Canadian Imperial Bank Of Commerce /Can/ Q4 FY2020 Earnings Call

Good morning and 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.

Thank you and good morning. We will begin this morning's presentation with opening remarks from Victor Dodig, our President and Chief Executive Officer. Following Victor, Hratch Panossian, our Chief Financial Officer, will review our operating results, followed by a risk management update from Shawn Beber, our Chief Risk Officer. Victor will close out the prepared remarks with a brief update on 2021. We're joined in the room by CIBC's business leaders including Harry Culham, Laura Dottori-Attanasio, and Jon Hountalas, as well as Mike Capatides, who has joined us remotely from the U.S. They will be available to take questions following the prepared remarks. 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 meeting over to Victor.

Thank you, Geoff, and good morning. Thanks for joining us and we hope you’re all doing well. 2020 was a year where we experienced a once in a century health crisis that affected all aspects of our society. At the same time, it was a year of continued transformation for our bank as we focus on helping make our clients' ambitions a reality. Our CIBC team acted with urgency and with purpose to support our clients, one another, and our communities, building a relationship-oriented bank for a modern world. For the full-year, adjusted revenue of CAD$18.7 billion and pre-provision earnings of CAD$8.2 billion were up over 2019, while expense growth was limited to just 2%. Net of a higher provision for credit losses that was primarily pandemic-related, adjusted earnings were CAD$4.4 billion or CAD$9.69 per share. Our capital remains strong with a CET1 ratio of 12.1%. Our investments in technology over the past several years to digitize and simplify our bank are allowing us to provide real-time remote support to our clients at a time when physical distancing has become the norm. These efforts are being recognized by our clients, with our highest client experience scores on record and recognition as the top-performing banking brand during the pandemic. We will continue to convert this momentum into deeper client relationships going forward. Now let me turn to our business performance. During the fourth quarter, we saw some improvement in the macroeconomic environment. The resulting increase in consumer activity was reflected in our Canadian personal and business banking franchise with monthly improvement in card purchase volumes throughout the quarter.

Thank you, Victor, and good morning, everyone. Starting on Slide 8. This morning we reported earnings of CAD$1 billion and diluted earnings per share of CAD$2.20 for the fourth quarter of 2020. Excluding items of note, we delivered earnings of CAD$1.3 billion or CAD$2.79 per share. Adjusted ROE improved to 13.5% for the quarter, as our profitability continues to recover from the Q2 drop. Pre-provision earnings of CAD$2 billion were down 3% from the prior year, reflecting the relative resilience of our diversified franchise in a challenging environment. Revenues of CAD$4.6 billion were down 2% year-over-year as balanced growth across our businesses and solid trading revenues partially offset the impact of lower client activity and interest rates due to the COVID-19 pandemic. Strong expense management helped offset the pressure on revenue, with adjusted expenses declining 2% from the prior year as efficiency improvements outpaced targeted investments aligned with our strategy. Provision for credit losses of CAD$291 million were meaningfully lower from the prior year and prior quarter. Shawn will speak to provisions in more detail in his remarks. Turning to Slide 9. We maintained the strength of our balance sheet over this quarter. Average LCR of 145% was relatively stable from the prior quarter and well above the 100% regulatory minimum. Our capital position continued to strengthen, ending the quarter with a CET1 ratio of 12.1% or 11.9%, excluding the ECL transitional benefit. Internal capital generation and a decrease in RWAs were the primary drivers of capital build in the quarter. Consistent with our previous guidance, RWA migration was a modest headwind to CET1 in the quarter, driven by negative migration of our wholesale portfolios net of improvements in retail. We remain very comfortable with our current capital outlook; strong internal generation provides capacity to absorb further credit migration and organic deployment in support of our clients. The balance of my presentation will refer to adjusted results, which exclude items of note. Slide 10 reflects our personal and business banking results, where we continue to see positive trends as we revitalize the business. Net income for the quarter was CAD$635 million, up 5% from last year, helped by sequential improvement in revenue and pre-provision earnings as well as lower provisions on credit losses.

Thank you, Hratch, and good morning. While the start of the fourth quarter saw the continued reopening of economies following the restrictive measures implemented at the onset of the pandemic, by the end of the quarter, we were starting to see a resurgence in case counts. Since then, we’ve had a mix of both challenging and positive developments, with renewed restrictions occurring in many of the markets we serve, while at the same time promising news regarding vaccine development has been announced. We’ve continued to evolve our analysis from prior quarters and exercise judgment where appropriate in determining our provision for credit losses for performing loans. Our overall provisions this quarter were lower than the third quarter. At this time, we are not seeing broad-based credit weakness in the portfolio, and to date, performance has been better than had been anticipated at the start of the pandemic, as our clients, both business and personal, have continued to exhibit prudent financial behavior, given the benefit of ongoing government support. Where we have seen issues, they have arisen in various unrelated sectors, and in many cases, we are experiencing issues before the pandemic. As forecasted, we did see some additional migration from Stage 2 to Stage 3 allowances, which we expect will be a continuing trend over the coming quarters as net credit losses are expected to peak in the middle of 2021. Turning to Slide 17. The provision for credit losses was CAD$291 million in Q4, down from CAD$525 million in the prior quarter, with lower provisions in both impaired and performing loans. The provision on impaired loans of CAD$178 million was down CAD$122 million from last quarter, largely due to lower insolvencies and write-offs experienced in our Canadian retail portfolios. Similar to the prior quarter, the decrease in retail insolvencies was in line with the industry trend as a result of lower consumer filings. The lower level of write-offs resulted from a combination of factors, including government support as well as the impact of the assistance offered to clients through our bank relief programs. We expect this trend will reverse over the next few quarters, as the vast majority of deferrals have ended and returned to normal repayment status. On the commercial side, we experienced lower provisions in our Canadian commercial and wealth and capital markets businesses, offset by an increase in U.S. commercial. Provision on performing loans was CAD$113 million, largely due to a number of model parameter updates along with some other moving parts that I will speak to on the next slide. Our credit portfolios have generally performed in line with our expectations this quarter. That said, we do anticipate additional negative credit risk migration across the portfolio, absent a material improvement in actual economic conditions over the coming quarters relative to our current outlook. We believe we’ve been prudent in recognizing performing allowances to reflect that outlook. Moving to Slide 18. The allowance for credit losses grew by 3% to CAD$3.7 billion this quarter and ended the year up 79%, or CAD$1.6 billion since Q1. Our performing provision was CAD$113 million in Q4. There are few elements within this number, which we’ve broken out in the lower left corner of the slide. The largest component was an impact of CAD$128 million for several parameter updates in our ECL model, which we do periodically. Partially offsetting this, we had a net CAD$97 million of allowances moved from performing to impaired, which is what we would expect to see as certain loans tipped from performing to impaired status, reflecting the ongoing challenges of the pandemic. The last piece is CAD$82 million of growth in provisions related to a continuation of our normal course activity, including the impact of FLIs, which were a small help, migration within our portfolios as we continue our risk rating activity and other portfolio movements. Overall, the loan losses this quarter were somewhat better than expected for both our retail and business government portfolios. So as we’ve discussed before, we believe the relief efforts have had a significant impact on these results, particularly in the cards portfolio, and delayed actual losses to future quarters. Turning to Slide 19. We’ve provided details of our allowances coverage by line of business. Our allowance coverage ratio increased from 86 basis points in Q3 to 89 basis points in the current quarter. The increase was mainly driven by higher provisions recognized in U.S. commercial Banking and CIBC FirstCaribbean. We feel comfortable with the current level of coverage and remain focused on monitoring the credit quality of our portfolios for potential future adjustments. On Slide 20, we show our credit portfolio mix, which remains well diversified and consistent with last quarter. Our total loan balances were CAD$416 billion, and the overall credit quality of our portfolio continues to remain high. Nearly two-thirds of our outstanding loans are to consumers, the majority of which are mortgages, with our uninsured mortgages having an average loan to value of 52%. The balance of our portfolio is in business and government lending, with an average risk rating for the portfolio equivalent to a BBB. This quarter, we’ve included in the appendix the additional details we previously discussed on specifically affected industries. The performance of those portfolios is in line with our prior outlook and expectations at this point. Slide 21 provides the status of our client accommodations and credit quality details by segment. Most of the deferrals have now run their course. Repayments are within expectations, and we believe our allowance coverage reflects the current risk in the portfolio. Slide 22 provides an overview of our gross impaired loans. Gross impaired dollars were down, mainly driven by consumer loans. The reduction in impaired consumer loans was principally due to payment deferrals and collection activities in the quarter. While new formations also trended lower, we do expect this to remain volatile in the near term. Slide 23 shows the net write-off and 90-plus day delinquency rates of our Canadian consumer portfolios. In the current quarter, we had lower insolvencies and flow write-offs as a result of government support programs and bank relief offerings. The late-stage delinquencies of residential mortgages are down as we work with our clients who were not part of the deferral programs to bring their accounts current. While personal lending delinquencies remained relatively flat quarter-over-quarter, credit card delinquencies have increased. We proactively enabled payment deferrals for credit card clients who were already showing vulnerabilities and payment difficulties at the onset of the pandemic. The increase in delinquencies is driven by a portion of these clients who have now exited the bank relief program and continue to have financial difficulties. However, the performance overall of the credit card balances that have now exited deferrals is in line with our expectations. In closing, the economic outlook remains uncertain, as we’ve seen an increase of new COVID cases, while also receiving encouraging news regarding the development of COVID vaccines. We will continue to monitor the changes in the macro environment and their impacts on our portfolios. Overall, we remain comfortable with the quality of our portfolios, and are well positioned to support our clients while managing through the crisis. Provisions were lower this quarter; however, we do expect to see impaired provisions trend higher and peak in the middle of 2021. As that occurs, and as we saw to some degree in the fourth quarter, we would expect to see more of our performing allowance transfer from Stage 2 to Stage 3 and provide a partial offset to losses in future periods. I will now turn the call back to Victor.

Thank you, Shawn. Before we take questions, I’d like to share our thoughts on CIBC's strategic focus for 2021 and beyond. Our first priority is to reinvigorate our Canadian consumer franchise, which includes increasing share in our core personal and small business products, accelerating growth in our newly established direct financial services business, and improving asset management net flows while delivering strong investment performance for our clients. We’ve made good progress in each of these areas throughout 2020, but there is still potential to capture in the coming years. Serving the Canadian consumer is a key aspect of our operations, and our efforts will provide greater value to our clients and drive growth for our Bank moving forward. Our second priority is to continue our transformation journey with a focused effort on reducing our cost base and reinvesting a significant portion of savings into high-return projects, especially in relation to process simplification and technology enhancements. Our third priority is to capitalize on our strengths where we are performing well, including Commercial Banking and Private Wealth, on both sides of the border and in our Capital Markets business. Each of these areas has plans for continued growth and is also launching new initiatives to enhance capabilities in emerging market segments like the innovation economy and sustainable finance. Now, let me provide some insights on our performance expectations for 2021 across our strategic business units. For our Canadian Personal Banking franchise, we will continue to build on our recent improvements and aim to restore our business to market levels of consistent growth. Assuming pandemic-related constraints begin to relax in the latter half of 2021, we anticipate a rise in consumer activity. In Commercial Banking, while loan growth is expected to decelerate from historical levels, we foresee a return to growth-oriented financing as the economic recovery gains momentum. In Wealth Management, we expect to see an increase in alignment with the economic recovery as investors seek alternatives to low rates on savings deposits. Key hires in our Private Wealth businesses, along with improved product offerings will help us grow our net flows and assets under management. In Capital Markets, equity issuance and M&A activity could rise as corporate consolidations increase in the aftermath of the pandemic. Our strong connectivity across our CIBC franchise will continue to generate opportunities and enhance Capital Markets capabilities for our clients in Canada and the United States. While the reopening of the economy offered some cautious optimism in the fourth quarter, the recent uptick in infection rates and the imposition of stricter restrictions in many municipalities will continue to negatively impact the near-term economic outlook. Our economists forecast assumes that mass vaccinations and effective treatments will commence in the middle of 2021, leading to a stronger global recovery in the latter half of the year. While this is our best projection, we are uncertain how vaccine access and effectiveness will unfold, so we remain cautious and are planning for a range of scenarios to ensure we can adapt quickly as the situation evolves. I want to emphasize that we have a strong management team leading the continued transformation of our Bank as our investments enhance efficiency and facilitate growth. We are agile, well-capitalized, well-provisioned and will continue to adapt prudently to the evolving macroeconomic environment. With that, let me turn it over to the operator for questions.

And the first question is from Ebrahim Poonawala from Bank of America Securities. Please go ahead.

Good morning. I guess a couple of follow-up questions regarding your strategic priorities, Victor, in terms of reinvigorating the Canadian franchise. One, talk to us in terms of your outlook for mortgage growth. If we do have a decent mortgage market next year, do you think the businesses at a point where we should see peer-like growth? And secondly, what does it mean, in terms of when you talk about tight expense management, investing, enhancing the technology platform? What should we expect in terms of the efficiency outlook, or just absolute expense growth as we think about next year?

Good morning, Ebrahim. Thanks for the question. I will share a few comments before passing it over to Laura for more details on mortgage growth and to Hratch for insights on expense growth management going forward. As you may remember, we mentioned a year ago that our goal is to ensure our mortgage growth, particularly in our Canadian consumer franchise, performs consistently, ideally in line with the market. If you examine our numbers from quarter to quarter over the past year, we are meeting that target. Last year, we were in a negative position, but this year, we are seeing positive results in terms of spot balances. We anticipate this trend will continue as we aim to keep pace with the evolving housing market and compete effectively with our peers through our investments, mobile mortgage advisors, and product offerings. Regarding expenses, we aim to maintain them in the low single digits to align with the current economic situation. If the economy recovers, we will grow alongside it and capture any benefits. Now, I will turn it over to Laura to elaborate on her progress in leading the Canadian personal bank, and then Hratch will provide additional insights on expense management.

All right. Well, I think you answered that very well, Victor. So I don't know if I have anything to add other than, again, a lot of work has been done to ensure that we can deliver more consistent and sustainable performance. I think that's what we're starting to see in mortgages, in particular. And as you mentioned, good news, we reversed the trend that we were on, and we're now starting to close the gap with the competition. So feeling very good about sort of the trajectory that we're on. And maybe over to Hratch on expenses.

Sure. Thanks, Laura. And I think Victor covered the punch line, Ebrahim, and good morning. So we continue to be focused on expense management. We think it's an important part of the transformation of our bank. We've proven that we can deliver efficiency. If you look at this quarter, down almost 2% on a year-over-year basis. For the full year, we contained expenses to 2%, in a year where we had a tough environment on revenues; we contained operating leverage to modestly negative. And so we're focused on pre-provision earnings, and we're focused on operating leverage. That's the way we sort of guide our expense targets, if you will. So going into next year, we're trying to get that pre-provision earnings to a growth trajectory; we're trying to get to positive operating leverage as soon as possible in what is a tough environment, right? So to do all of that, we're going to have to pull the levers, and we think of expenses in a few buckets. The first bucket is revenue-linked expenses, and a number of those will be improving as performance improves. But from an operating leverage perspective and a pre-provision earnings perspective, it doesn't work against our objective. What we're really focused on is the other two buckets, which are our investments against the strategy and to transform the business and discretionary expenses. And so between those two, we are pulling the lever so that discretionary is eliminated, where it's not value-creating, and we're investing in the right places. Net-net of those two, will actually manage the outcome to get the pre-provision earnings and operating leverage where we want to, and as Victor said, in the current environment, we think that means that low single-digit range restructuring we did this year, that's largely completed, it'll give us that full year benefit of CAD$250 million we’ve talked about. We telegraphed that at the time that's going to allow us to stay at that low single-digit level. We think we have opportunities to be at that level, while even accelerating investment by doing even more on efficiency initiatives as we go forward in '21.

Thank you very much.

Thank you. The next question is from John Aiken from Barclays. Please go ahead.

Hratch, just a quick follow on in terms of the efficiency discussion. I noted that you've still got about CAD$200 million left from the restructuring charge taken this year. How much do you think that can benefit your expense plans in 2021?

Sure. Thank you, John, and that's a bit of accounting. So as we had mentioned on the last call, we anticipated to largely complete that in this fiscal year, and we have done that. So it is mostly complete from a taking action perspective. And so the benefits will start accruing. From an accounting perspective, what happens is, when folks elect deferred payments over time, then the accounting reserve will come down over time as those payments are made to individuals. And so you're going to see that climb down slowly over time, but the benefit in the earnings will already be realized for fiscal year 2021.

Thanks. If I can add one quick one on; I noted that FirstCaribbean moved from available for sale in terms of the accounting treatment. Can you update us in terms of where the deal with the transaction sits at this point?

Yes, let me just provide some perspective on that John, and then Hratch will get into some of the technicalities. Just to remind everyone, we have an engaged buyer with a genuine interest in the Caribbean banking sector and a proven track record in banking. Our business there, like any other well-run banking platform, is adjusting sensibly to the economic reality of the pandemic. And it is good business; it's going to recover as the economy recovers. Our focus now is to continue to pursue the regulatory approval process, and that's been complicated by the COVID pandemic as well. When we have an important development on that front, we will advise our investors accordingly. This quarter was an accounting quarter, and I just want to pass it on to Hratch for some of the technicalities around that.

Sure, thanks, Victor. You will have time to review the MD&A and the notes in our annual report where all this information is reported. There isn't much to add beyond what's disclosed, but for those on the call, the accounting classification of held for sale and the assessment of recoverable value on goodwill are both governed by the relevant guidance under IFRS. This situation arose as we followed that guidance. It's important to distinguish the accounting from the deal, as Victor mentioned. The changes in accounting this quarter were prompted by the heightened uncertainty surrounding the deal, which we've detailed in our disclosures, previously discussing the complexities of the regulatory environment and COVID-related issues. Given this increased uncertainty and the technical requirements, we determined it was appropriate to discontinue the held for sale accounting this quarter and revert to using an estimated value based on current market conditions for assessing goodwill, rather than the terms of the proposed deal with GMV. This was the primary motivation for the change, but as Victor indicated, we will continue to pursue the transaction.

Thanks, Hratch. Hopefully, the rest of your questions won't be leading into the weeds on accounting. I will requeue.

Thank you. The next question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Yes. Are there any other implications of that accounting change other than like the evaluation of the goodwill, which I assumed was on a regular quarter or something like that?

No, there wouldn't be, Gabe. So we had, as you recall, we had added disclosure specific to held for sale classification; there was a summary balance sheet and so forth put in. And so that's really the only changes in the disclosures. In terms of how we were accounting for the business, we had continued to consolidate the business and the earnings coming in through the corporate and other segments. So that will continue.

My main question is about the mortgage growth strategy and the overall growth strategy for the Canadian retail business. Victor mentioned market-level growth and consistent growth, and Laura, you echoed that. What are you doing differently this time? A few years ago, we experienced significant fluctuations in the mortgage growth rate, with it being very high at times and very low at others. What measures are you taking to ensure greater consistency and to strengthen overall relationships?

Good morning, Gabriel. So I'm happy to take that one. I guess I'd say it's worth mentioning that you have a new management team across the board, but overseeing mortgages in particular, and we’ve given full end-to-end accountability for client journeys to this management team, which I believe will make a difference. So on acquisition, I'd tell you that we're very focused on the quality of our growth and the anchoring of our new clients. So that will certainly help us on a go-forward basis. And then secondly, you might recall in the last quarter, I spoke about retention. And while I tell you that we haven't been as successful as I would have liked in terms of retaining some of our past vintage clients when they came up for renewal, I believe we've laid the groundwork to ensure that we get not just better retention on a go-forward basis, but better acquisition. We've worked to increase our level and point of contact via the different channels we've had. We've eliminated friction points, et cetera. So all of that to say that, I expect we're going to see improvements on a go-forward basis in mortgages. And as Victor pointed out, this is all about laying the groundwork so that we can deliver you more consistent and sustainable performance.

Sounds like Investor Day material.

If I can just add to Laura's comments, because business is heading in the right direction. It's all consistent with the long-term strategy that we've laid out. When we say building a relationship-oriented bank for the modern world. You got to decouple not just the numbers that you're seeing in the business, but also some of the numbers that we don't accentuate as much, like our client experience scores. Our client experience scores at CIBC are the highest that they've been in two decades; that has been a steady climb up. It is a reflection of all the things that we're doing to improve processes and improve our product offerings, which are way more competitive than they were before. And super competitive relative to our peer group. That’s why we're starting to win business. On our checking account front, if you have CAD$6,000 in the bank with CIBC, you pay no fees. We have alternatives to our direct financial services; simply, if you have less, you can pay no fees to our direct bank. When it comes to our mutual fund offering, we launched our smart portfolios, which are more sharply priced than any other multi-asset portfolio offered by our peer group. Again, you see growth in the managed money portfolio. We've launched the CIBC Goal Planner to build deeper relationships with our clients. All of this stitched together with Laura's leadership and the team's leadership around continuing that trajectory will deliver that against that performance gap that we have. It will close, and over time, the market will continue to see us as the bank that we are: a new bank, a relationship-oriented bank and one that's ready to take on the future.

Thank you.

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

Hi, good morning. I just wanted to ask about the potential for reserve releases through this cycle. And specifically, what would be reasonable timing? And then also, where would it be more concentrated, consumer versus the commercial loan book?

Good morning, Meny. It's Shawn. So thanks for the question. We expect, as I mentioned in my prepared remarks, that our impaired losses will increase going forward and peak sometime mid-next year. It's obviously an uncertain environment; but based on our current outlook, we expect to average somewhere in the low to mid-40 basis points for impaired losses. As those impairments come through, we would expect to see the performing allowance get pulled through as a function of that. What contributed to that impaired loss ratio, you would have seen this quarter we had a particularly low level of impairments this quarter that was driven by a combination of strong credit performance, but also some of the deferral activity that we’ve had, and we expect to see that deferral activity, particularly in the consumer side roll through. So as a result, we will see those performing allowances sort of come through and offset some of those impaired losses in fiscal '21. In terms of sort of how the rest of the performing allowance behaves relative to those loans that won't ever go impaired or statistically aren't expected to go impaired, that's going to be a function of a bunch of different moving pieces: credit performance, outlook. That will be over a six to eight-quarter period, we expect to see most of that build we saw over the course of fiscal '21. We were up about 79% with our allowances. You'd see that sort of pull-through, but there may be timing mismatches between those releases and what you see on the impaired side.

If you're considering a shift in focus, do you believe you can achieve positive pre-tax pre-provision growth for fiscal 2021?

Yes, Meny, that's our goal. That's our goal. Winning market share and bending the cost curve done right with some economic tailwinds, we expect to start heading into positive territory.

And can you give us any more in terms of detail? Like how positive and more specifically, what are the key drivers there? Is it really about revenue more than expenses?

Certainly, Meny. I can provide more insight. It's important to mention that predicting this environment is challenging, but we’re basing our expectations on current trends. This year, we are experiencing just over 1% revenue growth, although we did face some slight negative operating leverage, which impacted our pre-provision earnings. Our goal is to improve this situation by addressing both revenue and expenses. We touched on expenses earlier, but the revenue aspect is crucial as well. We’re seeing positive momentum in our retail and other business sectors. However, from a net interest income perspective, we expect continued pressure from lower interest rates. Nevertheless, the steady growth we are seeing in client business across all areas gives us confidence. As we move into the latter part of this year and into next year, once recovery takes hold, we anticipate that these trends will accelerate, and we expect the net interest income trajectory to improve. In terms of fees, we're also witnessing positive trends, particularly in card recoveries, although some foreign exchange areas are lagging. We expect improvements in these areas later next year. We’ve seen good momentum in wealth management and investment fees, and if the markets remain favorable, we believe this trend will continue. The Capital Markets side has shown strength in trading, even amidst a challenging comparison year. Our team is committed to driving revenue growth, and we aim to achieve higher revenue levels than this year. We're also working to keep expenses contained within a low single-digit growth range. As we progress into next year, we believe we can turn around our pre-provision and operating leverage situation.

Thank you.

Thank you. The next question is from Scott Chan from Canaccord Genuity. Please go ahead.

Good morning, Victor. In your opening remarks, you talked about robust net flows on both sides of the border. There’s a lot of cash on the sidelines at low rates being reinvested industry-wide. But is there anything you can elaborate on that kind of specific to CIBC? And is it directed towards any certain client segment like retail private wealth or institutional?

Yes. Good morning, Scott. Thank you for that question. I'd say there are a couple of things that are driving our net flows on both sides of the border. One is investment performance. Our investment performance in our Canadian asset management business and in our U.S. asset management platform is in the top half and top quartile of performance, consistently good across important asset classes to our clients. I'd say the second thing is we've been really working hard, particularly in the Canadian market, where our footprint is larger, to ensure that our product offering is competitive relative to our peer group and is relevant to our clients. And that's what's driving our growth. We launched something called our Smart Portfolios last year, with smart beta embedded in them, and that is really, really getting good traction in our Canadian personal banking franchise. Then I'd say the third piece is on the higher net worth segment. The strategy of putting together Commercial Banking and Wealth Management where we're seeing the monetization of assets from our clients in our Commercial Banking business, from the sale of businesses to private equity or to strategic buyers, we're capturing those assets into our private wealth business in the U.S. and our private wealth business in Canada. Notably, in the U.S., we've gone from 0 to over CAD$70 billion in AUA over the last 6 years. In the fall of this year, Barron's ranked us as the number two registered investment advisor in the United States. It's CIBC Private Wealth Management, something that we don't focus on enough. So again, three things: investment performance, products that are relevant to our clients, and the referral activity within our bank is quite robust. We expect that to continue.

And Victor, you talked about the Commercial and Wealth Management connection. Maybe Laura, you can kind of talk about the strategy on the retail side and in the Wealth Management, and how that two may coincide?

Sure, Scott. I'll cover sort of some of the retail and maybe Jon wanted to add in his views. I think as you heard from Victor, a lot of the work that we've done, I'd say in retail was really to start with laying that groundwork to deliver again the consistent sustainable earnings. A lot of what we've done, we've reprioritized our investments into better digital capabilities. So really on the starting with the sales and servicing capabilities, and then we're really focused on increasing our sales force productivity. Victor referenced earlier on before the Q&A, he talked about that financial planning tool that we have. We think that's going to allow us to elevate our advice offering, because we have our clients who can come in either to banking centers or they can do sessions with us virtually. We think that's actually going to help move the dial. So we're really focused on those segments where we see that we can grow, where we can regain our natural market share. We’ve done all the prioritization, and I’d say 2021 is really about execution. What we've invested in has to deliver results. We are being granular, we are being targeted, and I think you're going to see — and we're starting to see some of the better client experience, and ultimately better results as we go forward for our shareholders. And maybe I'll stop there and see if Jon wants to add in on the Wealth side.

So most of what needs to be said has been said. The one thing I would add is our confidence level is high. We are adding people in every channel in the Wealth side to keep up with the flows. Everything we talk about is working; we need more people to handle the volume.

Thank you very much.

Thank you. The next question is from Doug Young from Desjardin Capital Markets. Please go ahead.

Hi, good morning. Just thinking about the all bank NIM, and you did mention the impact from higher liquidity in your comments as well. Wondering how we should think about this going into fiscal '21. So maybe we can think about like what was the impact in fiscal '21 from the additional liquidity on your balance sheet and how do you think that unfolds through fiscal '21, and how does that roll through your all bank NIM? Just hoping to get a little bit more color on that.

Very happy to elaborate on that. So, yes, if you look at the all bank NIM, I think it's been a story of degradation we saw through the year and then now stabilizing. This quarter all bank NIM was down only 1 basis point, and really the drivers behind that are some of the benefits that we saw in the retail NIM with the recovery there, offset by a small pressure from changes in mix towards lower-yielding parts of the balance sheet. So that part is abating, and that's related to your comments with respect to the excess liquidity. So if I look at that piece particularly, it has been something that's built up since the middle of the year, and we've spoken about it quite a bit. It's really because of the growth in deposits versus loans. We are pleased to have been growing deposits very robustly with our clients. And when you look at our data, we saw a rise of over CAD$80 billion over the year of growth in deposits versus just less than CAD$20 billion on loans. That delta has added up to the liquidity on the balance sheet. But that has stabilized. In terms of the cost of that, it's been sort of — and it varies quarter-over-quarter, but it's been in the teens territory in terms of basis points impact to NIM. I should point out it's not a big negative to NII. It's really the balance so that if you do the math just on the numbers I gave you, it would say 60, but it's more like a CAD$50 billion balance increase to the denominator that's driving it. When that goes away, that can recover pretty quickly. So when we get into next year, we do think that liquidity is going to get deployed. We do think that loan growth is going to accelerate, and we feel confident about that. You heard from Victor and the businesses just a moment ago. So as that happens, we think that will start coming back down and help offset some of the pressure that we are still going to have from rates. Net-net, I think those will help moderate the decrease in NIM from here.

Is that included in your expectations or not?

No, absolutely it is. What we would have built in expectations is stable NIMs in the U.S. as we've talked about, we feel pretty good about that. A small gradual decline in retail as we absorb the impact of lower rates and a normalization of the excess liquidity. All of those are in our forecast.

Perfect. And then just second, there was a charge related to the consolidation of the real estate portfolio. Just hoping you can unpack what that is.

Yes, sure. Happy to do that. And maybe Victor can start with the overall Square project because it is related to our consolidation in Square and then I'll give you a bit more on the accounting.

Yes. Thanks again for that question. Again, I take us back to what are we trying to achieve over the long-term; we're playing the long game here. Well before the pandemic, we had a vision to consolidate our head office footprint and the 23 locations that we have scattered across the Greater Toronto Area where a significant amount of our head office team is located into a modern purpose-built headquarters, and it's called CIBC Square. It exemplifies the future of work. And what I mean by that is, it's flexible, agile space, collaborative space, modern space, it reinforces employee wellness and convenience, and we’ll be happy to highlight more of that into the future as we start moving in there. It’s equipped with the most advanced ventilation systems and technology. Now, with the pandemic, it's allowed us to accelerate our consolidation plan, which is the result of some of the accounting that we undertook this quarter. As we move into a more normal environment, I've got three points to highlight here. One, our team is going to return to the office including CIBC Square into our other locations across Canada and the U.S. We're going to do this with safety in mind, health in mind, and we're going to do it in a very staged fashion because keeping our team healthy and well and engaged is the most important thing to us. Some of our team members are going to work remotely or work permanently. We've had great success with our contact center team working from home. They're engaged, they're productive, they're speaking to our clients and making their experience much better. And the other thing I'll say is this. I think it's important to recognize that many of our CIBC team members have continued to serve our clients in the workplace throughout the pandemic. That includes in our banking centers, in our currency operations, our technology operations. It’s really been a team effort. I mean, many of us have worked remotely; some of us have had to go to the workplace each and every day. I admire them for their courage and what we've done is tried to keep them healthy and safe while engaged with our clients. Now, the accounting of what happens with the real estate, Hratch, let me hand it off to you. Not to just want you to talk about accounting, but it's part of the question that was asked.

Sure. Thank you. Thank you, Victor. Yes, so as Victor said, it was important context, right. This isn't something we've done in isolation; it was always part of the plan. We are not taking on more real estate; we are moving into Square taking on square footage, and we were always going to give up square footage. But we've always got our eye on optimizing shareholder value and creating value for shareholders. In the current circumstances, we sort of looked at how we could optimize the exits that we were already going to do. Some of the spaces are sitting vacant at this point in time with teams working from home; there are cleaning expenses, utilities and so forth. So there really was a positive payback for our shareholders when we looked at it to exit some of the space earlier. And then this is where it gets into the accounting; the technicals of the accounting since we adopted IFRS 16 and put the right of use assets on the balance sheet is that when you vacate space, at that point in time, you've got to take the charge. This was a quarter where we vacated a number of those spaces, as people worked from home until we get into Square as Victor mentioned. That was the CAD$114 million charge related to the right of use assets plus a number of other things related to it with respect to the fixed assets on those properties and so forth. But as I said, there's a positive payback for our shareholders on that, and that's why we took the decision when we did.

And just sorry, what is the positive payback? And so this is just determination of leases essentially? Is that essentially it?

So it is the exit of the existing leases. There is positive payback from a few things. One, there is a sublease recovery assumption; we’ve been very modest with that sublease recovery assumption that's netted off that CAD$114 million. We understand it's a tough environment, but there are some leases here with value. The second one is related to some of those other expenses related to the properties I spoke about. And then the third one is really the savings on the expenses on the future rent. But to be fair, that offsets to some extent with the additional new cost of moving into Square and those expenses.

Great. Thank you very much.

Thank you. The next question is from Lemar Persaud from Cormark Securities. Please go ahead.

Thanks. My question is for Shawn. Shawn, I just want to take your answer on the PCL outlook a step further, just because it's important to my estimates. I think you said that the impaired loss ratio would be in the low to mid 40 basis points range, but that's going to be offset by some performing releases. So my question is, how should we think about the total PCL ratio for 2021?

Yes, thanks for the question. Look, the behavior of the performing provision is going to be variable through the year. As I said in the earlier remarks, we built a significant amount of allowance coming into the pandemic over the course of Q2 and Q3, in particular, a little bit this quarter as well. We anticipate that that would kind of run through that incremental amount holding all else constant; we would run through the P&L over a call it a 6 to 8 quarter period. But how that's going to play out quarter-to-quarter is going to vary based on a whole bunch of factors. So I'm reluctant to put a particular number around it; I'd say there's an amount of that performing provision that is going to move across as those impaired loans move because there's a certain amount of that performing allowance that would be booked against those particular loans. But for the balance of the portfolio, that's going to be as we've talked about the macroeconomic factors, credit behavior over the course of time. I think that's kind of the guidance that we could provide at this point, and the other thing I would say is over that 6 to 8 quarter period, it's likely that it'll be a little bit more front-end loaded than back-end.

You mean the release of the performance is more front-end loaded?

Just on the basis of the way the allowances build, and then as the economic — if things play out the way they're forecasted to at least at this point, you'd expect to see back to some level of normalcy. We will be taking into account all of the new information that we get having gone through this pandemic to inform our allowances at the end of it.

Okay, thanks. And if I could squeak another one in there. So last quarter you provided some disclosure on what delinquency rates would be in the Canadian consumer portfolio, excluding the impact of deferrals. It looks like residential mortgages and personal lending is trending better than expected, but cards a bit worse. Can you talk about the trends moving forward?

Lemar, it's Geoff here. Can I ask you to requeue? We got a number of people in line and we were going to run over.

Yes, sure.

Thank you, everybody. We will catch up after or requeue. Thanks.

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

Good morning. Shawn, you mentioned that impaired loans were approaching 40 or 45 points in 2021. This quarter, impaired loan losses were around 17 basis points, so that suggests a 2 to 2.5 times increase in impaired loans for 2021. Are you indicating to us that we should expect a 2 to 2.5 times increase from this quarter? If so, could you specify which line items or particular loans are contributing to this? Are credit cards or commercial loans particularly sensitive in this case? I'd appreciate your insights on that.

Yes. As I mentioned, the impaired losses were particularly low, and we saw a significant impact on the credit card side due to the deferrals. To answer your question, we expect impaired losses to be in the low to mid-40s. Some of that will be related to catching up on the credit card deferrals that we will be processing. On the consumer side, you will see less impact compared to the business and government sides, which are historically more variable. We anticipate this will unfold over the course of 2021. The outperformance this quarter compared to our expectations and the allowances we have built will be partly due to the consumer side, while the business and government sectors will remain unpredictable throughout the year.

Thank you.

Thank you. The next question is from Darko Mihelic from RBC Capital Markets. Please go ahead.

Hi, thank you. Question for Laura Dottori. Laura, as we do a post-mortem on 2020, I've done some preliminary math, but I'm hoping you've done this math too and you can provide some guidance on it. I'm interested in understanding the revenue impact in credit cards. So — and I don't really need it line by line, I'm just thinking about the drop in net interest income, the relief you provided, the drop in balances, the drop in revolve rates, you name it, fees. So if we look at 2020 versus 2019, how much did that drop? And how much do you think you can recoup in a recovery? And maybe you can speak to the results so far in November? What does credit card usage look like in November? Are we bouncing back? Are balances back up? Are people using the cards again? Are they spending on Christmas? So any kind of thought process there on just helping me pencil in a bit of revenue pickup from people going back into credit cards?

Okay. Thanks, Darko. That sounded more like a statement than a question. But let me see if I can provide a little bit of color. I guess I'd start just by saying a lot of the performance we're going to see on a go-forward basis will matter like in terms of economic activity, consumer activity. I would tell you that in the month of November, we have seen increased activity. We're expecting from an NII perspective, and maybe this is a bit broader than cards, but as you know, cards have higher margin, it tends to drive more of the business. We do expect to see NII growth in the latter half of 2021, so somewhere around the second quarter. I do think that's going to help offset some of that NIM compression that Hratch was talking about earlier. I think we're going to see some good usage from the cash back card that Victor talked about with our Dividend Enhancement Card and the great ratings that we have. When I looked at our applications for those cards, they're up significantly; assuming those get utilized, and we have revolving balances, I would expect to see a better trajectory in 2021 than we've seen in 2020. As you saw, and I think we provided some of that in our disclosure, you can see where purchase volumes have come back somewhat, and then remains to be seen if it continues. But for the time being, I would tell you that we're feeling pretty good, including our Aventura card. We did a really good job in my view in terms of modifying some of the rewards that we provide, so that they're not just travel. And in fact, from an outstandings perspective, we've seen an increase in our outstanding; and I would say almost flat from a purchase volume perspective. I think we've managed to do well in that regard. But as far as everyday rewards cash back cards go, we're seeing more activity there from a purchase volume perspective, and I would expect to see more from an outstandings perspective. But it really depends on the way forward from a consumer activity perspective. Does that help answer the questions you had?

I prefer to hear the revenue impact in 2020 versus 2019. If you're not willing to provide that, that's fine. So I'd love to know though, in your assessment of 2020, how much credit card revenues were down versus 2019 in totality if that didn't have that number handy. I mean …

Maybe Darko I will jump in. It's Hratch. I think Laura can maybe answer anything more on the business side, if you want, right? But we do not disclose P&L at the product level. So let me start with that. But I will give you some pieces just to help you think through what you're thinking through. I think you're trying to get to what this means for '21 more importantly. When I look at this year, you're right, you mentioned a number of the pieces, you can do the math on the credit card interest rate; really from the basis points you see, most of the 5 basis points increase this quarter, as I said, was related to that. But I’ll save you the math on that one. That was probably around sort of between the two quarters; it really impacted; it was kind of CAD$40 million for the year. So that’s one impact. The other one is what you would see coming in, in the card fees line in our SFI, which I'm sure you've looked at. And then there's also a piece in the FX other than trading piece that's related to cards' FX transactions. So on those, the cards line there is a broader line. So when you really just look at the personal and business banking element of that, fees on cards this quarter were recovered. They were down a bit more than this in the last couple of quarters, but this quarter they were still down about just over CAD$10 million. That number may have been double that over the last couple of quarters. And then on the FX side as well, there is about another similar number just over CAD$10 million this quarter. So when you look at about CAD$20 or so this quarter from that line item, and as I said that line was larger in Q3 and Q2. And then you put that together with the CAD$40 million from the interest rate relief, and then the NII balance, I’m sure you can do based on the balance drop and the average outstanding you saw; that'll get you a pretty good estimate for the year. Is that helpful?

Thanks. Yes, that’s very helpful. That’s what I was looking for. Thanks very much.

Thanks, Darko.

Thank you. The next question is from Nigel D’Souza from Veritas Investment. Please go ahead.

Thank you. Good morning. I had a follow-up for you on the payment deferrals for your credit card book. When I look at your reactive versus proactive portfolios, it looks like there's a divergence there in credit performance. I was wondering if you could touch on what characteristics specific to the proactive portfolio are driving less favorable experience? Because when I look at FICO scores, they seem to be relatively similar.

Yes. Good morning. Thanks for the question. So the population that we show is the proactive. We had identified a group of clients at the outset of the pandemic, who were already experiencing some level of difficulty going into the pandemic. We provided that group with the proactive deferrals. At the time, if you — and I think we had this disclosure in our last quarter's investor presentation, that group would have been — 68% of that group would have been current coming into the pandemic. So with the deferrals running off, that group is now 75% current, so actually an uptick. They've had more time to sort of address their financial situations and we provided that relief. So relative to coming into the pandemic, they're actually doing better at this point. Now it's still early stages, and we will continue to watch that portfolio very carefully. But that's what gives rise to the differential between the two populations.

Okay. That's really helpful. And just a quick question on performing loan loss provisions. When I look at your forward-looking indicators, it looks like they've improved across each of your scenarios. So the offset to that, the model parameter updates, is that more so management overlay and scenario weighting driven? Could you just provide some color there?

So we also had a scenario weight change; we put more weighting towards the downside from the upside. So that would have also contributed to it. But beyond that, it's been sort of regular way risk rating activity etc., that's contributed to the performing balance this quarter.

Okay. Thank you. Okay. Maybe, Victor, two quick questions for you. You've obviously done very well by the clients, and a lot of the actions you've taken, maybe waiving fees and what have you, are net beneficial both to clients and I guess to customer retention. Do you think brokerage commissions will go to 0 in Canada?

I don't know. I think the most important thing in our model — and I would say that we're not the low-cost producer. Our model is relationship-based. Actually, if you lift the hood on our Investors Edge business, which sits within direct financial services, as does simply financial. The biggest, most substantive part there is our Premium Edge service, which is very competitively priced. Clients are trading for CAD$4.95, and they actually have a relationship manager. It's very connected to our most affluent clients. So the business model works very, very well. For other clients, within our personal banks that are in sort of mass affluent and core segments, were priced at CAD$6.95, which is market-leading for the peer group banks. The offering is very, very good and satisfies their needs. So we will stay competitive; that's the most important thing I can tell you. We will stay relationship-oriented in terms of our focus.

Okay. And so when you look ahead, and assuming credit is enhanced, so to speak, and you think about the recovery and your complex of businesses here, do you feel like it's going to be more of a consumer or commercial-led recovery?

Let me take a moment to share my view on the current economy. It's essential to recognize that certain sectors, especially discretionary consumer and small businesses, are still grappling with the economic impacts of the pandemic. Their recovery will take time, and we must be attentive to this issue, as it doesn't receive enough discussion. However, I have confidence in the entrepreneurial spirit in Canada and the U.S. and observe that businesses are beginning to adapt their models. With the possibility of targeted government support, I believe they can recover more swiftly, and we will be there to assist them. From a broader macro perspective...

Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time, and thank you for your participation.