Canadian Imperial Bank of Commerce (NYSE:CM) Q3 2023 Earnings Call Transcript

Canadian Imperial Bank of Commerce (NYSE:CM) Q3 2023 Earnings Call Transcript August 31, 2023

Canadian Imperial Bank of Commerce beats earnings expectations. Reported EPS is $1.52, expectations were $1.25.

Operator: Good morning. 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, SVP, Investor Relations. Please go ahead, Geoff.

Geoff Weiss: Thank you, and good morning. 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 a number of our group heads, including Shawn Beber, U.S. region; Harry Culham, Capital Markets and Direct Financial Services; and Jon Hountalas, Canadian Banking. They are all available to take questions following the prepared remarks. As noted on Slide 2 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 will now turn the call over to Victor.

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Victor Dodig: Thank you, Geoff, and good morning, everyone. I hope you’ve all had a nice summer. I’ll begin with a few brief comments about our third quarter results including progress update against our strategic priorities. I’ll then turn the call over to Hratch, followed by Frank to review our performance in greater detail before we take your questions. This quarter, we delivered solid core business performance by continuing to execute on our client-focused strategy while building capital, expanding margins and prudently managing expenses. Net earnings of $1.5 billion or $1.52 per share were lower than the prior year and reflect higher provisions for credit losses, while pre-provision pretax earnings were up 5% during the same period.

Due to changes to our forward-looking economic indicators as well as the continuing normalization of credit conditions, we increased provisions in our consumer lending portfolios. The increased provisions in the commercial segment mainly relate to our U.S. office portfolio, which represents less than 1% of our overall loan book. We have a robust balance sheet, ending the quarter with a CET1 ratio of 12.2%. Going forward, we’re focused on continuing to build our capital levels to ensure that we remain well positioned for any changes as well as for any opportunities. We remain focused on our three key strategic priorities: growing our high-growth high-touch segments, including our Imperial Service Platform and North American private wealth franchise; Focusing on our future differentiators which includes delivering leading digital banking solutions to Canadian consumers and enabling and simplifying our bank.

Now let me give you a few highlights on our progress. Our Canadian consumer franchise continues to experience robust growth. Over the last 12 months, we’ve added over 650,000 net new clients to CIBC which includes 165,000 clients in our Simplii franchise. We also continue to make good progress on our strategic focus to deepen high-touch, high-growth relationships in the affluent segment. Imperial Service, our unique advice-based relationship offer for our mass affluent clients saw funds managed growth of $14 billion year-to-date, driven by successful client acquisition as well as our focus on ensuring clients are in the right offer to get the advice and solutions they need from CIBC. Imperial Service is an important and differentiated asset for CIBC.

We recently appointed dedicated leadership to directly oversee this key business platform, and we expect to see further momentum in this business. We’re also focused on delivering leading digital banking solutions. We recently earned the number one ranking in customer satisfaction for mobile banking apps in Canada from J.D. Power and continue to see increasing client engagement in our digital channels. 32% of our core retail products were sold digitally, and our digital adoption rate has increased to 84%. Looking at our North American Commercial Banking and Wealth Management businesses, higher volumes and organic client acquisition drove top line growth in commercial banking this quarter, although the pace has moderated from peak levels a year ago.

As expected, demand for loans is cool as business owners take a more conservative approach to borrowing in a higher rate environment and slower economy. In Wealth Management, our top-ranked advisers continue to provide high-quality advice to help our clients achieve their ambitions. Our high-touch personalized advice model supplemented by digital tools supported AUM growth this quarter with positive net flows on both sides of the border and our Private Wealth business. We also continue to benefit from referral activity driven through a focus on connectivity throughout our bank. In Capital Markets, our well-diversified business model and highly connected team across our bank delivered another solid growth quarter, driven by strong performance in our Global Markets business.

Our strategic focus on our sustainability, renewables and energy transition franchise was also recognized by Global Finance as the Best Investment Bank in Canada and for outstanding leadership in sustainable infrastructure finance. We also continue to invest in optimizing our technology infrastructure and processes to enhance productivity. This includes leveraging the cloud to drive scale and speed to market as well as automation of manual processes to reduce costs and improve cycle time and accuracy. Our efforts have resulted in significant cost savings so far this year and are having a positive client impact with a 40% improvement in our client Net Promoter Scores compared to last year. So in closing, we have a deep and experienced leadership team to make strategic decisions that position us for success even in the face of challenging conditions.

As we laid out on our prior calls, we have a clear momentum in the segments we’ve identified as strategic growth areas for our bank and we’ll continue to focus on them. We’ve moderated our expense growth to the mid-single digits while realizing the benefits of the investments we’ve made heading into this fiscal year. We’ve continued to build our capital, and we’ve driven improved margins across our bank. Our business momentum, coupled with prudent risk management and our strong capital position offers us the flexibility to adeptly navigate changing market conditions, adjusting our investments as needed throughout the economic cycle. Now before I turn the call over to Hratch, I’d like to extend our care and concern to those affected by the devastating wildfires in British Columbia and the Northwest Territories.

We are making available financial relief, advice and support to our affected clients including donations to CIBC Foundation’s relief funds for the two provinces. Our thoughts are with you all as you begin the process of recovery and rebuilding. And with that, let me turn the call over to Hratch.

Hratch Panossian: Thanks, Victor, and good morning, all. Thank you for joining us late in the earnings season. I’ll start my remarks on Slide 7. This quarter’s results reflect the strength of our client franchise as well as team CIBC’s ability to proactively manage through a dynamic operating environment. We will continue leaning on these differentiators to sustainably deliver value to our stakeholders. Improving margins, solid trading results and disciplined expense management allowed us to maintain revenue growth momentum, deliver peer-leading operating leverage and continue to drive strong organic pre-provision earnings growth. This helped partially offset higher credit provisions and a higher share count to deliver diluted earnings per share of $1.47 for the quarter.

Excluding items of note, adjusted EPS was $1.52 and ROE was 11.9%. We also continued to strengthen our balance sheet, ending the quarter with capital and liquidity ratios well in excess of current regulatory requirements. The balance of my presentation will refer to adjusted results, which exclude items of note starting with Slide 8. Adjusted net income of $1.5 billion was down 15% from the prior year, driven by an increase in credit provisions, which Frank will discuss in more detail. Revenues of $5.9 billion were up 6% year-over-year, benefiting from strong P&C margins, balance sheet growth and client trading activity. Expenses were also up 6% from the prior year as inflationary pressures moderate and we continue to focus on both expense discipline and strategic investment.

As a result, pre-provision pretax earnings of $2.6 billion increased 5% over the prior year. Slide 9 and 10 highlight the trends driving our net interest income. Excluding trading, NII was up 8% over the year due to continued balance sheet growth and a disciplined margin management approach, which prioritizes stability and long-term performance. Total bank NIM, excluding trading was up 2 basis points sequentially, benefiting from strong margin expansion in our P&C businesses. Robust Canadian P&C NIM of 267 basis points reflects the high quality of our Canadian franchise. NIM was up 10 basis points sequentially, including help from nonrecurring items. Excluding this, the key driver was deposit margin expansion in the quarter, supported by higher rates which more than offset moderating pressure on mortgage margins.

We have provided incremental disclosure on the factors impacting P&C margin in the appendix. NIM in our U.S. segment was 346 basis points, up 10 basis points year-over-year and 5 basis points from the prior quarter. The sequential increase was largely due to higher deposit margins and interest income on a recovery, partially offset by lower asset margins and prepayments. Net of the onetime benefits I just referenced, we expect both Canadian P&C and U.S. segment margins to remain relatively stable in the near term, and we maintain our recent guidance of 165 to 170 basis points for overall bank margin. Moving on to Slide 10. Loan balances averaged $537 billion this quarter, an increase of 5% from the prior year supported by all businesses. Growth in our high-quality deposit franchise outpaced loans increasing 6% from the prior year, with an underlying stabilization of the recent mix shift from notice and demand products to term products.

We continue to be focused on growing our balance sheet prudently and profitably with an emphasis on stable client deposits and lending focused on priority clients with strong returns. Turning to Slide 11. Noninterest income from $2.6 billion was up 13% from the prior year, supported by growth in trading income and higher transaction-related fees. Market-related fees excluding trading, increased 1% year-over-year as stronger underwriting and advisory and investment management and custodial revenues were largely offset by lower revenue from ancillary investments and treasury activities. Turning to Slide 12. Expense growth continued to slow in line with our guidance, increasing 6% from a year ago as we proactively pace steady strategic investments and emphasize efficiency against the backdrop of slowing revenue growth.

On a sequential basis, expenses were up 2%, with more than half of the growth resulting from the impact of more days in the quarter. Our balanced approach has allowed us to revert to positive operating leverage and deliver a solid NIX ratio of 55% this quarter. We continue to manage to mid-single-digit expense growth for the full fiscal year 2023, and we will continue to target positive operating leverage over the medium term. On to Slide 13 to discuss our balance sheet. Another area that has benefited from our focus on disciplined resource allocation and efficiency. Our CET1 ratio improved from 11.9% to 12.2% sequentially, primarily driven by organic capital generation and share issuance against relatively stable RWA excluding the impact of currency fluctuations.

We will continue to be disciplined on capital deployment and expect our CET1 ratio to continue trending higher. Our liquidity position remained well above regulatory requirements throughout the quarter resulting in sequentially higher average LCR of 131%. While we remain cautious in the face of economic uncertainty, our strong balance sheet positions us well to accelerate growth when the economic outlook improves. Starting on Slide 14, we highlight our strategic business unit results. Net income in Canadian Personal and Business Banking was $527 million, down 17% from the same quarter last year due to a higher provision for credit losses. Pre-provision pretax earnings were up 8% from the prior year and 14% sequentially, reflecting strong growth as a result of our focused strategy.

Revenues of $2.4 billion were up 6% year-over-year, helped by robust margin expansion and volume growth. On a sequential basis, revenue was up 7%, driven by the same factors as well as additional days in the quarter. Expenses of $1.3 billion were up 4% from the same period last year, resulting in 2% positive operating leverage. Moving on to Slide 15. Net income for Canadian Commercial Banking and Wealth Management was $467 million. Revenues of $1.350 billion were up 1% from a year ago, benefiting from 6% loan growth and 8% deposit growth in Commercial Banking, partly offset by a decline in wealth management revenue. Expenses increased 1% from a year ago and operating leverage was neutral. While wealth management revenues have been impacted by markets, this quarter highlights the quality of our Canadian P&C banking franchise, where we delivered pre-provision pretax earnings growth of 8% from the prior year, supported by strong margin performance and over 2% operating leverage.

And while we’ve been selective recently in commercial loan growth, we have the ability to accelerate support for existing and new clients as the environment improves to provide further momentum to our domestic P&C growth. We’ve included slides for the P&C segment in the appendix of this presentation. Net income of US$62 million in U.S. Commercial Banking and Wealth Management was down 62% from the prior year due to higher credit provisions, largely in our office portfolio. Revenues were up 5% over the same period, driven by a 10% increase in net interest income, partially offset by a 5% decline in fees that are impacted by market conditions. NII benefited from 7% loan growth and strong net interest margins, while average deposits decreased 4% sequentially, outflow and remixing trends stabilized through the quarter.

Expenses were stable year-over-year, resulting in positive operating leverage of over 5%, and we expect more moderate expense growth going forward as compared to the recent past. We maintained focus on balanced and profitable growth to scale our U.S. business and our uniquely differentiated franchise is well positioned to meet client needs as the local competitive environment evolves. Turning to Slide 17. Our Capital Markets business. Net income of $494 million was up 11% year-over-year. Revenues of $1.4 billion were up 13% over the prior year, driven by our differentiated capabilities. Highlights this quarter include 18% growth in Global Markets and continued double-digit growth in Direct Financial Services, which grew 26%, largely due to margin expansion in Simplii.

We also saw increased activity in underwriting and advisory and continued growth in corporate banking. Reflecting the capital market seasonality we’ve seen in recent years, we expect Q4 revenues to be lower sequentially in this segment with growth reverting to mid- to high single digits over the prior year. Expenses of $673 million were up 13% compared to the prior year, largely due to investments in key growth initiatives undertaken in late ’22. We anticipate sequential expense growth to continue moderating. Slide 18 reflects the results of the Corporate and Other business unit. Net loss of $98 million compared with a net loss of $50 million in the prior year largely due to less favorable treasury revenue and higher corporate expenses, partly offset by higher revenues from International Banking.

We continue to maintain our medium-term guidance of $75 million to $125 million quarterly loss in this segment. In summary, we delivered another quarter of steady, profitable franchise growth as a result of our agility and an unwavering focus on our differentiated strategy. Our strong margins, moderating expense growth and disciplined approach to resource allocation give us significant flexibility to respond to changes in the environment and to seize opportunities that present themselves. We will continue to manage proactively through a fluid environment to support our clients, maintain our balance sheet strength and emphasize profitability. With that, let me turn the call over to Frank.

Frank Guse: Thank you, Hratch, and good morning, everyone. This quarter, overall, our portfolio performed within our expectations. We saw a build in performing allowances this quarter, reflecting prudent outlook based on the macroeconomic environment. Our impaired loans continue to normalize and remain within expectations. We saw sustained headwinds in the U.S. office sector. However, our exposures remain relatively small at less than 1% of our total loan portfolio and our experienced real estate team is managing the portfolio on a loan-by-loan basis, working closely with our clients. Our other portfolios continue to perform well with demonstrated resilience in the Canadian consumer lending portfolio. Turning to Slide 22. Our total provision for credit losses was $736 million in Q3 compared to $438 million last quarter.

Total allowance coverage increased from 66 basis points in Q2 to 73 basis points this quarter. The $258 million performing provision this quarter, $211 million or 80% are driven by changes to our forward-looking indicators with remaining due to portfolio growth, credit migration and other movements. To build this quarter was primarily a result of higher debt service ratio forecast for the consumer books. After nearly 18 months of rate hikes, our forecast expects servicing pressures of higher interest rates and rising unemployment. Provisions on impaired loans was $478 million, up $99 million quarter-over-quarter. This increase was driven by our U.S. commercial portfolio, the bulk of which was attributable to our office commercial real estate exposures.

We also experienced high impaired losses in our retail portfolio. And overall, our impaired losses continue to perform within our expectations. Slide 23 summarizes our gross impaired loans and formations. Overall balances were up in Q3 and mainly driven by business and government loans. New formations were also up in Q3 over $515 million is related to our U.S. office exposure. Slide 24 outlines the net write-off of 90-plus day delinquency rates of our Canadian consumer portfolios, which overall continued to remain stable this quarter and in line with our expectations. As communicated in prior quarters, we expect write-offs and delinquencies to continue to revert towards pre-pandemic levels. Slide 25 provides an overview of our Canadian real estate secured personal lending portfolio, which makes up 54% of our total loan balances.

Our overall late-stage delinquencies remain low, especially when compared with pre-pandemic levels. Variable rate mortgages account for 1/3 of our mortgage book. These continue to display strong credit quality and performance. As a result of the interest rate hikes this past quarter, the portion of non-amortizing variable rate mortgages has increased to $50 billion, up from $44 billion last quarter. We continued our proactive client outreach and see good responses with around 8,000 clients increasing their monthly payments and just over 1,000 clients making lump sum payments, removing themselves from negative amortization status. We will continue to work closely with our clients through this high interest rate environment and other market developments.

On Slide 26, we’ll provide further disclosure on our U.S. office exposure. As mentioned, this represents less than 1% of our total loan book. Given the sector headwinds, we increased our allowance coverage from 4.1% to 7.6% quarter-over-quarter. While our maturity profile is weighted more towards fiscal ’23 and ’24, we have already seen $1.5 billion in net outstandings being renewed, reduced or paid out over the past few quarters. We worked through the balance of maturities. We expect to see losses in and around the current levels for the portfolio for the next few quarters, which is consistent with what we noted last quarter. I want to close by noting that our overall credit quality and coverage remains robust. Given the economic headwinds and sustained pressures in the U.S. office space, we expect our fiscal ’23 loan losses unimpaired to be at the high end of our guidance of 25 to 30 basis points for impaired losses.

We believe our additional provisions this quarter continue to provide prudent coverage for market conditions that will evolve. I will now turn the call back to the operator.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala: Good morning. I guess maybe a question for Frank, starting with you on just the performing PCLs, clear what you said. But as we think about — you mentioned, I think, 80% of the build this quarter was on forward-looking indicators. And what I’m trying to understand is how much of that is just the model output versus your expectation around the macro and how that evolves. So talk to us fundamentally how you see credit playing out in the consumer book. If rates stay higher for longer, I’m assuming your base case is for unemployment to go higher. Within the consumer book, where do you see the loss drivers? And just how quickly can things deteriorate?

Frank Guse: Yes, a couple of things to unpack there. So what I would say is — it is driven by our model outcomes. It is driven by our forward-looking expectations, as I said, by about 80% of the overall performing build. What we saw this quarter is a higher interest rate expectation. We saw two rate hikes in the market, one of which I would say was necessarily widely expected. And we see that playing out in debt service ratios that have an impact on all of our consumer lending products, probably the biggest one playing out in our unsecured personal books. And again, those are forward-looking expectations. What I would also say is those are forward-looking expectations for the next couple of years. And I don’t want to get too technical, but IFRS 9 in Stage 2 is asking for lifetime expected losses.

The average lifetime in our consumer lending book is a couple of years. So what we see as a build this quarter is certainly a reflection of what we would expect to play — see to play out over a couple of years. So, it’s not an imminent change in our outlook. It is an outlook change over those couple of years. And I think what I would say, as you asked for, it is playing out in the unsecured book, where we do see stress, but we see that stress playing out, as indicated as a normalization of net write-offs that we expected that we are seeing playing out. The other point, I will make on performing allowances overall. There is a large increase this quarter. If you normalize that over the last couple of quarters, if you normalize it year-over-year, it is certainly something that is not unexpected.

It is prudent to increase our coverage ratios this quarter, and that’s what we’re seeing play out.

Ebrahim Poonawala: Understood. And maybe one question, just because it is the first time since some of the articles around the mortgage under lighting service in the press. Maybe Victor, for you, I mean, I think you spent a lot of time under your leadership culturally turning around things at commerce from a risk management standpoint. So just to the extent not to make too much of what was out there in the press, but give us your sense both in terms of the risk framework at the bank, to the extent you can discuss that? And also culturally, in terms of leadership, in terms of like what should be made from the outside when we see some of these leaks coming through and making their way through the press? How should we interpret that?

Victor Dodig: So let me just first of all say that our regulators play an incredibly important role in ensuring strength and stability in the financial system in Canada, and I think they’ve done that over a century and a half and they do it well. So as you can appreciate, I can’t comment on the specific regulatory matters. I can tell you that we maintain an ongoing transparent engagement with all of our regulators in all of the jurisdictions that we operate and with our Board. We’ve also got effective controls to ensure compliance with supervisory expectations, and we continue to manage all of our businesses including our mortgage business prudently with a client focus. So what I will say about articles like that, it’s disappointing to see when things are being reported publicly that are presented in a way that simply does not reflect the way we actually operate.

There’s always going to be a healthy tension in running a large complex business, but I can tell you this, we’ve got strong governance. We’ve got an incredibly strong culture. We got really strong employee engagement scores and a team that cares about how we build our business going forward. And that as investors, you need to know, and we’re happy to engage with you on anything that’s on your mind to the extent that we can, but I can tell you we run it well. We run it prudently. We run it with good governance, and we run it very transparently.

Operator: Thank you. Our next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.

Gabriel Dechaine: A couple of questions here. Thanks for the margin guidance, Hratch. And I’m wondering if this could be like maybe some bouncing around to use that term. The U.S., in particular, I’m thinking about the impact it might have because deposits are down quite a bit sequentially, and that may require you to use more FHLB deposits or wholesale funding? And how does that play into your outlook then, if that’s an issue?

Hratch Panossian: Thank you for the question, Gabe. Look, I think everything is playing out in terms of margins as we had guided, right? And as I said in my remarks, we have strong franchises, both in the U.S. and Canada that plays into it. You’ve got a strong deposit franchise in the U.S. We’ve got a strong strategy that focuses on the right clients and focuses on profitability. And we have a strong ALM framework. We’ve talked about this before. We manage the U.S. balance sheet the same way we do the parent balance sheet where we stabilize for rate fluctuations and we manage for overall margin stability over time. And so that’s really what you’re starting to see play out. When you have a rate cycle like the one we did and this applies to broader than the U.S., right, rates went up very quickly and intensely and so that plays out a bit different upfront because you did see quite a bit of fluctuation in noninterest deposits going to interest-bearing or to term.