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

Welcome back, Mr. Hratch Panossian, Senior VP, Head of Canadian Personal and Business Banking for CIBC. Hratch, thanks for joining us. I think this is your second time at this conference, where you...

So yes.

It's been my eighth year, so it's hard to keep track. Let's kick off with the big picture question. And we have the macro backdrop that's not helpful for any forecasting or any outlook commentary. Nonetheless, I'll ask you an outlook commentary because -- and specifically related to organic growth. Your comments over the past few quarters, including Q1, pretty optimistic and bullish on organic growth in Canada, which seems to be at odds with reality, I guess, the way I see it, I'm a bit more glass half empty, I guess. What are you seeing that's more positive than we might expect?

Yes. So thank you for the question, Gabe, and good afternoon, everybody, or good morning. Nice to be here. It's always a pleasure to be with you in Montreal. Back to our strategy, to answer your question, right? The macro environment is not something we control. And so we always go back to, do we have the right strategy that allows us to perform regardless of the environment and what's going on out there. And we believe we do. So I'm going to spend a few minutes on our strategy. I won't take too long. But at the core of it, within our division, we're on a mission to build the best relationship-focused bank in the country. And what I mean by that is we need to be the most client-focused, the most future-ready relationship-oriented bank for consumers that becomes a clear choice for any consumer in Canada that wants to have a broader relationship with their FI. And to do that, we believe you've got to be able to deliver clients value with seamless experiences across the channels that are digitally enabled and personalized advice, and you've got to lead with advice. And our entire strategy is focused on those things. It starts with the team. We've got an amazing team, but you also have to leverage all the relevant emerging technologies to empower that team. And I think as an industry, frankly, putting those 2 things together and getting the best of both to deliver real value to consumers, we can do far better than anybody has done in the industry. And I think that inflection point comes in the next 5, 10 years. And for me, having moved from the tech world to banking about 20 years ago, this has been a personal mission of mine. And so I'm really excited, and I think we've got the right platform at CIBC to do it. So how are we doing that? And why am I so confident, right? This leads to your questions. Well, listen, if we execute on our strategy, we've talked a lot of our priorities. I won't reiterate them, but it's -- get the right clients, acquire clients specifically in key segments, mass affluent being a big segment, deepen relationships with existing clients and do everything that we can to make those experiences seamless and improve our efficiency across client experience and team member experience. And we think we can deliver. We think we can deliver even in slower environments, revenue growth that's above market. We think we can deliver a NIX ratio and ROE that is above median over time, and we're not there today. We're inching towards it. And we think we can deliver best-in-class client experience and team member experience. And you've seen a lot of the results on that, so very quickly, right, on client acquisition. We acquired last year almost 600,000 clients, but more importantly, even as some segments like students and newcomers started slowing, we're seeing continued momentum, slower, but continued momentum. And we're seeing share gains in those key segments that we believe are more valuable. In terms of deepening relationships, we touch 1 in 3 Canadians that are old enough to have a banking relationship. So we have lots of relationships, and we've done the math on the opportunity to consolidate those relationships we engage with those clients, and we're seeing the results of that. So far this year, our funds managed and funds consolidation has been far exceeding -- with existing clients has far exceeded what our plans were, and it is providing the majority of our growth. So even in a slower environment and less Canadians coming in, we've got a lot of opportunity to deepen the base. And in terms of our experience with clients and everything that we do, we've set ourselves up now with our org structure changes, key business capability build, operating model change, data and analytics, digitization, we've set up an infrastructure and a model where we're relentlessly focused on optimizing and digitizing all of our processes end-to-end in the personal bank. And you're seeing the results of that, right? Our NIX ratio dropped below 40% in Q1. Now there's going to be ups and downs, but I think we're on the right trajectory. Our NPS scores are the highest they've ever been. Our last Ipsos NPS study, we were #2, and we had the smallest gap to the market leader, and we're just getting started doing these things. So I've got conviction that we can continue delivering on this strategy. And just as we've done recently, right, we haven't had the highest volume growth. But this strategy is one that focuses on margins, focuses on profitability. It drives client engagement. And by doing that, we've driven above-market revenue growth. We've improved efficiency. We've driven good ROE despite some of the performing provision that has impacted that. And so I think that positions us really well in the tariff world. Now quickly on the tariffs. We're seeing -- I keep summarizing that hesitance and uncertainty. So we're seeing that from consumers. That's a natural reaction. People are waiting on big financial decisions, a little less proactive on home buying. You're seeing the sales data on the housing market. RESL has slowed down since January. A little bit of slowing we're seeing on the lower end of market on purchase volumes on cars, and you're seeing a preference again for liquidity and demand deposits over GIC. So those things are there. But with all of that, again, we go back to our strategy, right? We're staying close to our clients. We're deploying the best insights we have on the clients to our best advisers to do what's right for the clients, and we're continuing to drive good growth. So that's what makes me feel confident.

I do want to follow up on the purchase volume credit card topic a bit. But just when I hear deepen relationships and investment in IT, which is something that the bank has talked about for a number of years, is there a way to make that more, I guess, tangible? Like what have you -- are you able to do today that you weren't able to do 2, 3 years ago as far as you've identified -- you've got one product customer and now you've got a better capacity to cater to their other needs, like...

Yes. It's a good question, Gabe. There's different elements of that across the entire business. But at the core of it, what we're now able to do is have a way to engage with our clients regardless of where and what channel they engage with us through a common platform, understand what they're doing, understand their current circumstances, use advanced analytics based on their behaviors, their transaction patterns, changes in their life to understand who they are, what they need and how best to serve that need. And getting to the point where on a timely basis and over time, on a near real-time basis in some channels, being able to react to things, clients are doing or saying and being able to get back to them with an adviser or digitally or however the right method is for that client with the right thing to do at that time to maximize the long-term value of that client. So that's a big capability, and we've started -- we've done a lot, right? So we've seen a lot of what we've done recently on that analytics and how those analytics feed into providing leads with our Salesforce platform to the front line on what's right for that client at that point in time. And we've seen tremendous uptick both in terms of -- you've got advisers who -- nobody likes cold calling. But if you turn a cold calling into an advice opportunity by giving conviction to that adviser to say, here's the client, here's who they are, here's what they did, here's what's right for them. Now call the client to give them the advice, not to try to sell something. It changes the game drastically, right? We've seen the upticks in terms of number of leads actioned dramatically. We've seen the upticks of clients actually acting on those leads go up dramatically. And look, all of this has been deployed in the short term for us. A lot of it has been in the demand space and investment space. And it coincides with our investments in. We talked a lot about the CIBC GoalPlanner, right, the CGP platform. And so Imperial Service, and I'm sure we'll get into that, right, which is a big part of where our mass affluent growth comes from. We've been leveraging all of those things together to get to clients, to bring them in, to understand them, to give that advice to do the plan. And what we've seen is a 50% increase for folks who we take through these steps. We've seen a 50% increase in funds managed with the bank.

Well, let's stick with that then, the Imperial Service. What's the typical customer look like? And what's the opportunity there in terms of making that the, I guess, a more appreciated part of the bank because I think it's -- it comes up a lot, but I don't know if people really understand, at least I don't, what's been going on with that business for years and how it's better positioned today?

Yes. Yes. It's part of the platform we're most excited about. And so mass affluent very quickly, you all heard it, right? It's a very attractive segment for obvious reasons, right? We've got roughly when we look at Imperial, about 5x the revenue per client than we do with the average client. We've got higher profitability, and it's actually growing 4 or 5x higher in terms of the revenue opportunity with those clients. So that's why it's attractive. So no surprise. It's a segment that everybody in Canada is focused on. So I think the real question is, why us? Why do we think we can compete in this segment? Imperial Service is a unique proposition. Our Costco partnership is another unique asset we have, and we're leveraging both of them to gain share in the market, right? So when you look at Imperial, what are we doing? We've got a platform of over 2,000 registered advisers. Each of them serves a few hundred clients in their portfolio. And it's that dedicated four-quadrant adviser that will do everything for you across investments, lending, everyday banking, advice and so forth. And we've got all the technology behind that, right? So we're growing that. We're adding about 100 advisers this year. And as we add clients to the platform, we'll keep adding advisers. We're growing the tools, right? I talked a little bit about the CGP tool. But we're also digitizing the processes. We're using now GenAI to help advisers with preparing for meetings with next steps after meetings. We're using the machine learning algorithms on clients to give better leads. We're doing all of that. And that's actually driving productivity of the advisers up. So when I look at how much time we've saved, we've saved hundreds of thousands of hours of adviser time over the last number of years in Imperial Service, and that gives them more time to spend time with clients. So the number of calls with clients and the number of meetings with clients per adviser year-over-year is up 20%. And again, we're just getting started on this front. And as we do that over time, we can push up those loading factors on clients per adviser because clients want to do things more digitally, simple mundane things aren't coming to advisers anymore and advisers are more powerful. It takes them less time to do things with the infrastructure that we're giving them. And then lastly, we're adding clients, and this is where the big opportunity is, right? And it links to what I was saying before. There's 3 avenues we're adding clients. One of the big ones is looking at the current CIBC base. So about 10% of our clients would sit in Imperial today. If we look at the rest of the 90% in CIBC, that 1 in 3 Canadian that we have a touch point with, we've done through analytics work to realize that there is about 1 million of those clients that have the assets to be part of the Imperial Service platform. And if we go after those clients and consolidate those clients alone, that opportunity could double the size of Imperial Service. And we have another 1 million that would be slightly lower than that, and we've got another tier of clients we're addressing a different way. But if you look at the opportunity with just consolidating investments and other assets with existing clients in CIBC, and that's where we're just getting started. We've moved a small portion over the last 2 years of those 1 million clients into Imperial Service, and we've seen that NPS lift and the funds managed lift to 50%, I was telling you earlier about, and we can keep doing that. So as clients come in, as capabilities get better, the adviser force grows, the productivity of those advisers grow, we can keep driving the results, right? So what have we seen this year? In funds managed, even though funds managed has been low single-digit growth across the whole platform, Imperial Service annualized rate is high single digits this year already. We're seeing NPS scores that are best-in-class already, 70% plus, 80% plus if you've gone through a full advice conversation, those are up 10 points year-over-year. And you're looking at engagement of advisers as we're hiring more advisers and voluntary turnover is down 50%. So it's half what it was. And we're seeing, again, strong results, right? Our advisers ranked us 9 out of 10, #1 in satisfaction as a platform just recently in '24. And we're aiming for that 10 out of 10 over time, right? So there's a lot in Imperial Service that we can go after, and we're continuing to grow the client base on the platform.

Okay. Great. Now just to go drill into the credit card business because it's a big business for CIBC. The card balances have been growing pretty consistently for a number of years now, peak levels probably. Are you seeing a similar increase in revolving balances? Or it's still more of a revenue headwind at this point? Because it seems like that's been a challenge for not just CIBC, every bank that revolving balances are still quite low?

Yes. It's been recovering since the lows, but we still have a ways to go. Look, and let me take a step back, right? We're very pleased with our card position, right? We've gained share. We continue to do that. It's an important part of our value proposition. I think we've got the best lineup. Yes, I'm a bit biased, but we've got travel options across Aventura and Aeroplan. We've got the best retail card with Costco. We've got great everyday programs, and we're continuing to grow it. And what you've seen over the last year, and I think it's the case for both the overall core portfolio as well as our co-brand portfolio, you've seen good growth in outstandings. So overall outstandings were up 10%. And it was more than that, about 1.5x that is what we've seen in growth in interest-earning balances and revolve. So the revolves have been rebounding from the lows that you had in the pandemic, but they're still not at pre-pandemic levels. So, so far, we've seen a good trajectory, but not to the extent that we would actually be concerned from a risk perspective, right? And we're being very prudent on that. We've taken some proactive actions. And so one of the things that I'm most proud about is the quality of our card portfolio is really high. And it's not by accident, right? You look at the strategy, the clients we're going after, a lot of it are prime cards, Infinite, Infinite Privilege type of cards, transactors rather than revolvers. The Costco portfolio is really strong. So you look at our charge-off rates, and we're still in the 300 basis points. Even if you looked at the non-Costco portfolio, it's still in the 300 basis points range. We don't disclose that. But you saw it in Q1. We are 100, 200 basis points better in charge-off rates than some of the peers, and that's both the quality of the portfolio and some of the proactive actions we've taken over the last little while.

Yes. It's a good news, bad news story that the revolving balances still being quite low revenue headwind, but it's an underappreciated indication of the resilience of the Canadian consumer that they're paying off still an above-average rate of their monthly balances and I guess that's true both in the Costco and the non-Costco portfolio?

It is. It is true. And again, we've seen those revolving balances grow faster than the outstandings. Now look, I think where we're all going to have to watch this portfolio is what happens as the economy turns, right? As I said, purchase volumes, not in the affluent folks, but lower down, you're starting to see a bit of slowdown. It's that uncertainty. I think people are starting to be careful to see where things go with tariffs. And obviously, if we do see unemployment starting to move at some point, then you could start seeing an impact here. But we're being very prudent and at least proactively as well starting to zero in on the segments of our client base where we think there'd be more risk in what's coming ahead of us and then trying to get ahead of it.

And the Costco portfolio, I mean, just crudely, is it big enough for me or others to care? I mean it's a nice headline to have that partnership. I think at the time it was acquired, what, $2 billion or so of receivables.

Yes, a bit higher, but...

A bit higher. And has it grown since then? And what's the cross-sell experience been?

Yes, it has. So look, we're very pleased with our partnership. It was strategic. It was part of our strategy to go after mass affluent predominantly or a majority of their clients have some element of mass affluent into it or what they call their members. And so it's been a good program for us, right? If you look at the card, yes, it was around that $3 billion mark. It's more than doubled since then. We've added more than 1 million clients since then in terms of new cardholders. And if you look at our penetration, our penetration within their client base, their member base continues to go up in terms of the card, but their member base is also growing at a very fast pace. So the card still has a long way to go. If you look at the economics of the card, it's fine, right? Funding cost has been a bit of a headwind to original business case because interest rates went up higher than anybody thought, but lots of other puts and takes. I would say the card is at business case, and it was always going to be fine, right? But the real opportunity, and we're excited about is the franchising. And that's been a tremendous success, right? When you look at our franchising, we've only franchised about 10% of the cardholders today, but that's still a material number in terms of clients to CIBC. And it's been investments, it's been deposits, it's been mortgages. And again, we're just getting started and we can go from 10% higher up. Then we have the opportunity of the whole member base. And so what we've now started doing, which we're very excited about, and we just started this pilot in one location in the GTA is we now have kiosks to have -- start banking relationships directly with clients who don't have the card. So we're addressing the whole member base. And we're also doing that digitally through Costco.com. We're doing that digitally through their mailings. And so we are going to the entire 8 million member base with targeted offers in order to grow our penetration there, too. And when you look at that client base that we've franchised, 10% of them have actually joined Imperial Service. And so it is a core part of our strategy on mass affluent and something we're excited about. And we're investing in, right? We'll keep investing in the card. We'll keep investing in the relationship, and they've proven that so will they.

Just a suggestion, maybe put the kiosk next to the $8.99 chicken, roast chicken spot. I don't know...

It's a pretty big kiosk.

I don't know if that's a mass affluent, I get it. So business banking also under your purview, we don't spend too much time talking about it. Like can you -- the portfolio, the size, I mean, it's probably fairly small, but from a risk standpoint, is there any reason there to be concerned?

No. And there's a reason we don't talk about it a lot, right? It is a small part of our portfolio. So we have -- we would have kind of in the teens percent share on deposits, but we're actually underrepresented single-digit share in lending, and that's been partly by design. So the lending portfolio is about $3 billion. Majority of it is actually secured by real estate or other tangible assets. All of it has personal guarantees from the owners of the business and most of the owners of the businesses are CIBC clients with broader relationships, and it goes to our relationship strategy. So when we look at the portfolio, it's small, but we've done the analysis. We're never going to rest on our laurels. Only about mid-single-digit percent of the portfolio is actually in manufacturing or has any nexus to the U.S. They're both roughly the same number. And so we don't expect an impact. These are Canadian businesses, Canadian supply chain, Canadian customer base. And so if we do see a Canadian impact to the economy to unemployment, to people spending and buying that I could see, but there's no direct impact from the tariffs to our small business portfolio. In fact, longer term, with this national sentiment by Canada, focus on productivity, local investment, we actually think the small business space may benefit in Canada. And so we're starting to think through and have a few things on the go on how can we support Canada and Canadians and starting some of those efforts and trying to drive some of the local productivity up. And so we're excited about that.

Just to stick with the credit quality type of line of questioning, is the bank -- and I asked an earlier presenter this question, are you -- at this point in the cycle, are you doing things like cutting credit line or trimming credit lines, not cutting, but proactive risk management strategy, I guess, given the weaker status of our economy state?

Yes, we're always proactive, right? So it's not any point in time. We believe in doing prudent lending, providing good advice, taking into account the economy, potential changes in the economy when we do the original education decisions and underwriting. And it's also our strategy, right? Our strategy is focused on the right clients, the right relationships and those segments that we believe actually protect us. So one of the things we don't talk enough about is the portfolio composition. And I think the performance of the retail book you've seen so far shows that, right? The fact that we have a concentration in RESL, the fact that we have not a lot of small business, the fact that we don't have a lot of auto, the fact that we don't have a lot of other unsecured, the fact that our card book is more SKUs, more premium, those are the things we actually feel good about to begin with. And our underwriting is strong in the early days. And as I said earlier, right, we took actions a year ago just because of the sort of COVID cycle and inflation and so forth, we were in even before tariffs that I believe are part of why our books are performing better today than some of the other books in market. And so we're always doing that. We've done some proactive work to understand which sectors could get impacted most, who in our client base is vulnerable against those sectors, who's employed in those sectors and at least proactively when we're going and addressing the market and pushing increases in credit, at least let's not do that. But then looking reactively as well in a client-focused way, right? You can't just go cutting people's credit. But we're at least ready to know where we expect things to come up and be proactive with our activities with those clients.

Okay. We're nearing the 2-minute warning here. I got a couple of more questions. One on the NIM outlook, I guess. A couple of years ago, the big surge in demand deposits was -- create a lot of pressure on margins. A lot of those deposits are maturing currently. Is that dynamic supportive of margin expansion given maybe they're substituting into checking accounts or investment products or what have you so that you could see some tailwinds from lower funding costs?

Yes, absolutely. So we -- to be fair, right, we talked about this a bit in Q1. So we had actually in the fall a bit of an increased pace of maturities in our GICs, but that's kind of stabilized to a more normal level now for the foreseeable future. But you saw a lot of change, right? You saw clients who are coming out of GICs with a 5 handle on it and now facing a 3 handle, right? So that was naturally an opportunity to have an advice conversation. That's where we had our advisers work with folks to say, okay, what's the right thing for you at this point? And we've seen a few things, right? We've seen some clients need the liquidity because of their circumstances, and so they've gone to demand products. And that's why we've seen a good portion of GICs maturing going there. We've seen some clients needing to pay down debt. And we've seen some clients who don't need the cash and have longer-term goals require investments. And so a lot of that's gone to demand and a lot of it has gone to investments. And the way we've approached those client conversations and given advice is part of the reason why we've driven demand share growth. We've been #1 in FX sales. It's because we've done the right thing for the client, and we always say right thing for the client and right for shareholders. And it has been a really key area for that. And one of the things we've leveraged is actually our data and analytics, and we didn't talk a lot about that, but it is one of our biggest areas of investment. I've personally spent time essentially acting our CDAO for the retail business, understanding our data and how we can drive value in it. And we now have a full plan of how we can extend that another order of magnitude in terms of our capabilities, the investments behind it and the value we can drive from it, but it's already paid a lot of dividends.

Just last one, I'll sneak it in there. You've got a #2 player in the market that's reinvigorated, trying to accelerate its growth in Canada. How is that impacting your business?

Yes. Listen, I think I'll go back to what I said about tariffs, right? Competitive environment, slower growth environment, all of those things, the best way we can insulate ourselves from it is to focus on what we're doing. Could there be impacts? Listen, I haven't seen anything on the competitive front that's that material yet. But we're focused on our strategy. 1 in 3 Canadians, we have a relationship with. We're very focused on having everyday banking, transactional relationships, digital engagement with those clients. That allows you to really get under the hood and understand who the clients are and what they need. And we have the opportunity to double our business just by consolidating assets from those folks. And I think we've proven that. We've proven what that does to margins, ROE, NIX ratio. We've got a lot of opportunity still ahead of us. We're going to build the best personal bank in terms of advice and seamless processes. And so whatever happens on a competitive environment, right, we're laser-focused on delivering on that, and our shareholders will see the value.

Well, Hratch, great discussion. Sure everybody learned a lot today, and enjoy the rest of your day.

Yes. Thank you. Thanks, Gabe.