Canadian Imperial Bank of Commerce (CM) conference, March 9, 2021 transcript

Thank you very much.

Sure, thank you for the question, Darko. We rely a lot on our economics groups' inputs as well as what we're seeing in markets. So I think when we look at what's going on at this point in time around us in the economy, there's still a lot of uncertainty. So we're still in the middle of a pandemic. There's still a path out of this pandemic that is, you know, at this point in time, maybe looking a little bit more promising than it did several months ago when we didn't have the vaccines. But there is a lot of uncertainty in the application of that and the resolution of the health crisis so that the economy can fully reopen and not speak on the other side of it.

Now, that said, that key point on the vaccine I think is critical. So the way we look at it and our economics group looks at it in Canada is the quicker we can get the vaccines distributed and administered so that we can get people back to consumption and businesses back to operation, that will help drive the economy. And at this point in time, you know, say in Canada, we're seeing more and more positive news. We are seeing some good momentum, we are seeing some timelines accelerated, and so to that extent we are feeling better about it as the days go by and hopefully we can stay on that track and do what we can to support that recovery.

In terms of what that means more broadly for each of the factors you mentioned, let me start with housing. I think the housing market may be surprising many, has been very robust through this period of time. I think it's been a bit of a pause in 2020 in the early parts of the pandemic, but it's recovered from that and been incredibly strong. Now, when you look at the underlying factors of this pandemic, that's not that surprising. So it's really been a bit of a tale of different segments here. And there's a very large population, a large part of the Canadian households that haven't seen income disruption, haven't seen employment impacts from the pandemic. And at the same time, you've had this dynamic of lower interest rates, which has helped affordability.

So the combination of those, I think there have been a lot of households that have been able to take advantage of that situation and be able to participate in the housing market more so. And that's been driving some of the momentum. The other part of it is, again, I think if you look at the different components of it, the single family detached versus the condo has been a bit of a different story. So there has been more of a momentum in the single family detachment. There has been a bit of pressure on the condo side. And so that's been a bit of a natural hedge, if you will, which has worked together. And as we look to where we go from here, while we could see some normalizing, I think those two things reverse to some extent against ours.

So the condo market is projected to potentially get a bit more momentum behind it. The mini-municom family side can go the other way. Net-net, between those factors, between the immigration impact, which gets much talked about, which there has been a bit of a pause, but there is still commitment and there is policy around continuing to support immigration. So those two factors taken together, we still see the housing market as being able to come through this in a good situation, maybe not as robust as it has been, but continuing to be doing well and that bodes well for our mortgage business. For the rest of the recovery, there's a lot of liquidity in the system and there's a lot of liquidity on consumer balance sheets, about $100 billion across the sector in Canada, by our economics department's estimates.

And there's liquidity on the business balance sheets too. So as that vaccine rollout continues, as I said, and as that liquidity can be put to use in consumption, we think that bodes well for economic recovery. And our economics group, again, as have others in their most recent publications, have forecasted for higher growth. So the GDP forecast from our economics now is 4.3% for Canada for this year, up from about 4% in the US. So I think positive signs. I think again in terms of housing and overall economic recovery, we're optimistic. So hopefully all of that continues to evolve in that direction.

Sure, Darko. Maybe let's start with what's happened. You're right. We have seen impairments unusually low in this period of time. So if you looked at our impaired ratio, it was coming up a bit in Q1, and so we went from 17 in the prior quarter to 22 basic points on impaired, and still lower than even that guidance that you tested. But, you know, as you said, we are expecting for the full year impairment still to be in that mid-30s range. And so the back half of the year, that would imply that we're expecting elevated impairments as we go through. So why is that? And maybe let's decompose that a little bit. So when we look through, there's a couple of different components of it.

One on the consumer side, and I think there's more visibility on the consumer side because you do see the delinquencies rolling. Some of the dynamic there of why the delays have happened is related to the deferral programs. And the deferral programs were put in place, if you remember, for cards, those expired around sort of the middle of the fiscal year for our year in 2020. For mortgages and so forth, they were more towards the end of the year. As those people have come out of those delinquencies, a lot of people have cured, but some are moving down the budget and delinquencies. You do see that on the CARDS side that you referenced. When we look at 90+, for example, on CARDS last quarter, on a year-over-year basis was almost double.

We have good visibility that some of that progression will continue and we will see impairments coming out of that So we still expect on the consumer side as we work through those deferrals coming down the pipe into delinquency buckets that we would see impairments increase starting next quarter We think we will see some of that increase particularly on the card side and going into the latter part of the year and then continuing to see some of that work through and normalize as we go through 2022. When we look at the business and government side, on that side it can be a lot less predictable. What we're seeing so far is we're not seeing some of the losses that maybe we would expect that were a little bit better, but we're seeing that be part of some of our clients really having managed well through this.

So many of our clients have done well through this situation. They've cut costs, they've managed themselves out of this. And a lot of the clients that are focused on the sectors that have been impacted have built up some liquidity and from what we can see, they may be in a condition to get through this as the gradual economy reopening happens. But there will be some, and there will be instances where we will see losses, and that's why we provided for it. We provided for that conservatively, we believe. And so as we go through the normalization and opening of the economy, as we go through some of the support measures that have been put in place coming through to an end, and us moving to more of a self-sustaining economic activity, if you will, we will see some that likely will have some challenges and we'll see those impairments come in.

So that may be coming over the next few quarters here after that, but again, less visibility because you don't have as much of a progression that you can observe there on the business of government. So we're being conservative around it. What does that mean for the performing and how the two net off? That was the other part of your question. Now you saw some of that play out this quarter. So there was two pieces to it. There was a small bit of what we had from our performing PCL that was really a transfer to IMPERIAL BANK OF COMMERCE. We will see more of that, particularly the consumer impairments that we anticipate and we know that we can see those in the roles.

Those are all provided for and as we see that increase in impairments where they go through the hump, we will see that flow through from the performance side. There will be some of that transfer there. On the business and government side, we are conservatively provided for, as I said. It's hard on that side to have the timing of exactly what will happen as each individual name on the business and government side that will get impaired eventually does get impaired. But there will be some proportion, some ratio of transfer from that, not necessarily one to one. And as we work through that, we think there will be some differences across borders, but net net we think we're more than adequately provided for at this point and feel good about where we're headed.

I think it is a fair comment, Darco. You don't have to look much further than the fact that we did have a small, and it was pretty modest, right, outside of the transfer to impaired, but we did have a small release out of performing GANQ1. I think what I think is, we are seeing things in aggregate a little bit better in terms of forecasted forward losses than we would have seen it in Q4. And so we're going to do that thinking and that math and the judgment on a quarterly basis as we go forward and so it'll depend from there whether we look at the environment as voting better or worse for losses and we'll adjust up or down.

But QR definitely would suggest that.

Sure. I'm happy to do that, Darco. And maybe I'll take it or I'll organize it a little bit in reverse, right? Maybe I'll start with the broader perspective because I do think it's more that a mortgage story and the way we're running the business and thinking about it is broader than that. You are right, we are seeing green shoots more broadly, and therefore we are pleased with that. If I go back to the areas that we were focused on, as we looked at our revenue growth and had discussed with the market that we do see opportunities to improve our revenue growth on a relative basis for the industry. There were three areas we focused in on.

There were mortgages, there were cars, and there was the investment side. All of those are areas where we put very deliberate focus on. We've taken deliberate actions. We've made investments in a focused way. We're pleased to see some of the results of all of that coming out. I'll cover all of them in a little bit. If I start with the mortgage side, there's a number of things that we did, first starting with our people in the front lines. Whether that's the banking center, workforce, or whether it's our mobile advisors, we put a lot of emphasis on that. And there was emphasis both in the quantum and the number of advisors we had, as well as the training and the quality and productivity that comes out of that.

So we continued to add mortgage advisors. As of Q1, we had added another, you know, another sort of, call it just under 100 or so. And if you look at the last 12 months, we've added more than a couple of hundred. And we continue to add to that to that mortgage advisor base. And so that's been one part of it. The other part is, as I said, the training and the best practices to make sure that our advisors are having the right focus, advice, conversations with clients, and giving them the advice that they need and therefore serving their needs as well on the house ownership side and the mortgage if that's what's required. We put a lot of emphasis in that, and so what we've seen is on the mortgage advisor side, we've seen that almost 50% increase in productivity per advisor by doing some of those things and having the workforce season And the best practices applied across the advisory groups.

So we're pleased to see that. The other part that we had spoken about was retention a while ago. And so the retention for us, you know, we come at it slightly differently maybe, but a retention opportunity is really an opportunity to have an advice conversation with a client around their coming up to a big milestone financially for themselves and their family and thinking through what's the right step, whether that's a mortgage renewal at that time with us or something else. So We have come at it that way and we are pleased to say that we have seen some improvement there as well and more work to do. But in addition to the acquisition side, we have better the retention side and the area of focus and it has contributed.

When we look at the product side, we haven't had to make much changes there in terms of product pricing, Darko, and so I am glad you mentioned pricing. We have had a competitive product set and we have been competitively priced all along and we have maintained that mentality. So we have not competed with price when we look at the margins on the inflow spreads versus the outflow spreads. Mortgages have actually been pretty good. And so we been disciplined in terms of the pricing side and we intend to continue to do that reflecting our costs and the risks that we take in that portfolio And then lastly is the process side And this one been important too So we were a bit ahead of the pandemic on this.

We were doing it because that's what the momentum was anyway. But we developed a platform for our mobile mortgage advisor platform, which was introduced in August of 2019, so before the pandemic. We continue to roll that out and it's really a tablet-based digital origination capability. That was very useful throughout the pandemic. So that plus other improvements that we've made to allow a more seamless efficient origination process both for our advisors and a better client experience for the client. Those have helped as well on the productivity side, and I think that has been particularly helpful as we head into the COVID environment and a lot of the organization leads to more remote, virtual, or digital. On the other side, we've made a lot of investments as well.

So on the investment side, we invested in products, so we launched our smart portfolios, we invested in the relationship and the distribution between our retail network and the asset management business. We are pleased to see the record flows really. I mean, markets overall have been good as we know and flows are up. But for CIBC, Q1 was a record Q1 in terms of flows on net sales and we are continuing to see very good momentum there. So we are pleased to have seen improvements there as well. And on the card side, we invested in our digital capabilities, we invested in marketing, we invested in the card products, We expanded our Aventura product, we expanded our cashback and dividend products and so forth, and we invested in the new Aeroplan card as well.

And so all of those together have been good for us. And while the cards market itself has been a little bit challenging in the current environment with balance and so forth, we're doing well on a relative basis and gaining some shares. So we're pleased with that as well. And so the last point I'll make is when we look at the industry market share numbers, as of the latest ones that we have, we're very pleased to see the momentum in that. You would say we're within the pack and making good progress in terms of our share performance across all products on the asset side and the liability side now. And it's not a job done yet, lots more to do, but we are continuing to be focused on and we feel confident that we're on the right track to have that position that we want, which is to sustainably have performance and share gains across all of the products in the community.

Thank you for bringing that up, Darko. It's a good question, and we hear that as well, and I think there's a bit of misconception, so it's a good opportunity for us to address that. When we look at our card portfolio, and you're right, I touched on it, we feel that we have a very competitive and frankly one of the more comprehensive card portfolios out there in terms of choices for our clients. And it does span the travel space, which was and will continue to be an important space for Canadians despite some of the noise around the pandemic, as well as some of the other areas, particularly the cashback and dividend area that I spoke about.

So maybe I'll run through a little bit why we think we fare well there. If you look at the travel side, and we'll start with our Aventura program, which is our proprietary program that was launched several years ago, and we're very pleased with what has happened with Aventura. And over time, being a fly-any-airline, really, proposition, it's evolved beyond that. And it's evolved to be more than a travel card. And a few things we've done with that that I think have helped. And when we look at that proposition today where it stands, we feel it's frankly the best fly-ending airline proposition out there from the cards that are available in the market with the number of features that we have on it.

So whether that's the bonus multipliers, the print multipliers we have, and we've introduced that in everyday purchases. It's not just about travel, it's gas, groceries, and so forth. Features around insurance coverage for different things around clients. And again, that goes beyond travel around that card. And we've added some flexible redemption options, whether it's to pay balances with clients, whether it's other non-travel related redemptions. And so we did that again, starting before the pandemic, and that has worked out very well for us. So frankly, what we saw recently is about 40% in non-travel redemption increases was what we saw from these initiatives in Q1 on a year-over-year basis. And so you've seen some of the consumer choices change away from travel, but I think that's proven that the card has other options and other value to clients.

But going beyond that, the Aeroplan, I mentioned the Aeroplan card before, so we are continuing to be a partner to Air Canada and the new Aeroplan program and new cards with that. And so, you know, we would have those cards available to our clients that are interested in it and those clients that want to have an Aeroplan related specific card, we have that option too. So if you look at the travel, we have best of both worlds. We have what we believe is a leading client by any airline proposition and we have again the aeroplane proposition if somebody wants that. And then lastly, it's been outside of the travel segment. So we've continued to focus there as well.

We've made additions to our car portfolio with respect to dividend cars. We've improved the proposition on that as well and we're pleased with that cashback space as well. So whatever proposition is right for a client, we have a card for them. So we think we can participate well in any open card.

Sure. Yeah, Derrick, we continue to be very focused on expenses with the same objective we've always had. Our objective is to manage our expenses prudently to generate positive pre-provision earnings trajectory and to generate positive operating leverage in a normalizing environment. And that's the way we look at it. And it's a good question. We want to get there. If you take that mindset rather than expense-company for the sake of expense-company, we want to get there not through lack of investment, but frankly through investment, While also taking opportunities to offset those investments with areas where we can take out expenses. And we think we done that pretty well So if you look at some of the disclosures that were in Victor remarks last quarter we spoke about the over million that we taken out in cost between 2015 and 2020 which took our efficiency ratio down from the 60s to the 50s range And that doesn't even include all of the restructuring that we had spoken about, the 260 million fund rate that we are getting as of this year.

That's not fully based on the numbers. So if I looked at that, it's more than 800 million to take out. And so what that allows us to do is to continue investing in the business. And so when we talk about low single digit growth in poor expenses, that low single digit is a net number. So we are investing and we're investing in single digits plus. And I'll talk in a second to your question for what we're investing in. But we've been doing that over the last several years, so I'm not sure there's been as much of an underinvestment as maybe there's a perception that there has been. And we will continue doing that and investing going forward, but we will get those efficiency savings and we believe this year that allows us to leave that kind of core expense growth in the low to mobility rate.

One point I would make again, and I made this in Q1, is we're able to keep expenses low single digits before we get into some of the variable revenue-linked performance-linked pieces of expenses. And if we continue to see the type of robust performance we have seen, it's possible that pushes us up further in the low single digits for the full year basis. But obviously that's a good thing because that's driven by revenues, it comes with operating leverage internally itself and so forth. So if I go to what we're investing, it's across the board, Darko, but it is investing in growth and it's investing in our defense and it's investing in initiatives on efficiency to get us those savings that we want to take advantage of over time.

So if I cover a few examples of each of those, so when we talk about growth, it's investments in the front lines, and I think you've seen that in some of our FTE numbers, despite the restructuring that we did last year. When we look at the FTEU directories, we haven't seen net reductions in the SPUs. We've seen net reductions in the corporate and other segments, but a lot of the reductions that we had in the SPUs have been invested and we continue to invest in the front lines. I spoke about the mortgage advisor force earlier, for example, on mortgages, but we've also invested across our other businesses in front lines, whether it's RMs or advisors in the various businesses, and we see ourselves continuing to do that.

When we look at the technology side, again, there's been technology investments towards frontline and sales. I spoke a little bit about the mortgage tools earlier. Digital sales has been another big area for us in 2020 and 21. We're very focused on that in the consumer business. We've invested, continue to invest again on sort of the cash management side in our commercial businesses. We're investing in our wealth platform in the US. And we're investing technology more on that G-PETS perspective, right? I think that's just a part of being in this business and staying current. And then lastly, if I cover the last area around some of the more core infrastructure investments, and those, when I talk about efficiency and transformation, I think it's both the revenue side and the expense side that can benefit from that.

We continue to invest in our core CRM infrastructure, for example. We've made some announcements around that. And I think that can help us on the revenue side and can help us on the client experience side, having a better understanding of our clients, being able to have better personalized advice for clients, and that helps us on the revenue side. But we're also investing in things to help us improve our efficiency from a cost perspective. So we're investing in cloud. We are well on our way of transitioning to cloud, and we feel pretty good about the trajectory, The trajectory and the speed of our applications to cloud includes some app rationalization which allows us overall to manage that overall sort of ownership cost of our technology stack.

We're investing in being more agile and what does that mean? It means changing the way we operate, it means changing the skill set of the people we have that can operate more in that agile function and so forth. So they do span the board, Darko, and as you can see from just what I've itemized here, there's significant investment happening. The only way we're able to keep that to the low single-digit expense growth is through those savings on the other side.

A lot of that depends on markets, and markets continue to be robust and bringing the environment is a significant I will now turn the call over to management for a more normal trading. If you normalize to a more historically normal trading, you can do your own math there, but you can come up with some level of normalization for that. If you look at the credit losses, we spoke about that a little bit earlier. The PCLs are unusually low at this point, and they are not going to stay there. You should normalize for PCL as well, being at a more normal level. You take all of those things that are one-time-ish. I would say that would have been more of a 14 to 15% ROE quarter on a normalized basis.

And then you look at the capital side, which is part of your question, we continue to have elevated capital and our capital position continues to build. So there is some level of capital there that is causing a drag on ROE. So when I normalize for more normal capital levels as well, I do think for everything considered, Q1 was a 15 plus percent quarter from a normalized ROE perspective. So what does that mean for go forward and why did I go through all of that? I think coming into the pandemic, we made it very clear one of our objectives was to show that the poor profitability of our franchise kind of structurally wasn't impacted in the long term, and we still believe that.

There's still lots of uncertainty out there with the rate environment and so forth, but I think we've got a franchise here that can continue to recover from here, and it may not be a straight line from there. You normalize, as we said, Q1, and you continue to recover through this environment. Some of the transactional fees that are still depressed, we spoke a little bit on the Q1 call, around some of the fees that are transactional in the consumer business that we think still have some ways to go. As we come out of this recovery at the tail end of the year, we continue to see robust markets that helps the wealth, business and so forth.

I think you can see a good trajectory to getting us to that 15 plus percent on a sustainable basis, particularly as we see interest rates, at least as currently forecasted by the forward rates and the current steepness of the yield curve. It doesn't look like it would be as bad as maybe we all thought it would be several quarters ago. So all of those things together make me feel confident reiterating that we feel good about pre-pandemic profitability levels and pre-pandemic ROE returning at some point.

Of course, thank you Carlos M. Garth, and thank you all for listening.

Thank you.