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

All right. I'd like to welcome you all to our next session and happy to introduce Jon Hountalas, who runs the CIBC's commercial banking and wealth businesses, also a native Montrealer, so should mention that, given where we are. Thanks, Jon. Appreciate you coming here today.

I'd like to start off with just some commercial banking aside from mortgage has been one of the big growth stories in this post-pandemic period. We are seeing different trends between Canada, where growth is in the double digits and well for the industry in the U.S., it's still low single digits in commercial lending. What's your perspective on why Canada is outgrowing the U.S. in the commercial business?

That's a great question. So that is not a new phenomenon, right? So let's take it. I always think of the world now before 2020 and post 2020. So before 2020, the U.S. would grow 4%, 5%, we would grow 10%. If you look at the U.S. middle market, it is not as reliant on banks as the Canadian middle market is, right? The high-yield bond market, TLB, private placement, loan funds, alternate lenders, they play a much bigger role, I believe, in the U.S. mid-market. In Canada, it's all on the banks. So you see all the growth on the banks. So I think you'll continue to see the banks grow in the 10% zone, and I think you'll -- high single, low double. I think you'll see the U.S. banks revert to their mid-single. The last couple of years, it gets more confusing, because the U.S. had this PPP program, which was much different than the subsidies we did here in Canada. In the U.S., the clients got money upfront, forgivable, repayable, complicated formula. In Canada in the mid-market, it was largely a subsidy program that trickled in over time, so cash flows are actually harder to compare.

So market structure was one of the elements and a tangential question on that. Is that a risk that could develop over time in Canada that there's more nonbanks going into the middle market or?

Listen, I think, the banks -- I think the middle market is well served by the banks. Some of the U.S. loan funds are coming up here, I think you'll see in time more access to capital for middle markets in Canada from kind of other players from the U.S., but I don't see any inherent risks today, no.

Okay. And a question I've asked a few of the other presenters today is on overall growth in the commercial portfolio and how skewed it has been to -- by, I should say, commercial real estate lending, which in my view, is probably like a derivative of the housing market. So is that depiction accurate? And two, if I don't know, it seems unforeseeable now. But if the housing market really grinds down to a halt, does your commercial lending also grind down to a halt?

So again, another good question. So let's go pre-'20. Pre-'20, if you looked at our growth. And I think the industry was roughly the same. The diversified space and the real estate space grew roughly at the same rate, roughly. '20 and '21 is a different story, right? The diversified space, I mean, the economy was shut down for a long period of time, at least with us for a while, the -- we knew in '20 that it was going to be flat lined or there or thereabouts for diversified commercial banking. I mean the economy was closed. For real estate, it kept going. So we knew that real estate growth would continue, while the commercial -- the diversified space would flatten. What we didn't expect was how strong real estate would be in the last 2 years. So in our book, about 50% of our commercial real estate is residential, a little less than that, 50% nonresidential, call it, industrial, office, retail, and they're growing at roughly the same rate. So it's not skewed to housing. I think if housing slows, for sure, it will have an impact. But overall, [ Canada's ] real estate continues to be healthy. And we've been at it, we've had this one group that's been doing it, all the real estate at CIBC is managed by one group. It's been doing it for 25 years and at least I've been there for 12. I don't think we've had -- in the combined 12 years, I don't think we've had $10 million of loan losses, right? The market has been very good, and we've taken advantage of it.

And then as far as line utilization rates go, I suspect they're still running well below pre-COVID levels.

They are.

I'll make this a what are your clients telling you type of question. So what are they telling you? Do you see them underutilizing the lines? Why is that? Is it -- I'll stop there.

So the utilization, so do I think their borrowings are going to increase, I think the answer is yes. I don't look at utilization as much as others do because I have found that entrepreneurs now want more wiggle room. With uncertainty, they want bigger lines even if they don't use them. So the utilization is going down, but I'm not sure it's 1:1. So our utilization rate is down about 3%. So you could say there's 3% of upside, not 100% sure of that. What I do know is historically, if you looked at CIBC, we've been publishing these numbers for a while. About 50% of our growth comes from existing clients, 50% comes from new clients. And we've been growing roughly 12%. So think 6% existing, 6% new. Last quarter, we reported, I think, 18% loan growth and 60% of that was existing clients. So there is pent-up demand. 12% of growth came from existing clients, 6% came from new clients. So I mean entrepreneurs, again, I don't know if Ukraine, Russia will change things materially. But as I talked about on our annual -- on the Q1 call, the pipelines are good. They're better than '19. So I think at least -- and again, pipelines are not 2 years out in commercial banking. They're a few months out. And they feel pretty good. So I think you'll continue to see some growth.

And I guess that's another kind of what are your clients telling you. By your comments, it sounds like things are, in my words, honky-dory a bit because the pipeline is good and obviously, loan growth is good. But there has to be some element of concern of business owners, whether it's the situation in Eastern Europe or supply chain issues emanating out of China. What's the -- what are some of the things that are worrying them?

The 2 things, I would say there's inflation, there's supply chain, there's labor. And they're all -- they all have impact. If I was here 3 months ago, I would have said supply chain is starting to feel a little better, not so sure anymore. COVID, China, Ukraine, Russia, again, a few more complications. So I think supply chain will stay. Labor I think we're all facing it in all our industries. I think it will stay. It feels like it's easing a little bit, but still an issue. And the one to worry about as well is inflation. Historically, when I talk to entrepreneurs, they say "Don't worry about it, people want our goods, people are paying, we're not feeling it." That's true. They're still not feeling it, that can't last forever. At one point, there's going to be -- something is going to have to give and what entrepreneurs have to watch. And what we're watching is they have supply chain problems, and they think that prices are going to go up. So you have to make sure they don't overdo it on inventory purchases and get themselves into a bit of trouble. And those are the discussions. How much do you order, how long will it take? And again, if you have smart clients, it all works. So that's what you have to watch that they don't get overexposed to these extracurricular events.

Tangent question but on the commercial business. And I have some wealth questions coming, but we'll stick with commercial for now. But across Canada, is there any areas you are underrepresented? And I suspect maybe Quebec is -- everybody says Quebec.

I'd love to do more in Quebec. You've got 2 very strong homegrown banks here that control the market. Against the big 5, the other banks we're fine. The big part of the market doesn't go to the big 5, I'm from here, so I have a particular soft spot, but we'd like to do better here. We're growing nicely. We're growing faster than the rest of the country. The economy has been hot. So it's been good. But in a perfect world, I think everybody would like to be bigger in Quebec. It's an important part of the economy, right?

And is the labor shortage, which is a challenge for your customers as far as your business goes, getting -- I expect your hiring commercial bank areas. Is that tough these days?

Yes. Well, we've had a model now for 11 years or so. We grow our own talent. For the most part, we bring students from university. We train them for 2 years. We want to teach them kind of the CIBC way, focus on numbers, focus on people, focus on culture, get them into our way of doing business. So when we -- what we're seeing is when we lose relationship managers and turnover is higher everywhere, not losing them to other banks, but losing them to cool jobs, right? Fintech this, cannabis that, they're trying new things. We're probably promoting our associates faster than we have historically. It's a 12- to 24-month program. We used to do most of them between 18 and 24 months. We're now doing most of them between 12 and 18 months.

I'd like to spend a bit of time on the relationship between commercial banking and the private equity -- mid-market private equity sector in Canada. Let's just big picture, what's your strategy as it relates to lending to the sponsors or investing in the funds. I know this has been topical because one of your peers has been co-investing or whatever. What's CIBC's strategy? What are you doing? And what are you not doing? And the why's, I guess?

Okay. So let me start with the business. It gets a lot of attention. It's a great business, right? The margins in the PE business are higher. Leverage is higher, margins are higher. You lose a little more money. But if you're smart, the higher margins versus higher losses is a great trade-off. And it has been that for us. So we, again, have a group that does this, about 30 professionals. We've been doing it for 16 years, and we cover principally Canadian PE firms. In 70% of the cases, we would be either the sole bank or the lead bank. That's our strategy. Most of these deals have 3 or 4 banks -- 2 to 4. We'd like to lead or have it by ourselves, depending on the size of the deal. When you do this business, you get close to the sponsors and you have an opportunity to invest in the fund, if you want. So we do invest in funds. I think most of the Canadian banks invest in the funds, small investments. 1%, 2%, 3% of the fund. So if somebody is raising $200 million, we might put in $3 million in the fund. One of few banks, 2 banks would probably go into the fund. It just shows the market that we bring credibility to the fundraising. I think we bring some credibility to the fundraising efforts. That's the word. So we have some of those investments. We do them only to firms that have good investment returns, that are important to us from a relationship perspective, and it's a very small part of the fund. Those are the 3 conditions. Then some banks, and we don't do this. Some banks, in addition to investing in the funds, they invest along with the funds, they invest in a company. So as an example, if Canadian private equity fund purchased a Quebec company for $200 million. And it needed $50 million of equity and $150 million of debt. The -- in our world, the PE fund would put in the whole $50 million. Some other banks would tell the PE fund, you put in less than $50 million, we'll put in a bit ourselves directly into the company. That's something we don't do. A couple of the banks are doing it and it's a different strategy, kind of not our thing.

Okay. And as far as the business that you are doing, the loans to the -- to buy the company that they're investing in. How big is that in terms of the overall portfolio?

Less than 4% of the book.

Okay.

Right? So our book today is probably $80 billion or $82 billion. It will be in that zone, about 4%, a little less. And it hasn't grown any faster than the rest of our book. It grows in line with the book. It's a great business because in addition to the spread loan loss equation, our mid-market clients love it, right, because we introduce them to these PE firms that we do business with, right? And now they have people to talk to about selling their business. And then -- and we'll talk about this perhaps in our wealth discussion. When they sell, and we've introduced them, and wealth is created, our chances of landing that wealth go up. So it's a great business. It's a great commercial bank business, and it's a great wealth generator business.

You said maybe we'll talk about it, we are going to talk about it because that's my next question. The wealth -- sorry, the commercial banking and wealth businesses were integrated in 2017. So we've had 5 years of -- roughly 5 years of them working together. What -- I'm sure I've asked you over the years what's the business case, is there any sizing of an opportunity, stuff like that. But now that you've been doing it for a while. What can you say about how successful that is?

So it's been good, right? I'll give you -- so I'll give you last year. Last year is a typical example. $5.2 billion of referrals principally between Wood Gundy, private banking and commercial banking. And this is all because teams work together and get to know each other's clients, introduce each other and new funds come to the bank. Most of the funds is commercial entrepreneurs, bringing their banking and their investment business. So their investment business largely to Gundy and the banking business to our private bank. Some business goes back to the commercial bank, we've had more success at least at CIBC, moving entrepreneurs wealth.

Okay. So it's been more, all right, commercial into wealth?

So far.

Okay. Is there -- I mean, I like sometimes getting into the nuts and bolts with an example. Is there a system in place? How do you -- I'm a business owner and CIBC is my bank. How do you get me from just being that single product, if you will, customer to do some private banking with us as well, like what's the system?

Yes. So in the old days, I think what would happen, I talked a little bit about the private equity. People would wait. We'd sit down as private bankers. We would wait for a commercial client to sell. And then we'd ring the bell and we'd all go after the commercial client and say, you now sold for 50, 100, 250, let's become your private bank. What we learned was, if that's your strategy, that's hard, because everybody is -- by the time you get there, the entrepreneurs, they already are well established. So what we did early on, you have to remember, like to refer your best clients either side, private banking or commercial banking. I mean you really have to -- systems aside, you have to really trust the person at the other end of the transaction in the bank. So we spent the first couple of years. That's why we put the teams together. So they would know each other, trust each other to give each other referrals. And then we build systems where we talk about our portfolio companies, who do we think has an opportunity? Who doesn't have an opportunity? We pitch together. We've created entrepreneurial offers. So you think about the average entrepreneur. They're wealthy, 80% of their wealth, maybe 90%, sometimes 100% sits in their company. And unless you have these 2 teams together, it's hard to know what's the value of that company. How do I build that value into the financial plan of the entrepreneur? The entrepreneur is 50 years old. He wants to sell in 10 years. No one tells him how to structure his life. He's got this big valuable asset that nobody can quite figure out. You put the teams together, the commercial guys, the mid-market investment bank, we understand the value. We sit with the private bankers, our wealth advisers, we build plans around that model. You bring them over, you come up with special bespoke offers. So you bring them over as clients long before the sale. And when the sale comes, it feels much more natural. So we would refer in a year back and forth, 600 clients a year. And again, last year was a very strong year at $5 billion, but we'll do $3 billion to $5 billion of that type of business every year.

So that not would be -- majority of that would be commercial bankers transferring dollars that they've -- into AUM or?

Yes. Sometimes AUM, sometimes -- in the $5.2 billion, it was probably 50% investments, 25% deposits, 25% loans. And it's all -- the beauty of it is most of it is money that sits elsewhere. Like it's not moving it around the bank, right? You're banking the company, the individual is probably not banking with you. So, so far, so good.

Wealth on a standalone basis. If I look at the earnings contribution of wealth versus the peers, it's still at the lower end of the spectrum. Is there like -- and I know you're going to have an Investor Day in a few months. Is there an emphasis on closing that gap? Or do you...

So the gap -- so I'll -- when I look at the wealth businesses at all the banks, they are -- the geography on them is all different, right? So that's part of the issue with comparing. Like as an example, in our case, the wealth business has Wood Gundy, private banking, our investment counsel business, and it has asset management. Investor's Edge doesn't sit in the wealth business. In many other banks, it sits in the wealth business. [ Mic Cap ], our U.S. wealth business, it doesn't sit in my SBU. In many other banks, they put them together. So -- and it's not always easy to put all the wealth business together for others to know what it contributes. It sits between 14% and 15% of the bank. It's still light. We'd like it to be better, while it's a great business. My background is in commercial banking, but wealth is a great business, no funding, no capital, recurring revenue. It's all the things we like. So for sure, we need to push harder to grow in that.

For a while, it was -- the buzz was that CIBC would look to add some institutional money management to its wealth business. Is that still...

Could do. We're looking at some stuff, right? There's some alts, private credit alts. There's some products we want to add, may do it on our own, may do it with others, haven't ruled that out for sure.

Okay. So I didn't know Investor's Edge is in the personal banking.

It's in DFS.

Okay. And you monitored how that business is doing, given the competitive landscape where the no-fee -- no commission trading is ramping up pretty aggressively?

Yes. So, so far, that hasn't hurt us. So the business is doing well. We're investing in it. It's run by Harry's group. We're investing in onboarding. We're investing in analytics. We're investing in some tools. We -- some people followed the drop in price, I think we're competitively priced and we're growing. So no plans to change anything on the pricing side at all.

Okay. We can talk about the technology investments now. But we can do commercial and wealth separately. What are the kind of key investments you're making in each of these businesses? Because this is obviously a year for CIBC, where the investment spending has picked up.

So investing in both. In the commercial bank, you need a few resources, right? You need people, you need capital, you need funding, you need tech. Tech is probably not as high on the list as it might be in the wealth business. So we're investing in all of it. But in the high-touch, high-tech, commercial is -- we're investing in people. We're investing in digital onboarding in commercial, we're trying to speed to revenue, remove some of the obstacles, the complexity. So there's -- that's a 2- or 3-year project that's going well. So again, isn't built into -- we've been doing it without this. So we've been onboarding, doing a good job, but we think there's more to do. So big onboarding spend in commercial. In wealth, we have a few things going on. We've -- I think we've talked about it on calls, we introduced digital goal planning, financial planning, that's been a big hit. We've introduced pricing models to make people understand the price of their book and how they can do things better in our Wood Gundy franchise. We are investing in asset management and simplifying the onboarding in the branches. So that will be a big win, we think. We're investing in a unified account at Wood Gundy, which is all about fee-based, making it easier to do fee-based business. And finally, we're going to leverage a CRM system that the bank is introducing across the organization. So lots of good investments in wealth -- for wealth that we think will drive outsized growth over the next few years.

Now the private bank, Imperial. It's still called Imperial, I assume.

Imperial Service.

Imperial Service. How -- it's been a while since I've asked anything about that? Is it something that -- if you had to highlight something special about that business, what would it be?

So again, Imperial Service reports into Laura. It's -- it sits between retail and private banking. I think we're the only bank on the street. I think it's a total jewel. I think it's -- CIBC is known for Imperial. We give individual relationship managers to the mass affluent. And we've been investing, we again think mass affluent will grow faster than the economy as a whole. It's an area that Laura is focused on, the bank is focused on. I think it's a jewel in CIBC.

You got to figure out which business resides where. And the markets have not been so favorable lately. And what's your -- is it material earnings headwind we're in right now or...

Listen, it's less reliance on markets today than there may have been 5 and 10 years ago because financial planning is becoming such a bigger part of the wealth business. 5 and 10 years ago, it was how do I beat the market in and out. Now it's -- how do I plan for my future? How do I take care of my family? So there is less correlation between the markets and performance. But it's still there, right? When the markets are choppy like this, people stand on the sidelines. I don't know if it's one for one. The market drops, you -- if the market drops 10 year volumes drop by 10, that correlation, I'm not sure of. But certainly in volatile choppy markets with all the noise, people take a pause.

Got it. On that note, I think we'll call it. And Jon, I appreciate the time, and I appreciate you coming down to participate in the conference in person.

Nice to be here. Thank you. Thank you.

You bet.