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

Thank you and good morning. We will begin this morning's presentation with opening remarks from Victor Dodig, our President and Chief Executive Officer. Following Victor, Hratch Panossian, our Chief Financial Officer, will review our operating results. Shawn Beber, our Chief Risk Officer will close out the prepared remarks with a risk management update. We're also joined in the room by CIBC’s business leaders including Harry Culham, Laura Dottori-Attanasio and Jon Hountalas; as well as Mike Capatides, who has joined us remotely from the U.S. They will be available to take questions following the prepared remarks. As noted on Slide 2 of our investor presentation, our comments may contain forward-looking statements which involve assumptions that have inherent risks and uncertainties. Actual results may differ materially. With that, I will now turn the meeting over to Victor.

Thank you, Geoff, and good morning. I hope everyone joining us on the call, including your families and colleagues, are well. And to those on the frontlines providing essential services for healthcare and economic recovery, we'd like to thank you for your courage and for your dedication. I'd like to begin the call by underscoring three essential factors that guide our thinking about our bank in the current environment and as we look to the future. First, we're well positioned to balance the short-term actions necessary to successfully navigate the current challenges as well as advance our long-term strategy. We continue to make strategic investments now to position us for success as we enter the recovery period and beyond. Second, our investments over the past several years to modernize and simplify our bank have allowed us to mobilize early and to respond quickly to the pandemic in support of our clients, our team members and the communities we serve. Third, whether you're building client relationships or managing a public health crisis, your success often rests on your people and their leadership. Our CIBC team has stepped up in remarkable ways over the past several months and it has reinforced that we have a singularly connected team that is bringing a relentless focus on our clients. For our bank, we are leaning in to support our clients at a time when they need our help more than ever, while also ensuring the wellbeing of our team. Since mid-March, we've enabled over 75% of our employees to work remotely, tripling the number from a few months ago. We've also taken significant actions to ensure the wellbeing of our team members required to work on site as they support our clients and keep our operations running smoothly. For our clients, we have helped…

Thank you, Victor. Good morning, everyone, and hope you're all doing well. Starting on Slide 9, for the second quarter of 2020, we reported earnings of $392 million and diluted earnings performance share of $0.83. Adjusting for the $49 million after-tax item of note reflected in the appendix, we delivered net earnings of $441 million and earnings per share of $0.94. Our results this quarter are net of $1.4 billion provision for credit losses, which captures the full impact of the economic circumstances we anticipated as of the end of the quarter. Provisions were primarily driven by a substantial increase in our allowance for performing loans, reflecting potential credit losses as the economic impact of COVID-19 continues to unfold. Shawn will speak to credit provisions in more detail in his remarks momentarily. Pre-provision earnings of $1.9 billion were relatively stable from the prior year. While COVID-19 impacts presented headwinds in the quarter, our core underlying business performance remained solid, reflecting the resilience of our diversified franchise and continued progress against our strategy over the last year. Revenues of $4.6 billion were up 1% year-over-year, driven by a 13% increase in net interest income as continued growth in client balances and stable margin across our bank more than offset the COVID related headwinds. In contrast, non-interest income was down 13% as a result of reduced transactional activity by our clients and disruption in capital markets due to COVID-19. Adjusted expenses of $2.6 billion were down 2% sequentially and reflect the actions we have taken to contain expense growth while accelerating some investments to respond to COVID-19 and modernize our bank. We will continue to prioritize selective investments to address the challenges presented during this crisis and to position our bank for growth in the post-crisis period. Overall, net of our ongoing…

Thank you, Hratch, and good morning. Before turning to our provisions, I'd like to provide a few high level thoughts on our credit portfolios in the context of the current economic situation. First, our portfolios have performed well heading into this crisis. Nearly two-thirds of our outstanding loans are to consumers, the majority of which are mortgages, with our uninsured mortgages having an average loan to value of 53%. The balance of our portfolio is in business and government lending, with an average risk rating for the portfolio equivalent to a BBB plus. Second, given the unprecedented dislocation that has occurred since we last reported our results to you, we have performed various analysis and exercised judgment to determine our provision for credit losses this quarter, particularly with respect to the provision for performing loans. And third, we have also provided incremental disclosure this quarter to help you better understand select industry exposures. While acknowledging the uncertainty in the path forward for the global economy, if our current economic estimates materialize close to forecast, we would not expect to see notable increases in performing allowances from here. With that context, turning to Slide 18, the total provision for credit losses of $1.4 billion were higher quarter-over-quarter, mainly due to performing loan loss provisions driven by unfavorable changes to the macroeconomic outlook that informs our forward-looking indicators, reflecting the impact of the COVID-19 pandemic. For impaired loans, the provision this quarter was $343 million, up $99 million from the prior quarter, mainly due to a few impairments in Canadian Commercial Banking, and the oil and gas sector within our Capital Markets business. Given the current environment, we have provided additional information this quarter on the composition of allowance and our provision on the following slide. Turning to Slide 19, allowance for…

Thank you. [Operator Instructions]. And the first question is from John Aiken from Barclays. Please go ahead.

Good morning. Hratch, you mentioned in terms of the sale of FirstCaribbean that you’re expecting to go forward. My understanding though is that there's potential price adjustments based on book value. Do you see any impact on the pricing of this deal because of what happened in FirstCaribbean this quarter? Or alternatively, is there any impact on the timing you expected to close?

Sure. Thank you, John. And good morning. I would say on the price adjustment side, we've made references before to the way the agreement is structured. So any changes in book value, and as mentioned in our disclosures, would flow through to that. But that doesn't mean there's a price adjustment. So the agreement is as it is. It just reflects changes in the book value between agreement and close. And so, that would happen as normal course. However, I will say on the economics that, that structure actually guarantees us that the economics with that respect stay the same. So we've looked at and recalculated the impact of the close. And you'll see as this goes on our capital side, we still anticipate 40 basis points roughly benefit when we close that transaction. And in terms of timing, as we've disclosed, again, we are working through regulatory approval processes. And that's what is between now and close. And so, obviously the COVID-19 situation and shutdown of certain government bodies including regulators, and the workload can impact that but we still are anticipating later this calendar year.

Thank you. The next question is from Ebrahim Poonawala from Bank of America Securities. Please go ahead.

Good morning. I guess just a question following up, Shawn, on your comments around performing PCLs. If you can just give us some clarity around -- my sense is performer PCLs and the model is very sensitive towards the unemployment outlook. If you can talk to just on what you're baking in with regards to unemployment as we look out I guess first half of ‘21 in the housing market, that would be helpful?

Sure. Ebrahim. So we've used -- working with our economics department, we've taken the various scenarios, weighted them and then run our modeling exercise. So I'd say our base case is more reflective of a U shape pattern, so a big contraction in GDP and rise in unemployment fairly quickly. Then as the economy reopens, recovery begins and it’s sort of quickly at first, but then we're sort of forecasting a more gradual emergence from there where GDP doesn't get back to say end of 2019 levels until sort of late 2021, early 2022 with unemployment coming back after that. From a house price perspective, we've modeled in -- think about it as sort of a little more than 6%, 6% to 7% price drops over the next two years, and then some recovery in the following year.

Got it. And just on that, so you mentioned, this was the probably the high watermark absent the macro change on forward PCLs? Do you feel the same way about just total PCLs? Or do you think that impairment and credit migration could actually push absolutely a level higher than what we saw in 2Q as we move later in the year?

Yes, so as I said, we -- based on our view of the forecast and the various analyses that we've done, which includes bottom up analysis on impacted sectors; if things play out the way we've modeled them and based on the risks as we understand them today, we wouldn't expect to add any material amount to allowances. Now in terms of the impaired provisions, what we would expect to see, again, as things play out is some level of credit migration and ultimately perhaps some cycling of those performing provisions into impaired provisions. But net, not having that allowance number move up materially.

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

I just want to ask about the deferrals, and interesting that you’ve put the proactive and reactive descriptions in the card portfolio. That kind of hints at like need versus accommodation or tactical use of such a deferral program by some borrowers. I'm wondering if you talk about it across the whole book and especially on the tactical because if those numbers are quite high, it can give us comfort in how these deferral numbers are going to decline over the next few quarters and result in a much lower impaired loan number?

Good morning, Gabriel. It's Victor here. I wanted to just comment on that and I'm going to hand it off to Laura, where the largest number of deferrals occurred in our Canadian Personal Business Bank. At the outset of this pandemic, it was clear to us based on the inbound calls and based on the economics that we saw out there, that clients are feeling anxiety and hardship. Some was real financial hardship, some was perceived financial hardship. And we wanted to deal with them as expeditiously as possible. So we dealt with that on mortgages. We set up a digital form that made it very easy. We on credit cards decided that there was a group of clients that we wanted to offer relief to on a proactive basis based on their real hardship, because alleviation of hardship means alleviation of hardship. And that's what we set out to do for those clients, while at the same time recognizing that there were clients that we needed to open the lines for request for alleviation and that was a reactive group. In our Commercial Bank and our Corporate Bank, we also worked with our clients on the deferral basis, and/or to negotiate new lines of business. So we're highly and actively engaged. I think your question specifically relates to the proactive piece. So I'll hand it off to Laura to speak to that.

So, good morning, Gabriel. And thanks, Victor. So as Victor said really our number one priority during the crisis was to help our clients. So you would have likely seen if you're following the news that we were actually first out of the gate with all the announcement of the various deferral programs including dropping interest rates. And I do want to point out that during the pandemic, there's a national poll of Canadians that ranked us number one among the big six banks for our handling of COVID. And so that, that I point out because it was really important for us because we pride ourselves on doing the right thing. So it was a deliberate decision that we made at the beginning of the crisis. And as Victor pointed out, what we wanted to do here was really find a way to provide cash flow relief to the clients that we thought might need it the most. So those were -- there were those that came in and asked as Victor points out, and the ones we felt might also need it where we had seen say they had missed a payment or been late with the payments. So it was really trying to help these clients because that's what we're supposed to do during these times, during their period of I would say very high stress that avoided a lot of delays with calls into our call centers. And most importantly, we knew these folks would benefit. So just some stats for you, which I know we had a slide that showed them. But on mortgages, the 108,000 deferrals we did, that represented 18% of overall mortgage outstanding. On the card side, it was about 7% for those who asked for it and 9% for the proactive one, so totaling 16%. And what I think I should point out to you is what we're seeing with our clients. They've been acting incredibly responsibly during these times. So we've seen them cut back on purchasing. They haven't increased their debt levels. Actually, in fact, utilization rates, both on secured and unsecured lines have trended downwards. And of the folks that we offered proactive relief to, I would tell you that just under 60% of them still chose to make a voluntary payment on their cards. So I think that just speaks to the responsibly -- or sorry, how Canadians are acting responsibly during these times. So does that answer your question, Gabriel?

Again, it’s -- if I can -- if you could tell me like 80% of these deferrals are people that have just taken a payment holiday, while they sort out their situation, and I'd expect those to get back to performing and paying by when their six month period elapses. That's kind of what I was asking.

Yes, well, for mortgages, most of our client we offered six months deferrals to, on the card side, it was two to three months of, if you will, deferral and lower interest rates that they received. So I think your -- well comfort comes from of that segment of population, where we proactively deferred. As I said, just under 60% of those folks made voluntary payments on their cards.

Okay. My next question on capital. And Hratch, I think you were talking about at the -- you mentioned credit migration. A bank yesterday gave some sensitivity on migration that if everything would downgraded a notch, there'd be a 100 basis point or whatever hit to capital ratio. Just to kind of give a stress scenario, I was wondering if you have anything of that nature?

Yes, I'll take that Gabriel. It's Hratch. So yes, I can give you a little bit more color on that. So, as I mentioned, our capital is resilient and we expect it to remain resilient to cover migration. So we've got -- this quarter you'll see, if you go into the sub-packs, we only had about 5 basis points of CET1 worth of migration but we do expect that to come over time. When I look at our portfolios, if I look at, let's say, the wholesale -- and I'll give you a similar numbers to what was discussed yesterday. For our wholesale book, which is not just corporate, sort of overall wholesale book, we anticipate that we would have approximately -- if you just look at the RWA impact from migrations, it would be about 80 basis points to CET 1. But you've got to keep in mind that there is also on top of that potentially increases in the ECL which would come through. And so you put that all in, about a 100 basis points over several quarters. Now that I should point out is a very, very significant scenario to see the whole book downgrade one notch. And we are starting from a very strong place with a portfolio that is very strongly positioned. Just to give you some numbers, on our corporate sort of sovereign book as of Q2 of our exposures, 82% almost, where had a PD of under 0.5%. So I think that's a great starting point and we can absorb from there. In terms of what we actually expect, we've done a number of forecasts and what I'll leave you with is, absent credit migration, we think our capital is stable. At this point in time, hard to tell what's going to happen but we do expect some credit migration. But we think that level of credit migration will be sort of in our expected case within that sort of 40 basis points. And then, outside cases that we're seeing still well into the 10% I would say, about potentially sort of that 10.5% level. And then in a very, very severe stress, based on a number that I just gave you, you see that we still have, as I mentioned in my remarks, significant buffer to that regulatory minimum.

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

Laura, I was wondering if you could offer any update on client behavior trends post quarter. In terms of what you're seeing on the mortgage origination side or personal or card side would be helpful? Thanks.

Sure. Good morning, Scott. Well, I’d tell you, post quarter does feel better than what we went through during the quarter. That said, I'd still expect to see I'd say slower demand for credit, and that's just reflecting the new reality that we're in, let's see. We're seeing, I’d say, deposits, balances those continued to increase. That feels good. On the mortgage side, pre-crisis, I'd say we were feeling good in that, as you've probably seen we reversed that declining growth trend, and are now in a positive trajectory. That said, still not good enough in terms of where we'd like to be. But we were trending in the right direction. I’d tell you sort of post quarter end we are seeing some of those applications drop off, which I think is normal, given the circumstances. But on the credit card side for as much as we saw did drop off, particularly in April in terms of purchase volumes and new applications. We're actually seeing a much improved pipeline, as it relates to number of applications coming in including purchase volumes that have come up. And so, feels a lot better. That said, I think we're going to see slower demand, if you will, for credits on a go forward basis. Does that answer your question?

Yes, it does. Thanks. And just for Shawn, just a follow-up on your scenario analysis, I guess response on performing loans on the allowances. For the housing prices, when you say 6% to 7% over two years, is that over two years or is that 6% to 7% each year?

No, over the two years.

Over the two years. And when you find the weights to the different scenarios, can you quantify the weights for us?

I don't think we've historically disclosed that. We didn't move a bit towards our upside case, but that was more a reflection relative to prior quarters, but that was more a reflection of the fact that our base case now reflects more of a recessionary environment.

Thank you. The next question is from Steve Theriault from Eight Capital. Please go ahead.

Victor, in your opening remarks, you talked about looking forward to getting back to pre-COVID levels of profitability. That's been a big question. It hasn't always been the case. Obviously last cycle, put pressure on our ROEs. Can you just maybe elaborate a bit on your confidence there and talk about some of the risks to that outcome?

Yes. Good morning, Steve. I think we all generally know where we are today in the economy. I think the stimulus -- just to provide a broader macro context, my views, and our collective views here at CIBC are that the stimulus from the various government programs in both Canada and United States are helping and will help demand recover as we come out of this. Clearly, some sectors will perform better than others. The discretionary economy, travel, entertainment, leisure, the ones that you constantly hear about are the ones that are going to have a longer period of recovery. Our economists tell us that GDP will contract in the high single-digits this year, both Canada and United States and will likely rebound next year. Various letters of the alphabet are used to describe the recovery. I always say there's no letter in the alphabet that'll describe it. Let's just kind of take it quarter-by-quarter. In terms of my comments that we will return to pre-COVID levels, there's a number of things that we're going to have to do. We're going to have to continue to win market share and develop deeper client relationships with clients across all of our businesses. And I think you're seeing that in our businesses. There's obviously pockets of improvements that we have in our portfolio that we need to work on. We need to continue to transform our cost base and we announced that last quarter and we will continue with that program to transform our bank and to try and get our efficiency ratio to a normal level. If we do what we can do to improve the performance of our portfolio and the economic recovery does take root, which I believe ultimately it will. There's a tremendous amount of stimulus in the market, globally that's happening. We will see that growth come back. It may take the ‘21, it may take the early ‘22 before you see a robustness back in the banking sector again, assuming that the healthcare crisis is behind us. So I know that we have a good plan. We are going to continue to execute against that plan. I think quarter-after-quarter you will see the resilience in our business results that on a relative basis we will hold our own and try to improve versus our competitors as best as possible.

Okay. Thanks for that Victor. Second question for Hratch, I think the margin is up 3 basis points in the U.S., you talked about a decline going forward Hratch. Can you put some numbers around that, either some numbers around that or the timing with which it will take for margins to kind of settle out all else equal post rate cuts?

Sure. Thank you. So it's a little tough right now to put numbers around it. Because A, as I mentioned in my remarks there, we do expect some volatility over the next few quarters. And so, if you look at, for example, the Paycheck Protection Program and how that plays out and there seem to be potentially extensions to that. So that will when it's on balance sheet skew things to some extent in the short-term. But to give you sort of the longer term trends, as we've spoken about before, we do anticipate that business to be more stable now than it's been before because we have hedged that balance sheet fairly significantly. But directionally I would say LIBOR going down, you would see some modest pressure over the long-term. And I think once the noise of the [BBB] program clears out, you'll see the impact fairly quickly come in for the LIBOR changes that we've seen now and then stabilize from there if we don't see any changes going forward. So what you see in our disclosures -- I'll give you may be a bit of extra color, you'll see that 25 basis point disclosure to rates we have now, which is a lot more than what we had before because of some of the deposit floors. I would say within that number, there's probably a sort of somewhere in the neighborhood of $15 million for the U.S., and so you can go back and see how much rates have moved by. It was substantially less than that what we had said before arrived for shocks. And I think with that, you can triangulate to a number that still stands.

Thank you. Your next question is from Meny Grauman from Cormark Securities. Please go ahead.

Following up on Steve's question, Victor, in terms of thinking about the future, I'm wondering, you referenced a lot to digital investments and taking advantage of the current opportunity to do that. But I am wondering what about potentially the golden opportunity of more dramatically reducing the branch footprint? Is this something that's considered -- should be considered in your view?

How are you doing, Meny? Nice to hear your voice. So a couple of things I'd say about our physical footprint. We've kind of gone in a period of a journey of transformation in terms of modernizing the footprint where we're moving transactions out of our banking centers and moving advice into our banking centers. And that's the trend that I think you'll continue to see. I believe that now our transactional level is 91% and 92% of transactions are conducted either via an ATM, your tablet or your online banking platform, which is all encouraging. We see that going to 95%. But our belief over time is that people and people interaction, whether it's through some sort of safer distance measures or not, are going to be an important part of the banking equation. So, while banking centers may drop in terms of overall numbers, and they become smarter and lighter in terms of footprint, I think they'll be an important part of our value proposition, particularly in the Canadian marketplace over time. You'll see some shrinkage but they'll play an important role in building those client relationships. The other thing I'd add is that shrinking the number of banking centers doesn't necessarily improve your profitability that dramatically. What improves your profitability dramatically is your ability to attract the client relationships. We wish to attract and make sure they’re deep and meaningful relationships, so that you can see those numbers flow through both our ROA and our ROE, and that we can generate the healthy capital that we believe we will generate through our business model going forward.

Thanks for that. And while we're talking about the future, I thought I'd ask about taxes, and the question is, the inevitability of tax increases as we switch to pay for all of the segment spending and maybe even further than that, at what point should we get -- or at what point you get concerned that the government is -- government debts or public debt is just getting out of control?

Well, look at citizens we should always be concerned about what is the right level of debt to share the burden and then making sure that our countries are strong, well, the Canada, United States and other countries we operate in. I'm not going to talk about whether tax increases will happen or not. What I will say is that what matters most is economic growth, and policies that stimulate growth so that the economy can slowly retire the debt that's been incurred from this. We have the benefit of low interest rates that help but all policies need to point to growth as we move into the recovery period. There's obviously recovery period. There's going to be a reconstruction period, both for our bank as we continue to accelerate our transformation and our country as we move to a more modern economy. And I think this pandemic has opened our eyes to the ability to move swiftly in that regard. And the only thing I would continue to advocate all our government leaders to focus on is growth, because that'll raise the standard of living for everybody involved. And that's what we continue to advocate for. We continue to talk, engage with policymakers to make sure that our GDP can get up to a robust enough level, so that our standard of living continues to improve for all Canadians and Americans.

Thank you. The next question is from Sumit Malhotra from Scotiabank. Please go ahead.

Thank you. Good morning. First question is for Hratch and it's going to go to your capital slide on Page 10. So the lower capital deduction and ACL transition -- from what I've seen, the transition piece was 10 basis points. On the capital deduction, I was looking at the disclosure in the supplement and it looks like it's the removal of the shortfall that had previously been running in the $500 million, $600 million range that provided that boost to capital. Just thinking about this technically, Hratch, you are the bank booked $2.2 billion in performing provisions this quarter. Simplistically, does that give you a buffer in the neighborhood of $1.5 billion now on this line that would have to be worked through in the model before this deduction could reemerge? I don't know if I'm phrasing this as well as I want to, but hopefully, what I'm getting at is, I’m just kind of curious as to whether this deduction could reemerge because clearly it was a benefit to capital this quarter?

Yes, good morning, Sumit, I hope you're well. Let me give you some color on that. And maybe I'll tie on the ECL transition piece as well just to give you a sense of how this is likely to move going forward. So as I'm sure you're aware, that's the capital shortfall -- or the capital deduction that was there for the shortfall and any differences between what's in our allowance as an expected loss and what's in our regulatory capital models as an expected loss. And it was there to just ensure that you're holding either allowance or capital for the full spectrum of losses, right, between expected and unexpected loss as part of the capital framework. So we at the time go -- before going to this crisis, had about a $550 million kind of delta there, which was a deduction. And so what you saw as we increased the performing provision -- and this is mostly the stage one and two as we've talked about the 1.1-ish billion, that does not have an impact on the regulatory expected loss, which only moves as kind of the ratings move and downgrades. So we went through actually when you have to go after tax and there's some more complicated math there on what qualifies and doesn't. But net-net, we actually went from a shortfall to a surplus. And then what OSFI did with the ECL transition framework essentially is it made to some extent that sort of -- that dynamic symmetric. So when you're in a surplus now you also get to add it back to CET1 which you didn't get to before. So where that sort of lands you now is going forward, what you'll see that will impact capital mostly, there might be some noise still because it's not a 100% offset, right, as your stage one and two moves up or down. So what will really impact capital is how your regulatory expected loss changes and that will be driven by migrations. And so that's why in the comments we talked about migration. So I would at this point say we -- I would not be looking at the shortfall, but I would be looking at the migrations forward.

And that is more a reflection of what we've been discussing for a lot of this call, the trends in the underlying portfolio. Effectively the higher expected loss provision you took this quarter is -- was the trigger that moved you from this deduction to now being flat from a capital perspective at least as far as that line is concerned.

Correct. You can almost think of it Sumit as that, the impact of what flew through P&L this quarter, right, was basically already taken in capital and reserved for.

I might follow-up with you on that to make sure I'm thinking about this -- we'll do that later. Hopefully a more to the point question for Laura and it has to do with credit cards at CIBC. I think this is applicable both to your current role and your previous one. We all know that credit cards are a smaller portion of the loan portfolio for commerce than they were 12 years ago when we were going through the last downturn. But the composition of that book has changed as well with some of the shifts you've made over that time, specifically moving to less single product customers. When I look back in the archives, the loss rate on the card portfolio or at least the provisioning rate caught up to 7%, 8% at the worst employment levels in 2009. Laura, do you think the composition of the book has changed such that you expect loss rates will be lower for the bank and that product than was the case in the previous downturn?

Well, the composition has changed in that. We have spent time over the years really deepening our client relationships. So they're not sort of single product clients. And history has shown us that we always do better from a loss perspective when we have a deeper relationship. And we've also done a great job over the years with our risk team in terms of being much better from a credit adjudication perspective. So all of that I would tell you has contributed to our loss rate coming down as much as it has. That's it. I don't want to call things. We're in unprecedented times. Who knows how bad and how ugly things can continue to get. That said, I -- again, because in a stable environment, we've managed to really bring down the loss rate, I would hope and would expect it wouldn't go up to that same rate just based upon all of the good work that was done, as I said, in risk management in terms of how we adjudicate and with the teams over the years, how they’ve really deepened those client relationships. So we should do much better, sort of this round than we would have years ago. Does that answer your…?

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

Thank you. Actually, if I can just follow-up on that, Laura, one of the things you said was that the demand for credit is going to be a little bit slower, certainly mortgages. Maybe just to change Sumit’s question on its head. Is there a risk that you may have to get back into single product relationship in cards as you push for growth in Canadian small business -- personal and small business banking?

Hey, Sohrab. Well, I wouldn't call that a risk in that, a natural part of growth. You have to start somewhere with someone and so that can be entry level relationship you start with a credit card. We do see some stuff in the industry that shows that clients might also be migrating to a bit of single product. But that said, regardless of the product we start with, whether that's a transactional account that we open a credit card or a mortgage, I would tell you our goal is full client service. So it's how do we franchise that client so that we have a real and deeper relationship with them. So I wouldn't say that we don't want to have, if you will, just a credit card that might well be how we start off our relationship. But do know that the goal will always be to deepen the relationship so that we have deeper client relationships, which just goes to not only help us on the revenue generation front, but it does -- it helps us a lot from a risk mitigation front as well. And it allows us to offer even better service to our clients because we just know them that much better. So all around, win-win, but it's okay to start with just one product. Does that answer your question?

Yes. That's helpful. And if I can just quickly ask Shawn, maybe a bit of answered question, Shawn, I don't know. But when you have arrived at the allowances and the required provisions, are you in a position to comment on kind of vintage analysis? Is there any reason to believe -- maybe some of the outsized growth in mortgages in prior years may have kind of yielded higher allowance requirements now or the growth in PrivateBancorp -- since the PrivateBancorp acquisition, is there any reason -- have you done any vintage work to suggest there's anything peculiar about vintages that may have driven high reserve requirements, credit reserve requirements?

No, Sohrab, I don't -- I wouldn't attribute it to vintage as an issue. I mean credit adjudication standards have not been relaxed since -- I'll speak first to the PrivateBank acquisition, we haven't relaxed that. We've been growing -- I'll turn it over to Mike shortly to make a few comments about that business. And on the mortgage side as well, I don't think we've been changing our standards there in terms of our growth. But I'll pass it to Mike and then maybe Laura can speak to the mortgage piece.

Sure. Thanks, Shawn. I’ll remind everybody some of the comments we made before at the time of the acquisition of the PrivateBank is that, one of the credible positives we found at that time was the credit culture. And so it was seamless in terms of vintage analysis, in terms of the loans and the clients that were brought on the books and how we moved forward. So I would say pretty emphatically that you're just not going to see any type of negative vintage analysis in terms of loans that we inherited through the merger loans that we put on the books the last couple of years and attract going forward. It's a very consistent credit quality. Having said all that, we are in unprecedented times. Some of our clients and areas in -- for example, our specialty lending areas are doing well for the time being, that’s healthcare, construction, engineering, insurance. Some are more challenged like retail, hospitality where we have relative limited exposure. But for the most part, these sentiments are reflected for the time being in our relatively normal course provision on impaired loans. And I'll just end by saying this and consistent with the credit discussion we just had, we are actually seeing a fair bit of a good growth even in the midst of where we're going through over the course of the last couple of months and the last couple of weeks as deals in our pipeline are closing and our investments in additional people and capabilities are continuing to bring us new clients. So hopefully that gives you a little bit of color. I'll hand it over to Laura.

Look just having sat in the risk chair for so long, I did want to add in that, that vintage of client that you were referring to earlier with regards to mortgages -- again, having been in the risk chair when a lot of that origination happened, I can tell you that I did follow all of the vintages very closely and still continue to. Given I sat in the chair when we did those adjudications, and maybe just to reiterate what Shawn was alluding to that, when we look at that vintage relative to the others, most important takeaway for you is that there aren't any differences in performance. And in fact, for some of the special programs that we did during that time like our foreign income programs, not only did they track I would say in line with that overall delinquency profile, but they have a somewhat of a lower loan to value. So nothing to be concerned about.

And the last thing I would just mention is, we're not seeing impairments coming through. You would have seen in the numbers a very small uptick in the U.S. commercial portfolio. So we're not seeing those issues now at this point in the year -- in this point of the cycle.

Thank you. Your next question is from Doug Young from Desjardin Capital Markets. Please go ahead.

Shawn, just back on Slide 19, bottom left. When you talked about just the progression of the performing loan PCL, the 122 and the 136. 136 looks like it does include credit migration, and I'm hoping you can just maybe break that out. I mean how much is of that 136 relates to credit migration? And then talk about just the methodology that -- and the thought process and if you can quantify that credit migration that you're assuming in that number?

Okay. So in terms of -- we saw some credit migration over the course of the quarter, most of that would have been in the oil and gas sector. Obviously, it's been under some stress in that period. In fact, from an impairment perspective, that's where essentially all of the Capital Markets impairments came from this quarter. In terms of the composition of the 136, it would be less than 100 million, would be a function of credit migration. It's still early in the cycle for at least, since the pandemic onset to see that migration coming through. Obviously, our provisions are reflecting our views about that, but we would expect that migration to be realized in coming quarters. So hopefully that answers your question.

So that's just -- sorry, this is many banks and many days, but that migration that you're baking in here, that is just what you're seeing so far in the quarter. Are you anticipating some further migration in that number?

Yes, so that was this quarter. And so we would expect to see further credit migration for over the coming quarters, which is reflected to some degree, as you look at our provision build, and what we're sort of looking out forward, how we expect things to sort of materialize over coming quarters.

Yes. And then that minus 122 and positive 136, that's just -- essentially that's a management overlay to some degree, is that the way to think or is there -- or can you spike out how much of this is not the management overlay?

Sorry, not the 136. The 136 is parameters and actual experience migration. The 122 is the net of all of the various adjustments that we’ve made to reflect government support, bottom up analysis across various portfolios that we think are particularly impacted by COVID-19. So that netted to that $122 million number, but there was a decent amount of travel positive and negative to ultimately get to that number, relative to sort of the original 1.55 billion on the left side.

And then second, Hratch, the ability to add back the excess allowance over regulatory ECL and the CET1, that is new, I take it, because I didn't think you were able to do it before. So correct me if I'm wrong. And is that something that's temporary, or is that something that will go away at some point in time in the future, or is that something that's permanent?

Yes. So it is new. It was one of the changes announced by OSFI as they were sort of going through this. And I can't speak to its permanence, but it was introduced at this point in time, as was sort of the drop in the buffer -- the counter cyclical buffer to enable banks to support clients. And so that's its purpose that’s stated at this point. But I can't again speak to what happens in the future and what the regulators may do with that. What I will speak to is, from our perspective, we are continuing to watch the portfolio migrations. And as I said, we do feel pretty strongly with that trajectory forward. So that for us represented that sort of 10 basis points now if you will. And so if we do see -- as we see those migration numbers that I referenced with portfolio deterioration, part of it is add back going away and then going back to Sumit’s question, I guess starting to get into the territory of taking a deduction again. But as I kind of said to Sumit, I wouldn't focus on all the noise on which of the drivers that is underneath. It's just as downgrades happen, the weights will go up and the ECLs will go up and both of those items together are included in the 100 basis point-ish number for the wholesale book I gave you when it is significantly lower than that if you did a one band on our entire retail portfolio on top of that. So even with all of that combined, which I'm sure you can appreciate is a very significant stress and at that point we would not be relying on any sort of add backs here. I think you would see our capital ratio well above that regulatory minimum.

Perfect. Then so just the benefit from that add back to 10 basis points you said?

That’s correct.

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

Good morning. Shawn, your answer -- your opening comments sounded a little different too from [Indiscernible]. Maybe just help me understand what you're getting at. You said in your opening comments that you expected no change or no material change in the performing loan allowance going forward. And then in response to one of the questions, I think you said you expect no change in the total allowance going forward. Can you be more specific which one are you referring to?

So we don't expect to add to our performing allowance going forward. Like if things play out the way we anticipate them to, then this would be where the allowance level would be. And then you would migrate from stage one, stage two into stage three impaired over time as things play out. So we wouldn't expect for instance to take significant incremental provisions in coming quarters as a function of increasing our ECL. We believe we've reflected at least our current view in our $3.3 billion in allowances.

That's clear. One other thing. I've struggled during this reporting season to understand the expense of which banks take into account migration or anticipated migration in establishing their PCLs, the performing loan PCLs. And what I'm getting at is, when a bank revises the unemployment number materially higher, by definition they have to assume there's migration into -- like there's got to be downgrades and there's got to be defaults. So it just seems logical to me that migration is already contemplated when you change your forward looking indicator. Am I not thinking about this correctly?

Yes. So the way I think you should be thinking about it is, I talked about in my prepared remarks about the judgment we exercise in looking at a bottom up analysis across various sectors in the portfolio. The analysis that was done there, used a number of different tools, stress testing, et cetera, to get a view as to -- because we can't rewrite the book all real time at the end of the quarter to get a view around, well, what would migration potentially look like, and come up with a view around that, to then determine some level of judgment overlay to add to the provision. So we've done that in the best way we can, based on the understanding of the risks as we understand them today. So that's where you would see that anticipatory migration analysis come from at least the way we've done it. The other element of the adjustments was all the government support which goes the other way. And we've -- including in that bottom up analysis, as we thought about it, we also consider at least how that government support would play in that more bottom-up type analysis, but that's how we've come to our number. But what you don't see, like there's no -- you'll see it from a capital model perspective, other than the impact of the PCL. The migration in terms of RWA will happen over time in the future based on the experience.

Yes. So maybe Mario, I will jump in with the accounting side a little bit. So you're right in that, IFRS 9 basically requires us to determine right, how much of the portfolio is stage one, how much has had significant credit deterioration so at stage two, and then hold one year or lifetime as appropriate for each of those. So to do that, you will have to have a good view of what's in stage one, what's in stage two today. And that's where Shawn described all the analysis that we did to do that, because we couldn't take for example the larger portfolios like commercial and so forth, and one by one rerate our decline in the quarter but the analysis the team did on the risk side really estimated that for what we think would have been migrated, and that's captured in our overlays. Then in the model captures, some of that future migration, particularly on the retail side driven by SLIs, but on the commercial corporate side, really captured where we think the book would have been as of this quarter.

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

Hi. Thank you. Thank you for staying in the call to actually get to my question. I promise it's an easy one. Quarter-over-quarter, it looks like your credit risk RWA increased the least of the big six banks. And I'll just oppose this against TD which reported today as well. Your credit risk RWA is up 4% quarter-over-quarter and TD’s is up 10%. Now one of the things that I know in your capital supplemental, this is on Page 5, is you guys used some sort of client relief in government support programs to mitigate the increase in RWA and TD makes no mention of that. So I wonder how much did that help you contain the RWA this quarter if you can quantify that?

Hi Darko, its Hratch. Good morning and you’re welcome on extending call. So I think you're referring to the capital page as you said, Page 5 in the Pillar 3 pack. I want to make it very clear that we did not get any capital benefit from the programs. And so whether it's the deferrals that we’ve provided or the government programs, we did not -- we followed the guidance on both of those. And so whether you look at our provision that Shawn spoke about or you look at the capital and RWA sort of impacts of it, we did not take any benefit from that. And so what you're seeing -- and if you're referring to some of the changes here, there was some changes that went to the negative side on credit quality as some of the migrations happened that Shawn mentioned, and you see that 905 number there on asset quality, that's netted off against that. There is a number of sort of improvements on the retail side, mainly utilization. So what you actually saw as utilization rates dropped, as Laura referenced earlier, just the way the capital models work, that provides some credit benefit which netted off against the corporate and commercial that went the other way. But what you see here is that migrations that may have happened in terms of the delinquency buckets were sort of frozen, as was the guidance provided by OSFI on this. But that doesn't necessarily mean that there was capital benefit derived from that. And as Laura mentioned, a lot of those clients, particularly on the retail side, are still making payments and are delevering, which is providing a bit of a positive from a capital calculation perspective. But as that portfolio comes out and starts to either back to payments or if it does deteriorate and we expect there'll be some of both, right, as there is for the portfolio that hasn't done any accommodation. Some people will face challenges through this crisis and some won't. But all of that will get reflected as we experience it.

I guess what I'm confused by as it says here, in Q2 ‘20 credit mitigations -- credit migrations were mitigated by CIBC client relief and government support programs. So I don't understand -- I mean the verbiage seems to suggest that there was mitigation, but you're suggesting that there wasn't. Is that how I should read into that?

Yes. So Darko, what that would we have done is that refers to had we not provided that relief, maybe some folks would have had some cash flow trouble and they would have moved down delinquency buckets and then similar with some businesses. But what we've done is we have frozen the status; and again, this was the guidance provided. So we’d sort of largely frozen the status of folks where they were. And we have not assumed just -- essentially what we've done, right, it did not assume just because they have elected to take the payment holiday that means that they cannot make payments and their credit has deteriorated. But we have looked at all of the other factors that would have potentially driven deterioration. So on the retail side, credit scores, utilizations all of that stuff, that service still into the models and it gets calculated. And so both on the provision -- again, I'll state that because it is important. So thank you for bringing it up. Provisions and capital, we were very deliberate as per the guidance. If a company or an individual would have deteriorated regardless of deferral or no deferral, we would have reflected that. And if they took it to the deferral a loan, we are not going to assume they deteriorated. We're going to look at the underlying credit quality.

Okay. All right. Thank you. So it's possible that other banks are also doing it. They just haven't explicitly printed that into their sub-packs, I guess is another way to think of this as well, right? Yes. I’m just trying to understand why your credit risk RWA simply hit. I mean it's an understatement to say the quarter-over-quarter the world changed. And we're seeing significant credit risk RWA inflation. But yours is just so small relative to everybody else's that's why I'm curious.

Yes, again, I don't want to speak to the other banks Darko. But from what I remember glancing through some of the sub-packs, there was, if you look at the credit quality, some folks actually saw a net credit quality improvement in net CET1 ratios and RWA reduction. We saw net deterioration and that’s another 5 basis point drag to CET1 and adds that 905 you see here on a net basis.

Thank you. There are no further questions at this time. I'll turn the call back over to you Victor.

Thank you, operator, and thank you all of you for your very detailed questions. Before we end this call, I wanted to thank our incredible CIBC team. Thank you for your dedication and relentless focus on helping our clients achieve their ambitions during these very difficult times. Our immediate focus has been on providing our clients with the relief they need to deal with the short-term impact of the pandemic and I think we made that very clear both in the remarks as well as in the answers to your questions. We're committed to standing with our clients and the communities we serve throughout this recovery phase. We know it will take time and resolve to get our economy, our clients back on their feet. We, as a bank, have risen to the challenge and we're going to continue to do so as they fully support our clients and what I know will be an economic recovery ahead of us. So thank you and take care everyone.

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