Canadian Imperial Bank of Commerce at National Bank Financial Services Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : I'd like to start off with just some commercial banking aside from mortgage has been one of the big growth stories in this post-pandemic period. We are seeing different trends between Canada, where growth is in the double digits and well for the industry in the U.S., it's still low single digits in commercial lending. What's your perspective on why Canada is outgrowing the U.S. in the commercial business? Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada That's a great question. So that is not a new phenomenon, right? So let's take it. I always think of the world now before 2020 and post 2020. So before 2020, the U.S. would grow 4%, 5%, we would grow 10%. If you look at the U.S. middle market, it is not as reliant on banks as the Canadian middle market is, right? The high-yield bond market, TLB, private placement, loan funds, alternate lenders, they play a much bigger role, I believe, in the U.S. mid-market. In Canada, it's all on the banks. So you see all the growth on the banks. So I think you'll continue to see the banks grow in the 10% zone, and I think you'll -- high single, low double. I think you'll see the U.S. banks revert to their mid-single. The last couple of years, it gets more confusing, because the U.S. had this PPP program, which was much different than the subsidies we did here in Canada. In the U.S., the clients got money upfront, forgivable, repayable, complicated formula. In Canada in the mid-market, it was largely a subsidy program that trickled in over time, so cash flows are actually harder to compare.

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : Okay. And a question I've asked a few of the other presenters today is on overall growth in the commercial portfolio and how skewed it has been to -- by, I should say, commercial real estate lending, which in my view, is probably like a derivative of the housing market. So is that depiction accurate? And two, if I don't know, it seems unforeseeable now. But if the housing market really grinds down to a halt, does your commercial lending also grind down to a halt? Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada So again, another good question. So let's go pre-'20. Pre-'20, if you looked at our growth. And I think the industry was roughly the same. The diversified space and the real estate space grew roughly at the same rate, roughly. '20 and '21 is a different story, right? The diversified space, I mean, the economy was shut down for a long period of time, at least with us for a while, the -- we knew in '20 that it was going to be flat lined or there or thereabouts for diversified commercial banking. I mean the economy was closed. For real estate, it kept going. So we knew that real estate growth would continue, while the commercial -- the diversified space would flatten. What we didn't expect was how strong real estate would be in the last 2 years. So in our book, about 50% of our commercial real estate is residential, a little less than that, 50% nonresidential, call it, industrial, office, retail, and they're growing at roughly the same rate. So it's not skewed to housing. I think if housing slows, for sure, it will have an impact. But overall, [Canada's] real estate continues to be healthy. And we've been at it, we've had this one group that's been doing it, all the real estate at CIBC is managed by one group. It's been doing it for 25 years and at least I've been there for 12. I don't think we've had -- in the combined 12 years, I don't think we've had $10 million of loan losses, right? The market has been very good, and we've taken advantage of it.

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : I'll make this a what are your clients telling you type of question. So what are they telling you? Do you see them underutilizing the lines? Why is that? Is it -- I'll stop there. Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada So the utilization, so do I think their borrowings are going to increase, I think the answer is yes. I don't look at utilization as much as others do because I have found that entrepreneurs now want more wiggle room. With uncertainty, they want bigger lines even if they don't use them. So the utilization is going down, but I'm not sure it's 1:1. So our utilization rate is down about 3%. So you could say there's 3% of upside, not 100% sure of that. What I do know is historically, if you looked at CIBC, we've been publishing these numbers for a while. About 50% of our growth comes from existing clients, 50% comes from new clients. And we've been growing roughly 12%. So think 6% existing, 6% new. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MARCH 22, 2022 / 2:30PM, CM.TO - Canadian Imperial Bank of Commerce at National Bank Financial Services Conference Last quarter, we reported, I think, 18% loan growth and 60% of that was existing clients. So there is pent-up demand. 12% of growth came from existing clients, 6% came from new clients. So I mean entrepreneurs, again, I don't know if Ukraine, Russia will change things materially. But as I talked about on our annual -- on the Q1 call, the pipelines are good. They're better than '19. So I think at least -- and again, pipelines are not 2 years out in commercial banking. They're a few months out. And they feel pretty good. So I think you'll continue to see some growth.

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : Tangent question but on the commercial business. And I have some wealth questions coming, but we'll stick with commercial for now. But across Canada, is there any areas you are underrepresented? And I suspect maybe Quebec is -- everybody says Quebec. Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada I'd love to do more in Quebec. You've got 2 very strong homegrown banks here that control the market. Against the big 5, the other banks we're fine. The big part of the market doesn't go to the big 5, I'm from here, so I have a particular soft spot, but we'd like to do better here. We're growing nicely. We're growing faster than the rest of the country. The economy has been hot. So it's been good. But in a perfect world, I think everybody would like to be bigger in Quebec. It's an important part of the economy, right?

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : I'd like to spend a bit of time on the relationship between commercial banking and the private equity -- mid-market private equity sector in Canada. Let's just big picture, what's your strategy as it relates to lending to the sponsors or investing in the funds. I know this has been topical because one of your peers has been co-investing or whatever. What's CIBC's strategy? What are you doing? And what are you not doing? And the why's, I guess? Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada Okay. So let me start with the business. It gets a lot of attention. It's a great business, right? The margins in the PE business are higher. Leverage is higher, margins are higher. You lose a little more money. But if you're smart, the higher margins versus higher losses is a great trade-off. And it has been that for us. So we, again, have a group that does this, about 30 professionals. We've been doing it for 16 years, and we cover principally Canadian PE firms. In 70% of the cases, we would be either the sole bank or the lead bank. That's our strategy. Most of these deals have 3 or 4 banks -- 2 to 4. We'd like to lead or have it by ourselves, depending on the size of the deal. When you do this business, you get close to the sponsors and you have an opportunity to invest in the fund, if you want. So we do invest in funds. I think most of the Canadian banks invest in the funds, small investments. 1%, 2%, 3% of the fund. So if somebody is raising $200 million, we might put in $3 million in the fund. One of few banks, 2 banks would probably go into the fund. It just shows the market that we bring credibility to the fundraising. I think we bring some credibility to the fundraising efforts. That's the word. So we have some of those investments. We do them only to firms that have good investment returns, that are important to us from a relationship perspective, and it's a very small part of the fund. Those are the 3 conditions. Then some banks, and we don't do this. Some banks, in addition to investing in the funds, they invest along with the funds, they invest in a company. So as an example, if Canadian private equity fund purchased a Quebec company for $200 million. And it needed $50 million of equity and $150 million of debt. The -- in our world, the PE fund would put in the whole $50 million. Some other banks would tell the PE fund, you put in less than $50 million, we'll put in a bit ourselves directly into the company. That's something we don't do. A couple of the banks are doing it and it's a different strategy, kind of not our thing.

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : Okay. Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada Right? So our book today is probably $80 billion or $82 billion. It will be in that zone, about 4%, a little less. And it hasn't grown any faster than the rest of our book. It grows in line with the book. It's a great business because in addition to the spread loan loss equation, our mid-market clients love it, right, because we introduce them to these PE firms that we do business with, right? And now they have people to talk to about selling their business. And then -- and we'll talk about this perhaps in our wealth discussion. When they sell, and we've introduced them, and wealth is created, our chances of landing that wealth go up. So it's a great business. It's a great commercial bank business, and it's a great wealth generator business.

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : Okay. So it's been more, all right, commercial into wealth? Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada So far.

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : So that not would be -- majority of that would be commercial bankers transferring dollars that they've -- into AUM or? Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada Yes. Sometimes AUM, sometimes -- in the $5.2 billion, it was probably 50% investments, 25% deposits, 25% loans. And it's all -- the beauty of it is most of it is money that sits elsewhere. Like it's not moving it around the bank, right? You're banking the company, the individual is probably not banking with you. So, so far, so good.

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : For a while, it was -- the buzz was that CIBC would look to add some institutional money management to its wealth business. Is that still... Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada Could do. We're looking at some stuff, right? There's some alts, private credit alts. There's some products we want to add, may do it on our own, may do it with others, haven't ruled that out for sure.

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : Okay. And you monitored how that business is doing, given the competitive landscape where the no-fee -- no commission trading is ramping up pretty aggressively? Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada Yes. So, so far, that hasn't hurt us. So the business is doing well. We're investing in it. It's run by Harry's group. We're investing in onboarding. We're investing in analytics. We're investing in some tools. We -- some people followed the drop in price, I think we're competitively priced and we're growing. So no plans to change anything on the pricing side at all.

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : Now the private bank, Imperial. It's still called Imperial, I assume. Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada Imperial Service.

Question: Gabriel Dechaine - National Bank Financial, Inc., Research Division - Analyst : You got to figure out which business resides where. And the markets have not been so favorable lately. And what's your -- is it material earnings headwind we're in right now or... Jon Hountalas - Canadian Imperial Bank of Commerce - Senior EVP and Group Head of Commercial Banking & Wealth Management-Canada Listen, it's less reliance on markets today than there may have been 5 and 10 years ago because financial planning is becoming such a bigger part of the wealth business. 5 and 10 years ago, it was how do I beat the market in and out. Now it's -- how do I plan for my future? How do I take care of my family? So there is less correlation between the markets and performance. But it's still there, right? When the markets are choppy like this, people stand on the sidelines. I don't know if it's one for one. The market drops, you -- if the market drops 10 year volumes drop by 10, that correlation, I'm not sure of. But certainly in volatile choppy markets with all the noise, people take a pause.