Earnings Call Transcript - CM Q1 2023

Operator, Operator

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

Geoffrey Weiss, Senior Vice President, Investor Relations

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 Hratch Panossian, our Chief Financial Officer; and Frank Guse, our Chief Risk Officer. Also on the call today are our group heads, including Shawn Beber, U.S. region; Harry Culham, Capital Markets and Direct Financial Services; and Jon Hountalas, Canadian Banking. They're all available to take questions following the prepared remarks. As noted on Slide two 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'll now turn the call over to Victor.

Victor Dodig, President and Chief Executive Officer

Thank you, Geoff, and good morning, everyone. On today's call, I'll provide an overview of our first quarter results as well as an update on our strategy for successfully navigating the current economic environment with a clear path forward to achieving our 2025 objectives and targets that we laid out at our Investor Day last year. Before we get to the results, let me begin with the senior leadership change we announced last month. Following a 14-year career with CIBC, Laura Dottori-Attanasio has retired from our bank, and we wish her well as she takes on new challenges. Jon Hountalas has been appointed Group Head Canadian Banking, with expanded responsibility of leading CIBC's personal and business banking in addition to commercial banking and wealth management in Canada. Jon is a proven leader. He has had a positive impact in every business he has led at CIBC. He's focused on execution, on talent and our clients, which will serve us well to build on the progress we've made in our Canadian retail business. Now turning over to our first quarter results of 2023. Amidst continued central bank tightening and geopolitical tensions, we had a good start to the year, growing revenue and pre-provision pretax earnings to record levels. Adjusted net earnings were $1.8 billion or $1.94 per share. Our capital position remains strong with a CET1 ratio of 11.6%, comfortably above the regulatory minimum. Our return on equity improved to 15.5% for the quarter. This performance was supported by volume growth across all of our businesses and underscores the ongoing successful execution of our client-focused strategy, our diversified portfolio, and contributions from our organic investments over the past few years. Our expenses declined sequentially. As we indicated last quarter, with many of our key strategic investments completed or in flight, we expect expense growth to continue to moderate through the fiscal year. This should contribute to positive operating leverage as we realize the embedded revenue growth opportunities from our past investments. Looking at our Canadian consumer franchise, we delivered funds managed growth of 9%, almost matching last year's robust pace of 10%. Deposit growth outpaced loans for the first time in seven quarters, reflecting the shift in market sentiment given the higher interest rate environment. Our credit card portfolios continue to perform well above and beyond the Costco co-brand acquisition that closed in March 2022. New account openings were up and were over 30% higher than in the same period last year. This reflects our ongoing efforts to meet our clients' needs through new credit card products, enhanced client experience, and expanded reward offerings. More broadly, over the past 12 months, we've driven strong client acquisition, totaling over 0.5 million net new clients for CIBC. Our focused efforts to attract clients by leveraging the structural advantages we have built in this space will enable us to further scale our retail business in the years ahead. In our North American Commercial Banking and Wealth Management businesses, loans continued to see double-digit growth, while deposits were in the low single digits in both regions. Clients continue to be cautiously optimistic about their businesses. In light of the tougher operating environment, they're looking to strengthen their financial position through tighter working capital and disciplined expense management. While our pipelines remain stable, we've seen slower lending growth due to both reduced client demand and our prudent risk posture in this environment. Our Capital Markets franchise continued to deliver strong results, driven by robust client activity in global markets and strong top-line growth in our Direct Financial Services platform as well. We continue to play a leadership role in energy transition. New Project Media recently ranked CIBC the third largest lender to U.S. renewable energy projects in 2022. At CIBC, we have a long-standing focus on ESG as part of our commitment to create enduring value for our stakeholders. This quarter, our efforts continued to be recognized and validated by prominent third-party organizations. First, CIBC was named to the Dow Jones Sustainability Index North America for the 18th consecutive year. Second, we were included in Bloomberg's Gender Equality Index for the eighth consecutive year. Third, CIBC was named by Media Corpus Canada's top 100 employers for the 11th consecutive year, all recognitions that we're extremely proud of. Sustainability continues to be an essential component of our strategy, and we remain focused on ESG matters of importance to CIBC and our stakeholders. We're monitoring the global economy. While pockets of strength exist, there are growing uncertainties driven by geopolitical tensions, persistent inflation, and interest rate pressures. This will have an impact on economic growth and client activity in the near term. As the landscape evolves, we remain steadfast in our focus on our clients and our long-term strategy of growing relationships with the high-growth, high-touch segments that we're focused on, advancing our digitization efforts, and investing in future growth differentiators, all while staying agile and adapting as needed to the economic environment. We will leverage the investments we've made in recent years to support organic growth while taking a prudent and proactive approach to expense and risk management. A couple of examples: In our retail business, our investments in a comprehensive suite of services and tools tailored towards the mass affluent market, which includes CIBC GoalPlanner, have been successful in deepening client relationships. To date, just under half of our imperial service households have completed the CIBC GoalPlanner process, resulting in significantly higher growth in funds managed and favorable Net Promoter Scores. We also continue to benefit from the investments we have made in recent years in our digitization strategy, incorporating AI, automation, and cloud to further increase connectivity across our businesses. Another example is the migration of online and mobile banking applications to the cloud, which has vastly improved our efficiency in software releases, going from two per month to multiple per week. In addition, cloud automation will reduce costs going forward, improve resilience, and provide a faster change implementation to better serve our clients. We also continue to invest in our future growth differentiators, including our Direct Financial Services platform, which has delivered a three-year revenue CAGR of approximately 15% with revenues over $1 billion for the last 12 months. We've built a differentiated platform and a client-first culture that has allowed us to develop and deliver innovative products and services that enhance the client experience, grow our client base, improve efficiency, and drive stakeholder returns. We expect these benefits to continue to accrue into the future. In short, our investments are paying off in the businesses we're investing in, and you should see this going forward. With that, I'd like to pass the call over to Hratch for an update on our financials.

Hratch Panossian, Chief Financial Officer

Thanks, Victor, and thank you all for joining us this Friday morning. Our team delivered solid results for the first quarter of 2023, supported by strong execution against our client-focused strategy and disciplined resource management. We maintained our revenue momentum, credit performance, and balance sheet strengths while expanding margins and stabilizing expenses. Diluted earnings per share were $0.39, including items of note, most significantly an increase in legal provision related to the previously disclosed Cerberus ruling and an income tax charge stemming from the enactment of the 2022 Canadian federal budget. Excluding items of note, we generated strong sequential growth and profitability with adjusted EPS of $1.94 and ROE of 15.5%. Our balance sheet remained resilient despite the headwinds we absorbed this quarter, as evidenced by a CET1 ratio of 11.6% and an LCR of 134%. The balance of my presentation will refer to adjusted results, which exclude items of note, starting with Slide 8. Adjusted net income of $1.8 billion for the quarter was down 3% from the prior year, driven primarily by a credit provision against performing loans this quarter compared to a release last year. Record revenues of $5.9 billion and pre-provision pretax earnings of $2.7 billion were up 8% and 6%, respectively, from a year ago, benefiting from balance sheet growth across our business, higher interest rates, and strong trading activity. Expenses were up 9% from the prior year but down 1% on a sequential basis as we continue to focus on balancing investment and efficiency improvements. Slide 9 highlights the drivers of net interest income. NII of $3.2 billion was up 2% from the prior year, impacted by the movement of trading revenues from interest income to other income due to rising interest rates. Excluding trading, NII was up 13% from the prior year as a result of continued loan and deposit growth across our business as well as improving margins. Excluding trading, total bank NIM was up 5 basis points sequentially and 3 basis points over the prior year, benefiting from higher margins in several segments as well as interest income from corporate and treasury activities. Canadian P&C NIM of 248 basis points has improved steadily over the last year, up 12 basis points from the same quarter in 2022. Sequentially, it was up 1 basis point as deposit margin expansion due to higher rates more than offset pressure on asset margins, particularly mortgages. Margins also continued to improve in our U.S. segment. NIM of 354 basis points this quarter was up 9 basis points from the prior year and 5 basis points sequentially, primarily due to the net impact of asset yields and deposit pricing resetting higher to reflect recent interest rate hikes. We anticipate continued growth in non-trading interest income, supported by higher funds managed as well as margin expansion, assuming the forward rate expectations in the current yield curves. Turning to Slide 10. Non-interest income of $2.7 billion was up 15% from the prior year, supported by growth in trading income, which was particularly strong this quarter and is expected to moderate. Excluding trading, market-related fees recovered 10% sequentially but were down 4% over the prior year, largely due to investment banking and wealth management fees, which were impacted by lower client activity and market depreciation. Transaction-related fees were up 4% sequentially and 2% from the prior year, driven most notably by strong foreign exchange income from client activities this quarter. Turning to Slide 11. Expenses were down 1% sequentially or substantially comparable, excluding the impact of higher severance incurred last quarter. Compared to the prior year, expenses were up 9%, largely due to strategic investments made throughout 2022 as well as the impact of inflation in that year. As previously communicated, we increased the level of strategic investment in our bank over the last two years to build key capabilities and generate value through relationships, connectivity, and innovation. Approximately half of our expense growth in 2022 was related to investments against the strategy we laid out at our Investor Day, including investments in our Canadian affluent strategy, our U.S. and Canadian private economy businesses, and future differentiators like Direct Financial Services. Our efforts have already delivered results, in terms of market share gains in these segments, robust revenue growth, and a revitalized franchise with stronger customer satisfaction and employee engagement scores. They will continue to drive diversified and profitable growth going forward, contributing a substantial portion of our forecasted growth in 2023 and 2024. As we indicated last quarter, in light of the current macroeconomic uncertainties, we proactively took incremental steps to manage our expense base. In short, we're maintaining our level of strategic investment while continuing to realize opportunities for efficiency improvements. Based on our actions, we expect quarterly operating expenses to stabilize around current levels, resulting in mid-single-digit growth over the prior year for fiscal '23 as a whole. We also continue to be confident in our goal of delivering positive operating leverage over the medium term, as we've communicated at our Investor Day last June. Turning to Slide 12. Our balance sheet remains strong despite the significant draws on capital related to the legal matter and the enactment of the 2022 Canadian federal budget. We ended the quarter with a CET1 ratio of 11.6%, down just 9 basis points from the prior quarter as strong capital generation and share issuance largely offset the one-time headwinds and net organic RWA growth. We currently forecast our CET1 ratio to continue trending higher from here, ending 2023 around 12%. Our liquidity position strengthened this quarter, supported by continued deposit growth and moderating asset growth. We continue to monitor deposit balance trajectory and liquidity closely given the current macroeconomic backdrop. Starting on Slide 13, we highlight our strategic business unit results. Net income in Personal and Business Banking was $594 million, down 15% from the same quarter last year, but up 22% from the prior quarter. Revenues of $2.3 billion were up 4% year-over-year, helped by strong loan and deposit growth, partially offset by lower net margins, wealth commissions, and fees. Expenses of $1.3 billion were up 13% from the same period last year, driven by strategic growth investments, including investments in our co-brand card portfolio and related employee expenses. On a sequential basis, expenses were marginally lower, and we expect them to be relatively stable going forward. Moving on to Slide 14. Net income in Canadian Commercial Banking and Wealth Management was $469 million. Revenues of $1.4 billion were up 4% from a year ago, benefiting from strong results in Commercial Banking, partially offset by market headwinds that impacted our Wealth Management business. Commercial Banking revenue was up 17% from a year ago, driven by margin expansion from higher interest rates as well as continued growth in loans and deposits. Wealth Management revenue was down 5% from the prior year, primarily driven by lower commissions due to decreased client activity and lower assets because of market depreciation. Expenses decreased 1% from a year ago, helped by lower performance-based compensation, partially offset by strategic initiatives. Slide 15 shows U.S. Commercial Banking and Wealth Management results in U.S. dollars, where we delivered net income of $159 million, down 15% from the prior year due to higher credit provisions. Revenues were up 10% over the same period, driven by a 16% increase in net interest income, partially offset by a 1% decline in non-interest income. Strong loan growth of 12%, deposit growth of 4%, and expanded margins supported the higher net interest income, while in our wealth business, particularly strong annual performance fees somewhat offset the negative impact of market appreciation. Expenses were 14% higher year-over-year, driven by ongoing investments to support our growing business and infrastructure requirements. We anticipate continued investment in this segment but expect sequential expense growth to stabilize through fiscal 2023. Slide 16 speaks to our Capital Markets business. Net income of $612 million was up 13% from the prior year, and revenues of $1.5 billion were up 14%. Global Markets revenue grew 17%, supported primarily by client activity in foreign exchange, interest rates, and commodities trading. Direct Financial Services revenue was also strong, increasing 38% over the year, including the impact of deposit margin expansion in our Simplii business. This was somewhat offset by lower advisory and underwriting activity due to market conditions. Expenses of $650 million were up 9% compared to the prior year due largely to investments to continue building our differentiated franchise. Slide 17 reflects the results of the Corporate and Other business unit. Net loss of $47 million was in line with the year ago and $150 million better than the prior quarter. Revenues of $129 million were up 23% from a year ago, driven by the impact of higher margins and FX translation on our international banking business, partly offset by lower income in treasury. Revenues this quarter also benefited from non-recurring income related to corporate and treasury activities. Expenses were up 9% from the prior year but down 17% sequentially. We maintain our guidance of a quarterly loss in this segment going forward. In closing, we remain focused on successfully navigating the current dynamic economic environment as we have demonstrated this quarter. We're proactively managing expenses and our balance sheet resources while maintaining our level of strategic investment for the future of CIBC. We started fiscal '23 with solid momentum across our franchise, and we will continue to leverage our past investments and our strong balance sheet to support our clients, drive profitable growth, and generate long-term sustainable value for our stakeholders. I'll now turn the call over to Frank.

Frank Guse, Chief Risk Officer

Thank you, Hratch, and good morning, everyone. Credit performance this quarter continues to be well in line with our expectations. With the increases in allowances since Q2 of 2022, we remain well covered for any uncertainties in the upcoming quarters. Slide 20 details our provision for credit losses. Our total provision for credit loss was $295 million in Q1 compared with $436 million last quarter. The provision on impaired loans was $259 million, up $40 million quarter-over-quarter. We experienced higher impaired provisions in both retail and business and government loans this quarter. In retail, write-offs trended higher as expected, reflective of delinquencies returning towards pre-COVID levels. In business and government loans, high impaired provisions were attributable to both Canadian and U.S. Commercial Banking across a broad range of sectors with no specific concentration. The provision on performing loans was $36 million in Q1, and we are comfortable with our allowance coverage as we have had prior increases since Q2 of last year as the economic outlook deteriorated. Turning to Slide 21, we remain prudent in our allowances given the economic backdrop. The total allowance coverage ratio is consistent with prior quarters at 63 basis points and remains above pre-pandemic levels. Slide 22 focuses on our lending portfolio mix. Consistent with previous quarters, our portfolio reflects strong credit quality. Our total loan balances were $531 billion, of which 55% is real estate secured lending. Our variable rate mortgage portfolio accounts for a little over one-third of our mortgage portfolio and shows strong credit quality and performance. The average loan-to-value for our uninsured mortgage portfolio was at 52%, up from 48% a year ago as we have seen a continued house price drop in most markets. We continue to expect further moderation of house prices and as a result, year-over-year increases of LTV ratios. House prices peaked at around May or June of last year, and we saw some slowdown of the price decreases in recent months. The business and government portion of the portfolio has an average risk rating equivalent to a strong BBB, which has remained steady and continues to perform well. Slide 23 details our gross impaired loans. Overall, gross impaired balances were up in Q1 with an increase in both retail and business and government loans. New formations were also up in Q1. The increases of both gross impaired balances and new formations are in line with our expectations and for the most part, still below pre-pandemic levels. Slide 24 details the net write-off and 90-plus day delinquency rates of our Canadian consumer portfolios. As communicated in prior quarters, we expected write-offs and delinquencies to revert towards pre-pandemic levels, which aligns with our expectations. Slide 25 provides an overview of our Canadian real estate secured personal lending portfolio. We continue to focus our origination efforts in the segments where clients have deep and balanced relationships with us. The majority of our mortgage growth over the last two years has been with clients where we have those relationships. 88% of mortgages are owner-occupied with the balance being principally investor mortgages. Our late-stage delinquencies across these portfolios continue to remain low compared with pre-pandemic levels. We will continue to take a prudent approach and are closely monitoring as interest rates rise and markets evolve. On Slide 26, we have included details on the portion of our mortgage portfolio that will be renewing in the next 12 months. Over that period, $22 billion of fixed-rate and $9 billion of variable-rate mortgages contractually come up for renewal. At this time, we still only see a small portion, less than $20 million, of mortgage balances with clients we see as being at higher risk from a credit perspective and whose LTVs are in excess of 70%. We actively monitor our portfolios and proactively reach out to clients who are at higher risk of financial stress. Slide 27 shows our FICO score and LTV distribution in our Canadian uninsured residential mortgage portfolio. The key takeaway is less than 1% of our uninsured mortgage portfolio has both a score of 650 or less and an LTV over 75%. Overall, our mortgage portfolio is well positioned and continues to perform well within our expectations. On Slide 28, we provide details of our commercial real estate exposures in both Canada and the U.S. 69% of our Canadian portfolio and 60% of our U.S. portfolio are investment grade at the quarter's end with prudent lending standards for our CRE exposures in both Canada and the U.S., with this strategic focus remaining on well-capitalized sponsors with strong track records and experience managing through economic cycles. Our exposures in these two regions remain well diversified and continue to perform well. In closing, our performance is well in line with our expectations this quarter and is also better than the pre-pandemic levels. Our credit portfolio quality and coverage continue to remain robust. As economic conditions evolve, we continue to proactively work with our clients who are more at risk to provide solutions that ultimately drive positive outcomes. I will now turn the call back to the operator.

Operator, Operator

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

Ebrahim Poonawala, Analyst

Good morning. I guess maybe Hratch, if you could start with Slide 9 in terms of the NII outlook. Just talk to us in terms of three of the core NII, driven by what your expectations are on NIM? And what's going to be driving that NII growth in a world where balance sheet is slowing? And then maybe how much of a drag is the trading NII be going forward if rate hikes are more or less done in Canada and the U.S.? Thank you.

Hratch Panossian, Chief Financial Officer

Good morning, Ebrahim. Thanks for the question. Happy to take that. Overall, what you've seen in our trajectory of NII, as we've highlighted on the slide here in a number of quarters, is that we've got strong momentum, and we expect that momentum to continue. We've got a strong balance sheet. We've got margins that are positioned to continue expanding with where interest rates are now. On the back of that, we've produced NII growth, excluding trading of 13% over the last year. Going forward, we've been very clear on our guidance. We've got strong margin trajectory from here. What you saw this quarter is consistent with what we said, a few basis points positive in terms of core NIM expansion. A couple of basis points that I would call more quarter-over-quarter noise from last quarter's negatives coming back and so forth. But I think the core NIM, ex-trading, from that 164 level is positioned to continue increasing a few basis points a quarter, particularly accelerating, I would say, in the back half of the year, maybe more stable here in the shorter term. But between that and continued balance sheet growth as we continue deploying capital with our clients to grow our businesses, we think that will continue driving strong NII growth. Now in terms of your other question, I think it was on the trading side and what that can do. Again, that can create some overall noise to NII between trading and non-trading as you can see over the last few quarters here. That may continue if rates rise. But overall, I would look at trading results in aggregate. I would advise you to look at NII excluding trading as we do.

Ebrahim Poonawala, Analyst

Got it. And I guess maybe one question for Jon. Jon, congratulations on the new role. Maybe give us a sentiment check around commercial customers. Clearly, a lot of macro uncertainty. Credit seems to be normalizing, but holding up well. So where do you see growth coming through over the next few quarters on both commercial and consumer? Thank you.

Jon Hountalas, Group Head Canadian Banking

Thank you, Ebrahim. Let me start with commercial. There are several factors at play when you look at commercial loans. Some are macro and some are probably specific to us. Let me start on the macro front. Last year was a blowout year in terms of loan growth across the industry. I think the average was 17%. We were probably at 19%. The average over 10 years is something like 10%. So why so high? The economy was strong, receivable is high, inventory is high, billing with supply chain, a lot of that is winding down. You see some sectors actually declining, all for good reasons, by the way. To real estate, it's been a big area of growth. Real estate is quiet – that will subdue growth a bit. Finally, entrepreneurial confidence is down versus six months ago. Supply chain, better. Inflation, better. Labor, the same. Interest rates, worse. If you put that all together, I think entrepreneurs are a little more tentative. They're looking at where interest rates are going? What's the impact on the economy going to be? I think that's the macro factor. The micro factors are maybe specific to CIBC. Like in this type of environment, we're going to be a little more conservative. To be clear, we're going to support our clients. We know them well. We've been through our due diligence. We know how they operate. For new clients, we're going to be a bit more careful. You put that all together, I see loan growth in the mid-single-digit range, and I think we'll be in the mix on that. That's the commercial side. I don't think the consumer side is that much different. I think you'll see a tentative consumer. I think you see product growth already slowing. I think you'll see growth in the, where I think loans in the commercial side will be mid-single digit. In the consumer side, it might be low mid-single digits. But the general sentiment, roughly the same.

Ebrahim Poonawala, Analyst

Got it. Thank you for that.

Operator, Operator

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

Meny Grauman, Analyst

Hi, good morning. Jon, you mentioned increased caution in your underwriting decisions for the commercial sector going forward. Could you provide more details on this, especially in terms of geographic areas and sectors where you're observing a greater need for caution?

Jon Hountalas, Group Head Canadian Banking

Meny, to clarify, regarding our existing clients, we continue to follow the same approach we've used for 13 years. There is no significant shift in our strategy. We understand our clients and are committed to helping them grow and supporting them. We are not avoiding any sectors. However, when it comes to new clients, we are exercising a bit more caution due to the current uncertainties. It's important to note that not all new clients or prospects are the same. We are less concerned about the sector they belong to and more focused on how long we have known these potential clients. If we have been tracking a client for three or four years and there's an opportunity, we will pursue it. For newer clients whom we don't know as well, particularly in Commercial Banking, there can be significant differences; some prospects might be in our pipeline for five years while others for only six months. We will be more aggressive in pursuing the long-term prospects compared to those we've only recently encountered.

Meny Grauman, Analyst

And Jon, specifically on the CRE side of the business, and there's a lot of questions about office. We're definitely seeing return to work stall out. So, is there any change there in terms of your view or your posturing from an underwriting perspective when it comes to the CRE book, in particular, and office exposure?

Jon Hountalas, Group Head Canadian Banking

We have a well-established commercial real estate business with a track record of low losses over the past 20 years. Our portfolio is in solid condition, and we generally maintain long-term relationships with our clients, who have been fairly quiet lately. The industry is self-regulating and aware of the challenging environment, having made significant profits in recent years, which has resulted in a careful approach to new deals. We're observing a decline in transaction volumes, particularly in the office sector, where we hold about $4 billion, representing 10% of our portfolio. Sublease rates have certainly increased, but most of our office properties are managed by institutional clients. We are not altering our strategy regarding office assets, as we haven't expanded that segment in the past year or two. There are no significant changes or signs of stress at this moment, and we are actively monitoring the situation, as this asset class continues to evolve.

Operator, Operator

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

Scott Chan, Analyst

Good morning. Jon, I'd like to follow up with you regarding the private wealth area. I noticed you mentioned a 6.2% increase in net flows over the past year. Can you provide some insight into what the assets under administration are in that segment? Is that 6.2% growth considered above historical averages, especially in such a challenging year?

Jon Hountalas, Group Head Canadian Banking

Net flows have been positive. It seems we have two different situations within our two businesses. The mutual fund sector has generally been sluggish across the industry. After a record year in 2021, 2022 saw negative net redemptions, and this year, the whole industry remains in the negative. However, we are experiencing significant success in our private bank and Wood Gundy franchise. This is due to our regular sales discipline, client referrals, and close client relationships combined with strong financial planning. We have the right products and have made the necessary investments, resulting in achievements in Gundy and our private bank. Additionally, there are signs that mutual fund sales, which have been challenging, may be starting to improve, giving me a sense of optimism that has been lacking for some time.

Victor Dodig, President and Chief Executive Officer

And Scott, just to build on Jon’s comments, again this kind of ties back to our strategic investment agenda. We've been investing significantly in our private bank, and that's been driving really strong flows. We've been investing in our private wealth on the investment side. As Jon mentioned, CIBC Wood Gundy, those flows are coming from existing clients, they're coming from new clients, and they're coming from more competitive recruiting as people see the investments we're making in our platform on Wealth Management being something that they want to be part of. That's why you're seeing those flows and you should see those flows continue going forward.

Scott Chan, Analyst

Okay. Lastly, regarding DFS, the revenue has shown solid year-over-year growth. However, focusing on Innovation Banking, there have been some challenges on the EC side over the past year. Could you provide insights on that performance in relation to the strong year-over-year growth and share your outlook for fiscal 2023?

Jon Hountalas, Group Head Canadian Banking

Perfect. So, it's Jon, and I'll start with innovation banking, and then I'll send it over to my colleague, Harry on DFS. We highlighted the innovation banking business on Investor Day. We put out bold targets. I talked about exceeding every target we've set out. I'm convinced we'll exceed the targets we put out on Investor Day. All that said, the industry is quieter, for sure. We were probably doing 50% loan growth in the first three or four years of the franchise. That's not happening today. We're watching the book carefully. It's doing very well. Remember, we brought over a group of pros from Wellington. They’ve been doing this for 20 years. They’ve been with us since fiscal '17. We've teamed up with our own CIBC team. There's institutional knowledge around this business. It's performing well. Over the five years we've had it, I think losses are under $10 million. It's just we watch. We're being careful. Inflows into the business, capital going into the sector has slowed down. We're all over it. But so far, no signs of stress. Harry?

Harry Culham, Group Head Capital Markets

I'll just follow on from Jon there. Thank you for that question. As we discussed at Investor Day, our DFS, or Direct Financial Services business, is really a future differentiator for our bank, much like our innovation banking franchise. Just by reminder, it comprises Simply, which is our low-cost digital banking platform; our Investor's Edge, which is our digital-driven low-cost direct investing platform; and our alternative solutions, which is our innovative personal and B2B FX platform. It was created in 2020 just by a reminder to really capture the accelerating market demand for direct banking solutions, leveraging our technology and capital markets and expertise, which has a proven operating model for agile delivery. We have seen our investments in technology and data really enabling these results that are in front of you today. We were a leader in FX payments. We're onboarding new clients as we execute on our capabilities, and we're using the data analytics to make pricing decisions to expand on our margins as rates increase in Simply and Investors Edge. So, we're pleased with these results, and we think we continue to drive that 15% growth as we laid out at Investor Day.

Operator, Operator

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

Doug Young, Analyst

Good morning. Just the first question, I guess, Hratch, for you. I guess credit RWA was down sequentially. Counterparty RWA was down sequentially. Were you actively selling books? Or can you kind of dig into what drove this? And can you also talk a bit about the outlook for RWA as we move through fiscal '23?

Hratch Panossian, Chief Financial Officer

Thanks for the question, Doug. The short answer is no, we have not been offloading any risk from our portfolio, nor have we engaged in any unusual activities. It’s all part of our normal operations. The core earnings from our business contributed positively this quarter, along with the share issuance. Market factors, especially in counterparty credit, also played a role. During the quarter, we generated 30 basis points of capital tied to our growth. Our organic risk-weighted asset consumption primarily came from our core activities, reflected in the Pillar 3 pack at the back. There was about $4.4 billion in total book growth in core credit, resulting in 14 basis points of capital generation after accounting for credit growth. Market movements positively influenced our position by about 10 to 14 basis points as well. Counterparty credit decreased by $2.7 billion, and we saw a drop in the mark-to-market values on our derivative positions, which reduced our receivables and counterparty credit risk. This contributed another 14 basis points, along with 10 basis points from our issuance, allowing us to counter the challenges we faced, resulting in a total of 51 basis points. Despite the impacts of the Canadian federal budget, legal reserve, and the phase-out of the ECL add-back leading to a negative 9, we remain confident that our capital will continue to grow. As detailed in our press release, we resolved that legal file at a lower level, which provides a small capital boost. We expect to start around 11 to 7 for the next quarter, with some potential positives from Basel III. While we're currently estimating a neutral impact from its implementation in Q2, we anticipate generating an additional 5 to 10 basis points moving forward. Starting from 11 to 7, that suggests we could reach 12 by the end of the year without needing to offload risk or change models or methodologies. Additionally, the U.S. operation, currently on standardized approaches, will eventually transition to advanced, yielding further benefits. I hope this clarifies our position.

Doug Young, Analyst

No, I definitely appreciate the color. Second, I guess on NIMs, Canadian NIMs were down quarter-over-quarter, but the all-bank NIM ex-trading was up, and I'm hoping you can kind of unpack a little bit about what drove that. I think maybe this kind of goes to the corporate. I think you talked a bit about nonrecurring items in corporate and in treasury. If the two tie together, maybe can a bit about what those unusual or nonrecurring items were and quantify them? Thank you.

Hratch Panossian, Chief Financial Officer

Yes, I’m happy to provide more details in response to Ebrahim's question. In this quarter, much of the growth was due to core net interest margin (NIM) expansion in our businesses. As we've indicated previously, our balance sheet adjusts with rising interest rates, leading to repricing on the asset side compared to the deposit side, where some rate changes are passed on to clients. This overall dynamic contributes a few basis points to our NIMs each quarter. However, there are other factors at play. For instance, mortgage margins have decreased, which slightly pressures NIMs. Additionally, there have been shifts in our deposit mix, moving from non-interest-bearing to interest-bearing or term products. These aspects offset each other a bit, but we have factored them into our forecast. Thus, starting from this quarter's NIM of 166, I would adjust that to about 164. There were a couple of basis points of net positive, which reflects the fluctuations in corporate and other segments, particularly in treasury-related activities from quarter to quarter. Last quarter, we noted a couple of basis points of negative impact from these areas, and some of that has normalized in this quarter’s results. The 164, upon review, primarily reflects growth in our core businesses. Regarding the Canadian traditional banking performance, although it declined primarily due to mortgage margin challenges, the overall Canadian personal and commercial banking, when we include the commercial segment and the Simply business, showed an increase in NIM, contributing one basis point to total bank NIM growth excluding trading activities. The FCIB business is classified under corporate and other, and part of this corporate segment, which isn't driven by our net interest income strength, is from FCIB. This business is well-positioned to gain from higher U.S. interest rates as well. Our U.S. operations were robust, and combined contributions from FCIB in that market added another basis point to NIM. Additionally, corporate and other segments yielded another basis point that I would categorize as core. As we mentioned last quarter, we had some excess liquidity, and for this quarter, our cash resources were about $15 billion lower than before. When cash increases in deposits temporarily, we can't deploy it immediately. However, in the longer term, we utilize those funds effectively in treasury and high-quality liquid assets to secure higher yields, which has also been beneficial. I would attribute the NIM expansion to those three main factors, which are expected to continue, hence I start from 164 and look ahead. We are noticing some positive momentum and expect more acceleration towards the year's end, possibly with more stability in the first half of the year. Our estimates include some continued shifts from non-interest-sensitive deposits to higher-priced deposits, and we've accounted for a significant portion of that in our forecast. If this trend becomes more pronounced, as we are observing across the industry, it might exert additional pressure on margins, but we still anticipate some upward movement, albeit slightly less than previously expected. Currently, we project NIM to increase by 10 to 15 basis points from Q4 of 2022 to Q4 of 2023, likely leaning closer to the 10 basis points but remaining possible within that range.

Doug Young, Analyst

Very helpful. Thank you very much.

Operator, Operator

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

Gabriel Dechaine, Analyst

Good morning. I want to focus on the NIM outlook, particularly regarding the anticipated acceleration in the latter half of the year. Can you share your perspective on the macro environment? Additionally, what would happen to your guidance if rates were to be cut? I believe that could be a more positive scenario.

Hratch Panossian, Chief Financial Officer

Thank you for the question, Gabe. I'll address that. Our approach remains consistent; we do not attempt to forecast the market. As mentioned earlier, our assumptions align with the current forward curves, which do not indicate any rate cuts for the rest of this fiscal year. We believe Canada is mostly finished with cuts, though there may be one more. In the U.S., we expect a bit more movement but do not anticipate any cuts. We factor in some migration of deposits. In Canada, the mortgage market is showing positive momentum, and new commitments are moving closer to normal levels—though they are not entirely back to normal yet. We are cautiously optimistic and do not expect to reach full normalcy, but the situation is better than last year. All of these elements contribute to our forecast. If a rate cut occurs, our disclosures about interest rate sensitivity indicate that the impact accumulates over time. However, a short-term cut would be relatively insignificant, possibly resulting in low single-digit basis points over time, with a gradual increase thereafter.

Gabriel Dechaine, Analyst

But those hedges don't work the other way? I thought that was the…

Hratch Panossian, Chief Financial Officer

They do help. They do help. That's why you don't feel as much of it right up front, right? Remember, part of our exposure is to short-term rates. And so when you see the actual cut and the front end of the curve declines, you feel some of that right away. The hedges come in with the fact that you don't feel 100% of that. Generally, about 60% of our exposure right upside, downside has been to long rates. That takes several years to price in, but you'll feel some portion of it right away.

Gabriel Dechaine, Analyst

I usually don't ask about trading because people are often reluctant to reveal details, but this quarter's trading numbers, particularly in rates, are significant. I'm curious about what factors contributed positively this quarter. Additionally, since this is an asset line item that varies frequently, can we expect to maintain similar performance going forward? Also, regarding capital, while VAR increased, market risk-weighted assets decreased. Could you explain the relationship between the trading yield and this outcome? Why didn't the risk-weighted assets rise in that area?

Harry Culham, Group Head Capital Markets

Good morning. It's Harry here again. I'll take that. Yes. It was indeed a very strong quarter across the platform. I mentioned DFS earlier. We are focusing on implementing the strategy we've established over the years, and our investments in the platform are enabling us to achieve results even in tough times for our clients. We have a well-diversified client base, which is delivering significant returns. We are maintaining and growing our market share with our core Canadian clients in trading and corporate investment banking. Additionally, we're expanding our U.S. platform, aiming for growth of over 10%. This success is enhanced by our connectivity with the rest of our bank, allowing us to provide capital market solutions to all our clients. The trading environment has been exceptional, and we continue to execute our strategy effectively. The quarter was particularly strong, and we expect future results to align with our Investor Day projections of around 7% to 10% annual growth across the capital markets platform. We are confident in these numbers. Regarding the VAR and usage, Hratch previously mentioned counterparty credit risk. I would like to emphasize that we deploy risk to our clients and do not engage in standalone proprietary operations. The VAR is dedicated to client activity, and that remains the case. Our clients are very active right now.

Gabriel Dechaine, Analyst

No, I get the VAR going up; activity goes up. It just back in analyst school, I learned that, that usually causes RWAs to go up, but that's fine. Thanks.

Operator, Operator

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

Lemar Persaud, Analyst

I want to maybe start off with Frank. Just given the normalization of impaired PCLs this quarter, can you talk to your outlook for the year? I think the message is that we should still think about normalization to historical averages, but any thoughts would be helpful.

Frank Guse, Chief Risk Officer

Thank you for the question, Lemar. As I said in my prepared remarks, we are very pleased with the performance and resilience of our credit books, performing well within our expectations. As you pointed out, we did previously communicate that we do not expect low levels that were experienced over the last one or two years to sustain in the more uncertain and challenging macroeconomic environment. I would reiterate our outlook of normalization towards pre-COVID levels, expecting our impaired PCL ratios to trend towards that mid-20 to 30 basis point range that we previously communicated. For fiscal '23, we can expect to be at the lower end of that range. Overall, that guidance and outlook still remains intact.

Lemar Persaud, Analyst

Okay. I appreciate it. And then just flipping over to Hratch. You mentioned you're building up toward the 12% CET1 ratio by the end of 2023. Is that similarly just continued normalization to historical averages? Or does it allow for something more? And specifically, just referring to the CET1 ratio impact of normalization?

Hratch Panossian, Chief Financial Officer

Yes. Thanks for the question, Lemar. We've been pretty conservative in terms of our outlook to 12%. When I talked about that, adding 5 to 10 basis points roughly on average on a quarterly basis, that assumes that there is some normalization of the environment. We did have some negative credit migration this quarter. We're actually assuming more than what we had this quarter. We’re assuming that counterparty credit risk amount that came in is based on natural gas prices, FX prices, interest rates, and so forth. We assume some of that will revert back out, won't stay at these levels. The way I would think about it is, looking at our ability to generate 7 to 10 basis points in terms of core earnings, net of organic RWA growth to support profitable growth in our clients. Those negative items, they roughly add up in our forecast to what the issuances are through our DRIP program and other programs. Think of it as roughly in the order of a 10 basis point negative headwind. We expect that environment to normalize or getting more pessimistic even. That gets offset by the DRIP, which still allows us to continue having 7 to 10 basis points. We'll leave the DRIP on for now. Once the environment is more certain, some of the negative outlook out there gets better, then at that point, we'll revisit it. It gives us the ability to absorb those headwinds for now.

Lemar Persaud, Analyst

Appreciate the time. Thanks.

Operator, Operator

The next question is from Sohrab Movahedi from BMO Capital Markets. Please go ahead.

Sohrab Movahedi, Analyst

Thank you. Most of the questions have been asked and answered. Hratch, for clarification, in your comments about the expected expense growth for the remainder of the year, you referred to previous investments and the benefits from them. I didn't hear you mention inflation. Could you explain what kind of inflation is considered in that expense growth and whether it could lead to unexpected outcomes, either positive or negative?

Hratch Panossian, Chief Financial Officer

Thank you, Sohrab. I did mention inflation in the prior year in '22 as having been a driver. Looking at our expense growth last year, half of it was roughly our investments. The other half was our core operating expenses, and a good portion of that was the impact of inflation. We've assumed going forward is pretty in line with what you're seeing, some normalization through 2023. You're seeing inflation starting to come down. We’ve been more scientific than just looking at headline numbers. We’ve looked at our expenses. We know what has already been adjusted for inflation and what may be adjusted coming forward. Based on what I see right now, I don't think that's a material plus or minus. And so, overall, we are still confident that with that in mind, we will stabilize expenses around these levels. We are continuing to invest on a sequential basis as revenues grow and expenses stay stable. That's a positive result, and that will allow us to get to our positive operating leverage over time.

Sohrab Movahedi, Analyst

Okay. And then maybe I'll just come back to Jon now. Jon, I think it's been less than a month, maybe that you've got the official Canadian Banking kind of segment seat. Any early impressions worth kind of sharing with us right now with just a certified, albeit less than a month?

Jon Hountalas, Group Head Canadian Banking

Thank you for the question, Sohrab. Yes, I do have some first impressions. First on strategy. We outlined it on Investor Day; early days for me, but I don't see major changes. We're focused on execution. When we think about execution, it's in three key themes. The first is segments. You will see us push much harder in Imperial Service. I think that's a big differentiator. To win in mass affluent, we have to leverage Imperial Service. So more on that down the road. Second, we need to get better at small business. We've made big investments over the last two years, both people and in technology. To win in mass affluent, you must be able to deal very well with small businesses and the entrepreneurs. So more to do there. On strategic investments, both Hratch and Victor have spoken to it. We've made some important investments over the last couple of years. There's financial planning, investments in CRM, and we bought a co-brand card, but we're going to harvest those investments. Every one of those business cases had strong financial metrics against them. It’s our job to deliver those metrics, and I think we can. Finally, how to operationalize this is always tricky. There’s more heavy lifting to do. There’s more investments to make, but we’re going to pace ourselves. We’re going to focus on margins. We’re going to focus on expenses. What you’ll see in the pretty short term is improvements on both fronts. So, to conclude, first 30 days; if it's not obvious in my voice, I'm pretty excited.

Operator, Operator

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

Darko Mihelic, Analyst

Thank you for taking my question. I know it's getting a little late here on the call. My question is also for Jon Hountalas, but it refers to the mortgage business. I was hoping maybe you could help me understand some of the dynamics that are happening on the ground. I'm specifically looking at your Slide 35. Now when I look at this slide, the first thing that comes to mind is, I think maybe in the past, you may not be showing us this information in the same way. I think this slide is purely originations. Correct me if I'm wrong. So just a few questions come to mind, and I'm hoping to better understand what I see here. First, with respect to origination at $9 billion, that's down 47% year-over-year. Typically, we see this progress to higher originations in the next couple of quarters. So I'm curious if you think that might actually happen this year? The second observation is when I look at the loan-to-value distribution at the bottom part of this graph, I think, correct me if I'm wrong, this pertains to the originations that happened in the quarter. If that's the case, what I see is people that put down the smallest amount of down payment are growing variable rate mortgages despite the fact that the variable rate is higher than the fixed rate. So I'm curious if that is something that's being advised to the customer? If that's new, if that would be like relative to history, something that's new that's going on? Lastly, Jon, is that experience do you think based on what you see kind of market-wide? Or might this be a little CIBC specific? Thanks.

Frank Guse, Chief Risk Officer

Okay, Darko. It's Frank here. You're right; Page 35 shows originations, and that number is down year-over-year. It's reflective of a slower mortgage market right now compared to a very strong market that we saw last year, and that, of course, had an impact on our new originations. Similarly, as you pointed out, FICO score distributions and loan-to-values reflect current originations in the quarter. I think it's Page 27, where we show the same statistics for our entire portfolio. So, that's how you could compare those two. And then there’s a slightly higher percentage of people in those 75% buckets that take variable rate mortgages. I don't think it's necessarily advised; it's a client's choice we are working with clients. We've also seen, and Jon can add anything here, but we've also seen the share of variable rate mortgages dropping with the interest rate environment evolving. So that number would have come down from previous quarters quite a bit.

Jon Hountalas, Group Head Canadian Banking

Yes, 70% of clients today are taking fixed-rate terms; 30% are taking variable. That's a bit of a difference from last year. Again, as Frank said, advice depends client by client, based on their individual circumstances.

Darko Mihelic, Analyst

And do you think, Jon, is there any difference than the industry?

Jon Hountalas, Group Head Canadian Banking

No.

Darko Mihelic, Analyst

No, okay.

Jon Hountalas, Group Head Canadian Banking

In terms of mortgages, I think you'll see them in the low single-digit range throughout the year. It has slowed down.

Operator, Operator

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

Mario Mendonca, Analyst

Good morning. I'll try to be quick. Harry, could go back to you for a moment. Obviously, a big number in the trading side as other folks have offered. I went looking around for quarters that even came close to $206 million in estate trading. I don't think it's coincidence, but it just happens to be those quarters when credit spreads came down. I mean, a classic example would be Q3 '20 when credit spreads came in. So it would appear to me that what we're seeing at least in part is some mark-to-market on the fixed income book. First of all, do I have that right?

Harry Culham, Group Head Capital Markets

Good morning, Mario. I don’t think you have that right. This is not about our inventory; it’s about client activities and transactions. We have a well-diversified client base, and you can see significant returns. We’re maintaining and expanding our market share with our core Canadian clients, both in trading and corporate investment banking. Additionally, we’re growing our U.S. platform, targeting over 10% growth in those areas where we have strengths. All of this aligns with our connectivity to the rest of our bank as we provide capital market solutions to all our clients. The results were very strong, and the trading environment has been exceptional. We continue to execute on our strategy, and the quarter was particularly strong. We expect future results will be in line with what we shared at Investor Day, which indicates growth of about 7% to 10% annually across the capital markets platform. We're confident in those projections. In terms of the VAR and usage, Hratch mentioned counterparty credit risk earlier. What I want to emphasize is that we allocate risk to our clients and do not have stand-alone proprietary operations. The VAR is related to our client activity, which remains strong, and our clients are very active right now.

Mario Mendonca, Analyst

So, Harry, just a coincidence then that every quarter where credit spreads came in, the fixed income trading was really strong? Or is it really that declining credit spreads lead to increased trading activity? Because it seems like more than just a coincidence to me.

Harry Culham, Group Head Capital Markets

Yes, I think it's the latter. I think our clients are more active in general in that environment. I would say though that, as you've seen, even in extremely volatile markets that are not completely disrupted, we do outperform. You've seen that over the years. You've seen the stability of earnings be front and center for us as we try to deliver consistent, sustainable earnings growth in the Capital Markets platform, really delivering all of Capital Markets to our clients. So, I would say it's the latter; our clients are very active.

Mario Mendonca, Analyst

Let me discuss deposits for a moment. We are experiencing a decline in deposits, particularly in the U.S., but that is not the case for CIBC in Canada. Deposits are stable here. Can anyone explain why Canada is different? Was there simply not as significant an increase in deposits during the pandemic? What is your outlook on this?

Victor Dodig, President and Chief Executive Officer

It's always difficult to ascertain why specifically, Canada is different in this instance, Mario. I think it has to do with a number of different things. When you look at the stimulus that was provided in Canada through the emergency wage subsidy, the CEBA program, the SERV program, the student program, pound for pound, the stimulus was large. That's number one. Number two is, Canadians, we tended to open up slower than the United States did. So there was a tendency to spend less. Three, there's a conservatism factor in there that's playing out. I think that's, in a nutshell, why you see on a relative basis, a slower burn off. Those deposits will burn off over time. We're prepared for that. We're managing around that. The question that Hratch raised earlier is more going to go from non-interest sensitive to term. We've planned for that as well. The most important thing strategically for us as a bank is, are we growing deposits in those areas across our franchise? We're growing them in the Canadian personal bank, the Canadian commercial bank, in the innovation bank, in the U.S. bank, and our corporate bank. That's just a function of how we're serving our clients. We are a diversified relationship-oriented bank, and it's coming through in terms of all of our numbers, including deposits going forward.

Mario Mendonca, Analyst

And finally, Victor, you mentioned that the bank has experienced or might experience some deposit burn off. Can you provide an outlook on this for CIBC or if the bank has considered the situation in Canada as a whole? What would you estimate are the excess deposits in the banking system right now? Are we looking at around $400 billion? What are your thoughts?

Victor Dodig, President and Chief Executive Officer

It's $150 billion to $200 billion in total.

Mario Mendonca, Analyst

That's what you think for the banking system in total, $150 billion to $200 billion right now?

Victor Dodig, President and Chief Executive Officer

Yes. Much of this is due to stimulus, but some of it involves money shifting from markets, equities, and bonds into fixed-term deposits. Consumers are acting sensibly; with 4% returns on 1-year deposits, they prefer to hold onto their money until there is more certainty. I believe that moving forward, some of this money will return to the markets as conditions stabilize, while some will simply be the gradual decrease of excess deposits resulting from stimulus over time.

Operator, Operator

And this is all the time we have for questions. I'd like to turn the call back over to Victor.

Victor Dodig, President and Chief Executive Officer

You've been extremely generous with your time, everyone. I want to thank you for that. Thank you, operator. Just to recap, we delivered solid first quarter results in the face of an increasingly challenging and dynamic environment. Despite continued geopolitical tensions and inflationary pressures, our core CIBC franchise demonstrated the benefits of diversification, demonstrated the benefits of our unrelenting focus on our clients. We hope that you got the points that it's demonstrating the investments that we've made in the past in organic growth and that we believe that we can harvest going forward. You see that across all of our businesses, whether it's the Innovation Bank, our affluent strategy, our Capital Markets and DFS strategy, and our U.S. strategy. We've exhibited our resilience in difficult times in the recent past, and we're confident in our ability to navigate the current economic environment. Our relentless focus on our clients will continue to deliver successful outcomes, and we're going to help them make their ambitions a reality and create value for our shareholders over the long term. Finally, we remain well capitalized and well provisioned with a strong balance sheet. In conclusion, I want to thank all of our CIBC team members globally for bringing our purpose to life every day. It's thanks to our collective dedication that we have built a relationship-oriented bank that's positioned to continue to bring the best of our bank to our stakeholders, all of our stakeholders. And to our shareholders, thank you for your continued interest and support. We look forward to sharing our results next quarter. Bye now.

Operator, Operator

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