Canadian Imperial Bank of Commerce Executive Insights: Renewal, Preferred Shares

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On Thursday, Canadian Imperial Bank of Commerce (NYSE:CM) reported its second quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Renewal

Steve Theriault – Bank of America Merrill Lynch: For David Williamson. David, you started making outbound retention calls and Gerry alluded to this at the top of the call. Can you share your thoughts on the preliminary success that you have? I know it is a small sample, but are you more or less confident in your 50% retention target? Then related question on the mortgage side, can you give us a sense in your base case how much margin improvement you get over, say, the next three years from the mortgage broker business running off all else equal? So no rise in interest rates, no change in mix outside of mortgages.

David Williamson – SEVP, CIBC, and Group Head, Retail and Business Banking: So on the first question which is our efforts to renew from the FirstLine channel into the CIBC brand, so first comment I’d make, very early days. So we’ve just started that renewal process. We reach out on advance of the actual renewal. So this is a pretty preliminary result. However, it is going well. the propensity to renew into the CIBC brand seems to be quite high. So at this point it looks like we should be confident in the 50% target that I outlined last quarter. So early days, but our confidence regarding that target has increased. So on the margin front, there is no doubt that there is a spread enhancement. One of the reasons we are looking to make the shift is to increase the number of clients we have in CIBC, have deeper relationships with those clients and extend them. So you’re speaking about the NIM component. To actually give a three-year impact is tough because it depends on competitive pricing and the broker market competitive pricing or not and the let’s call it the direct market, so it’s hard to give that kind of projection. What I can speak to is what we actually experienced this quarter, because we did have a decline in the first line outstanding as we affected our strategy. The upshot is that we did see enough uptick in spreads as a result of that mix change that completely negated the impact of lower interest rate environments on NIM. So the last many quarters we’ve seen compression on NIMs due to low interest rate environment. This quarter that was completely offset by the positive impact of this mix change into our own branded mortgages. So hopefully that helps u.

Steve Theriault – Bank of America Merrill Lynch: If I could, one quick follow-up again, for David. The deal with Rogers, is there any exclusivity to that arrangement, and if so, how long?

David Williamson – SEVP, CIBC, and Group Head, Retail and Business Banking: No, the intend with that is really to see if we can for Canadians and CIBC customers get something going that’s universal really. So the intend with us and Rogers working together was to get it to market. Frankly, our hope is that other telcos, other banks and so forth would participate so that CIBC customers can pay with their phone, whether with Rogers or Telus and it becomes more of a broadly based capability. So, the Rogers has a similar mindset of innovation, and wanting to also lead in the space. So, they were a good partner for us to work together with. It’s been a great partnership. So, the intent here is to get it out into the market and hopefully it scales up from there.

Preferred Shares

Peter Routledge – National Bank Financial: Just a couple of question, first of all on the Basel III ratio, how much higher will risk weights be under Basel III? I mean we know we had that boost just recently because of Basel 2.5. Is there going to be a material increase in RWA from where you are right now, which is I think (1.13)?

Brian McDonough – EVP, Wholesale Credit and Investment Risk Management: Peter, it’s Brian McDonough. I’ll take that question. RWA has definitely increased under Basel III. While we haven’t given the numbers, it’s likely in the $7 billion to $8 billion range. But the bigger impact for sure is the deductions from capital under Basel III.

Peter Routledge – National Bank Financial: So I guess the next question would just be related to your preferred share redemptions. You did them last year. There’s some preferred shares that are going to lose utility as capital instruments starting in 2013, the Series 33, 35 and 37, and I know they comes up in 2014, but under what conditions would you do or are you at all considering tendering those early?

Gerald T. McCaughey – President and CEO: We have been proceeding with the following on our capital as pertaining to the preferred shares. What we have told the market is that we intend to redeem all of our preferred shares or we expect to subject to all the appropriate conditions being met, that must be met and that that we, at a minimum, intend to do that at their earliest redemption date. So, therefore, last year we redeemed Series 30 for ($100 million) and this year so far we’ve redeemed Series 31 and 32 for $450 million and $300 million. We do have Series 18 at the end of the year which is $300 million and as you mentioned in 2014, we have Series 33, 35 and 37 which are $825 million and actually the most expensive of our preferreds these are the rate resets. Their redemption date does come up in 2014. So, we do not expect, again subject to all of the conditionality that I attached, that we’ll let them go any longer than ’14.

Peter Routledge – National Bank Financial: Would you rule out tendering early for those?

Gerald T. McCaughey – President and CEO: I would not rule that out.

Peter Routledge – National Bank Financial: Then any prospects of share buybacks just given how strong you are on Basel III?

Gerald T. McCaughey – President and CEO: Again, we’ve laid out in terms of our capital, first and foremost to take out our preferred shares. Secondly, as we announced last quarter we have stopped issuing – well, we haven’t stopped issuing shares but we’ve moved the discount on our dividend reinvestment program and that will reduce dramatically the amount of share dilution that has been taking place. We have that in place, so we would have a very, very strong capital position. The other item that’s very important in terms of our progress on the capital front is that there is still an evolving regulatory environment and I don’t mean just domestically, I do mean the interplay between domestic requirements and what develops internationally. We are keeping an eye on that and would prefer a little more clarity in terms of both the international environment and how that might affect Canada prior to proceeding any further in terms of our capital activities. However, I would mention that CIBC has a very strong position in terms of our total common equity ratio in relation to the Canadian industry and internationally at 8.5%. There is another requirement, which is the Tier 1, effectively the Tier 1 ratio under Basel III, which one adds that we have incremental strengths, because we have more than $800 million of qualifying capital for that which is probably makes your question even more pointed is that on the Tier 1 level we’re at 9.25 if you add on – approximately 9.25 because NBCC is worth $0.70 to $0.75. So, I do believe that this topic will be receiving increasing attention from us in conjunction with clarity that we hope will emerge internationally and domestically as to requirements. It is an important topic.

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