Canadian Imperial Bank of Commerce (NYSE:CM) Q4 2023 Earnings Call Transcript

Canadian Imperial Bank of Commerce (NYSE:CM) Q4 2023 Earnings Call Transcript November 30, 2023

Canadian Imperial Bank of Commerce beats earnings expectations. Reported EPS is $1.57, expectations were $1.13.

Operator: Good morning and welcome to the CIBC Quarterly Financial Results Conference 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.

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 Goose, our Chief Risk Officer. Also on the call today are a number of our group heads including Shawn Beber, US 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. We do have a hard stop this morning at 8.30. So during the Q&A, please limit your questions to one to ensure you all get a chance to participate. We’ll make ourselves available after the call for any follow-ups.

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.

Victor Dodig: Thank you, Geoff, and good morning, everyone. I realize it’s a busy one for all of you. So with that in mind, there are really three key messages I want to leave with you today. The first message is that we made strong progress executing on our strategic growth priorities in 2023, and we delivered solid financial results despite normalizing credit losses. Our solid results are reflected in our healthy net interest margins, our positive operating leverage, and our strong capital liquidity. The second message is that we’re advancing our competitive advantages by focusing on four key strategic priorities, which I’ll elaborate on in a moment. And the third message is that while global economic growth is expected to continue to slow, our client-focused strategy, our disciplined resource allocation, and our experienced leadership team will deliver profitable growth in fiscal 2024 and beyond.

Now turning to our results, fiscal 2023 Demonstrated our bank’s strength and resiliency amid a challenging economic backdrop with high interest rates and elevated inflation, all of which affects our clients to varying degrees, guided by our purpose we support our clients with advice to navigate the challenging environment and to help make their ambitions real. We continued to benefit from our organic investments over the past several years, delivering record revenue of $23.4 billion, which was up 7%, and pre-provisioned pre-tax earnings of $10.2 billion, which were up 8% from last year. We achieved revenue growth across all of our businesses, where we [presumably] (ph) grew volumes, we remained disciplined on pricing to protect margins, and we generated incremental fee income through deeper relationship with our clients.

Adjusted net earnings of $6.5 billion were down 2% as a result of higher provisions for credit losses as credit continues to normalize. Earnings per share of $6.72 were down 5% from the prior year, impacted by an increased number of shares outstanding, primarily due to the dividend reinvestment plan discount in effect since the first quarter. Adjusted operating leverage was positive 1.2% in fiscal 2023, in line with our guidance as we harvested the investments we made to deliver strong revenue growth while prudently managing our expenses. We proactively improved our capital position in every quarter of fiscal 2023 to the end of the year with a 12.4% to CET1 ratio and have multiple levers available to continue accreting capital. As we communicated with our second quarter results, we have adopted an annual review of our dividend payment during fourth quarter earnings moving forward.

So today we’ve announced a $0.03 dividend increase to our common shareholders. Our adjusted ROE was 13.3% for the year and was impacted by normalizing provisions for credit losses and higher capital levels. We continue to prioritize investments that support capital light, fee-based, and deposit-generating businesses that will be accretive to capital — accretive to ROE. Our client-focused strategy is working. Our steady execution has enabled us to make good progress and we have built momentum for our bank on a number of fronts. So as we go forward, our four key strategic priorities will build on our momentum and will advance our real competitive advantage. These four priorities are, first, we’re committed to growing our mass affluent wealth franchise in Canada and the US.

In Canada, we’re well positioned with our differentiated mass affluent coverage model through Imperial Service. We have a great private wealth business. And in the US, we have a high quality, scalable private wealth program that we want to grow. Second, we’re further enhancing our digital banking offering. We’re a leader here today, and we intend to build on our market position. Third, we’ll continue to leverage our connectivity for commercial and capital markets clients. We’re uniquely positioned to bring this differentiated approach to the market, and our clients tell us that this sets us apart. Our model creates value by deepening client relationships, it generates recurring revenue, and it enhances our returns. Finally, our efforts to enable, simplify and protect our bank are building the operational excellence and efficiency required to drive higher returns for our stakeholders.

With that, let’s get into the segment results. In Canadian Personal and Business Banking, we have been a leader in growing our retail client base. On a trailing 12-month basis, we grew over 650,000 net new clients across our CIBC and Simply brands, including successfully attracting many newcomers and students to our bank. We’re leveraging our highly differentiated Imperial Service offering to serve clients in the mass affluent segment. This year, we introduced a dedicated leadership structure to sharpen our focus on growing this business. Our success in client growth and franchising has been a product of a relentless focus on enhancing our client relationship experience. CIBC continued to maintain a leadership position with our digital offering.

For the third time since 2020, we ranked number one in the 2023 J.D. Power Canada Banking Mobile App Satisfaction Study. In Canadian Commercial Banking, the effect of rapidly rising interest rates and inflationary pressures slowed growth across the Canadian commercial market. Against the backdrop of moderating economic growth, we achieved our third consecutive year of increasing client net promoter scores and in fact hit a record this year. We continue to improve the client experience and deliver our whole bank to each client, as evidenced by the $17 billion of referrals since fiscal 2019 across commercial banking and private wealth management. And in our CIBC Wood Gundy franchise, we ranked among the leaders for Big 6 banks in the Investment Executive Brokerage Report Card survey of advisors.

In the US, higher interest rates also cooled lending demand. However, our highly connected franchise and the investments we’ve made to scale our footprint have enabled us to attract new clients in a tempered economic environment. Deposit volumes in the US have stabilized and we’re focused on strengthening and diversifying our deposit base. Our efforts to build the best-in-class US private wealth franchise was recognized again by Barron’s, who ranked us in the top 10 of RIA firms in the United States for the fourth consecutive year. Now looking ahead, we’ll continue to grow our US Commercial Banking franchise organically with a focus on industries that value high-touch service and specialized expertise. We’ll also be expanding our US private wealth platform by leveraging our talent and technology investments and expanding into fast-growing affluent markets like Southern Florida.

In Capital Markets and Direct Financial Services, our differentiated platform continued to generate consistently strong performance. Our double-digit revenue growth was enabled by our strong client focus and increased activity in global markets as we helped clients address their short and long-term needs in a rising rate environment. In line with our strategy, more than 20% of total capital markets revenue was originated from the US region, where we’ve almost tripled our capital markets revenue since 2017. We also further expanded our DFS business to generate growing recurring revenue and to attract new clients seeking convenient digital banking and investing solutions. Through continued growth of Simply financial and our leading edge FX and remittance capabilities, DFS revenues of $1.2 billion increased 26% year-over-year.

Collectively, the strength of our diversified platform and strategic connectivity positions us well for more fluid market conditions in the year ahead. We closed out 2023 in a position of strength as a result of strategic investments in all of our core businesses. Looking ahead to 2024, we expect slowing consumer spending and continued success in global economic growth in response to monetary policy tightening. Amid this backdrop, we’ll continue to prioritize financial strength and risk discipline while advancing our purpose-driven culture and our growth strategy. We’re confident that this approach, combined with our client-focused strategy and strong execution, will deliver relative outperformance and top-tier shareholder returns over the years to come.

And with that, I’ll turn it over to my colleague, Hratch, for a detailed review of our financial results.

Hratch Panossian : Thanks, Victor, and good morning to you all. We delivered a solid fourth quarter to cap off 2023 as laid out on Slide 10. Echoing the themes we demonstrated throughout fiscal ‘23, our fourth quarter results reflect the resilience of our business, our ability to proactively manage through a dynamic environment and the strength of our balance sheet. Supported by revenue momentum across all of our business units and a continued focus on productivity, we generated robust operating leverage, strong pre-tax, pre-provision earnings growth, and diluted earnings per share of $1.53, which was up 22% over the prior year. Excluding items of note, adjusted EPS was $1.57 and ROE was 12.1%. Our capitalization and liquidity continued to improve during the quarter, coming in ahead of our in-year guidance on both fronts with a period-end CET1 ratio of 12.4% and average LCR of 135%.

The balance of my presentation will refer to adjusted results which exclude items of note, starting with Slide 11. Adjusted net income of $1.5 billion increased 16% from the same quarter last year. Revenue of $5.8 billion was up 9%, supported broadly by higher NII, trading revenue, and fee income. And we grew pre-provision pretax earnings 18% by containing expense growth to 3% and generating over 6% operating leverage. Credit provisions of $541 million were up 24% from a year ago, which Frank will discuss in more detail. Slide 12 and 13 highlight key trends and drivers of net interest income. While trading income was 26% higher year-over-year in aggregate, we continue to see a shift in trading revenues from interest to non-interest income due to higher rates.

Excluding trading, NII was up 8% over the year, driven by continued balance sheet growth and solid margins. Total bank NIM, excluding trading, was up 6 basis points from the prior year or down 1 basis point sequentially. Last quarter’s margin included a couple of basis points from non-occurring interest as we disclosed at the time. And underlying these quarterly fluctuations, we continue to see gradual margin expansion. Canadian P&C NIM of 267 basis points was up 20 basis points from the prior year and was stable sequentially as modest expansion and core margins offset the one-time interest last quarter. We have once again provided incremental disclosure on P&C margin drivers in the appendix. NIM of 344 basis points in our US segment was down 5 basis points year-over-year and 2 basis points from the prior quarter.

The sequential decrease was largely due to interest on a significant loan recovery in the prior quarter. As shown on Slide 13, average client loans and deposits continued to grow over the prior year despite the market-wide slowdown experienced this year. Deposit mix has largely stabilized and aggregate balance growth in deposits picked up late in the quarter, resulting in 4% growth sequentially on a spot basis. We remain focused on growing our balance sheet prudently and with strong returns, and we anticipate this to drive continued momentum in non-trading NII based on current market interest rate expectations. Turning to Slide 14. Non-interest income of $2.6 billion was up 20% from the prior year due to growth in trading revenues as well as higher market-related and transactional fees.

Excluding trading, market-related fees increased 8% year-over-year, driven by higher investment management and custodial revenues as well as recovery from lower treasury income in the same quarter last year. Transaction-related fees were up 6% year-over-year, driven by growth in credit as well as deposit and payment fees. While market factors can significantly impact these revenues, our strategic focus on deep relationships, as well as advice and differentiated solutions for key client segments will continue supporting ongoing growth in non-interest income. Slide 15 highlights our continued success in maintaining robust investment in our bank, while also containing overall expense growth. In Q4, year-over-year expense growth moderated to 3% as investments were partly offset by the benefits of prior initiatives to improve efficiency and deliver a better experience for our clients and our team.

We’ve also demonstrated the impact of this approach over the longer term. For the full year, this approach allowed us to meet our targets, containing expense growth to 6% and generating operating leverage of positive 1.2%. And despite the significant increase in strategic investment over the last few years, we’ve delivered neutral operating leverage in aggregate while positioning ourselves to improve on that going forward by leveraging these foundational investments. We intend to manage expense growth to around or below mid-single digits for fiscal ’24, and we continue to target positive operating leverage over the medium term. Slide 16 is focused on our balance sheet, which continues to benefit from our focus on disciplined resource allocation and an emphasis on returns over balance sheet growth.

We improved our CET1 ratio to 12.4% over the quarter, driven by organic capital generation and share issuance, partly offset by higher RWA driven by credit migration and model changes. Late in the quarter, we also received regulatory approval to apply the internal ratings-based approach to the majority of our US bank portfolio which we intend to implement in Q1 2024. On a pro forma basis, we estimate this implementation, net of the other regulatory changes coming into effect in Q1, results in us starting fiscal ’24 with a CET1 ratio over 12.5%. Our already strong liquidity position improved further throughout the quarter as loan growth slowed and deposits rebounded, resulting in a sequentially higher average LCR of 135%. Despite an evolving environment and regulatory landscape, throughout 2023, we demonstrated our ability to absorb unexpected headwinds and strengthen our balance sheet while maintaining support for our clients and deploying capital to generate solid top line growth.

This positions us well as the environment continues to be fluid. Starting on Slide 17, we highlight our strategic business unit results. Net income in Canadian Personal and Business Banking was $639 million, up 32% from the same quarter last year. We grew pre-provision pretax earnings 9% from the prior year by driving 9% revenue growth through the strategic priorities Victor outlined earlier. Revenue was supported by a 19 basis point increase in margins and volume growth on both sides of the balance sheet. And we delivered operating leverage of 8% by containing expense growth to 1% from the same period despite continued investment against our strategic priorities. Turning to Slide 18. Net income in Canadian Commercial Banking and Wealth Management was $490 million.

Revenue of $1.4 billion was up 4% from a year ago, benefiting from mid-single digit loan and deposit growth in commercial banking as well as higher fee-based revenues from market appreciation and net flows in Wealth Management. We also delivered positive operating leverage as we manage expenses to a 3% increase year-over-year. Our strategy continues to create momentum across our combined Canadian P&C banking franchise, where net income was up 22% while pre-provision pretax earnings were up 15%, fueled by 8% revenue growth and over 6% operating leverage. And we expect this momentum to continue. We’ve included more details on this segment in the appendix of our presentation. Turning to US Commercial Banking and Wealth Management. Net income of $39 million in US dollars was down 69% from the prior year due to higher credit provisions, predominantly in the office portfolio.

Revenues were up 2% over the same period, driven by a 5% increase in fee income and a 1% increase in net interest income. Expenses were up 11% year-over-year, including higher severance in the quarter. Excluding onetime charges, expenses were up 6%, reflecting investments across our business and infrastructure, which we expect to continue into 2024 as we expand our US platform. We remain focused on prudent and profitable growth to scale this business across both Commercial Banking and Wealth Management. Turning to Slide 20 and our Capital Markets and DFS business. Net income of $383 million was up 1% year-over-year. Revenues of $1.3 billion were up 9% over the prior year, driven by 20% growth in global markets and 12% growth in Direct Financial Services.

Expenses of $734 million were up 12% year-over-year, partly driven by charges in the quarter, including higher severance. Excluding these charges, expenses grew 8%, and we anticipate them to moderate. Slide 21 reflects the results of the Corporate and Other business unit. Net loss of $48 million compared with a net loss of $197 million in the prior year, largely due to higher revenues from Treasury and International Banking as well as lower corporate expenses. Going forward, we now anticipate a quarterly loss of $50 million to $100 million in this segment. In summary, notwithstanding a more challenging environment, throughout 2023 we took proactive steps to make meaningful progress against our strategy while staying on track relative to our medium-term objectives.

Extending the momentum we demonstrated in 2022, we grew revenue by 7% and pre-provision, pre-tax earnings by 8.5%, in line with our in-year guidance and medium-term targets. We delivered positive operating leverage through cost discipline and efficiency improvements to balance continued investment in our bank. And we overcame significant headwinds to enter the new year with a strong CET1 ratio of over 12.5% on a pro forma basis. EPS growth and ROE were below our medium-term targets this year, largely due to the impact of higher credit provisions and increasing capitalization. But we remain focused on working towards these targets despite external headwinds. We expect credit provisions and capital ratios to start stabilizing in 2024, and we will drive further EPS and ROE improvements through our strategic focus by emphasizing growth in key client segments with strong returns, maintaining discipline and resource allocation with a focus on returns over balance sheet growth and leveraging our capabilities to drive simplification and efficiency to generate ongoing operating leverage.

With that, let me turn the call over to Frank.

Frank Guse: Thank you, Hratch, and good morning, everyone. During ’23, as we navigated economic uncertainties, we saw our loan loss performance generally in line with our expectations with retail credit normalizing and sector-specific issues materializing in the business and government portfolio. Over the past few quarters, the headwinds in the US office sector have translated into higher impairments in our US commercial real estate portfolio. While the Canadian consumer remains resilient to higher interest costs, we are seeing excess savings accumulated during the pandemic decline, so clients adjust to a variety of inflationary pressures. Notwithstanding, our [allowance level] (ph) increase throughout fiscal ’23 positions as well and will ensure we are prepared for uncertainty in the year ahead.

Turning to Slide 25, our total provision for credit losses was $541 million in Q4 compared to $736 million last quarter. Total allowance coverage increased to 76 basis points this quarter, up from 73 basis points in Q3. Our performing provision was $63 million in Q4, mainly attributable to changes to our forward-looking indicators, some model parameter updates, portfolio growth and some credit migration. Provision on impaired loans was $478 million, which were flat quarter-over-quarter. And this was largely due to higher commercial and Canadian retail portfolios, was partially offset by lower impairments in the Canadian commercial portfolio and CIBC FirstCaribbean. While our impaired losses over the full year continued to perform in line with our expectations, we have seen elevated losses in the back of this fiscal year.

Slide 26 summarizes our gross impaired loans and formations. Balances were up this quarter, mainly driven by business and government loans in the US and is specifically attributable to the office sector. Overall, new formations remained relatively stable with the increase in retail, mostly offset by a reduction in business and government loans. On Slide 27, we show the trends in our Canadian consumer portfolios. Net write-offs and 90-day plus delinquency rates for personal lending have moved higher over the past year, reflecting the impact of higher rates. This was expected given the interest rate sensitivity of this portfolio. Our residential mortgage and credit card portfolios continue to perform well and remain below pre-pandemic levels.

Slide 28 provides an overview of our Canadian real estate secured personal lending portfolio, which makes up 55% of our total loan balances. Late-stage delinquency rates of residential mortgages continued to trend higher as expected as they return closer to what we experienced prior to the pandemic. Variable rate mortgages account for one-third of our mortgage book and the portfolio quality remains strong. The portion of non-amortizing variable rate mortgages was down quarter-over-quarter from $50 billion in Q3 to $43 billion in Q4. Clients are choosing to increase their payments, converting to fixed rates, making onetime prepayments and all of which bring the loan back to amortizing status. This quarter, we are also providing a scenario, highlighting the credit quality and payment increases for our mortgages coming up for renewal in the coming years.

Overall, these cohorts show very low LTVs of between 40% and 60% in the next five years. The average monthly payment increase is roughly between $350 and $700 for these cohorts, which represents an increase of about 3% to 5% based on the origination income. I also want to note that in this scenario, we assumed an interest rate of 6% across the next five years, and the analysis also assumes income remains where it was at origination. I want to acknowledge that this high rate environment, paired with cost of living pressures puts pressure on our clients. We are actively working with clients experiencing financial hardship to help drive to the best possible outcome. But overall, we feel comfortable with the resilience and reserve levels of our mortgage portfolio.

Turning to Slide 30. As we previously guided, our US office portfolio continues to see elevated losses. In ’23, we had $2.1 billion maturing, which is slightly more than 50% of the portfolio. Out of these maturities, around 54% qualified for extension or negotiated a renewal, around 15% was repaid and the remaining 31% went into non-accrual. Our allowance coverage continued to increase this quarter and now stands at 9.1%, reflective of the headwinds that persist in the office sector. In closing, despite the headwinds in the US office sector, our credit performance remained within our expectations and guidance for fiscal ’23. As we head into the new fiscal year, we expect uncertainties to persist in certain areas, and we will see impaired losses trend above our previous guidance of 25 basis points to 30 basis points, more in the mid-30s range.

We will continue to proactively manage portfolio exposures, and we will work with our clients to mitigate risks. The additional allowances we saw throughout ’23 will provide prudent reserves for headwinds in the new year. I will now turn back the call to the operator.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Doug Young: Hi, good morning. Maybe Hratch, if we can talk a bit about expenses. It sounded like you had some restructuring charges in the US and capital markets. Can you quantify what those were? Can you confirm that was not backed out of cash EPS? And I do understand your position about looking to drive positive operating leverage over the medium term. I’m trying to get a sense of, is that something you think you can achieve? You did obviously very well this quarter. Is that something you think you can achieve through fiscal ’24 and ’25? Thank you.

Hratch Panossian: Good morning, Doug. Thank you for the question. Happy to take that. So let me start with your immediate question, and we did disclose that, right? So we had about $114 million in severance. There was a few other things quarter that I referred to in terms of onetime charges that were in those businesses relating to some matters, some real estate, some software, et cetera across the bank. But that severance number that we disclosed was the majority of it. In terms of how it breaks down, I’m not going to get into a lot of detail. But there was — the predominant pieces of it were in the Corporate and Other segment and in capital markets, and there was a piece of it in the US, the onetime in the US And given what I said in terms of the growth, excluding the onetime you can back into it, it’s sort of about in the 10% of that number range that you had this quarter.

And all of that is part of our journey, and it ties to the second part of your question as we’ve said we want to continue optimizing the bank as we go, making continuous improvements, investing, having the ability to move the team around and our resources around. So that’s how we’ve delivered not just this quarter, for the full year, 1.2% operating average that we’ve shown over three years and five years around neutral despite significantly increasing investment levels over that period of time. And with that foundational capability now built, we have the ability to take out 1% to 2% of our expenses every year. This year, it was more around the 1% range. Going forward, we’ve got now visibility into the pipeline of efficiency savings we’re getting, that’s getting to that 2% number a year in ’24 and beyond.

So that’s what allows us to manage our expenses to around mid-single digits, plus or minus, as we said we will do. And the plus or minus depends on the top line environment. So next year, we think it might be a tougher environment on the top line. And so as I said in my guidance, we are now managing to the minus side of mid-single digits on the expenses. But we can do that while actually investing and grows — having expenses grow above mid-single digits through those investments, funding everything we’ve laid out in those four priorities that Victor spoke about, including further efficiency improvements through enabling and simplifying our bank. And so that’s what allows us to continue generating that operating leverage on an ongoing basis.

Doug Young: I’ll adhere to my one question limit. So, thank you very much.

Operator: Our following question is from Ebrahim Poonawala from Bank of America. Please go ahead.

Ebrahim Poonawala: Hey, good morning. I guess maybe on the macro and credit for maybe Victor and Frank, just talk to us going back to your comment around the impaired PCL outlook in the mid-30s for next year, one, assuming that the Bank of Canada and rates are done going higher for this cycle, just give us a sense of your expectations on weakness in the economy and the consumer that you expect over the coming quarters? And where is the downside risk? Like, what should we be — what are you paying attention to, to ensure that impaired PCLs are not meaningfully above, Frank, the guidance that you provided? Thanks.

Frank Guse: Sure. And in that guidance, I mean, as you can imagine, there is a couple of moving parts. As I said, we continue to expect some further normalization in our consumer portfolios, something we have seen and something we expect to continue to see. And then there is some others where we expect office to moderate in the next year in line with our maturity profile. And then give and take, that should lead us to that mid-30s range that we feel very confident with. I mean, if asking about downsides, and again, we have increases in unemployment factored in our high-now forward-looking information. If there is a more rapid shock to unemployment, that, of course, would change our outlook on impaired loan losses. But otherwise, given that we have started the fiscal year already and, as such, have a fairly good line of sight into the next few quarters, we feel very confident with our base case outlook, even though there is, as you said, risks to the downside.

In particular, any sharp shocks to the economy, a sharp increase in unemployment, a sharp drop in GDP would certainly bring us closer to the downside. And now, Victor will jump in to follow-up.