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

So we are in a good place now. We will continue to manage those expenses to a good place. When it comes to credit, I think Frank said it all. I think on a year-to-date basis, when you compare our provisioning on the performing side, we’re very much in line with our peer group when you factor in mix differentials across businesses. So fundamentally, I feel like our business is in a very good place. We don’t like the volatility in the models, we’ll work toward looking at variables that are more predictive as we go forward because we understand that our investors want consistency and believe me we want to deliver that consistency as well. So fundamentally, we’re delivering it. We’ll continue to deliver it going forward across all aspects of our P&L.

Operator: Thank you. Our next question is from Mike Rizvanovic with KBW Research. Please go ahead.

Mike Rizvanovic: Just a quick question for Hratch on the noninterest-bearing deposits. I think sequentially, last quarter, the outflow sort of flat-lined and now it’s sort of picked up. I’m guessing it’s because of the two rate hikes we had during the quarter. And I’m wondering in your margin guidance or just your outlook overall, like what do you see on the NIB runoff if rates do stay higher for longer? And let’s say we don’t get any rate relief until maybe mid-2024, how do you see that NIB runoff trajectory from here?

Hratch Panossian: Yes, look, it’s a very good question, right? As I mentioned, we’ve gone through a cycle that we haven’t before in terms of the speed of rate rises. And so, I don’t think anybody can predict exactly where we go from here. But what we are definitely seeing in the trends is a stabilization, and so if you look at this year, we’ve had tremendous growth in term product and interest-bearing product and it did come partly at the expense of a reduction in our overall demand deposit balances. And we’ve seen on a year-over-year basis, demand deposits will be down, and they’ll be down a substantial percentage over the last little while. If you go from the beginning of the rate cycle to now, we’ve seen about a 10% shift but that is stabilizing.

You’re right, this quarter, we did see a few billion dollar reduction in demand deposits, but it’s a lot more stable than what we’ve seen over the prior quarters. And we’re seeing that in the U.S. as well as in the Canadian franchise. And so if rates stay where they are now, I think we will continue to see this stability play out. If rates go further, you could see a little bit further fluctuation, right? If you look at it on a historical basis, we were actually starting to converge on the mix of term to non-term products that we’ve typically had over the last several years. And even if you go back to prior years of very high rates, we’re starting to get to within that range. So, if there is more remixing to go, it would be more muted and less than the 10% or so that we’ve seen so far, but I think it does stabilize around here.

Mike Rizvanovic: Okay. That’s very helpful. And just a quick follow-up. So in a scenario where rates are, in fact, declining, let’s just pick mid-2024 as a sort of talking point. Is it fair to assume that you don’t see this number start to reflect like you’d have to — is it fair to say that you have to have a significant drop in rates before you could potentially get a better mix here? Does it sort of just stabilize and stay roughly at those levels, what [indiscernible] getting at?

Hratch Panossian: Yes, I think that’s right, Mike, right? And I think, again, the speed makes a big difference, right? If you go back to our interest rate sensitivity disclosures, which assume a static balance sheet, that hasn’t played out this cycle on the way up, right? We had tremendous increase in rates, but very quickly. And what you actually saw is more than half of that. The big driver that has netted off interest rate increased benefits we would have otherwise had and our margins, has been this deposit remixing. More than half of the benefit you would have gotten has eroded away through this remix. Now on the way back down, I think it all depends, right? It depends again at the speed at which it happens and when it happens and how the markets are and therefore, will money flow to the markets?

Will it flow to demand accounts, et cetera. So, lots of factors to consider. But I think your assumption is right as a base case? Is it probably stays more stable for a while if it’s a gradual decrease?

Operator: Thank you. Our next question is from Lemar Persaud with Cormark Securities. Please go ahead.

Lemar Persaud: Just for Frank, a question on the U.S. office sector. I appreciate the 7.6% ACL coverage ratio and the increase from 4.1% last quarter. Can you talk to us about how you see that number evolving? Like is the point that you think like we’re done building here just given the strong coverage ratio and significant maturities through the end of the year? Or do you see the risk of future material bills, like perhaps that 7.6% to go to north of 10%. How should we think about that?

Frank Guse: Yes. So what I would say is, as I guided in my prepared remarks, we expect provisions to remain elevated in the U.S. office sector, specifically how exactly that will play out from a performing versus an impaired perspective, and then write-offs over time is a little bit uncertain. What I would want to reiterate is, overall, our credit portfolio is performing very well in the U.S. So, it is isolated to the office sector, everything that we are seeing. And as I said in my prepared remarks, we have worked through 40% by end of year, we will have worked through 50% of the entire book. But we are doing so on a loan-by-loan basis. We are doing so on a very, very granular and very intense basis. And we have a dedicated team doing that. But then again, coming back to your question, how exactly that will play out is a little bit more uncertain, and it is very hard to predict or it’s very hard to give you concrete guidance on.

Lemar Persaud: Okay. And then just sticking with you on the change the debt service ratio that drove the performing build this quarter. Was it all related to the, I guess, the unexpected rate hike? Like is it as simple as that? Or was it a combination of the higher rates and changes in other expectations like lower income expectations or something along those lines? I guess where I’m going is, you suggested there was two rate hikes, one of which was unexpected. It just seems like a relatively sharp build for one unexpected rate hike.

Frank Guse: Yes. And I did comment a little bit about model sensitivity. So to answer your question, it is mainly driven by debt service ratio. It is mainly driven by the interest rate hikes. We actually see income still trending higher. And that would, in part, offset, but not fully offset debt service ratios. So, it is driven by that. And well, as I said, it’s coming back to debt service ratios and it is coming back on how that plays out for our Canadian consumer portfolios from an expectations perspective.

Operator: Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead.