Canadian Imperial Bank of Commerce

TSX:CM

Earnings Call Analysis

CIBC sees strong earnings growth and stable credit quality

CIBC's adjusted net income rose by 28% to $1.9 billion, driven by improved margins and balance sheet growth which led to a 14% increase in net interest income. The bank expects mid-single-digit expense growth for the full year, ensuring positive operating leverage despite current economic conditions. Credit loss provisions fell significantly, bolstered by lower U.S. office portfolio losses, with moderate loan losses reflecting strong portfolio quality. Future growth will be supported by a solid capital position, with a CET1 ratio of 13.3% and a liquidity coverage ratio of 126%. These factors underpin a confident outlook for sustained profitability and shareholder returns.

Strong Financial Performance

During the third quarter, the bank reported adjusted net income of $1.9 billion, which is a 28% increase from last year, indicating robust growth and successful execution of its strategy. Revenue was up by 12% to $6.6 billion, driven by improved spread income and the expansion of fee-based businesses. The adjusted return on equity (ROE) grew to 14%, reflecting the bank's ability to generate higher returns for its shareholders despite an elevated capital buffer.

Credit Performance and Provisions

The bank observed a significant reduction in provisions for credit losses, particularly in the U.S. office portfolio. The total provision for credit losses was $483 million, compared to $514 million last quarter. This improvement in credit quality is attributed to lower impaired loan losses and strong performance in U.S. Commercial Banking. The bank maintains its guidance for the full year, expecting impaired PCLs to remain in the mid-30s basis points range.

Expense Management

Operating expenses increased by 6%, driven mainly by performance-based compensation and continued investments in strategic initiatives. Despite the rise in expenses, the bank posted 60 basis points of positive operating leverage, underscoring its ability to manage costs relative to revenue growth. The bank expects expense growth to remain in the mid-single-digit range for the full year, prioritizing efficiency while investing in its future capabilities.

Capital and Liquidity Position

The bank's Common Equity Tier 1 (CET1) ratio improved to 13.3%, up from 13.1% in the previous quarter, which positions it well to navigate volatility and support clients. Additionally, the bank's liquidity coverage ratio (LCR) stood at 126%, showing a strong liquidity position. These metrics affirm the bank's solid capital generation and prudent risk management.

Segment Performance

In Personal and Business Banking, net income increased by 20% to $633 million, driven by lower provisions for credit losses. Canadian Commercial Banking and Wealth Management saw revenues increase by 7%, led by a 15% growth in wealth management. In the U.S. segment, net income rose significantly to USD 163 million due to decreased loan loss provisions, with noninterest income up 28% thanks to strong syndication activity.

Growth Strategy

The bank continues to focus on deepening client relationships and expanding its digital capabilities. It has joined hands with industry leaders like the Creative Destruction Lab and the Vector Institute to enhance its AI capabilities. The bank is also investing in its wealth management services in both Canada and the U.S., which showed strong performance and is expected to be a key contributor to future growth.

Market Dynamics and Outlook

Despite tighter monetary policy affecting loan demand, the bank remains optimistic about business activity picking up through 2025, expecting relief from interest rate pressures and economic growth. The strategy to focus on high-return client segments and advance digital capabilities is expected to sustain growth and improve the bank’s overall return profile.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and 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.

[Geoffrey Weiss, executive]

Thank you, and good morning. We will begin this morning's presentation with opening remarks from Victor Dodig, our President and Chief Executive Officer; followed by Rob Sedran, our Chief Financial Officer; and Frank Guse, our Chief Risk Officer. Also on the call today are a number of our group heads, including Shawn Beber, from the U.S. region; Harry Culham, Capital Markets and Direct Financial Services; Jon Hountalas, Canadian Banking; and Hratch Panossian, Personal and Business Banking. They're all 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 and have inherent risks and uncertainties. Actual results may differ materially.

I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. Management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. With that, I'll now turn the call over to Victor.

[Victor Dodig, executive]

Thank you, Jeff. Good morning, everyone, and thanks for joining us today. I'll begin with a few comments about how our client-focused strategy continued to deliver for our stakeholders in the third quarter before turning it over to Rob and Frank to review our performance in greater detail.

Our core results were strong again this quarter, demonstrating continued momentum and consistency and execution, while positioning our bank for further relative outperformance. And in a nutshell, our strategy is working, and it's working well. On an adjusted basis, we reported net income of $1.9 billion and earnings per share of $1.93.

Our performance was supported by record earnings, underpinned by continued resilience in our credit performance. Our strong capital liquidity positions are foundational to our continued momentum in deepening relationships and attracting clients to our bank.

We ended the quarter with a 13.3% CET1 ratio and a 126% LCR, both well above regulatory and internal minimums. This also gives us confidence to announce a normal-course issuer bid for 2% of our outstanding shares.

Adjusted return on equity improved to 14%, even with an elevated capital buffer. ROE is improving as a direct outcome of the momentum we have in our core businesses and we will continue improving our overall return profile over time. I'd like to highlight for you some of the areas of strength across our bank in the third quarter that highlight this momentum.

We'll start with our Canadian consumer franchise where we are serving the Canadian mass market segment and meeting the needs of clients in the mass affluent segment. Over the past 12 months, we welcomed 640,000 net new personal clients to our bank across our CIBC and Simplii platforms, continuing a trend of strong client acquisition and retention.

During the quarter, we also launched new banking offer bundles for students and those in the skilled trades to further strengthen our leadership position with priority client segments. In Imperial Service, we continue to serve the needs of our Canadian mass affluent client base and deepen relationships. Money and balance growth for our Imperial Service clients was almost double the growth in the same quarter last year, highlighting our emphasis on this segment. We're confident in our momentum going forward because we've built up the client experience to enable our CIBC team to earn more business from existing clients and attract new clients to our bank.

Our Net Promoter Scores for Imperial Service and digital clients improved for another consecutive quarter and are tracking well above our fiscal year targets. Now moving to our Commercial Banking businesses. In Canada, client sentiment is improving with average loans up 2% sequentially this quarter.

Our pipeline remains strong and we're continuing to have active dialogue with our clients. In the U.S., we continue to focus on deepening client engagement and are making meaningful progress on the strategic rebalancing of our portfolio. This quarter, we delivered above-market growth in deposits and in C&I loans while continuing to deemphasize certain areas of our institutional commercial real estate business.

This continues to improve the overall credit quality of our U.S. portfolio, and Frank will provide more details in his remarks. While tighter monetary policy has slowed demand for loans in the industry on both sides of the border this year, we're expecting business activity to pick up through 2025 amid further interest rate relief and stronger economic growth.

Moving to our wealth platform, which remains a key -- which remains key to our long-term growth strategy. Our Canadian wealth business is performing well while strong equity markets have contributed to the 20% increase in AUA from the prior year, our Canadian retail mutual fund net sales ranked #1 within the Canadian Bank Group for the second consecutive quarter.

These mutual fund net sales were supported by the early success of our recently launched CIBC investment-grade bond fund lineup, which had net flows of $1.6 billion into these funds during the third quarter. In the U.S., we are continuing to invest in our wealth business and expect it to be a key contributor to our success over time.

To scale our teams, we added more relationship managers in target markets this quarter that are aligned with our culture and our strategy. Our investments in CRM technology are paying off as well as evidenced by improving client Net Promoter Scores and higher cross business referral volumes from our U.S. wealth business.

Moving to Capital Markets and Direct Financial Services. Our differentiated model delivered another quarter with strong top line growth. In line with our strategic objectives, our U.S. Capital Markets presence continues to grow. Capital Markets revenues in the U.S. region increased 24% this quarter versus a year ago, supported by our increased cross business referral activity.

Our highly connected approach is deeply embedded across the CIBC platform and in the CIBC culture, with connectivity revenue up 11% on a year-to-date basis. We also made significant progress on our ambition to leverage AI as a strategic enabler for our bank. We added a number of tools across the AI spectrum in the third quarter.

First, we launched a pilot of CIBC AI, a cutting-edge Gen AI platform designed to foster innovation across our organization. This custom-built tool supports team members to improve productivity, by providing access to powerful language models.

Second, we are piloting GitHub CoPilot, a tool that assists our bank's developers with providing code suggestions, automating repetitive tasks and enhancing overall coding efficiency. And finally, we're rolling out a Gen AI solution aimed at enhancing our frontline team members experience and using our central information hub to better serve our clients.

This pilot was recognized with the Best Gen-AI Initiative Technology award by The Digital Banker. As an early adopter of AI, we continue to recognize there's much more transformative potential if it's utilized effectively. Our strategic collaboration with the Creative Destruction Lab will enable us to leverage best practices from industry leaders and our enhanced partnership with the Vector Institute, will bolster our AI talent development programs.

Our track record of innovation extends to our commitment to removing barriers for the next generation of leaders from the indigenous community as well. For the second consecutive year, CIBC received the Indigenous Reconciliation award and the Innovation award as part of the 2024 employment equity achievement awards.

In closing, we are continuing to stick to our game plan and it's paying off. Our approach is clear. We are prioritizing high-return client segments, advancing digital capabilities, deepening client relationships and realizing efficiencies across our footprint.

We have a differentiated strategy, we remain focused on consistent execution, and we are delivering results today while positioning our CIBC franchise for the long term. And with that, I'll now turn the call over to Rob. Thank you.

[Robert Sedran, executive]

Thank you, Victor, and good morning, everyone. I'll begin with 3 takeaways from our results. First, our underlying results were strong this quarter. While there were a few puts and takes that I will describe in my comments, our performance shows continued execution against our strategy.

Second, we managed to another quarter of positive operating leverage, the fourth consecutive one. Excluding the items I just referenced and revenue-linked cost our operating expenses were in the mid-single-digit range, which remains our guidance moving forward. And third, our balance sheet positions us well to navigate the current dynamic environment and supports our organic growth aspirations and those of our clients.

Let's now move on to a detailed overview of our performance. I'm on Slide 9. Unless otherwise noted, results are being compared with Q3 of '23. The quarter saw an increase in net interest income, continued fee income growth, credit quality stabilization and capital accretion with strong performance across all of our business units.

Adjusted EPS was $1.93 and adjusted ROE was 14%.

Please turn to Slide 10. Adjusted net income of $1.9 billion increased 28%, pre-provision pretax of $2.9 billion were up 13% and revenues of $6.6 billion were up 12%, supported by improved spread income as well as continued growth across our fee-based businesses. We also continue to manage expenses relative to revenues while investing to support our strategy and posted 60 basis points of positive operating leverage.

Provisions for credit losses were down significantly from a year ago due to lower losses in the U.S. office portfolio, and so impaired loan losses came in better than our annual guidance range. Frank will discuss credit in detail in his presentation.

Slide 11 highlights the key drivers of net interest income. Excluding trading, NII was up 14%, driven by expanding margins and continued balance sheet growth. As a reminder, the net interest margin is affected by benchmark reform, which is a revenue-neutral shift to NII from other income. We've included more information on this dynamic in the appendix.

Excluding trading, total bank NIM was up 17 basis points from the prior year and 12 basis points sequentially on a combination of higher deposit margins, business mix and improved product margins. We also saw a benefit from market-related treasury revenues that added 3 basis points to the margin this quarter.

Canadian P&C NIM of 267 basis points was up 4 basis points driven by favorable business mix and deposit volume growth. For both the consolidated and P&C margin, we maintain our expectation of a neutral to gradual positive bias over time based on the current interest rate assumptions embedded in the forward curve.

In the U.S. segment, NIM of 342 basis points was stable to the prior quarter as lower yielding factors roll into higher rates offset by some higher deposit costs.

Turning to Slide 12. Noninterest income of $3.1 billion was up 17% from the prior year, amid growth in trading as well as continued momentum in market-sensitive businesses that drove an 11% increase in market-related fees.

Transaction-related fees were down 3% and represent the flip side of the NII discussion as the decline was mainly due to the permanent shift of BA-related revenues into net interest income.

Slide 13 highlights our balanced approach to expense management. Excluding performance-based compensation linked to the stronger revenues and continued investments, expenses grew 6%. Over the last year, we realized efficiencies while investing in our strategy. We expect expense growth to be in the mid-single-digit range for the full year, but we will manage -- we will continue to manage expenses relative to revenue growth.

Slide 14 highlights the strength of our balance sheet. Our CET1 ratio ended the quarter at 13.3%, up from 13.1% last quarter and positions us well to absorb volatility in the operating environment while supporting our clients. Solid organic capital generation was partially offset by RWA increases.

Our liquidity position continues to be strong with an average LCR of 126%, intentionally down from last quarter.

Starting on Slide 15 with Personal and Business Banking, we highlight our strategic business unit results. Net income of $633 million increased 20% due to lower total provisions for credit losses. Supported by core business momentum, pre-provision pretax earnings were up 6%. Revenues of $2.6 billion were also up 6%, helped by volume growth and higher margins. Expenses of $1.4 billion were up 7% and included higher revenue-related expenses and a software impairment charge.

On Slide 16, we show Canadian Commercial Banking and Wealth Management where net income and pre-provision pretax earnings were stable to a year ago. Revenues of $1.4 billion were up 7%, driven by strong wealth management growth of 15% and with higher average fee-based assets on both increased client activity and market appreciation. This was partially offset by commercial banking revenue, which declined marginally.

Expenses increased 13% from a year ago, mainly from higher compensation linked to the strong wealth management revenues and increased spending on strategic initiatives. Additional detail on our combined Canadian personal and commercial banking franchise have been included in the appendix.

Turning to U.S. Commercial Banking and Wealth Management on Slide 17. Net income of USD 163 million was up significantly from the prior year, mainly due to lower loan loss provisions in the office portfolio. Revenues were up 6% with noninterest income up 28% and mainly from strong syndication activity as well as market performance in wealth, partly offset by a 3% decline in net interest income.

Expenses were up 19%, reflecting performance-based compensation as well as continued investments to grow our business and further build infrastructure to support that growth, aligned with regulatory expectations.

Turning to Slide 18 and our Capital Markets and DFS segment. Net income of $476 million was down 4% year-over-year. Revenues of $1.5 billion were up 9% as we continue to earn through the impact of federal budget changes affecting dividends received. Strong results across our global markets and direct financial services businesses were partly offset by lower advisory revenue.

Expenses of $770 million were up 14% and included the impact of higher performance-based compensation linked to the stronger revenues and the charge taken in connection with the industry-wide record-keeping investigations being conducted in the United States.

Slide 19 reflects the results of the Corporate and Other business unit, which shows net income of $96 million compared with a net loss of $98 million in the prior year, driven by higher market-related treasury revenues and higher revenues from CIBC Caribbean. This quarter, treasury benefited from a parameter update in addition to episodic market-related gains for a total of roughly $90 million in revenue.

It's our preference to be closer to 0 in this segment since it gives us and you a better reflection of business line performance. So given that, we are not changing our guidance of a loss of between $0 and $50 million but we do expect to be closer to 0 in the coming quarter.

Let me close with the 3 takeaways I started with. First, the underlying drivers of our results continue to reflect strong and consistent execution of our client-focused strategy and positive momentum across our bank. Second, we continue to manage expenses to sustain positive operating leverage by focusing our investments and driving further efficiency, including through the use of AI.

And third, our disciplined resource allocation approach allows us to balance volume and margin, support our clients and drive sustainable shareholder value. With that, I'll turn it over to Frank.

[Frank Guse, executive]

Thank you, Rob, and good morning, everyone. This quarter, our credit portfolio performed well and loan losses remain moderate, reflecting the diversified nature of our portfolio, our strategic efforts of building strong client relationships and focus on working proactively with those clients experiencing financial stress. We continue to monitor our portfolios closely and focus on reaching out early to pre-delinquent clients. In addition, we have made significant progress on downsizing the impaired balances of our U.S. office book.

Our strong allowance coverage reflects our prudent risk management approach against uncertainties that continue to exist in the macroeconomic outlook.

Turning to Slide 23. Our total provision for credit losses was $483 million in Q3 compared to $514 million last quarter, with our allowance remaining flat quarter-over-quarter. Our performing provision was $79 million this quarter, driven by both migration and changes to our economic outlook in the retail and business and government portfolios.

Provisions on impaired loans was $404 million, down $43 million quarter-over-quarter. This was due to lower provisions in the U.S. commercial portfolio, partially offset by higher write-offs in retail as well as increased provisions in Canadian Commercial and Capital Markets.

Turning to Slide 24. Total bank impaired PCLs this quarter was down 5 basis points with a few offsetting movements across the business units. In Personal and Business Banking, our impaired PCL trended slightly higher as we guided to last quarter.

We anticipate PCLs to remain elevated into Q4. Our business and government portfolios collectively performed very well with impaired provisions down $71 million this quarter, largely driven by strong performance in U.S. Commercial Banking. Both Canadian commercial and capital markets portfolio has experienced an increase in impaired PCLs.

We do expect occasional episodic events in these portfolios and are comfortable this does not indicate systemic or sectoral risk. The U.S. commercial impaired PCL has seen improvements over the past few quarters with lower provisions in the office sector. Consistent with our past guidance, we do not expect the high level of losses we previously experienced to repeat. We remain comfortable with our full year mid-30s guidance for fiscal '24.

Slide 25 summarizes our gross impaired loans and formations. Gross impaired loans were down 2 basis points this quarter, mainly due to the disposition of U.S. office loans partially offset by an increase in Canadian residential mortgages.

Slide 26 summarizes the net write-off and 90-plus day delinquency rates of our Canadian consumer portfolios. As unemployment remains elevated and as clients continue to navigate this macroeconomic environment, our net write-off ratio has increased by 3 basis points.

While net write-offs in credit cards and unsecured products are higher this quarter, we have seen delinquency rates decreasing for these products. We remain comfortable with the overall credit quality of these portfolios. In our mortgage portfolio, we continue to see positive trends in negatively amortizing mortgages. Balances were down from $38 billion in Q1 to $28 billion this quarter, impacting over 19,000 mortgages.

Even with the help of 2 rate cuts seen this past quarter, clients are continuing to voluntarily increase payments. Overall, we do not expect material losses from our real estate secured lending portfolio. In closing, we continue to manage through the current credit cycle with strong third quarter loan loss performance.

As mentioned, we remain comfortable with our full year guidance of mid-30s for impaired PCLs and we will continue to proactively assess our portfolios and stay engaged with our clients. Our strong allowance coverage allows us to respond to any changes in the macro environment. And with that, I will now turn the call back to the operator.

[Operator]

[Operator Instructions] Our first question is from Ebrahim Poonawala from Bank of America.

[Ebrahim Poonawala, analyst]

Maybe going back, Victor, to your opening remarks around sentiment improving pipeline strong in Canada. Give us a sense of have we moved past the concerns around higher rates impacting the Canadian consumer, housing market and economic activity and are things looking, are we on the other side of that? I would love your perspective, as you talk to your bankers, clients around how likely it is that we do see this GDP rebound next year. And maybe, Frank, I would love your perspective on how that informs reserving and your outlook on credit?

[Victor Dodig, executive]

Thank you for your question. I would say that we're in the transition to getting to a better place. We've only had 1 rate cut. So I think that sentiment will continue to improve both on the consumer side as well as on the business side, as we continue to see more and more rate relief, which we are expecting, both in Canada and the United States. I think the -- our commercial clients are feeling more buoyant. I think our retail clients, our consumer clients are feeling a little more tentative when it comes to borrowing. But with 2 or 3 rate cuts and 5-year fixed mortgage is getting to a better rate, a price point may be slightly below 4%. I think you'll see that sentiment become more solidified, and we would see that as encouraging for the business going forward. Frank?

[Frank Guse, executive]

Yes. And Ebrahim, thanks for the question. From a credit perspective, we continue to maintain a prudent outlook on credit performance overall. I think unemployment continues to be a headwind for a little while. It's very hard to say when exactly that will peak and get better. We don't expect it to go up dramatically, and that's what you see in our outlook and in our provisioning, but we continue to expect this to be a headwind and then over time, interest rates will have a positive impact and will mitigate some of that pressures. But that will lagging -- will be lagging a little bit as well. So as I said, a more cautious or still prudent outlook on credit, but we also don't expect any material increases or substantive increases in those portfolios.

[Ebrahim Poonawala, analyst]

And just one follow-up on capital. So you announced the buyback or authorization. But Victor, I mean, I'm sure you spend a lot of time in terms of capital allocation. Just give us a sense of the opportunity set ahead of you in terms of going after growth in Canada. There have been a bunch of deals announced, if there are any dislocations that create that opportunity as well as in the U.S. with some of the pressure on the regional banks, are you doing more at through private to gain market share and that could -- at some point, when you look at inorganic opportunities as well.

[Victor Dodig, executive]

Sure, Ebrahim. So just to clarify, there are 2 cuts, not 1 cut as Geoff Weiss reminded me. So thank you, Geoff. Now look, on capital, our focus has been on building capital organically and delivering a premium ROE. And we're pleased with the results that we've been delivering so far. We're not going to rest on our laurels. As I mentioned in my remarks, we're going to continue executing against the strategy we've laid out, which we believe will generate capital and we believe will generate a premium ROE. So as we think about capital deployment and capital allocation, we as a team, spend a great deal of time focusing, first and foremost, on organic growth in our business and how we can help our clients realize their growth ambitions by using our balance sheet prudently and working with them. So that remains focus number one.

I think as you've seen in my remarks, in the Canadian commercial landscape in the private economy of Canada, you're starting to see sentiment improve, but we need more rate cuts, more clarity a U.S. election that gets behind us for people to see their confidence bolstered. I think in the capital markets business, you're starting to see constructive view. In our U.S. business, what you're seeing is a shift and I'm happy to have Sean talk about this, the shift from commercial real estate to C&I and growing with our clients. We're seeing that sentiment shift as well.

Second priority is dividend growth. We will grow our dividends as we grow our earnings. We're going to announce those once a year, as we've said to you earlier this year. Third is share buybacks. So we've actually activated the share buyback. We believe that there's an opportunity for us to both grow our earnings and deploy our capital prudently by returning capital to our shareholders. And the last piece is around opportunistic tuck-in M&A. We are leading in organic growth strategy first and foremost. It is going to deliver that premium ROE. It is going to create capital for our shareholders, and we believe it will deliver strong share price performance over time.

[Operator]

The following question is from Matthew Lee from Canaccord Genuity.

[Matthew Lee, analyst]

Maybe first on the Canadian Banking loan growth side. Deposit growth was 5%. Loan growth was just 1%. Is that a function of being more selective with customers? Or are there maybe some other puts and takes to consider there?

[Hratch Panossian, executive]

Matthew, thanks for the question. It's Hratch. I'll take it, and I'll speak mostly to the personal side and happy to have Jon speak to the commercial side of Canadian Banking. Look, on the personal side, I'll just remind everybody, we have a very clear strategy. Victor spoke about this for the whole bank. It's the same in our personal bank. We have a focused strategy. We've always talked about building a relationship-oriented bank. We're building the relationship-oriented bank of the future. And that means selecting certain clients who need a deeper relationship and value a deeper relationship with the bank, winning with those clients, having the best solutions, leading with differentiated advice, leveraging our data and analytics and leveraging our Imperial platform and our digital capabilities to build deeper relationships with those clients.

And we're digitizing the business to drive efficiency in the front lines in the back end. That's our strategy. And we've talked about what that strategy will deliver. We believe that strategy will deliver aligned with Victor's comments, growth that's above market. We've talked about high single-digit revenue growth in our business, and we've been delivering that. Operating leverage over time. Again, we've been delivering that. And improving mix in ROE, which are going to help the bank's profitability overall improve.

And so that's the strategy we've been following rather than trying to grow loans or deposits. So what does that means day to day? I think what you're seeing on our balance sheet and on our income statement is a direct result of that, yes. Loan growth has been slow. Overall, consumer growth has been low single digits on the loan side. When you look at Canada, we've been a bit lower than that. We've been about stable on mortgages on a year-over-year basis, we've been about 1% on loans overall, as you said. But we're winning where it matters. We're winning in money in. We referenced the [ effic ] numbers in terms of long-term net sales.

On deposits, when you dig into that 5% deposit number, you'll see particularly in the last few quarters, we're starting to win in demand deposits, where margins are higher, where relationship value is higher. And we're being more selective on the GIC front, where it's been competitive, margins are a bit smaller. And frankly, they're not that relationship oriented in terms of the business with clients. And so we're going to continue doing that. We've got an amazing team. We've got great data and technology supporting that. We're going to keep rolling tools out to understand our clients' needs better and to enable our team to serve those. And we think with that, we'll continue winning with revenue and ROE. And I'm less concerned about the numbers on volumes. But as Victor said, we think volumes will accelerate as confidence comes back as we get into next year. But I'll pass it on to Jon on Commercial.

[Jon Hountalas, executive]

Thanks, Hratch, and thank you, Matthew. We've spoken a little bit about this on prior calls kind of our view of kind of commercial lending over the last year was more cautious. So as a result, our loan growth was slower than market, and that was a conscious choice. At the same time, our loan losses are flat or down versus history, while industry loan losses have gone up. So net-net, we think that's a good trade-off. Going forward, we see interest rates come down, we've seen inflation more under control. Our entrepreneurs confidence level is increasing. So we have a more constructive view of the market. What I think you'll see going forward is loan growth that is higher than what we've had in the past. Our quarter-over-quarter growth is an indication of that. So as you think about next year, higher loan growth more driven by non-real estate business in the real estate business, it continues to remain quiet.

[Operator]

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

[Gabriel Dechaine, analyst]

Quick one and then more, I don't know, detailed one. The tax adjustment that was backed out of earnings or adjusted earnings, can you explain that one? Is that like some sort of true-up of previously recognized [ debt ] revenues?

[Robert Sedran, executive]

Gabe, it's Rob. So yes, it is exactly that. So in the first couple of quarters, we had an adjusting item in the opposite direction related to the change in the dividends received deduction legislation. It hadn't yet been substantively enacted. And so for the first couple of quarters, we continue to recognize that through our numbers. In Q3, it was substantively enacted. And so what you see on a year-to-date basis is 0, but this quarter is the reversal of the benefit we saw in Q1 and Q2.

[Gabriel Dechaine, analyst]

Okay. Perfect. Actually, Rob, while I got you here. I get the message from CIBC that you're balancing revenue and expense growth and that makes sense. If I look at the segments, I got a few here, commercial banking, U.S. banking, cap markets, expenses growth is all mid-teens against the revenue growth that's high single digits, we'll call it. And if not for a good treasury quarter, it seems like it would have been nearly impossible to achieve the consolidated balance. So the balance that we saw at the all bank level between revenue and expense growth.

I guess another way of asking or those are the statements, but my question is -- how much of the segment expenses are cash versus accrual? Like you had some opportunistic gains in treasury and we're able to step up some investment spending accruals, something like that? Or if there's another perspective you want to share I'm all ears?

[Robert Sedran, executive]

Yes. I would say there's a few items this quarter and that's what I referenced as the puts and takes, Gabe, that were both positive and negative. We did have a couple of expense items that we show on Slide 13, the expense slide, an aggregate of $65 million. One was in the Personal and Business Bank. One was in the Capital markets. And those would be the 2 that I would call out that sort of at least I would twin them against some of the unusual revenue from treasury this quarter.

On an overall basis, we -- like the 60 basis points of positive operating leverage, we are happy to have that streak continue. And -- but we are trying to manage the bank with better visibility as best we can get it to deliver that operating leverage. So the other bigger piece is just the revenues were strong. And when the revenues are strong and particularly from where the revenues are coming, you do end up with some of the performance-based compensation and variable expenses coming along for the ride.

[Gabriel Dechaine, analyst]

Yes. Okay. Now I just wanted to get a sense of how you can be so nimble, not from a skeptical standpoint, but just appreciate that dynamic more on a go-forward basis.

[Operator]

Our following question is from Meny Grauman from Scotiabank.

[Meny Grauman, analyst]

Just a few questions on credit. One, in terms of clarification, the sequential growth on the credit card side. I'm not sure how much of that is seasonality. I assume some of that is as travel ramps up. But I just wanted to check if there's something there beyond seasonality and a broader question just in terms of following on what you bring in that, just in terms of the health of your credit card customer? And are you seeing any trends there? Any signs of stress in that product in particular?

[Frank Guse, executive]

Yes. Thank you, Meny. So yes, no, I would say it is seasonality, and there's nothing else really to call out. It's, I would say, still a modest increase that we are seeing there. And then overall, from a health perspective on the credit card book, we do feel very confident with the credit quality of our book. We do see increases, and we do think that is a reflection of where we are in the economic environment. But if you look into a little bit more detail, utilization rates, revolve rates, payment rates. All of those are very strong and compare favorably to where we were pre-pandemic. So again, speaking to a good credit quality and good resilience in the book against the macroeconomic backdrop.

[Meny Grauman, analyst]

And then, Frank, just a question about how we should view the renewal wave. Obviously, it was a bigger concern before we saw rate cuts happening. But how worried should we be about the renewal wave? And can we say that it's an issue that's in the past? Or is it more nuanced to that in your view?

[Frank Guse, executive]

Yes. So we are still watching that closely, of course. And it's still in our presentation in the appendix. We did update our disclosures. And what we did was we reflected that interest rates have come down. So we now provide a 5% and a 6% scenario. And we continue to believe that renewal rates do provide some discomfort to clients. And yes, they are higher. But overall, they are very manageable. And if you see, I think it's on Slide 41. In terms of net income or in terms of income for our clients that we see at originations, the average increases peak at around 2%. And in that 5% scenario and that would be in '26. So overall, as I said, we are watching it closely, and we are not calling it over, but we also believe it continues to be quite manageable.

[Operator]

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

[Doug Young, analyst]

Victor, you mentioned a bunch of times just premium ROE. And I guess the question is, what needs to happen to get back to the 16%-plus ROE target? And if you can kind of itemize some of those items and whether it's credit, expenses, capital. And then how long do you think it takes to get back there?

[Victor Dodig, executive]

So it's a good question, Doug. When we had our Investor Day, we outlined a strategy that was targeting an ROE of 16% plus at the time when the regulatory CET1 requirement was 11.5%. Since that time, it has gone up. If you actually look at it on a like-for-like basis, that number would be 14.5%. Now we're not abandoning our goal of getting to a more premium ROE. We saw an improvement this quarter to 14%.

And the question is, how do you get there? One way and the primary way to get there is to build deeper, more meaningful client relationships, which, by definition, have a premium ROE, particularly when you have a balance with money in and money out. So not as credit intensive. And our affluent strategy if you actually did all the math, that is the most premium ROE segment when you look at that business and that business done well.

The second piece is just the connectivity across our SBUs. Our Personal Bank working with our Capital Markets business on FX, our commercial bank, working with our wealth management business on making sure that we can manage the wealth of our clients and our entrepreneurs. All of those things are ROE-enhancing. The second thing is operating our CET1 in the 12.5% plus range. That's really our goal. Today, we're at 13.3%. We've announced the buyback. We think that over time, that will be ROE enhancing. And then finally, we've made some real significant investments in technology over the last number of years. I think you've all been with us through that journey. And our goal now is to scale those investments to ensure that the investments that we've made continue to deliver real returns for our shareholders. And with that, I think you work your way towards a better and better ROE number, a more premium ROE number over time and doing it in a way that's consistent without volatility and meeting your expectations quarter in, quarter out, fiscal year in, fiscal year out.

[Doug Young, analyst]

And is there one area you listed for them? And I appreciate all the detail here. Is there 1 area that you think is more accretive to that ROE? And I mean is this a 5-year journey? And I get it that it's a hard question to answer in terms of timing given all the different moving pieces. But when you think back and you look at the strategy that you have laid out internally, like is this a 5-year time frame? Or is this similar?

[Victor Dodig, executive]

Look, it's a medium-term time frame, clearly. Every one of our business leaders at CIBC is focused on delivering a premium ROE. You can go through every single business unit. I think what we need to do overall as a bank is continue to simplify our business, simplify our processes, get some of the grit out of our cost base. so that we can actually use that and bring that down to the bottom line for our shareholders.

So the business leaders are focused on ROE. You can ask any one of them, and they'll tell you that that's what their goal is, is to generate capital and to generate returns in excess of their cost of capital and then managing the business for connectivity, but managing the business for less friction. I think, over time, we'll deliver those results. And quite frankly, we're starting to see that in our next [ roadshow ] as well and our goal on delivering positive operating leverage pretty consistently.

[Operator]

Our following question is from Mario Mendonca from TD Securities.

[Mario Mendonca, analyst]

Shawn, can we start with you in the U.S. I appreciate that the elevated expense growth is in support of a longer-term strategy. And I get you're up to there. Would be helpful to understand is how long this runway is? Like how many years left of this, let's say, elevated spending, negative operating leverage before missions accomplished and you can start to grow again in the U.S., I mean, grow pretax pre-provision profit because I see that net income was up this quarter.

[Shawn Beber, executive]

Mario, thanks for the question. So our expense growth, as you said, is part of a long-term strategy. It's continued investment in our growth initiatives as well as in our infrastructure to drive client experience, balancing -- enhancing our systems and technology aligned with both our business aspirations and regulatory expectations. And this quarter, it's about 50-50 between growth and performance-related expenses and the other half being more related to our infrastructure build and sort of normal course growth this quarter, in particular, had a, I'd say, a heavier project delivery timetable.

And so you see that in our results right now. We expect that to moderate. I think quarter-on-quarter, we're expecting more like a flat expense number Q4 over Q3. But it is a longer-term journey. I think we've got certainly a number of quarters in front of us where we will continue on that pace of investment. But our objective over time, and I would echo Victor's comment over a medium-term horizon to get to that place where we are ultimately generating positive operating leverage.

And it will require some level of constructive markets. Obviously, credit demand industry-wide has been lower. We are growing faster in C&I, which is a strategic focus of ours. At the same time, we're still pivoting on the commercial real estate side. It's still a very important business for us. But given the steps that we've taken in the portfolio, particularly around institutional and office, that's been a bit of a headwind to overall loan growth in the U.S. That will take a few quarters to play out, but we expect to resume growth going forward in the loan book and then continue to invest in our wealth management platform, making that a bigger part of the overall business. All of that should drive better revenue growth over time and drive towards that operating leverage target.

[Mario Mendonca, analyst]

Maybe slightly different. I think this might be best for Rob. Several banks have reported this quarter that their treasury activities were helpful to the NII and from what I said, that statement, although helpful is somewhat opaque to me. I'm not really sure what that means. What would be helpful then if you could address this in 2 ways. First, describe maybe even with an example, what that is? And then secondly, the conditions that were in place in the quarter that led several banks to benefit from treasury activities? Those are the 2 things I'd like to understand.

[Robert Sedran, executive]

Mario, it's Rob. So I obviously can't speak to the other banks, but I can say in terms of ours, it's a number of things that add up to the roughly $90-odd million that I called out in my prepared remarks. So for starters, rates did come down during the period. And we're talking about a balance sheet that has $1 trillion on each side of it. And our treasury is active daily in terms of positioning and hedging that balance sheet effectively. And so from an execution perspective, they saw some opportunities, and there was a benefit as rates were falling. And they took advantage of that.

There's also -- in any given quarter, you're going to get a series of market-related sort of esoteric items that matter only to treasurers, things like hedge ineffectiveness and extinguishment accounting and all these kind of things that were also moved in the right duration for us this quarter. And in our case, specifically, we also had the revaluation of a funding vehicle or a parameter update on a funding vehicle that added another $30-odd million to our revenues. So it was a series of things that we're going in the right direction from a treasury perspective.

And so it's difficult to call out any one individual thing as the reason. But I will say when rates are moving and we are positioning ourselves in that environment. Opportunities can present themselves, and we took advantage of it. So it's very much in keeping with the strategy of the treasury to try to keep the noise down as best as possible and keep it over the longer term, which is why I don't know that I would want to run rate the numbers that you saw this quarter, but the opportunities were there.

[Operator]

The following question is from John Aiken from Jefferies.

[John Aiken, analyst]

Frank, just a couple of quick clarifications on the commercial real estate exposure. And I apologize I had to jump on and off. So if you already answered this, just yell at me, I'll try to look at the transcript. On Slide 42, you mentioned the watch list, and we expect to see some new inflow. Is that additional loans onto the watch list or a transition from a watch list onto gross impaired?

[Frank Guse, executive]

Well, it's -- I think it is a little bit of both. We have seen very low -- very strong performance. We have seen gross impaired loan ratios as you see on the slide, actually going down, and we are quite pleased with those results. But what we are calling out here is in general, as we said in previous quarters, we have put the worst behind us, but we do not think that the stress we have seen in the U.S. office market as a market overall, is over yet. As I said in my prepared remarks, that you may have missed, we are not expecting any of the large losses we have seen previously to reoccur. But what we are saying here is there could be some that will still come.

[John Aiken, analyst]

And as you guys have discussed as you're managing the portfolio, there were some dispositions this quarter. Can you give us a sense of whether or not there were any gains or losses associated with that -- with those dispositions?

[Frank Guse, executive]

Yes. So generally, there was -- I think we used it a couple of times a few gives and takes on those. But we did see in our strong result in the U.S. was helped by that. We do see -- we did see some reversals on some of those dispositions. Overall, not a very large number, but it certainly contributed to the very strong results we've seen in the U.S. this quarter.

[Operator]

Following question is from Nigel D'Souza from Veritas Investment Research.

[Nigel D'Souza, analyst]

I had some follow-ups here on credit. When I look on Slide 38 and delinquency rates across uninsured mortgages, I'm noticing there's a bit of an uptick there in the GTA category. I'm wondering if you could point to any specific trends or segment that's driving that fixed versus variable owner-occupied versus non-owner-occupied or any specific vintages that are driving higher delinquencies.

[Frank Guse, executive]

Yes. So in general, what I would call out is that we do feel quite comfortable with the credit quality of our mortgage book. As I said in my prepared remarks, we do not expect material losses from these portfolios. I think it's on the slide. But from a segment perspective, investor mortgages tend to perform favorably compared to owner-occupied mortgages, what we are seeing in the books. I think if you're looking into and if you're segmenting it, it's probably a little bit higher delinquency rate on variable rate mortgages. It's a lower delinquency rate on fixed rate mortgages. But even in that, I would say nothing concerning going on there. What we have seen is just a very, very slow market.

And that, of course, supports a little bit of or drives a little bit of the delinquency rates. Hratch talked about our disciplined approach from a volume growth perspective. And even that is contributing a little bit to our delinquency rates because our denominator is not growing as much. And as such, as I said, we are concerned and we do believe our credit quality is quite strong. If I give you a couple of metrics, our liquid assets or liquid assets, our clients hold to cover payments is an average of 7 to 10x. The monthly payments, depending on, again, what segments you look at. Less than 1% of our uninsured clients, we would classify as high risk, meaning they have high LTVs and low [indiscernible] scores. And overall, even in those delinquent mortgages, the average LTV is less than 60%. So we're very well covered from an exposure perspective, even if you assume some moderate house price declines could still happen from here.

[Nigel D'Souza, analyst]

And on the broader retail portfolio, are you seeing any differences in trends between homeowners and renters? And what I'm getting at here is -- our strong balance sheets for homeowners, particularly on the asset side with real estate prices being stable, is that what's helping mitigate delinquencies or credit losses in your portfolio? Or is there no noticeable difference between the 2 buckets of retail borrowers?

[Frank Guse, executive]

Well, I would say, there is some differences. And generally, homeowners perform better and would carry less unsecured debt and would perform stronger on the unsecured debt. I wouldn't say it's a dramatic difference, but there is a difference there. And typically, our unsecured losses would not be with clients that are homeowners or carrier mortgage with us.

[Nigel D'Souza, analyst]

Great. And last question here on lies on Page 45. The unemployment rate right now is a bit higher than your base case assumption, and it's expected to trend a bit higher. So is there potential for upward pressure on your performing provisions next quarter based on where unemployment currently is?

[Frank Guse, executive]

Yes. And as always, as you can appreciate, a little bit of timing in those numbers. You're also looking at an average over the next 12 months. So there is a little bit of an expectation that unemployment has not yet peaked and will trend higher from here. I wouldn't speculate yet on next quarters performing allowances because that would be way too early. But unemployment is certainly one area that we are watching closely because it has been and continues to be a headwind in the overall economy.

[Operator]

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

[Darko Mihelic, analyst]

I wanted to go back to Shawn Beber for a moment on the U.S. business. And I just wanted to -- when I look at the suggestion that you're sort of reshaping the portfolio mix, can you maybe provide a little more color around that? And how -- I'm just thinking about loan growth parameters for the model and the NIM associated with that how long -- I think I heard you say it's a few quarters before you're repositioned. So maybe you can just give us some -- a bit more color on how far you need to run off commercial real estate? And what the puts and takes are to the NIM and revenue growth in the next few quarters based on this repositioning?

[Shawn Beber, executive]

Thanks for the question, Darko. So in terms of where we are on the journey, we've had, I think, a positive impact on the portfolio through the steps that we have taken over the last several quarters. I think, as I mentioned, that's going to continue to play out. We -- depending on what happens with the rate environment with rate cuts, we might actually see some even further payoff activity or accelerated payoff activity in the CRE portfolio. At the same time, we're seeing encouraging signs on the C&I side. We have seen that loan recovery start a couple of quarters ago. That continued this quarter. And based on the level of activity and discussions that we're seeing, the pipeline is improving. We're encouraged by what we're seeing in terms of being able to deliver on the C&I growth. So the headwind that CRE has been into overall loan growth, I think will dissipate over time.

As I say, it can still take a couple of quarters. It's a bit early to be giving guidance next quarter. But I would say overall loan growth, we had growth this quarter. I'd say I expect a level of continuation of that recovery in loan demand, assuming that we get the constructive or more constructive environment over the next couple of quarters on the rate side and the overall macro backdrop based on our outlook. In terms of NIMs, we're still calling for pretty stable NIMs. We're not anticipating this may having a material impact on that. And that also has to do with the deposit franchise and what we're doing there in terms of being proactive and responsive to the rate environment as we have been. So that's up and down. And so again, assuming rate cut environment comes through, then we're anticipating being quite responsive to that, balancing the competitive environment and ultimately resulting in a stable NIM outcome. So loan growth, probably still modest over the next little bit and stable NIM.

[Darko Mihelic, analyst]

Okay. That's very helpful, Shawn. And just if you could remind me -- when I look at your balance sheet, it's $36 billion or so, call it, of loans. Can you just remind me like the -- how much of that is actually like syndicated? And is that should be an area where you can press on the gas and hit the brakes whenever you like? Has that changed at all? Is that part of this build or this -- when you say infrastructure build and so on, is that what you're changing, how you originate the loans? Or is how you originate in the proportion of syndicated loans that you originate more or less the same?

[Shawn Beber, executive]

Yes, pretty stable in terms of what we're originating. I mean we are either the lead agent or sole bank on the vast majority of our loans, like more than 3/4 of our loans. So that hasn't changed. The infrastructure build is really twofold. It's driving better client experience, elevating. We just had a wires migration. We consolidated our wealth platform onto a single much more modernized platform. We completed that a couple of quarters ago.

We continue to invest in that as we bring on new capabilities in support of our wealth business, which strategically is one that we are quite focused on and looking to grow as a proportion of the overall -- of the overall bank. So -- and the other part of the infrastructure build is the regulatory environment continues to evolve. We are looking to make sure that we are keeping pace with that. And so that investment continues. But in terms of the origination activity, I'd say fairly stable in terms of our approach to market.

[Darko Mihelic, analyst]

Okay. Great. That's very helpful. I have a few follow-ups, but they're very technical. I'll call Jeff afterwards.

[Operator]

Our following question is from Sohrab Movahedi from BMO Capital Markets.

[Sohrab Movahedi, analyst]

Okay. And I'm going to stay also with Shawn. Shawn, I look at your sub-pack, the results this quarter in U.S. dollar is USD 158 million. A couple of years ago, this quarter, USD 152 million. You're doing it on similar provision levels, USD 28 million a couple of years ago versus USD 33 million this quarter. And you're doing it with a couple of quarters of improving loan dynamics from a volume growth perspective but you're also doing it with quite a number more FTE.

My question, I guess, just to kind of dovetail from Darko and Mario's is, are we now approaching a stable kind of earnings contribution level here from the segment? And is this a good base to work off of to go up, number one. And number two, have we seen a plateauing of this FTE build? Or do you anticipate that this kind of infrastructure -- continued infrastructure investment will require further FTE build? And then number three, is this FTE build going to have revenue benefits at some stage in the future?

[Shawn Beber, executive]

Sohrab, thanks for the question. So look, we are driving towards -- I think it's a good starting point from which we expect to grow. The infrastructure investments, we will be absorbing that cost as we go part of that is on the infrastructure side. But as I said, about half of the growth in expenses that we've seen this quarter, and that would have been similar last quarter has been around growth initiatives. And so we expect those to start paying off over the next -- the coming quarters. And so from here, we would expect growth. The investment that we're making in FTE on both infrastructure and our growth initiatives, we expect to continue, but we don't expect the same pace of expense growth going forward. So I think it's a good starting point. And from their continued growth both on the infrastructure side and on the front office side as we grow out the components of our business in the U.S.

[Operator]

Our last question is from Lemar Persaud from Cormark Securities.

[Lemar Persaud, analyst]

I want to turn to credit for Frank. Obviously, there's been a repositioning of the bank's U.S. office commercial real estate portfolio. But even then, I'd expect some reversion to [indiscernible] and U.S. commercial PCLs. So how should we think about losses in that business on a more normalized basis? Like where I'm going at with this is I fully appreciate the mid-30s and fair PCL guidance. But if I was to plug in a more normal level of losses in that business, you'd be well above the mid-30s guidance. So bottom line, like could we be looking at impaired PCLs meaningfully above that mid-30s guidance near term? Or are there some takes across other businesses that you see?

[Shawn Beber, executive]

Yes. So we put that guidance of mid-30s for the bank out because we feel very comfortable with that guidance. And that guidance does include some episodic events that we could see once in a while in the U.S. business or in other businesses as well. You're absolutely right. We do not expect the very strong performance we saw in the U.S. this quarter from a credit perspective to be the new normal. And the new normal run rate would be, I would say, a little bit higher. I mean pre-pandemic, we saw in the mid-double digit loss rates in the U.S. portfolio and that's probably a longer-term time line or run rate. And then in the shorter term, it can be a little bit higher. So I'm not giving you a precise answer here because I don't think we give SBU guidance in particular, quarter-over-quarter. But it will be lower than what we've seen in the past few quarters. It may be a little bit higher than what we've seen this quarter. And overall, it will fit very well within our mid-30s guidance for the bank...

[Lemar Persaud, analyst]

Okay. And then maybe turning over to Rob, just when looking at expense growth at CIBC, you're going to be running into some pretty tough comp quarters because there was a real slowdown of expense growth towards the end of 2023. The bank went essentially from the upper single digits to low single digits. Wondering if you could walk us through your thoughts on expense growth in the context of tougher comp quarters and then also operating leverage if some of these treasury gains don't materialize as you look forward?

[Robert Sedran, executive]

Thanks, Lemar. So the reason we show the expenses the way we do on Slide 13 is that that's actually how we manage the expenses, right? We focus on our operating expenses, and we're thematically linking our investment portfolio with generating the efficiencies to help fund it. And that helps keep operating leverage in view. And while we may not get it every quarter, we're certainly happy with the 4-quarter winning streak we're on, and we do start the year expecting to get operating leverage based on our plans.

This year, revenues have been stronger and so total expense growth has actually been higher. So I appreciate your comment on some of the comps, but we've been seeing expense growth trend higher as revenues have come in better than originally planned.

So when we look forward, we still think that construct of mid-single digit -- mid-single-digit expense growth, excuse me, is a reasonable assumption going forward, and we plan for the operating leverage and we plan to work these things against each other so that if revenues don't come in the way we are hoping they come in, we have some levers to pull to maintain that operating leverage. Again, we're not going to get it every quarter, but it's certainly our goal to get it annually.

[Operator]

Thank you. That concludes the question-and-answer session. I would now like to turn the meeting back over to Victor.

[Victor Dodig, executive]

Thank you, operator, and thank you, everyone, for your questions. As you heard this morning, we delivered another strong quarter, while positioning our bank for further success. Our performance builds on the consistency that we've demonstrated over the past several years and we remain committed as a leadership team to producing reliable results for all of our stakeholders across all of our businesses. Our bank has a dedicated, experienced leadership team in place, a differentiated strategy and a healthy balance sheet.

This time, I also want to acknowledge those affected by the extreme weather events in Canada and the United States. The CIBC team has been proactively working with our affected clients to provide financial relief, advice and support. I'm very proud of our teammates that bring our purpose to life each day to strengthen the communities where we work and serve them.

In closing, I'd like to extend a thank you to our dedicated CIBC team around the world, have a good day and enjoy the rest of the summer.

[Operator]

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