Canadian Imperial Bank of Commerce

TSX:CM

Earnings Call Transcript 2019-Q4

[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.

[Geoff Weiss;Senior Vice President of Investor Relations]

Thank you, and good morning. Following Victor, Hratch Panossian, our Chief Financial Officer, will review our operating results. Laura Dottori-Attanasio, our Chief Risk Officer, will close out the prepared remarks with a risk management update.We're also joining the room by CIBC's business leaders, including Mike Capatides, Harry Culham, Jon Hountalas and Christina Kramer. They're available to take questions following the prepared remarks.As noted on Slide 2 of our investor presentation, our comments may contain forward-looking statements, which involve assumptions that have inherent risks and uncertainties. Actual results may differ materially.With that, I will now turn the meeting over to Victor.

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

Thank you, Geoff, and good morning, everyone. This morning, CIBC reported fourth quarter adjusted earnings of $1.3 billion. Our core businesses delivered pre-provision earnings growth of 4%. However, a higher provision for credit losses this quarter affected our bottom line results.On a full year basis, we recorded pre-provision earnings of $8.1 billion, up 5% from last year. While provisions have increased, we remain confident in the quality of our loan portfolio going forward. Laura will provide further context on our credit portfolio in her comments. More broadly, we concluded the year with a strong capital position of 11.6%. This provides us with the flexibility to invest in our core businesses for long-term growth as well as return capital to our shareholders. We leverage this capital strength by repurchasing 1 million common shares and increasing our quarterly dividend payment by 5%.We continue to make progress in delivering a modern relationship banking value proposition for our clients. And we remain focused on 4 key levers: building a strong client-focused franchise; diversifying and accelerating our earnings growth; optimizing our operational efficiency; and maintaining capital and balance sheet discipline.In 2019, we made steady progress on all of these levers and furthered our capabilities as a bank that can compete and win where it matters most -- on the strength and quality of our client relationships.In Personal & Small Business banking, volume growth and higher margins drove a modest improvement in pre-provision earnings. While our 2019 financial performance did not meet our expectations, our ongoing focus on investing in our people and technology and deepening client relationships will have a positive impact on our growth going forward. We're pleased with the key indicators that our long-term strategy to modernize and transform our business is working. We continue to earn recognition as a leader in mobile and online banking. We've significantly improved our client experience scores in the J.D. Power retail banking study and Ipsos Customer Service Index. Our credit card portfolio is market leading and well positioned for growth, providing value and choice to our clients.We have seen strong results from our Aventura card lineup, and we continue to innovate with new features like Pace It, which allows CIBC clients to make installment payments on larger purchases at a lower rate of interest.We have modernized our banking center network with more than 200 locations across Canada now transformed to emphasize advice-based conversations with our clients, while leveraging technology to manage routine transactions. And we have invested in better meeting the needs of entrepreneurs, including the launch of CIBC smart business for banking -- SmartBanking for Business, a first of its kind banking platform in Canada, designed to help businesses integrate their banking, accounting and payroll functionality.Our Canadian Commercial Banking and Wealth Management business delivered strong and balanced growth in both loans and deposits, driven by the addition of talent to help meet the unique needs of our diverse clients as well as building on opportunities across our bank on both sides of the border.Our team is delivering growth through referrals, something we're able to do because we're building a highly connected team, culture and platform made for this purpose, making us more agile in how we collaborate across our bank to earn our clients' full relationship. Within wealth management, our clients have embraced our competitively positioned CIBC Smart investment solutions, a portfolio that blends active and passive investment strategies, which generated net sales of $1.7 billion, enabling us to attract long-term investment dollars while supporting our earnings growth.In the U.S., we reported very strong earnings growth of 22%, driven by strong connectivity across teams and borders. We achieved a significant milestone early in the year with the PrivateBank acquisition becoming accretive to earnings well ahead of expectations, further validating the strategic and financial benefits of our investment. We're growing our U.S. business through a combination of deepening existing relationships in verticals we know well and by selectively entering new markets. We now have offices in 27 U.S. cities, and we're building momentum in banking the private economy.We also continue to extend our U.S. Private Wealth Management capabilities with the recent acquisition of Lowenhaupt Global Advisors, a leading family office in St. Louis in New York. With this acquisition and our ongoing client development efforts, we grew assets under administration by more than 12% this year.In our Capital Markets business, we delivered solid underlying results, with pre-provision earnings in line with the strong fiscal 2018 despite a slower issuance market. The resilience of our performance reflects the strength of our client relationships as CIBC ranked #1 and #2 for the year in equity and corporate debt underwriting, respectively.We also continue to hold leadership positions in syndicated loans, advisory services, equity trading as well as commodities and foreign exchange. This year, we also committed to $150 billion in environmental and sustainable financing by 2027, underscoring our focus on enabling sustainable growth and helping make Canada and North America global leaders in environmental stewardship. In the U.S., we expanded our Chicago team and completed the acquisition of Cleary Gull, which added to our investment banking capabilities to serve middle-market clients.Post quarter end, we announced an agreement to sell a significant portion of our stake in CIBC FirstCaribbean to GMP financial group for approximately USD 800 million, while retaining a 24.9% stake of the business upon closing.With this transaction, we expect to improve CIBC's common Tier 1 equity capital ratio by over 40 basis points on closing and free up capital to reinvest in our core businesses.Looking ahead to 2020, rate cuts, trade uncertainty and a global economic slowdown are driving moderate GDP growth expectations of under 2% for the North American economy. Against this backdrop, we expect to see low digit single earnings growth next year. In Personal & Small Business banking, we're encouraged by the signs of progress taking hold in our business results. Looking forward, we will continue to lead with advice to help our clients achieve their ambitions. We'll add mortgage advisers to support more conversations with clients about homeownership, and we'll build on our strength in cards with a continued focus on our Aventura portfolio and our participation in Air Canada's new loyalty program in 2020.In our Canadian and commercial -- Canadian Commercial Banking and Wealth Management platform, we will build on our momentum from 2019 as we continue to grow a strong private economy bank that focuses on making our clients' ambitions a reality.Our U.S. Commercial and Wealth business will continue to capitalize on organic growth opportunities to deepen relationships in our core markets in the year ahead and build-out our presence in new markets that we've entered.And in Capital Markets, we will continue to accelerate revenue growth through increased connectivity across our bank in both Canada and the U.S. Core business performance has been strong in capital markets, and we expect that to continue in fiscal 2020.Across CIBC, we will continue to simplify and streamline our operations, optimizing our efficiency and changing our cost structure. This will enable us to make strategic investments in tools, talent and technology that will support our growth. We will focus on deploying our capital to organic growth opportunities across our businesses as well as returning capital to our shareholders in the form of dividend increases in line with earnings growth and share repurchases.Now with that, let me turn the call over to our CFO, Hratch Panossian, to review our financial results in greater detail. Over to you.

[Hratch Panossian, Senior EVP & CFO]

Thank you, Victor, and good morning, everyone. My presentation will refer to the slides that are posted on our website, starting with Slide 6. This morning, we reported earnings of $1.2 billion and diluted earnings per share of $2.58 for the fourth quarter of 2019. Adjusting for items of note, detailed in the appendix of this presentation, net income for the quarter was $1.3 billion and earnings per share of $2.84 was down 5% year-over-year. Overall, our pre-provision earnings growth of 4% was more than offset by increased provision for credit losses in the quarter.Revenues of $4.7 billion were up 4% year-over-year, reflecting solid margin and volume growth across our client franchise. Expenses grew in line with revenues as we continued to balance strategic investments across our bank with prudent expense management. Provision for credit losses of $402 million was up sequentially and compared with the prior year. Laura will speak to this in more detail in her remarks.Turning to Slide 7. Our capital position strengthened to 11.6% in the quarter, up from 11.4% last quarter and comfortably above our target range. Including the impact of the announced reduction in our stake in CIBC FirstCaribbean, our pro forma CET1 ratio was approximately 12%. Internal capital generation of 27 basis points this quarter was partially offset by the impact of higher risk-weighted assets due to strong organic growth, model updates and the impact of share buybacks.RWAs increased by $3 billion in the quarter, reflecting largely credit growth across portfolios in our business, partly offset by a decrease in market risk in our capital markets business. This quarter, we also bought back 1 million common shares as part of our ongoing normal course issuer bid, which had an impact of 5 basis points on CET1.Going forward, we expect continued balance sheet strength, but anticipate quarterly CET1 increases to be more modest than what we experienced this quarter as we grow our business organically and return capital to shareholders at a more accelerated pace.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, starting on Slide 8. Slide 8 reflects our Personal & Small Business banking results, where we continued to see improved growth in funds managed and returned to quarter-over-quarter growth in residential secured lending balances.Net income of $603 million was down 10% from last year as continued investments in the business outpaced revenue growth, and we experienced higher provision for credit losses. Revenue of $2.2 billion increased 1% year-over-year, driven by underlying NII growth of 3% as a result of expanded margins and deposit volume growth, partially offset by lower fee income.Net interest margin was 253 basis points in the quarter, down 2 basis points sequentially due to competitive pricing, but up 8 basis points from last year primarily due to the benefit of favorable rates.Noninterest expenses of $1.2 billion were up 5% from the prior year as we continued to invest in modernizing our bank's infrastructure, distribution channels and products. As we have noted before, while there is some quarterly volatility in expenses due to timing of initiatives, our full year expense growth for this segment of 3% is in line with our previous guidance.Slide 9 shows the results of our Canadian Commercial Banking and Wealth Management business. Net income for the quarter was $307 million, down 8% from a year ago due to a $73 million increase in provision for credit losses primarily due to one notable impairment. We continued to see strong operating growth in this business. Pre-provision earnings were up 7% from a year ago, driven by revenue growth of 4% against a 2% increase in noninterest expenses, primarily associated with strategic initiatives including our continued hiring in client-facing roles.Commercial Banking revenues were up 8% as we continued to gain share on both sides of the balance sheet with particular strength in deposits. Deposit and lending balances were up 14% and 12%, respectively, from the same period last year. Wealth Management revenues were up 2%, primarily driven by strong volume growth in our Private Banking business and higher fee-based assets in our brokerage business. AUM balances grew 11% year-over-year from growth in our mutual fund and institutional businesses, while AUA balances grew 7%.Net interest margin remained relatively stable in this business at 310 basis points, down 1 basis point year-over-year and 2 basis points sequentially, driven in part by unfavorable rates and modest pricing compression in the Commercial Banking business.Slide 10 shows the results of our U.S. Commercial Banking and Wealth Management business. Net income for the quarter was $191 million, up $52 million or 37% from the year prior. In addition to pre-provision earnings growth of 14%, the business benefited from particularly strong credit performance this quarter, which resulted in a $23 million reduction in provision for credit losses over the prior year. Revenues were up 11% from the prior year, driven by double-digit volume growth and higher asset management fees, more than offsetting the impact of lower interest rates.Average loans grew USD 4.3 billion or 18% from a year ago, reflecting our continued momentum in client development. The growth in loans was driven by increases in both the commercial real estate and C&I portfolios, while the institutional real estate portfolio continues to remain relatively flat. Average deposits grew USD 3.9 billion or 21% from a year ago, reflecting strong organic growth from new clients and other deposit initiatives.Net interest margin was 293 basis points, down 25 basis points sequentially and 31 basis points from a year ago. As noted last quarter, our NIM benefited from certain nonrecurring items, which contributed 7 basis points to our Q3 margin. The balance of the decrease quarter-over-quarter was largely due to the impact of falling rates related to the 3 recent Fed cuts.We also continued to grow our U.S. Private Wealth Business. AUM was up 15% over the prior year, driven by organic growth helped by tighter integration with our commercial and private banking businesses. Noninterest expenses increased 8% from the prior year, reflecting continued but moderating investments in headcount, infrastructure and marketing expenses to support growth. As with last year, we anticipate a seasonal expense increase in Q1 related to the accrual of incentive and benefit costs, but expect full year expense growth in 2020 to come in below the levels we experienced this past year.Turning to Capital Markets on Slide 11. Net income of $226 million for the quarter was down $7 million or 3% from a year ago as pre-provision earnings growth of 19% was offset by $49 million higher provision for credit losses. Revenues this quarter were $735 million, up $86 million or 13% from the prior year. This reflects strong performance across the business with higher trading activity broadly across all products, strategic growth in corporate banking and higher underwriting activity.Our differentiated Capital Markets business continues to generate strong returns and stable revenues, supported by our growth momentum in the U.S. and our growing revenue streams from its connectivity with our other business units. Noninterest expenses of $386 million were up $30 million or 8% from a year ago, primarily driven by higher performance-related compensation and higher spend on growth in enterprise initiatives.Finally, Slide 12 reflects the results of the Corporate and Other business unit. Net loss for the quarter was $18 million compared with a loss of $11 million for the prior year. These results reflect strong performance in FCIB and disciplined expense management balance against our ongoing investment in enterprise-wide strategic initiatives. We anticipate the announced sale of a portion of our stake in FCIB to close in the second half of 2020, and we will continue to recognize income from FCIB in the normal course until that.Let me now turn to Slide 13, which summarizes our full year 2019 results. On a full year basis, net income of $5.4 billion and earnings per share of $11.92 were both down 2% year-over-year. Our record pre-provision earnings of $8.1 billion were up 5% from the prior year, underpinned by revenue growth across each of our businesses and positive operating leverage. We maintained a return of equity of 15.4% for the year, ahead of our 15% target. And we finished the year with a strong balance sheet and CET1 ratio of 11.6%.Heading into fiscal 2020, we remain confident in our ability to continue delivering value to our clients, and we are well positioned to build momentum in earnings growth through 2020.And with that, I will turn the call over to Laura.

[Laura L. Dottori-Attanasio]

All right. Thank you, Hratch, and good morning. So let me start with a review of our credit performance in the fourth quarter.Turning to Slide 15. Provisions for impaired loans increased to $330 million, representing a provision rate of 33 basis points. This increase was driven mainly by our business and government portfolio and was largely as a result of 1 fraud-related impairment that amounted to $52 million in our Canadian Commercial Bank.Our provisions on performing increased to $72 million this quarter. $40 million of the move relates to changes in our forward-looking indicators, including our scenario weightings, which were adjusted towards the downside. The remainder of the increase is related to credit migration mainly in our business and government portfolio.The next slide provides an overview of our gross impaired loans, which increased to 47 basis points. The increase was mostly driven by our business and government loans as I mentioned earlier. Slide 17 shows the net write-off rates of our Canadian consumer portfolio. The increase in net write-off over the course of fiscal 2019 was primarily driven by our unsecured lines of credit. Notwithstanding the slight increase, write-off continued to perform within our risk tolerance and in line with consumer insolvency trends that we are seeing in Canada.Slide 18 provides the 90-day -- the 90-plus day delinquency rates of our Canadian consumer portfolio. Our delinquency rates have moved up this past quarter. The increase is mainly in insured mortgages and secured lines of credit within personal lending that have conservative collateral coverage. As such, we do not expect them to translate into notable losses. Increases are primarily from the Alberta region, which is experiencing more challenging economic conditions and higher unemployment rates.Page 19 summarizes our credit performance on a full year basis. Our key metrics such as write-offs, delinquency rates and loan impairments continue to remain well within our risk appetite. Provisions on impaired loans ended the year within expectation at 29 basis points, and that's despite some distinct impairments during 2019.When we account for this, I would expect our provisions on impaired loans to remain relatively flat in 2020 when compared with 2019. And with regards to provisions on performing loans, they migrated higher this year, primarily as a result of changes to our forward-looking indicators and scenario weights. More specifically, we slightly shifted the scenario weighting to the downside along with a more tempered outlook for unemployment and WTI prices. That said, to the extent our economic outlook remains stable, we would expect moves in provisions on performing to be more modest in 2020 than they were in 2019.To conclude, we continue to have solid underwriting standards and credit policies, a strong team of experts along with the proactive management of accounts, and I continue to have a strong degree of comfort with the quality and resiliency of our credit portfolios and with our credit outlook for 2020.With that, I'll turn the call back to the operator for questions.

[Operator]

[Operator Instructions] The first question is from Gabriel Dechaine with National Bank Financial.

[Gabriel Dechaine, Analyst]

Just want to ask first about the U.S. margin. You mentioned the 3 fed rate hikes. Is there any reason why the drop was sharper this quarter than it was in Q3? Is it just the lagged effect, it just jumped out at me. And then, sorry, where do you expect it to be in Q1 in 2020?

[Hratch Panossian, Senior EVP & CFO]

Thank you, Gabriel. It's Hratch. So addressing the NIM in the quarter, I think, first, starting with the 7 basis points onetime help that we had in the Q3 quarter. So I think that creates a bit of noise. And then in this quarter, I would say we have a couple of basis points of onetime negatives. So those things combined, I think, skew the quarter-over-quarter picture a little bit.I think for the rest of it, as you look at the combined margin change over the latter half, that represents the bulk of the impact in our business due to the recent changes in yield curve and the fed cuts. And the reason it presents that way with the bulk in the quarter is really the pricing dynamic of our book. And so as our assets repriced with LIBOR and we continue to reprice our deposits on a negotiated basis with clients, that effort is still underway.Despite the pressure on NIM though, I'll note, NII was up 7% year-over-year this quarter due to our strong volume growth. And in terms of looking at that forward, we do largely anticipate it stabilizing here given where LIBOR is at this point. Maybe a slight downward pressure from here, but largely stabilizing. And with that, we feel confident between the stabilizing margin and the continued growth in volume that we'll continue to see good NII growth.

[Gabriel Dechaine, Analyst]

So a couple of basis points down over the next few quarters?

[Hratch Panossian, Senior EVP & CFO]

Yes. I'd say something in that neighborhood, generally flat.

[Gabriel Dechaine, Analyst]

Okay. Then on the credit. I just want to better understand the guidance floor that you are giving. Full year loss on impaired loans -- loss rate on impaired loans of 29 basis points. So you're saying you're expecting that to be stable in 2020? I keep hearing the word normalization from banks and I'm just wondering if that means, no, we're actually going to move higher.

[Laura L. Dottori-Attanasio]

So yes, what I did say is that when we account for the unusual items that took place during 2019 that I do expect our provisions on impaired loans to remain flat when I compare them to 2019, so thinking out to 2020. So there would be some, if you will, normalization in the numbers, so increased impairs but offset by some of the one-off items, such that we remain flat or expected to remain flat on a year-over-year basis.

[Gabriel Dechaine, Analyst]

Okay. And then just last one. How -- like this trend of higher provisions is going to -- you talked about a lot. How does it affect your risk appetite? I'm thinking about cards, which is a battleground and that's only going to intensify to the midyear of -- midpoint of 2020. Unsecured personal lending has been a growth area for a few banks in the last number of years. How does all of this change your appetite looking forward?

[Laura L. Dottori-Attanasio]

Well, it doesn't change our appetite when we look forward. As I mentioned in my prepared remarks, we continue to have strong underwriting standards that will continue to apply and we're very proactive in terms of how we manage our account base. And while we are seeing some rise in our delinquency numbers and write-offs, all within risk appetite. As I said, we're seeing some increases in insolvencies across Canada, some softness in Alberta, but nothing of concern. And I think that's why you're hearing everyone talk about the term of normalization, if you will. Recall, we've come off of some really low loan losses in history, and I think this is just a bit of a return to normal. So don't see anything of concern.

[Operator]

The next question is from Scott Chan with Canaccord Genuity.

[Scott Chan]

Could you remind me how much the annual impact is on FirstCaribbean on an annualized basis? And if that is factored into your fiscal 2020 EPS guidance of low single digits?

[Hratch Panossian, Senior EVP & CFO]

Yes, thanks. It's Hratch. I'll take that. So we see FCIB impact as more of a later 2020 and 2021 impact, so it's not in the numbers that we're speaking of. As we mentioned before, we expect that transaction to close somewhere towards the end of the year, depending on the regulatory processes. So it's not a 2020 impact.For '21 going forward, the way we would think about it is that we see the impact of the reduction in earnings that we realize off of our FCIB position netted off against some income we have from the loan. And then in terms of the net of that -- we haven't talked about the specific numbers, but generally, when we do the math, the capital that we'll be freeing up in the transaction, if deployed towards the buyback program then net-net, we think that generally neutralizes the impact to EPS. So that's the way we would guide to it.

[Scott Chan]

Okay. And just on the Canadian Personal and Small Business banking side, I saw that NIM was up 8 bps year-over-year, but I didn't see the sequential number. I don't know if you have that and perhaps an outlook on that on the margin for that in fiscal '20.

[Hratch Panossian, Senior EVP & CFO]

Yes. Sure. So the sequential was down 2 basis points on the Canadian PSBB business. And that really was the net of some pressure on margins on certain products as we got into Q4, but still some continued momentum from favorable rates on the repricing of our [ attractors. ] And so going forward, at this point, with our expectation and what seems to be generally in line with market's expectation for rates in Canada, it's looking like stable with maybe slight negative margin pressure in that business. But generally, full year '18 to full year -- sorry, for the full year '19 to full year '20 in the same neighborhood.

[Operator]

The next question is from Steve Theriault with Eight Capital.

[Stephen Gordon Theriault, Principal & Head of Research]

I wanted to ask a question on mortgages for Christina. Christina, can you talk about your outlook for mortgage growth in 2020? And specifically, do you have a better sense of when you get back to market levels of growth, seeing some improvement this quarter here?

[Christina C. Kramer]

Thank you, Steve. While we have some more work to do to get back to market level of growth, we're pleased with what we're seeing and what we're delivering in the market. So we expect improved -- improvement in our performance. As you may be aware, this quarter, we saw growth, as Hratch mentioned, and that growth came across our banking centers and our Mobile Mortgage Advisor teams. And that comes after a period of flat growth the quarter prior and several quarters of decline prior to that. We see continued strong retention rates. And our pipeline remains improved on a year-over-year basis.So with all of that, we expect that -- market growth, we will improve our growth rate and it may take some time as we get to market level growth rates.

[Stephen Gordon Theriault, Principal & Head of Research]

Is that foreseeable in 2020 or is it difficult to say at this stage?

[Christina C. Kramer]

It's difficult to say, but our objective is to continue to improve. And we -- based on what we're seeing, we're confident that we will see that.

[Stephen Gordon Theriault, Principal & Head of Research]

Okay. And I had one quick question. Just about one of the unusuals, the interest income settlement on tax matters. Wondering if -- is that related to the CRA reassessments of the total return swap activity from a few years back? Can you help me with that, Hratch?

[Hratch Panossian, Senior EVP & CFO]

Sorry, what was that? Can you repeat the question?

[Stephen Gordon Theriault, Principal & Head of Research]

The -- one of the unusuals this quarter was -- it was called interest income settlement on certain tax matters. I was wondering if that's linked back to the CRA's reassessment of some of the total return swap activities...

[Hratch Panossian, Senior EVP & CFO]

Yes. No. So that was related -- a portion of it was related to the Enron settlement that we had announced and then a few other pieces, but nothing to do with that other file.

[Stephen Gordon Theriault, Principal & Head of Research]

And also the increase in legal provisions, was that related at all to the provision in the Canadian bank or was that -- is that something else?

[Hratch Panossian, Senior EVP & CFO]

So we won't speak to specifically the matters underlying that. There are some ongoing legal matters that were provisioned for before and this is an increase to that provision.

[Operator]

The next question is from Meny Grauman with Cormark Securities.

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

It's come up before, but definitely relevant today. Just trying to get a better sense of how to forecast provisions on performing loans and specifically, the forward-looking indicators. And I ask it specifically because -- I mean, I don't think we've seen any other updates this quarter from other banks, and I appreciate you can't speak to peers, but it stands out from that perspective and also just given even the Bank of Canada's statement yesterday. So I'm just wondering if you could give us any more guidance here? How much leeway do you have when you're making these kinds of updates? Like, was this an update that could have been made? Like -- can you defer it a quarter or 2? How does that -- how does those mechanics work? Is there anything that you can point to, to give us a better sense of when these types of adjustments are going to be made?

[Laura L. Dottori-Attanasio]

Sure, Meny. It's Laura. So I'll take that one. So a lot of it -- again, hard to compare all of the banks, but it really depends on where our starting point was back when we first implemented IFRS 9. And so from there, really, it's formulaic in that every quarter, we have an economic outlook that gets updated. And that's what tends to drive a portion of this number. So for us, this quarter, the biggest impact with the [ FLI, ] as I mentioned in my prepared remarks, was around the forward-looking indicators and the scenario weights. So essentially, what we did is we increased the probability weight of the downside scenario and equally decreased the weight of the upside scenario.And so from an economic outlook perspective, that was to reflect increased uncertainty in the macro environment. So that change, if you will, accounted for about half of the move. The rest of it came from revised forecast to certain factors, as I mentioned. One of those was unemployment and the other one was WTI. So again, it's really how we update our economic outlook on a quarterly basis. So hopefully, that clarifies.And as I said in my prepared remarks, when we look forward into 2020, so to the extent our economic outlook remains stable, we'd expect that the provisions on performing would come in at a more modest level than they have this year.Does that help you?

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

Yes. I mean, I guess, it seems like very small changes in sort of economic outlooks lead to relatively large changes in updates to the forward-looking indicators when it comes to performing loans. Is that correct? Like is there -- the sensitivity is -- would you say is relatively high to small changes? That's what it seems is going on.

[Laura L. Dottori-Attanasio]

Yes. That's right. And I think as we've always talked about IFRS 9, with that comes volatility that you'd expect to see on a quarter-over-quarter basis. Now we do always have the ability to overlay our expert credit judgment, which we do on occasion, but for a lot smaller amounts. For us here at CIBC, this is primarily formulaic driven.

[Operator]

The next question is from Mario Mendonca with TD Securities.

[Mario Mendonca, MD & Research Analyst]

Just one sort of detailed question first. The net interest income in the corporate segment, it seems elevated. Now I understand that a big portion of that, Hratch, is the $67 million interest settlement. But even adjusting for that, it does look somewhat elevated. My suspicion is that that's offset somewhere else, perhaps in other revenue or noninterest income? Can you help me think through that? Is that the right way to look at it?

[Hratch Panossian, Senior EVP & CFO]

Yes. Thanks, Mario. So you're right in that the large part of that NII is related to that $67 million of interest income. Outside of that, I would say we have the continued [ performance ] of FCIB. As well as within treasury, we had some good performance this quarter that would drive that. But generally, no other specific items to point out there.

[Mario Mendonca, MD & Research Analyst]

And so there is no natural offset there like noninterest income being maybe a little light in that division? Is there any sort of logical offset? Or is it just good treasury performance this quarter that you'd highlight for us?

[Hratch Panossian, Senior EVP & CFO]

No. Not really. I think it's those factors of those key pieces of NII being performing well.

[Mario Mendonca, MD & Research Analyst]

Okay. And then just broadly on expenses, I thought I heard you say something to the effect of expense growth should be lower in 2020 than it was in 2019. Now you may have been referring specifically to a segment. So if it was a segment, could you offer a more broad outlook on expense growth in 2020?

[Hratch Panossian, Senior EVP & CFO]

Yes. Sure. And that comment was specific to the U.S. business, Mario, as we've continued to invest in that business. Mike has talked about that in the past, both in terms of the back-end capabilities as well as the front line. So any particular more color on that, I'll let Mike take it if you want.In terms of total bank guidance, the last back half of the year, we've been guiding to that 4% or 5% range, and that's where we've been. And our goal overall is to manage the business over the long term for positive operating leverage and improve efficiency over time. So we're pleased to have done that both in Q4 as well as full year this year.Going forward, we think as we're seeing currently the revenue environment and the expenses that drives as well as the investments that we will continue to make, we think that back half is still the right range to target for 2020. And again, long term, we're managing to positive operating leverage here. And there will be some quarterly volatility in that, and you may have some negative operating leverage, but we think at this point, with the revenue we're seeing, that's the right expense level for us.

[Mario Mendonca, MD & Research Analyst]

4% to 5%, then.

[Operator]

The next question is from Doug Young with Desjardins Capital Markets.

[Doug Young, Diversified Financials and Insurance Analyst]

Just back to you, Laura. Just on the credit side, when you gave your guidance for impaired loans of being -- PCL rate being flat year-over-year, you talked about excluding unusual items. Can you talk a bit about what you define as being some of the unusual credit items that came through in fiscal '19?

[Laura L. Dottori-Attanasio]

Yes. For myself, the more unusual items would have been those that we mentioned that took place this quarter, so items that are really not representative, if you will, of the strength of the overall loan book. The unusual items we had this year that would have gone sort of straight to stage 3 and not transited sort of through the stage 2 provisioning.

[Doug Young, Diversified Financials and Insurance Analyst]

And that would have been the fraud in Canadian commercial and that was the $52 million, I believe, in PCL. Is that correct?

[Laura L. Dottori-Attanasio]

That's right. And you'll recall, we spoke of one in the utilities sector earlier on in the year. So those would form, if you will, the bulk of what I see as isolated events.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. And then your performing loan PCL for the year was about 4 basis points, but you're essentially saying between -- it's going to be less than that, essentially, is what you're anticipating absent any changes to forward-looking indicators or your models and scenario weights, essentially?

[Laura L. Dottori-Attanasio]

That's right.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. And then, Victor, you mentioned in your comments change of cost structure. And I don't want to take it out of context, but what I'd like to know is do you think big changes need to be made to your cost structure? And if so, do you anticipate having to take a restructuring cut charge to reset your cost structure?

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

So Doug, it's a good question. I think it's important to kind of provide broader context on our cost transformation over the years. If you look at the last couple of years, we've made progress on simplifying our bank and improving efficiency in a number of ways. And we use that through a combination of restructuring charges in 2016, and importantly, normal course efficiency gains. And with that, focus on cut cost transformation. Our NIX ratio had improved from where it was in 2016 at 58% to 55.6% today. Our goal is to get to 55%. Some of the revenue softness that we had got in the way, so we're at 55.6%, and we're fairly pleased with those results.As we go forward, we'll continue down the same path, and we believe we have further opportunities to simplify our operations and create efficiency. And while we prefer to execute this gradually over the normal course, we continue to review all our options, and that could potentially require a charge down the line in order to accelerate our progress. We've got a target of 52% by 2022. That was based on the old revenue environment. I think a more realistic NIX target for 2022 based on the macroeconomic factors that we see out there is in the 53.5% to 54% range, and we need to work diligently to get there.

[Doug Young, Diversified Financials and Insurance Analyst]

So not ruling that out. What would be the pivot point where you think some drastic change has to be made? Is that just [ when ] the revenue environment is just not turning the way that you anticipate? Is there any sense that you can give us?

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

[ Don't look ] at it as pivot point, Doug. We kind of look at it as an ongoing transformation, and we're sort of halfway through the cost transformation at CIBC. We've made really good progress, and there's more progress to make.

[Operator]

The next question is from Sumit Malhotra with Scotia Capital.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

I want to just start with Laura on a couple of things with credit. On the Canadian commercial fraud situation, looking at your all bank numbers here, your charge-offs weren't really that different than they've been running at here. I've got a lot of paper on my desk. So I think it was in the neighborhood of -- yes, I see, $234 million in the quarter.So is your provision for this situation, is it a resolve that this is something that you're not going to collect? Or is there any possibility this comes back because, obviously, there's a big delta between what you provisioned and what you charged off in Q4?

[Laura L. Dottori-Attanasio]

Yes. Sumit, you're right. I mean, the provision level can always change over time because it really depends on how the situation evolves. At this point in time, we're provisioned at $0.49 on the dollar. I think we're adequately provisioned at this point in time, but the story will play out. But at this point in time, feels like we're adequately provisioned.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And just a couple more for you. It -- I think Doug was getting at this, too. So if we look at the full year PCL ratio for the bank, I think it's around 33 basis points this year and you referenced a couple of things, whether it's the fraud, whether it's PG&E earlier in the year, I mean, look, the further we go in the cycle, these things are going to happen.When you couple that with the movements in your underlying parameters or methodology, when you think total PCL for CIBC in 2020, the bank has at times in the past, given us some indication. Relative to that 33 basis points on a total level, what do you think is an appropriate range investors should be thinking about?

[Laura L. Dottori-Attanasio]

Well, as I talked to and I break it down into 2 amounts because as you can appreciate, the provisions on impaired feels a little easier, if you will, to predict. So barring unforeseen events, my expectation, as I said, is that remain -- we remain relatively flat. So we came in at 29 basis points through the year, as I said, which was within guidance that we provided last year. I would expect us to remain flat next year.And with regards to provisions on performing, as you said, they were up 4 basis points. And I would expect, again, unless things change in terms of our economic outlook that the increase would be more modest than before.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And last one for you. The -- there's been some volatility in the Canadian consumer bankruptcy and solvency proposals that we've seen in the last number of months, which seems to be at odds with the jobs data in Canada and some of the underlying credit metrics we've seen from the banks. Did that play any part at all in the parameters update you enacted and any comment from you, especially given the larger credit card portfolio of the bank as to how you're thinking about that situation with respect to your consumer book?

[Laura L. Dottori-Attanasio]

Well, I'm actually feeling very comfortable with our consumer book and our credit cards are actually, I would say, performing in line with expectation. We did see a bit of increase in delinquency rates sort of quarter-over-quarter, but that was really seasonality where we see delinquencies normalizing after usually low summer numbers.What we're saying here and maybe if I look at it in 2 parts, so on the delinquencies, the bulk of the uptick was really in our insured mortgages and secured lines of credit. And that was mainly driven by the softness that we saw in Alberta. So from that perspective, all of those loans are really well collateralized. So losses would be very low if they ever materialized. But if you look at our net write-offs, where we're seeing the bulk of the increases there is really in our unsecured lines of credit, and that would be in line with the broader trend that we're seeing in Canada, where we've seen consumer insolvencies up.I guess, I'd just point out that even with that increase in the personal lending segment, when you look at it from a year-over-year basis, it's a $9 million increase, $15 million, 1-5 million, from a quarter-over-quarter basis. So nothing of great concern. And in our provisions for performing, there was some delinquency migration in that number. But as you saw on the -- I think it was Slide 15, it was a very small amount.Does that answer your question?

[Sumit Malhotra, Managing Director of Canadian Financial Services]

That's helpful. That's very good. Last question, and just very quickly for Hratch. I think, ex of the accounting or IFRS changes next quarter, pro forma capital, you're about 11.8%, one of the better numbers in the group, I believe.You answered the question on FCIB, saying that you could neutralize the EPS impact by buying back more stock. Is that something you're suggesting will occur as that transaction closes? Or given your pro forma visibility, is that uptick in buyback activity that you're referencing something that the bank is thinking about prior to the close of that transaction?

[Hratch Panossian, Senior EVP & CFO]

Sure. Thanks, Sumit. I'll take that one, but we're going to have to move on after this on the capital line. So I think we have slightly different numbers than you on the Q1. And as we've disclosed, the IFRS impact for us is a bit smaller than what the peer group has disclosed. But leaving that noise aside in Q1, as I mentioned in my remarks, we do expect capital generation forward to continue to be net positive, maybe a bit more modest than this quarter because of some of the onetime helps we had this quarter, but still net positive. And we feel pretty good about that. And even before that close and having the capital in the door on FCIB, we feel strong about our capital trajectory. And with that, we anticipate accelerating the buyback activity in advance of that. So as I said in the remarks, again, going forward from here, we anticipate to be more active in that than we have been in the past.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

We'll compare numbers after.

[Operator]

The next question is from Nigel D'Souza with Veritas Investment Research.

[Nigel R. D'Souza, Investment Analyst]

My questions have actually been asked and answered.

[Operator]

The next question is from Mike Rizvanovic with Crédit Suisse.

[Mehmed Rizvanovic, Research Analyst]

Just want to go back to Laura on the provisioning on performing loans. So if you could just help me understand, but your guidance for a lower number in 2020 is a bit confusing to me just based on the fact that you're discussing more downside risk. It seems like you're a bit more negative than you would have been last quarter or even at the beginning of the year. Can you just sort of help me understand that dynamic?

[Laura L. Dottori-Attanasio]

Yes. Well, maybe I'll start with provisions on performing. So those are forward-looking. And so I would say that, that takes into account that downside. My expectation, again, at this point in time would be that our economic outlook at this point remain stable. So in that regard, that's why I expect provisions on performing to come in lower in 2020 than they did this year. That's with regards to provisions on performing.With regards to provision on impaired loans, just in keeping with a bit more downside on the horizon, I do expect impaired provisions to increase in 2020 relative to 2019. But essentially, what I've done is I've taken into account the unique events of 2019 that we spoke of and I assume that those likely won't represent. And when I took all that into account is how I get to flat in my expectations for provisions on impaired in 2020 relative to 2019. Does that help?

[Mehmed Rizvanovic, Research Analyst]

Yes, it helps. Is it fair to say that -- so as you add loans in 2020, you would be provisioning slightly more on the performing? Is that fair? On those new loans, just given your more negative outlook.

[Laura L. Dottori-Attanasio]

Well, I'm not sure that that's the way I would look at it. I mean, the provisions on performing take into account the economic outlook. And during the year, they'll take into account credit migration. So yes, I guess, there'll be some of that in there. But even with that, I still expect that provisions on performing when we look forward to come in less than what we had in 2019.

[Mehmed Rizvanovic, Research Analyst]

Okay. That's helpful. And then just one quick one for Christina. Just wanted to get your thoughts on how you think about the trade-off between getting your residential mortgage growth back up towards industry peer levels with the margin? Like are you going to look to maybe protect the margin and maybe this is a longer process than was originally anticipated? Or -- how do you think about that trade-off?

[Christina C. Kramer]

So it isn't a mortgage strategy trade-off. It's really about our focus on our clients and growing with our clients and the markets that we serve them and across Canada. So as we continue to see opportunity to continue to help clients with their home ambitions, we expect there's opportunity for growth in this space. And it will also then contribute to our relationship strategy because homeownership is a great moment for us to help Canadians with broader goals and their financial planning goals beyond that.So when we look at the margin question, it's really about how do we build a longer-term relationship with our clients, and we'll compete in the market at the rates we'll need to compete in.

[Mehmed Rizvanovic, Research Analyst]

So is it fair to look at that catch-up as maybe more of a 2021 story, just given the sizable differential that you currently have?

[Christina C. Kramer]

We'll see growth in this segment of the business in the mortgage space in the portfolio over the course of the year. And I say that because we're seeing it in Q4. And that's been improving for a couple of quarters now. And the growth will continue over that course of that business and by the end of the year will position us well for '21 as well.

[Operator]

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

[Sohrab Movahedi, Analyst]

A quick question for Jon Hountalas. Jon, if I look at just the commercial banking component of Canadian Commercial and Wealth, the margins in that business are down every quarter this year anyway. Can you just talk to me -- to us, I guess, a little bit about the dynamics there between volume growth and margin compression as you look into 2020?

[Jon Hountalas]

Thank you for the question. So our model has been pretty consistent, and we don't compete on rates at all. Has the market gotten a little kind of more aggressive? Yes. But nothing material. A lot of the compression you see is just rate impact. So we haven't seen big client compression and whatever has existed, has been more on the deposit [ than ] the loan side.Going forward, I don't see -- again, from client pricing perspective, I don't see big deterioration. So could it move a basis point? A couple of basis points, perhaps, but nothing material.

[Sohrab Movahedi, Analyst]

But the directional is generally low or down, I should say?

[Jon Hountalas]

I mean -- client pricing, I don't think we'll be going up. So again, we're running a relationship bank. We compete in the market. We don't meet on price. But we win business when they're good clients and when they are relationship clients.

[Sohrab Movahedi, Analyst]

Okay. And then maybe just a couple of quickies here. Hratch, you -- or Victor, I guess. I mean, we've talked about the capital ratios now on pro forma and potential for buyback. But generally speaking, is there a kind of level that you're going to try and run the bank with the capital ratio level? Is it 11.5%? Is it low 11s? Is it high 11s? Can you give us a kind of yardstick on that?

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

Sohrab, it's Victor here. So we've done a good job in building up a very robust capital level on a pro forma basis at 12%. We think about running the bank at 11% to 11.5% range being the comfortable range for us. We're clearly at 11.6% today. Just to remind you of our capital priorities going forward, and I try to do this every quarter, we have 4. The first one is to invest in our businesses for organic growth. We have been investing, and that's reflected in our expense growth with an over-indexing in our Commercial Banking and Wealth Management businesses in addition to our Canadian Personal banking business.Share buybacks are an important component of that. I think Hratch has been clear. We bought back 1 million shares last quarter. We do intend to accelerate the pace of share repurchases given our current capital level.With respect to dividends, we target the midpoint of our 40% to 50% range on an adjusted basis or slightly above that, but we plan to grow our dividends as in line with our earnings.And the last one on inorganic investments. And I think we've been quite clear that we're selective. We're in no rush. We're investing in our business organically. You can see the growth in the U.S. is quite robust. With the expansion in the markets, our bias is really toward tuck-ins at most for the foreseeable future.

[Sohrab Movahedi, Analyst]

That's excellent. Victor, do you think you will rethink the dividend policy from semiannual to an annual, just to give a bit more flexibility, given some of the kind of lack of transparency or visibility, I guess, into the outlook? Or you think there's no need for that?

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

At this point in time, there's no need to rethink it. We may. We're really focused on improving the performance of our businesses. We did not deliver what we wanted to deliver to our shareholders, and we are focused on getting the bank back to earnings growth in 2020. That's the primary preoccupation of the leadership team.

[Operator]

Thank you. This will conclude today's question-and-answer session. I would now like to turn the meeting over to Victor.

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

Thank you, operator. So we said in 2015 that we were going to succeed by building CIBC into a client-focused bank, and we've made clear progress in that regard. This year, we continued to improve our client experience numbers across our Canadian retail business. We drove robust top line growth in commercial banking, delivered strong results in U.S. -- in our U.S. businesses and continued the transformation of our Capital Markets franchise into a connected business that's driving high-quality earnings consistently for our bank.We are firm in our belief that we're on the right path. And as I look to 2020, I'm confident that we are well positioned to deliver value to our clients and team and growth to our shareholders.Now just before I wrap up, I'd like to thank Kevin Glass for his contributions to our bank over the past 11 years. He's been quiet during this call, but he's been beside a microphone in case you did have a question for him. Kevin has been a tremendous leader and an important part of our team, and we wish him the very best as he starts his retirement at the end of the year. And on behalf of our Board and executive leadership team, I want to thank our entire CIBC team for your continued dedication to making our clients' ambitions a reality and to our shareholders for your continued support. Have a wonderful holiday season, everyone. We'll talk to you in the New Year.

[Operator]

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