All right, welcome, welcome back. Hope everybody had a good break. Our next speaker, Shawn Beber, group head of the CIBC's U.S. banking operations. Shawn, thanks for coming.
Great to be here.
You were here a couple years ago, I think pre-COVID, but you were chief risk officer at the time.
At the time, yeah.
Well, having said that, before you were chief risk officer, I think you were corp dev, and you were heavily involved in the PrivateBank, PrivateBancorp, pardon me, acquisition.
Yes, correct. Correct.
So let's—you know, with that background and leading up to your current role, let's take a high-level view of the U.S. strategy now that you've been there for a couple years. I think, you know, in some couple of your peers get a bit more attention on the U.S. strategy front, so it's a good time to refresh, you know, what's going on with CIBC in the U.S.
Yeah, terrific. So we continue to execute the strategy that we set out a number of years ago, and it's really got three components to it. We're building a highly connected commercial banking and wealth management business in the U.S. And what do we mean by that? We really look to bank the business owners, commercially and personally, the principals of those businesses, and we do that by bringing leading capabilities across lending, treasury management, investment management, and really importantly, capital markets. So we leverage our global capital markets capabilities and bring those products and services to our mid-market clients. And so all of that connectivity is a really important part of our overall strategy. And we focus on clients who really do value that high-touch relationship focus. That's been the hallmark of the team that we acquired.
It's part of what we're doing in Canada as well, so all very aligned on a north-south basis. We're also looking to make private wealth management a bigger component of the overall U.S. business. First of all, we like the fundamentals of the affluent and high net worth segment of the market, but it's also very synergistic with our commercial banking business from a referrals perspective, from a capital generation perspective, and an ROE enhancement capability, and also from a funding perspective. And so having those businesses together and making that an even bigger part of the overall business is an important strategic pillar for us in the U.S. And finally, we're investing in our infrastructure. We've invested in the front office, adding new capabilities, in the commercial banking side, on the wealth management side, investing in our technology and our platform.
We're in the last innings of consolidating three wealth management platforms onto a single platform to drive operational effectiveness and really be able to scale that business going forward. We're investing in the infrastructure to, you know, meet the evolving regulatory environment in the U.S. and to support the growth that we have achieved and that we look to achieve going forward. So all of that, it's a long-term strategy, and we're very happy with what we've seen so far, and we've got more to grow.
And if we focus a bit on the lending part of the business, which is obviously a core part of it, how would you describe your ex-Illinois loan growth performance? Is that what's really driving the buzz? 'Cause we've seen that from banks in the past where they're, you know, more than half of their growth is coming from outside of the core footprint, if you will.
It's pretty, it's pretty balanced, for us. We're now in 29 cities, 10 of the 12 largest MSAs. We have scale in certain markets or more scale in certain markets like the Midwest, but look to continue to grow in those markets. And a lot of that has been following clients into those markets and then having enough presence to, or at least having enough activity to warrant opening up an office. We've opened up a few branches now, in terms of additional branches, and all of that is in of the growth ambition. But it's fairly balanced growth.
So as far as the just bottom-line performance, if I look at ROE of, of your division, there's been obviously fluctuations over the past few years. What's your perspective on, or outlook for your business generating, you know, double-digit ROEs, and, and what sort what steps are required to get there? What kind of timeline do you have in mind?
So look, in our investor day in 2022, we talked about a 9%-plus ROE. And we actually achieved that. You know, when we made the acquisition, you know, you start; there's a bunch of goodwill that comes along with the acquisition. So we sort of started at a mid-single-digits ROE, and we grew that, and we exceeded 9%. The pandemic hit. There's been a lot of volatility since the onset of the pandemic. We were below 9%. We were above 10%. Some of that was driven by, you know, the performing build and then the subsequent release in 2021. But broadly speaking, our strategy has stayed quite aligned with our targets for generating, you know, 9%-plus ROE over the course of time.
So as we get into sort of a more normalized environment, more normalized rate environment, more recently, we've, you know, been working through some challenges in the institutional real estate book and the office sector in particular. As we see that normalize, we expect to get back on that trajectory. How we do that is, again, back to the strategy, in terms of having a highly connected franchise, which is ROE enhancing, bringing all of the capabilities to our clients across capital markets, wealth management, etc., and again, increasing the percentage of wealth management in that business will also help underpin that ROE performance.
Hey, we'll get back to the wealth angle 'cause that's obviously an interesting one. But before we do that, I on the last earnings call, when you were talking about your margin performance, part of the strategy there involves shedding lower-margin clients and then bringing on higher-margin clients. I mean, that kind of intuitively makes sense. How do you go about doing that? And what's the, I guess, is there still a lot of work to be done in terms of improving the overall margin profile?
Yeah, so on the earnings call, that comment was really focused on in the quarter, there was some margin expansion. And part of that is, as we have been strategically pivoting out of some of the institutional real estate business that we have historically done, some of that was lower margin. And so we've been replacing that with higher margin in the mid-market and in the C&I space. And so I would say that had an impact last quarter, and that will, you know, play itself out, I think, over a reasonably short period of time. More broadly, our approach with respect to returns from a on our loan book is about the going-in conversation and how we deploy capital. We're very disciplined in how we deploy capital.
We look at the loan returns, and then we also sit down with our clients to talk about what are the other things that we can be doing with them and what the expectations are to ultimately drive a, a return profile that makes sense for us and provides them products and services that make sense for them. That's an ongoing discipline. We do quarterly reviews of the portfolio to understand it's a bit of sort of a promises made, promises kept type analysis of, "This is what we expected to happen. This is how life has played out." There'll be context around that in terms of what's happened over the last little while to drive particular outcomes. Then we work with our clients to make sure that we are, in fact, you know, following along that, that path.
In certain circumstances, we'll look at it and say, "Look, this just isn't gonna be a fit going forward." It's a two-way relationship. We talk about that all the time. So that's an ongoing discipline that we do as a general matter. So last quarter, the comment was a bit more of a specific dynamic that's been happening as we sort of pivot, but more broadly, that's how we manage the portfolio on an ongoing basis.
So that sounds more of a client-specific type of interaction and evaluation. As far as the portfolio and its composition, one of your peers in the U.S. has been, you know, exiting certain activities. I'm wondering if there's a story there at all, with regards to CIBC in the U.S. and how that, you know, could play into your ROE performance. If there are any activities you're like, maybe we should probably rethink that one?
No, I mean, look, we're constantly evaluating elements of the portfolio. Right now, I'd say it's pretty business as usual at this point, other than, as I've talked about, from a CRE perspective, where we're doing some of the pivoting with respect to some of the institutional relationships that we've had historically that won't be part of the future. And through that, expect our CRE book to grow more slowly relative to the rest of the portfolio as we go through that sort of transition period. But, you know, broadly speaking, we've been pretty specific about the areas that we participate in and where we've grown capabilities over the last number of years, and we expect to continue that trajectory.
Now, bringing it to the wealth business, you know, when I think about wealth in the U.S., I think of Atlantic Trust that was bought several years ago and, fairly, well, it was part of the PrivateBancorp, was also a wealth operation. Nothing, it wasn't too, too large. But how have those businesses evolved and become more integrated over the past few years? And, and, is there, you know, just throwing it out there, but your Atlantic Trust based in Atlanta, right?
in, yeah, in Atlanta.
Is there any geographic challenge there that's notable, or no?
No, look, we've made a few acquisitions over the course of time. We've been very deliberate about what we acquire. Cultural alignment, excuse me, is key in any of those M&A discussions. I'd say from a leadership perspective, it's come together very nicely across the platform. Geographically, I think we're in a good spot. We've got more investment to make. We've got additional offices where I think we can put people in place and add talent to the portfolio. We've been investing in the talent. Given the dislocations that happened in the spring of last year and in the aftermath, we've been adding talent to the platform. We're an employer of choice in a number of markets where we're well-known. So we've been building out the team that way.
Then I would say probably more, from an operations perspective I alluded it to earlier, we've been on a journey to consolidate the underlying platforms onto a single, consolidated wealth management platform. And so we're in the final throes of that. We've got one more transition to do in the near term. And that'll put us on a sort of leading, modernized investment and wealth management platform, that we think will allow us to, you know, continue to scale the business going forward. But it's you know, we've, we've our retention rates are terrific in terms of, assets. We've grown the business dramatically over the last 10 years, more than quadrupling it since we made the Atlantic Trust acquisition. And we've got room to grow, we believe.
I guess, you know, you and I were talking yesterday, there was a phase where all the disruption took place in the U.S., and that meant a lot more customers coming to you 'cause they're like, "I need something stable in my life," I guess. Has that sort of petered out, or are you still?
Yeah, look, I, I think things have, have in many respects calmed down. You've obviously, any day of the week, you can see something happen. There was some more energy a few weeks ago, with one name. But, like, by and large, it's been, I think, more, more steady at this point. And, and we were, you know, a beneficiary, in the early days of that. And then we've been sort of back to our, sort of BAU, opportunities. And look, people like the stability. They like the story, in terms of what we've built, the commitment to the U.S. market that we have made and that we continue to make, and the strength and stability of being part of a, a large Canadian bank, isn't lost on, on a number of investors.
That brings up a point. Now, when I look at, you know, CIBC in the U.S., I see loans if I just look at the segment disclosures. I'm sure it's more complicated than that, but I see a loan-to-deposit ratio of 110%.
Right.
If you were a standalone regional bank, I would say, "Oh, that's possibly a problem." Do regulators look at you? Well, maybe give me a bigger perspective on your funding in the U.S. and why maybe I shouldn't care about that ratio or look at it in a different context. And then also, do regulators look at you differently? Because you're obviously not a standalone regional bank. You're part of a much bigger entity, and therefore, something like that doesn't really pop up as a concern for them.
Yeah, so I, I think it's important to, to differentiate between the management and the segment reporting versus the legal entity reporting. And I would say regulators are more focused, they don't ignore the management construct, but they're more focused on the legal entity reporting. And so from a management perspective, we show the deposits and loans specific to our segment. But from a legal entity perspective, if you can see it in the Call Reports, our loan-to-deposit ratios would be in the mid-ish 70s% loan-to-deposits. And that's because there's a bunch of funding activity, deposits that are raised by Treasury, deposits from other SBUs that are in the bank but are reported as part of the other SBUs' results, Innovation Banking , corporate banking, all of which contributes funding to the legal entities.
I would say from a regulatory perspective, that would be more the foundational view of what does our loan-to-deposit and liquidity profile look like. We've got very strong liquidity and capital profile in our U.S. entities. Look, that's driven by a number of factors, including it's foundational to our business that we speak with our clients both about lending and deposits. A high majority of our clients do their Innovation Banking with us. That's not by accident. That's about one-on-one conversations with clients.
When we establish a relationship again, back to expectations, promises made, promises kept when we look at what the opportunity is for us from a deposit perspective, and then we look at different areas of the market that are potentially more deposit-rich than others and build capabilities to be able to have that sort of balanced portfolio from a funding and a deployment perspective. So, no, from a because of regulatory matter, we feel very good about our liquidity profile.
Is the wealth business a bit of an untapped source of deposits?
Well, and I should also mention.
Are there undertapped?
It's part of the SBU results, and it's part of the reason that we really like, you know, we like having these businesses together. We see the real synergy between them because as we grow wealth management, we also grow the deposit and funding capabilities that come with that wealth management franchise. And so that's been, you know, a core part of the strategy in building to where we are today and will continue to be the case. I mean, we're six and a half years into this strategy. We are continuing to build and be in build mode, but we see great opportunities going forward.
Then the other deposit topic not a huge one, I don't think, but just to, you know, cross the T, dot the I sort of thing, you and every other bank in the U.S. paid a big, well, assessment, to the FDIC, and we're expecting another one to come. You expect? I know you probably can't give me a specific number, but is it gonna be smaller than the last one?
Yeah, I would expect it to be smaller. I mean, look, the FDIC will make its determination, in due course. I mean, what, what we're hearing is, I think the speculation is that the costs were somewhere around 25% more than they anticipated. So, you know, is it gonna be in that kind of, of range? I mean, we'll, we'll see where it goes. It'll all be subject to their determination, both in terms of quantum and, and timing. But as we're thinking about it, certainly smaller than the, the first one and, I guess, is order of magnitude around there.
Now, the rate cut cycle is obviously the huge talking point now. It seems like an on-again, off-again type of thing. Let's just say consensus plays out with 75 basis points of rate cuts this year, or so. You know, how do you expect your margins to evolve in that, if that's the trajectory? Do they go down and then up, or is it the opposite effect of the what we saw when the rates were being hiked?
Right. Our general outlook is fairly stable margins, and that's in part, you know, a strategic decision that we manage margins for stability. Hratch talked about a bit of this on the Q1 earnings call. You know, given the way the tractors work that we deploy, we expect that to be 'cause we're still rolling off lower rate and into higher rate as we go through. We expect that to be a bit of a help. On the flip side, you know, loan pricing will come down. Most of our book is floating rate. There's some lag to it. Some of it's 30 days SOFR. A lot of it is 30 days SOFR. Some of it is more like 90 days SOFR. So there'll be some level of lag there.
But then on the deposit side, you know, we've been responsive historically. We expect to be responsive here. The offset to that or partial offset is the competition there is out there right now for deposits. So we'll be very mindful about that and how that balance plays out. But between those elements, and, you know, the tractors and the hedging strategy that we use to maintain stability in our margins, we expect and that's what we saw, you know, if you go back to Q1 of 2020, right through till Q1 of 2024, you know, it moves around quarter-over-quarter. Q2 is seasonally a lower deposit month. Our, you know, clients are paying taxes. Commercial clients are paying bonuses. So there's that seasonality component to it. But broadly speaking, we expect to see stable margins going forward.
So margins could be stable, but NII spread income would we should expect some growth there because I'm assuming and maybe you can talk about the pent-up demand effect that your commercial borrowing base is just waiting for rates to be lower to make business decisions and cement them. How you know how do you see that you know latent growth I guess evolving over the next year and a half or two?
Yeah, look, it's a good point. I mean, in the high-rate environment, you've seen certain behavior. I mean, you've seen it in our loan growth, in the last several quarters. Clients have paid down. They're not, you know, utilization rates are lower than they've been, historically. And credit demand and this is an industry-wide phenomenon. Credit demand has been lower. So our expectation is with rate cuts, we would expect to see some level of increase in utilization rates, some increase in demand, you know, broadly. We're staying very close to our clients and listening to what they're doing. But clients have been prudent through this period. They're not building as much inventory. They're making, you know, less CapEx expenditures in the recent past just given the rate environment. We would expect to see some of that recover.
We've also, but, you know, independent of market, we've also launched new capabilities, and we're gonna see some traction in some of those. Equipment Finance is one, that's very connected to our middle-market core franchise. It was a capability that had been on the radar for a while. We started building it over a year ago. We're starting to see that have traction. And so even with a slower market, we do expect to see over the course of the balance of the year some improved loan growth relative to what we've seen over the last several quarters. And then finally, M&A activity. You know, we're hearing a lot more conversation going on, and that's a part of the business as well. And so that's been slower, more recently.
We would expect to see that pick up, as the year goes on, assuming that that sort of trajectory plays out.
The other aspect of the rate cut outlook that comes to mind as an important one is, you know, the credit quality. And if, you know, in the U.S., obviously, if rate cuts just keep getting pushed back, is there a component of your borrowing base? 'Cause I've heard, I've seen, you know, this explanation that some of the impairments we're seeing today are from customers that have been just kinda getting by and, you know, they run out of gas, basically, and the loan becomes impaired. Is that something that could skew the impairments upwards if rate cuts get pushed out even more than what we're currently expecting?
Well, look, I think what we've seen throughout, really, since the onset in 2020 is clients are really resilient. We saw that through the commercial book, really, right through this piece. So they dealt with supply chain issues. They dealt with inflation in their cost bases. They dealt with higher interest rates. And they've been managing. So we're not seeing a lot of pent-up, you could see some credit migration as a result of rates staying higher for longer, but we're not seeing systemic issues in any specific portfolio. There'll be individual names that, as is always the case, may pop up from time to time, but we're not currently seeing that kind of playing out. We've seen people be prudent in how they manage their businesses, you know, adapting to the environment. And we'd expect to see that continue.
So not seeing any significant buildup in, like, from a systemic perspective in the portfolio.
So that was me asking you to put your chief risk officer hat back on for a moment. Now I'll ask you to the corp dev hat, dust that one off. And I, I ask this only 'cause, you know, wanna feel the pulse for, you know, your M&A appetite. Your strategy sounds largely organic. The, Victor's communication over a number of quarters and years even has been pretty much organic, organic, organic. Is that you know, what's the message now in terms of inorganic, growth?
Yeah, look, I mean, it has been an organic, predominantly organic strategy. I'd say that's continuing. We always keep our eyes open for opportunities. We've made investments in the platform that, you know, certainly allow for to help facilitate that to the extent, you know, opportunities would come up. But largely, it's an organic strategy. And we're also balancing back to the ROE conversation. I mean, especially on the wealth side, wealth acquisitions come with goodwill. And so as we balance, you know, the ROE and the growth, you know, there's a bit of a drawdown on ROE in the first instance when you acquire these things, and then you grow into it. And so we're gonna manage all of that going forward, but eyes open, but certainly organic focus.
Okay. Well, that wraps it up for us. Thanks, Shawn, for making the trip and taking the time to talk to us.
Absolutely. Good. Thank you.
Good.
Thank you.