Canadian Imperial Bank of Commerce (NYSE:CM) Q1 2023 Earnings Call Transcript

Canadian Imperial Bank of Commerce (NYSE:CM) Q1 2023 Earnings Call Transcript February 24, 2023

Operator: Good morning, and welcome to the CIBC Quarterly Financial Results Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Geoff Weiss. Senior Vice President, Investor Relations. Please go ahead, Geoff.

Geoffrey Weiss: Thank you, and good morning, everyone. We will begin this morning’s presentation with opening remarks from Victor Dodig, our President and Chief Executive Officer; followed by Hratch Panossian, our Chief Financial Officer; and Frank Guse, our Chief Risk Officer. Also on the call today are our group heads, including Shawn Beber, U.S region; Harry Culham, Capital Markets and Direct Financial Services; and Jon Hountalas, Canadian Banking. They’re all available to take questions following the prepared remarks. As noted on Slide two of our investor presentation, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results may differ materially. With that, I’ll now turn the call over to Victor.

Victor Dodig: Thank you, Geoff, and good morning, everyone. On today’s call, I’ll provide an overview of our first quarter results as well as an update on our strategy for successfully navigating the current economic environment with a clear path forward to achieving our 2025 objectives and targets that we laid out at our Investor Day last year. Before we get to the results, let me begin with the senior leadership change we announced last month. Following a 14-year career with CIBC, Laura Dottori-Attanasio has retired from our bank, and we wish her well as she takes on new challenges. Jon Hountalas has been appointed Group Head Canadian Banking, with expanded responsibility of leading CIBC’s personal and business bank in addition to commercial banking and wealth management in Canada.

Jon is a proven leader. He’s had a positive impact in every business he’s led at CIBC. He’s focused on execution, on talent and our clients, will serve us well to build on the progress we’ve made in our Canadian retail business. Now turning over to our first quarter results of 2023. Amidst continued central bank tightening and geopolitical tensions, we had a good start to the year, growing revenue and growing pre-provision pretax earnings to record levels. Adjusted net earnings were $1.8 billion or $1.94 per share. Our capital position remains strong with a CET1 ratio of 11.6%, comfortably above the regulatory minimum. And our return on equity improved to 15.5% for the quarter. This performance was supported by volume growth across all of our businesses and underscores the ongoing successful execution of our client-focused strategy, our diversified portfolio and contributions from our organic investments over the past few years.

Our expenses declined sequentially. And as we indicated last quarter, with many of our key strategic investments completed or in flight, we expect expense growth to continue to moderate through the fiscal year. This should contribute to positive operating leverage as we realize the embedded revenue growth opportunities from our past investments. Looking at our Canadian consumer franchise. We delivered funds managed growth of 9%, almost matching last year’s robust pace of 10%. Deposit growth outpaced loans for the first time in 7 quarters, reflecting the shift in market sentiment given the higher interest rate environment. Our credit card portfolios continue to perform well above and beyond the Costco co-brand acquisition that closed in March 2022.

New account openings were up and were over 30% higher in the same period last year. This reflects our ongoing efforts to meet our clients’ needs through new credit card products and enhanced client experience and expanded reward offerings. More broadly, over the past 12 months, we’ve driven strong client acquisition, totaling over 0.5 million new — net new clients to CIBC. Our focused efforts to attract clients by leveraging the structural advantages we have built in this space will enable us to further scale our retail business in the years ahead. In our North American Commercial Banking and Wealth Management businesses, loans continued to see double-digit growth, while deposits were in the low single digits in both regions. Clients continue to be cautiously optimistic about their businesses.

And in light of the tougher operating environment, they’re looking to strengthen their financial position through tighter working capital and through disciplined expense management. While our pipelines remain stable, we’ve seen slower lending growth due to both reduced client demand and from our prudent risk posture in this environment. Our Capital Markets franchise continued to deliver strong results, driven by robust client activity in global markets as well as strong top line growth in our Direct Financial Services or DFS platform as well, we continue to play a leadership role in energy transition. New Project Media recently ranked CIBC the third largest lender to U.S. renewable energy projects in 2022. At CIBC, we have a long-standing focus on ESG as part of our commitment to create enduring value for our stakeholders.

This quarter, our efforts continue to be recognized and validated by prominent third-party organizations. First, CIBC was named to the Dow Jones Sustainability Index North America for the 18th consecutive year. Second, we were included in Bloomberg’s Gender Equality Index for the eighth consecutive year. And third, CIBC was named by Media Corpus Canada’s top 100 employers for the 11th consecutive year, all recognitions that we’re extremely proud of. Sustainability continues to be an essential component of our strategy and we remain focused on ESG matters of importance to CIBC and to our stakeholders. We’re monitoring the global economy. And while pockets of strength exist, there are growing uncertainties driven by geopolitical tensions and persistent inflationary and interest rate pressures.

This will have an impact on economic growth and on client activity in the near term. As the landscape evolves, we remain steadfast in our focus on our clients, and our long-term strategy of growing relationships with the high-growth high-touch segments that we’re focused on, advancing our digitization efforts and investing in future growth differentiators, all whilst staying agile and adapting as needed to the economic environment. We will leverage the investments we’ve made in recent years to support organic growth while taking a prudent and proactive approach to expense and risk management. So a couple of examples. In our retail business, our investments in a comprehensive suite of services and tools tailored towards the mass affluent market, which includes CIBC GoalPlanner have been successful in deepening client relationships.

To date, just under half of our imperial service households have completed the CIBC GoalPlanner process, and it’s resulted in significantly higher growth in funds managed and favorable Net Promoter Scores. We also continue to benefit from the investments we’ve made in recent years in our digitization strategy, incorporating AI, automation and cloud to further increase connectivity across our businesses. Another example, the migration of online and mobile banking applications to the cloud have vastly improved our efficiency in software releases, going from two per month to multiple per week. In addition, cloud automation will reduce costs going forward, improve resilience and a faster change implementation to better serve our clients. We also continue to invest in our future growth differentiators, including our Direct Financial Services platform, which has delivered 3-year revenue CAGR of approximately 15% with revenues over $1 billion for the last 12 months.

We’ve built a differentiated platform and a client-first culture that has allowed us to develop and deliver innovative products and services that enhance the client experience, grow our client base, improve efficiency and drive stakeholder returns. We expect these benefits to continue to accrue into the future. The net-net is our investments are paying off in the businesses that we’re investing in, and you should see this going forward. And with that, I’d like to pass the call over to Hratch for an update on our financials.

Hratch Panossian: Thanks, Victor, and thank you all for joining us this Friday morning. Our team delivered solid results for the first quarter of 2023, supported strong execution against our client-focused strategy and disciplined resource management. We maintained our revenue momentum, credit performance and balance sheet strengths while expanding margins and stabilizing expenses. Diluted earnings per share were $0.39, including items of note, most significantly an increase in legal provision related to the previously disclosed Cerberus ruling and an income tax charge stemming from the enactment of the 2022 Canadian federal budget. Excluding items of note, we generated strong sequential growth and profitability with adjusted EPS of $1.94 and ROE of 15.5%.

Our balance sheet remained resilient despite the headwinds we absorbed this quarter as evidenced by a CET1 ratio of 11.6% and LCR of 134%. The balance of my presentation will refer to adjusted results, which exclude items of note, starting with Slide 8. Adjusted net income of $1.8 billion for the quarter was down 3% from the prior year, driven primarily by a credit provision against performing loans this quarter compared to a release last year. Frank will cover credit provisions in further detail later in our presentation. Record revenues of $5.9 billion and pre-provision pretax earnings of $2.7 billion were up 8% and 6%, respectively, from a year ago, benefiting from balance sheet growth across our business, higher interest rates and strong trading activity.

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Expenses were up 9% from the prior year, but down 1% on a sequential basis as we continue to focus on balance between investment and efficiency improvements. Slide 9 highlights the drivers of net interest income. NII of $3.2 billion was up 2% from the prior year, impacted by the movement of trading revenues from interest income to other income due to rising interest rates. Excluding trading, NII was up 13% from the prior year as a result of continued loan and deposit growth across our business as well as improving margins. Excluding trading, total bank NIM was up 5 basis points sequentially and 3 basis points over the prior year, benefiting from higher margins in several segments as well as interest income from corporate and treasury activities.

Canadian P&C NIM of 248 basis points has improved steadily over the last year, up 12 basis points from the same quarter in 2022. Sequentially, it was up 1 basis point as deposit margin expansion due to higher rates more than offset pressure on asset margins, particularly mortgages. Margins also continued to improve in our U.S. segment. NIM of 354 basis points this quarter was up 9 basis points from the prior year and 5 basis points sequentially, primarily due to the net impact of asset yields and deposit pricing resetting higher to reflect recent interest rate hikes. We anticipate continued growth in non-trading interest income, supported by higher funds managed as well as margin expansion, assuming the forward rate expectations in the current yield curves.

Turning to Slide 10. Non-interest income of $2.7 billion was up 15% from the prior year, supported by growth in trading income, which was particularly strong this quarter and is expected to moderate. Excluding trading, market-related fees recovered 10% sequentially but were down 4% over the prior year, largely due to investment banking and wealth management fees, which were impacted by lower client activity and market depreciation. Transaction-related fees were up 4% sequentially and 2% from the prior year, driven most notably by strong foreign exchange income from client activities this quarter. Turning to Slide 11. Expenses were down 1% sequentially or substantially comparable excluding the impact of higher severance incurred last quarter.

Compared to the prior year, expenses were up 9%, largely due to strategic investments made throughout 2022 as well as the impact of inflation in that year. As previously communicated, we increased the level of strategic investment in our bank over the last 2 years to build key capabilities and generate value through relationships, connectivity and innovation. Approximately half of our expense growth in 2022 was related to investments against the strategy we laid out at our Investor Day including investments in our Canadian affluent strategy, our U.S. and Canadian private economy businesses and future differentiators, like Direct Financial Services. Our efforts have already delivered results. In terms of market share gains in these segments, robust revenue growth and a revitalized franchise with stronger customer satisfaction and employee engagement scores.

And they will continue to drive diversified and profitable growth going forward, contributing a substantial portion of our forecasted growth in 2023 and 2024. As we indicated last quarter, in light of the current macroeconomic uncertainties, we have proactively taken incremental steps to manage our expense base. In short, we’re maintaining our level of strategic investment while continuing to realize opportunities for efficiency improvements. Based on our actions, we expect quarterly operating expenses to stabilize around current levels, resulting in a mid-single-digit growth over the prior year for fiscal ’23 as a whole. We also continue to be confident in our goal of delivering positive operating leverage over the medium term, as we’ve communicated at our Investor Day last June.

Turning to Slide 12. Our balance sheet remains strong despite the significant draws on capital related to the legal matter and the enactment of the 2022 Canadian federal budget. We ended the quarter with a CET1 ratio of 11.6%, down just 9 basis points from the prior quarter as strong capital generation and share issuance largely offset the onetime headwinds and net organic RWA growth. We currently forecast our CET1 ratio continue trending higher from here, ending 2023 around 12%. Our liquidity position strengthened this quarter, supported by continued deposit growth and moderating asset growth. We continue to monitor deposit balance trajectory and liquidity closely given the current macroeconomic backdrop. Starting on Slide 13, we highlight our strategic business unit results.

Net income in Personal and Business Banking was $594 million, down 15% from the same quarter last year, but up 22% from the prior quarter. Revenues of $2.3 billion were up 4% year-over-year, helped by strong loan and deposit growth, partially offset by lower net margins, wealth commissions and fees. Expenses of $1.3 billion were up 13% from the same period last year, driven by strategic growth investments, including investments in our co-brand card portfolio and related employee expenses. On a sequential basis, expenses were marginally lower, and we expect them to be relatively stable going forward. Moving on to Slide 14. Net income in Canadian Commercial Banking and Wealth Management was $469 million. Revenues of $1.4 billion were up 4% from a year ago, benefiting from strong results in Commercial Banking, partially offset by market headwinds, which impacted our Wealth Management business.

Commercial Banking revenue was up 17% from a year ago driven by margin expansion from higher interest rates as well as continued growth in loans and deposits. Wealth Management revenue was down 5% from the prior year, primarily driven by lower commissions from decreased client activity and lower assets due to market depreciation. Expenses decreased 1% from a year ago, helped by lower performance-based compensation, partially offset by strategic initiatives. Slide 15 shows U.S. Commercial Banking and Wealth Management results in U.S. dollars, where we delivered net income of $159 million, down 15% from the prior year due to higher credit provisions. Revenues were up 10% over the same period, driven by 16% increase in net interest income, partially offset by a 1% decline in non-interest income.

Strong loan growth of 12%, deposit growth of 4% and expanded margins supported the higher net interest income, while in our wealth business, particularly strong annual performance fees, somewhat offset the negative impact of market appreciation. Expenses were 14% higher year-over-year, driven by ongoing investments to support our growing business and infrastructure requirements. We anticipate continued investment in this segment but expect sequential expense growth to stabilize through fiscal 2023. Slide 16 speaks to our Capital Markets business. Net income of $612 million was up 13% from the prior year and revenues of $1.5 billion were up 14%. Global Markets revenue grew 17%, supported primarily by client activity in foreign exchange, interest rates and commodities trading.

Direct Financial Services revenue was also strong, increasing 38% over the year, including the impact of deposit margin expansion in our Simplii business. This was somewhat offset by lower advisory and underwriting activity due to market conditions. Expenses of $650 million were up 9% compared to the prior year due largely to investments to continue building our differentiated franchise. Slide 17 reflects the results of the Corporate and Other business unit. Net loss of $47 million was in line with the year ago and $150 million better than the prior quarter. Revenues of $129 million were up 23% from a year ago, driven by the impact of higher margins and FX translation on our international banking business, partly offset by lower income and treasury.

Revenues this quarter also benefited from non-recurring income related to corporate and treasury activities. Expenses were up 9% from the prior year, but down 17% sequentially. And we maintain our guidance of $75 million to $125 million quarterly loss in this segment going forward. In closing, we remain focused on successfully navigating the current dynamic economic environment as we have demonstrated this quarter. We’re proactively managing expenses and our balance sheet resources while maintaining our level of strategic investment for the future of CIBC. We started fiscal ’23 with solid momentum across our franchise, and we will continue to leverage our past investments and our strong balance sheet to support our clients, drive profitable growth and generate long-term sustainable value for our stakeholders.

I’ll now turn the call over to Frank.

Frank Guse: Thank you, Hratch, and good morning, everyone. Credit performance this quarter continues to be well in line with our expectations. With the increases in allowances since Q2 of 2022, we remain well covered for any uncertainties in the upcoming quarters. Slide 20 details our provision for credit losses. Our total provision for credit loss was $295 million in Q1 compared with $436 million last quarter. The provision on impaired loans was $259 million, up $40 million quarter-over-quarter. We experienced higher impaired provisions in both retail and business and government loans this quarter. In retail, write-offs trended higher as expected, reflective of delinquencies returning towards pre-COVID levels. In business and government loans, high impaired provisions were attributable to both Canadian and U.S. Commercial Banking across a broad range of sectors with no specific concentration.

The provision on performing loans was $36 million in Q1 and we are comfortable with our allowance coverage as we have had prior increases since Q2 of last year as the economic outlook deteriorated. Turning to Slide 21. We remain prudent in our allowances given the economic backdrop. Total allowance coverage ratio is consistent with prior quarters at 63 basis points and remains above pre pandemic levels. Slide 22 focuses on our lending portfolio mix. Consistent with previous quarters, our portfolio reflects strong credit quality. Our total loan balances were $531 billion, of which 55% is real estate secured lending. Our variable rate mortgage portfolio accounts for a little over one-third of our mortgage portfolio and shows strong credit quality and performance.

The average loan-to-value for our uninsured mortgage portfolio was at 52%, up from 48% a year ago as we have seen a continued house price drop in most markets. We continue to expect further moderation of house prices and as a result, year-over-year increases of LTV ratios. House prices peaked at around May or June of last year, and we saw some slowdown of the price decreases in recent months. The business and government portion of the portfolio have an average risk rating equivalent to a strong BBB, which has remained steady and continues to perform well. Slide 23 details our gross impaired loans. Overall, gross impaired balances were up in Q1 with an increase in both retail and business and government loans. New formations were also up in Q1.

The increases of both gross impaired balances and new formations are in line with our expectations and for the most part, still below pre pandemic levels. Slide 24 details the net write-off and 90-plus day delinquency rates of our Canadian consumer portfolios. As communicated in prior quarters, we expected write-offs and delinquencies to revert towards pre pandemic levels, which are in line with our expectations. Slide 25 provides an overview of our Canadian real estate secured personal lending portfolio. We continue to focus our origination efforts in the segments where clients have deep and balanced relationships with us. The majority of our mortgage growth over the last two years have been with clients where we have those relationships. 88% of mortgages are owner-occupied with the balance being principally investor mortgages.

Our late-stage delinquencies across these portfolios continue to remain low compared with pre pandemic levels. We will continue to take a prudent approach and are closely monitoring as interest rates rise and markets evolve. On Slide 26, we have included details on the portion of our mortgage portfolio that we’ll be renewing in the next 12 months. Over that period, $22 billion of fixed rate and $9 billion of variable rate mortgages contractually come up for renewal. At this time, we still only see a small portion, less than $20 million of mortgage balances with clients we see as being at higher risk from a credit perspective and whose LTVs are in excess of 70%. We actively monitor our portfolios and proactively reach out to clients who are at higher risk of financial stress.

Slide 27 shows our FICO score and LTV distribution in our Canadian uninsured residential mortgage portfolio. The key takeaway is less than 1% of our uninsured mortgage portfolio has both a score of 650 or less and an LTV over 75%. Overall, our mortgage portfolio is well positioned and continues to perform well within our expectations. On Slide 28, we provide details of our commercial real estate exposures in both Canada and the U.S. 69% of our Canadian portfolio and 60% of our U.S. portfolio are investment grade at the quarter end with prudent lending standards for our CRE exposures in both Canada and the U.S., with this strategic focus remaining on well-capitalized sponsors with strong track record and experience managing through economic cycles.

Our exposures in these two regions remain well diversified and continue to perform well. In closing, our performance is well in line with our expectations this quarter and is also better than the pre pandemic levels. Our credit portfolio quality and coverage continue to remain robust. And as economic conditions evolve, we continue to proactively work with our clients who are more at risk to provide solutions that ultimately drive positive outcomes. I will now turn the call back to the operator.

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Q&A Session

Operator: And the first question is from Ebrahim Poonawala from Bank of America. Please go ahead.

Ebrahim Poonawala: Good morning. I guess maybe Hratch, if you could start with Slide 9 in terms of the NII outlook. Just talk to us in terms of three of the core NII, driven by what your expectations are on NIM? And what’s going to be driving that NII growth in a world where balance sheet is slowing? And then maybe how much of a drag is the trading NII be going forward if rate hikes are more or less done in Canada and the U.S.? Thank you.

Hratch Panossian: Good morning, Ebrahim. Thanks for the question. Happy to take that. Overall, what you’ve seen in our trajectory of NII, as we’ve highlighted on the slide here in a number of quarters is that we’ve got strong momentum, and we expect that momentum to continue. We’ve got a strong balance sheet. We’ve got margins that are positioned to continue expanding with where interest rates are now. And on the back of that, we’ve produced NII growth, excluding trading of 13% over the last year. Going forward, we’ve been very clear on our guidance. We’ve got strong margin trajectory from here. What you saw this quarter is consistent with what we said, a few basis points positive in terms of core NIM expansion. A couple of basis points that I would call more quarter-over-quarter noise from last quarter’s negatives coming back and so forth.

But I think the core NIM, ex-trading, from that 164 level is positioned to continue increasing a few basis points a quarter, particularly accelerating, I would say, the back half of the year, maybe more stable here in the shorter term. But between that and continued balance sheet growth as we continue deploying capital with our clients to grow our businesses, we think that will continue driving strong NII growth. Now in terms of your other question, I think it was on the trading side and what that can do. Again, that can create some overall noise to NII between trading and non-trading as you can see over the last few quarters here. That may continue if rates rise. But overall, I would look at trading results in aggregate. And I would advise you to look at NII, excluding trading as we do.

Ebrahim Poonawala: Got it. And I guess maybe one question for Jon. Jon, congratulations on the new role. Maybe give us a sentiment check around commercial customers. Clearly, a lot of macro uncertainty. Credit seems to be normalizing, but holding up well. So where do you see growth coming through over the next few quarters on both commercial and consumer? Thank you.

Jon Hountalas: Thank you, Ebrahim. Let me start with commercial. There are several factors at play when you look at commercial loans. Some are macro and some are probably specific to us. Let me start on the macro front. Last year was a blowout year in terms of loan growth across the industry. I think the average was 17%. We were probably at 19%. The average over 10 years is something like 10%. So why so high? Economy was strong, receivable is high, inventory is high, billing with supply chain, a lot of that is winding down. So, you see some sectors actually declining, all for good reasons, by the way. To real estate, it’s been a big area of growth. Real estate is quiet. That will subdue growth a bit. Finally, entrepreneurial confidence is down versus six months ago.