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

Okay. Great. So we can start with our next session. I have with me Victor Dodig from CIBC, the CEO. Welcome to the stage, Victor.

Thanks, Darko. Nice to see everybody. Happy New Year.

So Victor, we've been having a similar discussion with all the CEOs all morning long, so no sense in changing it. Now we'll dive into some questions on the macro. We've heard some variety of answers around this. So I'm very interested in hearing how you view it, is starting off with the interest rate expectations and how they change so rapidly. And in your case, I'd really love to sort of dive into your views on rate outlook, net interest margins, net interest income growth for 2024.

Sure. Well, I'm sure you've heard from others on rate outlook, it's all really a guessing game. Other than looking at the forward curves, I don't know if many people would have predicted that the rates would be where they are today. Where the U.S. 10 years today, I'm not so sure you would have gotten much of our audience saying it'd be at 400 basis points. So we look at the forward curves. We assume the central banks are going to be mindful of where inflation is and likely see 2 to 3 cuts this year starting in May, June on both sides of the border. In terms of our own positioning, and this is something that we mentioned to you last year, it's our work on improving our margin profile. Under that type of a scenario, we would see our margins improve in the mid-single digits range, more so to the back half of fiscal 2024. So that's it in a nutshell.

So that's the margin side of it. What about the loan growth expectations? What could we think about...

Yes, I think some growth...

What kind of some varying degrees of views on loan growth?

Yes. I think on the consumer side, you're seeing low single-digit loan growth at present. That could adjust as rates adjust and the housing market might see an uptick in the spring. In the Canadian commercial and corporate sector, you're seeing sort of mid-single-digit loan growth expectations, at least as far as we can see. In the U.S., we'd see in the mid-single to mid-high single-digit loan growth in the U.S., and that's just a function of what we see happening in the regional bank landscape pulling back and presenting opportunities for us.

And are they pulling back equally across all sort of sectors? Or are there some sectors?

I think it depends by institutions, but we would kind of just focus on the sectors that we're focused on. And we're seeing growth amongst our -- within our existing clients as well as with the new clients, largely because of institutional level episodic growth slowing down at certain regional banks.

Okay. Great. Now the other angle of falling interest rates has been really a market sort of lack of concern, I would say, with respect to the mortgage renewal issue. And CIBC, for all intents and purposes, I thought your disclosure was one of the best amongst the big 6 in terms of disclosing, everything from the renewal profile to the level of shock. And now that rates are falling, is anything changing in your mindset? Does anything change for you? What do you do? Do you maybe press -- try and press harder on the gas with mortgage growth? Is this an opportunity for you? How should we view about -- view this for CIBC?

I think you should always look at the growth at CIBC. And this is one of the themes I really want to emphasize to you as we share more and more data about our focus on the depth and quality of the client relationship. So we're going to look at mortgage growth and keeping up with market growth. But we're much more focused on the types of clients that we want to build relationships with rather than the sort of growth, broadly speaking, okay? So the mass affluent client strategy, which I hope we can touch on today, some of the core clients that we're attracting and the mortgage growth there being profitable mortgage growth, a depth of client relationship that we can see being an enduring client relationship, being the hallmark of our strategy going forward. In terms of what we're seeing on the mortgage side, clients are reacting. They're taking action because we're helping them take action on the variable rate piece. We reduced our negative amortizing mortgage amount by a good amount over the last little while by taking proactive actions and working with our clients. Clients who are renewing are renewing in the 2- and 3-year fixed zone in anticipation of a rate decrease, and clients that are managing through the rate increases and the monthly payment shock that comes with it. So it could be $300, it could be $500, it could be $700 a month depending on the client and depending on the situation, which equates to $4,000 to $8,000 per year on additional mortgage payments. And what we're seeing is clients adjusting their own discretionary spending. They have excess deposits relative to where they were pre-COVID. What I always like to remind everyone on about is that clients do the calculation of keeping their home even though mortgage payments would increase on a monthly basis because the frictional cost of moving out of your home are not inconsequential. They are order of magnitude larger than the mortgage payment increases themselves. That would include real estate commissions, land transfer taxes, moving costs, et cetera, on $1 million home. It could be in the $50,000 to $60,000 range. So that goes into their calculus.

Okay. Great. And maybe just while we're sort of on the topic of the rate expectations. So we've touched on NIM, NII growth. We've touched on the mortgage side. Is there anything else we should think about that might benefit or not benefit with this -- with a reducing sort of interest rate profile?

Well, look, if you have a rapid reduction in interest rates that go well beyond the consensus today, that will affect NIMs negatively. That would also be a signal that there's some broader softness in the economy that would be concerning. So I think what the consensus reflects is what I think most of us would agree to say a constructive outcome for the economy after the rate shock that we've seen over the past 18 months. So that would be the downside as I see it.

So switching gears to talk about capital a little bit. So last year at this conference, we were surprised by a DSP increase, and we did it again in the summer. And here we are today, no increase in December. Your ratio is high and looking for a net benefit in Q1.

Yes. So we've been working -- you'll recall last year, we did talk about building our capital position in light of the regulatory changes. We were confident that we could do that. We did that through organic capital generation. We did that through a DRIP that we put in place. We did that through a strategic risk transfer. And as we announced in the fourth quarter, our regulators approved our U.S. business moving to an AIRB framework. And that, in addition to all the other changes that come in the first quarter, will put us just north of 12.5% on a pro forma basis. So we're very encouraged by that. As we think about capital, we think about what is the regulatory outlook look like, what is the economic outlook look like, where are our peers. And when you add all of that up, operating in the 12.5% zone is the right level to operate at. 12.5% being the upper level of that. That's a 50 to 100 basis point buffer depending on where the DSP is. It's 100 today DSP. We look at the DRIP that we have in place today. It's on the radar screen in terms of is there an opportunity to move that decision forward to shut that discount off, and that's an opportunity for us as well. And again, we look at the economic environment. We look at where our peers are as we think through that.

So as I think that through that answer, I think to myself, my model says, well, you could be at 12.7% end of Q1 if things go right, maybe even higher by the end of Q2. So even if the regulator were to go 50 basis points in June to the upper end, it still feels like you'll have plenty of space. So could you not see a situation where you could shut off the DRIP by...

I can see us reflecting on that in that quarter, in that second quarter, yes.

Yes. Okay. Right.

But it'd be something again that we reflect on in the context of the overall environment, right?

Sure.

It's important to note that in 12 months' time, we've gone from a world where everybody wanted our banks to have more and more capital to now fine-tuning it to 12% to 12.25% to 12.5% to 12.7%. We are all too conscious of where our peers are, the capital that we need for growth and the economic environment that we're operating in. As I said, the ability to move that decision forward on the DRIP discount is something that may provide an opportunity for us in the second quarter.

And so that's a near-term construct, and we're all sort of focused on it. But I think the -- what I've learned and what I'm sort of sensing is, globally, we're just heading for higher capital. And some of the stuff still hasn't completely finished hitting. We've got output floors rising, potential for further regulatory action. And as I think of over time and think about other things that maybe there's going to be higher mortgage lending RWAs, maybe there's higher liquidity requirements coming, maybe one day even a further increase. So do you see it that way? Do you see the longer-term pressure on capital? And do you think that there is a potential where we enter a world where you have to carry longer term more capital? And what do you think about your longer-term sort of ROE goal?

Look, we take our cues from a regulator, right? So our regulator has been quite clear. And I think in the decision in December, they emphasized that the buffer is there. It's a countercyclical buffer. They saw no need to change it. If the economy turns -- proves to be much more resilient, you may see that go up. And therefore, we have to be prepared for that. If the economy turns out to be softer, you may see the buffer get lowered because that's the way it's supposed to work. And your question as to all of these other decisions, I think much of this -- many of the decisions on regulatory buffers and capital consequences are pretty well reflected in the decisions that have made so far, and I don't anticipate more in that regard. I don't think that there's a trend to reduce capital. If anything, there is a trend to increase it. But I think a series of actions have been taken so far. They've been pretty clear on how the buffers work. And I think we're all pretty clear on that in my mind. Are you?

To be discussed.

Okay.

I think there's always a chance. I always -- I have my concerns. But yes, let's see.

Like policymakers, whether they're at the government level in terms of policymakers or the regulatory level in terms of policymakers, all too conscious of the role that banks play in economic growth, and buffers play a role in that economic growth model. It's important to maintain the safety and stability of institutions, but it's also important to make sure that the institutions are competitive at a global level and can help the economy grow.

Fair enough. I think maybe just to finish on it, though. I mean, the thought sort of always keeps in my mind when we talk about capital is, I mean, you're generating a good amount of capital.

We are.

And so Inevitably, this will lead to, hey, what are you going to do with your capital on the other side, where you've got lots of it? And there's a lot of different options and availabilities. And maybe we can talk a little bit about and weaving this into sort of your long-term kind of view on inorganic deployment of capital. And I know we've got lots of things to talk about today. We've got a little bit of time. But maybe you can give us a bit of a reminder here of your sort of priority of how to use your -- when you get to that stage of high capital, which I think is going to happen soon, Victor. So you're looking at me smiling, I think it's going to happen by end of the year. We could easily see you well above 13% common equity tier 1 if things go well. And so the question is what do you do with the excess capital?

Well, dividends, once a year announced, being the 40% to 50% payout ratio. We've already announced ours this year. The second piece would be how do we think about the DRIP. The third piece would be how do we think about deploying capital for organic growth. I mean, if the economy proves to be much more resilient, and we see the demand for loan growth improve versus that low consumer growth or mid-digit commercial and corporate growth that I alluded to earlier, then you deploy it to growth with your clients. And you're looking for the question, are you going to do anything inorganically? And we'll talk about our strategy being highly focused on organic growth, being the primary driver of return of ROE enhancement, of operating leverage, and that's what we're really focused on as a leadership team.

Now on operating leverage, I mean, one of the things that we've seen with respect to many of your peers and was a little bit more of an aggressive move on restructuring at year-end, you seem to be a little bit ahead of the game on that. And I think, therefore, when I talk to investors, because the other banks seemingly have taken what we'll call aggressive moves in Q4 and Q3, there's a view that maybe on a relative basis, it will be a little more difficult for you to show as much expense control as some of the others. So maybe can you just talk about what you have sort of in place for expense control going into 2024. And the setup for longer-term expense growth, you're mentioning mid-single digit. Or is there an environment where you would have to get more aggressive with employee reductions? Or maybe you can just offer how you plan to sort of manage through a difficult environment and manage down expenses without the use of big, aggressive restructuring charges?

Good question. Again, if you reflect back on last year and sitting in this room and talking about where we were on expense growth, we're approaching double digits as a bank. And we said quite clearly that we have a plan in place to get to mid-single digits. We said quite clearly that the double-digit -- near double-digit investment was not just purely expense growth, it was investment growth in our technology, in our ability to scale, in our ability to get productivity improvements. And we've delivered on that. Going forward in the year ahead, our goal is to continue to deliver that, being in that mid-single digit, low mid-single-digit range, sort of in the 4% to 5% range ideally is sort of what we think about as a leadership team. Embedded within that is an annual 1% to 2% productivity improvement from the technology investments that we've made. As investors, you want to get -- you want to be reassured that the investments that we made are meant to provide scale, are meant to provide those productivity improvements. And we're delivering on that in the context of this year. We have been mindful about how we reduce our headcount, how we offer reskilling opportunities to our employees. We have done that all in the ordinary course of business rather than through restructuring charges. And our goal is to pretty consistently, and that will depend on where revenues are from quarter-to-quarter, deliver positive operating leverage. Because CIBC has gone through that investment mode, where now we're looking to get scale and looking to take our strategy on client focus, and they're going to elaborate on that and how we believe that, that focus, plus our expense discipline, plus the investments that we've made in technology, plus our focus on productivity improvement will deliver that positive operating leverage.

I never hear banks talk about the branch network. Is that not something that's a potential source of further cost saves but change? Is that something that's ever on your mind?

Sure. I mean if you look at the last 2 to 3 decades, there has been a shrinkage in the branch network, I think, across all the Canadian banks. Consumers are taking self-serve transactions by definition and conducting them on their own, right, whether they're through the ATM, through mobile phone, through online banking. And we're seeing that move kind of marching toward the 95%, 96% on over time. So transactions are coming out of the banking centers. The changes that we've made to our footprint and that we envision making to our footprint are to shift more of our branches, our banking centers to advice to a community model. So a community model has a transaction hub, but the spokes are advice centers. And there may be some repurposing of some of the branch footprint of branches. Banking centers will be an important point for our relationship managers and our clients to interact on advice, while clients take the self-serve transactions do that on their own.

So picking up on that point there and trying to tie this back, I mean, one of the nice things is we had an Investor Day. And one of your key kind of messages, which resonated with me because I've been following CIBC for a very long time. And one of the things that you talked about is the desire to grow the mass affluent. And you've just touched on some branches. But maybe you can give us a little more color on that because in today's world, what I'm hearing is deposit competition. And maybe this rate environment is going to shift deposits back to investments and so on. There's a lot of -- I'm thinking to myself, wow, all I'm hearing is lots of competition for that affluent investor. So maybe you can provide a little bit of color here as to how you see this evolving, put some meat on the bones for us for the strategy. And I know Jon Hountalas is now in charge of this, so I'm very interested in seeing what a new leadership take on that would be as well.