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

Welcome back. I hope everybody had a good break. Our next speaker, Shawn Beber, Group Head of the CIBC's U.S. banking operations. Shawn, thanks for coming.

Great to be here.

You were here a couple of years ago, I think pre-COVID, but you're Chief Risk Officer at the time.

At the time, yes.

And well, having said that, before you were Chief Risk Officer, I think you were CorpDev, and you were heavily involved in the private banking -- Private Bancorp, pardon me, acquisition.

Yes, correct. Correct.

So let's -- with that background and leading up to your current role, let's take a high-level view of the U.S. strategy now that you've been there for a couple of years. I think a couple of your peers got a bit more attention on the U.S. strategy front, so it's a good time to refresh what's going on with CIBC in the U.S.

Yes, terrific. So we continue to execute the strategy that we set out a number of years ago, and it's really got 3 components to it. We're building a highly connected Commercial Banking and Wealth Management business in the U.S. And what do we mean by that? We really look to bank the business owners, commercially and personally, the principles of those businesses. And we do that by bringing leading capabilities across Lending, Treasury Management, Investment Management and, really, importantly, Capital Markets. So we leverage our global Capital Markets capabilities and bring those products and services to our mid-market clients. And so all of that connectivity is a really important part of our overall strategy. And we focus on clients who really do value that high-touch relationship focus. That's been the hallmark of the team that we acquired. It's part of what we're doing in Canada as well. So all very aligned on a north-south basis. We're also looking to make private Wealth Management a bigger component of the overall U.S. business. First of all, we like the fundamentals of the affluent and high net worth segment of the market, but it's also very synergistic with our Commercial Banking business from a referrals perspective, from a capital generation perspective and an ROE enhancement capability and also from a funding perspective. And so having those businesses together and making that an even bigger part of the overall business is an important strategic pillar for us in the U.S. And finally, we're investing in our infrastructure. We've invested in the front office, adding new capabilities in the Commercial Banking side, on the Wealth Management side, investing in our technology and our platform. We're in the last innings of consolidating 3 Wealth Management platforms onto a single platform to drive operational effectiveness and really be able to scale that business going forward. And we're investing in the infrastructure to meet the evolving regulatory environment in the U.S. and to support the growth that we have achieved and that we look to achieve going forward. So all of that is a long-term strategy, and we're very happy with what we've seen so far. We've got more to grow.

And if we focus a bit on the lending part of the business, which is obviously a core part of it, how would you describe your x Illinois loan growth performance. Is that what's really driving the bus? Because we've seen that from banks in the past where they're more than half of the growth is coming from outside of the core footprint, if you will.

It's pretty balanced for us. We're now in 29 cities, 10 of the 12 largest MSAs. We have scale in certain markets or more scale in certain markets, like the Midwest, but look to continue to grow in those markets. And a lot of that has been following clients into those markets and then having enough presence to, or at least having enough activity to, warrant opening up an office. We've opened up a few branches now in terms of additional branches. And all of that is in furtherance of the growth ambition, but it's fairly balanced growth.

So as far as the -- just bottom line performance, if I look at ROE of your division, there's been, obviously, fluctuations over the past few years. What's your perspective on, or outlook for, your business generating double-digit ROEs? And then what sort of -- what steps are required to get there? What kind of time line do you have in mind?

So in our Investor Day in 2022, we talked about a 9%-plus ROE, and we actually -- we achieved that. When we made the acquisition, you start -- there's a bunch of goodwill that comes along with the acquisition. So we sort of started at a mid-single-digits ROE. And we grew that, and we exceeded that 9%. The pandemic hit. There's been a lot of volatility since the onset of the pandemic. We were below 9%. We were above 10%. Some of that was driven by the performing build and then the subsequent release in '21. But broadly speaking, our strategy has stayed quite aligned with our targets for generating 9%-plus ROE over the course of time. And so as we get into sort of a more normalized environment, more normalized rate environment, more recently, we have been working through some challenges in the institutional real estate book, in the office sector, in particular. As we see that normalize, we expect to get back on that trajectory. And how we do that is, again, back to the strategy in terms of having a highly connected franchise, which is ROE enhancing, bringing all of the capabilities to our clients across Capital Markets, Wealth Management, et cetera. And again, increasing the percentage of Wealth Management in that business will also help underpin that ROE performance.

We'll get back -- we'll get to the wealth angle because that's obviously an interesting one. But before we do that, on the last earnings call, when you were talking about your margin performance, part of the strategy there involves shedding lower-margin clients and then bringing on higher-margin clients. I mean that kind of intuitively makes sense. How do you go about doing that? And what's the -- I guess, is there still a lot of work to be done in terms of improving the overall margin profile?

Yes. So on the earnings call, that comment was really focused on -- in the quarter, there was some margin expansion. And part of that is, as we have been strategically pivoting out of some of the institutional real estate business that we have historically done, some of that was lower margin. And so we've been replacing that with higher margin in the mid-market and in the C&I space. And so I would say, that had an impact last quarter, and that will play itself out, I think, over reasonably short period of time. More broadly, our approach with respect to returns from a -- on our loan book is about the going-in conversation and how we deploy capital. We're very disciplined in how we deploy capital. And we look at the loan returns. And then we also sit down with our clients to talk about what are the other things that we can be doing with them and what the expectations are to ultimately drive a return profile that makes sense for us and provide them products and services that make sense for them. And that's an ongoing discipline. We do quarterly reviews of the portfolio to understand. It's a bit of sort of promises made, promises kept type analysis. So this is what we expected to happen. This is how life has played out. There'll be context around that in terms of what's happened over the last little while to drive particular outcomes. And then we work with our clients to make sure that we are, in fact, following along that path. And in certain circumstances, we'll look at it and say, look, this just isn't going to be a fit going forward. It's a 2-way relationship. We talk about that all the time. And so that's an ongoing discipline that we do as a general matter. So last quarter, the comment was a bit more of a specific dynamic that's been happening as we sort of pivot. But more broadly, that's how we manage the portfolio on an ongoing basis.

So that sounds more of a client-specific type of interaction and evaluation. As far as the portfolio and its composition, one of your peers in the U.S. has been exiting certain activities. I'm wondering if there's a story there at all with regards to CIBC in the U.S. and how that could play into your ROE performance. Are there any activities maybe we should probably rethink that one?

No. I mean, look, we're constantly evaluating elements of the portfolio. Right now, I'd say, it's pretty business as usual at this point, other than, as I talked about, from a CRE perspective, where we're doing some of the pivoting with respect to some of the institutional relationships that we've had historically that won't be part of the future. And through that, expect our CRE book to grow more slowly relative to the rest of the portfolio as we go through that sort of transition period. But broadly speaking, we've been pretty specific about the areas that we participate in and where we've grown capabilities over the last number of years, and we expect to continue that trajectory.

Now bringing it to the Wealth business. When I think about wealth in the U.S., I think of Atlantic Trust that was bought several years ago and a fairly -- well, part of the Private Bancorp was also a wealth operation, nothing -- it wasn't too large. But how have those businesses evolved and become more integrated over the past few years? And is there -- just throwing it out there, but your Atlantic Trust, based in Atlanta, right? And is there any geographic challenge there that's notable or no?

No, look, we were -- we've made a few acquisitions over the course of time. We've been very deliberate about what we acquire. Cultural alignment is key in any of those M&A discussions. And I'd say, from a leadership perspective, it's come together very nicely across the platform. Geographically, I think we're in a good spot. We've got more investment to make. We've got additional offices where I think we can put people in place and add talent to the portfolio. We've been investing in the talent, given the dislocations that happened in the spring of last year, and in the aftermath, we've been adding talent to the platform. We're an employer of choice in a number of markets where we're well-known. So we've been building out the team that way. And then, I would say, probably more from an operations perspective, I alluded to it earlier, we've been on a journey to consolidate the underlying platforms onto a single consolidated Wealth Management platform. And so we're in the final throes of that. We've got 1 more transition to do in the near term. And that will put us on a sort of leading modernized investment in Wealth Management platform that we think will allow us to continue to scale the business going forward. But it's -- we've -- our retention rates are terrific in terms of assets. We've grown the business dramatically over the last 10 years, more than quadrupling it since we made the Atlantic Trust acquisition. And we've got room to grow, we believe.

And I guess you and I were talking yesterday, there was a phase where all the disruption took place in the U.S. and that meant a lot more customers coming to you because they're like, I need something stable in my life, I guess. Has that sort of petered out? Or are you still...

Yes. Look, I think things have, in many respects, and obviously, any day of the week, you can see something happen. There was more energy a few weeks ago with 1 name. But by and large, it's been, I think, more steady at this point. And we were a beneficiary in the early days of that. And then we've been sort of back to our sort of BAU opportunities. And look, people like the stability. They like the story in terms of what we've built. The commitment to the U.S. market that we have made and that we continue to make and the strength and stability of being part of a large Canadian bank isn't lost on a number of investors.

And that brings up a point now. When I look at CIBC in the U.S., I see loans -- if I just look at the segment disclosure, I'm sure it's more complicated than that, but I see a loans-to-deposits ratio of 110%. If you were a stand-alone regional bank, I would say, "Oh, that's possibly a problem." Do regulators look at you -- maybe give me a bigger perspective on your funding in the U.S. and why maybe I shouldn't care about that ratio or look at it in a different context. And then also do regulators look at you differently because you're obviously not a stand-alone regional bank, you're part of a much bigger entity. And therefore, something like that doesn't really pop up as a concern for them.

Yes. So I think it's important to differentiate between the management and the segment reporting versus the legal entity reporting. And I would say, regulators are more focused. They don't ignore the management construct, but they're more focused on the legal entity reporting. And so from a management perspective, we show the deposits and loans specific to our segment. And -- but from a legal entity perspective, if you can see it in the call reports, our loan-to-deposit ratios would be in the mid-ish 70% loan to deposits. And that's because there's a bunch of funding activity, deposits that are raised by treasury, deposits from other SBUs that are in the bank, but are reported as part of the other SBUs' results, Innovation Banking, Corporate Banking, all of which contributes funding to the legal entities. And so I would say, from a regulatory perspective, that would be more the foundational view of what is our loan-to-deposit and liquidity profile look like. We've got very strong liquidity and capital profile in our U.S. entities. And look, that's driven by a number of factors, including -- it's foundational to our business that we speak with our clients, both about lending and deposits. A high majority of our clients do their treasury management with us. That's not by accident. That's about one-on-one conversations with clients. When we establish a relationship, again, back to expectations, promises made promises cap. When we look at what the opportunity is for us from a deposit perspective, and then we look at different areas of the market that are potentially more deposit-rich than others and build capabilities to be able to have that sort of balanced portfolio from a funding and a deployment perspective. So no, from a -- I guess, a regulatory matter, we feel very good about our liquidity profile.

And is the wealth business a bit of an untapped source of the business? Undertapped?

Well, it's part of the SBU results, and it's part of the reason that we really like -- we like having these businesses together. We see the real synergy between them because as we grow Wealth Management, we also grow the deposit and funding capabilities that come with that Wealth Management franchise. And so that's been a core part of the strategy in building to where we are today and will continue to be the case. I mean, we're 6 years, 6.5 years into this strategy. We are continuing to build and be in build mode, but we see great opportunities going forward.

Then the other deposit topic, not a huge one, I don't think, but just cross the t, dot the i sort of thing. You and every other bank in the U.S. paid a big assessment to the FDIC, and we're expecting another 1 to come. We expect -- I know you probably can't give me a specific number, but is it going to be smaller than the last one?

Yes, I would expect it to be smaller. I mean, like, the FDIC will make its determination in due course. I mean, what we're hearing is, I think the speculation is that the costs were somewhere around 25% more than they anticipated. So is it going to be in that kind of range? I mean, we'll see where it goes. It will all be subject to their determination, both in terms of quantum and timing. But as we're thinking about it, certainly smaller than the first one, and I guess, its order of magnitude around there.

Now the rate cut cycle is, obviously, a huge talking point now. It seems like an on again, off again type of thing. Let's just say consensus plays out with 75 basis points of rate cuts this year or so. How do you expect your margins to evolve in that -- if that's the trajectory? Do they go down and then up? Or is it the opposite effect of what we saw when the rates were being hiked?

Right. So our general outlook is fairly stable margins. And that's, in part, a strategic decision that we manage margins for stability. Hratch talked about a bit of this on the Q1 earnings call. So given the way the tractors work that we deploy, we expect that to be -- because we're still rolling off lower rate into higher rate as we go through, we expect that to be a bit of a help. On the flip side, loan pricing will come down. Most of our book is floating rate. There's some lag to it. Some of it's 30 days SOFR -- a lot of it is 30-day SOFR, some of it is more like 90-day SOFR. So there will be some level of lag there. But then on the deposit side, we've been responsive historically. We expect to be responsive here. The offset to that or partial offset is the composition that is out there right now for deposits. So we'll be very mindful about that and how that balance plays out. But between those elements, and the tractors and the hedging strategy that we use to maintain stability in our margins, we expect -- and that's what we saw -- if you go back to Q1 of '20 right through until Q1 of '24, it moves around quarter-on-quarter. Q2 is seasonally a lower deposit month or clients are getting taxes, commercial clients are paying bonuses. So there's that seasonality component to it. But broadly speaking, we expect to see stable margins going forward.

So margins could be stable, but NII spread income, we should expect some growth there because I'm -- and maybe you can talk about the pent-up demand effect that your commercial borrowing base is just waiting for rates to be lower to make business decisions and cement them. How -- how do you see that latent growth, I guess, evolving over the next 1.5 years or 2?

Yes. Look, it's a good point. I mean in the high rate environment, you've seen certain behavior. I mean, you've seen it in our loan growth in the last several quarters. Clients have paid down. They're not -- utilization rates are lower than they've been historically. And credit demand -- this is an industry-wide phenomenon. Credit demand has been lower. So our expectation is, with rate cuts, we would expect to see some level of increase in utilization rates, some increase in demand broadly. We're staying very close to our clients and listening to what they are doing. But clients have been prudent through this period. They're not building as much inventory. They're making less CapEx expenditures in the recent past. Just given the rate environment, we would expect to see some of that recovery. We've also been independent of market. We've also launched new capabilities. And we're going to -- we're seeing some traction in some of those equipment finances one that's very connected to our middle market core franchise. It was a capability that had been on the radar for a while. We started building it over a year ago. We're starting to see that have traction. And so even with a slower market, we do expect to see, over the course of the balance of the year, some improved loan growth relative to what we've seen over the last several quarters. And then finally, M&A activity. We're hearing a lot more conversation going on, and that's a part of the business as well. And so that's been slower more recently. And so we would expect to see that pick up as the year goes on, assuming that, that sort of trajectory plays out.

The other aspect of the rate cut outlook that comes to mind is an important one is the credit quality. And if -- in the U.S., obviously, if rate cuts just keep getting pushed back, is there a component of your borrowing base? Because I've seen this -- I heard this explanation that some of the impairments we're seeing today are from customers that have been just kind of getting by, and they ran out of gas, basically, and the loan becomes imperative. Is that something that could skew the impairments upwards if rate cuts get pushed out even more than what we're currently expecting?

Well, look, I think what we've seen throughout, really, since the onset in 2020 is clients are really resilient. We saw that through the commercial book really right through this piece. So they dealt with supply chain issues. We dealt with inflation in their cost bases. They dealt with interest rate -- higher interest rates, and they've been managing. So we're not seeing a lot of pent up. You could see some credit migration as a result of rates staying higher for longer. But we're not seeing systemic issues in any specific portfolio. There'll be individual names that, as is always the case, that may pop up from time to time. But we're not currently seeing that kind of playing out. We've seen people be prudent in how they manage their businesses, adapting to the environment, and we'd expect to see that continue. So not seeing any significant buildup in like from a systemic perspective in the portfolio.

So that was me asking to put your Chief Risk Officer hat back on. Now I'll ask you to -- the CorpDev hat to -- dust that one off. And I ask this only because I want to feel the pulse for your M&A appetite. Your strategy sounds largely organic. Victor's communication over a number of quarters and years even has been pretty much organic, organic, organic. Is that -- what's the message now in terms of inorganic growth?

Yes. Look, I mean, it has been an organic -- predominantly organic strategy. I'd say that's continuing. We always keep our eyes open for opportunities. We've made investments in the platform that certainly allow for -- to help facilitate that to the extent opportunities would come up. But largely, it's an organic strategy. And we're also balancing, back to the ROE conversation, I mean, especially on the wealth side. Wealth acquisitions come with goodwill. And so as we balance the ROE and the growth, there's a bit of a drawdown on ROE in the first instance when we acquire these things and then you grow into it. And so we're going to manage all of that going forward. But eyes open, but certainly, organic focused.

Okay. Well, that wraps it up for us. Thanks, Shawn, for making the trip and taking the time to talk to us.

Good. Thank you.

You bet.