Canadian Imperial Bank of Commerce (NYSE:CM) Q1 2024 Earnings Call Transcript

Canadian Imperial Bank of Commerce (NYSE:CM) Q1 2024 Earnings Call Transcript February 29, 2024

Canadian Imperial Bank of Commerce beats earnings expectations. Reported EPS is $1.81, expectations were $1.24. CM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Welcome to the CIBC Quarterly Financial Results Call. Please be advised that this call is being recorded. I would like to turn the meeting over to Geoff Weiss, Senior Vice President, Investor Relations. Please go ahead, Geoff.

Geoff Weiss: Thanks very much, and good morning, everyone. We will begin this morning with opening remarks from Victor Dodig, our President and Chief Executive Officer; followed by Haradh Panossian, our Chief Financial Officer; and Frank Gros, our Chief Risk Officer. Also on the call today are a number of our group heads, including Shawn Beber, U.S. Region; Harry Culham, Capital Markets and Direct Financial Services; and Jon Hountalas, Canadian Banking. They are all available to take questions following the prepared remarks. Once again, this quarter, we have a hard stop at 8:30 to give everyone an opportunity to participate, please limit your questions to one. As noted on slide 2 of our investor presentation, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results may differ materially. With that, I will now turn the call over to Victor.

Victor Dodig: Thank you, Geoff, and good morning, everyone. On today’s call, I’ll provide a brief high-level overview of our Q1 results, followed by an update on the progress we’re making against key strategic initiatives. Building on the growth momentum we’ve established over the last few years, we delivered a strong start to this fiscal 2024 year. We continue to successfully navigate through a fluid economic backdrop and execute on our client-centric strategy, supported by the addition of 700,000 net new clients over the last 12 months. Our performance this quarter was a reflection of our diversified business model and a strategy that is working. Turning to our adjusted results for the first quarter. We reported net earnings of $1.8 billion and earnings per share of $1.81.

These results were driven by record revenue and prudent expense management, resulting in 8% pre-provision pretax earnings growth and 2% positive operating leverage. Our capital position remains strong with a CET1 ratio of 13%. This positions us comfortably above regulatory requirements and internal targets, allowing us to continue deploying capital in support of our clients. Our adjusted return on equity was 13.8% during the quarter. Helping our clients realize their ambitions is our North Star. As we’ve articulated in the past, our strategy is supported by four key priorities that are aligned to long-term market opportunities and competitive advantages that we have built within our bank. Our first strategic priority is to grow our mass affluent franchise in Canada, as well as our private wealth franchise on both sides of the border to drive growth in deposits, investments and enhanced returns.

To enable this, we’ve made important investments in our unique Imperial Service and private wealth businesses to elevate our platform capabilities. As an example, we’re leveraging our predictive client analytics to deeper relationships and accelerate high-value client introductions from personal banking to Imperial Service, resulting in robust inflows of client assets. In Canadian private wealth, financial plans completed by our clients were up 54% year-over-year. This is a great example of how we’re leveraging modern financial planning technology and our strong advice capabilities to deliver an improved client experience and build deeper, longer-term relationships. Finally, in the US, we’re building on our industry-leading CIBC private wealth platform for high net worth client segments because during the quarter, we continued to invest in our talent and our physical presence in strategic growth markets, including Boston, South Florida, and San Francisco.

Our second priority is to attract and deepen relationships with our personal banking clients by leveraging our CIBC digital capabilities, including through our Simplii Financial platform. Improvements in our digital channels meet our clients’ evolving needs for self-service capabilities. This quarter, we were the first of our competitors to introduce a new digital banking solution bundle, leveraging AI to streamline the application process for newcomers to Canada into a single digital application. In our Canadian personal banking platform, we’re seeing a digital adoption rate of 86%, while improvements in our retail offering have resulted in 38% of product sales originated digitally. In Simplii Financial, our direct digital bank, we’re also seeing strong momentum, with 180,000 net new clients added over the last 12 months.

We’ll continue to expand our digital channels and capabilities to build our pipeline of clients for future growth. The third priority of our strategy centers on our highly connected platform across the bank to drive referrals, to generate recurring revenue, and to enhance relationship returns. It’s something our clients say differentiates us, and it provides us with a competitive advantage in a world where capital requirements and costs continue to increase. On both sides of the border, we have a unique organizational structure that combines commercial banking with wealth management. In Canada, 31% of our commercial clients have a CIBC private wealth relationship. In the U.S., that number is 17%. While we’ve been making progress on both sides of the border, there is room to grow.

Also core to this strategic priority is our differentiated capital markets business, which delivered record revenues in the first quarter. Global markets client activity was seasonally higher this quarter and is likely to normalize. But we expect a continued recovery in M&A activity and a pickup in corporate bond issuances through the year to provide a tailwind to this business. We’re excited about the opportunity ahead, as we continue to leverage a connected approach across our bank to deliver a seamless and a holistic client experience to deepen our relationships and enhance returns. Finally, our fourth priority is to enable, simplify and protect our bank to ensure that we maintain operational resilience and improve the efficiency with which we deliver for our clients.

Over the past few years, we’ve made significant technology investments across our businesses to improve client experience, enhance revenue growth, increase productivity, and generate positive operating leverage. As we look forward, we are increasingly leveraging AI to drive this strategy and have already unlocked high-impact use cases across our bank. This kind of innovation presents tremendous opportunity, and we will continue to be responsible as we adopt these tools to create sustainable benefits for all stakeholders. A review of our strategy would not be complete without highlighting our commitment to supporting a more sustainable world through our focus on the environment, social investment in our communities and delivering on high standards of governance.

During the quarter, we were selected by the Government of Canada as the sole structuring advisor on its recently updated Green Bond framework. We also issued our own €500 million CIBC Green Bond to fund eligible projects aligned with our sustainability strategy. Putting it all together, our disciplined execution will lead to growth in our client franchise and improved returns for our shareholders, as we focus on targeted client segments, advance our digital capabilities, and deepen connectivity, all while maintaining a laser focus on efficiency. And we expect the relative outperformance we’ve demonstrated to continue supported by the positive outcomes of our strategy. And with that I’ll turn the call over to Hratch. Over to you.

Hratch Panossian: Thank you, Victor and good morning to you all. As Victor said, we’re pleased to deliver another strong quarter to kick off fiscal 2024 as laid out on Slide 7. Our team’s consistent and strong execution against the strategic priorities Victor described continues to drive sustainable growth and profitability in line with our targets. This quarter solid client activity across our diversified business, margin expansion and productivity gains contributed to diluted earnings per share of $1.77 and ROE of 13.5% on a reported basis. Excluding the items of note adjusted EPS was $1.81 and adjusted ROE was 13.8%. Strong capital generation and liquidity further bolstered our resilient balance sheet ending the quarter with a CET1 ratio of 13%, an average LCR of 137% both of which exceed our normal course or operating targets.

The balance of my presentation will refer to adjusted results which exclude items of note starting with Slide 8. Adjusted net income of $1.8 billion decreased 4% year-over-year due to the impact of the credit cycle on credit losses, which Frank will discuss in more detail. Supported by the strategic investments we’ve made in recent years we delivered record revenue of $6.2 billion this quarter, up 5% from a year ago. We also continue to successfully balance ongoing investments in our business with efficiency gains to contain expense growth and generate positive operating leverage of over 2% resulting record pre-provision, pre-tax earnings of $2.9 billion increased 8% year-over-year aligned with our medium-term earnings growth target. Slide 9 and 10 highlight key trends and drivers of net interest income.

Excluding trading NII was up 6% over the year, driven by continued balance sheet growth and improving margins. Total bank NIM excluding trading was up 6 basis points from the prior quarter and year, partly helped by classification changes associated with the implementation of FRTB, which attributed 3 basis points. The balance of the increase was from continued margin expansion consistent with our guidance. Canadian P&C NIM of 268 basis points was up 1 basis point sequentially, largely due to balance sheet repricing to higher rates net of higher interest expense on deposits. In the US segment, NIM of 349 basis points was up 5 basis points from the prior quarter mainly due to improved loan margins and deposit growth in excess of earning assets.

As we’ve often communicated, we positioned our balance sheet to stabilize margins and drive sustainable NII growth. While we continue to expect some upward momentum margins will start stabilizing over the next few quarters based on current rate forecast. With that let’s turn to further detail on our balance sheet on Slide 10. Average client loans to deposits continued to grow but slowed in line with industry trends. Average loans and deposits grew 2% year-over-year. And sequentially, our stable, well-diversified deposit base grew 3% and experienced a modest mix shift to higher cost term deposits during the quarter. We expect continued growth in client loans and deposits at healthy margins to support NII going forward. Turning to Slide 11. Non-interest income of $3 billion was up 9% from the prior year due to growth in trading revenues as well as market-related and transactional fees.

Excluding trading, market-related fees increased 3% year-over-year as higher underwriting, advisory and investment management and custodial revenues were partly offset by lower mutual fund fees and FX related to treasury funding activities. Transaction-related fees were up 4% year-over-year, driven by growth in credit as well as deposit and payment fees. Slide 12 highlights our continued success in balancing investments with productivity gains to manage overall expense growth. Year-over-year expense growth of 3% continued to moderate in line with our guidance. Over the last year we crystallized almost 2% in efficiencies, while maintaining a higher level of strategic investment across our bank. This allowed us to deliver positive operating leverage of over 2% as investments made over the last few years supported the revenue growth in excess of our net expense growth.

For fiscal 2024 we continue to expect expense growth at the low end of mid-single-digits and we’re targeting positive operating leverage barring a material change in the revenue outlook. Slide 13 highlights the strength of our of our balance sheet. We improved our CET1 ratio to 13% over the quarter, driven by organic capital generation, share issuance, and RWA reductions, driven by the implementation of methodology changes, net of organic growth in the quarter. Methodology changes this quarter included the adoption of internal ratings-based approach for the majority of our U.S. bank portfolio and the implementation of new regulatory approaches related to FRTB, CVA, and negative amortization mortgages. Based on the strength of our capital position and current outlook, we intend to eliminate the discount in our DRIP program after the payment of our Q2 dividend on April 29th.

Our liquidity position improved further during the quarter helped by deposit growth in excess of loans, resulting in the average LCR of 137%. With both our capital and liquidity ratios ahead of normal course operating targets, we are well-positioned to withstand any potential macro headwinds, while deploying balance sheet to support our clients and drive growth when market activity picks up. Starting on Slide 14, we highlight our strategic business unit results. Net income in Personal and Business Banking was $655 million, up 10% year-over-year supported by core business momentum, offset by higher credit provisions. Benefiting from recent investments and strong execution, this segment delivered a 25% increase in pre-provision pre-tax earnings supported by revenue momentum and strong operating leverage.

Revenues of $2.5 billion were up 10% year-over-year helped by a 25 basis point increase in margins along with volume growth on both sides of the balance sheet. Expenses of $1.3 billion were down modestly from the prior year as the business redirected resources over the last year to support its current strategic priorities. We expect expenses to increase over the year and maintain our guidance for full year growth in the low to mid-single-digit range. Turning to Slide 15. Net income in Commercial Banking and Wealth Management for the quarter was $498 million. Pre-provision pre-tax earnings of $705 million were up 3% from a year ago, largely supported by the Wealth Management business. Revenues of $1.4 billion were up 2% from the prior year as Wealth Management revenues increased 3% while Commercial Banking revenues were comparable to last year.

Our combined Canadian Personal and Commercial franchise continues to exit strong momentum, delivering revenue growth of 8%, operating leverage of 7%, and pre-provision pre-tax earnings growth of 15% over the prior year. Additional details on our best-in-class Canadian franchise have been have been included in the appendix. Turning to U.S. Commercial Banking and Wealth Management. Net income of $48 million was down from the prior year largely due to higher credit provisions in the office portfolio. Revenues were down 4% from last year partly to a lower annual performance being Wealth Management. Excluding these performance fees in both periods, revenues were up 1% from core business momentum. Expenses were up 4% year-over-year, reflecting investments across our business and infrastructure, which we expect to sustain.

We remain focused on scaling our US business and are position to drive long-term profitable growth across both Commercial Banking and Wealth Management. Turning to slide 17. Net income of $575 million in capital markets and DFS was down 6% year-over-year. Revenues of $1.5 billion were up 2% over the prior year driven by strength across all business lines, which more than offset the impact of the federal budget proposal in our markets business. Excluding the impact of this budget proposal, reported revenues were up 5%, supported by a 14% increase in corporate and investment banking and a 5% increase in direct financial services. Expenses of $712 million were up 10% compared to the prior year largely due to continued investments in growth and higher employee-related compensation.

Finally, slide 18 reflects the results of the Corporate and Other business units. Net loss of $23 million compared with a net loss of $47 million in the prior year as higher revenue from a lower tab offset and lower credit provisions were partly offset by higher expenses. This quarter’s expenses included onetime costs related to the outsourcing of our check processing operations as we’ve taken yet another step to simplify our bank. In closing, we’re proud of the results our team delivered this quarter. Record revenues and pre-provision pre-tax earnings reflect strong execution against our strategy and momentum across our diversified connected franchise. Combined with our strong balance sheet, this momentum positions us well to navigate an environment that continues to be fluid as we remain intensely focused on achieving our medium-term strategic and financial targets.

With that, I’ll turn the call over to Frank.

Frank Guse: Thank you, Hratch, and good morning, everyone. Our credit portfolios performed within our expectations this quarter and in line with the current macroeconomic environment. In the US, we have made good progress managing through the stressed office environment and are now through the majority of substantive issues in this portfolio. All other commercial real estate sectors within our Canadian and US portfolios have been performing well with no systemic issues. Our allowance levels remain robust for expected changes in the economy. Turning to Slide 22. Our total provision for credit losses was $585 million in Q1 compared to $541 million last quarter. Over the past 12 months, our allowance levels have grown by over $800 million or 14 basis points, creating further resilience for future changes in the macro economy.

Our performing provision was $93 million in Q1, mainly attributable to an increase in provisions for the US office sector, model parameter updates and credit migration. Provision on impaired loans was $492 million, which is up slightly $14 million quarter-over-quarter. And this was largely due to higher impairments in the Canadian real estate portfolios and was offset by lower impairments in the US commercial portfolios. Slide 23 summarizes our gross impaired loans information. Gross impaired balances were up slightly in Q1, mainly driven by our Canadian retail portfolio, as well as the commercial real estate sector in the US, partially offset by write-offs in business and government loans. Overall, new formations remained relatively stable quarter-over-quarter with the increase in retail, offset by a reduction in business and government.

Slide 24 summarizes the net write-off and 90-plus day delinquency rates of our Canadian consumer portfolios. We’ve seen 90-plus day delinquency rates trending higher over the past 12 months, reflecting the impact of higher rates and cost pressures our clients are facing. However, the overall credit quality and portfolio health of our clients remain strong. Our credit card and mortgage delinquency rates continue to remain below 2019 levels. Slide 25 provides an overview of our Canadian real estate secured personal lending portfolio. The 90-plus day delinquency trends reflect the continued seasoning of prior vintages, coupled with a slower housing market. We remain comfortable with this portfolio given the overall reasonable loan-to-value metrics and do not expect to see material losses in this portfolio.

Consistent with last quarter, our analysis on clients who are renewing in the next 12 months demonstrates that only 1% of these renewal balances are clients at higher risk from a credit perspective. We’ve included an updated version of the previous stressed mortgage disclosure slide on page 42 of this presentation. Turning to slide 26. We are providing an updated view of our US office portfolio. Our team’s focus has reduced the portfolio by more than 10% year-over-year. This quarter, we also increased the performing allowance from 9.1% to 13.7%. Assuming market conditions don’t materially deteriorate. We expect to see more muted P&L and capital impact in office for the remainder of the year. We have managed to the vast majority of stressed loans.

In line with the comments made in prior quarters, we expect impaired levels to decline in the back half of 2024. This quarter, we’ve also included incremental disclosures in the appendix on our multifamily exposures, both in Canada and the US. Multi-family continues to exhibit strong credit performance with very limited watch list and impaired exposures. We’ve also not seen any losses in this portfolio in the last 12 months. In closing, while loan losses trended marginally higher in Q1, the portfolio continues to perform well within our expectations. The economy evolves, our allowance levels remain strong and provide us prudent levels of coverage. We expect our office portfolio to have the vast majority of issues well provisioned with impairment levels reducing in the quarters ahead.

And I will now turn the call back to the operator.

See also 17 European Countries that Allow Dual Citizenship and 14 Best Software Stocks To Buy According To Hedge Funds.

Q&A Session

Operator: Thank you. We will now take questions from the telephone lines. [Operator Instructions] Your first question is from Gabriel Dechaine, National Bank Financial. Please go ahead.

Gabriel Dechaine: Hi. Good morning. Yeah, I just want to go back to that CRE commentary. So can you maybe explain a bit more why you believe the most problematic loans have been dealt with or in the rearview mirror? And at a high level, this is — that portfolio has been about a-third of your impaired loan losses over the past four quarters. As that moderates, is it your expectation that there’ll be — that will be a natural offset to higher impaired loans across the rest of the bank portfolios like the Canadian consumer, et cetera, so that you’re going to stick within your expected loss guidance, loss ratio guidance?

Victor Dodig : Yes, sure. So I’ll tackle them one-by-one. So on the U.S. office specifically, we have done, and we’ve said that in prior quarters, we have done a very thorough assessment of the portfolio. We have a team of specialists working on that portfolio on an ongoing basis. And with that, we feel comfortable that we have identified, provisioned all of the stressed loans that we expect in that portfolio. And with that, when I said a more muted P&L impact, what we should expect to see is some migration into impaired, but that should be largely offset by a reduction in our performing allowances. Then if we take one step further, once we get into the recovery and resolution of those files, we should also see a release from an RWA perspective, given the amount of capital we hold from an unexpected loss perspective against those loans.

And to your second question, as we always guide it, there will be a moderation in that, and that will offset some of the expected gradual increases that we should or could see in other portfolios. And all of that well within our guidance of mid-30s that we provided earlier.

Gabriel Dechaine: Perfect. Thanks.

Operator: Thank you. The next question is from Meny Grauman from Scotiabank. Please go ahead.

Meny Grauman : Hi. Another credit-related question. Obviously, we’re seeing some stress across the group in terms of unsecured credit cards specifically. Frank, I’m curious if you’re seeing any sort of interesting patterns in how these portfolios are performing. Specifically, I’m wondering the Costco portfolio relative to the other card portfolios that you have, is there any divergence in performance there? And then also in terms of single product clients versus multi-product clients, anything there that you would note?

Frank Guse : Well, I mean, overall, I would say the portfolio in card specifically is performing as expected, so well within our expectations. We always expected it to trend up. We called it normalization. We are still favorable to what we would have seen pre-pandemic. You touched on some of the trends. So our co-brand card portfolio is exhibiting, and we expected that better credit quality, and is of course supporting the overall portfolio. We also continue to invest in business strategies, risk strategies to improve that and those are proving to be quite successful as well. In all of that, I wouldn’t say there’s any other trends to call out specifically. I mean, one maybe we have always talked about a deeper franchise client is usually performing better from a credit perspective.

So that’s something we are seeing and something that we continue to expect. And that is well in line with our strategy of going deeper after client relationships and driving those shares up of those clients that have those relationships. But outside of that, as I said, we continue to be quite happy with the credit performance, and it is well within our expectations.

Meny Grauman : Thanks for that. And then maybe just related, just a bigger picture question in terms the — when do we expect to see improvement here? Is it driven by rate cuts? Or is there something else that’s important here whereas rate cuts really the key variable that’s going to see the pressure on these unsecured portfolios really start to ease?

Frank Guse: Yes. So it’s probably a little bit too early to give you a longer-term outlook. I think we talked about our 2024 outlook being in the mid-30s and the various offsetting pieces in that portfolio. From what is driving that, I would say, it’s the overall economy driving it. So a single rate cut or two rate cuts won’t have a material impact on the portfolio. And it really depends on how unemployment continues to evolve, how rate cuts continue to evolve. What I would reiterate is everything we are seeing so far is going well within our expectations from a forward-looking information and forecast perspective. So assuming that everything continues to go within those expectations, we wouldn’t expect any material changes to our performance here.

Meny Grauman: Thank you.

Operator: Thank you. The next question is from Mario Mendonca from TD Securities. Please go ahead.

Mario Mendonca: Good afternoon or morning rather. This might be best for you. So I’m watching CMC’s performance here over the last couple of quarters, maybe more than a couple of quarters. And there’s probably little doubt that performance has been better than your peers. I think you highlighted that in your opening remarks that you expect to maintain this relative outperformance. But I can’t help observing at the same time that the bank also trades at the lowest multiple in the group. So clearly, there’s a disconnect here between your performance and the way the market values it. And I can’t help but think that it relates to certain things, a concern that something could go wrong. So I want to go through a couple of those. What could go wrong and get your impression.

First, on US commercial real estate. I think the message here is that the issues are behind you. Domestic mortgages, that always comes up as a particular risk for CIBC, if interest rates remain higher. So the broad question for you is this, what could go wrong? What do you think investors are worried about? And how would you respond to those concerns?