored in terms of success. And there's a higher degree of precision and loading that we're putting in front of our relationship managers to make sure that execution is right on the mark, and that's what you're starting to see in our numbers. You're starting to see that not only in our mortgage numbers, but in our managed money numbers, and you'll see that in our card portfolio as the year progresses. So people, the way we're managing that process, I think, are key contributors to that. In terms of, I think, the process simplification and overhaul that's going to happen in the thick middle of the bank, I think, if anything, it will make that easier for our team to do business with our clients. We have been on a digital journey at the front end. So our clients are experiencing that, and our team is starting to experience that more in terms of how they do business within the bank. That includes the rollout of a digital financial planning platform that is now -- we started the roll out in the fall as well as a customer relationship management platform through Salesforce that we are implementing in its fullest form in retail that will allow our relationship managers to know their clients well, know what is that they feel that they need best and allow their leaders to also monitor, manage and measure us. So it's not -- this isn't rocket science for us. This is just basically putting the right people in place, the right process in place and the right technologies in place. And I think you'll see as a result of that, the numbers continue to improve. It will take some time, but they're on the right path.

I want to talk about technology investment and a discussion of expenses. But first, just to kind of close a loop on this. One question is we see these green shoots, can the performance continue? If we look out to 2021, even in an environment where, let's say, mortgage growth -- the market overall slows, there's a sense that maybe some of the activity we're seeing now is kind of a pull forward, and we're likely to see a little bit of a moderation. In that kind of environment, can you still deliver?

I think on a relative basis, there's room for continued deepening of our client relationships beyond the mortgage portfolio itself. So our stated goal is to kind of keep up with the market, truly keep up with the market on mortgage growth, and we'll see where that evolves. It's clearly being -- seeing the stimulus of low interest rates and consumer behavior shifting. But we believe that overall, our personal banking franchise can do much better than it has in the past and keep up and outcompete our competitors.

When you're trying to accelerate growth in a business like this, how do you make sure that you do it in a risk controlled way and that you're not sacrificing the growth for...

Well, part of it is, you have your former Chief Risk Officer running it. So they have a good sense as to what risk is and what risk isn't, and they also have lending experience. So they grow up as a lender, and therefore, you put all of those together. And my concern is not us reaching for risk in our personal bank. Our risk is not growing at the level that we've been growing in the recent past and are rejuvenating the franchise is sort priority #1 for us.

And in terms of -- one final area that I get a lot of questions on is in terms of the margin and the margin outlook and I take your point that there's a lot more going on here than retention, but one aspect that people latch on to is that this retention strategy is really very, I call it, damaging to the margin or weighs on the margin a lot. So I'm wondering you could address that specifically? And then just more generally, the outlook for the margin for the Canadian?

I think the way we look at margin overall is the profitability of a client relationship in its entirety and not specifically focused on NIM. So making sure we have the equation well balanced. And with interest rates where they are today and where they're likely to stay for some period of time, that focus on noninterest income that comes from the investment management that we do for our clients, it comes from the payments that we process for our clients is going to be equally important to the interest income driven part of that portfolio. So we believe that managed well, we can create a more diversified portfolio in terms of noninterest income during this low interest rate environment. And then we're going to have to also focus on growing market share to offset some of that. And for total bank earnings, we're going to have to focus on how we manage expenses and expense growth going forward. And I know we'll touch on that in the context of our conversations. So I'm confident that we've got the right plan in place to deliver on all of them. I am confident that the team will continue in the personal bank, break those tailwinds that we know we can create, and we know we will deliver for our investor base.

One area that you mentioned, it sounded really interesting, so I wanted to follow-up on it was just travel versus nontravel cards. And whether you really think that there is a more fundamental shift that is happening out there in the marketplace for cards as a result of the pandemic, something with legs that's long standing. If you could...

I think there are a couple of things. I mean, the card space is competitive. We've got -- I'm pleased with what we've been able to accomplish over the last number of years in terms of building our Aventura portfolio alongside our Aeroplan portfolio. We've done a number of things in our existing card portfolio to allow our clients to use their points to shop with them beyond travel alone. We've introduced the Pace It technology on our cards that allow clients to purchase larger items on an installment basis. And in fact, during the pandemic, we reduced the ticket size of that large item quite substantively to allow our clients to extend payments over a period of time. So they didn't feel overly burdened. I think the goal now is to continue to invest in both our travel portfolio, the new Air Canada card, which we're part of. We'll benefit there. But recognizing that travel may not take off in the not to near future, it's important for us to have our dividend portfolio card competing effectively. And that is going to be a big part of what we do. The other thing I'd say is just some of the partnerships that we have. We have the student price card that we had launched about a year ago. That's done really well in terms of usage amongst the millennial group that we really want to attract to our bank. We've also signed a partnership with Parkland Fuels in the JOURNIE loyalty program or the gas category, which is an important category for our clients. And that's in the early stages, but we're also confident that, that will contribute. So good travel cards, an investment in the nontravel segment, good partnership, good use of points, should deliver good results in the card segment as well.

I want to move on to expenses, definitely a key focus for me, for a lot of investors. On the call, you talked about the restructuring charge that you announced being completed by Q4. And you talked about -- you slipped something in there that I think some people missed, but you talked about some of those savings, those $260 million in savings being repurposed for strategic investments. So question for you is, I want to better understand how much is going to strategic investments? And what are the strategic investments that you have in mind with these savings?

So a couple of things. We've been on a multiyear journey to get our mix ratio to a better place. And we started off close to 60%, and we're kind of hovering in the 55% zone, right? Thereabouts. And obviously, that's a function of both revenues and how we manage our expenses overall. So this has been a multiyear journey. In the first quarter. We announced a restructuring charge of $339 million, which we said would deliver about $260 million in savings in F '21. We paused on that activity during the height of the COVID pandemic. We will complete that activity in this fourth quarter, so we're ready for the new year. That will deliver that $260 million in savings. The majority of which will be delivered to the bottom line, and it will help offset a net interest income compression that we will all see as a result of where interest rates are today. In terms of investments, a significant portion of our investments are being funneled to our Canadian consumer bank, make sure that we can get those returns, that performance that I alluded to earlier, whether it's in the data -- in kind of how we manage our data, how we manage our client relationships, whether it's improving our product portfolio that we can establish those deeper relationships by having a competitive edge in terms of our offering, much of it is focused there.