Canadian Imperial Bank of Commerce

TSX:CM

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the CIBC quarterly financial results conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Hratch Panossian, Executive Vice President, Global Controller and Investor Relations. Please go ahead, Hratch.

[Hratch Panossian]

Thank you, operator, and good morning, everyone. In a moment, Victor Dodig, CIBC's President and Chief Executive Officer, will kick off our prepared remarks. Our Chief Financial Officer, Kevin Glass, will then review operating results for the third quarter; and Laura Dottori-Attanasio, our Chief Risk Officer, will provide a risk management update before we open the line for questions. We are joined in the room by CIBC business leaders, including Mike Capatides, Harry Culham, Jon Hountalas and Christina Kramer who are available to take your questions. [Operator Instructions]As noted on Slide 2 of our investor presentation, our comments today may contain forward-looking statements which involve assumptions and have inherent risks and uncertainties. Actual results may differ materially.With that, I will now turn the call over to Victor.

[Victor G. Dodig, President, CEO & Director]

Thank you, Hratch, and good morning, everyone. CIBC delivered solid third quarter results through the continued execution of our strategy to build a relationship-oriented bank for a modern world.This morning, we reported net income of $1.4 billion. On an adjusted basis, we delivered earnings per share of $3.10, an increase over the same period last year. Overall, we are pleased with our core operating results this quarter. Through continued growth and deepening of client relationships, we generated revenue growth of 4% year-over-year. Adjusted pre-provision earnings were a record $2.1 billion. We also continue to diversify our earnings as our highly connected team furthers our momentum in cross-border business growth.While our provision for credit losses increased modestly this quarter to $291 million, the quality of our book remained relatively stable and we remain comfortable with the outlook. Our capital position also strengthened this quarter. Our CET1 ratio ended at 11.4%, which gives us the flexibility to deploy capital towards investments in our business for long-term growth while also returning capital to shareholders.We will be disciplined in deploying our capital as we continue to prioritize organic investments across our business, and we will use the other 3 pillars of our deployment strategy to maximize long-term value creation for our shareholders. We remain open to inorganic investments but only if there is the right cultural fit that enables our client-focused strategy and on financial terms that would make it accretive to our shareholders in a reasonable period of time. Given our strong capital position, in addition to dividend increases, we will engage in shareholder -- share buybacks to return capital to shareholders.Looking at organic investment, we have consistently invested in our business to enhance our capabilities for our clients as well as to modernize our platforms. These investments are delivering clear results. We're driving strong top line growth in Commercial Banking across North America through new hires and expansion into new markets. We're augmenting our U.S. Capital Markets capabilities with our acquisition of Cleary Gull, a U.S. investment banking firm that will extend our M&A and underwriting capabilities to more business clients in the United States.Market share is growing in 3 of our business units despite a highly competitive market. And our client-focused strategy in Personal and Small Business Banking is showing clear signs of progress.Our internal client experience metrics improved again this quarter. And our clients continue to benefit from our leadership in digital banking. According to the latest J.D. Power survey, we ranked #1 in client satisfaction amongst mobile credit card apps offered by Canada's big 5 banks, and we ranked #1 for best overall mobile banking experience in an assessment by ServiceCore.In addition, we're also modernizing and evolving the way we work to further our client-focused culture. Good examples of this include our continued migration to cloud-based technologies, including our recent successful transition to Workday, a unified HR platform that further aligns our team by providing better tools, data and analytics to enhance business performance.And our preparation for CIBC SQUARE are well underway. This modern urban banking campus will help us attract and retain top talent, enable our teams to better collaborate and continue to put our clients at the center of all that we do. These are all examples of our strategy to build a relationship-oriented bank for a modern world, enabling us to generate sustainable growth and returns for our shareholders over the long term.I'd now like to turn to our business segments. Personal & Small Business banking delivered adjusted earnings growth of 2.5% this quarter compared to the same period last year. The modernization of our banking centers to facilitate advice-based conversations and our investment in industry-leading digital capabilities continue to generate solid volume growth and lower acquisition costs across our core business. Margins expanded 8 basis points in the quarter, and deposits grew 8% year-over-year, demonstrating our success in delivering leading advice and deepening our relationships across existing and new clients.In our Canadian Commercial Banking and Wealth Management business, top line growth of 4% was primarily driven by strong volume growth on both sides of the balance sheet as we continued to gain market share in Commercial Banking. In addition, our strategic hires in client-facing roles and the collaboration between our private banking and brokerage teams helped to grow assets under management by 5% year-over-year and drove higher fee income.Our U.S. Commercial Banking and Wealth Management business delivered strong results with adjusted earnings growth of 6% this quarter, backed by double-digit volume growth in both loans and deposits in excess of our Investor Day targets, supported by fee income growth in our Private Wealth Management business. Growth in existing geographies, deliberate and thoughtful expansion into new markets and cross-border referrals have all contributed to these strong results.Turning to Capital Markets. Adjusted earnings of $231 million were lower than last year as market conditions were unfavorable to underwriting activity and our provision for credit losses was higher this quarter. However, our focus on diversified growth and deepening client relationships is delivering results. We maintained our relative league table standings, produced trading revenue growth of 8% and made continued progress against our U.S. and cross-bank growth objectives with revenue growth of 10%. In keeping with our strategy, our Capital Markets business is delivering consistent revenues despite challenging market conditions because of our well-diversified business model and connectivity with our broader bank.In summary, we delivered strong underlying results across each of our businesses this quarter. I'm pleased that our client-focused strategy and uniquely interconnected franchise continues to generate benefits on both sides of the border and across our bank.And before I turn the call over to our CFO, I'd like to add a few comments regarding the senior leadership changes we announced this morning. First, Kevin Glass, our Chief Financial Officer, will be retiring later this year. Many of you on the phone will -- know Kevin well and know that we'll miss not just his expertise but also his approach and his sense of humor as well as his cycling expertise. He's a very good cyclist. Kevin Patterson, who leads our technology and operations team, will retire next spring. Kevin has been with our bank for more than 35 years, and his tremendous leadership and wisdom have been an incredible asset to us. Kevin and Kevin will be with us for a while longer as part of our planned transition.We also announced appointments to the bank's executive committee that draw on the depth of CIBC's leadership team and will further our efforts to build a relationship-oriented bank. Hratch Panossian will take on the role of CFO on November 1, Shawn Beber joins our executive committee as General Counsel and also leads Corporate Development and Deepak Khandelwal will assume a new role of CXO or Chief Client Experience Officer. Hratch, Shawn and Deepak are all very talented, client-focused leaders, and I look forward to continue to work with them in their new roles.With that, I'd like to turn the call over to Kevin Glass for a more detailed review of our financials.

[Kevin A. Glass, Senior EVP & CFO]

Thanks, Victor. My presentation will refer to the slides that are posted on our website starting with Slide 6. The CIBC reported earnings of $1.4 billion and EPS of $3.06 for the third quarter of 2019. And adjusting for items of note detailed in the appendix to this presentation, our net income was $1.4 billion and EPS was $3.10. We generated revenue of $4.7 billion for the quarter, which is up 4% year-over-year. We continued investing in our businesses while delivering an efficiency ratio of 55.4%, and we increased our quarterly dividend by $0.04 to $1.44 per share.Turning to capital on Slide 7. We ended the quarter with a CET1 ratio of 11.4%, up 20 basis points from the prior quarter and comfortably above our target range. Our strong internal capital generation of 32 basis points this quarter was partially offset by higher risk-weighted assets, which increased by $2 billion, largely reflecting growth in our commercial businesses, both in Canada and the U.S. Our leverage ratio was 4.3% and our liquidity coverage ratio was 129%.The balance of my presentation will be focused on adjusted results, which exclude items of note. Let me now turn to the performance of our business units. Slide 8 reflects the results of Personal & Small Business banking. Net income for the quarter was $659 million, up 2% from last year. Revenue of $2.2 billion was up 3% from last year primarily driven by favorable rates and deposit volume growth, partially offset by lower fee income.Net interest margin was up 8 basis points sequentially, largely due to the impact of deposit promotions ending and also due to the benefit of favorable rates. Based on current rate expectations, moving forward, we expect some downward pressure but relatively stable NIMs.Noninterest expenses were $1.1 billion, up 3.5% from the prior year as we continue to invest in modernizing our infrastructure, distribution channels and products. Provision for credit losses was up $5 million from the prior year, driven by an increase in provision for performing loans. Laura will speak to credit quality in more detail in her remarks.Slide 9 shows the results of Canadian Commercial Banking and Wealth Management. Net income for the quarter was $348 million, in line with the results of the year ago. Commercial Banking revenue was up 6% driven by strong deposits and lending volume growth with higher credit-related fees. Deposit balances were up 15% and lending balances were up 12% from the same period last year. Wealth Management revenue was up 2% primarily driven by higher AUA of 2% or higher AUM of 5%. Net interest margin was down 4 basis points sequentially primarily due to lower BA rates impacting the Commercial Banking deposit business.On a combined basis, NIM for Personal and Commercial Banking was up 6 basis points sequentially, as the impact of wider prime BA spread in Commercial Banking was more than offset by the impact of favorable rates and deposit pricing in our Personal & Small Business banking business. We have included a slide showing results for the combined Personal and Commercial Banking business in the appendix to this presentation. Provision for credit losses was up $21 million mainly due to higher provisions on impaired loans. Noninterest expenses were up 4% primarily driven by spend associated with strategic initiatives, including hiring in client-facing roles.Slide 10 shows the results of U.S. Commercial Banking and Wealth Management, where net income grew by $11 million or 6% from the prior year. Results reflect solid business performance and investments to support growth, assisted by a stronger U.S. dollar. Revenue was up 15% from the prior year driven by double-digit volume growth, higher asset management revenue from growth in AUM as well as an increase in syndication fees.Average loans grew $3.6 billion or 15% from a year ago, reflecting continued momentum in client development. The growth in loans was driven largely by increases in the commercial real estate and C&I portfolios. The institutional real estate portfolio, formerly our U.S. real estate finance business, has remained relatively flat. Average deposits grew $3.4 billion or 20% from a year ago, reflecting organic growth from new clients and deposit initiatives.Net interest margin for the segment was 318 basis points, down 2 basis points sequentially and down 7 basis points from a year ago. The yield on interest-earning assets benefited from certain nonrecurring items which contributed about 7 basis points. This was offset by higher deposit costs as well as the declining core loan yields as the 1-month LIBOR drifted lower. Going forward, we expect NIM to compress given the rate outlook in the U.S. The trajectory of NIM will be further determined by the rate at which we can renegotiate deposit costs which will lag the loan book. We would still expect growth in NII as volume growth continues.Provision for credit losses was up $15 million, mainly due to higher provisions on impaired loans. Expenses increased 17% from the prior year. We should remember that the prior year quarter included a recovery in the institutional real estate business. Normalizing for this recovery, expense growth was 12%, and expenses in this quarter include investments in headcount to support growth and higher marketing expenses. Overall, we're very pleased with the performance of our U.S. segment, which continues to execute on our high-touch, relationship-oriented strategy.Turning to Capital Markets on Slide 11. Net income of $231 million was down $34 million from a year ago, reflecting lower revenue, higher noninterest expenses and a higher provision for credit losses. Revenue this quarter was $746 million, down $6 million or 1% from a year ago, reflecting lower equity and debt underwriting activity, lower foreign exchange in equity derivatives trading revenue and lower investment portfolio gains. But this is partially offset by higher interest rate trading and corporate banking revenue as well as higher revenue from our financing businesses.Noninterest expenses were up $6 million or 2% from a year ago, primarily driven by higher spend on growth initiatives, partially offset by lower performance-related compensation. Provision for credit losses was up $43 million due to higher provisions on both performing and impaired loans.In Capital Markets, we continue to make progress against key objectives, including growth in the U.S. as well as growing revenue from nontraditional capital markets clients across CIBC. On a year-to-date basis, the earnings contribution from our U.S. region, which includes the U.S. segment and the U.S. portion of our capital markets, was approximately 17%. You can refer to Slide 21 in the appendix to this presentation, which shows how this contribution has grown over the years.Slide 12 reflects the results of Corporate and Other, where our net loss in the quarter was $5 million compared with a net loss of $30 million in the prior year. Results reflect higher treasury revenue as well as strong performance in CIBC FirstCaribbean, including our loan loss recovery this quarter. Expenses this quarter were up 7% compared to the prior year driven by investments in strategic initiatives and regulatory projects. Going forward, we do anticipate elevated expenses as we invest in defensive and growth initiatives. With that, let me turn the call over to Laura.

[Laura L. Dottori-Attanasio]

Thank you, Kevin, and let it be transcripted that we are going to miss you. You are a wonderful colleague, fantastic human being. We're going to miss you, Kevin. So good morning, everyone.Turning to Slide 14. Provisions on impaired loans increased from $250 million to $272 million this quarter, and this was mainly due to higher provisions in U.S. Commercial Banking and Capital Markets, partially offset by a decrease in provisions in Canadian Commercial Banking and lower write-offs in our personal lending portfolio. This resulted in a 1 basis point increase in our loss rate to 27 basis points. Provisions on performing loans were $19 million this quarter. The increase was primarily driven by higher forecasted provisioning in the oil and gas portfolio as a result of continued softening of natural gas prices in Canada.The next slide provides an overview of our gross impaired loans which were down from 52 basis points to 45 basis points this quarter. The decrease was mainly driven by the completion of the sale of a previously noted impairment in the utility sector, which was partially offset by a small number of new impairments, half of which were in our Canadian agriculture portfolio with the balance in the U.S. business services sectors. On a year-over-year basis, our gross impaired ratio is up by 1 basis point.Slide 16 provides the net write-off rates of our Canadian consumer portfolios. Overall, the write-off rates are stable year-over-year and they remain in line with our expectations.Slide 17 provides the 90-plus days delinquency rates of our Canadian consumer portfolios. On a quarter-over-quarter basis, delinquencies have remained stable and performed within our risk appetite.To conclude, while we expect to continue to see some movements in our portfolios, commensurate with the later stage of an economic cycle, overall, our asset quality remains well positioned with no broad industry or sector themes emerging other than for certain gas producers in our energy portfolio. At this time, and as we communicated earlier in the year, barring any unforeseen events, we continue to expect to see our impaired provisions for credit losses come in below 30 basis points for the 2019 fiscal year.With that, I'll turn the call back to the operator for questions.

[Operator]

[Operator Instructions] Our first question is from Ebrahim Poonawala from Bank of Montreal Merrill Lynch.

[Ebrahim Huseini Poonawala, Director]

Not yet, I guess, Bank of America still. Just a question on capital, I guess, for Victor or Kevin. CET1 at 11.4%. One, given the environment, like do you think the capital ratio is essentially close to where you would like to stay? And if that is the case, it seems like given your desire for inorganic growth, there would be some tendency to build excess capital and have some dry powder, particularly given sort of the relative valuation improvement for the Canadian banks versus U.S. regional banks? So if you could help reconcile in terms of where you want to maintain capital, and if inorganic growth is something that may happen 6, 12 months out, would you rather have some dry powder and build capital from current levels?

[Victor G. Dodig, President, CEO & Director]

So a couple of things. One is, we're pleased with the growth in our CET1 ratio through the performance of our business. Two is we don't think about capital as a dry powder factor. We think about it in our 4-pillar framework. We've been very, very clear about that. The first order of business has always been to strengthen our existing franchise, and you see that in the investments that we've been making in digital technologies where we continue to be recognized as a leader in Canadian banking. You see that in the expansion of our footprint organically into the U.S. as we expand into new markets and the investments that we're making -- continue to make in technologies across our business, both from an offensive standpoint and from a defensive standpoint.The second thing I'd say is dividends continue to be an important piece of our pillar framework, and that's why we increased the dividend against -- again this quarter. We're confident in our business. We're confident where it's heading, and we increased our dividend by $0.04.The other 2 are mergers or acquisitions or inorganic growth, as you describe it, and buybacks. We've been very, very clear that we think of those levers as potentially active. But we've been very, very clear on the M&A front that we're very patient. That will -- it's going to take time. It's going to take time to find the right fit. It's going to take time to find the right business that will enhance the growth profile of CIBC. And we've been very clear in today's call that while we've announced an NCIB last quarter, we plan to be more active on the share buyback front in our own market here.

[Ebrahim Huseini Poonawala, Director]

Got it. So the capital ratios, are we close to target levels? Or should we anticipate some buildup just generally?

[Victor G. Dodig, President, CEO & Director]

I think we're in a good place, Ebrahim.

[Operator]

Our following question is from Meny Grauman from Cormark Securities.

[Meny Grauman, MD & Head of Institutional Equity Research]

Victor, in the past, you've talked about your view that double-digit commercial loan growth at least in Canada is not sustainable. I'm wondering if you could update your thinking about that. Is that still your view? Or how do you view the outlook for commercial loan growth in both Canada and also in the U.S.?

[Victor G. Dodig, President, CEO & Director]

Well, I'm going to make a few comments, but then I'm going to hand it off to my colleagues, Jon Hountalas and Mike Capatides. One is to emphasize that our Commercial Banking growth in both Canada and the United States has been not only on the lending side but on the deposit side, it's been double digits on both.In Canada, the investments that we've made in cash management technologies and the investments that we've made in relationship management has helped us to drive strong deposit growth as well as lending growth. In the United States, you see the same factor. The credit rating that we lent to PrivateBank with our acquisition was an important factor as well as some of the cross-border business that we're seeing and the connectivity to wealth management.So in terms of growth going forward, I'm going to pass it on to Jon first for the Canadian business and then to Cap for the U.S. business.

[Jon Hountalas]

So thank you, Victor. It's Jon. Our pipeline is healthy. It's in line with where it's been over the last 4 quarters. So we're feeling pretty good. We review our clients annually in a credit review process. We just -- this is the heaviest period, the summer period. We went through that. Our clients are in good shape. Our risk ratings confirm all that. So it's all pretty positive.I guess the new factor versus a few months ago is kind of the trade issues out of Asia. And I'd say, they've added a little bit of caution into the mix. Lower interest rates help in the short term, trade issues hurt in the long term. Our clients are generally thinking things will sort themselves out before it impacts their business materially.Like Victor, we've been pretty consistent. The double-digit loan growth that we're seeing in the industry feels high. On Investor Day, we thought it would be in the mid-high single digits. We still think that's what it will revert, and we still believe we can outperform and grow in the kind of 9%, 10% range.

[Michael G. Capatides]

So this is Mike Capatides. I'm going to echo some of Jon's comments with a little bit of a twist, and that is our loan growth reflects the fact that we have great growth from our existing and organic footprint. But as we said before, we've made some investments ever since the acquisition. We have new offices in Tampa, Miami, Dallas. We have significant build-outs of our offices in Atlanta and Boston. And in all these offices, as was always the plan, we're putting in C&I bankers, both on the C&I side, the real estate side, and we're building out our wealth platform and private banking platform as well.So all of this has resulted in very good loan growth, very good deposit growth, and 1/3 -- over 1/3 of that growth is coming from these new initiatives. So when you back those out, our growth is a little bit closer to what you're seeing in the market elsewhere in the U.S. But we continue to believe that the investments that we've made in the U.S. in building out these additional initiatives and markets with a decline in the costs of doing that, which we see this quarter, are going to continue to deliver low double-digit loan and deposit growth in the U.S. region.

[Meny Grauman, MD & Head of Institutional Equity Research]

Just as a follow-up on that. We're obviously talking a lot about trade uncertainty and wondering about what it all means for business confidence. But it seems like if I look at the commercial loan growth on both sides of the border, it doesn't really seem to be impacting things very much at all. Is that your view? Or when you look deeper on the ground, do you see trade issues coming into play more than in the past? Are they impacting what you're seeing in terms of business activity?

[Jon Hountalas]

So I would -- there's pros and cons, right? There's mixed signals. GDP is good. Unemployment is strong. Interest rates are coming down. Those are positives. The trade issues are being discussed more. The NAFA thing was a much bigger deal in clients' minds and that seems to be kind of sorted out or feels better. The Asia thing is more distant. Canada's trade with China isn't as material as with the U.S. So overall, I think clients believe that this will get sorted out before it impacts their business. And if it doesn't, the balance sheets of our clients are good and they think they can adjust. So a little more caution, but so far, I haven't seen a material change in how they're operating in their business.

[Michael G. Capatides]

So again, this is Cap. I'll echo those comments. Our customers are still positive about their business and our business with them. But the discussion about trade issues and potential issues in the economy are in the conversation. So we're staying very close to them. But right now today, we're just not seeing an effect on business.

[Operator]

A following question is from Steve Theriault from Eight Capital.

[Stephen Gordon Theriault, Principal & Head of Research]

A question on margins. Kevin, you were somewhat clear on Canada. And I know it's difficult for the U.S. business, but could you give us any kind of base case of what you think the margin downside could be if we get the 4 rate cuts in the U.S. that seem to be expected by the forward curve?

[Kevin A. Glass, Senior EVP & CFO]

Thanks, Steve. Let me just follow -- let me talk about both. So I mean obviously, NIM is impacted by rate moves but also changes in business mix and pricing changes. So based on our current expectations, both in Canada and the U.S., we certainly expect some margin compression, but we feel it's manageable.So from a Canadian perspective, just to put my comments into context, we invest our core capital in deposits in long-term tractors. And so what that means is changes in rates will manifest over time as the balance sheet reprices. So when you look at our Canadian operations, that's why I said we expect NIM to be fairly stable but with some downward pressure as a result of falling rates in the -- over the next 12 or so months, but we continue to anticipate modest growth in NII.So as far as the U.S. is concerned, we'd expect NIM compression as -- due to the rate decreases that are priced in the market. But we'd still anticipate a modest growth in NII in the medium term as volume growth continues. So there's a bit of a timing element to this. After each rate cut, a lot of our deposits are negotiated. So in the shorter term, you'd see more of an impact, but over time, we'd see that stabilized.And I think what's important to understand from our perspective is, since the acquisition, in particularly over the last few quarters, we've taken a number of balance sheet actions to reduce our rate sensitivity in the U.S., where we've tried to adjust our structural interest rate risk to be more in line with where we were before we did the acquisition. So the intent is to manage rate risk to stable and predictable earnings. So there certainly will be downward pressure, a bit more acute straight after a rate drop but manageable over the longer term.

[Stephen Gordon Theriault, Principal & Head of Research]

I guess maybe another way to look at it is if the revenue growth has been high single digits. The -- appreciating that the margin might be impacted immediately and then as you mentioned, repricing, I guess is that sustainable with that 4 rate cuts looking ahead? Just trying to get a sense. The perception is, I think that the margin is going to be more volatile in the U.S. business, and I hear it's going to translate into revenue and you've got loan growth, but maybe boiling it down to revenue would be helpful.

[Kevin A. Glass, Senior EVP & CFO]

So I mean I think that if you were to take the impact of a 25 basis point rate cut, all-in once things stabilize, we'd say that's about a $10 million per quarter -- sorry, a $10 million per year hit, but it's going to be more acute in the shorter term, so max up to $15 million. So that would be what your NII impact would be over the longer term.

[Stephen Gordon Theriault, Principal & Head of Research]

Okay. That's helpful. And then just the -- on the margin, the runoff of the deposit promotions in Canada, is there any more impact from that? Or did -- have we seen it all now?

[Kevin A. Glass, Senior EVP & CFO]

No. I mean I think you're certainly seeing a benefit of that now, and this will be a new base for us to move forward from.

[Stephen Gordon Theriault, Principal & Head of Research]

It's been great working with you. Congratulations on your retirement.

[Kevin A. Glass, Senior EVP & CFO]

Thanks very much.

[Operator]

The following question is from Scott Chan from Canaccord Genuity.

[Scott Chan]

Just on the U.S. business side, it seems like you changed the disclosure a little bit relating to CIBC Bank U.S.A. and PrivateBancorp. Specifically, I'm just trying to unwind the growth components of PrivateBancorp in terms of commercial mortgages and commercial real estate and I guess was your thought that material. I was wondering if you can provide data points on that for fiscal Q3?

[Kevin A. Glass, Senior EVP & CFO]

So I'll just talk about the disclosure. I mean in -- from a general perspective on the slide show, we manage the U.S. SBU as an integrated unit. We certainly talk about -- or you can talk about the contribution of CIBC Bank U.S.A., which continues to perform extremely well. The sensitivity we've spoken about is generally in that unit, and a lot of the loan growth and deposit growth we're talking about is almost all coming out of the original PrivateBank U.S.A. because our institutional real estate business from loan growth is flat.

[Scott Chan]

And maybe perhaps like looking at the 15% year-over-year growth in commercials or commercial real estate, which is the bigger driver of that growth year-over-year?

[Michael G. Capatides]

This is Mike Capatides. We're seeing good growth across all segments of the SBU unit. And the growth has been about equal between the C&I portfolio and real estate, which is consistent with the historical pattern. So again, that's consistent with our approach of building out these offices with both C&I and CRE professionals. So it's very balanced and we see that to continue going forward.

[Operator]

Our following question is from Gabriel Dechaine from National Bank Financial.

[Gabriel Dechaine, Analyst]

I just want to flip the deposit pricing impact question around a little bit here and it had a beneficial impact on your margins, whereby the promos ended, your margins went up. But I also see the deposit growth has been ramping up for a number of quarters. I'm just wondering where you expect deposit growth in Canada to end up since these promotions are gone? And have you seen any of that trend yet?

[Christina C. Kramer]

So Gabriel, it's Christina speaking. Thank you for the question. We're pleased with the performance of our deposits business. And as you mentioned, we've achieved strong and profitable revenue growth driven by year-over-year balanced growth of nearly 8%, and that's also with the benefit of expanding margins. So as we look to the second half of the year, so including Q3, we will see slower growth but with strong retention of balances, so that will result in compensating positive impact on margins for the year.

[Gabriel Dechaine, Analyst]

So have you started to see a deceleration already or...

[Christina C. Kramer]

We have actually seen strong retention of the balances that we put on promotion. We're actually pleased with our year-over-year performance in that regard.

[Gabriel Dechaine, Analyst]

Okay. Then commercial real estate, a different question here. I just looked at the slide -- I hope to get the right quarter here, 23, and if I add up real estate and construction plus non-resi mortgage, in Canada, it's about 36%, 37% of your wholesale loan book. And in the U.S., it's a bit over 30 -- sorry, it's in the high 30s and in Canada, it's in the low 30s. Just wondering do you have a limit on how big you want or able to take CRE to in your total wholesale book? And by extension, how does that affect your M&A strategy in the U.S. because a lot of the targets could potentially have big CRE books? Is that an impediment?

[Laura L. Dottori-Attanasio]

So Gabriel, it's Laura. I'll kick it off and maybe I'll hand it over to Cap or Jon if they want to add on. So of our portfolio and it's pretty well split, I'd say, between Canada and the U.S. So again, it's very good book, like the majority of it is really loans to investment-grade public companies, institutional borrowers, all very well diversified whether we look at it by property type or borrower type.So I'm very comfortable with the asset quality of the portfolio. It remains very strong. And we do have limits, we have limits on different types of property buckets, borrower buckets, overall buckets, where we want to be in certain regions and how and that includes whether it be Canada, the U.S., and we go further and break it down by region. And so all of that is very well managed within our risk appetite. Maybe...

[Gabriel Dechaine, Analyst]

Are you bumping up on any of those limits?

[Laura L. Dottori-Attanasio]

Yes. We're coming close in some of the segments to some of the limits. And as you would have heard us mention, I think, on previous calls, we're putting more emphasis on growing the C&I business in the U.S. in particular, and that's where we have started to see some of the growth from. And maybe I'll hand it over to Cap to add on to that.

[Michael G. Capatides]

Thanks, Laura. So as I mentioned before, we have a general guideline in the U.S. segment of CRE being less than 50% of the book. And if you deconstruct that a bit and you go back to the CIBC Bank U.S.A., that split is more 2/3, 1/3; 1/3 real estate. And then when you add in the legacy CIBC real estate business, which is a more institutional business, we're purposefully keeping that segment flat.So we're seeing very good C&I growth. And on the CRE side, we're very diversified and within the context of being very cautious. We're -- we like our book. We like where we're sitting right now and we see good growth there, but we -- but it's going to be balanced against good growth against the C&I portfolio.

[Gabriel Dechaine, Analyst]

And on the M&A, like how does it affect the M&A?

[Michael G. Capatides]

Well, I'll go back to Victor's comments about our 4 pillars of capital deployment and with all the caveats in terms of when and if we didn't do something on the M&A stuff -- side. But I will tell you that one of the very attractive aspects of a legacy PrivateBank was that, it was heavier in the C&I portfolio, and we would expect that emphasis to continue going forward with this 50-50 balance. To the extent anything -- I'd rather not speculate, but I think you'll see in the market M&A activity would involve acquisitions where CRE portfolios are run down. But again, that's pure speculation and we're not there at this point.

[Gabriel Dechaine, Analyst]

And just a fine point, the -- you said 50 -- your -- in the U.S. Bank, CRE exposure is 50% and based on Slide 10 here, it looks like your -- about 1/4 of the loan book is CRE. So theoretically, you could have some room for more CRE heavy mix in the target?

[Michael G. Capatides]

So just to repeat, and we'll have to get back to you with the tieback to the slides. But in CIBC Bank, which is pretty much the legacy PrivateBank, where all the expansion is taking place, it continues to be approximately 2/3 C&I, 1/3 real estate. And when you add in the legacy CIBC institutional real estate business into the U.S. SBU, you start to approach a 45% figure for CRE.

[Operator]

A following question is from Mario Mendonca from TD Securities.

[Mario Mendonca, MD & Research Analyst]

A question for Christina. You expressed confidence that you would retain these deposits. It would be helpful to understand -- when the promotion was removed, was that also -- is that insofar as new deposits are concerned? Or are there existing deposits where the -- that rate, that higher rate has now been lowered to something more standard?

[Christina C. Kramer]

So in -- thank you, Mario. It's Christina speaking. Thank you for the question. The deposit promos, and they were a few, largely came off at the end of March, April time frame. And that's why I was speaking confidently around the retention of balances.

[Mario Mendonca, MD & Research Analyst]

Okay. But what I was asking was, do you -- were the deposit promos -- are there existing deposits where the rate has now been removed because -- lowered because the reason I'm asking it that way is, that would speak to retention going forward?

[Christina C. Kramer]

The answer is yes.

[Mario Mendonca, MD & Research Analyst]

Okay. But obviously, you've had enough history to suggest that they're holding tight?

[Christina C. Kramer]

Right. Yes. And our experience -- as I mentioned to a prior question, our experience year-over-year in the retention of the balances has been stronger.

[Mario Mendonca, MD & Research Analyst]

Okay. And just a real quick question on, I think someone said -- maybe it was Kevin. I think you said that there was 7 basis points of unusual -- the margins could have been down something like -- would have been down 7 basis points, but there were some unusual NII in the U.S. business. Can you just rephrase that for me?

[Kevin A. Glass, Senior EVP & CFO]

Sure. There were a couple of onetime items in the U.S. that would have had an impact of about 6 or -- 5 or 6 basis points. So if you take the impact of that, that would have meant a 7 basis point overall reduction, Mario.

[Mario Mendonca, MD & Research Analyst]

Okay. And that -- I just did a quick math, that doesn't amount to much, maybe like $0.01 on EPS, is that fair?

[Kevin A. Glass, Senior EVP & CFO]

Correct. I mean it's -- and that's about right, yes.

[Operator]

Our following question is from Doug Young from Desjardins Capital Markets.

[Doug Young, Diversified Financials and Insurance Analyst]

Just I guess a question for Laura, a 2-part question. I guess PCLs on U.S. commercial book were up. And I'm hoping to get a little bit of color on what you're seeing around credit in the commercial book. And then I think there was mention in the MD&A that there was negative migration in the Canadian personal portfolio. Just hoping to get a little color about what that related to you and what you're seeing?

[Laura L. Dottori-Attanasio]

Sure. I guess I'll start by telling you, we're not seeing anything of concern across any of the book. We continue to have really strong quality of the book and that's across the board. I think you want me to speak more specifically, if I heard you correctly, to PCLs as they relate to the U.S.?

[Doug Young, Diversified Financials and Insurance Analyst]

That's correct, yes.

[Laura L. Dottori-Attanasio]

Yes. Nothing again unusual there. From an impaired perspective, we had 3 losses this quarter. Again, I would classify that as business as usual when you're lending in commercial. They were across different sort of business sectors and so no themes emerging there. From a performing provisions perspective with the U.S., you'll see in that segment we had a release, and that's really due to repayments and transfers that went into impaired. Does that help? And then from -- I think the second part of your question related to retail and what we were seeing in retail?

[Doug Young, Diversified Financials and Insurance Analyst]

In Canadian. It looked like Canadian personal, there was mention of migration. And I was just curious what segment that would relate to? Was that auto? Was that unsecured lending? Little more color.

[Laura L. Dottori-Attanasio]

Well, we had -- there were a lot more moving parts, if you will, in our provisioning on performing for retail. So in that segment, I think you saw it was up $7 million. And so our FLI moves, I'd say, were pretty muted this quarter. So there was some credit migration and then we had parameter updates in our cards and in our personal lending portfolio that really related to updates to our historical loss data.So nothing -- again nothing really to report in there. I would tell you it's a bit of the gives and takes in that particular portfolio. Like our -- when we look at our delinquencies and what not, they're -- they've been relatively stable. And in fact from a cards perspective, I would tell you that, that came in somewhat better than I would have expected. Does that answer your question?

[Doug Young, Diversified Financials and Insurance Analyst]

Yes. And lastly, just I mean from a 10,000-foot view, 2 basis points on performing loans. Does that feel like that's something that we should be anticipating assuming there's no other bumps like that? It seems like that's a reasonable expectation as you continue to grow the book and there's puts and takes, but just hoping to get some color there.

[Laura L. Dottori-Attanasio]

Yes. I always hesitate to agree to a number there because it does move, but yes, that sounds reasonable. And again, just to add things that you know, but really it will depend on growth in the portfolio, migrations within the portfolio and then whatever changes we may make to our forward-looking indicators and then you add on to that all the probability weightings that we assign to, whether it be the downside, upside base case scenarios. But that would be an acceptable range of a number to use.

[Doug Young, Diversified Financials and Insurance Analyst]

Fair to say, it doesn't sound like anything is keeping you up at night right now.

[Laura L. Dottori-Attanasio]

No. And I know I've said this on a call, maybe one of my first calls, it would still only be my children, certainly not our credit book. It is still solid credit quality. We're adequately provisioned, and so no concerns from that perspective.

[Operator]

The following question is from Sumit Malhotra from Scotiabank.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

I want to start with Kevin. Kevin, I better get these capital questions in for you while I can. So I will start with you. One of your counterparts mentioned yesterday that to start 2020, there would be a few implementations that would have an impact on capital. I was hoping you could provide us with an update there.And somewhat relatedly, in these periods of lower bond yields, we have seen in the past that there are pension deficit issues for capital. I didn't see it listed in the slides. Is that something that had an impact on CIBC this quarter or something you're expecting before the end of the year?

[Kevin A. Glass, Senior EVP & CFO]

Thanks, Sumit. So let me just talk about the changes we're expecting. So there are some accounting and regulatory changes coming through in Q1. We think if we can earn through that because -- I mean overall, I think that will be like, I don't know, between 10 and 15 basis points, and the big impact there would be IFRS 16 and then also securitize -- changes to securitization. So you put those 2 together and we'd say like between 10 and 15 basis points is what we're anticipating on that front.As it relates to pension volatility, what we've done is we've implemented a hedging program that largely immunizes our planned exposure to rate risk. That's a part of our liability-driven approach to investing. So I mean, okay, there is a bit of residual risk because it's not 100% hedged. But what -- I mean to give you a sense of sensitivity right now, we'd say that a 25 basis point decline in rates is about a 1 basis point negative impact to CET1 to give you sort of an order of magnitude as to how we're managing that.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

What's the offset to that change in strategy? Is there an increased expense that you take through the income statement as a result of that shift?

[Kevin A. Glass, Senior EVP & CFO]

That's part -- I mean it will be part of the cost of running the pension plan, Sumit. And it's a -- they're just hedging overlays that we put in place. So there's, I mean, a cost, but it's relatively modest given the risk that we're mitigating. And it's a -- I mean clearly, as you can see from this quarter and certainly into this environment, it's working well for us.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Okay. So the takeaway for me is 10 to 15 basis points in Q1 2020 as a result of those implementations?

[Kevin A. Glass, Senior EVP & CFO]

No. I'd say, I think 10 to 15 would have been more the way I would put it. But yes, that's okay, I mean 10 to 20, something like that.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

I thought I said 10 to 15, but we'll make sure we're on the same page there. And then just relatedly, Victor, we've spoken and on this call, you've spoken about share repurchases in the past. I think we did so last quarter. It hasn't seemed like it's been a top-of-mind priority and that seems to be somewhat different today. Simply put, is this a reflection of valuations and what's happened to Canadian bank stocks and CIBC more specifically that share repurchase lever looks more attractive to management at these prices?

[Victor G. Dodig, President, CEO & Director]

I'd just say that we've always been pretty consistent in our 4-pillar approach. It's really hard to kind of communicate quarter-to-quarter what we're going to be doing. What I want our investors to know, and I'm going to repeat it again, as much as I may sound like a broken record, we've got a strategy. The strategy is to invest organically to strengthen the bank. The bank is really strong relative to where it was 5, 6, 7 years ago.When it comes to digital technologies, #1; when it comes to migration to cloud, a leader; when it comes to cyber and AML, an important file for us; when it comes to dividend growth, really important. We've heard that from our shareholders and it's also a sign of confidence in our business.When it comes to the other 2 levers, buybacks today, it's always been an active lever. We will use it. And I think I've been pretty clear that we'll start to be more active on that front because we think we've got a great company and we think it's not a bad place to put some of our capital.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And my last question will be for Christina. In your segment, we've had some back and forth over the last couple of years in terms of growth in the resi real estate portfolio for the bank. At least from a industry perspective, volumes and pricing trends in the GTA have been stronger and we've seen some pickup in aggregate levels for the industry. Has it been the case for your business yet? And I was hoping you could provide an update on what your outlook is and how some of the shifts you've enacted are playing out in terms of residential real estate.

[Christina C. Kramer]

Thank you, Sumit, for the question. It's Christina responding. We continue to be focused on our clients on delivering great advice to help them with their goal. So as you commented in terms of the overall market, there has been some positive momentum, and we've seen in GTA some rebound and GVA continues to be somewhat challenged. We are seeing some positive signs on our focus on improved growth and I'll speak to why I see that -- say that.Our RESL portfolio was roughly flat quarter-over-quarter on a spot basis. And this is the first quarter after several of declines. We also see continued strong retention rates with our existing book and our pipeline has improved. So if I compare Q3 to the same period last quarter, we see positive improvements in our pipeline, both in total units and in average dollar size. So our teams are helping more clients with their homeownership goals. And it's early, but it's positive signs on our focus on improved growth in the space.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Do you expect to be back into growth in the near term?

[Christina C. Kramer]

We expect continued improvement in our performance based on what we're seeing in the market.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

Kevin, thanks for all of your help over the years.

[Kevin A. Glass, Senior EVP & CFO]

Thanks, Sumit.

[Operator]

A following question is from Darko Mihelic from RBC Capital Markets.

[Darko Mihelic, Financials Analyst]

I wanted to follow up there on the mortgage question, Christina, and I'm going to press you for a couple of details. The first is, if your originations are $9 billion in the quarter and you're flat Q-over-Q on a spot balance, that tells me that there's still some runoff happening.And so what I'm curious about is a couple of things. The first is, what's running off? Is it lower-margin product versus what you're putting on now? That's the first question on that. The second question is, why is it running off? If it's not margin, there must be some sort of an issue there. And I don't know if it's because they're not great clients or there's been perhaps a credit quality issue. But I'm just curious about what is running off and when will that stop running off.

[Christina C. Kramer]

So thank you for the question, Darko. It's Christina again responding. We are seeing normal paydowns in the mortgage portfolio that we normally would have seen. If I take you back to prior conversations around -- on the call regarding our focus and our performance relatively, we are -- our focus was indexed on the GTA and GVA markets, so particularly in the -- at mass affluent segments, and that's where we're seeing pullback in activity.So as we start to see some positive momentum in the market, we're going to see and I'm anticipating seeing growth in our relative performance. So we're not seeing anything unique in terms of runoff or paydowns. It seems to be fairly consistent. What we're focused on is the net new sales and net new volume to grow our total portfolio.

[Darko Mihelic, Financials Analyst]

And the NIM versus -- I mean it just seems peculiar that if I had -- if you had last quarter $6 billion of originations and if your balances were flat, and this quarter you had $9 billion and your balances were flat, that somehow there isn't any runoff happening. That's just a little confusing.

[Christina C. Kramer]

Some of that's just seasonal that we see in the relative quarter. So nothing unique in that to comment on.

[Darko Mihelic, Financials Analyst]

Okay. And just lastly then, I'd like to look at year-to-date when I look at expense growth versus revenue growth. And we've seen a bit of difficulty here for you on the expense side. Can you give us some color on whether or not Q4 will see any kind of a difference in terms of your expense growth?And just generally speaking, when you talk to your efficiency targets, are we seeing light at the end of the tunnel? Or are we seeing perhaps -- is it possible that the 52% efficiency ratio is at risk here? Just any color on the cost side would be beneficial.

[Kevin A. Glass, Senior EVP & CFO]

Darko, it's Kevin. I mean our expense growth this quarter was around 5%. And I think that what we guide to is for the next little while, as we continue to invest in the business, we'd probably be running at about that rate.With respect to the 52%, we came pretty close to our 55% target for this year. The economic environment has clearly changed since we last spoke about that. But I think it will be premature for us right now to give detailed guidance on that -- on the 52%. But that will give you a sense for where we're at and what we see in the short term.

[Operator]

We have no further questions. So just -- so at this time, I would now like to turn the meeting back over to Victor.

[Victor G. Dodig, President, CEO & Director]

Thank you, operator. So I think we all know we're operating in a challenging macroeconomic environment with geopolitical tensions and global trade uncertainties. But having said that, we remain confident in our ability to manage through this environment. Our long-term client-focused strategy is going to continue to shape our decision-making aimed at further diversifying our earnings growth, improving our operational efficiency and deepening our client relationships.I believe we're well positioned to be flexible in a changing market. We have enhanced our strategic position in serving the private economy this quarter through solid organic growth across Canada and the United States. We will continue to focus on building our presence in the U.S., relying primarily on our strong organic growth.On behalf of CIBC's executive committee and our Board and all my colleagues, I'd like to thank our shareholders for their continued support and our entire team for their dedication to helping make our clients' ambitions a reality. Thank you, and have a good day.

[Operator]

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