Earnings Call Transcript - CM Q1 2022

Operator, Operator

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.

Geoffrey Weiss, Senior Vice President, Investor Relations

Thank you, and good morning. We will begin this morning's presentation with opening remarks from Victor Dodig, our President and Chief Executive Officer; followed by Herach Panossian, our Chief Financial Officer; and Shawn Beber, our Chief Risk Officer. Also on the call today are a number of our group heads, including Mike Capatides, U.S. Commercial Banking and Wealth Management; Harry Culham, Capital Markets; Laura Dottori Attanasio, Canadian Personal and Business Banking and Jon Hountalas, Canadian Commercial Banking and Wealth Management. They are all available to take questions following the prepared remarks. During the Q&A to ensure we have enough time for everyone to participate and finish on time, we ask that you please limit your questions and requeue. As noted on Q2 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 meeting over to Victor.

Victor Dodig, President and Chief Executive Officer

Thank you, Geoff, and good morning, everyone. I'll start our call today with some comments on our first quarter results and the operating environment. I'll then turn the call over to Herach to review our financial performance in more detail. Earlier this morning, we announced another quarter of record results with adjusted earnings of CAD 1.9 billion or $4.08 per share, which is up 14% from last year. Our performance was supported by top line growth of 11%, which drove positive operating leverage. Our first quarter results also underscore the ongoing strength of our highly connected franchise, an increasingly supportive economic environment and steady execution against our strategic priorities. We're earning business from new clients. We're deepening relationships with existing ones, and we're continuing to build our CIBC franchise with the long term in mind. We also reported an adjusted ROE of 17.6% and a CET1 ratio of 12.2%, the latter being 170 basis points above the regulatory minimum. Credit quality remains strong as the economy improved and our clients maintain high levels of liquidity. This morning, we also announced the proposed 2-for-1 stock split that will be voted at our annual meeting in April. Our stock price has appreciated significantly, thanks to our collective focus on living our purpose and driving consistent financial results. That makes now a good time to announce a split, which would make our shares more accessible to many retail investors. Turning to our business results. In our Canadian consumer franchise, we delivered market share gains in deposits and loans that will be further advanced when we officially become the exclusive provider of Costco Mastercard in Canada. This serves to grow and diversify our credit card portfolio, and we're looking forward to welcoming many new clients to our bank. We also continue to invest in our digital banking capabilities to meet the needs of our clients today and in the future. As just one example, we've recently announced a fintech partnership with nCino to digitize and automate the client journey, enabling a faster, more efficient and more transparent experience for our business owners. And earlier this week, we announced an exclusive partnership with Pollinate to launch TIL by CIBC in Canada. TIL, spelled T-I-L, is a cloud-based digital-first platform for small and medium-sized businesses that enables entrepreneurs to accept payments, administer loyalty programs and gain insights into their business. It's already operating successfully in markets such as Australia and the United Kingdom with very positive feedback from business owners. We view this as an opportunity to bring an improved modern service to over 1 million merchants in Canada and strengthen our CIBC client offerings in business banking. In our North American Commercial Banking and Wealth Management business, our unique structure provides us with an aligned focus on the private economy in both traditional and emerging industries. We co-locate our teams, we serve our entrepreneurial clients in an integrated fashion, and we drive solid cross-business referrals. Our structure, coupled with a constructive economic environment, led to double-digit loan growth and solid banking growth, solid deposit growth in commercial banking on both sides of the border. Wealth management activity also remained strong with double-digit growth in assets under management in both Canada and the United States, driven by market activity, strong investment performance and solid net flows. In Capital Markets, robust client activity in foreign exchange and equities drove double-digit growth in our trading revenue. In the U.S., we are delivering on our objective to grow with revenue increasing 36% from the prior year. Additionally, our capital differentiated capital markets franchise, a business that is highly connected to the rest of our bank, continues to deliver strong results. Revenue from nontraditional capital markets clients increased 17% over the prior year. Within our direct financial services business, we made further enhancements to our global money transfer capabilities by enabling real-time direct money transfers to eligible Visa debit and credit card holders in over 80 countries. This added capability comes at a time when client demand for digital and contactless banking options continues to grow. It's one of many examples of how CIBC is innovating at the forefront of the digital banking experience for our clients. During the quarter, we also advanced our shared ambition of building a more sustainable future and creating social and economic opportunities for underserved communities, including an announcement of a new $100 million commitment dedicated to investing in low carbon and climate tech funds to support new climate innovations. Our continued focus on enhancing environmental sustainability was also recognized by CDP, who reaffirmed our A minus rating, placing CIBC amongst the highest ranking Canadian financial institutions and in the top tier of banks globally. More details on our progress on this and other important ESG initiatives will be available in our March publication of our sustainability report. Now before I turn the call over to Hratch, I'd like to share my thoughts on the operating environment. We can all see that there's a fair amount of uncertainty driven by geopolitical tensions, supply chain disruptions and inflationary pressures. These factors may have an impact on economic growth and client activity in the near term. Recognizing this economic backdrop, the most important thing I'd like to stress is that we've demonstrated over the past two challenging years that we have a strategic playbook that will not only support our clients but also manage our risk and allow us to invest for future growth. We have a well-diversified, resilient portfolio, a strong balance sheet, prudent risk management and a dedicated CIBC team that will continue to deliver for all of our stakeholders. And with that in mind and with those comments, I'd like to turn it over to Hratch for his commentary.

Hratch Panossian, Chief Financial Officer

Thank you, Victor, and good morning all. Starting on Slide 7. We are pleased to have delivered another quarter of strong growth and profitability while maintaining the resilience of our balance sheet. This performance was enabled by the investments we've made in our client-focused diversified business and purpose-oriented team. Diluted earnings per share was $4.03 for the quarter, excluding the amortization of acquisition-related intangibles and expenses associated with the acquisition of the Costco credit card portfolio, adjusted EPS was $4.08 while adjusted ROE came in at 17.6%. Strong growth in revenues and pre-provision pretax earnings underpin this quarter's results and credit quality remains strong as Shawn will cover later in our presentation. The balance of my presentation will refer to adjusted results, which exclude items of note, starting with Slide 8. Adjusted net income of $1.9 billion for the quarter was up 15% from the prior year, while pre-provision pretax earnings of $2.5 billion were up 11%. Revenue was $5.5 billion, up 11% year-over-year, driven by broad-based volume growth, resilient margins, and robust fee income across our bank, including strong performance in our trading and wealth management businesses. Expenses were up 1% sequentially and 10% from the prior year, largely due to performance-based compensation, continued increase in investments to fuel sustainable growth, the impact of inflation and increasing activity, including business development across our business. Slide 9 highlights the drivers of net interest income. Excluding trading, NII was up 11% from last year due to robust growth in client business on both sides of the balance sheet. We anticipate continued NII growth supported by volume and strong margins assuming the rising interest rate expectations embedded in the current forward curve are realized. Total bank NIM was up 2 basis points sequentially. Underlying this, Canadian Personal and Commercial Banking NIM was largely stable, up 1 basis point sequentially, benefiting from continued deposit growth and an aggregate relatively stable margins otherwise. PNC NIM is positioned to continue improving, assuming the current forward curve helps by growth in higher-margin unsecured lending, including the impact of the Costco credit card portfolio. NIM in the U.S. segment was down 3 basis points relative to last quarter, primarily as the impact of higher interest-earning assets more than offset NII contributions from deposit growth. Consistent with our prior guidance, we continue to anticipate downward pressure on NIM as loan growth outpaces deposits and PPP income subsides. Slide 10 provides an overview of our sensitivity to interest rate increases. An instantaneous and sustained 100 basis point increase across all interest rates applied to our balance sheet as at quarter end would have an estimated benefit of around $450 million on net interest income over the next 12 months. Approximately 60% of the sensitivity is to short-term rates, while the remainder is driven by the gradual repricing of our balance sheet to longer rates. As a result of this continued repricing, all else being equal, NII would be expected to benefit by over $800 million in the second full year following this type of rate shock. Turning to Slide 11. Noninterest income of $2.4 billion was up 11% from the prior year, driven by growth in market-related and transactional fees. Robust client activity drove trading revenues 20% higher than the prior year with particularly strong growth in equities and foreign exchange. Growth in card, credit and deposit and payment fees was also robust, reflecting the rebound in economic activity over the past year. Turning to Slide 12. Expenses were up 10% year-over-year, with higher performance-based compensation being the most significant driver. Excluding this, expenses were up 7%, driven in part by higher investment related to strategic initiatives to drive our continued growth. Excluding these initiatives, expense increases were most significantly driven by inflation, increased travel and business development activity, and general business growth, offset in part by efficiency improvements from past investments in business and infrastructure simplification. Looking ahead, we intend to continue balancing our ongoing investments with efficiency improvements and expense discipline to achieve our financial objectives in fiscal '22 and beyond. As we said in the past, we have the ability to manage the pace of investment in the face of a more challenging operating environment in order to work towards our positive operating leverage target. Turning to Slide 13. Our balance sheet remains strong as we continue to deploy our capital and liquidity resources to support organic growth across our client franchise. We ended the quarter with a CET1 ratio of 12.2%, down 13 basis points from the prior quarter. Strong internal capital generation in the quarter was largely offset by organic RWA growth to enable our clients' ambitions. Capital was negatively impacted this quarter by a reduction in unrealized gains in our HQLA portfolios, the continued phaseout of the transitional ECL add-back and our share buybacks. Going forward, we will continue to prioritize the deployment of our balance sheet resources towards organic growth and return of capital to shareholders while maintaining our resilient balance sheet position. Starting on Slide 14, we highlight our strategic business unit results. Net income in Canadian Personal and Business Banking for the quarter was $697 million, up 7% from a year ago. Pre-provision pretax earnings of over $1 billion were up 11% from the prior year, reflecting continued momentum in our consumer franchise and market share gains. Revenues of $2.2 billion were up 8% from the same quarter last year, largely due to NII supported by broad-based volume growth and double-digit growth in fee income, which benefited from mutual fund commissions and improved consumer activity. Expenses of $1.1 billion were comparable sequentially and up 5% from the same quarter last year, driven by employee-related expenses and higher spending on strategic initiatives. Moving on to Slide 15. Net income in Canadian Commercial and Wealth Management was $462 million, up 31% from a year ago. Pre-provision pretax earnings of $624 million were up 21% from a year ago, benefiting from an improved commercial outlook, stronger markets and increased client activity. Commercial Banking revenue was up 24% from a year ago, driven by 19% loan growth and 12% deposit growth over the same quarter last year. Wealth Management revenue was up 16% from the prior year, driven primarily by higher fee-based assets and commissions, which benefited from market appreciation, positive net sales and increased transaction volumes. Expense growth of 18% was in large part due to higher revenue performance but also reflects increased strategic investment. Slide 16 shows U.S. commercial and wealth results in U.S. dollars, where we delivered net income of $188 million, up 21% from the prior year. Pre-provision pretax earnings of $242 million were up 4% over the same period as continued growth in strategic client relationships drove broad-based growth in funds managed. Revenues were up 10%, supported by strong growth across both Commercial Banking and Wealth Management units. Commercial Banking momentum continued to benefit from the economic recovery driving average year-over-year loan growth of 13% in the segment, excluding PPP forgiveness. In our Wealth Business, solid AUM growth of 16% benefited from strong client flows and market appreciation despite being somewhat tempered by this market performance. Expenses were elevated in Q1 as anticipated, up 16% over the prior year. The increase was driven primarily by ongoing investments in our team and business infrastructure to support our U.S. franchise as it continues to scale. We expect sequential expense growth to moderate in the coming quarters. Slide 17 speaks to our well-diversified capital markets business. Net income of $543 million was up 10% from the prior year, while pre-provision pretax earnings of $708 million were up 9%. Underlying this, revenues of $1.3 billion were up 11%, driven by strong performance across all businesses, particularly in equities and foreign exchange, corporate banking and direct financial services. Expenses were up 14%, driven by employee-related compensation as well as continued investments in talent and technology in support of our strategic growth. Slide 18 reflects the results of the Corporate and Other business units. Net loss of $47 million in the quarter compared to a net loss of $59 million in the same quarter last year due to lower provisions for credit losses, offset partially by lower pre-provision pretax earnings. As highlighted in the past, expenses in this segment are impacted by the timing of enterprise initiatives. Expenses were up 7% from a year ago but down 22% sequentially as the prior quarter included higher costs associated with these initiatives including the launch of our new brand. We anticipate a net loss between $50 million to $100 million a quarter in this segment going forward. In conclusion, we started the year with strong momentum across our business with a record quarter, which demonstrates once again the competitiveness and earnings power of our diversified franchise. We continue to leverage our strong balance sheet and profitability to support our clients, fuel organic growth and increased distribution of capital to our shareholders, all while maintaining the resilience to withstand stress in the event of deteriorating macro conditions. We expect our continued strategic investments to sustain this momentum but we maintain the flexibility to adapt our pace of execution to any changes in the environment. In aggregate, this positions us well to drive strong shareholder returns relative to the industry in a period of elevated uncertainty. With that, I'll turn the call over to Shawn.

Shawn Beber, Chief Risk Officer

Thank you, Hratch, and good morning. In our first fiscal quarter of 2022, our businesses performed well across our bank while navigating more volatile markets and changing conditions. Credit quality remains strong. As we anticipated, we're starting to see some normalization in our retail credit portfolios, though our clients continue to exhibit higher savings and payment activity than prior to the onset of the pandemic. At the same time, this quarter saw higher case counts and hospitalizations as a result of the Omicron variant, the return in some areas of more restricted public health measures and the continuation of supply chain disruptions. Together with geopolitical developments, these conditions have contributed to higher levels of inflation and market volatility, and we are monitoring these developments closely. And while uncertainty persists, particularly given events over the last 24 hours, our allowance levels are strong and provide coverage for a variety of outcomes. Turning to Slide 21. In Q1, the provision for credit losses was $75 million compared with a provision of $78 million last quarter. Provision on impaired loans was up modestly at $126 million in Q1. Impaired provisions were up in Canadian Personal and Business Banking due to higher write-offs and higher delinquencies and in U.S. Commercial and Wealth due to higher impairments. In Canadian Commercial and Wealth and in Capital Markets, impaired provisions were lower as a result of a few reversals. In our performing portfolio, we had a provision reversal of $51 million this quarter, primarily driven by a favorable change in our forward-looking indicators, partially offset by credit migration, which we have been expecting to see increase in our retail portfolio as clients begin to revert to pre-pandemic spend patterns. Overall, credit performed well this quarter, reflecting the strength of our portfolio and underwriting discipline. Slide 22 details our allowance coverage by line of business. In Q1, we had a slightly lower allowance dollar level from the previous quarter resulting from the reversal in performing provision and higher impaired losses. Our coverage ratio was down by 3 basis points quarter-over-quarter, mainly driven by our portfolio growth. We continue to feel comfortable with our current coverage, which remains above pre-pandemic levels. Slide 23 illustrates our lending portfolio mix, which remains consistent with previous quarters, reflecting good diversification and strong overall credit quality. Our total loan balances were $483 billion, over half of which are mortgages. The average loan-to-value for our uninsured mortgage portfolio is currently 48% with an average LTV for uninsured mortgages originated this quarter at 66%. The business and government portion of the portfolio has an average risk rating equivalent to a BBB and continues to perform well. Slide 24 provides an overview of our gross impaired loans. Overall gross impaired balances were up slightly in Q1. Impaired balances in retail remained flat, while we had higher impairments in U.S. Commercial and Wealth, as mentioned earlier. Notwithstanding a slight increase in the gross impaired balances in the quarter compared with Q4, both the gross impaired loan ratio and our new formations are still lower than our pre-pandemic run rate. Slide 25 details the net write-off and 90-plus day delinquency rates of our Canadian consumer portfolios. While net write-offs in our retail portfolio remained relatively flat in Q1, we are seeing an increase in the 90-plus day delinquencies on a quarter-over-quarter basis in a few portfolios. We expected to see an increase in delinquencies and write-offs from the lows experienced in fiscal 2021 as the benefits of government support are removed and clients' liquidity and spending patterns start to normalize. The experience this quarter is aligned with our expectations and is somewhat favorable to our initial forecast. Lastly, as we work towards the closing of the Costco portfolio in early March, we've been focused on integrating the data and clients into our systems and calculations. You'll see the impact of this in our Q2 results. Overall, the credit quality of the Costco portfolio compares favorably to our existing cards portfolio. In closing, we started fiscal 2022 with continued strong credit performance against the backdrop of the uncertainties impacting markets globally. Our allowance levels are strong and remain above pre-pandemic levels. We are monitoring developments closely as expectations for inflation, the rate environment and geopolitical conditions evolve and how that may impact our outlook. And we are well positioned to support our clients through the continued uncertainty. I'll now turn the call back to the operator.

Operator, Operator

And the first question is from John Aiken from Barclays.

John Aiken, Analyst

I wanted to dive in a little bit in terms of the domestic commercial loan growth that we saw 5% growth sequentially and, as noted, 19% year-over-year. Just wondering if we can get a little more color in terms of what type of activities are driving this? What are you seeing that the business is doing? What's the sense of the pipeline through the remainder of the year, particularly with the volatility that we're seeing in the economy? And what type of competitive response are you seeing in terms of the market share growth that presumably you're gaining?

Jon Hountalas, Senior Vice President, Canadian Commercial Banking and Wealth Management

Thank you for the question, John. So for the quarter, our loan growth, both for the quarter and for the year, was diversified by geography and diversified by asset class. In Q1, specifically, 25% of the growth came from our real estate business. The rest came from other diversified areas. Notwithstanding all the challenges you've heard, demand for clients' products is high. They can push through price increases; supply chain challenges aren't really impacting when inventory comes in late, clients are able to sell it. So when we talk to clients, they're talking about growth, they're talking about investment, and it's reflected in our loan growth. This quarter, about 40% of the growth came from new clients, 60% came from increases, some of it from M&A and some of it from natural growth. Interestingly, the pipeline going forward is strong. It's stronger than I've seen it since 2019. So it continues to be good. You see our credit quality is very strong. So overall, we're feeling pretty confident.

John Aiken, Analyst

And in the competitive environment, are you observing any pressures on pricing or any shifts in people moving down the credit curve?

Jon Hountalas, Senior Vice President, Canadian Commercial Banking and Wealth Management

It's a competitive market. We don't notice much in terms of pricing changes. Occasionally, there are deals where clients push their limits, but we don't engage in those situations. We understand our clients well and avoid stretching our offerings too far. Overall, nothing in the past year has indicated a significant change from historical trends. It's a challenging market, but we're successfully competing.

Ebrahim Poonawala, Analyst

I guess just Hratch, going back to Slide 12 around expense growth. To us, I think there was a lot of concern last quarter. The stock reacted negatively to your guidance for negative operating leverage in the first half. Year-over-year, the efficiency ratio was relatively flat. When we think about the 7% or the 10% year-over-year expense growth, is this the high watermark, both in terms of dollar and growth rate? Should we expect to trend lower through the course of the year? What does that imply when we think about operating leverage, either on a quarterly basis or full year? Any color there would be helpful.

Hratch Panossian, Chief Financial Officer

Ebrahim, thank you for the question. It's a good question, and we think about this topic a lot because we believe managing our resources and deploying capital prudently for our shareholders is one of the key things we do here. So let me start with reminding everybody how we think about our investments and managing our cost base. We are very disciplined and deliberate in terms of how we allocate capital on behalf of our shareholders. And we think in this environment where the banking landscape continues to evolve and uncertainty exists, it's important to allocate capital to invest to transform our bank and to create sustainable competitive advantages, and that's what we've been doing. And alongside our balance sheet, we do see the expenses coming through our income statement as one of the key resources we have to invest, and we manage it that way. Our overall objective, as we said, is always to increase investments to generate growth while reducing operational expenses through efficiency and discipline and through that overall generate strong top line performance and generate positive operating leverage over time. And we've done that successfully. If you look at the pandemic years, we've invested heavily in our business, team and clients, and we're seeing great results as a part of that. We've seen market share gains and momentum across all of our businesses. We have seen accelerated top line growth. You're seeing that this quarter, double digits, same with last quarter. And we've achieved slightly positive operating leverage despite the increased investment and despite some of the disruptions to revenues from the pandemic. Coming into this year, we've guided to do the same thing. Looking at Q1, thingslook like they are at or ahead of plan. Internally, we are delivering what we expected from our strategic initiatives, in fact, a little bit ahead in terms of benefits realization. Externally, we're seeing some pressure from inflation, maybe a little bit more than what we thought. That's in the 10% increase noted on the slide here. We're, of course, seeing with the higher performance-based compensation. So I think this is all according to plan. With this 10% number here, we achieved slightly positive operating leverage, which is better than what we had guided to because of that top line performance. We've seen revenue growth outpace the higher expenses that are being driven because of that revenue and inflation piece. So from here, do we think, on a full year basis, the 10% watermark; whether it's a high watermark or not, that will depend on performance. We think at this point, performance will continue to be strong. If continued strong performance exists this year, we'll probably end up with high single digits. I wouldn't say double digits but probably towards high single digits expenses total rather than mid-single digits because of that performance. But at the same time, we would feel confident about delivering that positive operating leverage. If the uncertainty that we're seeing does manifest in a slower top-line environment, we have levers we can pull. We've identified contingency actions we can take for pacing of our investments and being thoughtful around that, and we will still strive, as I said in my remarks, to achieve that positive operating leverage.

Ebrahim Poonawala, Analyst

Just clarification on those, Hratch. One, when you talk about high single digits on the back of a stronger revenue backdrop, are you assuming some benefit from rate hikes in Canada and the U.S. in that statement? And does some component of that $71 million on that slide, does that roll off or does that become part of the run rate going forward?

Hratch Panossian, Chief Financial Officer

Thanks for the follow-up, Ebrahim. I think when you think about this on the strategic investment side, those are investments that we are making that are going to continue increasing. So we see for the foreseeable future here, we're going to have that level of investment continue and it should be more elevated. Some of that turns into ongoing revenues for us, and then some of it is going to be ongoing operational expense, but we think that investment level is going to continue.

Meny Grauman, Analyst

Harry, in your segment, we're seeing the average loan balances on a sequential basis up about 10%. And I'm just wondering what's driving that? Is it utilization, or are there other factors pushing those balances as well?

Harry Culham, Senior Vice President, Capital Markets

Thank you for the question. As you know, within Capital Markets, we provide lending solutions really to a well-diversified client franchise. This is truly a client-driven business. So that would include loans to our personal clients in direct banking, simply in Direct Investing Investors Edge. That would also include corporate clients, particularly as we grow in selected industry verticals in the U.S. and really continue to maintain our leadership position in areas such as renewables and energy transition. And then, of course, institutional clients, which include insurance companies, asset managers, pension plans and private capital on both sides of the border. The majority of that loan growth is from corporate and institutional loan growth, particularly in the U.S., where we see about 70% of that growth. We have been strategically and deliberately growing our loans in the U.S., including institutional clients, where we're providing asset-based financing that has very strong returns and are very well collateralized. So to answer your question, it's very well diversified. There is some increase in utilization as well, but it really is driven by the client demand for this resource, in particular as we deepen relationships and build our client franchise.

Meny Grauman, Analyst

And in terms of that personal side of the business, what kind of growth are you seeing there?

Harry Culham, Senior Vice President, Capital Markets

We're seeing single-digit growth in the Simply platform. We have seen some growth as well in the Investor's Edge portion as we strive to grow market share. So it's very well diversified across the platform, but the majority of the growth is the corporate institutional loan growth.

Meny Grauman, Analyst

So just to clarify, what you're saying is that we're not seeing accounts becoming more cautious from a risk perspective. Instead, this represents positive growth rather than clients withdrawing from their lines due to increased risk aversion. Is that correct?

Harry Culham, Senior Vice President, Capital Markets

That's absolutely correct. We've seen very robust client opportunities over the past few quarters. You've seen our strong loan growth numbers. We're really happy with the results and comfortable with the risk as we grow that franchise.

Doug Young, Analyst

I want to go back to just the comment you made on your partnership, and I probably get this wrong, but with TIL -TYL, that's the cloud-based platform for businesses. I'm just wondering whether you can talk about is this anticipation of the launch of open banking in Canada? Because I do say that because Australia and the U.K. are two areas where open banking does exist, and the SME seems like it's a tremendous opportunity for open banking. So hopefully, just to get a little more detail on that.

Victor Dodig, President and Chief Executive Officer

Sure, Doug. Let me first address open banking, and it was a question that was asked in the last quarterly webcast, and it's one I want to reaffirm that we're ready for open banking. We welcome open banking; we encourage our government policymakers to think about both the offense and the defense in open banking. When it comes to our bank, specifically, we're well set up for it both through our personal and business banking franchise as well as through our direct financial services franchise. We've got strategies that cover the map and allow us to compete very effectively. Today, we specifically announced two fintech-related investments that relate specifically to our business banking franchise in our personal bank. One is the Encino platform that will make lending easier. The TIL platform, it's still not TL. I learned that as well on the way. It has been very successfully implemented by National Australia Bank and by NatWest Bank. We've made an equity investment in the underlying company called Pollinate that runs TIL. We think it's a real opportunity for us to serve small and medium-sized business clients. Laura and her team have been working with their technology team at the forefront of this. I'm just going to hand it off to her to talk about why TIL is an important aspect of competing as the world changes.

Laura Dottori-Attanasio, Senior Vice President, Canadian Personal and Business Banking

Sure. Thanks, Victor, and thanks, Doug, for the question. We're really excited with this partnership. We are looking forward to being able to offer our business clients more services. So this is really about having more of an integrated ecosystem for payment processing. We think this gives us a great advantage where we can combine payment processing and small business banking services under one service provider. When we think of the work we'll be doing with nCino, that should actually help us as we digitize, I'd say, to grow faster and really offer better services and experiences to our client base.

Hratch Panossian, Chief Financial Officer

Yes. Thanks. Certainly happy to take that. It's embedded in that other when you look at our NII slide and the waterfall chart in the bottom right corner there, you'll see. The other buckets within that other bucket is the impact of our PPP prepayment activity and the PPP income this quarter. What I can tell you breaking that out is this quarter, it was actually down a bit. We started seeing that moderating. So on a sequential basis, it was a negative to NIM, but it was offset by other general prepayments and repayment activity happening, which sent the overall to positive in that other bucket. Going forward, I'd say there's probably a few basis points, single-digit, low single-digit basis points left in terms of help to the NIM from PPP, and we do anticipate it to go away here in the next quarter or so; it's a little bit unpredictable. But that will go away. That's the impact to the U.S. NIM, and it really isn't a material amount of NII to total bank, and so we don't anticipate it impacting total bank NIM.

Nigel D'Souza, Analyst

I had a question for Shawn. Based on my calculations, it looks like you still have a sizable amount of allowances on performing loans remaining from what you built during the pandemic? Could you give us some color on whether there's a likelihood that you may not be able to fully release those excess allowances given the headwinds that we're seeing politically, economically, on inflation and interest rates? Should we start assuming that a good portion of those allowances may not be released?

Shawn Beber, Chief Risk Officer

Thanks for the question, Nigel. So we did build provisions, as you noted, throughout 2020 and then have been on a trend for the last several quarters in terms of releases. There are a couple of different moving parts in terms of how that performing provision behaves. I should say, from a coverage perspective, we peaked at 89 basis points. We're down at 61 basis points, and we started immediately prior to the pandemic at 51 basis points. As that coverage ratio has come down, it's been a combination of releases as a result of the improving economic backdrop and the economic outlook continuing to improve, but also as a result of portfolio growth. And as we've seen, we've had strong portfolio growth over the course of the last couple of years. As we add provisions, performing provisions in relation to that portfolio growth that starts to, if you will, consume some of that performing PCL build. From here, I mean, we've certainly got uncertainty in the environment. We have talked in prior quarters about the fact that the outlook if they continue to improve; we would expect to see those releases. We'll assess the uncertainties today as we go quarter by quarter, but that trend has been one that we've been witnessing over the course of the last several quarters in terms of the releases as well as the consumption through organic growth in the portfolio. We assess that every quarter. As we update our FOIs, that will help guide in terms of what ultimately happens with those provisions.

Nigel D'Souza, Analyst

Okay. Great. And if I could kind of just drill down a little bit further into that. When I look at your FLIs on Slide 35, and your indicator on the household debt service ratio, could you give us a sense of your assumptions for rate hikes that are baked into your base case forecast? Does the rate hike assumption differ for your upside and downside case?

Shawn Beber, Chief Risk Officer

Yes. The ratio we have accounted for assumes a 100 basis points increase in interest rates and an inflation rate around 3 percent based on our economic team's outlook. This assumption is included in our forecasts. From that point, we have adjusted for various upside and downside scenarios, but our base case prediction includes a 100 basis points increase in interest rates for the upcoming year.

Sohrab Movahedi, Analyst

I just wanted to quickly go to Laura. Laura, the segment the Canadian personal and small business segment improvement in efficiency ratio quarter-over-quarter versus last year is probably the lowest since, I don't know, Q1 '20. Back then, you had much higher net interest margins. Can you just talk a little bit about how much of this is because of management of expenses as opposed to efficiency pickups from prior investments? Where do you think this may kind of trend understanding that it's hard to talk about a particular segment? But I'm just trying to understand how you're thinking about this.

Laura Dottori-Attanasio, Senior Vice President, Canadian Personal and Business Banking

Look, as Hratch mentioned earlier when Ebrahim asked his question, so this is a bit of a derivative of that. A lot of what we're seeing is the investments and the hard work that the whole team at CIBC has put in, which is allowing us to deliver, I'd say, some real quality volume growth. We're seeing great top-line growth. We've put in a lot of work to ensure that that will be consistent and sustainable. As Hratch mentioned, we're going to continue to do that. That said, we do expect to continue to spend and invest in our strategic initiatives. Therefore, I would expect we're going to see volatility quarter to quarter as we do that. But again, as Hratch said, we're going to be prudent in terms of what we do. We're pacing our investments. We are continually looking at ways to simplify how we do things in order to deliver more bottom line to our stakeholders. So hopefully, that answers your question.

Sohrab Movahedi, Analyst

It does. But can I just drill down a little bit, for example, FTE count is up versus last year, but your efficiencies have improved. Is it just more of a variable comp-based FTE? Do you expect the FTE trends to continue? I'm just trying to kind of get a feel for what sort of control you have over your expenses? How much of this is because of the better revenue environment?

Laura Dottori-Attanasio, Senior Vice President, Canadian Personal and Business Banking

No, I think we have really good control over our expenses. A lot of what you're seeing there are increases in productivity. We've talked about in previous calls some of the great tools we've put in place for our team members, whether that's ECR, our goal planner, etc. So we have a lot of tools that are allowing our team members to be much more productive. Absolutely. We need to start by implementing and rolling them out. They are beneficial for us from a defensive perspective in keeping our existing clients satisfied and providing them with the tools and experiences they need. Additionally, it will support our growth and enable our team members to be more productive once we have those in place.

Gabriel Dechaine, Analyst

Can you clarify your rate sensitivity? Have you mentioned it before? What assumptions have you made regarding surge deposits? Are they included or excluded from your guidance? Additionally, regarding the pace of rate hikes, what do you anticipate in terms of passing deposit betas? Are you considering 50% to 75% of volume?

Hratch Panossian, Chief Financial Officer

Yes, thanks, Gabriel. To start, when you look at the disclosure, there are a lot of assumptions in that, as you mentioned, with respect to the deposits that are more transient in nature, those are included in this number when we provide that. We have treated those as more transient. So we've invested and hedged them accordingly, and we do anticipate some of that to moderate. We've managed that appropriately, and we feel confident about the NII impact from those deposits and how that will progress from here. But it is included in that sensitivity. In terms of the assumptions we make, this goes a bit to Ebrahim's follow-up question earlier. When we talk about our outlook, and it was all over my script, we base it on the forward curve. Therefore, when we talk about our outlook in terms of top line, when I talk about operating leverage expectations for this year, that assumes the increases in the forward curve today. If you look at since the end of January and the end of the quarter when we first looked at this, I think despite everything that happened yesterday, we were not far off where we were before yesterday. In fact, rates, if I just look at 3- to 5-year in Canada, you're in the teens basis points even ahead on the swap curve where you were at the end of January. You've seen material run up over 100 basis points, and based on our sensitivity, you can do the math on how much you would expect that to impact '22 earnings. We expect to manage that and one of the changes could be the assumptions on sensitivity. As you mentioned, only about one-third of our deposits are sensitive to beta assumptions. Some of it is not interest-bearing; some of it is indexed to prime, etc. The beta assumption really comes in only about one-third of the deposits. We've modeled that on the basis of past experiences that includes modeling and any convexity that we would have experienced in the past. We think about what the future environment might look like, and all of that is reflected in our outlook; it's reflected in the sensitivity that we disclosed. Now, could it be different? Yes, there's always risk around that. But that's manageable if we see a little bit of variation in betas. Frankly, you could cap them both ways; you can have opportunities to lag on the way up in deposit repricing or there could be competitive pressures that push betas a little bit further. So in either direction, we have the ability to manage that, and we feel confident the top line will behave as we've outlined.

Gabriel Dechaine, Analyst

Well, that's a lot to chew on. My next question is on the commercial growth, 18% in Canada. Jon, can you talk to me about the impact of lending to private equity sponsors, like the businesses they're acquiring, and do you do any co-investment alongside these partners? Because I've heard about those types of borrowers being a pretty important influence on commercial loan growth from all the banks. So maybe throw some numbers around there.

Jon Hountalas, Senior Vice President, Canadian Commercial Banking and Wealth Management

We typically do not engage in co-investment. Regarding our growth this quarter, it's not a significant part of our overall business. Our loan portfolio stands at $80 billion, and this segment likely added only a few points to our growth, which is not substantial. The attention on higher leverage is noted; indeed, some loan funds have entered the market, making it more competitive. We concentrate on a select group of sponsors, nurturing close relationships that yield a large portion of their business, and our loan portfolio remains strong. These sponsors are certainly active, and as you're aware, there's plenty of private capital available. By choosing and deeply engaging with your sponsors and following your clients closely, positive outcomes are likely to arise.

Victor Dodig, President and Chief Executive Officer

Mario, thank you for your question. As you have been following our narrative and evolution, the bank has significantly transformed over the years, with a primary focus on our culture, the collaborative way we serve our clients, and our ongoing commitment to meeting their needs, both for existing and new clients. Looking back over the last seven years, our client experience scores have improved more than anyone else in the industry, and we are still striving for better. This reflects how clients perceive our service across every area of the bank. We are a client-focused bank, leveraging all our resources to serve our clients, managing within our risk appetite, and investing in the technologies needed to modernize our operations. Clients can handle routine tasks independently but can also meet with our relationship managers. We're investing in all areas including private banking, capital markets, commercial banking, and personal banking to strengthen those relationships. This is the bank we are today and will continue to be. You can expect us to keep delivering strong results for our shareholders, excellent client experiences, and impressive employee Net Promoter Scores, which I take great pride in. People feel positive about our bank and our client-centric approach, and that should lead to strong financial outcomes.

Scott Chan, Analyst

Maybe going back to Jon or Shawn, on the Canadian commercial segment. You kind of talked about the improved commercial outlook. Just on the credit side, I noticed last year, I think the impaired loans were just 1 basis point and 9 basis points this quarter. Jonathan, is there metrics like watch list that you could maybe talk about in terms of how you envision any normalization in impaired loans within the segment this year or next?

Jon Hountalas, Senior Vice President, Canadian Commercial Banking and Wealth Management

Thank you, Scott. Fiscal '21 was remarkable from a loan loss perspective. The start of '22 has been very good. The watch list looks good. We watch; we look at things by risk rating, size of credit, the numbers are down. There's nothing we see that causes us any great concern. I'll pass it over to Shawn if he has anything to add. But so far, so good, and confidence in the underlying confidence of our clients is good. You see very few clients today going backward. Revenues are up, margins are good, and people are doing well. I know it's uncertain, but so far, it's good.

Shawn Beber, Chief Risk Officer

I'd just add the outlook is based more on a view towards some level of normalization over the course of time. How quickly that normalization comes is a function of what the economic backdrop is going to look like. There's been additional uncertainty at this stage than there would have been when we put it in our FLI, but we'll see what that looks like next quarter. To John's point, we feel very good about the portfolio sits today, and we'll continue to monitor for that. As Jon mentioned, it's lumpy, and we're always watching for those types of stresses to develop, but no thematics at this stage.

Mike Rizvanovic, Analyst

A question for Sean. I just wanted to quickly ask about the trends in insolvencies. Maybe this is more so on the consumer side. Are there any impediments right now in this environment with COVID and maybe the courts being backed up? Is there any sort of backlog building in terms of when things are maybe running a bit more smoothly that you get a rapid increase in insolvency? I guess what I'm asking is, are there any hindrances in your ability to petition someone into insolvency at this point in time?

Shawn Beber, Chief Risk Officer

I think that was more an issue earlier on in the pandemic. We have started to see, and we're not seeing it in our portfolio just yet, but we have started to see an uptick in, for instance, business bankruptcies. As I say, we're not seeing it in our portfolio as yet. We're not anticipating a significant wave of that at this stage and believe we've got an appropriate level of provision coverage for the stress that we anticipate over time in the portfolio just from a normalization perspective, as opposed to any deterioration.

Operator, Operator

This concludes the question-and-answer session. We'll turn the meeting back over to Victor.

Victor Dodig, President and Chief Executive Officer

All right. Thank you, operator, and all of you for asking your questions. I know they're very technical in nature, and I hope we answered all of them. I want to take this opportunity to thank our incredible CIBC team, who continues to operate with a client-first mentality, which is a critical component to the success of our bank. Our strong performance this quarter highlights the momentum across all of our businesses as we continue to build on our 2021 accomplishments and execute against our very clear strategic priorities. This, combined with a resilient balance sheet, is enabling us to invest in client-focused, profitable growth initiatives and continue to position CIBC for the future. Over the past few years, we have invested significant resources to enhance our banking capabilities, to grow market share and to streamline our cost base. I think you can see all of this in our results. We've seen evidence of our strategy success in our past investments as we deliver profitable growth and volume growth. We're a very different bank today with a collaborative culture that's on the ascent. We're going to stay focused on a client-first strategy with an investment road map that drives profitable growth over the short, medium, and long term. I want to thank you for your interest in CIBC, and we look forward to speaking with you on our next call. Take care.

Operator, Operator

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