Darko Mihelic, I'm the Canadian banks analyst at RBC, and I'm joined on stage with Robert Sedran, the Chief Financial Officer of CIBC. We have half an hour. I'm gonna sit here and try and get as much information out of Rob as I can in the next half hour. Rob, thank you very much for joining us this morning.
Good morning. Thanks for having me.
For many of you who follow the Canadian banks, you'll be well aware that Canadian banks just recently reported their first quarter results. A lot of what I'm gonna ask is kind of a chance to, it's like kind of getting a second chance at the conference call to sort of follow up and ask some questions of Rob as well as of recent events. I think we'll start at the very high level. One of the things that's been happening in Canada, it's actually happening, I'm noticing everywhere, is this reach for higher ROE from Canadian banks. When we look in isolation at CIBC's first quarter result, it was very high ROE. It was a 17.4% ROE for the bank.
Very high relative EPS growth trajectory. Frankly, the way I saw it was one of the strongest quarters. Obviously, as a sell-side analyst, the first thing you say is like, "Wow." Like, what is sustainable? Where are you maybe punching above your weight? And what's left to come? So I know it's a kind of a softball to kick off, Rob, but I wanna just sort of kick off and let's get your thoughts on the strong quarter and what's left to come. Where are you punching above your weight? How should we think about a 17.4% for Q1?
Thanks for that. I don't, you know, punching above our weight is an interesting phrasing. Maybe I'll stick with what we feel is going right. What it is for us is just the compounding effect of disciplined execution on a strategy that we think has been working quarter in, quarter out. When we look at the client segments that we've chosen in every one of our businesses that start with the retail side, focusing on those affluent current clients, having the right conversations, supporting our people with the right technology to enable them to have the right tech, those right conversations, it's leading to better, deeper client relationships, better, deeper customer service scores and the volumes that come along with it. We're seeing strong growth in the retail side.
That plays through in NIM, it plays through in fee income, and it's playing through in some of the investment story as well. It's a similar story in Capital Markets where we've been targeting our growth and then we're growing on both sides of the border in Canada and the United States and making the right investments in technology to understand our risks, to understand our clients better, and it's just been leading to that strong performance over time. You know, when we think about Q1, it was, there's some seasonal strength to Q1 as there always is. We don't think of it in terms of we're over-earning or punching above our weight.
We think of it more as we've positioned the bank for the upside capture, and we think the relationship strategy enables us to avoid some of the downside capture when the markets turn the other way.
Let's maybe do a bit of a deep dive there in what you just mentioned on the retail side. You know, having better penetration, better conversations. Maybe to start on retail from a more fundamental level, the loan growth. Maybe you can speak a little bit to, how you think about loan growth in the retail business. In Canada, housing market is not doing great. It's relatively soft. We're not seeing a lot of growth in a lot of other areas. What is it specifically that CIBC might be doing there, and how do you intend to sort of compete, in what I would call a muted loan growth environment for retail?
Yeah, I think that's a fair way to describe the retail loan growth environment as muted, right? I think the consumer does feel a little bit on the tired side, given the amount of growth and debt that we've seen over many years. The housing market definitely is sluggish. We've made the decision, you know, before even this started years ago, to de-emphasize a little bit the mortgage product in favor of more of the transaction account, whether it's the checking, the savings, the credit card, because we think it's a better way to acquire client. We think it's a better way to deepen and have a better affinity for your bank. I mean, you know, you ask somebody where they bank, they don't typically tell you where their mortgage is.
They typically tell you where their payroll goes, where their, you know, transaction accounts is, the one they interact with every day. It's where you build more of an emotional attachment to the individual, where you get to know them better. There's a richness of data that then you can use to help tailor financial advice and help tailor financial products for them. When we think of the overall loan growth in retail, like we're very comfortable lagging market in residential mortgage. We're not, we don't wanna be too far from the pack. It's never a good idea to be too far from the pack. If we're in that 4, 5, 6 spot instead of the 1, 2, 3 spot in mortgage, we're perfectly happy.
On the flip side, we're adding, like, our customer acquisition channels through the credit card in particular, and our Costco partnership is one of those areas, has been robust, and we're finding that what we're getting through that channel is a digitally engaged customer, you know, and generally affluent customer as well, and we're finding the ability to deepen those relationships with them from there. When we think of overall loan growth, especially given the mortgage market just generally, it's gonna be in that low single digit range. Now for us, by design, it's a little bit more biased towards a different product set.
You touched on something else there, which is like we're so focused on loan growth, but there's deposit growth and so, two questions come to mind when I hear your answer when you said, first of all, in mortgage growth, we're 4, 5, 6 spot, we're fine. Where do you wanna be number one?
We like the money inside of the business, right? Like when we think about you acquire a client. You bring them in. We've invested a fair bit in a proprietary, we call it CIBC GoalPlanner, goal planning software that we've empowered our front lines with. When a customer comes through these channels, they inevitably we internalize assets. You know, 'cause remember, you know, it's not just the loan growth, it's not just the deposit growth, but it's the asset management side as well. The fee income that comes with selling a wealth management solution, and building that financial plan for people inevitably brings assets from the outside as well.
You know, we wanna be strong on the deposit side, we wanna be strong on checking account growth because, again, that's the one that it's not just the profitability, but it's where the affinity and it's where the transaction happens. On the money side is absolutely where we're more focused.
One of the things that we did see in retail, we saw some fairly hefty NIM expansion. I think what was it, 10 basis points quarter-to-quarter. I think 17 basis points quarter-to-quarter in U.S. commercial and wealth. We've seen an awful lot of NIM expansion at CIBC. Now, you cautioned a little bit about seasonal for Q2, but generally your view is stronger NIM. Maybe we can talk a little bit about, you know, your optimism on the NIM and what might change your conviction level on NIM expansion.
Yeah. You know, people look at the NIM, and it's almost synonymous with the so-called tractoring strategy.
Mm
the hedging and positioning, and they focus very much on, well, rates were low five years ago, rates are in a better place today. That's a tailwind that's going to expire, and that's absolutely part of the story, right? You know, when we think about our margin expansion that we have seen, part of it has been driven by that structural tailwind as we've been reinvesting at higher rates. I think the part that sometimes gets forgotten is the business mix component of this. Everything that I described to you in terms of our retail strategy, as an example, is all margin enhancing, right? Like, that's a better margin product, it's a better experience for the customer. It's the checking account versus a term deposit. It's credit card versus mortgage. All those things tend to be positive for margin.
The same is true on the deposit side where you know the growth in the deposits generally. It brings net interest income along with it. The margin has been expanding partly because of the tailwind from the interest rate environment, which who knows what's going to change on that front. You know, I would have thought historically, when you saw what happened last Friday, the rates tend to go down. Rates managed to go up. We don't pretend that we're smarter than the yield curve. We're just gonna keep rolling our hedges and continue to play that out. The business mix component of this is where we still have the confidence that that's an ongoing thing that we're gonna continue to pursue.
If the mortgage market was to pick up, and again, we're not, you know, we're not looking to lead the mortgage market, but if the mortgage market picks up and our growth in mortgages were to pick up along with it, that could have a bit of a NIM impact, a net interest margin impact. That's positive to net interest income too, right? Like, it's not a goal of having the highest NIM possible. We're trying to grow a revenue line. If the market, if the dynamic shifts in terms of customer preference, you know, we're not gonna force it to make sure that we're still building that NIM. We're gonna make sure that we're doing what's right for the customer. We're still confident that the underlying strategy.
Like, we look at our NIM performance as a manifestation of the strategy we talk about. It's a proof point that we're actually doing what we say we want to do.
Just to go back to the tractoring, 'cause you mentioned it. We're all familiar with tractoring. In Europe, they call them structural hedges, whatever the case may be. For all intents and purposes, from what we look at when we look at those graphs, it seems like it peters out in 2027. The question that I often get from investors is, "If that's the case, Darko, like, that means a tailwind is sort of dying midway through 2027." If you don't get balance sheet growth, I'm saying balance sheet growth, not loan growth.
Yeah
Should we be prepared for slower revenue growth in 2027? How do you combat that?
Yeah, I think it's possible that you're gonna see that revenue not grow as rapidly if the loan growth doesn't come. You know, I think we delivered 15% revenue growth in the most recent quarter, and you know, we're a Canadian bank in a mature market. I don't think we're. I'm certainly not up here on stage suggesting that we're a 15% revenue growth business for the next, you know, forever. We would expect revenue growth to slow from the levels that we've hit. What we focus on is making sure we're maintaining that operating leverage, making sure that we're maintaining the right investment profile so we can continue to deliver the earnings growth. We target for the medium term, we target 7%-10% earnings growth. We've been delivering well above that.
We target that 7%-10% earnings growth with an expanding ROE. We think even if revenue growth is to slow, we can still deliver on that 7%-10% earnings growth and still deliver on the higher ROE.
That's a great lead-in to the next question. You know, I'm covering all the Canadian banks. Some of them are aggressively taking some restructuring charges, really talking about pulling and widening out operating leverage. We haven't really seen that at CIBC. I think it's 10 consecutive quarters where we've seen operating leverage 4%. I mean, it's been really high. Maybe asked differently, what is a reasonable level of operating leverage, and what levers can you pull when we get to a slower revenue growth environment?
Yeah, I mean, it's an interesting phrasing of the question that we really haven't seen it at CIBC, 'cause we have inside of CIBC. I will say-
Mm-hmm
You know, as much as we haven't reported any restructuring charges, like, over the last four quarters, we've had over CAD 150 million of severance baked into our numbers. We've had some software write-downs baked into our numbers. We've just had the strong revenue environment that's allowed us to power through. Rather than, you know, thinking of restructuring or rather than thinking of operating efficiency as a program, it's a bit of an always-on function for us. We show it every quarter in our slide deck what we're after in terms of efficiency. We ask for a 2% efficiency target from every group in the bank, both the functional groups and the front office. Just continue to find these efficiencies so that we can recycle them in and protect that operating leverage. We are making.
You know, we do these things. We retool on the fly, if you will. Particularly when revenue growth is strong, we should be doing these things on the fly. We think we have the ability to do it. You can see the revenue environment, the visibility into 2025 and into early 2026 revenue was reasonably good. We've decided to advance some spending and advance some of these things. You know, I'm not suggesting that we'll never take a restructuring charge, but I. We don't like them. I think the idea, if you're going to take one, it has to be very purposeful, very targeted, and very transparent on what you're doing and what you're taking out and making sure we're reporting back to the street on exactly how that rolls through.
whether we have one or not, and again, I you know, as a CFO, you never like to lose the flexibility of maybe taking one. We're not planning anything at the moment. It does come down to having that always-on function and making sure that you're taking the cost out as you go, particularly when revenues have been as strong as they have been.
You mentioned 2% target efficiency from the groups. What does that bake into for an overall kind of operating leverage?
Well, I mean, you know, we target that kind of 1%-2% operating leverage.
Right
... annually. We've got a 10-quarter winning streak, as you noted. It doesn't mean we're gonna get it every quarter, but certainly on an annual basis, that 1%-2% is what we target. When revenues are as strong as they are, inevitably you're gonna have a bit more than that.
Maybe we'll touch on credit quality, because it seems like the natural next thing to sort of chat on. I think the one thing that sort of came out this quarter was very clear was a mild deterioration in the consumer space. We saw 90-day delinquencies were up sequentially across the board in Q1. You know, we're seeing it in mortgages, credit cards, you name it. I actually thought on the margin, yours wasn't quite as visible as some of your peers, but nevertheless, it's there. You know, how should we think about that? Are there any reasonable risks here to your PCL guidance for the year?
I mean, it's a continuation. In the retail bank, it's been a continuation of the trends that we've been seeing. It's been a gradual erosion that is consistent with the underlying economic data that we've seen. The unemployment rate, other than the odd surprise improvement, has kind of been bouncing around in the same range. GDP on a per capita basis has not been all that inspiring. The economy's not, you know, is not performing that well. We've had the impact of lower interest rates start to buffer that a little bit. I do think you need better economic growth to start things improving faster. You know, like everything, we always have to sort of cut the mortgage away from the rest of the book, right?
When you look at the mortgages in Canada, delinquency rates have been rising, particularly in some of those vintages from that, you know, very low interest rates and some of the frothier housing markets. We're seeing the delinquency rates rise, but we're seeing a loan-to-value on these. The impaired loss portfolio is still, like, under 70%. I think it's around 66 or 67%. We're not expecting to take any losses on that front. Notwithstanding the fact that there's a formulaic component that you add some impaired losses, we're not expecting to see them roll through in actual losses. On the credit card book, we're seeing a little bit of an increase in impaired formations. We're seeing a bit of an increase in loss rate.
Even there, it's. I don't wanna call it plateauing, but it's not going up all that rapidly, and we're hoping that as you know, you get some trade certainty, we get a little bit better, some of the stimulus starts to come in, that by the second half of the year, things start to improve. On the retail side, it's been a story of gradual increase in delinquencies, gradual increase in losses. We suspect it'll be a similar story when things crest and start to head the other way. Don't see an inflection point. On the commercial front, we had a prolonged period of very strong credit quality. This most recent quarter, we had a few individual credits. They're completely unrelated to each other, different industries, different sides of the border.
Just the things that happened, things that we had been watching for a while all seemed to land in the same place. We're what we had guided to mid- to low-30s in terms of our impaired loss rate. We did 35 in the first quarter. We still feel comfortable with that guidance for the full year. This year, more than most, there feels like some path dependency to all of this, like the USMCA and now with the war having started and you wonder what happens to oil and inflation and interest rates and the rest. For what we can see and for what we see in our own book, we're still comfortable with our guidance.
Yeah. Well, we're definitely gonna touch on some of the stuff. I mean, why don't we touch on it now?
Sure
How do you know, recent event, you're the CFO, what do you do first? How do you see this affecting, if at all? How should we think about it? I'll leave it open-ended. How about that?
Yeah. I mean, listen, I appreciate you have to ask the question. I hope you also appreciate that it's the answer's gonna rely heavily on it depends. You know, I would say. Maybe it goes without saying, maybe I'll say it anyway. We don't have any direct exposure to Iran, right? So that's an easy one. You start to think through the indirect exposures around what the oil price and interest rates and inflation, and that's where the it depends comes in, and it really depends on how long whatever is happening happens. You know, when something like this first happens, this is why we have invested significant dollars in our risk systems, particularly in Capital Markets. You establish your risks. You know where you are. You're in a good place.
We felt comfortable with our positioning. It immediately turns into a client conversation, right? We have a strong CET1 ratio, 13.4%, going higher on a pro forma basis to 13.7. Strong liquidity position. You know, we didn't have to be in the markets from a wholesale perspective. All of that stuff just allows us to turn to our clients. Then you start game planning a little bit, like how long can this go on? If revenue is going to be, you know, hurt by this, if wealth management revenues are going to be hurt by a prolonged slowdown in the markets or a downturn in the markets, how do you protect that operating leverage that we've already talked about?
What's on your list of things you can now, instead of accelerating, you can start to push back a little bit to make sure you're using the gas and the brake a little bit in terms of investment dollars. You know, we haven't done anything yet on that front. I mean, so far, it's just kind of watching and seeing how long this will play out. You start to build the playbook. We feel comfortable that we're in a good place. It's been more about, you know, what do clients need and what do clients want to do.
Similarly, though, you know, you kind of feel compelled to ask about the other thing that's quite prevalent today, which is private credit. You know, sometimes what I sense is that, you know, things sort of happen, and they sort of happen all at the wrong time. We've got AI concerns, private credit, and now the Middle East. How should we think about private credit for your business? I do get a lot of questions on it.
Yeah.
You do screen as having a bit more than some of your Canadian peers. Maybe you just want to touch on it and how you're thinking about that right now.
Yeah. You know, I'm going to start off by saying we're comfortable with our private credit exposure. The warehouses that we have in place are with strong sponsors. They're very diversified underlying. They're performing well. And maybe most importantly, we've got a group of seasoned, experienced professionals, both in the front office and in risk management, that have been around the space for a long time that are running our books. We saw a period of pretty significant growth. Like, as you know, as you think about, this is sort of like the market has moved from the public to the private by and large, and we're in a lot of ways following our clients as well. Some of these exposures that we have are key toward building a deeper relationship with these institutional clients.
Like, it's just one of the products that we have with some of these high-end, you know, higher-end sponsors. We're comfortable that the portfolio is performing well. When we think about private credit, it goes through the spectrum from quality to, you know, some of the lower ends that we do not participate in. We focus on making sure we're comfortable with the structures. There's a good amount of subordination involved in all of the positions that we have. You know, we're watching it closely. I will say we've grown it. I think it's a more mature business from here. We're expecting growth to moderate.
We still think it's an opportunity to grow, but it's more of a measured pace of growth that keeps pace with the rest of the bank rather than something that's going to be outsized growth from here.
Now, when you say it's measured pace, do you mean that this is something specific that CIBC is doing? Or, because, I mean, at the CEO conference that we had in January, one of the CEOs of the Canadian bank stood up and said, "You know, our private credit outfit is not getting any more capital." Right? So, you know, I don't obviously sense that's what you're saying, but is, when you say it's moderate growth, are you saying it's just now an industry thing, or is it something specifically that you-
No, I think you could grow it faster, right? I think for us, you know, it's a word we use a lot, and in a lot of different ways, but the word balance, right? Like, we're not looking to become, you know, a giant private credit bank. Like, this is. It's an important part of our relationship with our institutional client base. We think we are well-positioned with them, but we could grow it faster. For us, it's not even a question of we don't like the risk profile of it. It's just about balanced growth. We wanna make sure that we feel like we've got four growth businesses at CIBC. We'd like them to all grow.
They're never gonna grow at exactly the same rate in any given year, but we would like them to grow over time in the same rate. We like our business mix. The business mix works from a capital generation, capital usage perspective. It works from a liquidity perspective. It works from a risk perspective. When I say it's moderate, it's because we're just expecting it to grow a little bit more in line with the rest of the bank.
Okay. We will take questions from the audience if anybody has any. If you want, throw up your hand. Otherwise, I'll just keep marching along with my questions. No? All right. You mentioned, you know, you threw some capital in there. Let's talk about capital. You know, one of the things that's obviously happened in the Canadian banking sphere is lots of buybacks. Your buybacks, what, 8 million shares in Q1?
Yep.
Versus 3.5 in Q4. Maybe we can talk about the level of share buybacks. Like, what do your current capital plans consider? And what if RWA growth really remains muted or starts-
Yeah
to pick up? Like, maybe you can talk a little bit about those levers and what your intentions are on the buyback.
Yeah. The first priority is always organic growth, right? We think over time, we're gonna have opportunity to deploy organically. Having said that, when we launched the buyback 18 months or 21 months ago, the CET1 ratio was at 13.4. We bought back roughly 30 million shares over that time, and the CET1 ratio was at 13.4. You know, as the ROE rises and we're generating capital, it becomes a nice problem to have in a lot of ways. The buyback, you know. You mentioned the difference between Q4 and Q1. Part of it was the first buyback had expired.
We didn't have the approval for the second one yet, so Q4 was a little bit light. In the most recent quarter, we increased the pace a little bit because we saw the capital generation coming. You know, we had talked about the operational risk weights 30 basis points. We use the buyback as a capital management tool, right? We wanna be regularly in the market. We're using it to manage our share count, using it to manage our excess capital. But it's not a call on the share price, and we certainly don't wanna be a buyback bank. We do think over time we'll have the opportunity to deploy. So that 2%-3% buyback feels like the right ballpark for us right now.
Something that if organic growth or when organic growth picks up, we can toggle back and slow down a little bit to deploy the capital more productively. In the meantime, you should expect us to remain active.
You're getting some capital here in the next quarter, right?
Yeah.
I think it's this quarter, right?
30 basis points this quarter, yeah.
30 basis points of capital. You know, you mentioned you're at 13.4 after 30 million share buyback. Well, we're getting more.
Yeah.
Right? It still doesn't change the calculus for you.
No. I think we don't want to be a disruptive force in the market, right? Like, I think we want to be a regular participant, a regular buyer of our own shares as we're managing the share count. But I don't think we want to get to that point where we've got, like, a 5% buyback going. I do think over time we have the opportunity to deploy. Having an excess, it doesn't feel like a scarce resource at the moment. But, you know, common equity is a scarce resource. Having an excess of a scarce resource doesn't feel like a bad place to be.
You mentioned that the share price wasn't part of the calculus. Is that how we should think about this moving forward?
Yeah. I mean, listen, I think we'll leave the share price to you folks. You know, we're buying back stock as a capital management tool. I don't wanna get into a position where we're suggesting that the buyback is on 'cause the stock is cheap, and the buyback is off 'cause it's not. You know, we're trying to manage our capital position, trying to manage a balance sheet, and we'll leave the valuation to the market.
Reasonably speaking, now that you're getting the 30 basis points of capital in Q2, you're gonna continue and march on. In this low growth environment, I mean, does 14% sound irrational to get by the end of 2020s? I mean, our modeling gets you at a very high level.
Yeah
if we maintain the current. What do you see as a-
I mean, listen, we're trying to grow our earnings between 7%-10%, and we would like our ROE to continue to move higher. We've been accomplishing both with a heavier capital load than we think we need to carry. If to the extent that we have, you know, a little bit more capital on board, particularly in what is a very uncertain environment, like it's nice to have a strong balance sheet. It's like a strong liquidity position, a strong capital position means that we can execute our strategy under pretty much any macroeconomic outlook, and continue to grow our bank. We don't wanna be too short-term focused in terms of. Yeah, I mean, could it get to 14? It's possible, as.
You know, we're not gonna do anything unnatural to avoid that from happening, right? Like, we're gonna continue on executing our strategy, growing our client base, growing our earnings, and growing our ROE. If all that drives a bit better higher capital ratio, I think that's a feature, not a bug.
Inorganic deployment, couple words on that.
Yeah. I mean, it's a tuck-in. Like we use the word tuck-in very explicitly, right? Like I think particularly in the U.S. market, it's a focus strategy. It's commercial banking where we think we have a lot of opportunity to deploy organically before some of the bigger players even realize we're here. And we think on the wealth management side, tuck-ins is the best way to go simply because, A, of the amount of goodwill you bring on for something larger, and B, the culture that you disrupt if you bring on something larger. Tuck-in in the wealth management space is something that we, you know, we actively look around for. But our acquisition appetite is quite limited right now.
Now, one of the things that we heard in January and, you know, obviously through reporting season is we saw really good strength in Capital Markets businesses. It really feels to us as modelers of the business, it's difficult to model continued high growth rates. Yet it's something that a lot of people suggest should happen. Maybe you can just touch a little bit.
Yeah
On the very high growth rate you've seen in your Capital Markets space, the tailwinds that you're seeing, and how we should think about that business overall. Like how do you think of it as a CFO, the kind of growth that we should expect from Capital Markets notwithstanding having spectacular results from the last few quarters?
Yeah. It is a client-led and connected business for us, and it's one that I would suggest there's two components to it, right? There's a cyclical component where obviously the markets are conducive to strong revenues. There's also for us a structural component to it as we're building out our platform both in the United States and internationally, right? In Canada, largely a mature market where we feel like we've always gotten more than our fair share of revenues, and we continue to get more than our fair share of revenues given our size. You know, the U.S. now is responsible for between 35%-40% of revenues for that business in any given quarter, and it's in a lot of ways adjacent to what we have.
Right
In the Canadian business. It's not... You know, we're not gonna be all things to all people in the U.S., but we continue to deepen in verticals where we would like to continue to grow, including in cash management. Like we're, you know, we're adding technology, we're adding people, we're adding the right systems, and we're seeing the growth come from it. A lot of that is then translating into some growth in Europe and Asia as well. Not as meaningful part of the platform, but there's parts of the business where you need to be global to be relevant. We think of things like energy transition and energy infrastructure, some of the big infrastructure projects. Those are just things that we need to continue to invest in. We're building a connected platform.
It's connected to the rest of the bank, by the way, right? Structured notes has been a very strong grower for us. That's just sells into our wealth management organization. That connectivity is what manages and controls the risk profile as well. It's a good return profile. It's a 29% ROE this quarter. I'm not suggesting that that's what it's gonna continue to be, but it's a strong return on equity, a strong mix ratio. I think we're very happy with what we built. It's gonna continue to consume capital for us.
We're running out of time, so quick key message you wanna leave everybody with?
Yeah. Listen, we're, you know, we're just focused on executing our strategy, and we've been very clear on what that is. You know, the compounding effect of that, we think we're seeing the benefit in our results, and we expect to continue to see it. Thank you for your interest in CIBC.
All right. Rob, thank you very much. Great.
Thanks, Darko.
Thank you.
Thanks, man. Appreciate it.