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

Well, good morning, again. I'd like to welcome our next presenter to the virtual stage, Mr. Shawn Beber, Senior Executive Vice President of CIBC and Chief Risk Officer of the bank, job he's had since February 2020, which was an auspicious time to jump into that role, no doubt. Good morning, Shawn.

Morning. Thanks very much for having me.

It's a pleasure. We've got 4 P&C heads, so it's a nice twist, I guess, to have the Chief Risk Officer for the presentation.

I'd like to start out. Just -- this is maybe like a ballpark answer type question, but we keep hearing about how credit conditions, how they've evolved over the past few quarters. Anyway, they've been -- they're far better than what you were thinking at the outset of COVID. Obviously, there's a lot of unknowns at the time. Is there a way to put that into like a number sense? So what you were thinking around this time last year when you're setting your performing provisions and how you see the world today. If you're planning for peak impairments and peak losses of x, what does it look like today? Like what's the kind of delta? Is it half of that, incrementally better, what does it look like to you?

So look, at the outset of the pandemic, which was just about a year ago at this point, a little more, there were a lot of unknowns, as you mentioned. At the time, we had [indiscernible] of some level of value. But at the end of the day, they were fairly extraordinary issues that were affecting us, and we were looking at the various elements that were coming into play, government support programs, bank relief efforts that we were thinking about. Obviously, The Street came forward with a number of different relief efforts. And so in the context of all that uncertainty, we still had to come up with an estimate of what our performing provision would be. And as you saw, we wound up taking a pretty significant performing provision in the second quarter of 2020. And then we added small amounts to that in the third and the fourth quarter. At this point, we've started to see signs of -- I would say, positive signs of an economy that will pick up steam in the second half of this year, then into 2022. And so against that backdrop, we have given guidance a few weeks ago on our Q1 earnings call that we thought impaired losses would come in somewhere in the mid-30 basis point range. That's down from where we thought we were in Q4, where we were talking about low to mid-40s in terms of impaired losses. So to put that into context, that will be somewhere in the $200 million to $400 million range in terms of improved outlook for impaired losses. Relative to the start of this, like, we'll have to see how things ultimately play out. Certainly, credit performance has been better than we anticipated. But we're still in a period of uncertainty. We'll still have to see how that all plays out. But we do expect to see that performing provision kind of work its way through over the next kind of 4 to 6 quarters, the majority of it. We had, as I said, a big build from Q1 of '20 to Q2 '20, and we'll see that sort of coming through a combination of impaired losses moving through. We still expect to see peak impaired losses in the middle part of this year, so sometime over the next quarter or 2. And then as the economy picks up, we'd look to see some improvement and some further reversals of performing.

Well, that's the direction I'm heading here, is that, a year ago, it was panic mode, and rightly so. And now the majority of investors, we saw from U.S. banks, so no surprise there, but a majority of investors are wondering when did this reversal cycle materialize and how big is it going to be? And I'm not talking about the migration from Stage 2 to Stage 3, but the, whatever, the $1 billion-plus performing, you took Q2 last year, then you added to Q3, Q4. There's a view that a chunk of that is going to have to be released. So what kind of, I guess, goalposts, can you give investors on that front, both in terms of possible size, timing, understanding that there's unknown still.

Yes. So size is still a question mark. It's going to be a function, as you say, of how much impaired losses we experienced. We think it's sort of in that towards the mid-30s basis points. The rest of that performing build, our expectation is sometime over a 4- to 6-quarter period, with more of it front-loaded because in that performing provision, there are some management overlay because we had to exercise judgment in the context of what was going on. So for instance, we had deferral programs around credit cards. We've taken the performance of that portfolio and the anticipated performance of that portfolio into account building the provision. So we would expect to see some of that get offset in the coming couple of quarters as we expect to see the peak losses come through at that point. So I would say sort of a 4- to 6-quarter period, where you'd see the majority of that performing build that isn't otherwise being part of the migration from Stage 2 to Stage 3 play out over that kind of period of time.

So if -- and this is -- just to pick -- if it's Q3 or Q4, let's say, the start of that phase, you could -- would have maybe a bigger reversal in Q4, smaller up until the end of 2022 kind of thing? Is that how you're...

Starting now, I mean, I think in Q4, we talked about 6- to 8-quarter period from that point. So next time, we're reporting it will be sort of 2 quarters in. So I would say starting in Q2, we would expect to see some of that be applied against some of the peak impaired losses and then play through over that -- those coming 4 to 6 quarters, with more of it likely in that first 3 to 4 quarters.

And I've heard from some other discussions I've had that if not for management overlay, there'd be already quite a bit of this stuff happening in the numbers with, I mean, stuff like variance, which are obvious risk factors out in the market. Is that something that still kind of puts pressure on that management overlay to hold back, I guess, the...

Yes. We definitely take into account the uncertain environment relative to what would otherwise be straight model that will exercise judgment against the portfolio to figure out where do we think we need to exercise some judgment, just out of prudence and caution, given the uncertainty that continues to exist, as you say. There's a race on right now between the vaccinations versus delivery and then the actual deployment of the vaccines against the case counts and the variants. And so with that level of uncertainty, there's still management judgment being -- that we've exercised over the course of the period and continue to do so.

Okay. The -- I mean, there's still loans that will become impaired. One thing that I've been thinking of and be curious to hear what -- if you're seeing is at all, but there's so much liquidity out there chasing assets. As a bank that takes over impaired assets from time to time, your ultimate goal is to get rid of that asset, sell it off and recover your -- whatever you provided for against that loan, right -- or not provided rather. Is it easier to get off of troubled assets these days, given that there's so much -- and then does that potentially mean that whatever you've provided for might be too conservative because there's so much demand for certain assets? Or is that just a fiction of my imagination?

I don't think it's a fiction. I mean, there's certainly a lot of liquidity and a strong bid as a result out of the market for various assets. And you're seeing M&A is active and has been for some time. So that certainly is an analysis, part of that is based on loss giving default LGDs. And those LGDs and the models, at least, are based more on sort of longer running observations. And so any particularly busy time in M&A for sort of short-term effects aren't necessarily going to be manifest materially in those models. But when a loan goes impaired, now you're talking about a very specific loan with specific collateral associated with it, et cetera. And that's where we'll see more of that impact, at least in terms of if there's strong liquidity out there, what our estimate would be against that particular impaired loan and where we expect and ultimately realize if that's the route that we go, it can have an impact. And so it's certainly constructive to have liquid markets and active M&A. And we've seen some consolidation in some sectors. So certainly, that's helpful in the final analysis around what we anticipate by way of realization. I would also say that as a relationship oriented bank, our main goal is to work with clients and help them through when they're in challenge. So in the normal course, we would spend a good amount of our energy, trying to restructure, work with clients to get to a better place. But it is to say that sometimes we're not going to wind up in a position where we do need to foreclose. And we've had some of those situations through the pandemic and we've recognized losses as a function of that. But they haven't been large at this point and certainly manageable within expectations. And the last part is there's certainly appetite for distressed assets. It's -- again, it's not generally the route that we go because we're generally working with our clients in those circumstances. But it creates some level of optionality in the event that, that's a path that we want to pursue. So certainly, liquidity and a robust M&A market are constructive as you move through these types of periods. But we continue to work closely with our clients that are struggling to try to find paths forward.

Okay. And one of the -- I guess, the focus areas from a risk standpoint these days is the commercial real estate market. Every bank has a fair bit of it on their balance sheet, including yours, and you've got some in Canada, some in the U.S. What's the update there in terms of ultimate risk level? What actions are you taking in certain markets or certain categories? Are you -- because it's happening in the States. Certainly, where borrowers are -- they're being granted the extensions or modifications to make their lives easier and weather through the storm, however long it lasts for that particular asset class. Are you -- what's the experience been at CIBC?

So the market has held up actually quite well through the pandemic. There are certainly pockets of stress, hotel being one, for instance. Retail and certain sectors have also struggled. I mean, from our portfolio perspective, we've got nominal exposure right now to impaired losses, and our COVID-impacted clients went in with reasonable loan to values, strong liquidity and strong sponsorship. And so we've worked with clients on case-by-case basis if we need to do some tailoring and some covenant amendments to help them through this period. But it's held up well and there's been good support from government programs as well that have, I think, contributed. In the U.S., I'd say, a similar story. Our exposure to the most affected industries like hotel, like some of the retail are pretty small against the portfolio. We're paying very close attention to those. They are -- particularly hotel sector is continuing to struggle. We expect to see some recovery in that as the economies open up. And so we will again work on a case-by-case basis with clients there. It's not been -- we haven't seen like large-scale deterioration. It's still pretty episodic, I would say. And then when we have circumstances, particularly ones we've had a couple that were struggling, frankly, before COVID occurred, and COVID obviously exacerbated those situations, where we've gone to foreclosure. So it's not about taking the can down the road. I mean, to the extent that the prospect isn't there, then we've taken that kind of action. So it's a combination of different approaches. But the portfolios have done well through the pandemic and continue to do so.

So there may be, as you say, episodic situations where you've to work with clients, but generally not as big as an issue now. Okay. Now probably maybe another ballparkish-type question, but we get asked or think about a lot how much the government support programs, the bank's own deferral programs -- I say banks, the group anyway, industry have helped take what could have been a very, very bad scenario into a much, much less bad scenario. Is there any alternative universe type that you look at to say, "If the government hadn't stepped in a way it did, our losses would have been x times higher and lasted several years longer." Well, probably not a fair question but...

No, no. Look, it's hard to talk about an alternative kind of universe. What I would say -- I mean, the easy answer is it's helped. The government supports, the bank relief efforts all have, in our view, made a material difference to the experience through the pandemic. I mean, in the context of having seen unemployment rates rise, I mean, the government supporting the bank relief efforts, I think, had 2 sort of significant impacts. One is, we probably peaked at a lower level and the impact of that higher unemployment rate hasn't been the same as it has been in historic context because notwithstanding people having lost their jobs or been furloughed, there's been incremental support, as I say, through a combination of the relief programs, but also the government support. And so what would normally you would expect to see play through in terms of delinquencies, defaults, people struggling has been muted to a very large extent, I would say, as a function of the combination of those actions. So the other piece of it is in terms of the support programs, it's also checked, I think the unemployment rate lower than it otherwise would have been, which will allow for a stronger bounce back when the economy reopens. And so we're looking forward to better growth in the second half of '21 and into '22. And I think that, that rebound has the ability to occur more quickly as a function of the impact of those programs. I mean, we talked about -- when we took the largest piece of the provision in Q2, we talked about the fact that there was some model outcome, then there were adjustments for the government support and also the lockdown of the economy because we haven't seen sort of either of those kind of play out. And they were -- they had fairly offsetting impacts one against the other. So significant in terms of the ultimate outcome. The losses that we anticipated incurring as a function of some of those relief programs, and we started to see that. Some of the delinquency rates, as expected, have come up with the deferral programs rolling off. We built those into our performing provision as best we could see them playing through. And we -- as I said earlier, we'd expect to see that play through over the next couple of quarters just given the roll rates in the credit card portfolio. But all of that has really contributed to, I think, a lesser loss experience and less suffering in the market, in the community generally, as a function of those programs.

So the -- you mentioned the credit card business, and this is industry trend, balances are way down. There are some data points out of the U.S. that a certain percentage of stimulus payments have been going to pay down credit card debt, which is good behavior, not good for revenues, but good behavior. I also wonder -- I mean, this is like the types of actions that governments might take, especially in Canada, if some of that balance -- those balances that are gone might never come back. If universal basic income or something like that, we're introduced in Canada, could it be like something that structurally changes the lending industry in Canada?

Yes. So I'll start with the first part in terms of the credit card balances. We saw the combination of prudent behavior by our clients. And I think that you've seen that across the industry. And the government support programs resulted in an increase in the savings rate. People were paying down debt. And so our credit card balances were down year-over-year as a result of that. And part of it also is a function of -- with the lockdowns, the level of activity and the opportunities for spend were different. And so I'd say that we saw that broad-based, sort of across all risk categories within the portfolio. So I think that was a broad-based phenomenon. As we see the economy open, we'd expect to see those balances resume. To the extent there are policy changes in terms of universal income, for instance, as you mentioned, that -- we'll have to see sort of how that plays out. There's certainly the possibility that, that could have an impact. You could also see just the level of spend rise to meet that sort of policy level. So I think we'd have to see how that plays over time. It would be speculation at this point. But certainly what we saw in the portfolio through the pandemic was people applying that extra liquidity to generate savings and to pay down debt. And that prudent behavior, coupled with the lockdowns has, I think, all contributed to lower balances in that particular category.

So on more capital-related topic. We did see credit migration, not just in the income statement, but in the capital ratios, where negative migration resulted in higher RWAs. Does some of that start to come back this year? I forget the number that -- the impact of credit migration on your capital ratio over the past year. But some banks have already started to reverse some of that, and I'm just wondering what your outlook is there.

Yes. So we expect it to be relatively stable. There's still uncertainty out there. So we'll see how things play out, but pretty stable. We were sort of net 10 basis points of negative migration. We saw negative migration in the business and government portfolios being offset by positive migration in the retail portfolios. And so that impact, we've already seen. And so as things reopen and as the economy continues to pick up, we look at that to be relatively stable. We'd expect to see RWAs increase, but also will be generating capital. And so overall, I'd say our expectations right now is pretty stable CET1.

So stable from that aspect? Or just kind of a stable ratio?

Yes, stable capital ratio as a function of sort of those are of RWA generation through growth, offset by capital generation internally. And that's sort of how we see things right now.

How about liquidity levels? I mean, there's been a massive increase in liquidity on bank balance sheets because deposits coming in, but also banks deliberately taking on more liquidity in the time of crisis. Is there -- of those 2 factors, which one is more important now? And now you're dialing back on liquidity, so how's the margin impact?

Right. So as you say, there's been sort of 2 elements of that dynamic. One has been deposit growth as a function of client activity, which was very significant through the pandemic. And the other was a decision that we made as an organization to ensure that we had very strong liquidity ratios to deal with any kind of uncertainty that might otherwise hit. And so we feel very good about our liquidity levels. I'd expect to see that kind of normalize as the economic backdrop normalizes over time. But we are certainly prudently managing all of those aspects at this point. And that liquidity that's come on from a client perspective, we're looking to optimize as we move forward. But overall, I'd say you'd expect to see these liquidity levels normalize as the economic backdrop gets to a more normalized level.

Okay. We got 1 minute left here. I want to ask about the risk appetite. So we're still in the downturn, I guess, technically, but moving our way out of it. And banks are -- they're wanting to get back onto the growth trajectory. Are you -- are there some pockets of the economy that are still no-go zones, ones that were previously unattractive that from a risk rewards standpoint have gotten better now? Like how generally is the bank -- sector by sector, are there any big changes in terms of your risk appetite?

Yes. I'd say not really. I mean, it's -- we continue to pursue our strategy. We'll continue to grow with our clients and grow the franchise in areas that we know and understand well. Certainly, there are areas like the COVID, particularly COVID-impacted segments. We're being very careful, obviously, around those. But we've seen momentum in our mortgage growth. We'll continue to do -- to pursue that. We've had it sustainability and our sustainable finance initiatives. We've been a -- we've got a leading franchise in Canada. We're top -- #1, I think, in Canada, top 10 in the U.S. We'll continue to pursue that. It's aligned with our commitments as well. So I'd say broad-based growth across the franchise and continue to support our clients and focused on industries and sectors that we know and understand well. And as I said, the COVID-impacted sectors will continue to be cautious around as we watch for the continued evolution of the economic backdrop.

Well, with that, Sean, I'd like to thank -- I think this was your first conference, and I'm honored that you came to ours. I hope the rest of your meetings today go great. Have a good one.

Thanks very much, David.