Canadian Imperial Bank of Commerce (CM) Q4 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the CIBC fourth quarter results conference call. Please be advised that this call is being recorded. [Operator Instructions] I would now like to turn the meeting over to Mr. Geoff Weiss, Senior Vice President, Investor Relations. Please go ahead, Mr. Weiss.

Good morning, and thank you for joining us. This morning, CIBC's senior executives will review CIBC's Q4 2015 results that were released earlier today. The documents referenced on this call, including CIBC's Q4 news release, investor presentation and financial supplement as well as CIBC's annual report can all be found on our website at cibc.com. In addition, an archive of this audio webcast will be available on our website later today. This morning's agenda will include opening remarks from Victor Dodig, CIBC's President and Chief Executive Officer; Kevin Glass, our Chief Financial Officer, will follow with a financial review; and Laura Dottori-Attanasio, our Chief Risk Officer, will close the formal remarks with a risk management update. After the presentations, there will be a question-and-answer period that will conclude by 9:00 a.m. Also with us for the question-and-answer period are CIBC's business leaders, including Harry Culham, Steve Geist and David Williamson as well as other senior officers. Before we begin, let me remind you that any individual speaking on behalf of CIBC on today's call may make forward-looking statements that are subject to a variety of risks and uncertainties. These statements may include material factors or assumptions that could cause CIBC's actual results in future periods to differ materially. For further information, please refer to the note about forward-looking statements in today's press release. With that, let me now turn the meeting over to Victor.

Thanks, Geoff, and greetings, everyone. Thank you for joining us on the call. This morning, CIBC reported annual adjusted earnings of $3.8 billion with earnings per share up 6% from last year. We also delivered an industry-leading return on equity 20%, while increasing our capital strength with a Basel III Common Equity Tier 1 ratio of 10.8%. We entered fiscal 2015 as a team with 3 goals in mind. One was to rejuvenate our corporate culture; the second was to reengage our clients; and the third was to enhance shareholder value. And I believe we have made excellent progress in all 3 areas. Throughout the year, we invested considerable time and effort as a team to change the way we think and to change the way we operate. We also made a concerted effort to reengage with our clients to better understand their needs. Personally, I met with over 500 of our corporate and business banking clients to convey our commitment to putting the commerce back into CIBC. Our vision is to become the leader in client relationships. And aligned to that vision, we repositioned our brand from what -- from the tagline "For what matters" to "Banking that fits your life." Our clients, they want a bank that knows them, values their business, advocates for them, fixes their problems quickly and listens to their needs. Our team members are feeling energized by a renewed client-focused strategy. In 2015, we received our highest employee Net Promoter Scores on record. In terms of shareholder value, we increased our dividends by 12%, which helped drive our industry-leading total shareholder returns in 2015. Now although we've made progress, the work is far from done. We're going to continue to evolve our culture and we're going to place a greater emphasis on performance orientation. We're going to continue to focus relentlessly on our clients and deliver to them what's relevant to them, and we're going to unlock shareholder value by transforming our foundational business, by optimizing the use of our balance sheet and by redeploying capital to businesses that are core to our strategy and core to the future. So our goal is clear. It's to build an innovative, relationship-oriented bank that provides consistent and sustainable earnings growth through a 3-pillared strategy. We outlined that 3-pillar strategy at our investor presentation. I'd like to go through it again this morning. The first pillar is to simplify our bank. We will transform CIBC into a nimble financial institution. We will leverage technology and we're going to redeploy the resources to improve our efficiency. We're going to be better at cost management and better at growth. We believe we can get to -- our efficiency ratio down to 55% from the current 59% over the medium term. The second pillar of our strategy is to continue to focus on innovation. We are the innovation leader today in banking, but the rapid pace of change in the industry, especially from FinTech disruptors, is forcing all of us and CIBC to continue to innovate for our clients as they adopt new technologies and look for secure, easier and more flexible ways to do their day-to-day banking. We recognize at CIBC that we can't build everything ourselves, and that's why we're open to collaborating with high-quality third parties where appropriate. Our third pillar is a relentless focus on our clients. Our goal is to be #1 in client experience over the medium term. Since we've shifted our focus from being a product-centric bank to being a client-centric bank 4 years ago, we've had third-party validation that our strategy is working. For the past 3 years, CIBC was the only Big Five Canadian bank with positive momentum in client experience as reported by both the Ipsos Reid and the JD Power client satisfaction surveys. So we're making an impact in the marketplace, but there is still a lot of work to do to be #1. So we've declared client experience as a bank-wide priority, and we've made changes to the executive compensation programs such that client experience goals are a meaningful part of our compensation program. So if I can now just turn briefly to the macroeconomic front. We expect the Canadian banking industry will continue to face headwinds from a low interest rate environment and sustained low commodity prices in 2016. While we are cautious about the economic environment, we are confident that our risk management protocols will detect the early warning signals that allow us to react appropriately and still work with our clients. Now I'd like to give you some highlights from each of our business units. In Retail and Business Banking, we transformed our branches into banking centers. That's an important point, we don't call them branches anymore. And the focus is on providing personalized advice and deepening our client relationships. For day-to-day banking transactions, we are leveraging our digital technology and encouraging our clients to access banking through their tablets and through their mobile devices and obviously, the ATMs that exist at our banking centers. At our banking centers, we also simplified the leadership structure and introduced the new role of a banking center leader. This will give each of our over 1,000 banking centers across Canada a single leader responsible for building and deepening client relationships and strengthening ties in their communities. For our mass affluent clients, we expanded our Imperial Service Direct offer. This is an offer that connects clients with a dedicated financial advisory team remotely. This offer enables us to deliver financial advice and deepen relationships with those clients who visit our banking centers infrequently, yet they prefer a dedicated team to meet their needs. In business banking, we added more relationship managers to meet our clients' needs and offer them advice to help them with their -- the growth of their businesses. To build our business banking client base, we recently entered into an exclusive partnership with a Montréal-based lender, Thinking Capital, and we announced that recently, who provides short-term online loans to small businesses with unanticipated needs. The size of the loans range from $5,000 to $300,000 and the unique selling point here is the adjudication can be done in less than 10 minutes using technology. Funds from approved loans are deposited in a matter of days instead of weeks as is the case for traditional small business banking. This partnership, like many of our partnerships, are about leveraging innovation to broaden our -- broaden the options for existing business clients and attract new business and personal banking relationships to CIBC. To further CIBC's innovation leadership for our clients, we also entered into a partnership with the MaRS Discovery District in Toronto to create a new corporate innovation hub. We're also part of MaRS' new FinTech cluster to continue our focus on developing the next wave of banking innovations for our clients. My colleague, David Williamson, is here this morning to answer your questions about Retail and Business Banking. Our Wealth Management franchise also has made good progress in 2015 against our strategy of enhancing the client experience and attracting new clients. Our Canadian asset management business achieved its sixth consecutive record with $5.5 billion in net sales of long-term mutual funds. New account openings at CIBC's Investor's Edge were up 36% year-over-year and that was driven by a strong partnership in our retail banking centers; it was also driven by innovation where we've significantly shortened the account opening time for a self-directed brokerage account. Within CIBC Wood Gundy, we continue to invest in our technology platform to significantly streamline the new client and account opening process, again using technology. And we've used technology to provide personalized service. We launched a new planning capability, which will help us to deliver comprehensive and individually-tailored financial plans to each of our clients. We also experienced strong net flows in our Atlantic Trust business in the U.S., which continues to perform well. My colleague, Steve Geist, our Head of Wealth Management, is here to answer your questions on Wealth Management this morning. Now in early October at our Investor Day, we announced the name change of our Wholesale Banking business to CIBC Capital Markets. We're moving away from Wholesale Banking. We're moving away from world markets. We're moving into the future and calling ourselves CIBC Capital Markets. We believe that this name better reflects what we do in this business unit, which is to provide advice, insight and execution in the Capital Markets for those clients that are particularly reliant on that source of financing. Throughout 2015, our Capital Markets franchise continued to hold leadership positions in syndicated loans, debt and equity underwriting, M&A advisory and trading activities. We also made good progress against our strategy of helping our clients grow globally by expanding our lending and advisory mandates, particularly in areas of our core competency in energy, utilities and infrastructure finance. To support our clients' businesses, we continue to expand our suite of Capital Markets products in key regions globally in the areas of foreign exchange, fixed income, commodities and equity derivatives. On the innovation front, Capital Markets recently introduced 2 new products for the convenience of all our clients at CIBC, products that our clients are already embracing in a very important way. The first is CIBC Global Money Transfer, a no-fee service allowing our clients to send money overseas easily and affordably online from their online banking account or from our banking centers. The second offering is CIBC Foreign Cash Online, which allows our clients to order any of 75 foreign currencies online for secured delivery to their home or their local banking center, and in Toronto at Pearson Airport at no extra charge. These 2 innovative products underscore our commitment to simplifying banking for our clients and being the leading provider of foreign exchange in Canada. It's also a classic example where our Capital Markets expertise works with our retail expertise to deliver to main street Canada what they need each and every day. My colleague, Harry Culham, our Head of Capital Markets, is here this morning to answer your questions. So I'm going to close now and as I reflect on my first year as the leader of CIBC, I'm very pleased with the progress we've made as a team. And I'm very excited about what lies ahead for our shareholders and for our employees and for our clients. Our strategy will allow us to unlock value, will allow us to redeploy resources for growth and we're going to remain vigilant when it comes to managing risk and managing our cost structure. And on behalf of CIBC's executive committee and our board, I'd like to take this opportunity to thank our shareholders for their continued support and all of our team, our 44,000 employees, for their ongoing dedication of serving our 11 million clients. I'd be remiss if I didn't wish everybody a happy holiday, if I don't get the opportunity to do that again on this call. We have a lot to be thankful for. And with that thankfulness, let met turn it over to Kevin to review our results in detail. Kevin?

Thanks, Victor. So my presentation will refer to the slides that are posted on our website, starting with Slide 5. And before I review the fourth quarter in detail, let me start with a brief overview, just a reminder of the full year where our adjusted net income was a record $3.8 billion and adjusted EPS was $9.45, up 6% from 2014. I think our performance in 2015 reflects the strength of our client-focused strategy and diversified business segments. Adjusted revenue growth of 6% was driven by strong asset growth, improved margins and higher fee income. And we delivered an industry-leading ROE of 20% and a year-over-year increase in dividends paid of 9% per share and the highest total shareholder return among our peers. We finished the year with a Basel III CET1 ratio of 10.8%. So moving on to our results for the fourth quarter. CIBC delivered adjusted net income of $952 million and adjusted EPS of $2.36. Record earnings in Retail and Business Banking reflects strong loan and deposit growth. We had stable results in challenging market environment in both our Wealth Management and Capital Market segments, and we increased our quarterly dividend by $0.03 to $1.15 per share. We have 3 items of note during the quarter, which resulted in a negative impact of $0.43 per share, and the most significant item of note was the restructuring charge of $161 million after-tax in noncontrolling interest, reflecting the initiatives we have been implementing to simplify our bank and better align our resources to meet the changing needs of our clients. The balance of my presentation will be focused on adjusted results, which exclude these items of note. We have included slides with reported results in the appendix to this presentation. Let me now review the performance of our business segments starting with the results of Retail and Business Banking on Slide 7. Revenue for the quarter was $2.2 billion, up 6% from last year, driven by strong performance in both personal and business banking. Revenue in personal banking was $1.7 billion, up 7% compared with the same period last year. Performance benefited from volume growth across most products, with total personal funds managed up 9%. Wider spreads in our variable-rate lending products and higher fee income, primarily driven by strong sales of long-term mutual funds, also drove higher revenue. Revenue in business banking was $414 million for the quarter, up 5% compared with the same period last year. And business banking benefited from strong loan and deposit growth and higher fee income. Business loans are up 10% year-over-year and business deposits up 9%. Revenue growth was muted due to the persistent low-interest rate environment, which continues to narrow margins on business deposits. The other segment had revenue of $20 million, which is down $7 million from the same period last year due to the continued run-off of the exited FirstLine mortgage broker business. Our provision for credit losses in the segment was $190 million, up 11% from last year due to higher business banking losses, largely 2 company-specific losses in the oil and gas sector. Noninterest expenses were $1.1 billion, up 4% from the prior year, primarily driven by our continued investment in strategic growth initiatives, directs [ph] towards innovation and transforming our business to better serve our clients. Our net interest margin was up 1 basis point sequentially, mainly due to wider spreads on variable-rate lending products. In the quarter, Retail and Business Banking reported record adjusted net income of $656 million, up 7% from the same period last year. Slide 8 reflects the results of our Wealth Management segment. Revenue for the quarter was $612 million, up $25 million or 4% from the prior year with solid performance from most business lines. Retail brokerage revenue of $304 million was relatively flat year-over-year as growth in fee-based revenue was offset by lower commission revenue, mainly due to a decline in transaction volumes. Asset management revenue of $217 million was up $11 million or 5% from last year. This was largely due to higher assets under management driven by strong net sales of long-term mutual funds. And on a full year basis, CIBC achieved a record $5.5 billion in net sales. Private Wealth Management revenue of $91 million was up $12 million or 15%, mainly due to the favorable impact of foreign exchange rates and higher assets under management driven by net flows. Noninterest expenses of $443 million were up $19 million or 4%, primarily due to higher employee-related costs, including performance-based compensation and the unfavorable impact of foreign exchange rates. Net income in Wealth Management was up $5 million or 4% from the fourth quarter of last year. Turning to Capital Markets on Slide 9. Our results reflect the challenging market conditions that are highlighted. But despite these headwinds, we delivered results in line with last year. Revenue for the quarter was $578 million, again, in line with the prior year quarter. Global markets revenue of $310 million was up $2 million from the prior year as higher revenue from debt issuance activities was largely offset by lower equity underwriting and trading revenue. Corporate and investment banking revenue of $269 million was up $4 million from the prior year, with higher revenue from corporate lending and advisory, was partially offset by lower underwriting activity. There was a net credit recovery of $5 million this quarter compared to the provision of $14 million in the prior year. Noninterest expenses of $321 million were up $29 million from the prior year, primarily due to higher employee-related costs. Net income of $211 million was in line with the prior year. Slide 10 reflects the results of the corporate and other segment. The net loss for the quarter was $44 million compared with the net loss of $45 million in the prior year. Higher earnings in CIBC FirstCaribbean due to favorable foreign exchange and good credit performance was largely offset by lower investment gains. The current quarter also benefited from certain year-end tax credits. Losses in this segment have historically been in the $60 million to $70 million range and we would anticipate it being at that level going forward. CIBC's capital position remains strong. Our Basel III Common Equity Tier 1 ratio was 10.8%, the same level as in the prior quarter. Solid organic capital generation was offset by the impact of higher risk-weighted assets, and our RWAs increased by $2 billion from the prior quarter as a result of strong growth in our lending portfolios. Our Basel III leverage ratio was 3.9%, which is well above the minimum required by our regulator. So to wrap up, we're very pleased with our results this quarter which capped a record year in which we had strong performances from all of our businesses. In 2015, we performed well against our medium-term financial objectives, with strong earnings growth and continued capital strength. Heading into 2016, we feel confident about delivering long-term value to our shareholders. And with that, I'd like to turn the meeting over to Laura Dottori.

Thanks, Kevin. Good morning, everyone. I'll be referring to the risk section, which begins on Slide 13, where you'll see that loan losses came in at $198 million or 26 basis points, which is up $9 million or 1 basis point from the prior quarter. This was mainly due to higher losses in business banking related to 2 oil and gas accounts and that was partially offset by recoveries in our Capital Markets. Turning to Slide 14. New formations were up $64 million quarter-over-quarter due to the 2 accounts I mentioned earlier. You'll see that gross impaired loans were down, and that's primarily as a result of declines in CIBC FirstCaribbean and in the U.S. region. Gross impaired loans as a percentage of gross loans and acceptances have trended down over the past few years and they've come in at 49 basis points this quarter. To review our oil and gas portfolio, you'll see Slide 15 shows our corporate and business banking portfolios. We have $17.3 billion of direct exposure, which is down slightly from $17.4 billion last quarter. Our loans outstanding have declined $131 million or 2% quarter-over-quarter. 78% of our exposure is investment-grade and this has remained stable throughout the year. 56% of that is to exploration and production companies, with only 5% in the services space. On Slide 16, you see our retail portfolio exposure to oil and gas, where we have $39 billion exposure to the provinces of Alberta, Saskatchewan and Newfoundland, and that's up from $38 billion last quarter. If we exclude insured mortgages, we have $17 billion, which is unchanged from last year. Overall, our portfolio is performing as expected given the stressed oil prices. We continue to be vigilant and to proactively monitor our exposures. Turning to cards on Slide 17. You'll see that our net credit losses were $88 million this quarter, that's down $5 million from last quarter. And this is attributable to the seasonality as we typically see lower write-offs in our cards portfolio in the fourth quarter. In the oil provinces, we've seen some increases in delinquencies, but this performance has been, as I mentioned earlier, as expected. The increase was mainly in the segment of customers with lower credit quality, which accounts for just over 1% of our total retail portfolio. The overall cards portfolio continues to perform well. The delinquency increase in this quarter was driven by seasonal increase from the low levels in the summer. We continue to monitor our exposure in the oil provinces across all retail lending and remain cautious given that we are seeing increases in unemployment claims. Our Canadian residential mortgage portfolio is highlighted on Slide 18. As you can see, 64% of our portfolio is insured with 82% of the insurance being provided by the CMHC. The weighted average loan-to-value of our uninsured portfolio is 59% and has remained stable over the past year. Condo mortgages account for roughly 11% of our portfolio and the loan-to-value of the uninsured portion is 61%. Slide 19 shows our condo developer exposure, which continues to remain diversified across many projects, and both drawn and authorized loans have remained stable over the year. Lastly, on Slide 20, this shows the distribution of revenue in our trading portfolios as compared with VaR. We had one negative trading day this quarter compared with none last quarter. Our average trading VaR was $3.9 million, roughly in line with last quarter at $3.7 million. I'll now turn things back to Geoff.

Thanks, Laura. Well, that concludes our prepared remarks and we'll now move on to the Q&A. Operator, can we please have the first question on the phone?

[Operator Instructions] The first question is from John Aiken from Barclays.

David, wanted to explore the loan growth that you had in your operations in terms of what's underpinning the mortgage growth as well as what you're seeing on the commercial side in terms of pricing pressure or what's going on in covenants with your competitors?

Okay. John, so growth is pretty broad-based in personal banking and business banking. By that, I mean, asset side, liability side, both showing growth. But you did mention specifically mortgages, so let's focus in there. A couple of drivers for the mortgage growth. And again, we have the dichotomy where we're coming out of the brokerage side -- the FirstLine mortgage broker side and then working on our own brand to grow that apart. So first comment I'd make is on FirstLine, we're still retaining about 50% of the balances, double the target we set out at the very beginning of that effort to come out of that brokerage channel. So that's what's happening on that side, and we focus on building our own brand. We are seeing substantive growth there for sure. It's working quite well, a couple of drivers, as I said. First is expanding the mobile channel. So as we continue to focus on remote banking and banking that fits the life of our clients, building out that remote channel of mobile advisers, we were certainly below where we needed to be. So as we've built that channel, that's had an impact on our growth rate, from 2 perspectives: MaRS relationship, folks out on the street; and two, as they've had the role for a while, their productivity has been improving as well. So kind of 2 elements of lift there. And then the second driver for growth in mortgages is just process improvement, couple of examples. On the credit adjudication side, we've tightened it up, sped it up. We're getting answers back to our clients faster. And even simple things like documentation, we refined it, simplified it, tightened it. So I'd like to believe there's 2 drivers, one is expanding the sales channel, mobile advisers and the productivity thereof; and two is just tightening our processes, making us quicker, faster, tighter when we respond to clients. Oh, and then you asked on the business side. So on the business side, we're seeing growth on the lending of about 10%. We've been seeing that for a while. I think that's sustainable. No doubt it's a competitive space, but we seem to be maintaining our margins. And on the deposit side, we're high single digits growth in that space as well. So I think there's nothing that would indicate that we're coming off of that. We see Alberta, which used to be -- is still a very much growth market. It was growing faster than the national average. Now it's growing slower than the national average, but it's still showing substantive growth.

Good, David. In your comments in -- on the margins for the consumer side, you're not actually seeing any pricing pressure or is this just because of the dynamics of the spread on the variable rates moving out?

Okay. So when I commented on pricing pressure, I thought you'd asked, John, about the business side, so I was speaking about business. So let me speak about margins on the personal side, go to that directly. So we've been guiding to stable NIMs for quite some time and outperforming a bit relative to that. So I think this year, up 3 basis points. This quarter up 1 basis point. As I look forward, I think maintaining a stable NIM is going to be a bit of a challenge from a couple of perspectives. From an industry perspective, like the low interest rates in our noninterest-sensitive ladders just continue to grind. And then the second is it's a competitive world for deposits. So we've shown substantive deposit growth and we'll continue to seek that deposit growth, but to do it requires promotional rates at a point in time; we're in with a promotional rate in the market now. So that puts near-term pressure on NIMs. I think it's the right thing to do. I'm confident it's the right thing to do for the long-term value of the franchise. But because of the noninterest-sensitive rate impact and just the level of competition for deposits in the market, there is pressure. On the personal banking side, there is pressure on NIMs in the industry and we'll continue to need to manage through that.

The next question is from Rob Sedran from CIBC Capital Markets.

Kevin, the capital ratio, the CET1 ratio, has been flat now for a couple of quarters, and I wonder if you can give us a better sense as to what's going on and whether there's any opportunity to return to more normal levels of growth in that ratio just based on retained earnings going forward. And then Victor, whether the fact that the ratio wasn't really moving up as much as it was colors your thoughts on the dividend growth.

Sure, Rob, it's Kevin. Let me take the first part of that. So I'd say in, I think, back in Q1 of this year, we were actually up 50 basis points, but it's been relatively flat since then. And I think that essentially what's happened is our capital growth has been impacted by business growth and also changes in FX rates. And so if I look at the current quarter, again strong capital growth, but we did have the restructuring charge, which would have decreased the CET1 growth from that. And then offsetting that was regular business growth that you would have seen. So we had a couple of billion dollars of RWA growth. And so that would have offset that. I mean, going forward, we would anticipate a continued strong capital generation that would be offset to a certain extent by business growth and -- but overall, we continue to see increasing our capital ratios.

So this number should migrate higher. I mean, even if it's 10 or 15 basis points a quarter, we should expect to see some growth in that ratio over time?

Well, absolutely. I mean, if I think -- even for this quarter, I think the restructuring charge was about 16 or 17 basis points, so -- in and of itself. So absent that, we'd have had a -- we'd have certainly have had that growth this quarter.

And Rob, as a follow-up on the dividend side, just consistent with all the messages we've delivered in the last numbers of quarters, we're just going to keep going at -- $0.03 a quarter is what we've been doing this year consistently, quarter-after-quarter, until we get to the upper end of our range, which is 50%. We're at 45.5% now, so we have room to move up.

The next question is from Gabriel Dechaine from Canaccord Genuity.

A couple of quick questions. Victor, can you give us a sense of the timing? Or what's the talk around the potential increase in mortgage risk weights? It sounds like it's been kicked down the road a little bit. And then on -- for Laura, on the redetermination, you didn't mention average credit lines, how much they were cut and all that stuff. But I'm also interested in how many of these E&P firms had their loans restructured. So from revolving to terms, stuff like that, and if that just means we might see some credit issues a few months away if some of these clients or borrowers can't sell off the assets to repay the loans.

So Gabriel, on your first question, as you know, I'm not the regulator, I'm not the Minister of Finance, so it's hard for me to predict where that's all going. But I look at what's happening around the world as you do, and other countries and other regulators, they're increasing their risk weights. I and the team here, we always plan for a more conservative stance, which is why we have a higher CET1 ratio in the event that, that does change. So I think we have to plan for that. The extent of the chance, I can't comment on, although I suspect over time, risk weights will increase but in such a way that the industry can continue to provide to Canadians, mortgages at a reasonable level to help them buy their homes that they wish to buy.

But you don't expect it in the next couple of quarters, anything like that?

Now look, Gabriel, you know what? I don't know. I just -- as I said to you, the most important thing for us is how are we planning for this? Higher -- being at the higher end of CET1 in our peer group is something that we feel very comfortable with for a number of reasons, one of which is possible regulatory changes.

The next question...

All right, Gabriel.

I got one...

Sorry, there were -- yes, it was one question that had various segments to it. So a nice way to go about it. On the borrowing base redetermination. So the majority of our clients have been through this redetermination calculation. And so what we've seen as it relates to our borrowing base facilities is a reduction in amounts of about 5%. And that's with our price deck that we've brought down about 15% from the previous one we were using. And so your other question within the one question was how many of the loans had been restructured, and I can tell you that at this point in time, very few. We're probably -- we're well under 10% of our borrowing base redeterminations that either have off-cycle determination dates or we've been discussing some form of extension. I would expect to see some increase in that number through 2016, particularly if oil continues to remain below $50 on a consistent basis.

The next question is from Meny Grauman from Cormark Securities.

Victor, you talked about online lending in your remarks. I was wondering if you could just give us a little color. As you think about this developing opportunity or platform, where is it going? And how big can it get? So what do you see in that regard?

Well, we see on both sides of the border emergence of players in this space. We saw OnDeck Capital sign a relationship with JPMorgan just 2 days ago. They're trying to provide faster, smarter, sharper adjudication to the Small Business segment. Thinking Capital is the Canadian equivalent of that. We believe that there is a gap to fill for our Small Business clients. And this adjudication process is data intensive, it's paperless, it's quick and it's something that our clients appreciate. The relationship we signed with Thinking Capital is an exclusive relationship. It also allows us to deepen our relationships with those clients not only from getting a small business loan but also opening up a small business banking account and a personal banking account. David, I don't know if you would like to add to that?

Yes, just a couple of comments. If I go up a few thousand feet and picking up on what we talked about at Investor Day and as we transform our operations. So you kind of look at it in -- as we talked that day, about 3 horizons: we're innovating within our core banking; innovating within kind of boundaries to what we do currently and what we might be doing soon; and then the third horizon being innovations and stuff that's out there further. Thinking Capital's in horizon 2, all right? It's algorithm-based online lending, which is not exactly what we do currently but pretty close, and it's us learning and exploring in that space. It's critical for us, as Victor said in his opening comments, to be laser-like focused on meeting the needs of our clients. And this currently is a faster, tighter response to small business, which can be, in traditional banking, a bit clunkier and not as crisp as what's being done by FinTechs like Thinking Capital with algorithm-based lending. So hence, the partnership. It's good for Thinking Capital. It's good for us as we learn and explore in that space. And things we're doing in the third horizon are investments, in blockchain, Digital Currency Group. We're looking at cryptocurrencies. And then horizon 1, all the stuff we talked about at Investor Day where we're doing network transformation, just getting more digital in our operations and the kind of banking we do today. So Thinking Capital is in horizon 2, and it's a -- it's an important step for us to explore a space that we can learn from and make sure that we're meeting the needs of our clients as quickly and as effectively as possible as that space evolves.

And then just another quick question. The sequential drop in fixed-income trading revenue, is that all market related? Or is there anything else notable going on there?

Meny, why don't we get Harry Culham to answer that question?

Actually, we are coming off a very strong trading performance in quarter 3 and -- which benefited from a combination of good client activity and market volatility. And quarter 4, on the other hand, had lower client activity really around uncertainty in the markets and lower activity coming out of the summer. If you look at the full annual trading revenues 2015 versus '14, we're very proud of the performance, where it's up significantly on '14.

The next question is from Mario Mendonca from TD Securities.

Before I get to my actual questions, just to clarify that on the trading side, were there any mark-to-market losses this quarter? It doesn't appear to be on Page 20 of your presentation. But anything you can help with there?

Not that -- there are no significant mark-to-market losses; nothing material.

Maybe the right way to ask it is, were there big mark-to-market gains in Q3 then?

We had some significant transactions in quarter 3, all client-driven transactions that led to a very strong performance. In fact the first 3 quarters were very strong. Quarter 4 is essentially in line with quarter 4 last year, and we're actually off to a good start as we start quarter 1 here. The outlook is quite positive with some solid client activity in the first part of the quarter.

And did those significant client transactions in Q3 result in significant mark-to-market gains?

There were -- yes, there were some significant gains from some client transactions. There were some larger transactions in quarter 3. This is -- as you well know, this is a well-diversified client franchise across various different products.

Okay, let me get to my actual question then. So David, you referred to -- actually, let me start it this way. From Q1 to Q3 -- sorry, Q1 to Q2 in domestic retail, there was a sharp change in the bank's performance, both earnings growth, operating leverage. It was like a switch got flipped. And what I'm thinking about going into 2016 is operating leverage in particular. The sort of operating leverage you've seen in these last 3 quarters, is that sustainable going into 2016 given the pressure on margins and your need or your desire to spend more aggressively in that business?

Mario, yes, let's go back to the message at -- from Investor Day early October. So at that point, I had said that 2016 would be a challenge maintaining a positive operating leverage. And if you look to the last few quarters, you're right, they've been strong. And I got to say in particular, Q4 came in better than I anticipated. So if we de-comp it a bit, the expenses, which are just inside 4%, I think that's indicative of what we'll expect in the near term given our continued investment in the business. Revenue, I'd say, came in stronger than what I anticipated and may -- is, let me turn it to is -- stronger than what I anticipate in the near term. So my perspective for 2016 hasn't changed. On Investor Day, we talked about some of the investments that were lighting up currently. The simplifying of our leadership structure. We talked about moving clients into Imperial Service where they're better served there and out of core. We talked about our network transformation. We talked about investing in digital sales. So all those steps we're taking to make our bank better cause me to stay with the guidance that I provided at Investor Day.

And the guidance, to be clear, is challenge maintaining positive operating leverage?

That's correct, Mario, yes.

The next question is from Sumit Malhotra from Scotiabank.

Just to pick up on that, David, I was surprised to hear you say that even with this investment spend that you're contemplating for 2016, the expense growth level isn't likely to change. I had thought that was the lever that was more likely to push the operating leverage down in 2016 as opposed to revenue. So is there -- do you have some offsets in mind that is going to keep expense growth at this same level of 4% next year to offset the investment spend?

I guess I'd make a couple of comments. Like we're talking it's kind of near term as opposed to quarter-to-quarter. One thing that I'd say is that although we're a substantive enterprise, like $10 million moves operating leverage 1 percentage point. And $10 million isn't really a big number on the expense base that we're dealing with. It's about $1 billion-ish per quarter. So there's some -- there is some volatility. $10 million moves at a turn on operating leverage. So you'll see that number move around, as it has in the past. I'm guess I'm saying we have been investing. There are some specific things that we said on Investor Day that we want to do, and that will put some pressure on expenses for sure. And you'll see some movements in the quarter, especially, as I point out, $10 million can move at a turn. But I'm just saying that take, for example, the noninterest income line and -- which has been flat for some period of time. It's up this quarter about 20-ish. When I look at that number and dissect it, it's a whole lot of small items, many of which aren't reoccurring. So we just had a bit of a tailwind in Q4 that pushed us to a level beyond what I'd hoped for.

Fair enough. That's clear. And then one final one for Victor. Victor, you've mentioned many times since taking the seat that getting the dividend ratio -- dividend payout ratio to the high end of the range is a target for the bank as long as earnings permit. I guess I wanted to ask you, what happens when you get to 50%? Have you discussed either with the board or with the regulator the possibility of taking it above the for now magic 50% mark? Would you want to do that? And is there capacity in terms of what the regulator thinks for you to move above 50% in the future?

I -- Sumit, I think we just -- we're going to move to 50%, and we're going to try and grow our earnings. And that way, we can continue to grow our dividends by growing our earnings. The payout range of 40% to 50% and being at the upper of that is where we feel comfortable, and that's really where the discussions have stopped. Our real focus is on how can we drive earnings growth, both from the top line and bottom line, and managing our costs better to deliver more value to our shareholders. That's the preoccupation of the leadership team at CIBC.

So dividends go up because earnings go up and not because the payout ratio moves?

Yes. Right.

The next question is from Doug Young from Desjardins Securities.

Just maybe starting, Laura, can you talk a little bit about the evolution of your watch list over the past year and in general, and then specifically related to the evolution of the watch list on the energy book?

Yes, overall watch list -- so across the organization has actually been very good. So we haven't seen any increases. In fact, I'd say it's been down a bit. As it relates specifically to the oil and gas space, we have seen increases in our watch list. However, none this past quarter. And I'd say that accounts that are of higher concern to us, there's about a handful of those.

So it's -- so there hasn't been any change in the number of loans in the energy book on the watch list over the past year?

Oh, there certainly have been over the last year. There haven't been this quarter. In fact, when we look across the broad spectrum of accounts, so including our Small Business accounts in the oil space, we've had 100 names that have been downgraded. And just to give you an idea, that represents an increase in our risk-weighted assets over the year of just under $400 million.

Okay, interesting. But overall, over the last year, your total watch list hasn't really moved? Your oil and gas has increased, but there's been changes elsewhere? Is that the right way to think of it?

Yes.

Okay. And then just quickly, if I can sneak another one in here. On the Wealth Management aside, I noticed that your earnings were up 4% year-over-year, but your assets were up 12%. And if I recall at the Investor Day, about 71% of your Wealth Management earnings is driven by asset management. And so I'm just a little perplexed as to why you're not seeing more leveraged asset growth. And is there anything in the numbers that has caused the lack of leverage there?

It's Steve. Overall, the quarter this year to quarter last year growth in assets is relatively consistent with the revenue growth. The real reason why our earnings this quarter were down somewhat from previous quarter is really just the market pullback that we saw primarily in August and September where the TSX was down about 8%. And so our revenues really were fairly much in line with the overall asset movement. And so that's really why we were down. But we still did produce 4% revenue growth, or 4% NIAT growth rather, Q4 this year to Q4 last year. So still positive but much less than the momentum we had been seeing previously.

I guess maybe yes, I'll -- maybe I'll follow up.

The next question is from Peter Routledge from National Bank Financial.

A question for David. Great mortgage results. I saw a report where CIBC is market leader in terms of mortgages for foreign investors in Vancouver. And at least one competitor now is making a push into that market, dropping their LTV limits to minimum 20% down. So how do you respond to these types of competitive threats?

Peter, no anticipated change on -- in that particular respect. We are strong in that region, and I'd like to believe it's the team we've got there -- and I know that may sound a bit generic, but it is a team that's very strong, been established there for quite some time, very connected within the community. We've got consistent support throughout the bank with risk and so forth, regarding the limits that we have established, have allowed us to be competitive. So yes, there's more of a push from one of the -- one of our competitors into the space. But I guess the simple statement would be we feel good about our position in that market, good about our team. And we'll just push on with what we're doing.

How important is that market and maybe the Toronto market, which may be a bit smaller? But how important is that submarket to your overall mortgage growth?

Well, Ontario is a core market for us, generally, and Toronto, obviously, the epicenter within. So if you look at our mortgage book, which I think in Laura's side she's got it cut by province so we have it in our materials, so you can see that the center of Canada is strong for us. But when you actually look at those 2 cities as a percentage of our overall book, it's actually not that substantive. We're a broad-based Canadian lender, even into the smaller rural communities. So they're important, but the key thing is for us to be competitive in all the spaces that we're active. And Toronto and Vancouver are different from other markets. Rural markets have different dynamics. What we have done over the last few years is to change our pricing to reflect the dynamics in each of those markets, as where before we used to be kind of "one price fits all" across the country, which oversimplifies the dynamics within our country.

And just on credit, you mentioned you do credit mitigation. Per se, the high-net-worth foreign buyer that puts 20% down on a home, I mean, obviously, they would have financial assets beyond just their home. What credit mitigation techniques do you use? I mean, I guess the question I'm asking is, do you ensure that you have assets custodied in Canada when you do that type of business?

Maybe what I'll do is just hand over to Laura, who's my colleague, to make sure that what we're doing as we pursue growth is appropriate in nature. So I'll hand over to Laura and she can comment.

So I would say we absolutely qualify all of our borrowers. And if we are making loans where we're taking security, particularly in the mortgage space, of course the security we're taking is in this country. And just to elaborate a bit as it relates to sort of nonresident Canadians, the percentage of our portfolio, as David said, is really small. It's under 1%.

Okay. So this isn't a huge driver? Okay.

Not a huge driver. And I'd also tell you that from a delinquency perspective or performance perspective, it's a very well-performing segment of our book. It just happens to be an incredibly-small one.

Yes, but the new resident would be a lot bigger. So people coming to Canada and staying here.

Yes. You're right, it would be. And again, the same, we do all the qualifications for all borrowers. And what I can tell you as it relates to our mortgage growth, most of it or -- for that segment is coming out of Vancouver and Toronto. And our originations actually look quite good in performance to-date. So we've got really good profiles. And in fact, when we look at our late-stage delinquencies in that segment, we're actually down in the Greater Toronto area and in British Columbia.

The next question is from Sohrab Movahedi from BMO Capital Markets.

But -- so I just wanted to stand back a little bit and look at that at a bit higher level. You've obviously had pretty good ROEs even on higher capital ratios. At the Investor Day, you talked about a medium-term target of 18% to 20%. I mean, if you had a chance to revisit that, would you stick with it or would you really reduce the lower end of that range?

It was only 6 weeks ago, Sohrab, so we...

But I think the world has changed quite a bit even since.

The world keeps changing week after week. We were at the high end of ROEs for banks of our size around the world. And I don't think that the 20% level is something that's sustainable. I think competition will continue to eat away at that and we're prepared to deal with it. We're not prepared for a precipitous drop in ROE. Is 18% the right number? Is 18.5%, 17.5%? I'm not sure, but all I can tell you is we're guiding that ROE will drift downwards over time. And what we were clear about in the investor presentation is we want to get to an earnings per share profile of 5% to 10%. We want to be well within that range in 1.5 years from now. We want to get our NIX ratio down to 55%, a run rate in the medium term at that level. ROE will be in the 18% to 20% range and dividends will be at the upper end of 50%. We're really just focusing on core quality earnings growth, staying close to our clients in all our businesses, working across all of our businesses and just delivering good, old-fashioned earnings growth to our shareholders and, hopefully, share price appreciation with that.

The next question is from Mike Rizvanovic from Veritas Investment.

A quick question for David on the strong mortgage growth that you've been seeing. In terms of new originations, can you tell us roughly how meaningful the contribution is on the -- or from the 5% cashback offer? And as a quick follow-up, in your view, is the risk profile for someone who chooses that product meaningfully different than your average mortgage borrower?

Well, I'll answer the first bit and maybe hand over to Laura for the second bit. To be honest, it's not that meaningful. The key thing, to be honest, is it's a discussion point for our front line to have with clients and to have a basis to reach out to clients who don't currently have their mortgage with us. It's more a tool to facilitate that conversation and to catalyze the focus of our front-line team on that area to continue to push for the deeper relationships that we seek as a fundamental part of our strategy. Regarding those that we do book and the credit risk associated with them, I'll turn to Laura, if I could.

Yes, Mike, similar to my earlier comment, risk profile actually tends to be better as it relates to Beacon scores, loan-to-values, delinquencies.

I would now like to turn the meeting back over to Mr. Weiss.

Thank you. So that concludes our call. If there are any follow-up questions, please call our Investor Relations department. Thanks again for joining us this morning. And on behalf of the team at CIBC, I'd like to wish everyone a happy and safe holiday season.

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