Canadian Imperial Bank Of Commerce /Can/ Q2 FY2024 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, everyone. We will begin this morning's presentation with opening remarks from Victor Dodig, our President and Chief Executive Officer; followed by Rob Sedran, our Chief Financial Officer; and Frank Guse, 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; Jon Hountalas, Canadian Banking; and Hratch Panossian, Personal and Business Banking. They are all available to take questions following the prepared remarks. We have a hard stop this morning at 8:30, so please limit your questions to one during the Q&A to allow everyone to participate. As usual, we will make ourselves available after the call for any follow ups. 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.

Thank you, Geoff, and good morning, everyone. I will begin the call today with a brief overview of our second quarter results, followed by an update on our key operating segments and progress on our strategy. We delivered strong results this quarter that reflected our differentiated business model, our diversified portfolio and our client-centric strategy, which we continue to consistently execute on. On an adjusted basis, we reported net income of $1.7 billion and earnings per share of $1.75. This performance was driven by 9% pre-tax, pre-provision earnings growth and a third consecutive quarter of positive operating leverage. Our capital position remains strong with a CET1 ratio of 13.1%. This provides us with the flexibility to draw on excess capital, support our clients and continue growing our businesses, while also returning capital to shareholders. Our adjusted return on equity was 13.4% as we maintain focus on profitability, while holding elevated capital. Looking forward, our strategy is deliberately designed to deliver a robust long-term return profile as we prioritize specific client segments, advance our digital capabilities, deepen client relationships and realize efficiencies across our portfolio. Now turning to our business units, starting with Canadian Personal and Business Banking franchise. We delivered a strong quarter as we continue to advance our strategic priorities. In CIBC Imperial Service, which serves the needs of the Mass Affluent segment in Canada, our client Net Promoter scores are trending higher, and money-in balance growth for Imperial Service clients was up 27% sequentially. With the support of AI, we're continuing to foster a cultural mindset of delivering an enhanced client experience. In one use case, we're using advanced analytics to compile a holistic client financial snapshot, which provides our advisors with deeper insights to guide more personalized conversations with their clients. We're also leveraging our digital capabilities to continue deepening relationships with our personal banking clients. Today, 4 out of 10 core banking products are sold digitally, continuing to trend up from prior periods. In addition, we saw improved Net Promoter scores for digital channel clients as well. Turning to our Canadian Commercial Banking and Wealth Management businesses, softer economic growth and lower levels of residential construction have dampened loan demand, while financial markets have benefited from expectations of interest rate reductions later in the year. Our emphasis on client relationship returns generated significant growth and referral volumes between Commercial Banking and Wealth Management, which are on track to increase 70% relative to fiscal 2023. In line with our strategic priorities, we recently launched a modernized platform for our investment advisors, as we continue to evolve our wealth management capabilities. During the quarter, our asset management business garnered first place out of our big six peer group in absolute long-term and total retail mutual fund net sales. We will continue to drive growth in this business as we execute on our strategy to lead in the Mass Affluent and High Net Worth client segments. In the U.S. region, our results reflected continued progress on our growth agenda. During the quarter, C&I loan growth was strong and broad-based, while we continue to deemphasize certain segments of our institutional commercial real estate business. In our Private Wealth Management business, we continue to invest in technology and infrastructure to scale our platform, attract new advisory teams, and drive connectivity. Cross business referral volumes from the U.S. are tracking well above our targets supported by our ECRM investments. Our highly connected U.S. platform remains a critical imperative to our cross-border strategy and to our long-term enterprise earnings potential. Moving to Capital Markets and Direct Financial Services. A differentiated platform delivered another strong quarter of results. We maintained our number one market share position among Canadian peer groups in equity trading, while also moving to the number one market share position for advisory fees. Revenue sourced from the U.S. region was up 20% year-on-year on a year-to-date basis. In our DFS business, our efforts to build a best-in-class digital experience were recognized with CIBC Investors Edge ranking #1 of the big 5 Canadian banks in the J.D. Power self-directed investors satisfaction study. Underpinning our momentum are the investments that we've made to strengthen our bank. We're investing in technology to enhance our client experience, advanced operational resilience to protect our clients, and to deliver efficiencies in how we work. We're taking a thoughtful and proactive approach to how AI plays a role in advancing our client-focused strategy and the governance required to do so effectively. We already use AI in key functions across our bank. Existing implementations include sophisticated risk and information security models that can detect fraud and enable our team to help prevent losses for our clients. We're also using generative AI solutions to enhance our frontline experience to improve our contact center efficiency and to make head office activities easier and faster to perform. We've got many use cases currently in flight across our bank, all connected to our strategy, and all with our clients at the center of our thinking. Delivering on our commitment to build a secure, equitable, and sustainable future, our efforts were recognized by several prominent third-party organizations again this quarter. For the second consecutive year, we were recognized by Global Finance as the best investment bank and for our leadership in sustainable finance. For the third consecutive year, we were recognized by Media Corp as one of Canada's greenest employers. Finally, for the fourth consecutive year, we ranked number one in Canada for gender equality by Equileap. These recognitions reinforce our consistency and focus on delivering across our bank on a number of fronts. In closing, we delivered another strong quarter to build on our recent momentum. We have a skilled, tenured, and connected management team that is laser-focused on the consistent execution of our clearly defined strategy. Going forward, our focus is to continue delivering on our strategic priorities, remain disciplined with resource allocation, and further improve the client experience. With that, I'll hand things over to our new CFO, Rob Sedran, to review our financial results. Rob has a deep understanding of the banking sector, and will bring valuable perspective to our CIBC Executive Committee. This move, along with the other new and expanded roles announced during the quarter, are consistent with our approach to deliver a strong bench to draw from and to lead our bank into the future. So, Rob, over to you.

Thank you, Victor, and good morning, everyone. Having spent 19 years with CIBC in various roles, I'm very excited to serve as our bank CFO. Let's get started with our Q2 '24 performance. I'm on Slide 6. The results this quarter reflect our focus on the consistent execution of the strategy Victor reiterated in his remarks. Strong performance in our largest business unit, personal and business banking, momentum in market-sensitive businesses, and balance between expense control and investing in our growth contributed to diluted earnings per share of $1.79 and ROE of 13.7% on a reported basis. Excluding items of note, adjusted EPS was $1.75, and adjusted ROE was 13.4%. Our balance sheet remains in a strong position with ratios that are well above our normal course operating targets. The balance of my presentation will refer to adjusted results starting with Slide 7. Unless otherwise noted, results are being compared with Q2 of '23. Adjusted net income of $1.7 billion increased 6%. Pre-provision pre-tax earnings of $2.7 billion were up 9%, and revenues of $6.2 billion were up 8% aligned with our growth targets and supported by expanding margins, volume growth, and higher fee income. We also continued to prudently manage expenses while still investing to support our strategy, which helped generate positive operating leverage. Provisions for credit losses continue to be elevated, up 17% from a year ago, but they are down 12% sequentially. Frank will discuss credit in detail in his presentation. Slide 8 highlights key drivers of net interest income. Excluding trading, NII was up 9% over the year, driven by expanding margins and continued balance sheet growth. The net interest margin performance this quarter and for the next couple of quarters is muddied by the impact of benchmark reform as we approach the June 28 cessation of CEDAR. I would note that this transition is revenue-neutral, and it is simply a shift of revenue to NII from other income. Excluding trading, total bank NIM was up 7 basis points from the prior year and stable sequentially. Canadian P&C NIM of 263 basis points was down 5 basis points sequentially. About half that decline was from revenue-neutral items in commercial banking, including benchmark reform. The balance of the decrease was driven by competitive pricing and business mix, also mainly in commercial banking, and has since largely stabilized. In the U.S., NIM of 343 basis points was down 6 basis points from the prior quarter with a continued mix shift in deposits and slightly lower loan margins. Consistent with our prior guidance, aside from the ongoing impact of benchmark reform, we continue to expect core margins to be stable for the balance of the year based on current market rate expectations. Turning to Slide 9, non-interest income of $2.9 billion was up 15% from the prior year amid growth in trading revenues as well as higher market-related and transactional fees. Excluding trading, market-related fees increased 13% due to higher underwriting and advisory fees as well as investment management and custodial revenues. Transaction-related fees were up 6% driven by growth in deposit and payment card and credit fees. Slide 10 highlights our balanced approach to expense management; excluding performance-based compensation linked to the stronger revenues and continued investments, expenses grew 4%. Over the last year, we realized efficiencies while investing to advance the four pillars of our strategy as you can see on the slide. That combination helped us to deliver 50 basis points of positive operating leverage this quarter. With higher revenue-linked expenses, we expect expense growth to be in the mid-single-digit range for the full year, and we remain committed to delivering positive operating leverage for the year. Slide 11 highlights the strength of our balance sheet. Our CET1 ratio ended the quarter at 13.1%, up from 13% last quarter, and positions us well to absorb volatility in the operating environment while still supporting our clients. Solid organic capital generation supported by share issuance was partially offset by RWA increases, a combination of business growth and credit migration. Based on our strong capital position and stable outlook, as we signaled on our Q1 earnings call, we announced earlier this morning the formal elimination of the discount on our DRIP program, starting with our Q3 dividend payable on July 29. Our liquidity position continues to be strong with an average LCR of 129%, down from last quarter as we moderated our funding activity during the period. Starting on Slide 10, with Personal and Business Banking, we highlight our strategic business unit results. Net income of $653 million increased 1% driven by strong revenue growth and operating leverage, partly offset by higher provisions for credit losses. Supported by core business momentum, pre-provision pre-tax earnings were up 15% as the execution of our client-focused strategy continues to deliver results. Revenues of $2.5 billion were up 9% supported by a 16 basis point increase in the margin along with volume growth. The sequential revenue decline was primarily owing to the impact of two fewer days in the quarter. Expenses of $1.3 billion were up 4% related to higher revenue growth and investments in strategic initiatives, partly offset by ongoing efficiencies. On Slide 13, we show Canadian Commercial Banking and Wealth Management where net income and pre-provision pre-tax earnings were stable to a year ago. Revenues of $1.4 billion were up 4% driven by strong Wealth Management revenue growth of 11% with higher average fee-based assets on both increased client activity and market appreciation. This was partially offset by commercial banking revenue, which declined 5%. As I mentioned a few slides back, net interest margin in this segment was affected most directly by benchmark reform and will be for the next couple of quarters, which again has no revenue impact. We also saw the impact of deposit competition and elevated funding costs as well as the impact of business mix during the quarter. Other than the impact of benchmark reform, we are seeing these things start to level off, and so expect more stability in the core margin moving forward for this segment. Expenses increased 7% from a year ago, mainly from higher compensation linked to the strong Wealth Management revenues. Our combined Canadian Personal and Commercial franchise delivered revenue growth of 6%, operating leverage of 3%, and pre-provision pre-tax earnings growth of 8% over the prior year. Additional details on Canadian P&C have been included in the appendix. Turning to U.S. Commercial Banking and Wealth Management on Slide 14. Net income of US$81 million was up from the prior year, largely from lower provisions in the office portfolio. Revenues were up 3% with non-interest income up 10% mainly due to market performance and wealth, partially offset by a 1% decline in net interest income. Expenses were up 10% year-over-year, reflecting investments across our business and infrastructure. We continue to scale our U.S. business and are positioned to drive long-term profitable growth across both Commercial Banking and Wealth Management. Turning to Slide 15 and our capital markets and DFS segment. Net income of $509 million was up 2% year-over-year. Revenues of $1.4 billion were up 4% driven by strong results across all business lines despite the impact of the federal budget changes on our global markets business. Corporate and Investment Banking benefited from growth in both equity and debt underwriting activity, and 5% growth in direct financial services was helped by higher revenues and Investors Edge, our direct investing platform. Expenses of $706 million were up 6% largely due to continued investments in growth initiatives and higher employee-related compensation. Slide 16 reflects the results of the corporate and other business unit, which shows a net loss of $9 million compared with a net loss of $33 million in the prior year, driven by higher treasury-related revenues and higher revenues from CIBC Caribbean, partly offset by higher expenses. This quarter's expenses included a charge related to the divestiture of certain CIBC Caribbean assets. In periods of heightened volatility, our treasury function can sometimes buffer the impact on our client-facing businesses. As that volatility settles back down, so too should the impact on our corporate and other segments, which we are now seeing. Therefore, in the current environment, we would anticipate losses of between $0 and $50 million, rather than our previous guidance of a loss of between $50 million and $100 million for this segment. So let me close with three takeaways from the results. First, our results reflect the consistent execution of our client-focused strategy and positive momentum across our diversified franchise. We remain very focused on controlling what we can control and positioning CIBC for consistent, strong, profitable growth. Second, our strong balance sheet combined with capital and liquidity ratios that are ahead of operating targets positions us well for the present and the future as we continue to manage with a long-term lens. And third, our disciplined and balanced resource allocation approach allows us to focus our investments, support our clients, and drive sustainable shareholder value. With that, I'll turn it over to Frank.

Thank you, Rob, and good morning, everyone. Our credit performance this quarter has remained stable despite a challenging environment. We completed a number of dispositions in our U.S. office book which reduced impaired balances in the sector. With strong allowance coverage, we remain focused on maintaining reserves for evolving macroeconomic conditions. Turning to Slide 20, our total provision for credit losses was $514 million in Q2, compared to $585 million last quarter. We've continued to build allowance levels by 9 basis points over the past 12 months to prepare for future changes in the economy. Our performing provision was $67 million this quarter, primarily from our business and government portfolios. Provision on impaired loans was $447 million, down $45 million quarter-over-quarter. This was due to lower provisions in the Canadian retail portfolios, as well as both the Canadian and the U.S. commercial lending portfolios. Turning to Slide 21, we are providing an updated view of our impaired PCLs by business. Over the past few quarters, we've seen total bank impaired PCL performing around our mid-30s guidance with strong performance in a number of our strategic business units. In PBB, impaired PCL trended slightly higher over the past year. We expected to move slightly higher in the coming quarters. The Canadian commercial portfolio has yielded strong and stable performance. While some fluctuation will be normal for this portfolio, we remain pleased with these results. We would also highlight the performance in our capital markets business where impaired PCL rates over the past few quarters remain muted. U.S. commercial impaired PCL has seen improvements over the past few quarters with lower provisions in the office sector, partially offset by increases in diversified commercial. We expect to see these improvements continue. Our credit performance this quarter reflects strong credit quality across all of our portfolios, driven by our underlying relationship and client-focused strategies and proactive risk management approaches. Slide 22 summarizes our gross impaired loans information. Gross impaired balances were down in Q2, mainly due to the disposition of U.S. office loans, partially offset by an increase in Canadian personal lending. Overall, information continues to remain stable quarter-over-quarter, with the increase in retail offset by a reduction in business and government. Slide 23 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, reflecting the year-over-year impact of rising unemployment and elevated interest rates. The overall credit quality and portfolio health of our clients remain strong. We also remain comfortable with our mortgage portfolio, given the overall reasonable loan-to-value metrics, and we do not expect to see material losses from 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 in uninsured mortgages and at a higher risk from a credit perspective. We also continue to see positive trends in negatively amortizing mortgages that were down from $38 billion in Q1 to $36 billion this quarter, primarily from clients continuing to voluntarily increase payments to reduce the interest rate impact. Slide 24 shows an updated view of our U.S. office portfolio. Our team's focused efforts have reduced the portfolio size by more than 20% year-over-year. As mentioned in my opening remarks, the disposition actions taken have reduced our growth impaired loan ratio from 19.7% last quarter to 10.3% in Q2. With the reduction in impaired balances, our allowance coverage is now at 10.2%, down from 13.7% last quarter. Going forward, we believe that we are through the bulk of substantive issues in this portfolio and expect losses to continue to trend lower in the coming quarters. In closing, we continue to proactively assess the portfolio and we remain comfortable with our mid-30s guidance. Our allowance coverage remains strong for the macroeconomic environment we operate in, and we remain prudently provisioned for what lies ahead. As market uncertainty persists, our team remains focused on closely monitoring portfolio performance and quality while also staying engaged with our clients. I will now turn the call back to the operator.

Thank you. Our first question is from Matthew Lee from Canaccord. Please go ahead.

Good morning, guys, and thanks for taking my question. I wanted to hone in on the Canadian PBB segment, which saw sequential improvement in impaired PCL. I thought it was against the industry-wide trend in this space. Could you maybe talk about the puts and takes in that business and maybe how we should expect that trend in the back half of the year just given an increasingly strained Canadian consumer?

Thanks, Matthew. Thanks for the question. I think as we guided in my prepared remarks, we continue to expect NCLs trending up a little bit more in the second half of the year. And that should be expected against the macroeconomic environment. But we do remain overall very comfortable with our performance and credit quality in the Canadian consumer book. We're very intentionally focused on growing relationships with clients with strong credit quality. We have invested heavily in retail strategies focused on the Mass Affluent segment, even investing in our co-brand credit card has improved overall credit quality for the portfolio. We're also investing heavily in risk strategies and Victor touched upon some of those using AI in bringing in more data to just be very conscious about risky decisions that we are making in the portfolio as an origination during the lifecycle of the loan and even when it comes to collection efforts and pre-delinquency strategies. So I would say a very intentional strategy, good investments that we're making both on the business and the risk side. And that's what you're seeing reflected there in the results notwithstanding we're still guiding to net credit losses to continue to trend up moderately in the second half of the quarter.

Okay. That's helpful. And then …

Sorry, Matthew. Do you have another question? Go ahead.

Oh, no, no, no, go ahead.

No, I want to hear from you, Matthew.

Oh, sure. I just want to ask about the Costco portfolio. It feels like when I go to Costco, get my groceries, enjoy my $1.50 hotdog, I can see how it's really easy to end up with a Costco, CIBC, MasterCard, and perhaps even open a bank account, but just can you elaborate on how you have been able to take that initial interaction with the consumer and turn it into a kind of a longer term multi-product relationship?

Yes. So I'm going to hand it off to Hratch in a moment, that whole Costco strategy is very much tied to our overall client strategy to build a product suite that is market-leading. In that instance, we have a market-leading travel and non-travel credit card portfolio that's been performing very well and to make sure that our clients, including you, Matthew, have an opportunity to do more banking business with us. Franchising the client and making progress on that front is something that we're seeing in a very encouraging way in our partnership with Costco, and quite frankly across our banking business. So Hratch, over to you.

Thanks, Victor, and good morning, Matthew. The Costco portfolio overall is trending very well for us. Let me go back for a second and remind you what we had said at the time of the acquisition. The card itself is interesting to us, the economics of the card for our business case were good. But the real value for us was building the relationship and franchising that client base, which is several million that we've acquired and hundreds of thousands that we are acquiring on an annual basis going forward as new cardholders. A large portion of that client base aligns with our strategy of our focus on Mass Affluent. So what we're seeing so far on the card itself, there are some puts and takes. The cost of funds is higher because of where the environment is, that hurts us. But if I look at some of the operational metrics, in terms of number of accounts, in terms of number of new accounts, in terms of balances, in terms of transaction volumes, in terms of how that spend is materializing, all of that is trending at or better than business case. Overall, the economics of the card are as good as we expected in the business case. When I look at the real value of franchising, though, we are ahead. We're ahead of our initial goals life to date. We're acquiring clients, we're engaging those clients. You asked, how are we doing that? A large portion, I would say the vast majority of the client base that's coming to us through this portfolio is digitally engaged. We can engage with those clients digitally after the fact to build the relationship. We've got the data on the clients and understand what other products and services could be beneficial. We have a very good relationship with our partner, and we think over time, there's more and more we can do with that partner, both with cardholders and with the overall base that they serve their member base, which is significantly larger than that.

All right. That's really helpful. I appreciate it.

Thank you. A following question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Hi, good morning. Rob, I wanted to revisit our earlier discussion and see if you could clarify some aspects that I find confusing. The Canadian Commercial is down 40 basis points, U.S. Commercial is also down, and Canadian banking is up slightly. I assume there is some offset in corporate, and yes, I recognize there may be some of that benchmarking you mentioned. Can you help me understand what is happening? It would be helpful if you could explain how you envision this evolving at both the divisional and overall bank levels, and how corporate Canada fits into that picture.

Thank you, Doug, and good morning. Our guidance on net interest margins is based on numerous assumptions. I’d like to outline my thoughts, which you can then use to evaluate your investment perspective. I categorize this into three key areas. The first area involves our hedging and positioning for interest rate risk. We strive to maintain stability throughout the economic cycle, including during volatile periods, and have had some success in that regard. In most scenarios moving forward, the new hedge rates will likely exceed the rates of maturing hedges, and like other banks, we have strategies in place. I view this first area as a positive factor for us. The second area is related to our business mix. If you expect higher rates for a longer period or a shift towards GICs over mortgages, as well as potential changes in demand deposits, these customer choices will impact our margins, especially as rates increase. We anticipate that if rates remain steady, this will pose a mild challenge, but it’s not as significant as it once was. The third area concerns the competitive landscape. Competition within Canadian banking is consistently strong across all sectors we operate in, although it remains relatively stable. During times of slower asset and balance sheet growth across the industry, we experience increased competition. However, we don’t adopt a product-focused strategy; rather, we aim to balance margin and volume based on our target customer segments and shareholder interests. When I combine all these factors, I see a slight advantage from the first category, a moderate challenge from the second, and a neutral position from the third. Overall, I come to a flat outlook, but if pressed, I would lean slightly positive due to the potential benefits in the first area. This thought process applies when analyzing Canadian Personal and Commercial Banking, and further down to Commercial Banking and Wealth. The guidance I provided doesn’t account for the impact of benchmark reform, which is set to remain relevant for another quarter or two. We’ll strive to be as clear as possible in explaining what’s happening to our core margins moving forward.

So let me consider this; the hedging is managed at the corporate level, which is a positive aspect. As for the Canadian Commercial side, is that a standard level of margin we should expect moving forward? Is there anything out of the ordinary that I need to take into account?

I would clarify slightly: the hedging doesn't come through the corporate. The hedging, the factoring strategy has the benefit that gets fed into the businesses over time. What you're seeing in corporate is largely the normalization of some of the treasury volatility that you otherwise would see when rates are spiking. We do try to insulate the business and the customer-facing businesses from some of that volatility because we want them focused on serving the client and growing the business the right way and they need stability to do that. The Commercial Banking margin, yes, that’s around these levels; we are assuming from here, a number of moving parts really and it's a bit of a noisy quarter on the Commercial Banking margin. All the things that have effectuated are generally stabilizing and so we would suggest more stability from here in that margin.

Appreciate the color. Thank you.

Thank you. A following question is from Ebrahim Poonawala from Bank of America. Please go ahead.

Hey, good morning. I just had a question, maybe a multi-part question on the outlook for CET1 capital build from the 13.1%. If you could just respond maybe, Frank, Rob, and maybe even Victor around how we should think about RWA migration from your balance sheet growth. Balance sheet has been shrinking about balance sheet growth. And then finally how should we think about inorganic deployment—is it too early for buybacks? When we think about the strategy of impact, maybe open to US M&A. So thank you.

So, Ebrahim, thanks for the question. Capital is always an important area to focus on, and we're very pleased with the progress that we've made over the past year. We've built 120 basis points in capital from this time last year. That was a very deliberate focus of the leadership team to continually focus on our strategy that we've laid out, a client-focused strategy, high-quality returns, and increasingly over time, capital light, generating capital for our business. We were pretty clear about how we're thinking about the discount of the DRIP; which we've made official in this quarter. We saw some credit migration, which I think reflects the reality of what we see out in the marketplace. Our strategy is working. What I'll do with this question is hand it off to Frank on credit migration, just to give you a little bit of a double click there. Then we can move on to any other questions you might have in your multi-part question, Ebrahim.

I think it's a reflection of the macroeconomic conditions out there. Certainly, some of the migration this quarter, I think it's Canadian retail portfolios and some of our commercial businesses, including CRE. I think it's important to reiterate that we do not expect these migrations to lead to losses outside of our guidance. A couple of reasons for that. For instance, on the Canadian consumer side, a lot of the migration is actually driven by slightly changing house prices continuing to moderate in some cities. These migrations happen with clients with very strong credit scores, so we don't have any reason to believe that we will see large impairments or losses arising from that. Overall LTVs remain very strong. So yes, we do expect some of that migration to happen in an environment like that, but it's not translating into higher losses or changes to our guidance and outlook.

Thank you, Frank. Ebrahim, just to answer some other aspects of what you put forth earlier on when we think about our capital deployment strategy, our first priority is to continue to invest in our business, continue to make investments that are highly consistent with the strategy we have laid out and that we are going to continue to deliver on; that would include growth in credit formation as the interest environment and the economic environment becomes clearer. We have the capital to continue to do that. The second aspect is obviously to grow our dividends, which we do once a year—that's in line with earnings growth and to be within our payout ratio of 40% to 50%. The third is buybacks—this lever obviously becomes more active when your capital gets to a higher level. We want to be within our peer group here; we don't want to be an outlier. We want to maintain strong capital to grow, not be an outlier. But that active lever is there for us. On M&A, I would say think about CIBC as a highly organically focused bank, with opportunities to do tuck-ins in areas that we want to strengthen, particularly in wealth management. We have already been focused on team lift-outs, we see some of that and there may be other opportunities to further strengthen our hand in wealth management. That's the way to think about it, Ebrahim. Thank you.

Thank you, Victor. Thanks, Frank.

Thank you. A following question is from Meny Grauman from Scotiabank. Please go ahead.

Hi, good morning. I want to ask about the loan sale that you did in the U.S. office portfolio. Are there more—we see more potential for loan sales in that specific portfolio? More broadly, are there other portfolios where that strategy would be appropriate in your view?

Good morning, Meny, it's Shawn. Thanks for the question. As we've talked about over the last several quarters, we've been looking at various strategies as we work through challenges in the office portfolio that have included extensions, short sales, and earlier in the year, we identified a portfolio of 8 loans that we thought made sense to expose to the market and see what kind of attention and interest that would generate. We were very pleased with the level of interest and the execution that we ultimately completed, which was in line with our expectations. We continue to look at all of those strategies as we work through the portfolio and any challenges. These are not unique strategies in terms of how they can be employed in other circumstances, so we continue to evaluate the portfolio on an ongoing basis and look for best execution to optimize the outcome.

Thanks for that, Shawn. Just as a follow-up, in terms of the characteristics of that portfolio that you sold, either regionally and then from a credit perspective relative to the overall U.S. office portfolio.

Yes. So these were loans that were—seven of the eight were impaired at the time that we took them to market. They would have been some of our more troubled assets. We presented it as a portfolio as it happened; we got best execution by splitting it up into a few different sales transactions. Again, we're very pleased with the outcome.

Thanks for that.

Thank you. A following question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Okay, thank you very much. I wanted to go back to the comments Rob made about momentum in the markets related businesses. See if I could get both Harry and Jon to talk a little bit about how they see that momentum for the Wealth and Capital Markets businesses over the coming quarters. Thank you.

Hi, good morning. It's Harry. Just a couple of comments on the outlook. This is a very well-diversified strategy. As we saw slowdown maybe in some of the lending and deposit areas of our product capabilities, we saw growth in other areas. Victor mentioned some of those areas in terms of the M&A space; the underwriting revenue and across global markets, we're seeing good activity. The pipeline is strong, our clients are—activity is robust, and you're seeing about 20% growth this quarter and for the first half of the year. We're really focused on driving towards those Investor Day targets that we laid out. We're quite confident that we can achieve those while maintaining a very robust ROE and mix ratio that leads the street. So we're quite confident. The environment is such that we can continue to achieve that result in a diversified manner and drive the results that you've been seeing.

Thank you, Harry, and good morning, Sohrab. On the wealth side, the first six months, interest markets have been good. I don't think they will sustain the same level, but still positive overall. Our investment performance is solid. The big differentiator for us, I think, is financial. We’re getting better; we’ve been at it for a while now. Our advisors are getting better. Our focus on Imperial Service is paying off, and we’re seeing that in the numbers. Everything we laid out, our plans, they’re working as we expected. The other leg of our strategy on wealth is just the referral volumes we do—both between retail and wealth, but also between commercial and wealth. Again, we think that’s differentiated; we think it’s helping us. M&A is going to get better in the back half; it’s been pretty quiet, but as companies get sold, the proceeds come in and the referral process works, I think it’ll be good for our wealth business. So, again, generally pretty positive on the back half.

So, Rob, I mean, prior—obviously not exactly before COVID, but if you think about pre-COVID years, maybe you were in the low 50s, maybe around 50-50 between spread income and fee income. Looking at your total revenues, I think for the last few quarters, it has been skewed toward spread income. Do you see that over the next four, six quarters staying at current levels? Or do you see gravitating closer to a 50-50?

Thanks, Sohrab. It’s Rob. The strategy absolutely would have us migrate more towards fee-based income over time. As you think about the next four, six quarters, everything from benchmark reform, which is actually pushing some revenue from credit fees into NII to the strategy that I talked about earlier delivering some help on the margin side, the ability to move that in a shorter term from a balanced perspective might be a little challenged. But in terms of the strategy itself, the focus on growing fee-based income, in balance with other income with NII, is absolutely part of the strategy, but in the short term, it may not play out quite that way.

Thank you for taking my call.

Thank you. A following question is from Nigel D'Souza from Veritas Investment Research. Please go ahead.

Good morning. Thank you for answering my question. I wanted to confirm that the outlook for credit losses is based on the expectation of a mid-interest rate environment. I noticed that your service ratio forecast was revised lower due to interest rates. Is there any potential for loss rates on your commercial portfolio to decrease for the remainder of the year?

Yes, Nigel, thanks for the question. Yes, mid-30s guidance for fiscal year '24 includes a variety of scenarios and includes a variety of scenarios also from an interest rate. We have been working through the portfolios and working with our clients in those portfolios. Specifically to the DSR ratios where you saw some moderate changes from an FLI perspective, this is not so much driven by interest rate decreases; it's much more driven by continued strong income numbers driving DSRs down slightly for our clients from an FLI perspective. We’ve been very cautious and put in very moderate interest rate cuts into our plans. We also expect it will take time before the impact of the interest rate cuts fully migrates into some of our losses. We feel very comfortable with our mid-30s guidance under a variety of scenarios.

If I could touch quickly on U.S. commercial real estate, any comments on the risks outside of office? Some regional banks may take potential losses on family or life sciences. Any color on your portfolio—is it concentrated in the U.S. office?

Yes. As you can imagine, we watch those sectors and industries very closely. Our multifamily loan portfolio is very stable, well diversified, and has very low NPL balances. We do not expect any issues in their portfolio. What I would say is very different than office; demands for those asset classes remain strong, even though we see some pressures on short-term rental rates, some pressure on cap rates; performance remains very strong. We don’t anticipate any similar issues as seen in office; we are watching it very closely.

That's it for me. Thank you.

Thank you. A following question is from Lemar Persaud from Cormark Securities. Please go ahead.

Yes, thanks. Maybe for Rob on expenses. Just looking at your waterfall on Slide 10, that divestiture related to CIBC Caribbean assets, is that in the operating cost bucket, that $170 million?

It is. Lemar, good morning, it's Rob. It is roughly $0.02 a share. It's a non-recurring expense; the exit closed just recently, so it's included in that number.

Okay, thanks. Just sticking with that same question, that mid-single-digit expense growth target, do you think you could get there even with some strength in the markets-related business? Or is that mid-single-digit subject to what happens in capital markets?

Well, we do think mid-single-digit is the right range. But having said that, as you pointed out, when performance-based compensation is the item that lifts our overall expense outlook, we're okay with it. Revenues come up, some of the expenses come along for the ride, but on a net basis, it's a positive for shareholders. If revenues continue to outperform, could there be some upward pressure on our expense number? Yes. Are we concerned about it? No. What you're seeing on the slide is very much thematically linked to the efficiencies in the investments we’re making. We try to control that part tightly. We want to maintain growth with profitability.

Thank you.

Thank you. A following question is from Gabriel Dechaine from National Bank Financial. Please go ahead.

Good morning. I have a detailed accounting question for Rob. My question is on mortgages. It seems like the pace of 30-year-plus amortization balances have been declining, but the pace seems to have slowed. I don't know if I'm reading too much into it; it’s more of a macro-type question. Whether it’s getting tougher to get people to increase their payments or take other actions to get back on track, so to speak, because of inflation and stuff like that. Just more broadly, what is your process, and how easy or difficult is it?

Yes, I think it is a very proactive process and it is very thorough conversations with clients that we are having on an ongoing basis. You're right; we are seeing that drop decelerating, or the speed of how it comes down is decelerating a little bit. It is still a good drop. All of that is just clients making voluntary payments—they are not contractually obliged to do that. This is just good financial planning we do with our clients. We expected that to come down over time, there are clients who have an easier time of making those payments. We see some more sophisticated clients in that portfolio who are just saying they want to wait it out and are waiting for interest rates to drop. Those are good conversations as well; reasonable arguments that clients can bring forward. Again, all of those are voluntary adjustments that clients are making based on good financial planning.

And are you stepping it up, so to speak, to try to get that number down even more? Or are you just keeping it the normal course, what you've been doing over the past year or so?

We have been very proactive. We started our efforts early. I don't think we are letting down on our efforts. But there's not a lot we have seen that would give us reason to really step it up or force those discussions more broadly. Overall, the portfolio is performing well. When we look into deposit cushions, even for those non-amortizing mortgages, clients owe substantial incremental liquid assets in their portfolio that would carry them at least 6 to 7 months of payments. There would be room for doing that. But I wouldn’t say we will accelerate that; we will just keep it as a constant proactive outreach to those clients.

Got it. Thanks.

Gabe, it's very consistent with our strategy. Our strategy is to help each of our clients and the output reflects in our financial statements. More importantly, it reflects in our clients' financials. The relationship-oriented approach, whether with Main Street, affluent, wealthy clients, or corporate executives—this is how we operate at CIBC. It is not product-driven; it is relationship-driven, planning-driven. Done right, it reflects well on our clients and also on our financials. We take pride in this, and you’re seeing it in our results.

All right. Thanks, Victor.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Victor.

Thank you, operator, and thank you for your engagement today. Our recent relative outperformance is a direct outcome of delivering consistency for all of our stakeholders, starting with our clients. We're going to continue to build a modern relationship-oriented bank that we've set out on the path to build while maintaining our financial strength and risk discipline. Again, hallmarks of what you're seeing in our results this quarter and in several quarters now. I'd like to thank our 48,000 CIBC team members. I would like to thank our executive team and our leadership team who work collaboratively to bring our purpose-driven culture to life every single day. The success of what you're seeing at CIBC is a team effort possible with a dedication from everyone of our team members. We are motivated, and we are excited to keep delivering for you, our stakeholders. We look forward to reporting on our progress in August and clearly engaging with you between now and then. Thank you for your interest in our bank. Have a great day and a good upcoming weekend. Cheers.

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