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

Okay. Thank you. Welcome back to the conference. It's my pleasure to have Victor Dodig, the CEO of CIBC here. Before we begin, I'd just like to remind you all 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. With that, welcome to the conference, Victor. Good to see you again.

Good to see you, Darko.

Thank you. And so maybe we'll just start and now the fact that we had the regulator here this morning, and I'm kicking it off with everyone. I think we just start maybe a little bit on capital. And in CIBC's case, 12.3% Common Equity Tier 1 ratio, that's a fully loaded -- it's a very strong ratio relative to the minimum, but it is on the lower end of the peer average of being around 13.3%. So the first question is where do you think you should be operating? And given the fact that the regulator may be implying that capital ratios would be going higher and certainly not this year, but potentially next year. Where would you like to operate CIBC, at what capital ratio do you think is optimal for your company? And how do you plan on getting there?

Well, thank you for the question. We feel very comfortable with the capital level that we're at today at 12.3%, well in excess of regulatory expectations and even heightened expectations over time based on what they are superintendents talking about this morning. So as we go into the year, we generate 55 to 60 basis points of capital a quarter. Our goal is to obviously pay 40% to 50% of that of dividends. Some of it will also be consumed by organic growth in our RWA, and we've seen very good organic growth across our businesses. And we'll be about 20 basis points of that, that gets used for the Costco investment. So we have ample capital to also continue with our buyback program as well as any tuck-in acquisitions. And our goal is to operate at 11-plus as a kind of a baseline, if you will.

And we've had some precedents now in the marketplace of a company making an acquisition and suggesting that it will draw it all the way down to 11%. And do you think that, that's also something that's potential for yourself as well to eventually go down an inorganic route of capital deployment, in which case we could see you operate at around 11%?

Our primary focus, Darko, has been an organic growth trajectory and investing in our business organically. And we found that, that has really paid dividends to our franchise in terms of deepening and attracting client relationships and it is the highest and best use of our capital, and that will be the real focal point for our business. We've always said that there are tuck-in acquisitions that will improve our ROE and strengthen our businesses. We'll look at those, but this is an organic-led strategy that we're very, very focused on, and we see that paying dividends in our businesses in Canada, the United States and across our franchise. So we're pleased.

Okay. Great. Now one of the things that set CIBC apart, I think, in 2021 was very strong revenue growth and -- coupled with an elevated expense base. And so for 2022, you had guided to a relatively high expense growth in the mid-single-digit range. Maybe you could talk a little bit about just to sort of provide a little bit of color around the elevated spend and the kind of investments that you're making in 2022? And what is it that you expect to get from these investments? Maybe you can give us some sort of tangible measurable sort of expectations around what we're doing with the spend.

Sure. So last year was a record for our bank, record revenue growth generated over $20 [indiscernible] in revenues. We've seen that across all of our businesses. So we are going to be really pleased with our performance. We've seen good market share growth. We see client experience scores improve across all of our businesses as well. And we did have an elevated level of investment because our view is that as banking changes, you need to continue to invest to drive the strategic growth agenda of the bank to transform for the future, to free up legacy resources to invest in the future. And that whole cluster of investing is paying dividends. You see that in terms of how our mobile banking platform is rated. You see the investments that we're making that are transforming to growth in our retail business, our digital financial planning platform, CIBC gold planners now approaching almost 200,000 plans. With every plan that we do with clients, we're seeing deeper relationships. We're seeing improved Net Promoter Scores. And we've been quite clear to our investors that in this year ahead, 2022, we will continue to invest but we'll also see a commensurate growth in our pre-provision earnings as a result of that. So we're very, very focused on what type of pre-provision earnings growth profile is generated by our investments. And that's our focus. You cannot start a bank in this day and age to actually maintain a competitive advantage.

And so you mentioned a couple of digital planners, expenditures and the benefit that you're getting from that. What about the cost side? Are you spending to digitize the bank and also remove costs as well? And do you have anything that you could share on that front that might give us some more comfort on?

We are. On a relative basis, I think we're moving into the cloud on a more intense basis than many of our peers are. And that will allow our [indiscernible] to be moved into the cloud where you see some scale economies come in terms of our cost base over time. Now some of that comes over time. It doesn't come right they went. So what I see is an investment poster that delivers good earnings growth. And then what we'll see is we'll see our cost base adjust over the medium term. But the investments that we're making today are driving a much better growth profile for our bank. And this is where we want to get an advantage on the top line side and the revenue side across all our franchises, which is why it's a balance. So I kind of look at today, the investing is driving the revenue profile. Over time, it will drive even a better cost profile while maintaining that revenue profile. And we believe that we're working toward the 5% to 10% earnings per share growth been quite clear with our investors. And over time, we'll see that improve towards the upper end as our investments take route.

So I definitely want to touch on the revenue growth opportunity. But before I do, I just would be remiss to not touch on inflation. It sounds like big numbers are expected in the year, potentially that this is not transitory that it is, in fact, something that we're going to have to live with going forward. What are your thoughts on inflation and how you're managing the bank in an inflationary environment?

Well, my view is -- and our view is that we're going to see a heightened level of inflation as we move into 2022 and the out years. The 2% inflation that we've seen in the pre-pandemic world is likely something of the past. And that's okay. So a slightly heightened level of inflation and high level of interest rates would be good for the banking sector, quite candidly good for the economy as money gets repriced to a more normalized level. I do not -- we do not foresee significant levels of inflation going forward. If that were to occur, we'd obviously adjust our investment profile so that we're delivering financial performance that our investors would expect. So I think you're going to see an inflation rule that's in the 4% on an annualized basis. You'll continue to see negative real interest rates until they adjust over a period of time. And that, quite frankly, is a good outcome for the economy overall as we seek to retire the debts that have incurred from the pandemic and public accounts level.

And so now turning to growth, okay? So let's think about CIBC, the story has really been around the rejuvenation of the Canadian consumer franchise, right? We've had excellent mortgage growth. in Canada, P&C was accelerated. It was one of the highest amongst the peers. So what are your expectations for mortgage growth in 2022? And what is the sort of the next focus for your business as we think about broadening out the franchise in 2022 and beyond?

So the business has been rejuvenated from a Canadian personal business banking standpoint. It's now a front foot and we are seeking to continue to grow market share in the marketplace across all categories through deeper client relationships. The case in point of mortgages, we've gotten that back to a market-leading like level. We -- irrespective of where the market goes, we plan on maintaining a leadership level there. But more importantly, across the franchise. We're not looking to lead with a product, we're looking to lead with building relationships. And what you're seeing in our bank, Darko, is attracting new clients and deepening existing relationships is happening in our personal and business bank. It's happening in our commercial and wealth franchise on both sides of the quarter. It's happening in our capital markets business. So for us, it's continued investment to grow market share at the expense of our competitors and doing that in a very profitable way. And we feel very, very good about the bank that we've built. It is built for growth. It's on the ascent and you should expect to see us continue to perform across our franchise going forward.

And so if you've attracted new customers and maybe a lot of that is coming from the mortgage channel, maybe not, you can give me some idea on that. If you're attracting them through the mortgage, what's next? What's the -- as you build that relationship? What's next for that customer on their journey and their relationship with CIBC? Are you looking at wealth? Is it credit? I mean could you give us an idea of what the biggest opportunity is?

Sure. First of all, let's make sure that the client experience continues to be leading edge and market-leading in terms of the digital experience. So clients can self-serve on those aspects of the relationship with our bank, that they can actually transact on their own, so that we can set aside time to build relationships. And a case in point, the personal bank, we're investing in our financial planning platform. We're investing in our client relationship management system. We're investing in our Imperial Service, which continues to be a market-leading offer. And with that, we're seeing that as every new client or existing client goes through the full robust relationship management of our bank, you're seeing a better outcome for them and a better outcome for our shareholders. In our Canadian commercial and wealth business, the setup that we have today where clients that run their own personal businesses are monetizing their well. We're seeing a pretty significant referral flow coming to our wealth management platform. And you're seeing market share gains, therefore, in our private wealth business as well as in our asset management business. And in our Capital Markets business, you're seeing a franchise that's highly connected to the rest of the bank. And this, I think, is a very unique and differentiating platform for us, $0.25 out of every dollar in capital markets comes from its connection to personal banking, commercial banking and wealth management. And that, I think, is a very different capital markets franchise than when you're seeing out in the marketplace today. So I think you're going to continue to see growth. The one thing that is notable that everybody knows about is the Costco acquisition. That will start getting traction in March and April of this year, and that will bring on a significant level of clients that we plan on franchising as banking clients over time, that will provide a real pipeline of growth for our retail franchise going forward. And that is a very attractive client base because it's an affluent client base, many of which don't...

Okay. It tailed off there a little bit for me. I hope we still have you. Okay. I can hear you.

I'm here. I was talking about the Costco investment that will actually bring on a significant pipeline of affluent growth over time because many of those clients don't bank with us today.

Okay. So maybe on that topic with respect to credit cards, let's talk about the existing credit card portfolio. It's been down across the board during the pandemic. Can you talk a little bit about what we saw during the holiday season? Are we seeing a lift? Is Omicron rearing its ugly head and causing it? So what is your expectations for credit card volumes? Maybe talk about now but thinking through 2022.

Well, first, let's just step back and look at the credit card portfolio that we've built over the last number of years. We have market-leading travel offer in terms of both offering the Aeroplan as well as our own Aventura card, which has done very, very well. We have a nontravel portfolio with our dividend card and soon the Costco card that is going to be market leading in its category as well. So we're well positioned for consumer behavior irrespective of how the economy evolves. If clients go back to travel, we have market-leading offers. If they stick with the nontravel side, we have market-leading offers. What you saw during the month of December, as we've headed into the holiday season, what we saw was robust purchase volume and to some extent, outstandings growth. Then the next lockdown hit, and now we're going to have to wait to see how things evolve. Clearly, there's excess savings out in the system. So I think that purchase volumes will be robust as the economy opens up into the spring. I think outstandings are still going to be more tepid over time until consumers exhaust the excess savings. And that's the big question mark is how a consumer behavior evolved in the fully post-pandemic world. My sense is it will start to normalize over time, but that normalization may take a little bit more time than some of us would have hoped for.

Okay. Great. So just thinking about interest rate sensitivity, I would say in CIBC, when we look at CIBC, it's right down the middle of the road in terms of its overall rate sensitivity. But how do you think about interest rates? How do you think about managing the bank in a rising rate environment? And we're not talking about 1 interest rate increase or 2. We're talking about a series of rates over an extended period of time. Hopefully, there aren't any shocks in there. How do you think about managing the bank in that kind of environment? And do you dial up your interest rate sensitivity or dial it down as rates go up from here?

We manage our structural interest rate risk. So we try to match our assets and liabilities to its more extent as possible. With rate increases on the horizon, I think everyone recognizes that money has been mispriced, as I would say, over a long period of time. And as the central banks look to normalize those rates, we see that, that would contribute to our margins over time. But again, that will take time, right? So we see this year, as I kind of look at margins overall, I'd say that in the early part of the year, you'd see a few basis points shaped off. In the back half of the year, you'll see that improve as rates improve. And with 3 to 4 rate increases over a period of 12 to 15 months, you should see that as an enhancement to margins over time. But for the most part, we manage our structural interest rate risk and really what we see our growth coming from, Darko, is growing market share in the marketplace, making sure that we're benefiting from the immigration inflows and capturing our fair share as well as winning market share from others across our franchise. That is going to be the primary driver of top line growth.

Great. And maybe just shifting gears a little bit, thinking about the U.S. franchise. I think Michael Capatides or Cap has been there since 2019, [indiscernible] been there for a couple of years. What's the next pivot? Is there a pivot? What is -- what are you expecting from the U.S. franchise? We've had good organic growth. Is it just simply shouldering on and doing the same things? Or is there going to be a pivot in strategy now that he's had his time down there to sort of work his magic, so to speak? What does he do next from here?

Well, our bank's investment in the U.S. has been increasingly appreciated by our investor base. If you look at 5 years ago, we generated 2% of the bank's earnings from the United States, which equated to about $85 million, $86 million after tax. This past year 2021, it accounted for 21% of our bank's earnings and accounted for almost $1.3 billion net income after [ comp ]. That is a sizable jump in a large market. And it's a function of the investments that we've made, but also the significant organic growth that you've seen in our commercial bank, in our wealth management franchise and our capital markets business. And Darko, I think we should expect to see more of that continue. Now as we've grown in the U.S., we're going to be investing more in the platform. We just launched a significant investment in our wealth management platform as we bring our businesses together on the one unified platform. We're investing in the backbone of our commercial bank to support future growth. And I think what you can continue to expect in the U.S. is continued growth in our franchise across the board. In Commercial Banking, we have market leadership positions in health care. Innovation Banking is a bigger thrust of growth for us in the U.S. We just launched an equipment -- specialized equipment finance business in the U.S. In our wealth management business, we're adding private bankers to generate more deposit mortgage growth. Currently, our wealth management business is ranked #4 by Barron's in the RIA space. It has over $100 billion in AUA, Darko. This is something that we've built from scratch 7 years ago, and we see continued growth there. In our capital markets business, much like the business in Canada is very connected to the rest of our bank and is driving significant growth from its connectivity of Commercial Banking, Wealth Management, in addition to investing in energy transition, in addition to investing in prime brokerage, in some of the global markets capabilities that we have in the Canadian market that we're extending into the U.S. So you will continue to see our U.S. franchise thrive. You will consider -- continue to see us invest in that business, and we're very encouraged by the organic growth profile that we have.

Okay. Great. And you touched on capital markets in your answer there and saying it's very connected, which is I find very interesting. So it's really quite -- and I think the number you gave us was $0.25 of every dollar is coming from its connection. So if that's the case, maybe now we can sort of talk about capital markets, first and foremost, what are your expectations for this year for capital markets? You may have a great year, right? I mean should we think it's a tough comparable? Should we be excited? How are you tracking so far against your expectations in the capital markets business?

Well, we had a very, very strong year in 2021, and we expect that to continue both on a relative basis. And then if the market continues to provide tailwinds, we plan to capture our fair share of that in all the component parts, that would be in our trading business or global markets franchise. We have a leading position in foreign exchange. We've got a very robust derivatives platform that we've built. And a lot of that has been rooted in the technology that investments that we've made over time. And we talk about investing in technology and driving further growth, our capital markets franchise epitomizes what we're trying to do as a bank across all our franchises. The second thing is in our corporate and investment bank, one particular area that's notable there is our growth in the energy transition space. We rank as a top 10 renewables lender in North America. We're #1 in sustainability-linked loans. That whole space of renewable energy is where we're seeing some pretty significant growth, not just here at home, but also in the United States and abroad. And then, of course, we put our direct financial services businesses in the capital markets business for a very good reason. One is they're very technology driven, which is, again, reflective of what the capital markets team has done in technology. Some of them are connected to the capital markets capabilities like our Alternative Solutions group, which is competing with TransferWise and Flywire, some notable fintechs and the money movement space as well as in the student financing space. We've got market-leading franchises there. We're investing in our Investor's Edge franchise, which is highly connected to the rest of our trading platforms. And of course, we've got a direct banking, Simplii. And we've set that up within the capital markets business in order to capture those self-directed clients that are -- that want to bank on their own. And that we see as a significant growth opportunity. So our direct financial services business is approaching $1 billion in revenues, and we see that as a real growth engine over this past year. The revenue is there around over 17%. You see that continuing to grow going forward.

And is it possible, given your discussion here with me on the capital markets business, is it possible that we see this business grow, whether it's balance sheet, whether it's risk-weighted assets, whether it's pre-tax, pre-provision earnings, is it possible that we see that become a much bigger part of CIBC overall? Or do you think that the other businesses can sort of keep track and we're not going to really see a shift in mix?

Well, here's another case in point. You go back 5 years ago when capital markets were accounting for more than 20% of the bank's profits this past year, it's about 16%. Your profits have almost doubled in capital markets because the rest of the bank is growing. So we see that as a really important narrative for our overall portfolio of businesses. They're all growing, and they all need to continue to grow to support growth in other areas of our business. So that is something that you're going to see is a balanced approach to how we grow the bank, a balanced approach to how we diversify the bank and a better outcome for our shareholders that is going to deliver pre-provision earnings growth that meets and exceeds their expectations as we go forward. That's just our philosophy overall, Darko. It's not going to see a tilt to one business or another. But it's getting good diversification across our franchise and staying highly connected across our franchise, which I think is a unique characteristic of how we run our bank today.

So I'm going to shift gears a little bit, talk about credit. It's been pretty benign. Your bank has suggested, hey, PCL ratio in the range of low to mid-20s for 2022. Curious about your assumptions, your underlying assumptions around that. And if Omicron is a matter, how should we think about your PCL ratio outlook? And could it be that first quarter? We don't see as much releases as we've seen in the past. Or maybe just some early thoughts here on PCLs and your allowances given where Omicron has taken us?

Sure. All look, nobody knows where Omicron will go, but I think the consensus is that this is something that we'll get through in spite of the very challenging circumstances that exist in the health care system today. So if you break it down, we've said that impaired PCLs will be in the 20 to 25 basis point zone. In the early going, you won't see as much activity in the consumer side, but as the economy opens up, you can start to see that normalize, although not likely at pre-pandemic levels, the business and government portfolio that we have, again, we see companies that we bank largely are in a very good position and looking for the economy to continue to open up. They're actually deploying capital. So I think that the impaired rate PCL that we've kind of stated is something that we'll kind of grow into overtime. It's always hard to predict how that happens quarter-over-quarter. In terms of our Stage 1, Stage 2 releases, I'd expect more of that, at least over 2022, but we're looking at a very benign credit environment with some level of uncertainty right now. But I think what we've articulated in the past to our investors continues to stay consistent with our views today.

Okay. Fair enough. I'm going to turn some of the questions from the audience. So the first one that's been uploaded here. You added a new equipment finance team in the U.S., why do you want to expand there? What opportunities are you seeing?

Well, we're seeing opportunities from our clients. And our philosophy in the United States and across our bank is if we can bring good bankers with good capabilities that meet the increasing needs of our clients with the infrastructure build that's out in the U.S., we see that as a significant growth opportunity, and we want to make sure that we [ fair ] share of that growth as that capital is deployed. We've got a fairly large construction banking business in the United States, and we see that equipment finance business as being a big complement to that as the infrastructure build takes hold, of course, backed by good bankers.

Okay. Next question from the audience. Interesting one. Your new branding, what does that do for CIBC? What are the benefits versus the costs?

Well, our brand is a very valuable asset. The intangible value of our brand has been pinned in the $9 billion to $10 billion range. It's a 150-year-old brand. And what we have done today is invest in our brand for the future. We built the bank that we wanted to become. And we thought that with the capabilities that we've built, the culture change at the bank, with a focus on our purpose of making our clients' ambitions a reality, and with an increasingly more significant focus on digital banking, we needed to refresh our brand to project both into the future and one that digitally renders better. And what we've done is we've invested in the Canadian business. We're going to be rolling that out into the U.S. business. It's all manageable from a financial standpoint, but the returns that we think we're going to get by the investment in the brand are going to be very positive. The early read on social sentiment, our brand has significant improvement of where it was because it builds on our heritage, but it looks to the future, and we're very pleased about that. Same thing with our new headquarters. We've moved in to -- we're moving into CIBC SQUARE. And again, we're purpose building our bank for the next 150 years. And that means not only the investments that we're making in digital [indiscernible] experience, but also rebranding the bank and projecting it into the future. So we're very pleased with early showing there, and we're confident that, that will continue going forward as brand consideration for our bank improves amongst consumers and clients.

And sir, just to pick up on something you said that you haven't quite launched this brand into the U.S., and that's coming, I guess, in 2022.

Yes, slowly launching into the U.S. Again, when you do the network effect, you want to concentrate in the markets. We've concentrated in the Canadian market and then the U.S. markets next.

Okay. Okay. Great. Another question. I think we touched on the Cap Markets business. So I just want to talk about this next question. Can you describe the culture shift going on at CIBC? That's pretty open-ended. So over to you on that one, Victor, if you can give us...

The culture shift has occurred, and the culture shift is all about focusing incessantly on many our clients' needs in making their ambitions or reality and ensuring that every part of our bank from the front office and our relationship managers to those that hire the best and the brightest, whether they're operations and technology and our functional support areas are building our businesses. There's a real cultural shift that's occurred over 7 years at CIBC. You see that in our employee engagement scores, which are some of the highest on a global norm basis that we see across industries, not just in financial services. You see our client experience scores at the highest they've been in decades. And you see that in our market share growth, which is really a reflection of the culture that we've built building relationships, deepening relationships and being a very different bank than the bank you were 7 or 8 years ago and being a bank that is going to continue to invest on that strategic growth agenda. So we see the financial performance, that client performance continue to outpace our competitors. So the culture of the bank is very much focused on our clients, very much purpose driven, and that's reflected in the investments that we're making, the financial performance that you're seeing and you're going to continue to see that going forward. The last thing I'll say is the collaborative nature of how we serve our clients in our bank as a competitive advantage. You see that between commercial banking and wealth management in terms of referral activity. You see that in terms of the capital markets connectivity to the rest of our bank. And that is, I think, a big deal when you kind of dig deep and see how we operate as a bank, we operate very much horizontally, very much collaboratively to serve our clients.

Okay. Great. We're bumping up against the end of our time. And as I'm doing with all of the CEOs today, Victor, I'm going to hand the floor over to you and ask you to give us -- what are the key messages that you'd like investors and shareholders to take from today's discussion?

Well, the first message is the message that I tried to echo through our brief discussion this morning, Darko, is that we're a very different bank. And we built -- we've put significant resources into building the bank that we are today over the past 7 years. And you see that in terms of our client focus. You see that in terms of the relationships that we've attracted, the relationships that we're deepening. You see that in terms of our collaborative culture. So the culture of our bank, the client focus of our bank, the reason for being, you see that in [ most of ] our businesses and across all of our businesses. The second thing that we're doing is we are investing. That's something that you raised at the very beginning of our conversation because we believe that transforming a bank to compete into the future requires investment. Investment that pays off in terms of revenue growth in the short term, and it pays off in terms of a better cost base over the medium to long term. And getting that math right is important for us, but that investment agenda is something that we're very focused on, while also delivering a high-quality level of pre-provision earnings. So we're investing in the client experience. We're investing in the cloud. We're investing and building stronger relationships by equipping our relationship managers with technologies that allow them to drive more growth with our clients. And the third thing I'd say is that all of our businesses are performing well. We have a stable of core businesses, personal business banking, Commercial Banking, Wealth Management and capital markets where you're seeing robust growth and robust profitable growth. And you're seeing investors investment in key differentiators. We talked about direct financial services. That is a key differentiator for us, and we'll talk about that more as we have our Investor Day later this year to give our investors more insight into why we believe that that's a big part of our future. Our Innovation Bank, which is growing from a very small investment in Wellington Financial to one of the leading innovation banks in North America, where we're banking the technology sectors, Software-as-a-Service, emerging health care as a sector as well. We're growing both loans and deposits and a differentiator in the energy transition space. We're working not only with our nonrenewable energy clients, but also our renewable energy clients to drive greater growth. And we're confident that the formula we have in place today to continue to stay client-focused, to continue to stay on an investment road map that drives profitable growth over the short, medium and long term and investing in these key differentiators will allow us to win and continue to be the bank that's on the ascent and one that's built [indiscernible].

Okay. That's great. Thank you so much for that, Victor. Great way to end the session. Thank you again for participating. And with that, we'll end the session, and we'll pick it up soon on TD. So thanks again, Victor.

Thanks, Darko. Thank you, everyone, for listening. Take care.