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

All right. Welcome Jon Hountalas, Head of Canadian Banking for CIBC. Jon was here last year and he had the Commercial and Wealth business under his purview, and now it's the whole Canadian banking business. So we'll have a broader discussion of that operation. Thanks, Jon.

Thank you for inviting me, Gabe.

You bet. I do want to -- we've got a lot of strategy questions, but I do want to talk about some of the more topical things initially on deposits. What have you been observing in your deposit flows over the past few weeks? Has there been a ripple effect linked to events in the U.S. that is percolated into Canada?

I would say, no. I think it's so far pretty restricted to the U.S. If anything, a bit of a net positive, but nothing material at the start of a few questions. How are things different? Few explanations, but really a nonissue. We were preparing for things, but nothing came, of course.

And what -- as far as the trends that we observed prior to all of this, whether it's the shift out of 0 cost into fixed term or intensification of pricing or has that accelerated at all or...

No. We came out of the chute fast on savings to GICs. I think you saw it across the industry. We -- our own business has slowed a bit on that front, could come back. But for now, we're seeing a bit of a lull after kind of a big surge, I think, at the start of the year.

And with rates pulling back a bit, is that...

It could be helpful, right. We're watching it. I think it's a trend that's going to continue.

Right. Now I mentioned earlier how your -- you've got a broader set of responsibilities now. And 1 comment I recall you making was how the Wealth business, there was obviously some linkages with Commercial, but then maybe some linkages with the personal bank that weren't as tight or performing as well as they could be. Can you give us a sense of how that strategy is going to play out in the next couple of years?

Yes. So let me just back up. I think if you looked at our Investor Day, we spent a lot of time on what we call a connected culture. I call joining up the bank, connecting the dots, whatever term you want to use. I think our capital markets business put out a number and said there's $1.3 billion between capital markets and the rest of the bank in revenue. I put out a number that said we're doing about $11.2 billion in referrals between Commercial and Wealth and Gundy. We haven't really talked about the referrals from the personal bank to retail. I mean they've been there forever. There are good flows. Whenever we move clients, we do the right thing, and we've seen investments go up 50%. So I think it will get a little better because we're closer. I do. But I think the real uplift for Wealth isn't the connectivity. I think we've always had that. The real kind of uplift is going to be our investment in Imperial Service. So I was here last year, I talked a little bit about Imperial Service. I called it a gem. It's now under my purview. It's a mass affluent financial advisor sales force. And we're the only bank on the street that has the sales force. It deals -- it's somewhere between the mass market and private banking. And that is a big seller of advice of investment products. We look at our business. That part of the retail market is growing faster. We're going to put more energy, more investment, more time, more effort into Imperial Service. So I suspect you'll see Wealth being a benefactor of that.

And that will be more of a Wealth or AUM type growth business but not so much on the lending side or...

Correct. Correct. So today, the business is probably -- if you look at Imperial Service, it's probably 20% lending. It's got some deposits, but the vast majority of the business is investment. So if we do it right, you will see higher flows over our AUM, right? Our percentage flow should go up.

Okay. Another business that's come under your purview is the Costco relationships. What are your initial impressions there? And then relatedly, how much has been invested in the deal -- in the partnership? And what does the future opportunity look like there?

So that was a big deal for the bank. That came to Victor's table when it was done. I liked it then. I like it more now. So I think the numbers -- and I'll miss them by a little bit. They're public numbers. I think the original premium was $350 million or so. We took a provision on the loan book when we purchased of about $70 million, and we put some acquisition costs in of about 70%. Those are behind us. So now you look at the business case itself and there's 2 parts to it. There's the card alone and there's the franchising. And the card alone is interesting, and it's gone as well or better than we expected on key metrics, on purchase volumes, on loans, on loan losses, all those have done well. Cost of funds have kind of worked against us because it's kind of moved. I expect that will regularize over time. The piece that we -- the thesis of the transaction was always the franchising. Can we convert 2 million clients, many of whom are mass affluent, can we turn them into CIBC clients? And it's early days. We have done tests as we go. Every test is coming in better than we expected. So when I look at the whole business case today, all the puts and takes, assuming the franchising continues not even at the levels we're at today, what we're seeing, but better than we originally expected, I think you'll see a very, very good business case. So I'm quite excited.

Can you just define franchising?

It's turning those clients into CIBC clients. So today, we've converted, as an example, a couple of months ago, we had $3 billion outside of the cards, where people joined us, bank accounts, mortgages, et cetera, et cetera, without a hard push. So now we're -- we've started. We're going to continue. We think there's significant upside there.

So that's been 1 area of investment, but the bank overall has made quite a few investments. It's been a theme for CIBC and CIBC's results over the past year or more. A, could you give me other than Costco and I guess private banking as well would be one, Imperial Service rather. What are the key areas of investment? And then as outsiders, investors, in particular, how do they assess whether or not these investments are paying off or not?

Yes. So those are very fair questions. So the Costco one's, probably easy. You'll see it in the whole credit card business. Look, we have internal metrics. We measure these business cases very carefully, both financial and nonfinancial. So Costco, I think you'll just see it in the growth of the credit card book. We've talked a lot about a digital goal plan. We call it CIBC GoalPlanner that is helping our clients digitally do financial advice. We've -- now that 50% of our Imperial Service clients doing a digital goal plan, lots of upside there. If that continues, we have internal metrics, Net Promoter Scores, number of plans done, but that will contribute to higher wealth management flows. We've talked a lot about the innovation bank. There, we were very explicit on numbers we put out on Investor Day. Even with the slowdown in the technology sector, we will comfortably meet those numbers. We've talked a lot about in the commercial bank. We've talked about investing in cash management. We've put a lot of money into streamlining onboarding processes. I think you'll see continued deposit growth. I think you'll see a mix ratio coming down from that investment. And finally, we have Salesforce. We're getting to know our clients better across the bank. I think you'll see lower retention, greater -- higher retention, greater cross-sell. So each investment has its own metrics. But I think overall, I think we'll be judged by how quickly our PPE grows. And I'm prepared to be judged by that.

All right. And then knowing your customer better, a big part of your customer base is in the mortgage business, which is along with the rest of the industry growing by the leaps, is slowing now, but leaps and bounds over the past few years. And alongside that growth, the message from CIBC is we're developing multiproduct relationships, not like in prior years when it was a single product. Do you have any stats you can share on of all that mortgage growth and those new mortgage customers that are new to CIBC, how many are taking on more products?

I'll give you 3 stats. 92% have another product. And again, now enrolled, I look at this 90%. That looks like a good number, but let's take a look at what kind of products. And I said, okay, how many have their main bank account 78%. So if you have your mortgage and your main bank account and your main checking account to a bank, I think that's your principal bank. So I think, again, those numbers have been increasing over time. I think the team has done a great job there. And finally, when you look at mortgage clients versus nonmortgage clients and you take out the mortgage, forget the loan, everything else the bank does, the client has with you, our mortgage clients have 2.4x the funds managed of our nonmortgage clients. And when I say funds managed, I'm totaling everything, deposits, investments, other loans, not the mortgage. So in general, attracting mortgage clients is good. And we have shown evidence of being able to deepen that relationship.

And another mortgage-related question, not the -- it is on the risk side. So affordability, payment shocks, trigger rates, these have all been the buzzwords in the mortgage business for over a year now, because of the -- the design of the mortgage -- variable rate mortgage product, a lot of borrowers are seeing their amortization periods extending. And then on renewal, they get back on site. So there might be some payment shocks there. How do you view that risk?

Yes. So listen, so far, I view it as acceptable, satisfactory. We're watching it carefully. Let me give you some numbers, and then you can maybe follow up with questions. So our book is $255 billion, the whole mortgage book. $155 billion is fixed, $100 billion is variable. The average loan to value is in the low 50% on the whole thing. So the book as a whole it feels pretty good. Then you start to look at, okay, what about the clients coming up for renewal, where the variable rate mortgage, which I think is the riskier piece, because the payments will jump the most. A third is coming due over the next 3 years, 1/3 of the $100 billion. Only $9 billion coming due in the next year of the variable rate mortgages. So when people book these mortgages, they book them long and now for they have, I think, time to adjust. So that feels like a good sign. Then we look at the ones that have matured. I said, okay, how are the people maturing? How are they reacting? And many are increasing their amortization faster than they have to. 80% are living by the rules and coming in right on time and 20% have asked for stretched amortizations. They're doing refinancings. But again, nothing material. And what's, again, interesting is the variable rate mortgages that we've renewed in the last little while, the average income is 10% higher than the fixed rate people. The credit scores are higher and the cash they have in their bank account's higher. So, so far, not seeing any stress, but of course, it's something we're watching, right? If this lasts a long period of time, you have to be careful, and we're on it.

So in the early stages of variable rate mortgage renewals and the new rate environment, 80% there just taking on the higher payment and going on with their lives and 20% are...

Asking for refinancings. And that's not materially different than normal life at maturity. And the average payment on a variable rate mortgage is going up $500 a month. But they're sitting on much more cash than they were sitting on 3 years ago. Again, so far, it feels normal.

And then those 20% they get reunderwritten, right?

Yes. Yes. When you refinance, you get -- that's a good point, Gabe. I should have brought it up. Most of the people that are -- that have mortgages today, while rates were quite low, they were getting qualified in the $500 to $550 zone, which is kind of where rates are today. So they should be able to afford the payments that are coming. These are the rates they qualified on a few years ago.

Okay. The other mortgage-related question I have is on spreads. I think in the -- well, in the fall of September, I guess, 2022, rates had already moved, but mortgage price -- mortgage pricing didn't move as fast. So it's spreads that hit record tightness, I guess. Are you seeing some relief there, normalization, whatever you want to call it?

Relief for sure. Normalization, not yet. Long-term spreads on our mortgage are reasonable, right? Today, they are much better than they were 6 months ago. I mean flows are down a bit, as you can appreciate with what's happening in the market. Spreads are better, not quite at our long-term average yet, of course.

Okay. The personal banking loan growth hit a low below point for the past 2 years, are we potentially going into negative territory or more of a flat lining scenario?

Yes, I tend to look at things through history, ignoring fiscal '19 -- fiscal '20 to fiscal '22, I've kind of, I take out of my mind because I think the economy was not normal. I think most loan categories in personal banking have grown in the mid-single-digit range over time. I think you'll see something slower than that. I don't think you'll see negative, but we have our eye on it. And I think that will be the same theme in commercial banking, not as, I think, normally commercial banks are high single-digit loan growth over the last 10 years outside of, again, '20 to '22. I think you'll see that come down. And I think with us, as I talked to on the last Q1 call, we're being a bit more careful. It's uncertain out there. So we're going to support our clients. We're going to support people we've known a long time. People we've just met, we're going to be a little more careful.

On the -- the linking, if I can connect the personal banking, mortgage business, deceleration to the Commercial Banking businesses. If the mortgage business really slows down a lot, flatlines or whatever, how much of an effect does that have on Commercial Banking?

I'm not sure I can draw a direct line. But for sure, if people's mortgage payments are coming up, consumer spending slows, company inventory levels are going to take longer to come down, I think what you'll see is they're interlinked. So I do think slower real estates, lower consumer spending will have an impact on the commercial bank -- on commercial banks generally in Canada. And the other thing to watch with commercial banks in Canada is U.S. GDP growth, because most mid-market companies in Canada, once you get to $20 million in sales, $30 million in sales, you're exporting to the U.S. So 1 eye on Canada, 1 eye on the U.S. as you look at the Commercial Banking business.

So having said that, at the Investor Day not too long ago, you had targeted 7% to 10% growth in the Commercial Banking business. In the current environment, in the foreseeable future, I guess, does it seem more likely you'll be at the low end of that range?

I think on the revenue, I think that was a target on the revenue side. I think we'll -- I'm comfortable everything I see will stay in that zone, a little bit of interest rate help, maybe a little -- maybe a little less volume than we may have thought 8 months ago. So if you had asked me 8 months ago, I probably would have said high single-digit loan growth in the commercial bank. Today, I'm probably seeing mid-single digit. But I think we can make that up in other ways.

As growth, and it's not a CIBC phenomenon only, but as that growth in Commercial Banking decelerates what's the spread situation like there must be much more competition?

So I would have thought with the rate environment, you'd see rates go up, they haven't. So it's competitive, right? Everybody needs to grow a little bit. The commercial banks have been good engines of growth for all of us. So it's competitive, but I haven't seen anything untoward on the pricing side. I've seen generally, I've seen reasonable discipline.

And as far as the verticals within commercial, every bank, about 30% of their commercial book is commercial real estate and everything else is agricultural, industrial, whatever. That's presumably your mix. How much of the issues in the commercial real estate market, and I'm saying issues in a growth sense, a plan to your outlook?

Yes, I think that's a big contributing factor to why you're going to see mid-single-digit growth. I think if you look at the growth of the banks, all the Canadian banks over the last several years, a big part of it came from real estate. 30%, 40%, it's all going to slow.

And I asked you, I'm sure, last year, about the influence of private equity on commercial loan growth, and it's probably another headwind there.

That's a headwind. So again, this conversation a year ago or so, that was a -- in the last 2 or 3 years, the whole private equity sector was hotter. And just loans were growing more quickly, and it's a small part of the business. It's, I think, in our bank, it's 6%, 5%. So it's slowing like everything else, but it's not moving the dial in terms of overall growth. I think the macro environment is what's going to move the dial from high single to mid-single.

The budget was out yesterday. I know there's a lot of incentives for green industries. Is that -- do you have any big exposures there that you'd like to highlight?

No. No. I think, listen, I think it will create opportunities, right? So I'm anything -- very supportive of what's being done and hopefully, some opportunities for banks along the way.

And on the commercial deposit side, we spent a lot of time focusing on. Are they the ones that are shifting out of 0 cost and into fixed term faster? Or are they just reducing their excess liquidity levels overall? What's the...

There's no -- the GIC trend in commercial bank in -- on the business side isn't as pronounced as the personal side. But very few clients, very few commercial clients, the bigger ones, ever had free balances kicking around. Most -- at least in our bank, most of the balances have always been tied to prime, prime minus. So as prime has gone up, they benefited without having to do big shifts. The smaller clients that perhaps didn't have -- had some free money sitting in their checking account, they've moved to GICs, but the bigger guys.

That's already played out.

It's already played out.

So if you talk to your average, I mean, on average is probably doesn't exist, but your average commercial borrower these days, what are there -- are they more pessimistic presumably so? And if so, what are the top 3 concerns?

So, I mean it's changed. I did a survey 9 months ago, I sent that out. A few of us got to the other wrote-down 5 or 8 questions, sent that out. And the confidence level 8 months ago was kind of an 8. We ran it 3 months ago, it was low 7s. Haven't run it now. Conversations would be, if I had to bet, 7, maybe high 6s. Listen, it's just a lot -- what they worry about. It's almost always get the same response. My business feels fine. I was asked the same question, are you better or worse than fiscal '19? Most say better. Some will say better, a little more inventory than I would like versus '19, because I had to bring it in. It was all a bit awkward for a while, all coming down normally. But when I see and hear and read everything and the level of uncertainty, that's where they have their ranks. In their own specific business, it still feels okay. Not as good as '21 and '22. But even in '21 and '22, when you talked to business people, they knew this couldn't last forever, right? They said we're hitting it now. It's really good. It can't last. It shouldn't last. We got to get back and are you happy with '19, '19 was a great year. If we could get back to '19, things would be good. It feels like a long time ago, the economy was in reasonable shape in '19. And it still feels in that zone. Again, I don't know, 6 and 12 months from now, but for now, it feels reasonable.

And you mentioned earlier that your -- you're sticking with your long-standing clients, of course, but a little bit more cautious, I guess, on new clients. How does that -- how often is that an issue, I guess?

So the way Commercial Banking generally works is some clients are in your pipeline for years. And then some deals just show up because there's an event or you get a referral. The ones that have been in our pipeline for years, we've been following them. We've been getting their financial statements. They've been very nice to us. They just haven't found a reason to move. But we know how they operate over 3, 4, 5 years. They may not be banking with us, but we know how they can react to challenging times, which is what we're most interested in today. Forget the financials, how do we think we will react because we don't know what's coming. We know that about our clients, 100%. We know what about our long-term prospects pretty well. We don't know it as well about our short-term prospects. Those are where we're being a little more careful.

Well, that -- any questions from the audience? We went through, I think, a record number of questions. And there you go.

Thank you, Gabe.

I didn't think we could.

Thank you.

You bet.

Thank you.