Canadian Imperial Bank of Commerce Q3 2024 Earnings Call Transcript

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

Question: Ebrahim Poonawala - Bank of America - Analyst : Good morning. Maybe going back, Victor, to your opening remarks around sentiment improving pipeline strong in Canada. Give us a sense of -- have we moved past the concerns around higher rates impacting the Canadian consumer, how to market, and economic activity? And are things looking -- are we on the other side of that? We'd love your perspective as you talk to your bankers, clients, around how likely it is that we do see the GDP rebound next year? And maybe Frank, we'd love your perspective on how that informs reserving in your outcome credit? Thank you.

Question: Ebrahim Poonawala - Bank of America - Analyst : And just one follow-up on capital. So you announced the buyback or authorization. But Victor, I mean, I'm sure you spend a lot of time in terms of capital allocations. Just give us a sense of the opportunity set ahead of you in terms of going off the group in Canada? There have been a bunch of deals announced. Is there any dislocations that create that opportunity? As well as in the US, some of the pressure on the regional banks, are you doing more through private to gain market share? And at some point, would you look at inorganic opportunities as well? Thanks. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 29, 2024 / 12:00PM, CM.TO - Q3 2024 Canadian Imperial Bank of Commerce Earnings Call

Question: Matthew Lee - Canaccord Genuity - Analyst : Hi, good morning, guys. Thanks for taking my questions. Maybe first on the Canadian banking loan growth side. Deposit growth is 5%, loan growth is just 1%. Is that a function of being more selective with customers or are there may be some other person takes to consider there? Hratch Panossian - Canadian Imperial Bank of Commerce - Senior Executive Vice President, Chief Financial Officer and Head of Enterprise Strategy Good morning, Matthew. Thanks for the question, it's Hratch, I'll take it and I'll speak mostly to the personal side and happy to have Jon speak to the commercial side of Canadian banking. Look on the personal side, I will just remind everybody, we have a very clear strategy. Victor spoke about this for the whole bank. It is the same in our personal bank. We have a focused strategy. We've always talked about building a relationship oriented bank. We're building the relationship oriented bank of the future. And that means selecting certain clients, who need a deeper relationship and value a deeper relationship with the bank, winning with those clients, having the best solutions, leading with differentiated advice, leveraging our data and analytics and leveraging our imperial platform and our digital capabilities to build deeper relationships with those clients. And we're digitizing the business to drive efficiency in the front lines and the back end. That's our strategy. And we've talked about what that strategy will deliver. We believe that strategy would deliver aligned with Victor's comments, growth that's above market. We've talked about REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 29, 2024 / 12:00PM, CM.TO - Q3 2024 Canadian Imperial Bank of Commerce Earnings Call high-single-digits revenue growth in our business and we've been delivering that. Operating leverage over time, again, we have been delivering that. And improving mix and ROE, which are going to help the bank's profitability overall improve. And so that's the strategy we have been following rather than trying to grow loans or deposits. So what does that mean today? I think what you're seeing on our balance sheet and on our income statement is a direct result of that. Yes, long growth has been slow. Overall consumer growth has been low-single-digits on the loan side. When you look at Canada, we've been a bit lower than that. We've been about stable on mortgages on a year-over-year basis. We've been about 1% on loans overall, as you said. But we're winning where it matters. We're winning money in. We reference the [Indiscernible] numbers in terms of long-term net sales. On deposits, when you dig into that 5% deposit number, you'll see, particularly in the last few quarters, we're starting to win in demand deposits, where margins are higher, where relationship value is higher, and we're being more selective on the GIC funds, where it's been competitive, margins are a bit smaller, and frankly, they're not that relationship oriented in terms of the business with clients. And so we're going to continue doing that. We've got an amazing team. We've got great data and technology supporting that. We're going to keep rolling tools out to understand our clients' needs better and to enable our team to serve those. And we think with that, we'll continue winning with revenue and ROE. And I'm less concerned about the numbers on volumes, but as Victor said, we think volumes will accelerate as confidence comes back as we get into next year. So I'll pass it on to Jon on commercial.

Question: Matthew Lee - Canaccord Genuity - Analyst : Yes, yes, that's great. I'll pass my mic.

Question: Gabriel Dechaine - National Bank Financial - Analyst : Hi, a quick one and then a more detailed one. The tax adjustment that was backed out of earnings or adjusted earnings, can you explain that one? Is that like some sort of true up of previously recognized TEB revenues?

Question: Gabriel Dechaine - National Bank Financial - Analyst : Okay, perfect. Actually, Rob, I got you here. You know, I get the message from CIBC that you're balancing revenue and expense growth and that makes sense? If I look at the segments I got a few here, you know, commercial banking, US banking, cap markets, expenses growth is all, you know,

Question: Gabriel Dechaine - National Bank Financial - Analyst : Yes, okay. Now I just wanted to get a sense of how you can be so nimble, not from a skeptical standpoint, but just appreciate that dynamic more on a go-forward basis. Thanks.

Question: Meny Grauman - Scotiabank - Analyst : Just a few questions on credit. One, in terms of clarification, the sequential growth on the credit card side. I'm not sure how much of that is seasonality. I assume some of that is as travel ramps up. But I just wanted to check if there's something there beyond seasonality and a broader question just in terms of following on what you bringing up, just in terms of the health of your credit card customer? And are you seeing any trends there? Any signs of stress in that product in particular?

Question: Meny Grauman - Scotiabank - Analyst : Thanks for that. And then, Frank, just a question about how we should view the renewal wave. Obviously, it was a bigger concern before we saw rate cuts happening. But how worried should we be about the renewal wave? And can you say that it's an issue that's in the past? Or is it more nuanced to that in your view?

Question: Meny Grauman - Scotiabank - Analyst : Thanks.

Question: Doug Young - Desjardin Capital Markets - Analyst : Hi, good morning and thanks for taking my question. Victor, you mentioned a bunch of times just premium ROE. And I guess the question is, what needs to happen to get back to the 16% plus ROE target? And if you can kind of itemize some of those items and whether it's credit, expenses, capital? And then how long do you think it takes to get back there?

Question: Doug Young - Desjardin Capital Markets - Analyst : And is there one area you listed for them? And I appreciate all the detail here. Is there one area that you think is more accretive to that ROE? And I mean is this a five-year journey? And I get it that it's a hard question to answer in terms of timing given all the different moving pieces. But when you think back and you look at the strategy that you have laid out internally, like is this a five-year time frame? Or is this similar?

Question: Mario Mendonca - TD Securities - Analyst : Good morning. Shawn, I'll start with you in the US. I appreciate that the elevated expense growth is in support of a longer-term strategy. And I get you're up to there. Would be helpful to understand is how long this runway is? Like how many years left of this, let's say, elevated spending, negative operating leverage before missions accomplished and you can start to grow again in the US, I mean, grow pre-tax pre-provision profit, because I see that net income was up this quarter. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 29, 2024 / 12:00PM, CM.TO - Q3 2024 Canadian Imperial Bank of Commerce Earnings Call Shawn Beber - Canadian Imperial Bank of Commerce - Senior Executive Vice President and Group Head - U.S. Region, President and Chief Executive Officer, CIBC Bank USA Good morning, Mario, thanks for the question. So our expense growth, as you said, is part of a long-term strategy. It's continued investment in our growth initiatives, as well as in our infrastructure to drive client experience, balance, enhancing our systems and technology aligned with both our business aspirations and regulatory expectations. And this quarter, it's about 50-50 between growth and performance-related expenses and the other half being more related to our infrastructure build and sort of normal course growth this quarter, in particular, had a -- I'd say, a heavier project delivery timetable. And so you see that in our results right now. We expect that to moderate. I think quarter-on-quarter, we're expecting more like a flat expense number Q4 over Q3. But it is a longer-term journey. I think we've got certainly a number of quarters in front of us where we will continue on that pace of investment. But our objective over time, and I would echo Victor's comment over a medium-term horizon to get to that place where we are ultimately generating positive operating leverage. And it will require some level of constructive markets. Obviously, credit demand industry-wide has been lower. We are growing faster in C&I, which is a strategic focus of ours. At the same time, we're still pivoting on the commercial real estate side. It's still a very important business for us. But given the steps that we've taken in the portfolio, particularly around institutional and office, that's been a bit of a headwind to overall loan growth in the US. That will take a few quarters to play out, but we expect to resume growth going forward in the loan book and then continue to invest in our wealth management platform, making that a bigger part of the overall business. All of that should drive better revenue growth over time and drive towards that operating leverage target.

Question: Mario Mendonca - TD Securities - Analyst : Thank you.

Question: John Aiken - Jefferies - Analyst : Good morning. Frank, just a couple of quick clarifications on the commercial real estate exposure. And I apologize I had to jump on and off. So if you already answered this, just tell me look at the transcript. On slide 42, you mentioned the watch list, and we expect to see some new inflow. Is that additional loans on to the watch list or a transition from a watch list onto gross impaired?

Question: John Aiken - Jefferies - Analyst : Thanks, Frank. And as you guys have discussed as you're managing the portfolio, there were some dispositions this quarter. Can you give us a sense of whether or not there were any gains or losses associated with that -- with those dispositions?

Question: John Aiken - Jefferies - Analyst : Great, thanks Frank, I appreciate it.

Question: Nigel D'Souza - Veritas Investment Research - Analyst : Thank you. Good morning. I had some follow-ups here on credit. When I look on slide 38 and delinquency rates across uninsured mortgages, I'm noticing there's a bit of an uptick there in the GTA category. I'm wondering if you could point to any specific trends or segment that's driving that fixed versus variable owner-occupied versus non-occupied or any specific vintages that are driving higher delinquencies?

Question: Nigel D'Souza - Veritas Investment Research - Analyst : Thanks, Frank and on the broader retail portfolio, are you seeing any differences in trends between homeowners and renters? And what I'm getting at here is -- our strong balance sheets for homeowners, particularly on the asset side with real estate prices being stable, is that what's helping mitigate delinquencies or credit losses in your portfolio? Or is there no noticeable difference between the two buckets of retail borrowers?

Question: Nigel D'Souza - Veritas Investment Research - Analyst : Great. And last question here on FLIs on page 45. The unemployment rate right now is a bit higher than your base case assumption, and it's expected to trend a bit higher? So is there potential for upward pressure on your performing provisions next quarter based on where unemployment currently is?

Question: Darko Mihelic - RBC Capital Markets - Analyst : Hi, thank you. I wanted to go back to Shawn Beber for a moment on the US business. And I just wanted to -- when I look at the suggestion that you're sort of reshaping the portfolio mix, can you maybe provide a little more color around that? And how -- I'm just thinking about loan growth parameters for the model and the NIM associated with that how long -- I think, I heard you say it's a few quarters before you're repositioned. So maybe you can just give us some -- a bit more color on how far you need to run off commercial real estate? And what the puts and takes are to the NIM and revenue growth in the next few quarters based on this repositioning? Shawn Beber - Canadian Imperial Bank of Commerce - Senior Executive Vice President and Group Head - U.S. Region, President and Chief Executive Officer, CIBC Bank USA Thanks for the question, Darko. So in terms of where we are on the journey, we've had, I think, a positive impact on the portfolio through the steps that we have taken over the last several quarters. I think, as I mentioned, that's going to continue to play out. We depending on what happens with the rate environment with rate cuts, we might actually see some even further payoff activity or accelerated payoff activity in the CRE portfolio. At the same time, we're seeing encouraging signs on the C&I side. We have seen that loan recovery start a couple of quarters ago. That continued this quarter. And based on the level of activity and discussions that we're seeing, the pipeline is improving. We're encouraged by what we're seeing in terms of being able to deliver on the C&I growth. So the headwind that CRE has been into overall loan growth, I think will dissipate over time. As I say, it can still take a couple of quarters. It's a bit early to be giving guidance next quarter. But I would say overall loan growth, we had growth this quarter. I'd say I expect a level of continuation of that recovery in loan demand, assuming that we get the constructive or more constructive environment over the next couple of quarters on the rate side and the overall macro backdrop based on our outlook. In terms of NIMs, we're still calling for pretty stable NIMs. We're not anticipating this having a material impact on that. And that also has to do with the deposit franchise and what we're doing there in terms of being proactive and responsive to the rate environment as we have been. So that's up and down. And so again, assuming rate cut environment comes through, then we're anticipating being quite responsive to that, balancing the competitive environment and ultimately resulting in a stable NIM outcome. So loan growth, probably still modest over the next little bit and stable NIM.

Question: Darko Mihelic - RBC Capital Markets - Analyst : Okay. Great. That's very helpful. I have a few follow-ups, but they're very technical. I'll call Geoff afterwards. Thank you.

Question: Sorab Movahedi - BMO Capital Markets - Analyst : Okay. Thank you. And I'm going to stay also with Shawn. Shawn, I look at your sub-pack, the results this quarter in US dollar is $158 million. A couple of years ago, this quarter, $152 million. You're doing it on similar provision levels, $28 million a couple of years ago versus $33 million this quarter. And you're doing it with a couple of quarters of improving loan dynamics from a volume growth perspective, but you're also doing it with quite a number more FTE? My question, I guess, just to kind of dovetail from Darko and Marios is, are we now approaching a stable kind of earnings contribution level here from the segment? And is this a good base to work off of to go up, number one. And number two, have we seen a plateauing of this FTE build? Or do you anticipate that this kind of infrastructure -- continued infrastructure investment will require further FTE build? And then number three, is this FTE build going to have revenue benefits at some stage in the future? Shawn Beber - Canadian Imperial Bank of Commerce - Senior Executive Vice President and Group Head - U.S. Region, President and Chief Executive Officer, CIBC Bank USA Sorab, thanks for the question. So look, we are driving towards, I think it's a good starting point from which we expect to grow. The infrastructure investments, we will be absorbing that cost as we go part of that is on the infrastructure side. But as I said, about half of the growth in expenses that we've seen this quarter, and that would have been similar last quarter has been around growth initiatives. And so we expect those to start paying off over the next -- the coming quarters. And so from here, we would expect growth. The investment that we're making in FTE on both infrastructure and our growth initiatives, we expect to continue, but we don't expect the same pace of expense growth going forward. So I think it's a good starting point. And from their continued growth both on the infrastructure side and on the front office side as we grow out the components of our business in the US.

Question: Lemar Persaud - Cormark Securities - Analyst : Yes, thanks. I want to turn to credit for Frank. Obviously, there's been a repositioning of the bank's US office commercial real estate portfolio. But even then, I'd expect some reversion to a mine and U.S. commercial PCLs. So how should we think about losses in that business on a more normalized basis? Like where I'm going at with this is I fully appreciate the mid-30s impaired PCL guidance. But if I was to plug in a more normal level of losses in that business, you'd be well above the mid-30s guidance. So bottom line, like could we be looking at impaired PCLs meaningfully above that

Question: Lemar Persaud - Cormark Securities - Analyst : Okay. And then maybe turning over to Rob, just when looking at expense growth at CIBC, you're going to be running into some pretty tough comp quarters, because there was a real slowdown of expense growth towards the end of 2023. The bank went essentially from the upper single-digits to low-single-digits. Wondering if you could walk us through your thoughts on expense growth in the context of tougher comp quarters and then also operating leverage if some of these treasury gains don't materialize as you look forward?

Question: Lemar Persaud - Cormark Securities - Analyst : Appreciate the time. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 29, 2024 / 12:00PM, CM.TO - Q3 2024 Canadian Imperial Bank of Commerce Earnings Call