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

Good morning. I'm Brian Morton and I cover the Canadian banks here at Barclays. Our next presentation comes from CIBC. From the company joining us, we have Rob Sedran, Chief Financial Officer. Welcome, Rob.

Thanks, Brian. Good morning.

Good morning. Thanks for coming. Let's just start off with the health of the Canadian consumer. At the start of the year, there were some concerns, slowing economy, rising unemployment, impact of the mortgage renewal cycle. But still consumer has pretty much held up better than expected. Do you expect this to continue? And are there any specific geographic areas of concerns or segments of concern?

Every cycle has its story, right? We went from a period of tremendous amount of monetary stimulus and fiscal stimulus, created the conditions, I guess, where inflation came in for the first time in a very long time. And so then we flipped the cycle to the other side and pretty rapid increase in interest rates. And the consumer has had to deal with quite a bit, both the rising inflation and the rising cost of credit. Interest rate increases did their thing. They did what they were supposed to do. We had, inflation now is on the downslope again and interest rates are back coming down on the downslope as well. But the intended consequence, I guess, of the higher interest rates was slowing economy. You're always going to get a little bit of an increase in jobless rates as well. And so we've seen a rise in delinquencies and we've seen a gradual increase in impaired loss rates. We're satisfied with the performance of our book. We never like to see rising loan losses. But our strategy and certainly within our risk tolerance is performing as expected for us. And we're pleased with the trajectory that we're on. We think, from here, it's going to take some time for the lower interest rates to start and declining interest rates to really start to have their impact on economic performance and on the end consumer. But we're already seeing that sort of stabilization come in. We think impaired loss rates probably continue to grind a little higher from here and -- but not in any meaningful spike or something that we're terribly concerned about. And from a geographic perspective, from a customer segment perspective, our strategy is very much one of getting to know our clients and really deepening our relationship with those clients. And that's probably the best mitigant against rising loan losses. It's just knowing who you're lending to and having that deeper customer relationships. So there's no particular pockets of worry. It's more just a macro trend that we're expecting to continue.

Excellent. Maybe talking specifically in the Canadian part of the business, the Canadian loan portfolio is focused on residential real estate, secured personal lending. How are you looking to expand to other segments of the consumer to add diversify -- to add diversity to the portfolio? And do you remain comfortable with your residential mortgage exposure?

Well, we might probably come at it a little bit differently than just as a diversification play. When you think about why the mortgage is as large an asset on our books, it's because the home is the largest asset on our clients' books. And so as they're making their payments, as they're working through their mortgages, it's going to be -- their largest liability becomes our largest asset. When we think about our strategy, it's not really a product-focused strategy. It's not about we've got mortgages, we'd like to add auto lending or we'd like to add some other loan category to balance things off. It really is about getting deeper relationships with the clients. So when you think about the various ways you can do that and we're -- the investment product is an area that we would like to -- and we do spend a lot of time engaging with our clients, doing the financial planning, really thinking about their long-term success. And the investment side, whether it's on the deposit side or it is on the balance sheet or it's the off-balance sheet investment products, in either case, it's not going to really balance off from an asset perspective. And then the transaction account is one. The credit card increasingly is the one with which you interact with your bank almost daily now because that's become the payment option as opposed to cash. And so the affinity for the rewards programs and the various -- we've got a strong credit card lineup and we continue to grow that side of the book. And so it's -- we're looking -- you'll see that diversity happen -- diversification happen naturally from a customer perspective but it's not like it's a goal to try to reduce our mortgage exposure because we're quite comfortable with our mortgage exposure. This is a book that's been tested now in various parts of the cycle, right? We've had very low interest rates. We've had issues within the out west, in Western Canada around the oil price. We've had now higher inflation and higher interest rates with rising unemployment. The loss rates remain low and we're comfortable that, that's going to remain the case. So for us, it's more of a how do we grow the book as opposed to trying to do something to diversify risk.

Excellent. Last week, we saw a third rate cut from the Bank of Canada and we still got a few more expected before the end of the year. Do you think customers are starting to see the benefit from lower rates? Is that going to even come through more in 2025? And with the outlook for rates to be coming down, are you seeing customers starting to move towards like a variable rate mortgage to take advantage of that?

Yes. We do expect it to take some time, right? I mean the same way that the rise in interest rates did take some time to do their work and start bringing inflation down. The drop in interest rates is going to take some time to really have its impact. So I do think it's more of a 2025 phenomenon, which is why we've talked about our impaired loss rates continuing to migrate higher on the consumer side. Still comfortable with our full year guidance of mid-30s in terms of the impaired PCL rate. But it is going to take some time before that starts to kind of work its way lower in 2025, we hope. In terms of customer preference, there's been a little bit of -- a little bit more of customers taking up maybe a longer longer-term mortgage. There's been -- there have been a lot of the 2- to 3-year becoming the more popular option. We're seeing a little bit of that turning out. The variable rate really hasn't come back. I mean, we still have an inverted curve. The front end is still low. I think as long as rates are as low as -- sorry, as high as they are on the front end, the variable rate mortgage is likely not to be an option that people go for. And I think the experience people have had with rising interest rates has also made them a little bit more cautious in terms of how they position themselves. So as we look at where customers are going and what the advice is, it is more into the longer term.

Long term. Great. And then maybe talk a little bit to how the impact of declining rates -- you've been able to generate some modest NIM expansion, excluding the kind of trading piece. With interest rates continuing to decline, you believe you can still maintain a stable NIM outlook?

Yes. We manage our net interest margin. We manage our balance sheet really to try to create stability over time. And we're -- we've seen that positioning has delivered that more stable margin over time. When I think about the margin, I guess I'd break it up into a few different components. And the first is just that balance sheet positioning and our [indiscernible] strategy. And considering where rates are today and where they were 5 and 6 years ago, that roll-on versus roll-off phenomenon of our hedges is going to be a tailwind for us we would expect in the most plausible rate scenarios. I mean, if we're going back to pandemic lows in interest rates? Maybe not but under most plausible rate scenarios, we do think that, that's going to continue to be a tailwind. We've talked about 1 basis point or 2 a quarter for the foreseeable future. The area where there's the potential for some notion, then becomes your business mix, right? And we talked a little bit about our growth in credit cards. What you saw in the most recent quarter for us was business mix was quite favorable. We had good growth in everyday banking accounts and everyday balances. We had growth in term deposits. We had growth in the credit card book as well. And our mortgage -- loan mortgage book has been -- we've been kind of keeping pace, if you will. And so business mix has been a positive for us and we continue to think business mix ought to be positive over time but that's a little bit, comes down to -- from a quarter-on-quarter basis that can be a little bit difficult to predict. And the competitive environment, I call it relatively stable, right? There's periods where those product margins can get squeezed. There's probably -- there's periods where we get a little bit more oxygen coming into those product margins. I would say when rates are moving rapidly, it can be -- the market can be a little bit slow to react on the competitive side. A bit more stability in rates, I think the margins tend to find their level. So as we think about the margin from here, we've talked about flat to gradually rising. That's assuming basically what's embedded in the forward curve in terms of interest rate cuts from here. So that -- there's still a bit of a positive bias to it. And then it does depend a little bit on how the book evolves and how the macro evolves from here. But from what we can tell, we still think there's opportunity on the margin.

Okay. Maybe a little more, really important drivers to NIM is kind of the funding strategy. So maybe can you provide a little bit more color on your funding strategy and kind of where you're seeing the best opportunities for deposit growth? Do you think you need to be more aggressive on rates to attract deposits? Or is that kind of not an issue in Canada?

No. I mean -- well, so it's a good question. Our funding strategy begins with the deposit, right? And I mentioned that we had good performance in everyday banking, the checkings and savings accounts. And it's that we are trying to acquire customers. And as we're acquiring customers at a fairly rapid rate, we think we're getting more than our fair share of customer growth. The goal then is to create -- to get the transaction accounts and create activity through the everyday banking accounts and that's a great source of our funding. And when you think about term deposits, there is an element of this. When it's your own customers and you know them well and certainly, they're, not suggesting they're not price-sensitive but they're not as price sensitive. We're not about hanging the best rate on the window and trying to bring in dollars that way. What you'll find both when it comes to the mortgage business and when it comes to term deposits, you can move share with rate. It tends to not be sticky share and [indiscernible] it's sticky as long as your rate is the best. And it doesn't really put you in a place to grow a franchise over time, right? Like we want customers that are -- and clients that are looking for our advice, looking for a deeper relationship with us. And so as we acquire those customers, we think it's a great source of funding and we continue to expect to outpace the market on deposits. The rest of the funding strategy really comes down to diversified by product, by geography. And so our wholesale funding strategy really is something that we think about as a long-term advantage, right? We have -- we raise in dollars. We raise in pretty much every currency of size around the world. And we keep that diversified platform because -- and even they are covered and unsecured and the rest really just to keep -- make sure we have as wide and as diversified a liquidity base as possible. We're quite comfortable with the way we're positioned on that front. And we actually think it's an advantage for us.

And maybe like talk a little bit more about some of your fee revenue businesses. And kind of despite increased economic uncertainty, revenues in the financial markets business, both investment banking and trading, have been relatively steady in the last few quarters. Do you expect this trend to continue in the near future?

Yes. The financial markets have been in a constructive place but part of this is just our strategy, right? So our -- we've got 3 main pillars to our strategy in the financial market and our CIBC Capital Markets business. And that's, we want to be the leading financial services provider for our clients in Canada, our core clients in Canada. We've got a very strong market position, a lot of deep relationships. And it's a significant source of strength for us on an absolute and relative basis. We think we like our positioning in the Canadian market. That said, it is a competitive market and it's not growing as rapidly. And so the second pillar comes down to expanding into the United States, in particular but internationally into businesses that we know well and businesses where we can export some of that expertise that we have. If you think about energy transition, if you think about renewables, if you think about the -- just energy infrastructure, those are areas where we're spending an awful lot of energy and growing internationally. And you're seeing the growth in the United States, in particular but a lot of these businesses are global and we're seeing that benefit there as well. And then the third one and this is an important one and we think it's a differentiator for us, is really having the connectivity to our Commercial Banking franchise and to our -- and to the rest, even to the retail franchise. And so when everything from global money transfer product into retail but increasingly, we are in a position where our commercial banks can offer fairly sophisticated hedging programs and fairly sophisticated financial products, both -- on both sides of the border, both in Canada and the United States that allows for that third wheel of growth. And it's -- that connectivity is something we talk about every day. It's a key pillar of our strategy and it's providing a lot of that stability and the recurring nature of the revenue. So for sure, the markets have been constructive. Other than the odd period here and there where you get some of the extreme volatility that we've seen, the markets have been accommodative and constructive. We expect that to continue. We're not part of the year where there can be a little bit of seasonality. You never know. We've got elections coming up. There's an awful lot of uncertainty in the macro environment you pointed out in a couple of your questions. But for now, it's a client-facing strategy, it's a client-facing business and as long as our clients are active, we should be able to continue with the performance that we've had.

Great. Maybe moving on to more like the expenses and the efficiency. In terms of operating leverage, what levers do you have to continue generating positive operating leverage? And how do you balance that against making additional investments? And maybe kind of also, when you talk about investments, how do you think you compare maybe new competitors on investing in technology?

Okay. Yes, the operating leverage theme is something that we spend a lot of time on. And it begins with an efficiency push, right? Like this isn't about -- and it's not tactical kind of we're going to put on hiring freezes and manage expenses tactically. There are certainly things intra-quarter or during the year where you can balance yourself off against how the revenues are coming in. But when we think about efficiency, we're thinking about structural costs that we're looking to take out, that will enable us to reinvest into our growth initiatives that we're looking to do. And so when we show a slide in our investor materials, that's really the way we come at the expense, the expenses, right? Like the efficiency gains and the investments that we make, they're not linked dollar for dollar but they are linked thematically. And so as we remove those structural costs, which is just an ongoing cultural thing that we do, those dollars will find themselves back into the investment side. And in the meantime, keeping as tight a reign as possible on our controllable costs, right, the cost to just operate the business and very much a focus on expense discipline on that front. And so we're comfortable. We've got an operating leverage now for the last 4 quarters. We're comfortable -- I mean, we're not going to deliver it every quarter. I think it's difficult to suggest we can deliver operating leverage quarter in, quarter out but I do think it's something that annually we should very much target. And so when we start thinking about those investments and the technology investments that we make, we're investing at pace, right? And we are both in terms of our client-facing technology where you can see it and just our client -- the technology to support our front office as well. So you think about our CIBC GoalPlanner, which has really had a transformative impact on the frontline experience in terms of their ability to deepen those relationships and really bring in more assets that may have been outside the bank into the bank. We've invested in a client relationship management system that just gives them better intel on their clients and you can feel the improvement to the customer service because they get to know their clients better and it's a more targeted conversation that they're having with them. And so there's a series of those investments we're making into the front office, across the bank, including Capital Markets and the commercial banks as well that are enabling a lot of that growth. And then we're investing to harden the bank as well, right? Like there's all of the -- through the use of AI and also through the use of traditional old technology to make sure that we're investing properly for the infrastructure that we want, for the risk controls, for all of the various hot button issues that are in the market right now, we're investing at pace and we're comfortable that we're more than keeping pace on that front.

Okay. Great . And then can you give a little bit more color on kind of the credit trends, particularly within the U.S. commercial banking? And would you think about maybe executing -- you've done something like sales of office CRE, where you can think about maybe doing more sales to reduce exposure?

Yes, we weren't pleased with the exposures that we had in office. But when you think about the structural downturn that you saw in that space, we're comfortable, like the loans that we made at the time we made them, were very good loans. And what we found ourselves, what was a structural downturn, clearly, the pandemic had the transformative impact in the way people work. And our maturity schedule had a number of those just coming at us early. We dealt with them proactively. And you can see now we are on the down slope in terms of the impact on that side. So we did dispose of some. We've refinanced some. We've worked with our clients to get them into a better position. We we're always looking at ways to optimize the portfolio. But by and large, we're comfortable that the worst is behind when it comes to our U.S. office portfolio. In terms of the book more broadly, it's performing well. Like we're -- there's those pockets of CRE that are feeling some strain, like the industry is. We're not expecting any material loan losses to come from them. We are expecting -- the loan losses that we put up this quarter in the U.S. were abnormally low and we signaled that on our recent conference call. We do expect them to normalize but certainly not back to the level at which they got previously. So the nature -- I spoke earlier about how the consumer book is performing and it's been a gradual increase and it's going to be more of a gradual decline when the rates start to have their impact and losses start to come down. The nature of commercial banking and the nature of wholesale business and government lending generally is, it tends to be a little bit lumpier, a little bit less predictable. Some quarters are going to be there, some quarters are going to be down. Overall, when we look at our performance over the last many quarters, we're quite comfortable with the strength of the book. And on both sides of the border, there's going to be the episodic idiosyncratic, whatever adjective you'd like to use, issues that pop up but we don't see anything systemic that's going to come and be a big problem. So we would expect that -- and that's all sort of rolled into that mid-30s guidance in terms of impaired loss rates that we're talking about, we're quite comfortable. And we've been outperforming a little bit but that mid-30s guidance still holds. And as we think about the outlook for next year, we'll have to see how the environment evolves and we'll give a little more guidance as we get closer to the year.

Okay. Great. Maybe a quick question on capital. Capital levels continue to accrete with the CET1 ratio moving higher over the past few quarters. Like what kind of CET1 ratio are you targeting for your business? And where are you looking to deploy incremental capital?

Yes. Well, so the regulatory minimum is 11.5% at the moment. There's still 50 basis points of room if the [ regulatory authority ] wishes to use on their buffer. But for now, 11.5% is the minimum. So we think something 12.5%, maybe above 12.5% makes sense as an operating range, especially given some of the uncertainty in the market that we've been talking about through our chat here. Clearly sitting at 13.3%, we're in an excess position and so we were comfortable announcing a buyback with our results this most recent quarter that we intend to use. But even there, we -- to your point, we've been generating capital quarter in, quarter out. Loan growth remains and organic growth remains our preferred output. And we are starting to see some signs that, that growth is picking up. And so we expect to see a little bit more loan growth from both the retail and the business side, as we think about the next quarter and into 2025. We're starting to see, like I said, some signs that, that's picking up and that remains our preference. So when it comes to where we're prepared to operate, like I said, we're -- this isn't a -- when I say 12.5% or a little bit above 12.5%, that's not suggesting that we're in any rush to take that 13.3% down to 12.5%. We like the optionality that it provides us. We have a -- we feel like we're positioned -- again in the client-facing business, in a client-focused business, we don't want to be in a position where we're having to curtail our activities because we're trying to manage capital. And so the optionality that we have now, if that loan growth picks up, when that loan growth picks up, we can stand in for our clients under pretty much any condition here and continue to grow our franchise and continue to grow and help them grow their franchises. And so that optionality is something that we value. And it was hard work to get here. It's been a journey to get here. But now with the excess position we have and we'll use the buyback. It's just a capital management tool, that organic growth remains our priority. And we -- like I said, we see the opportunity on both business and government and the retail side start to see some loan growth picking up.

Okay, great. And then kind of my last question is, over the past year, we've seen kind of ROE in personal -- in Canadian Personal and Business Banking and Canadian Commercial Banking and Wealth Management has been under pressure. What are the steps that you are taking -- think, to improve returns within these businesses?

Yes. So the pressure and on -- the pressure on profitability has come from a couple of areas. One, the rising loan losses has dampened profitability a little bit. Clearly, we're carrying more capital against these businesses, both in terms of the regulatory minimums that have been rising as well as the excess position that we're sitting in that can crimp profitability a little bit. When we think about the trajectory and where our business mix and where our strategy will take things, we do think we have a strategy that will deliver a premium ROE over time. The depth of client relationship that I mentioned earlier, the investment side, the deposit side, the credit card -- the payment side of the credit card business, these are all areas that should lead to a higher ROE in time. It's a --it will be a gradual build. But as we continue to execute the strategy, we're going to continue to push on the ROE front. We do think that the execution of the strategy day in, day out, quarter in, quarter out, will continue to grind that ROE higher. So we got to a 14% ROE in this most recent quarter and that's carrying the capital load that we're carrying. We think that there's opportunity still to continue to push it higher in time, not in a straight line, particularly, again, it's difficult to talk quarter-on-quarter. But we -- again, I would just call out the fact that we think the strategy will deliver a premium ROE over time.

I'll pause this here and open up to any questions. There's a mic going around. I think we'll start in the front row, please.

Some of your larger competitors have been more aggressive in pursuing a kind of U.S. retail acquisition strategy. How do you feel about that? And if you were going to go down that path, what are the kind of criteria that you would look for?

Thank you for the question. The U.S. retail business is a highly competitive, highly scale intensive business. And we find ourselves much more drawn to the private economy, both Commercial Banking and Wealth Management, where there's linkages between those 2 businesses, so we can grow them over time. I think having a large retail footprint commits you to having a larger retail footprint. And it's just something that we have not entertained and are not looking at, at the moment. As we think about our U.S. strategy and any inorganic opportunity, it is more likely to be of the tuck-in variety, first off and attached more to the wealth and fee-based side rather than the banking side at the moment. It's just an area that we want to continue to build out our capabilities because we do think there's a tremendous opportunity in the connectivity between Wealth and Commercial Banking. To the extent we have a retail presence at all, it will be more through the electronic, digital means rather than having a bricks-and-mortar footprint.

Great. Second question.

You talked about the international opportunity. And when you think about those businesses and business clients, are you talking about more capital-intensive lending business or more of a service type advisory business? When you discuss international and international sounded more like outside of the U.S.?

Yes. So in the capital markets business, there are certain verticals that are difficult to not think about on a global perspective, right? Like things like energy infrastructure and energy transition. We've got a practice in the U.K. and Europe as well. And it's very much connected to the rest of the footprint. So our ambition is largely a North American ambition but there are product areas where, to be meaningful, even in the U.S. and Canada, you need to have that global footprint. It's difficult to only get an advisory business, right? But without having any balance sheet attached to it. But we are using our balance sheet smartly and we are looking at ways to recycle that capital a little bit more quickly as well. There's an awful lot of demand, frankly, off of the financial sector from private credit and the rest for some of this activity. And so looking at ways to be a little bit nimbler from a capital perspective. So there's not -- we're not talking about deploying a material amount of capital into the business but it is, without having some capital deployed, it's difficult to get the advisory in the fee-based side.

Great. Another question in the front.

You've mentioned energy infrastructure and energy transition as an attractive area several times. Can you possibly just give us a bit more detail, so we understand better like your kind of scale, competitive environment, what kinds of renewables you're lending to in infrastructure and also what your competitive advantage is?

Generally speaking, we're following our clients. And so when we think about the large pension plans, when we think about some of the larger Canadian players, we are working with them and following their ambitions globally. It's not so much a local-led strategy, it becomes more of a, we have a strong presence with them in Canada, they expand into the United States, they go on to other infrastructure opportunities and we'll be there to underwrite and to help syndicate and to give them the advice on that front as well. So it's not a -- it is a very competitive space and it's a very global space and we know who we are. We're not going to be one of the top banks globally on this. But following our clients that are active is, we think, gives us an opportunity to grow.

[indiscernible]

Yes. I don't have the breakdown off the top of my head. We can get that for you.

In Canada, the concentrated market, small changes. Where are you seeing meaningful changes in terms of free market share given all the changes you've made bottom up at the bank level?

Yes, we have -- we're pleased with the number of the initiatives that we have. Our Imperial Service platform is an area where we have invested in the technology and we've invested in people to bring a bit of a different offering. Think of it as a private bank light to the affluent and mass affluent market. And We're also pleased we've got our partnership, our co-brand with Costco in Canada, has been a client acquisition opportunity. They're a very good partner and it's also been a very good client acquisition opportunity as well. And so as those customers come on, the opportunity to broaden those relationships and deepen those relationships, the combination of the assets that we have underlying it and the engine we have now in terms of customer acquisition is providing that opportunity. And you're right, our market shares don't move rapidly in the Canadian marketplace. It is a bit of a gradual process day by day but we're seeing the impact of the strategy and we're seeing those market share start to move.

Just taking a very long view on CIBC. I mean recently, execution has been great. ROE has been basically on power -- par with the biggest banks in Canada. Over the long term, the previous reputation of CIBC was a bit of a also ran, it had a slightly lower return on equity than its peers and more volatility. So there's been some fantastic improvement. Can you give us your perspective on what's been different and how the bank has changed?

Thank you. I think it's been a clear articulation and a clear focus on developing, refining and communicating that strategy that we have, right? If you think about -- there's 3 main pillars, the mass -- the affluent and high net worth strategy and deepening our relationship there and I've spoken about it in a few cases already today. The digital and really being a strong digital bank, both through our Simplii initiative, which is a challenger brand within our bank. But also through our traditional banking channel and making sure that the digital offering is strong and we've got a good set of digital assets that are performing well. We think the connectivity -- the third piece is the connectivity, which is having our capital markets and our commercial bank really service as one, the private economy and our core clients. And then the fourth pillar is making sure that we are investing to harden the bank enable, simplify and protect, we call it internally. And having that clear strategy and communicating it, not just externally but internally, gives people a better definition of what's on strategy and what's off strategy and it really focuses on the execution of it. And so we do think we're in a different place. We do think the way forward is just focused on executing that strategy it sounds. It's not particularly complicated, good strategy shouldn't be. But we do think we have the assets underlying the strategy. It's not just about what we want to be but we've been investing. And I mentioned our goal -- our planning software, I mentioned our CRM software, I mentioned a lot of the investments that we've made are aligned with the execution of that strategy. And we think it's a winning one. As I said, we think it will deliver a premium ROE over time. And for us, it just comes down to executing against it. And we expect that focus on execution is not going to change.

Okay. Well, maybe if there's anything else that we haven't covered, do you want to leave us with any closing remarks?

No. Well, I would say if I had closing remarks, it might be the things that I just said, like the idea here that we think boring is good. We're focused on executing our strategy. We think it's a clear one that will lead to that premium ROE and a good solid earnings growth over time and should deliver long-term value for shareholders and we're focused on executing against it.

Great. Well, thank you very much, Rob. Please join me in thanking Rob for his presentation.

Thank you, everyone. Thank you.