We're ready to continue with our bank conversations. It's my pleasure to welcome to the stage Victor Dodig, President and CEO of CIBC.
Shake your hand again.
Hey, Victor.
Shake it again.
Here, please sit here. Good to see you. I hope you had a good summer.
I had a great summer.
Not over yet. Is that right? I've been thinking it's over for a day or two. You got kids going back to school, you feel that way.
That's right.
Victor, a lot of momentum for your stock. I wanted to start by talking about ROE. It's definitely a topic that I've been doing a lot of work on, a topic I've been speaking to your peers today about. Your 16%+ ROE target is a challenge to meet. You've been very vocal about that, given higher capital requirements, and they changed on you. It is understandable from that perspective. The question is, what's the path to getting above 14%? How do you see the building blocks to get there? You still have confidence in that.
Thank you for being here. For those of you who've invested in our bank through our journey, I particularly appreciate it. For those of you who are considering, I'm grateful for that consideration. We've been working really hard as a leadership team over the better part of a decade to get CIBC to its rightful place in the Canadian banking landscape by having a very client-focused strategy. Your ROE question is, of course, on everyone's mind. In fact, our leadership team thinks about how do we get to our EPS target of 7%-10% and how do we enhance ROE? We think we need both of those to get the multiple expansion on a price-to-book basis and a price-to-earnings basis. That's been working over the past 12 months as we've gotten to a better place.
We believe now we can continue to enhance on both fronts. When it comes to ROE, this last quarter we reported 14%. How do you think about ROE going forward? We think about how we deliver a premium ROE to our investors. We think we can do it in a number of different ways. One is, foundationally, our strategy. The strategy that we laid out on investor day to continue to show meaningful progress in the affluent, mass affluent segment is working. That is, at the heart of it, our Imperial Service, but also our wealth management business. Those businesses are capital-light. They, by definition, have an attractive ROE. That part of our strategy is working.
As we get into a better place in the U.S., where ROE has been single digits for the last number of quarters for a variety of reasons, we see that improving. You saw that improvement this quarter. Our leadership theme there is very focused on more wealth, more deposits, more ROE-enhancing business. Our strategy is core to driving that ROE to a better place, to a premium place. The second piece is how we run our business. We run it on a very connected basis. CIBC is a one-team horizontal approach. We think about how we can serve our client in every part of our bank. The deeper the relationships through what we call connectivity, the higher the ROE of those relationships. We are not leading with products. We are leading with relationships. That relationship strategy is paying off.
The third piece is just our investments in technology. What you saw leading up to this period of time were some significant investments in the backbone of our technology. We were pretty clear to all of you that we think we've reached the peak in terms of growth. We'll continue to invest in technology. We'll see some scale from that strategy meeting technology as it's been implemented. That should enhance ROE. Finally, we've announced a share buyback. We issued shares for the last number of years through our DRIP program. We want to see the number of shares outstanding decrease. What's the right level of capital to operate at? How does that correlate to ROE? We think about it as the north of 12.5% zone for a variety of reasons. Right now we're at 13.3%, which is for us a high point.
We can put that capital to work in terms of a buyback as well. All of that should get us north of that 14% zone.
I want to talk about capital deployment.
Sure.
Maybe first talk about Canada. An interesting thing happened this quarter. Canada surprised to the upside, I think, pretty much across the board. CIBC was no exception and took the market a little bit by surprise in terms of the resiliency of Canada. I think we've kind of been overly pessimistic on Canada, maybe just a general malaise out there in the broad society. The question is, did this strength surprise you? I know there's a few things going on here. Maybe if you could approach it more from a macro perspective and then also from some of the more micro changes and continuous improvement you're making in your business. Just from a big picture perspective, should we be more optimistic about Canada? How do you see maybe not so much the challenges, but the opportunities here in Canada from a big picture perspective? Are we underestimating that?
I think for those of you who know me well, I'm a big Canadian patriot. I think we've got everything the world needs. We just need to do a little bit better. We have the ability to feed and fuel the world with our energy and our agriculture resources. We just need more Canadian ideas and innovation. We're going to get our GDP per capita up to where it should be. I will say that from a global perspective, the best place to be in banking today is in North America, particularly in Canada, the United States. They are highly integrated economies. I think that the developed world central banks are engineering a soft landing, some to varying degrees of success. I think that we're seeing that emerge in the Canadian market. I think you're seeing that even emerge in the U.S. market.
That all plays to our strengths because of our footprint here, because of our footprint in the Canadian market and our footprint in the U.S. Look, I do not own the economy. I do not own what the central banks do. What we do own at CIBC is our strategy and our ability to execute exactly like we have laid out for you on investor day, to focus on the profitable segments that we think will generate meaningful return, to focus on the pipeline for the future so that we have clients that are newcomers and students that have a tendency to become affluent into the future. Even if that number is decreasing because of immigration policy changes, we still have a leadership position there to focus on how connected we are as a bank and to focus on continuing to simplify the bank.
That focus on efficiency is something that will also drive a better outcome. Yes, Canada is in a good place, relatively speaking. Canadians have managed their resources judiciously. Look, I look at the Canadian consumer and I see them as three groups. One are the savers who are benefiting from high interest rates. As interest rates come down, they'll put their money to work in the market and in other investments, which is what we need. At the other end, which is where you see the stresses, is where the Canadians who are trying to make ends meet each day. We have to be mindful of that, both as a bank and as a society. Then there's a group of Canadians in the middle, many homeowners, many worried about the wealth effect on their homes, not so much the credit deterioration, but the wealth effect.
I think these interest rate increases that I believe will have started to get set into motion will be welcome relief. We'll engineer that soft landing. I'm happy to be in this part of the world as a bank.
I wanted to talk about something you recently said in terms of not willing to trade off volume for profitability, profitability being the priority at the expense of market share. I think I have that right. I wanted to talk about it in reference to the mortgage business in Canada. We've been talking a lot today about the competitiveness in that business, the hyper-competitiveness, maybe even irrationality in terms of pricing in that business and how you can navigate through that. Where that line is between market share and profitability is you're managing through a very significant part of the business for CIBC.
We have a we're the Premier League of banking in terms of competitive set. The competitors that we have are all formidable in the Canadian banking landscape. I will tell you that our anchor is not how are we doing in the mortgage business. Our anchor is how are we doing building relationships with clients? And can we attract those clients who value relationship-oriented banking? If they do not, can we actually put them into our digital channels where price sensitivity may be a bigger factor in their decision-making? What is really important for us is, A, deliver consistent performance in terms of our financials, stick to our strategy day in and day out, do not get caught up in the aggressive pricing game. At times, that might mean you lose some market share, but you should benefit margin.
That is what you're seeing in our most recent quarter results. As the market and the mortgage market begin to normalize, I mean, it won't grow at 2% if interest rates go down. It'll start to grow at a more robust level. We want to make sure that we're right in there performing consistently in terms of our overall ability to hold market share but bring the right kind of clients to our bank. That is getting increasingly more codified in terms of how CIBC does business. You see that in commercial banking. You see that in wealth management. You see it in capital markets. You see it in our U.S. business. You see it in our Canadian business. Of course, you see it in our personal business bank.
I want to talk about the deposit side of the balance sheet. If we talk about mortgages being very competitive, deposits also an area of intense competition as banks are all looking at the same thing in terms of wanting to grow deposits. How do you win in this intense competitive environment? I have a follow-on question on that.
Technology plays a role. Making it easy to bank with us is certainly an important factor in terms of day-to-day banking. People will place their deposits with those who have less friction in their banking experience, being competitive on price but not negative on price in terms of building relationships. I think that whole way we go to market in terms of engaging a client with a plan, with a broader financial picture, you do not get into the duke it out on GICs kind of mode. That does not mean we do not do that from time to time because we do not want to lose business. I also see clients that as rates go down, I said this a little earlier, you see the savers are starting to put money into the market.
The first wave of that money that we've seen is in managed money, particularly in bond funds. Our team was very astute in launching a portfolio of bond funds that really attracted that client money because they saw the benefit of a declining rate environment. I think the next natural evolution will be more into the equity markets over time as well. Not losing share on deposits is really, really important, being sufficiently innovative on technology to attract clients. We're holding our own. More recently, as Rach noted in a recent webcast, we've seen our demand deposits in our personal bank grow, which is really what's key for us.
You touched on as rates come down, the money in GICs starts to flow into investments. What is CIBC doing in order to make sure that that money stays in the CIBC ecosystem?
We've done a number of things to invest in our affluent strategy. One is we've reorganized our entire retail leadership field for us to actually have a focus on our core clients and our mass affluent clients. We've invested in, as I said in last year's call, but we continue to make progress last year's meeting on digital financial planning. CIBC Gold Planner is a real game changer for us in terms of actually having a codified digital footprint of a client's financial plan that's easy to update, that results in more funds managed growth, that results in a better NPS. We've also implemented new technology so that the fund flows that you're seeing are not just coming from mass affluent. They're also coming from our core segment because it's easier to onboard a client.
Advice and planning and making the technology easier for our advisors is also driving a better outcome. At the back end, to service our clients, we're also making sure that we're segmenting our service levels so that our clients are waiting an appropriate time, an appropriately short time when they have questions for us.
Related question is just the connectivity between commercial banking and wealth. I mean, you've definitely emphasized the goal of building out that connectivity. The question is, can you talk about the successes you've had there?
Sure. We are unique as a bank. I know that's sometimes frustrating for you as investors to say, why do you organize it this way? Why don't you just show us P&C? We show you P&C in the appendix. We operate the bank as a private economy component. The private economy component is commercial banking, which is largely banking entrepreneurs and managing their wealth, the wealth of wealthier Canadians whether entrepreneurs or executives or medical professionals or other professions. That strategy is working. The whole idea here in the business side is there's a generational transfer of wealth that's going on. For those of us who've been in this business for decades now, we talk about it. It's actually really happening. You see it happening in the mortgage business.
Not to go back to mortgages, where Benny Tao has been quite clear that many, many new homeowners are getting assistance from a previous generation. Canada is becoming wealthier. In the business segment, you're seeing businesses sold, or we have the opportunity to manage that wealth. Over the past five years, on average, we've seen about CAD 3 billion a year flow in Canada in that business. We've also organized our U.S. region in the same way where commercial and wealth sits together. In the Canadian business, we're further along because it's a more mature strategy. Over a third of our commercial banking clients do private banking with us. In our CIBC Wood Gundy franchise, it's over 50% of our clients, closer to 55%. In the U.S., it's at 17%. You're going to see that U.S. number improve.
We will continue to work to franchise those clients who are in that private economy segment with success. That also is ROE enhancing, by the way.
I wanted to talk about credit. We came into the year worried about your U.S. office exposure but continue to see lots of shrink, as you've guided to. I think it's been a very successful sort of management of this problem. I'm curious if you can kind of give us a little bit of insight into how you were able to manage this problem, get your hands around it so effectively, and maybe also sort of what you've learned from this experience. Maybe we'll start there, and then I will.
Sure. It was not due to poor underwriting. Nobody anticipated that lending 60% to loan to value on a Grade B building would wipe out that value after COVID and that one particular segment of clients, the institutional real estate segment, basically walked. Those who are agents versus principals. Principals behave differently both in the United States and in Canada, even more so in Canada in terms of ownership and working through that building. That was a bit of a learning experience. It was not the deepest relationship with the institutional investors. It is a bit of a wake-up call to say that segment would not be a segment that we would bank going forward, particularly in the U.S.
I have to give great credit to our leadership team, both the business leaders and our risk team, to work around the clock to get ahead of the curve to say, this is an issue that we want to get behind us as soon as possible. I think we have, relative to many other banks that are in this space, I feel like we're in a very good place now. Frank was quite clear that, and Shawn was too, that the U.S. institutional commercial real estate piece is more or less in the rearview mirror. You might have the episodic here and there, but that's all accounted for in our allowance provisions for the most part. Now it's about how do we focus on the business going forward. Frank's also been clear that we see our impairments being in the mid-30s.
He's been clear about for a couple of quarters around that. He's been clear about the fact that you're likely to see the Canadian consumer normalize, particularly on the unsecured credit side, almost exclusively on that side. That refers to that segment of our population that sees the greatest amount of stress. That business and government's in a good place, and that U.S. real estate is a good place. We should operate within that zone.
Focusing again on the implications of the U.S. credit experience, I mean, you're clear in terms of not an underwriting problem. The real question that I get from investors is just, what are the implications for growth in that business? Obviously, it's clear, and you've said it explicitly in terms of a shift in business mix. What about overall growth? How does this experience impact the outlook for growth in the U.S.?
Right. There is a definite pivot in the commercial banking space away from institutional commercial real estate into more of a diversified portfolio, whether that be healthcare, equipment, finance, and other sectors that we are good at. You already saw that in the last quarter, that component of the portfolio grew while the other shrank rather dramatically. The net-net was a benign loan growth number. What you are going to see a focus on from our team in the U.S. is how we contribute to the overall ROE and EPS growth agenda of our bank. Over the last, you look at our U.S. performance over the last Bank USA performance, that ROE is too low for our liking. It started to approach, I think, 7.8% this last quarter. We have to get to a better level.
The way you do that is you lend to a client that will give you deposits, a broader relationship, and a credit they're comfortable with, but also increase the wealth management piece. As I said to you, our Canadian commercial business is 34% of clients doing private banking with us, private wealth with us. In the U.S., it's half that. Can we grow that business? Can we grow the wealth management business? We've invested significantly in the U.S. business, in the infrastructure, as well as in the wealth management platform, as well as in the expansion of private banking offices to major centers to signal to our investors that our strategy in the U.S. is to really drive organic growth. We think that'll drive a better ROE. That'll drive a better outcome. It'll contribute to the overall objectives of the bank.
Sticking to the U.S., is it a reasonable expectation that we'll see year-over-year PTPP growth next year for CIBC in the U.S.?
Yeah, I think it is. I think we have to look at our U.S. business not just as Bank USA, but as our capital markets business and our Bank USA business because it is in its entirety representative of who CIBC is in the United States. If you look at those numbers, the ROEs are better. The growth profile is better. There is a greater amount of connectivity across the two. Yes, I think you can expect that.
This came up earlier today, but just when you speak to clients or just talk about your overall outlook in terms of the U.S. presidential election looms large in the U.S., can we see sort of a more material recovery in commercial loan growth in the U.S.? Or do we have to wait till the U.S. presidential election to see that? Is that sort of an important point we have to cross before we can see more meaningful improvement there on the loan side?
There's no upside to me predicting the outcome of the U.S. presidential election. There is a view that we have that irrespective of which administration is running the United States, we see it as stimulative. We see it as stimulative either from a tax policy perspective and/or a spending perspective. We see that as being good for Canada and good for our U.S. business. Some sectors will clearly benefit more than others, depending on which administration's in office. We see that as a positive.
The U.S. regional banking crisis that we saw sort of unfold, any sort of permanent repercussions to your business, to your thesis on the U.S.?
I think standalone regional banks in the United States are still having a harder time getting kind of lower-cost funding. That is going to restrict their ability to grow. From a CIBC perspective, the capital we have there, our ability to actually continue to have a strong deposit franchise has given us a tailwind in that regard. We think it gives us an opportunity to grow market share organically from those competitors.
One question that I get a lot, we talk a lot about private credit, direct lending, obviously a bigger force in the U.S. market. How big of a competitor is that? How big of a challenge is that as you look ahead in your U.S. business? How much are you running into that, and how big of a stumbling block is that?
I think in banking overall, just to take a step back, one of the biggest challenges and opportunities to banks that have been in business for over 150 years is the disintermediation of banking. At the corporate and commercial level, it's clearly the rise of private credit. It's been allowed to grow. It's been kind of unfettered growth in many ways. Some people would say it's because they don't take deposits, and therefore there's no systemic risk to the system that way. I do think that there are opportunities to work with these providers to lighten a load on our own balance sheet where maybe it may belong on their balance sheets. It's pure math. Can we do that from a relationship standpoint and still hold true to our strategy, which is preeminent in what we do? You can't ignore them.
I think there's opportunities to work with them. It's the same thing at the other end. I mean, there's disintermediation from digital disruptors. And are we well placed as a bank to deal with the digital disruptors? I think we are. We have a direct banking platform in Simplii. It has got several million clients. It has been growing over the last number of years. I think we need to have those answers for the Gen Z client that wants entry-level banking and investing. I think we have those component parts. Can we do a better job of delivering that to them? Work with private credit appropriately. Work with that group of clients that over the lifecycle will prove to be mass affluent over time.
It's not a challenge that will impact your ability to grow in the U.S., as you've seen?
Look, it's a challenge if you ignore it. I think it's not a challenge if you pay attention to it. If you pay attention to it and engage in it, I think it provides you some tailwinds.
I want to talk about capital deployment. You touched on it. You announced a buyback. You talked about on the call a focus on organic growth. You made that very clear, talking about maybe opportunistic tuck-ins, but not more than that. I do not know if you have anything more to say on that, but I thought, okay, maybe I will push back a little bit on it in terms of why not do larger M&A in the U.S.? The U.S. is a huge market. You have a strong base there. You could start to extract maybe quite significant expense synergies by combining something with your current platform in the U.S. Most people think that there is a consolidation wave likely to happen in the U.S. Why not embrace that and, from an inorganic perspective, prioritize bigger deals in the U.S.?
Our leadership team has looked at how best to add value to our shareholders. However you look at the math, organic growth is the driver, whether it's the Canadian market and how we can continue to grow profitable market share in the segments that we wish to serve, or whether it's the U.S. market where we've invested significantly to gear up for organic growth. We see weakness in some spots with some competitors. We obviously want to bank the right clients, but we think that is the highest and best use of our capital. In absence of growth, and sometimes you see soft patches of growth like we've seen over the last little while, we will buy back stock. We've issued a lot of shares through the DRIP over time. We've shut that off. We've announced a buyback program.
We think that that's an avenue that's going to be activated today. We like to see the number of shares outstanding shrink over time. Growth and organic growth would be first and foremost, making sure that dividends grow with our stock, activating the buyback. There will be the occasional tuck-in acquisition. We are not taking three steps back and diluting ROE, creating lots of frustration. What is this now? We are going to focus on the strategy that we've laid out. We believe that that organic strategy will deliver the goods.
Very clear. I wanted to just follow up on the opportunistic tuck-in M&A comment and just get a better sense of what you mean by that. I assume this is in the U.S. Is it wealth? Is capital markets something you would be open to making further tuck-in acquisitions in? When you talk about tuck-ins, where are you?
I think our capital markets team is doing a great job of doing organic growth. In the U.S., our leadership position in renewable energy, whether it's advisory or lending, is like top 10. The team is great. We're focused on those sectors where we think we can compete organically. When it comes to wealth management, there'll be team liftouts. We've had a few of those. They work. They work over time. They don't show up in the math right away, but it's attractive math. There may be smaller wealth acquisitions that would fit the bill. The most important thing is that we can grow organically. That is the primary driver.
That does not mean we are blind to opportunities to enhance ROE, but our real goal is to be consistent, to deliver that EPS target that we laid out on investor day of 7%-10%, to deliver that ROE that is north of 14% as we started our conversation with. The best way, and you do not have to be a mathematician to know this, is to drive organic growth and be really smart about your capital deployment. We are in a good position. We have built up the capacity in our U.S. business to be able to do that. Our capital markets business is growing robustly and at a good ROE in the U.S. as well. We feel very pleased about where we are at, not resting on our laurels and just more of the same.
If we can continue to simplify our bank, there is more expenses that we can put either to the bottom line or invest in areas that we think will drive further growth.
I want to talk more about capital markets. You've raised it a few times. It's definitely been an area of success for CIBC on a relative performance basis. Just wanted to get an update here in terms of the strategy here and more specifically the key elements of success over the last little while. It really has been an outperformer relative to peers. How have you been able to achieve that?
It has. I think the capital markets team, the leadership team there, like the rest of the bank, has been really focused on a client-oriented agenda over a decade now, building a client-oriented agenda with leaders that focus on clients, leaders that focus on relationships, leaders that focus on those relationships across the bank. Today, in our capital markets business, a third or more of our revenues, depending on the given quarter, come from a connection to our retail bank and our retail banking partners. It deserves a better multiple. It has a lower VAR for every dollar of CET1. It has a very attractive ROE. It's got leading relationships with the clients that we choose to serve. It, like the rest of our bank, has been a beacon of what we stand for. That now is being replicated in the United States.
No fence swinging, very, very risk-minded, very collaborative, very client-oriented. It is a pride point for all of us at CIBC.
Just talking about or sticking with capital markets, but maybe from a bigger picture perspective, there seems to be a lot of sort of malaise. We talked about malaise overall in people's thinking about Canada. When it comes to Canadian capital markets, there seems to be this view that maybe there's something structural going on here. We definitely see booming deal activity in the U.S. and in Canada, especially on the equity side, much more muted, IPOs, a lot of companies that were public going private. Question for you from your perspective, and you have a privileged position to see this all and to comment on, is just is there something structural here in Canadian capital markets, or is it just cyclical? Maybe another way to ask is, what's your outlook here for the Canadian capital markets?
I think we can all agree that the United States has deeper, broader pools of risk capital than Canada has. I think Canada has probably lost some of its edge in terms of some of those capital pools. We were known as a pioneer in the mining sector way back when. We still have pioneers in the mining sector, but I think mining finance and markets and tradable markets and deep risk pools, they're not where they used to be. That's something that our policymakers should focus on because I think that's what's needed. When I look at sentiment, sentiment is starting to shift in a more constructive way with our clients, whether they be corporate or commercial clients. It's not fervent deal activity is on the horizon, but I think people are starting to think through a new world where money's been repriced.
It will not go as low as where it was. People are trying to figure out what is the clearing price for some of these assets at a different type of interest in a different type of interest rate environment. As rates go lower and sentiment starts to build, you are starting to see that quintessential pipeline of activity start to fill somewhat. I am feeling better about that. Again, we do not own the economy. We own our strategy. I think our capital markets team has demonstrated time and again that we have been able to perform through those businesses, largely because of the connection to the rest of the bank, in addition to our ability to be focused on episodic deal activity.
Finally, we only have a few minutes left, but I just wanted to go back to capital, but in terms of capital policy. Just we've seen tighter capital rules. It's been a factor in terms of the ROE objectives that you have, and you touched on that. The broad question is, have tighter capital rules impacted the supply of credit in your view? We've seen OSFI hold back on the rationing up of the capital floor. What's your opinion of that? Is there a good argument to be made that this should be a permanent change rather than just a temporary pause?
Since the great financial crisis, there's a significant amount of capital that's been built on the Canadian banking system. I think that's a focus on how well it's regulated as well as how well it's managed across the landscape. I think more capital is a good thing in banking, just given what we lived through 15 years ago. I think our regulator is thinking about both stability and security of the banking system as well as competitiveness. As our regulators to the south are rethinking Basel III and what will be the ultimate outcome, I think the Canadian regulator, OSFI, has really thought about competitiveness when it comes to the capital floors vis-à-vis what's happening in the U.S. It's not a forever thing.
It's their obligation to make sure the system is safe and secure and our obligation to make sure that we run our banks that way. We do certainly at CIBC. Is 12.5%+ the right CET1 number that we should be operating at? Currently, yes, with the buffers where they are. If the buffer increases, then we'll have to change that. If the buffer decreases because we go into a recession, then we'll have to change that. I think where we are today, we feel good where we are as a bank. We think that the regulatory decisions that we've made here more recently, particularly with respect to the capital floors, are just a reflection of the reality of what's going on in the U.S.
Okay. With that, Victor, I want to thank you so much for being here. As always, always a pleasure.
Always good to be here. All right. Keep smiling. Thank you.
Thanks, man.
Thanks so much.
Thank you.
Thank you very much.