Are we live now? Okay, great. Thank you very much.
Looks like we are.
Okay, so thanks for joining the next session with CIBC. I have the CFO, Hratch Panossian, here with me this morning. Hratch, welcome, and thank you.
Thank you. Morning, Darko. Good morning, all. Always nice to see everyone.
So, I think in, in this session, what I'd love to do is just sort of start off on credit quality, because one of the things that we heard in your first quarter was, you know, you're substantially past a lot of the issues with commercial real estate. So I thought maybe you can put a little bit of color on that for us and sort of discuss what we've seen with commercial real estate and office, in particular in the U.S., the elevated losses we've seen in the last few quarters, and, maybe give us some perspective on that and what we could think about for the next couple quarters on that front.
Absolutely. Thank you, Darko. So maybe I'll start with the context, right? 'Cause it's important. We've got a solid, diversified business in the U.S. that cuts across commercial banking, private banking, private wealth for high net worth individuals. Our loan book includes some real estate, some traditional C&I in the portfolio, and the portfolio we're talking about here is a very small portion of the loan book in the U.S. It was sort of 10% of the loan book in the U.S., a portion of our CRE portfolio in the U.S., and really a finite book of office properties that were originated pre-pandemic and went through the discontinuity of the pandemic with respect to occupancy rates falling off with the work- from- home and hybrid models coming and staying in the model. So it was a portfolio that was...
I think Victor covered this on the last call, right? High quality when we originated it, 60% are better LTVs, good cash flows, but nobody anticipated the pandemic and the disruption it would cause to this particular asset class within CRE. Other than that, the rest of the business continues to perform well. We don't have any concerns with CRE or commercial lending in the U.S. book or frankly, our commercial businesses and capital markets, business Canada, U.S., credit continues to perform very strong. This portfolio is a finite portfolio. It was just over $4 billion when we started. It's down to $3.5 billion. We haven't been originating into this portfolio since the pandemic really hit. Because of that, the nature of the portfolio was that maturities were fairly short- term.
As we've communicated over the last year, we started seeing some of the stress in the portfolio as those renewals came up and the maturities of the book came up. The good news is that that's allowed us to deal with the majority of the loans that we had concerns about by the time that we reported in Q1. One of the things that makes us comfortable with where we are now is that we've had to work through a lot of the portfolio maturing. Now, when things have matured, we've had a number of pay downs, and those have contributed to the balances coming down. There have been some workouts, but there also have been the loans that have and properties that have actually refinanced and renewed with us.
But, you know, the important thing is when those have renewed, they've renewed and they've been re-underwritten by the sponsors of the property and by our team on the lending side to the current situation of the property, current LTVs, current cash flows, current occupancies, et cetera. And so we don't anticipate issues with those loans unless the environment changes significantly to the negative from here. And it feels, in terms of all those fundamentals on this asset class, it does feel like we've generally stabilized, right? So what does that mean? That means that over this period of time, we worked through the loans that we worked through. A number of loans have been impaired, and they've been reserved for. We've looked to the performing provision. We've done a loan-by-loan, bottom-up review of even loans that aren't impaired or aren't due for renewal.
Our team has gone through it between the business and the risk team, and we've got our best expectations of losses based on what we're currently seeing things clear at end market, represented in that allowance number. So that's allowed us to build the allowance up to the 14%-ish we disclose as of this quarter on that portfolio, and we feel we are adequately covered. Now, what we expect going forward from here, and our CRO covered this, is that we do expect impairments to continue in that portfolio, but we will see the, from the provisions that are in our performing as well, provide a bit of an offset to that.
And so with that, we expect to get through the next quarter here, and then as we get to the back half of this year, we do expect, on a net basis, total PCLs for the office portfolio to start declining. And in the aggregate, all of that expectation is within our mid-30s basis points, impaired PCL guidance for the total bank for the Fiscal 2024 year that that we've described. So generally, all going according to our guidance, and we're pleased to be working through it.
Okay. Pretty thorough, thorough, thorough walk-through. And so from a renewal point of view, essentially, you're saying like what? We've renewed the tougher ones. Is that another way to think of this overall, and the renewal-
It is.
Trajectory from here?
I think we've renewed the majority of the tougher ones, Darko. And then they are now, you know, sort of enhanced in credit quality if we did renew them, like I said, so that's an important point.
For the ones that haven't renewed yet, we've gone through loan- by- loan and reflected in our reserves, and our allowance, what we believe the outcomes will be there.
Okay. So sticking with credit quality, just for the time being, let's think about other portfolios. I don't think we really have too much to think about, other than perhaps credit cards, and there's an awful lot of discussion on mortgages, as you know. So maybe we can walk through those two portfolios in particular in Canada.
Yeah, absolutely. So we're, look, we're again, we're seeing things in line with our expectations or a little bit better in the Canadian consumer portfolio. And certainly when I look at it across the market with some of what we saw recently relative to industry trends, our portfolio is performing well. We're not surprised by that because we're happy with the quality of our portfolio, but the facts certainly seem to be bearing that out. So what's actually happening, right? It's a bit of a different story by different asset class. So when you look at the delinquency rates and the PCLs and so forth, we are seeing we were talking about normalization to pre-pandemic levels. In general, you could still call it normalization or having normalized, if you will, in terms of the loss rate overall.
But there are some puts and takes with the products. If you look at the unsecured lending products, and I would not include cards here, the unsecured portfolios are the ones where delinquencies have come up to pre-pandemic levels and beyond pre-pandemic levels, and they've been at the forefront of the trend. The credit card product is still fairly comparable to what I'll call normalized levels, and our portfolio particularly is of stronger quality in aggregate now than it was before. We've got our co-brand card, which is a very high-quality, transaction-based card. We've got our travel portfolio, which again, is a very high-quality portfolio in aggregate. So overall, our portfolio certainly is normalizing again, but we're not seeing anything that's unusual or, or having gone significantly above pre-pandemic normalized levels yet in the card book.
And then in the mortgage portfolio, you're seeing some of the delinquencies starting to come up, and I think you saw that across the industry this quarter. Over the last couple of quarters, you've seen some increase in 90-plus delinquency days, but you're really not seeing much in terms of losses and charge-offs in the mortgage portfolio yet. And so when we look at that picture, again, it's pretty consistent with what we expected. It's pretty consistent with what, you know, common sense would say, right? So where you saw first the delinquency starting to rise and write-offs, the unsecured portfolios, these were the portfolios where the monthly payment shock would have come in most quickly as interest rates went up. Because if you had lines of credit, secured or unsecured, you had the monthly payments change to reflect interest rates. In credit cards, monthly payments didn't change.
We haven't seen much change in utilization levels over the last year or credit quality, and so in terms of people's ability to make those payments, there hasn't been a big shock yet. Mortgages are the same. So we're certainly seeing maybe some of these recent delinquency increases reflect higher cost of living, the inflation impact on folks, people adjusting their cash flows and trying to make things work. But from a mortgage payment perspective, unless voluntarily variable portfolio folks who are in non-amortizing status have taken action, most of the portfolio is seeing that payment change when their renewal comes up, whether they're in a variable or a fixed-rate portfolio. So that's playing out more slowly. Now, the good news is, when those renewals are coming up, we're seeing what we expected. Clients are taking action. They're increasing their payments.
Some are making some pay downs on the loans and taking on a smaller principal amount. And we haven't seen anything different, frankly, than we see historically in that portfolio at renewal in terms of delinquency. And so how do you explain. Let me just address it, because that might be a question you have on your mind. We certainly get that a lot. Well, how do you explain then the increase in delinquencies of mortgages? Part of that is actually a bit of a denominator effect, right? So a normal origination vintage of any loan portfolio mortgages will start with low delinquencies, and over time, delinquencies will go up.
In an environment where new originations have slowed as they have, so some of this is just a normal course of vintages, older vintages playing through in the portfolio, actually seasoning into with a flat profile on the balance basis, right? Some of it is what we're seeing across the industry, but when you take those 20 basis points-ish delinquency rates, 90+ that you're seeing, and you go through how many of those will actually go to default, you look at the LTVs on that part of the book, which are well north of 50, well south of 50%. You look at the amount that we expect to have challenges with, we don't expect material losses out of the mortgage portfolio. And this is a point we've made all along.
The fact that we're more secured in our loan book in Canada, we believe is a credit-enhancing quality, and we're seeing that play out. You're certainly not seeing large losses in the mortgage portfolio, and in our forecast, we don't anticipate it.
Okay, great. I'll move on from credit quality, and we'll talk a little more about top line. So, we're seeing stable margins. Talk a little bit about what your outlook would be for NII from here on in. Given that you're having a little bit of a slowdown in revenue growth, some mortgage lending, certainly expectation is that commercial loans will also slow. So maybe you can give us a bit of an update and thought process on net interest income first, and then we can talk about fees in a moment. But let's start first with net interest income and how you see it from your role as a CFO, how you see it evolving for the rest of the year.
Yeah, it's a good question, and, and it's been a hard one to really keep track of, right? Given how much, rate expectations seem to change daily for the last several months here, and I think that's gonna continue. But, the good news for us is that we manage the balance sheet for stability and for stability in our margins, as we've talked about, extensively, through this cycle. And I think when you look at the results in terms of our total bank margins, our Canadian P&C margins, and our U.S. P&C margins, you see that, right? In fact, you have on the Canadian side, our P&C margins were up more than 20 basis points. But if you even go back through 2022 to now, we've seen quite a bit of stability over that period of time on a relative basis.
When you look at U.S. margins, despite all the discontinuity that we saw in the U.S. and the big change in market trends and behaviors, and shift of deposit mix towards term and higher cost, and all of that, from late 2022 to now, our U.S. margins have been stable in the 3.40s level through that period of time. So we're pleased with how our margins have performed. In aggregate, total bank margins are up, which has been helping NII, to your point, right? We've grown NII very healthily, you know, in the double- digits, and then slowing down a little bit as the balance sheet has slowed down. When I look at this year, yeah, look, I think the loan growth is slowing, right? If I just use as an example, our Retail business.
Our Canadian Retail business revenue growth was 10% year-over-year this quarter. A large component of that would've been rate impact, as that particular segment had 25 basis point margin expansion year-over-year. That's probably going to stabilize. As we go through this year, margins are going to stabilize. We're not gonna have a tailwind from margin expansion anymore, and I think that's the case at the total bank level as well. In terms of balance sheet growth, on the consumer side in Canada, it's been slow for a while. It's been low- single- digits. That's what we expected, that's what we're seeing, and I think that expected to be the case for the rest of the year. On the commercial side of the business, both Canada and the U.S., actually, a bit of the opposite of what you said, Darko.
It's already slowed down, and for us, it's actually slowed down, and the early part of this year in both businesses was fairly muted. Part of that was commercial companies are seeing some uncertainty on the horizon on demand for their products, so they're not borrowing. Part of that has been de-levering and pay downs that we've seen. Utilizations have come down in those businesses. And you're seeing similar trends in corporate banking, where companies aren't borrowing, they're not renewing, and so you're seeing the portfolios, actually, utilizations as well, are staying fairly muted, right? So loan growth in the first quarter has actually disappointed a little bit slower than what we thought. But going through the next few quarters this year, we actually see that accelerating.
So some green shoots that we're seeing across all those businesses in Commercial Banking, Canada and the U.S., clients are having more conversations. They see a little bit more certainty in the outlook. They're starting to think about borrowing, and the pipelines are good, and so we're expecting those to accelerate and get to overall in sort of the mid-single digit range for the commercial portfolios. And then in Capital Markets, there's been really good uptake and some strategic conversations with clients. Advisory was up in the first quarter, right? Our corporate investment bank was up 14%, and it was largely advisory and some issuances that helped that. And so all of those conversations now in the pipeline require financing, and so we expect some of the financing needs in the capital market space as well to potentially accelerate as we get through this year.
So if I put all of that together, it's probably mid-single- digits as balance sheet growth overall, right? Low single- digits for retail, mid for the rest of the book, maybe a little bit higher for capital markets, and then a little bit of margin help. And so mid-single- digits plus on NII is, I think, a reasonable expectation for the rest of the year.
That's including your thought process on rate cuts that are coming in the back half of the year. Would that be correct?
Correct. Correct. And that gets to our margin stability, Darko, right? We've talked about this quite a bit. Even with anticipated rate cuts as they are in the forwards in the current curve, our margins would actually be stable to somewhat still rising, right? And just to put that in context, the repricing of our balance sheet, which is all of our non-interest sensitive deposits, our capital, et cetera, that's invested long- term, that repricing, every month as we roll several billion CAD, I won't give the exact numbers of that repricing, it's repricing more than 300 basis points higher than what's coming off the books. And that's really what gives the momentum of a few basis points positive trajectory to our margins every quarter that we've talked about.
When you do the math, and you can start from our disclosure on a 100 basis point shock and work backwards, and what you get to is that short-term cut, if there are cuts, that short-term impact is only every 25 basis points will only have about 0.5 basis point impact to the margin for the year, right? So for 2024, even if there is a surprise and more cuts than expected, our net margins will be pretty stable. As you get into 2025, that starts compounding a bit more.
Okay. Great. And so now let's talk about the fee side o f the business. So thinking mid-single- digit NII, fee side, now we can maybe talk a bit more longer term strategy now. There's been some discussions at, from CIBC that you're really gonna focus in on, on the fee side, the wealth side of the business. So maybe you can give us an idea, and I've got some statistics here we can, we can walk through, but, you know, I thought on the call, there was a pretty interesting sort of discussion, where 31% of your commercial clients have a relationship with CIBC, and in the U.S., that figure stands at 17%.
So maybe we can talk first about that opportunity, and then we can go back to Canada and talk about the mass affluent opportunity there as well. But first, let's start with the U.S.
Sure, sure, and we can try this pretty quickly, 'cause I'm watching that clock.
Just-
But, look, I think in the U.S.-
We're talking-
...right, a starting point would be, we have a very high-quality franchise that we've built, as I said, across commercial and wealth. But it is new. It is fairly new, and we've bought different pieces over time. We had the Atlantic Trust business that we had acquired, the private bank business, the Geneva Advisors business, and we've done smaller acquisitions since then. And one of the things we've been very focused on is continuing to invest in that platform. On the technology side, we're putting all the wealth management platforms. I was telling you that a bit earlier, right? All on the same technology platform, which will make it easier for our advisors to frankly do business across the commercial bank and wealth and serve clients, and for us to add more advisors over time to that platform.
We've been investing in people, and so we've been adding to our offices, particularly in the key MSAs, where we see both growth in Commercial Banking and wealth management. And we've been building that in a way to have these offices where we actually have all CIBC employees, 'cause this connectivity bit is very important for us. And what I mean all is the CRE teams, the C&I teams, the private wealth advisors, the p rivate bankers, and our capital markets people, where we have them. All are in the same offices, and they're all managing that market and the client base together to offer all of their products to that client base. We just did that in San Francisco with our new office and flagship branch in San Francisco.
We've done that in West Palm, in Florida, and we've got the same model in New York. We're in, you know, sort of nine of the top 10 MSAs, and in all of those MSAs, over time, we wanna build this model of having all of the right folks there. And that's why going to that stat, right? There's more opportunity in the U.S. than there is there to get to where Canada is, because we've just started this model of putting all the legs of the stool in, having the teams come together, and having the commercial bankers introduce their clients to the private wealth advisors, and vice versa. And so we think there's opportunity to drive up that penetration and drive up the income as a result of that, right?
Our plans for net funds, the net sales flows, both in Canada and the U.S., you know, are pretty robust. I think we're seeing those materialize because of all the efforts of the team.
Maybe just touch on the Canadian side.
Yeah, the Canadian side, you know, I think it's the same model of connectivity, but a lot of what we're trying to do in Canada, Commercial Banking and wealth management, because of the way we put the segment together, there's been this connectivity for more time now. Referrals, and we talked about this at our Investor Day, referral flows have been a key metric we track, and we've done well on that. Now the focus has shifted really more to our Imperial business and that mass affluent franchise. There's a number of things we've done, right? Over the last year, Jon and his team have done an excellent job. They've invested about 400 FTEs worth, predominantly in the Imperial business, but overall against our mass affluent franchise.
As you saw from expenses down year- over- year in that segment, 2%, we did that by reallocating from elsewhere. So we've shifted resources. There's about 800 FTE that has come out of that business. 400 has been reinvested in these key strategic areas. We've got our CIBC GoalPlanner technology that we launched a couple of years ago. We now have the majority of our households having gone through that GoalPlanner exercise. NPS score, Net Promoter Score, from clients who do that, over 60% have done that, has gone up from the 60s to the mid-70s when they do the plan because they get valuable advice. The opportunities we uncover and I won't give the exact stats 'cause we haven't disclosed them, but we uncover very significant opportunities to franchise those clients and bring in assets.
And we've consolidated upwards of 20%-30% increases in relationship assets for those clients because they disclose what assets they have, where they have them, and through that advice, we have an ability to consolidate the business. So that's the effort in Canada, and we believe that that's gonna drive our growth, and above-market growth in that business by growing with the right clients in that segment.
Now, those numbers are. Those sound very big. Now, I'm gonna assume if there's 400 FTEs added to Imperial Service, those are not all frontline Imperial Service staff, right?
Most would be.
Wow!
Most would be. It's either frontline or direct support for a frontline.
So, presumably they would get, they would get, as time goes on. I mean, how—like, maybe give me just a thought process here. How new are they and how productive are they?
Some of it is we're still adding folks. What we see in terms of productivity, Darko, in that space, right, this is a bit of a different model than the private wealth advisor model or Brokerage model. Productivity is actually pretty good because, and we see within the first 12 months or so, we actually see people being net productive to the bank and contributing.
The reason for that is we're also doing. And again, I think Jon and his team have done an excellent job here, is we're prioritizing what the frontline is focused on. And so we're taking some of the best and most seasoned advisors and focusing them on the biggest opportunities. We're taking some of the newer folks and giving them some of the more where it's less about trying to grow, but it's more about maintaining and taking care of clients, giving them those portfolios. The other thing we're doing is we've taken the leads because we've gone now to the clients that aren't in our mass affluent segment across our bank.
So if you look at the 9 million or so clients we have with us that wouldn't qualify for that offer because they don't have those assets with us, we've mined the data that we have and the models that we've built, that client base, and we have generated leads. We know there is a large proportion, a couple of million clients plus in that portfolio, that has those assets, and they're not with us at the bank. And so we've generated those leads, and that's another thing that we pass on to the right advisors in the Imperial channel, those leads, to try to consolidate those clients to the bank as well. And so it's not only growing and deepening the relationship for those who are already in Imperial Service, so they have more than 100,000 of assets with us, it's-...
taking others that are not there and building them up. And then in addition to that, we're building a pipeline, right? I know we talked about the 700,000 net new clients we've brought to our bank over the last year, and every year, that gives you to give you a sense, right, of the sort of 600,000 households or so that would be in that bucket today. Every year, you're basically creating new stock and potential that's almost equal as an opportunity, and we're going through and mining that base.
So what are the markers we can look for? AUM, revenue growth? Give us a sense, and I realize we're-
Yeah, absolutely. So you will, you know, over time, we're seeing some of the early signs of success in conversions, right? Over time, what we think the market should see is, it should see our Net Promoter Score improve because the offer is, particularly in this segment, is very attractive. You should see money in. We're very focused on money inflows, so that'll be deposits, that'll be investment flows, net sales, and then obviously, the economics that come off of those.
Okay. So I'd probably spend a lot more time on that with you if I could, but we don't have that much more time, so-
I know, I know you have views on it.
So we're definitely gonna have some more follow-ups with you at some point. I wanted to just maybe switch gears because we do have you here as the CFO, and I want to talk a little bit about capital and the discussion around the DRIP program likely being shut off this summer. If if indeed, that's the way it sort of plays out, how should we view your capital generation thereafter, given that you are expecting some acceleration of growth, on the loan portfolio? So give us a sense of where you see your capital ratio kinda landing when you turn off the DRIP and kinda where you expect it to kinda go from there.
Yeah, sure, Darko. So we're very pleased with what we've done with capital, right? We've added over 130 basis points over a year, and on a relative basis, taking pro forma, pending acquisitions, et cetera, we're now at the top of the pack, near the top of the pack of the peer group with capital. And so we've talked about this all along. If we're in a good position relative to peer group, if we're well clear of regulatory requirements, that's, to us, sufficient capital, right? And I said it in my remarks this quarter, we're beyond that, right? So we have more than enough capital. We don't need the DRIP on, because on an ongoing basis, we have a strong ROE, and we're focused on making that ROE stronger over time, and we can talk a little bit about how.
But that gives us the confidence that net of dividends, we generate enough capital to grow our business. You can do the math, right, outside in. What you'll land on is the amount of capital we generate now, we can grow our RWAs in the high single-digit range and still support that. And so based on the environment that we see, we think we are generating more than we're gonna be able to deploy. Not by a lot, but, you know, our goal is always 5-10 basis points of net generation a quarter, unless there's really good organic opportunities to grow, right? So I expect capital to be generally stable-ish around that 13% level we're at now without the DRIP, as that a little bit of generation offsets some of the other things.
There might still be a little bit of negative credit, credit migration, et cetera, on the horizon, but overall, we'll sort of stabilize around that 13 level at this point, I think.
Okay, you opened the door to talk about ROE improvement.
So let's talk about how you get your ROE higher.
Yeah, and I think this question came up, right, Victor? Victor had a question come up in this quarterly call a bit. Maybe I can add a little bit color and some numbers to it, right? So we're very, very focused on ROE and our overall ROE trajectory, our ROE goal that we put out at Investor Day, and our relative ROE to the industry and competitors. And so, our strategy is constructed deliberately to be an ROE-enhancing strategy over time, and we feel comfortable that over time, that we're gonna get that. And so just some of the numbers around it. We had set an Investor Day target of 16%+, right? And there was a pair, because they go together. We had said through the cycle, ROE 16%+, with a CET1 ratio in the 11%-11.5% range.
If you just adjust for the CET1 ratio being 13%, that 16% ROE is the equivalent of sort of 14, 14.5% ROE. If I look at our ROE this quarter of 13.8%, with the loss ratio being high in the 40s, our through-the-cycle loss, PCL, right, loss ratio is 25-30 basis points. So if I just normalize for the through-the-cycle losses, this quarter, through the cycle was a sort of 14 and change ROE quarter, right? So we're there. We're about where we thought we were gonna be, ex the higher capital requirements. But we're not giving up on clawing back some of what we've lost to the higher capital requirements, right?
And so if you look at our strategy, our focus on the affluent business, both Canada and the U.S., those businesses are fees, they're deposits, they're high ROE businesses. For the most part, our affluent businesses are 30%+ ROE businesses. We talk about digital banking for mass market and more and more digital banking in the personal space in general. Our Digital Banking Services for clients are 20%+ ROE businesses. We talk about our commercial and capital markets. We talk about this connectivity franchise, right? And this one I think is really important. In a world where I don't think we're done, right? I think capital costs, I think capital requirements will continue to be pressured and driven upwards. And so it becomes very important to deploy that capital against relationships that can hurdle. That's been a focus of ours, right?
The way we get there is because we have this way of serving clients across our entire bank and bringing all the ancillary services. When we put capital out in commercial and capital markets, we expect those relations to be well into the double- digits ROE, into the teens ROE. In contrast, if you have a weak, shallow relationship in those businesses, you could be single- digits. You could be below cost of capital, right? And so on the revenue side, as we shift the revenue more towards those sources of revenue and those mixes, those are ROE enhancing, right? And just to give you some rough numbers, every 1% of our revenue that we grow in these capital-light businesses assume a marginal mix of 20 basis points on it or 50% on it.
It's about 20 basis points ROE enhancement, all else being equal to the bank. Our expense side, which is our last priority, fourth one, we've talked about 1%-2% productivity every year to drive operating leverage. Every 1% of expenses you can take out, that is another 17, 18 basis points of ROE enhancement. So if we can take out 2% of expenses every year, and we can move our revenue mix a few percent in the direction that we're trying to go every year, then you can see how over time, you can close that 150- 200 basis points that's been taken away because of the higher capital requirements, right? And I also think relative to our peer group, that'll put our ROE on a good trajectory.
Well, that's a very good, thoughtful, response. I really appreciate that, Hratch. Thank you so much for being here. There's tons of follow-up for me, but,
Thanks
... excellent, meeting. Thank you very much for that.
Appreciate it.
Thank you.
Thank you all.
Cheers.