Earnings Call Transcript - CM Q4 2023

Geoff 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 Hratch Panossian, our Chief Financial Officer, and Frank Goose, our Chief Risk Officer. Also on the call today are a number of our group heads including Shawn Beber, US region; Harry Culham, Capital Markets and Direct Financial Services; and Jon Hountalas, Canadian Banking. They are all available to take questions following the prepared remarks. We do have a hard stop this morning at 8:30. So during the Q&A, please limit your questions to one to ensure you all get a chance to participate. We'll make ourselves available after the call for any follow-ups. As noted on Slide 2 of our investor presentation, our comments may contain forward-looking statements which involve assumptions and have inherent risks and uncertainties. Actual results may differ materially. With that, I will now turn the call over to Victor.

Victor Dodig, President and Chief Executive Officer

Thank you, Geoff, and good morning, everyone. I know it's a busy day for all of you, so I want to highlight three key messages today. First, we made significant progress on our strategic growth priorities in 2023 and achieved solid financial results despite the normalization of credit losses. Our strong performance is evident in our healthy net interest margins, positive operating leverage, and robust capital liquidity. Second, we are enhancing our competitive advantages by focusing on four strategic priorities, which I will discuss shortly. Third, while global economic growth is expected to slow, our client-focused strategy, disciplined resource allocation, and experienced leadership team will ensure profitable growth in fiscal 2024 and beyond. Now, focusing on our results, fiscal 2023 showcased our bank's strength and resilience in a challenging economic climate marked by high interest rates and inflation, affecting our clients to varying degrees. Guided by our purpose, we supported our clients with advice to help them navigate these challenges and achieve their ambitions. We benefited from our investments over recent years, resulting in a record revenue of $23.4 billion, up 7%, and pre-provisioned pre-tax earnings of $10.2 billion, which increased by 8% from last year. We saw revenue growth across all our businesses, grew volumes, maintained disciplined pricing to protect margins, and generated additional fee income through stronger client relationships. Adjusted net earnings were $6.5 billion, down 2% due to higher provisions for credit losses as they continue to normalize. Earnings per share were $6.72, a decrease of 5% from the previous year, affected by an increased number of shares outstanding, primarily from the dividend reinvestment plan discount in effect since the first quarter. We achieved a positive adjusted operating leverage of 1.2% in fiscal 2023, consistent with our guidance, as we capitalized on revenue growth while prudently managing expenses. We proactively improved our capital position in every quarter of fiscal 2023, ending the year with a CET1 ratio of 12.4%, and we have several levers available to continue building capital. As mentioned with our second quarter results, we will now conduct an annual review of our dividend payments during the fourth quarter's earnings. Today, we announced a $0.03 increase in our dividend to common shareholders. Our adjusted return on equity was 13.3% for the year, impacted by normalizing provisions for credit losses and higher capital levels. We are focusing our investments on capital-light, fee-based, and deposit-generating businesses that will be beneficial to our return on equity. Our client-focused strategy is effective. Our consistent execution has led to good progress and momentum for our bank on numerous fronts. Looking ahead, our four key strategic priorities will build on our momentum and enhance our competitive advantage. First, we are committed to growing our mass affluent wealth franchise in Canada and the U.S. In Canada, our differentiated mass affluent coverage model through Imperial Service positions us well, and our private wealth business is thriving. In the U.S., we aim to grow our high-quality, scalable private wealth program. Second, we are further enhancing our digital banking offerings and intend to reinforce our market leadership. Third, we will leverage our connectivity for commercial and capital markets clients, which adds distinct value and enhances our returns. Finally, our initiatives to enable, simplify, and protect our bank are fostering the operational excellence and efficiency that drive higher returns for our stakeholders. Now, let’s discuss the segment results. In Canadian Personal and Business Banking, we have significantly expanded our retail client base, adding over 650,000 net new clients across our CIBC and Simply brands, including many newcomers and students. We are utilizing our unique Imperial Service offering to cater to clients in the mass affluent segment and have introduced a dedicated leadership structure to sharpen our focus. CIBC has also maintained its leadership in the digital space, ranking number one in the 2023 J.D. Power Canada Banking Mobile App Satisfaction Study for the third time since 2020. In Canadian Commercial Banking, rising interest rates and inflation have slowed growth across the market. Despite this, we have achieved our third straight year of increasing client net promoter scores, hitting a record this year. We continue to enhance the client experience and unite our services, evidenced by $17 billion in referrals since fiscal 2019 across commercial banking and private wealth management. Our CIBC Wood Gundy franchise also ranked among the top in the Investment Executive Brokerage Report Card survey. In the U.S., lending demand has cooled due to higher interest rates, yet our connected franchise and investments in scaling have attracted new clients in this tempered environment. U.S. deposit volumes have stabilized, and we are working on strengthening and diversifying our deposit base. Our efforts to build a top-tier U.S. private wealth franchise were recognized by Barron's, which ranked us among the top 10 RIA firms in the U.S. for the fourth year in a row. Looking forward, we'll continue to grow our U.S. Commercial Banking franchise organically, focusing on high-touch service and specialized expertise, while also expanding our U.S. private wealth platform into fast-growing affluent markets like Southern Florida by leveraging our talent and technology investments. In Capital Markets and Direct Financial Services, our differentiated platform has consistently generated strong performance. Our double-digit revenue growth stemmed from our client focus and increased activity in global markets as we supported clients facing short and long-term needs amid rising rates. Over 20% of our total capital markets revenue was derived from the U.S., where we've nearly tripled our revenue since 2017. We have also expanded our Direct Financial Services business, generating growing recurring revenue and attracting new clients seeking convenient digital banking and investing solutions. Our DFS revenues reached $1.2 billion, marking a 26% year-over-year increase. Overall, the strength of our diversified platform and strategic connectivity positions us well for more favorable market conditions in the coming year. As we concluded 2023, we are in a strong position due to strategic investments across all core businesses. Looking into 2024, we anticipate slowing consumer spending and continued challenges in global economic growth as a result of monetary policy tightening. Despite this, we will prioritize financial strength and risk discipline while fostering a purpose-driven culture and growth strategy. We believe this approach, alongside our client-focused strategy and strong execution, will yield relative outperformance and top-tier shareholder returns in the years ahead. Now, I'll hand it over to my colleague, Hratch, for a detailed review of our financial results.

Hratch Panossian, Chief Financial Officer

Thanks, Victor, and good morning to you all. We delivered a solid fourth quarter to cap off 2023 as laid out on Slide 10. Echoing the themes we demonstrated throughout fiscal '23, our fourth quarter results reflect the resilience of our business, our ability to proactively manage through a dynamic environment and the strength of our balance sheet. Supported by revenue momentum across all of our business units and a continued focus on productivity, we generated robust operating leverage, strong pre-tax, pre-provision earnings growth, and diluted earnings per share of $1.53, which was up 22% over the prior year. Excluding items of note, adjusted EPS was $1.57 and ROE was 12.1%. Our capitalization and liquidity continued to improve during the quarter, coming in ahead of our in-year guidance on both fronts with a period-end CET1 ratio of 12.4% and average LCR of 135%. The balance of my presentation will refer to adjusted results which exclude items of note, starting with Slide 11. Adjusted net income of $1.5 billion increased 16% from the same quarter last year. Revenue of $5.8 billion was up 9%, supported broadly by higher NII, trading revenue, and fee income. And we grew pre-provision pretax earnings 18% by containing expense growth to 3% and generating over 6% operating leverage. Credit provisions of $541 million were up 24% from a year ago, which Frank will discuss in more detail. Slide 12 and 13 highlight key trends and drivers of net interest income. While trading income was 26% higher year-over-year in aggregate, we continue to see a shift in trading revenues from interest to non-interest income due to higher rates. Excluding trading, NII was up 8% over the year, driven by continued balance sheet growth and solid margins. Total bank NIM, excluding trading, was up 6 basis points from the prior year or down 1 basis point sequentially. Last quarter's margin included a couple of basis points from non-occurring interest as we disclosed at the time. And underlying these quarterly fluctuations, we continue to see gradual margin expansion. Canadian P&C NIM of 267 basis points was up 20 basis points from the prior year and was stable sequentially as modest expansion and core margins offset the one-time interest last quarter. We have once again provided incremental disclosure on P&C margin drivers in the appendix. NIM of 344 basis points in our US segment was down 5 basis points year-over-year and 2 basis points from the prior quarter. The sequential decrease was largely due to interest on a significant loan recovery in the prior quarter. As shown on Slide 13, average client loans and deposits continued to grow over the prior year despite the market-wide slowdown experienced this year. Deposit mix has largely stabilized and aggregate balance growth in deposits picked up late in the quarter, resulting in 4% growth sequentially on a spot basis. We remain focused on growing our balance sheet prudently and with strong returns, and we anticipate this to drive continued momentum in non-trading NII based on current market interest rate expectations. Turning to Slide 14. Non-interest income of $2.6 billion was up 20% from the prior year due to growth in trading revenues as well as higher market-related and transactional fees. Excluding trading, market-related fees increased 8% year-over-year, driven by higher investment management and custodial revenues as well as recovery from lower treasury income in the same quarter last year. Transaction-related fees were up 6% year-over-year, driven by growth in credit as well as deposit and payment fees. While market factors can significantly impact these revenues, our strategic focus on deep relationships, as well as advice and differentiated solutions for key client segments will continue supporting ongoing growth in non-interest income. Slide 15 highlights our continued success in maintaining robust investment in our bank, while also containing overall expense growth. In Q4, year-over-year expense growth moderated to 3% as investments were partly offset by the benefits of prior initiatives to improve efficiency and deliver a better experience for our clients and our team. We've also demonstrated the impact of this approach over the longer term. For the full year, this approach allowed us to meet our targets, containing expense growth to 6% and generating operating leverage of positive 1.2%. And despite the significant increase in strategic investment over the last few years, we've delivered neutral operating leverage in aggregate while positioning ourselves to improve on that going forward by leveraging these foundational investments. We intend to manage expense growth to around or below mid-single digits for fiscal '24, and we continue to target positive operating leverage over the medium term. Slide 16 is focused on our balance sheet, which continues to benefit from our focus on disciplined resource allocation and an emphasis on returns over balance sheet growth. We improved our CET1 ratio to 12.4% over the quarter, driven by organic capital generation and share issuance, partly offset by higher RWA driven by credit migration and model changes. Late in the quarter, we also received regulatory approval to apply the internal ratings-based approach to the majority of our US bank portfolio which we intend to implement in Q1 2024. On a pro forma basis, we estimate this implementation, net of the other regulatory changes coming into effect in Q1, results in us starting fiscal '24 with a CET1 ratio over 12.5%. Our already strong liquidity position improved further throughout the quarter as loan growth slowed and deposits rebounded, resulting in a sequentially higher average LCR of 135%. Despite an evolving environment and regulatory landscape, throughout 2023, we demonstrated our ability to absorb unexpected headwinds and strengthen our balance sheet while maintaining support for our clients and deploying capital to generate solid top line growth. This positions us well as the environment continues to be fluid. Starting on Slide 17, we highlight our strategic business unit results. Net income in Canadian Personal and Business Banking was $639 million, up 32% from the same quarter last year. We grew pre-provision pretax earnings 9% from the prior year by driving 9% revenue growth through the strategic priorities Victor outlined earlier. Revenue was supported by a 19 basis point increase in margins and volume growth on both sides of the balance sheet. And we delivered operating leverage of 8% by containing expense growth to 1% from the same period despite continued investment against our strategic priorities. Turning to Slide 18. Net income in Canadian Commercial Banking and Wealth Management was $490 million. Revenue of $1.4 billion was up 4% from a year ago, benefiting from mid-single digit loan and deposit growth in commercial banking as well as higher fee-based revenues from market appreciation and net flows in Wealth Management. We also delivered positive operating leverage as we manage expenses to a 3% increase year-over-year. Our strategy continues to create momentum across our combined Canadian P&C banking franchise, where net income was up 22% while pre-provision pretax earnings were up 15%, fueled by 8% revenue growth and over 6% operating leverage. And we expect this momentum to continue. We've included more details on this segment in the appendix of our presentation. Turning to US Commercial Banking and Wealth Management. Net income of $39 million in US dollars was down 69% from the prior year due to higher credit provisions, predominantly in the office portfolio. Revenues were up 2% over the same period, driven by a 5% increase in fee income and a 1% increase in net interest income. Expenses were up 11% year-over-year, including higher severance in the quarter. Excluding one-time charges, expenses were up 6%, reflecting investments across our business and infrastructure, which we expect to continue into 2024 as we expand our US platform. We remain focused on prudent and profitable growth to scale this business across both Commercial Banking and Wealth Management. Turning to Slide 20 and our Capital Markets and DFS business. Net income of $383 million was up 1% year-over-year. Revenues of $1.3 billion were up 9% over the prior year, driven by 20% growth in global markets and 12% growth in Direct Financial Services. Expenses of $734 million were up 12% year-over-year, partly driven by charges in the quarter, including higher severance. Excluding these charges, expenses grew 8%, and we anticipate them to moderate. Slide 21 reflects the results of the Corporate and Other business unit. Net loss of $48 million compared with a net loss of $197 million in the prior year, largely due to higher revenues from Treasury and International Banking as well as lower corporate expenses. Going forward, we now anticipate a quarterly loss of $50 million to $100 million in this segment. In summary, notwithstanding a more challenging environment, throughout 2023 we took proactive steps to make meaningful progress against our strategy while staying on track relative to our medium-term objectives. Extending the momentum we demonstrated in 2022, we grew revenue by 7% and pre-provision, pre-tax earnings by 8.5%, in line with our in-year guidance and medium-term targets. We delivered positive operating leverage through cost discipline and efficiency improvements to balance continued investment in our bank. And we overcame significant headwinds to enter the new year with a strong CET1 ratio of over 12.5% on a pro forma basis. EPS growth and ROE were below our medium-term targets this year, largely due to the impact of higher credit provisions and increasing capitalization. But we remain focused on working towards these targets despite external headwinds. We expect credit provisions and capital ratios to start stabilizing in 2024, and we will drive further EPS and ROE improvements through our strategic focus by emphasizing growth in key client segments with strong returns, maintaining discipline and resource allocation with a focus on returns over balance sheet growth and leveraging our capabilities to drive simplification and efficiency to generate ongoing operating leverage. With that, let me turn the call over to Frank.

Frank Goose, Chief Risk Officer

Thank you, Hratch, and good morning, everyone. During '23, as we navigated economic uncertainties, we saw our loan loss performance generally in line with our expectations with retail credit normalizing and sector-specific issues materializing in the business and government portfolio. Over the past few quarters, the headwinds in the US office sector have translated into higher impairments in our US commercial real estate portfolio. While the Canadian consumer remains resilient to higher interest costs, we are seeing excess savings accumulated during the pandemic decline, so clients adjust to a variety of inflationary pressures. Notwithstanding, our allowance level increase throughout fiscal '23 positions as well and will ensure we are prepared for uncertainty in the year ahead. Turning to Slide 25, our total provision for credit losses was $541 million in Q4 compared to $736 million last quarter. Total allowance coverage increased to 76 basis points this quarter, up from 73 basis points in Q3. Our performing provision was $63 million in Q4, mainly attributable to changes to our forward-looking indicators, some model parameter updates, portfolio growth, and some credit migration. Provision on impaired loans was $478 million, which were flat quarter-over-quarter. And this was largely due to higher commercial and Canadian retail portfolios, was partially offset by lower impairments in the Canadian commercial portfolio and CIBC FirstCaribbean. While our impaired losses over the full year continued to perform in line with our expectations, we have seen elevated losses in the back of this fiscal year. Slide 26 summarizes our gross impaired loans and formations. Balances were up this quarter, mainly driven by business and government loans in the US and is specifically attributable to the office sector. Overall, new formations remained relatively stable with the increase in retail, mostly offset by a reduction in business and government loans. On Slide 27, we show the trends in our Canadian consumer portfolios. Net write-offs and 90-day plus delinquency rates for personal lending have moved higher over the past year, reflecting the impact of higher rates. This was expected given the interest rate sensitivity of this portfolio. Our residential mortgage and credit card portfolios continue to perform well and remain below pre-pandemic levels. Slide 28 provides an overview of our Canadian real estate secured personal lending portfolio, which makes up 55% of our total loan balances. Late-stage delinquency rates of residential mortgages continued to trend higher as expected as they return closer to what we experienced prior to the pandemic. Variable rate mortgages account for one-third of our mortgage book and the portfolio quality remains strong. The portion of non-amortizing variable rate mortgages was down quarter-over-quarter from $50 billion in Q3 to $43 billion in Q4. Clients are choosing to increase their payments, converting to fixed rates, making one-time prepayments and all of which bring the loan back to amortizing status. This quarter, we are also providing a scenario, highlighting the credit quality and payment increases for our mortgages coming up for renewal in the coming years. Overall, these cohorts show very low LTVs of between 40% and 60% in the next five years. The average monthly payment increase is roughly between $350 and $700 for these cohorts, which represents an increase of about 3% to 5% based on the origination income. I also want to note that in this scenario, we assumed an interest rate of 6% across the next five years, and the analysis also assumes income remains where it was at origination. I want to acknowledge that this high rate environment, paired with cost of living pressures puts pressure on our clients. We are actively working with clients experiencing financial hardship to help drive to the best possible outcome. But overall, we feel comfortable with the resilience and reserve levels of our mortgage portfolio. Turning to Slide 30. As we previously guided, our US office portfolio continues to see elevated losses. In '23, we had $2.1 billion maturing, which is slightly more than 50% of the portfolio. Out of these maturities, around 54% qualified for extension or negotiated a renewal, around 15% was repaid and the remaining 31% went into non-accrual. Our allowance coverage continued to increase this quarter and now stands at 9.1%, reflective of the headwinds that persist in the office sector. In closing, despite the headwinds in the US office sector, our credit performance remained within our expectations and guidance for fiscal '23. As we head into the new fiscal year, we expect uncertainties to persist in certain areas, and we will see impaired losses trend above our previous guidance of 25 basis points to 30 basis points, more in the mid-30s range. We will continue to proactively manage portfolio exposures, and we will work with our clients to mitigate risks. The additional allowances we saw throughout '23 will provide prudent reserves for headwinds in the new year. I will now turn back the call to the operator.

Operator, Operator

Thank you. Our first question is from Doug Young from Desjardins Capital Markets. Please go ahead.

Doug Young, Analyst

Hi, good morning. Maybe Hratch, if we can talk a bit about expenses. It sounded like you had some restructuring charges in the US and capital markets. Can you quantify what those were? Can you confirm that was not backed out of cash EPS? And I do understand your position about looking to drive positive operating leverage over the medium term. I'm trying to get a sense of, is that something you think you can achieve? You did obviously very well this quarter. Is that something you think you can achieve through fiscal '24 and '25? Thank you.

Hratch Panossian, Chief Financial Officer

Good morning, Doug. Thank you for your question. I’m glad to address it. To start with your immediate inquiry, we disclosed that we incurred about $114 million in severance costs. There were also a few other items this quarter related to one-time charges in various business operations, including some real estate and software matters throughout the bank. The severance figure we shared constituted the majority of those costs. While I won’t go into extensive detail about the breakdown, the main portions were in the Corporate and Other segment and in capital markets, with a portion allocated to one-time expenses in the US. Excluding these one-time costs, you can deduce that the growth this quarter aligns with about 10% of that total figure. This is part of our ongoing journey and links to your second question regarding our commitment to optimizing the bank. We aim to make continuous improvements and successfully manage our resources. This approach has enabled us to achieve a 1.2% operating average over three years and five years, all while significantly increasing our investment levels. With this foundational capability established, we can reduce our expenses by 1% to 2% annually. This year, we were around the 1% mark, but looking ahead, we anticipate reaching that 2% efficiency savings target in 2024 and beyond. This approach allows us to control our expenses to around mid-single digits, influenced by the top-line environment. For next year, we expect a tougher environment regarding revenue, so as I indicated in my guidance, we are managing expenses toward the lower end of the mid-single digits. However, we can still invest and allow our expenses to grow above that range as we fund initiatives aligned with the four priorities Victor outlined, including further efficiency improvements designed to simplify our operations. This strategy is what will enable us to keep generating ongoing operating leverage.

Ebrahim Poonawala, Analyst

Good morning. Regarding the macroeconomic and credit outlook, could Victor and Frank elaborate on your comment about the impaired PCL outlook in the mid-30s for next year? Assuming the Bank of Canada has finished raising rates for this cycle, what are your expectations regarding economic and consumer weakness in the upcoming quarters? Where do you see the downside risks? What should we monitor to ensure that impaired PCLs do not exceed the guidance you provided, Frank? Thank you.

Frank Goose, Chief Risk Officer

Sure. And in that guidance, I mean, as you can imagine, there are a couple of moving parts. As I said, we continue to expect some further normalization in our consumer portfolios, something we have seen and something we expect to continue to see. And then there is some others where we expect office to moderate in the next year in line with our maturity profile. And then give and take, that should lead us to that mid-30s range that we feel very confident with. I mean, if asking about downsides, and again, we have increases in unemployment factored in our high-now forward-looking information. If there is a more rapid shock to unemployment, that, of course, would change our outlook on impaired loan losses. But otherwise, given that we have started the fiscal year already and, as such, have a fairly good line of sight into the next few quarters, we feel very confident with our base case outlook, even though there is, as you said, risks to the downside. In particular, any sharp shocks to the economy, a sharp increase in unemployment, a sharp drop in GDP would certainly bring us closer to the downside. And now, Victor will jump in to follow up.

Victor Dodig, President and Chief Executive Officer

Just really quick, because I know there are a lot of questions and we're on tight time. So we've architected CIBC to deal with the economic environment that might come in 2024. If things go slow, we'll manage accordingly. If things turn better, and there's a very good chance that we have this ‘soft landing’, we will capitalize on that as well. Thanks, Ebrahim.

Gabriel Dechaine, Analyst

Good morning. Just a question on capital here and you converted the US loan book to IRB, that's going to add 20 basis points next quarter. That's great. I'm just wondering how does that affect the proximity of your risk-weighted assets to triggering the output floor because the IRB deflates the RWA. So I think that might bring you closer to that for.

Hratch Panossian, Chief Financial Officer

Yeah, thanks for the question, Gabe. I'll take that. And so, first let me clarify that the 20 basis points approximate number that we disclosed is proforma net of everything. So that is, we have more than that and benefit from the transition to IRB, it’s netted off by some fairly modest negatives from the combination of FRTB implementation and CVA changes as well as the negative amortization mortgages as well as taking into account any floor impact. And we don't see, at this point, even post IRB, floor being an impact in the foreseeable future. And so net, we would have that 20 basis points this quarter, and I don't anticipate any other impacts because of that in the short term.

Meny Grauman, Analyst

Hi, good morning. Frank, I found the Slide 29 very helpful. Just a question in terms of the LTVs that you're showing. What are you assuming in terms of home prices to calculate those? Is there any sort of change in home prices that's being reflected?

Frank Goose, Chief Risk Officer

Yeah, so those are our current LTV calculations. We're based on externally published indices. We adjust house prices to our best prediction of current LTVs. So that would include the more recent moderation we have seen in house prices. It does not include any forward-looking further moderation or recovery in the house prices. It's our current LTV calculations that are shown on the slide.

Darko Mihelic, Analyst

Hi. Thank you very much. I'll be brief, Frank. I probably have a lot of follow-ups later, but I appreciate the extra disclosure. I have a question about the negatively amortizing variable mortgages. Coming down from $50 billion to $43 billion, you're showing some success in getting people out of negatively amortizing situations. However, I'm curious about the opposite effect. Of the original $50 billion, how many individuals did you contact? While we see a 14% reduction, how many people are choosing not to increase their payments or reduce them? What would be the main reason for their reluctance to move into a positively amortizing situation? Thanks.

Frank Goose, Chief Risk Officer

Yeah. Thank you. Thank you, Darko, for the question. So we have had a proactive outreach program to our clients for quite some while. We started that early. We have now reached out or contacted most of our clients in their portfolio, and we do see strong results, and we've seen those results quarter-over-quarter. In this quarter alone, 13,000 clients took action to remove themselves from negative amortizing status, for the most part by increasing their monthly payments on a voluntary basis to remove their accounts off of negative amortization. Why are clients not electing? There's a couple of reasons for that. Some are just saying, well, I'm aware of the status, I do not have to take action right now, I expect interest rates to come down and I just want to wait for that. There may be other reasons for that. But in general, we are very pleased with the outcomes that we are seeing so far. We continue to expect seeing those outcomes, and we continue to expect that number to come down as we keep up our outreach efforts and having conversations with our clients.

Lemar Persaud, Analyst

Hi, thanks for taking my question. Questions for Frank. Can you talk about what gives you the confidence in your PCL outlook despite the continued increase in delinquencies in Canadian consumer? Like, does that assume normalization delinquencies to the Q1 ‘20 rate you're showing here, so the 34 basis points? Or are you assuming something above that 34 basis points you're showing?

Frank Goose, Chief Risk Officer

Yeah, well, I would say, as I said before, there's a couple of moving parts. So we do expect some further normalization, and it's probably a little bit more product-specific. We talked a little bit about mortgages in our prepared remarks, where we expect normalization, but we are very confident with the quality of those books and that those renewals will remain very manageable for us. Cards performance continues to be very good. There is in part our co-brand portfolio that is supporting strong credit quality but there is underlying investments in risk management that we did in the cards book that is helping drive a real change in credit quality as well. And then in personal lending, again, that is a little bit a mix of different things, but we are seeing strong credit quality there, but there's also certain pockets like our unsecured lines book where we see normalization and we should expect to see normalization. So that gives us confidence with our base outlook because it's based on a bottoms-up assessment of all of those moving parts.

Sohrab Movahedi, Analyst

Okay, thank you. Capital ratio is going to look pretty strong. Maybe a question for Victor and/or Hratch. Can I get a sense of what are the priorities and at what sort of levels are you comfortable running the cap ratios for the bank, given the type of outlook that you've kind of presented to us? And I guess implicit in that, Hratch and Victor, is whether or not you intend to continue to keep the DRIP on? Thank you.

Victor Dodig, President and Chief Executive Officer

Good morning, Sohrab. Thanks for that question. We've been as a leadership team, very focused on accreting capital over the course of the year. And as I said in my opening remarks, we've done that every quarter through organic capital generation, through our DRIP, as well as through a strategic risk transaction. We continue to focus on a strong capital level. We look at it through three lenses. What is the regulatory stance today vis-a-vis the buffer that OSFI has put in place? How do we compare against our peer group? And three is how do we view the macroeconomic environment? Our goal is to continue to maintain a strong level of capital and liquidity. I'll hand it over to Hratch to take it through the numbers, how we think about the buffer, how we think about the DRIP. But you can rest assured that that focus of ours as a leadership team on capital is paramount.

Hratch Panossian, Chief Financial Officer

Thank you for the question, Sohrab. I'd like to expand on what Victor mentioned. We have robust ongoing capital generation and do not require the DRIP to grow our business or meet our EPS targets. In any given quarter, we produce 25 to 30 basis points of capital after accounting for our dividend payments, and our return on equity allows us to increase our risk-weighted assets by high single digits while continuing our growth. The DRIP program this year has helped us manage challenges and improve our capital ratio. We've successfully raised the capital ratio by 70 basis points year-over-year, despite facing significant challenges from legal fees and regulatory changes. Currently, we are in a strong position. Regarding the regulatory uncertainties Victor mentioned, we expect to stabilize above 12.5% in 2024 and will reevaluate the DRIP as we gain clarity on these issues. Once we are confident in stabilizing our levels, we can discontinue the DRIP and rely on our strong organic capital generation to continue growing our business.

Victor Dodig, President and Chief Executive Officer

Thank you, operator, and thank you for the questions today. We're going to give you back some time. I know you got another call at 8:30 and another call today. I want to thank you all for your engagement with us throughout the fiscal year this past year on our quarterly calls and in the other forums where we get to engage with you. I said at the outset of my remarks that we have the right strategy at CIBC. We also know how to operate in a fluid and uncertain environment. Our proactive management in a more challenging environment this past year is an example of that. A year in which we generated positive operating leverage, a year in which we protected net interest margin, and a year in which we strengthened our balance sheet throughout the year while continuing to make strategic investments to ensure our bank is well positioned for the future. I have full confidence, and our leadership team has full confidence in the deep bench of talent within our businesses, and our experienced leadership team is there to deliver on our strategic priorities that we've laid out here in all of our businesses in the upcoming year. Before we close the call, I'd also like to recognize our entire CIBC team for their contributions as they delivered on our purpose for our clients, our communities, and for one another and of course for our shareholders. This purpose comes to life each year at CIBC Miracle Day, taking place next week, next Wednesday, to raise funds for children's charities. I'm looking forward to the event. It's a big deal for us. It's a big deal for the community. It's something we started over three decades ago, and I hope you all participate. Wishing you all the best for the holiday season. Thank you.

Operator, Operator

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