CIBC Announces First Quarter 2013 Results

TORONTO, Feb. 28, 2013 /CNW/ - CIBC (TSX: CM) (NYSE: CM) reported today net income of $798 million for the first quarter ended January 31, 2013, compared with net income of $835 million for the same period last year and $852 million for the prior quarter. Reported diluted earnings per share (EPS) was $1.91, compared with $1.93 a year ago and $2.02 for the prior quarter.  Return on common shareholders' equity for the first quarter was 19.9%.

Excluding items of note listed below, CIBC reported record adjusted net income of $895(1) million for the first quarter, compared with adjusted net income of $833(1) million for the same period last year and $858(1) million for the prior quarter. Adjusted diluted EPS was $2.15(1), compared with adjusted diluted EPS of $1.97(1) a year ago and $2.04(1) for the prior quarter.

Results for the first quarter of 2013 were affected by the following items of note netting to a negative impact of $0.24 per share:

  • $148 million ($109 million after-tax or $0.27 per share) loss from the structured credit run-off business, including the charge in respect of a settlement of the U.S. Bankruptcy Court adversary proceeding brought by the Estate of Lehman Brothers Holdings, Inc.;
  • $16 million ($16 million after-tax or $0.04 per share) gain, net of associated expenses, on the sale of our Hong Kong and Singapore-based private wealth management business; and
  • $5 million ($4 million after-tax or $0.01 per share) amortization of intangible assets.

Effective January 2013, CIBC adopted the Office of the Superintendent of Financial Institution's (OSFI) revised Capital Adequacy Requirements (CAR) guideline reflecting changes to capital requirements, referred to as Basel III.  As a result of the change in methodology, the regulatory capital information at January 31, 2013 is not comparable to prior periods. CIBC's Basel III Common Equity Tier 1 ratio at January 31, 2013 was 9.6%, and our Tier 1 capital ratio and Total capital ratio were 12.0% and 15.3%, respectively, on an all-in basis.

"CIBC's solid results in the first quarter reflect our strong focus on our clients as well as our underlying business fundamentals," says Gerald T. McCaughey, President and Chief Executive Officer.  "The broad-based performance across our core businesses reflects our first principle which is to be a lower risk bank delivering consistent, sustainable earnings."

Core business performance
Retail and Business Banking reported net income of $611 million for the first quarter, up from $567 million for the same quarter last year.

Revenue of $2.1 billion was up 2% from the first quarter of 2012, primarily due to volume growth across most products, higher fees and wider spreads, partially offset by lower treasury allocations.

Provision for credit losses of $241 million was down $40 million, or 14%, from the same quarter last year due to lower write-offs and bankruptcies in the cards portfolio.

During the first quarter of 2013, our retail and business banking business continued to make progress against our objectives of accelerating profitable revenue growth and enhancing client experience:

  • We launched the CIBC Mobile Payments App, marking another first for CIBC. Our clients now have an ability to make credit card payments using their smartphone, putting them at the leading edge of a market that will grow significantly in 2013 and beyond;
  • CIBC continues to deliver mobile innovations, offering anytime, anywhere access to banking and financial information, with the launch of a new mobile banking app for President's Choice Financial clients. The new PC Financial Mobile Banking App is compatible with iPhone, iPod touch and iPad, with Android support coming soon;
  • The ongoing conversion of our FirstLine clients into CIBC-branded mortgages continues to exceed our targets;
  • We opened three branches and will open, expand or relocate 23 branches by the end of 2013 to better serve our clients;
  • As the lead sponsor of the CIBC Pan Am and Parapan Am Games, we announced the start of construction for the new CIBC Pan Am and Parapan Am Athletics Stadium at York University. CIBC's objectives for the Pan Am and Parapan Am Games are to inspire a generation of young athletes, enrich our communities, provide significant opportunities for local businesses and leave behind a sustainable legacy; and
  • To enhance financial literacy, we entered into a new partnership with HGTV's Income Property and trusted Canadian real estate expert, Scott McGillivray, to reach consumers who want to better equip themselves with financial know-how prior to home purchases or renovations.

Wealth Management reported net income of $90 million for the first quarter, down $10 million or 10% from the same quarter last year. Excluding a gain of $37 million ($35 million after-tax) relating to an equity-accounted investment in the first quarter of 2012, included as an item of note, net income was up $25 million or 38% from the same quarter last year.

Revenue of $432 million was down $3 million or 1% compared to the first quarter of 2012. Excluding the above-mentioned item of note, revenue was up $34 million or 9% from the same quarter last year.

During the first quarter of 2013, our wealth management business continued its progress in support of our strategic priority to build our wealth management platform:

  • Wealth Management has achieved an all-time high of $223 billion in assets under administration as a result of deepening client relationships and sustained sales momentum in our investment solutions;
  • CIBC Investor's Edge launched a new online interface, providing clients with additional tools and functionality to monitor their investment portfolios;
  • We achieved our strongest quarterly long-term mutual fund net sales results on record with $1.7 billion for the first quarter; and
  • In CIBC Wood Gundy, we continued to invest in our strong technology platform with the launch of the latest portfolio management system to support client relationships through enhanced functionalities and advisor-focused work flow.

Wholesale Banking reported net income of $91 million for the first quarter, down $102 million from the prior quarter. Excluding items of note, which include the settlement related to the Estate of Lehman Brothers Holdings, Inc., adjusted net income was $200(1) million, up $8 million from the prior quarter.

Revenue of $563 million was down $12 million or 2% from the prior quarter, primarily due to lower gains in the structured credit run-off business, partially offset by higher capital markets revenue in fixed income and higher revenue from corporate credit products.

Wholesale Banking had several notable achievements during the first quarter that supported its objective to be the premier client-focused wholesale bank centred in Canada:

  • CIBC acted as lead coordinator for Canada Housing Trust #1's $5.0 billion issuance of 1.7% Canada Mortgage Bonds due December 15, 2017;
  • CIBC acted as joint bookrunner on Husky Energy's $3.2 billion credit facilities; 
  • CIBC acted as financial advisor to GDF Suez on the sale of 60% interest in its Canadian renewable generation portfolio to Mitsui & Co. and a consortium led by Fiera Axium Infrastructure with an enterprise value in excess of $2.0 billion;
  • CIBC acted as joint bookrunner on a $700 million bond offering for Reliance LP;
  • CIBC acted as financial advisor to Penn West on the sale of its 11.7% Net Royalty Interest in its Weyburn Oil Unit to Franco-Nevada for $400 million; and
  • CIBC acted as joint bookrunner of Hudson's Bay Company's $380 million common share initial public offering.

"CIBC delivered solid performance during the first quarter," says Mr. McCaughey. "The investments we are making in our retail and business banking, wealth management and wholesale banking businesses are furthering our strength and positioning us well for the future."

CIBC in our communities
CIBC is committed to supporting causes that matter to our clients, our employees and our communities. During the quarter:

  • CIBC Miracle Day raised a record $4.5 million in donated fees and commissions that will support over 450 children's charities across Canada, and in the U.K. and the U.S.;
  • CIBC's 2012 United Way campaign raised $11.1 million, marking an increase of 30% per cent over last year's total of $8.5 million; and
  • The top student fundraisers in the Canadian Breast Cancer Foundation CIBC Run for the Cure Post Secondary Challenge won $2,500 CIBC Education Awards to help pay for their studies.

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(1) For additional information, see the "Non-GAAP measures" section.

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The information on the following pages forms a part of this press release.

(The board of directors of CIBC reviewed this press release prior to it being issued. CIBC's controls and procedures support the ability of the President and Chief Executive Officer and the Chief Financial Officer of CIBC to certify CIBC's first quarter financial report and controls and procedures. CIBC's CEO and CFO will voluntarily provide to the Securities and Exchange Commission a certification relating to CIBC's first quarter financial information, including the attached unaudited interim consolidated financial statements, and will provide the same certification to the Canadian Securities Administrators.)

Management's discussion and analysis

Management's discussion and analysis (MD&A) is provided to enable readers to assess CIBC's financial condition and results of operations as at and for the quarter ended January 31, 2013, compared with prior quarters. The MD&A should be read in conjunction with our 2012 Annual Report and the unaudited interim consolidated financial statements included in this report. Unless otherwise indicated, all financial information in this MD&A has been prepared in accordance with International Financial Reporting Standards (IFRS or GAAP) and all amounts are expressed in Canadian dollars. This MD&A is current as of February 27, 2013. Additional information relating to CIBC is available on SEDAR at www.sedar.com and on the U.S. Securities and Exchange Commission's (SEC) website at www.sec.gov. No information on CIBC's website (www.cibc.com) should be considered incorporated herein by reference. A glossary of terms used throughout this quarterly report can be found on pages 182 to 185 of our 2012 Annual Report.

External reporting changes

Basel III
We adopted the Office of the Superintendent of Financial Institution's (OSFI) revised Capital Adequacy Requirements (CAR) Guideline effective January 2013.  The revised CAR Guideline reflects the changes to capital requirements, commonly referred to as Basel III, that have been issued by the Basel Committee on Banking Supervision (BCBS). 

A NOTE ABOUT FORWARD-LOOKING STATEMENTS: From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including in this report, in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission and in other communications. These statements include, but are not limited to, statements made in the "Overview - Income taxes", "Overview - Outlook for calendar year 2013", "Review of quarterly financial information", "Capital Resources", "Management of risk - Credit risk", "Management of risk - Market risk", "Management of risk - Liquidity risk", "Management of risk - Operational risk", and "Accounting and control matters" sections of this report and other statements about our operations, business lines, financial condition, risk management, priorities, targets, ongoing objectives, strategies and outlook for 2013 and subsequent periods. Forward-looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate" and other similar expressions or future or conditional verbs such as "will", "should", "would" and "could". By their nature, these statements require us to make assumptions, including the economic assumptions set out in the "Overview - Outlook for calendar year 2013" section of this report, and are subject to inherent risks and uncertainties that may be general or specific. A variety of factors, many of which are beyond our control, affect our operations, performance and results, and could cause actual results to differ materially from the expectations expressed in any of our forward-looking statements. These factors include: credit, market, liquidity, strategic, insurance, operational, reputation and legal, regulatory and environmental risk; the effectiveness and adequacy of our risk management models and processes; legislative or regulatory developments in the jurisdictions where we operate; amendments to, and interpretations of, risk-based capital guidelines and reporting instructions; the resolution of legal proceedings and related matters; the effect of changes to accounting standards, rules and interpretations; changes in our estimates of reserves and allowances; changes in tax laws; changes to our credit ratings; political conditions and developments; the possible effect on our business of international conflicts and the war on terror; natural disasters, public health emergencies, disruptions to public infrastructure and other catastrophic events; reliance on third parties to provide components of our business infrastructure; the accuracy and completeness of information provided to us by clients and counterparties; the failure of third parties to comply with their obligations to us and our affiliates; intensifying competition from established competitors and new entrants in the financial services industry; technological change; global capital market activity; changes in monetary and economic policy; currency value fluctuations; general business and economic conditions worldwide, as well as in Canada, the U.S. and other countries where we have operations; changes in market rates and prices which may adversely affect the value of financial products; our success in developing and introducing new products and services, expanding existing distribution channels, developing new distribution channels and realizing increased revenue from these channels; changes in client spending and saving habits; our ability to attract and retain key employees and executives; our ability to successfully execute our strategies and complete and integrate acquisitions and joint ventures; and our ability to anticipate and manage the risks associated with these factors. This list is not exhaustive of the factors that may affect any of our forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on our forward-looking statements. We do not undertake to update any forward-looking statement that is contained in this report or in other communications except as required by law.


First quarter financial highlights
                           
          2013       2012 (1)     2012  
Unaudited, as at or for the three months ended         Jan. 31       Oct. 31       Jan. 31  
Financial results ($ millions)                            
Net interest income       $ 1,855      $ 1,848      $ 1,842   
Non-interest income         1,326        1,311        1,315   
Total revenue         3,181        3,159        3,157   
Provision for credit losses         265        328        338   
Non-interest expenses         1,987        1,829        1,791   
Income before taxes         929        1,002        1,028   
Income taxes         131        150        193   
Net income       $ 798      $ 852      $ 835   
Net income attributable to non-controlling interests       $     $     $  
  Preferred shareholders         25        29        56   
  Common shareholders         771        821        776   
Net income attributable to equity shareholders       $ 796      $ 850      $ 832   
Financial measures                            
Reported efficiency ratio         62.5  %     57.9  %     56.7  %
Adjusted efficiency ratio (2)         56.1  %     56.5  %     55.3  %
Loan loss ratio (3)         0.42  %     0.53  %     0.54  %
Return on common shareholders' equity         19.9  %     21.7  %     22.4  %
Net interest margin         1.83  %     1.83  %     1.85  %
Net interest margin on average interest-earning assets (4)         2.12  %     2.14  %     2.16  %
Return on average assets (5)         0.79  %     0.85  %     0.84  %
Return on average interest-earning assets (4)(5)         0.91  %     0.99  %     0.98  %
Total shareholder return         7.13  %     8.42  %     2.78  %
Common share information                            
Per share ($)                            
    - basic earnings       $ 1.91      $ 2.02      $ 1.94   
    - reported diluted earnings         1.91        2.02        1.93   
    - adjusted diluted earnings (2)         2.15         2.04        1.97   
    - dividends         0.94        0.94        0.90   
    - book value         38.07        37.48        34.31   
Share price ($)                            
    - high         84.10        78.56        78.00   
    - low         76.70        72.97        68.43   
    - closing         83.20        78.56        76.25   
Shares outstanding (thousands)                            
    - weighted-average basic         403,332        405,404        401,099   
    - weighted-average diluted         403,770        405,844        401,613   
    - end of period         401,960        404,485        402,728   
Market capitalization ($ millions)       $ 33,443      $ 31,776      $ 30,708   
Value measures                            
Dividend yield (based on closing share price)         4.5  %     4.8  %     4.7  %
Reported dividend payout ratio         49.2  %     46.4  %     46.5  %
Adjusted dividend payout ratio(2)         43.7  %     46.1  %     45.5  %
Market value to book value ratio         2.19        2.10        2.22   
On- and off-balance sheet information ($ millions)                            
Cash, deposits with banks and securities       $ 72,656      $ 70,061      $ 71,065   
Loans and acceptances, net of allowance         251,139        252,732        250,719   
Total assets         392,783        393,385        391,449   
Deposits         306,304        300,344        296,137   
Common shareholders' equity         15,303        15,160        13,817   
Average assets         402,313        401,092        396,122   
Average interest-earning assets (4)         347,020        343,840        339,567   
Average common shareholders' equity         15,361        15,077        13,826   
Assets under administration(6)         1,429,049        1,445,870        1,364,509   
Balance sheet quality measures                            
Basel III - Transitional basis                              
  Risk-weighted assets (RWA) ($ billions)       $ 134.8        n/a       n/a  
  Common Equity Tier 1 ratio         11.5  %     n/a       n/a  
  Tier 1 capital ratio         12.4  %     n/a       n/a  
  Total capital ratio         15.3  %     n/a       n/a  
Basel III - All-in basis                            
  RWA ($ billions)       $ 126.4        n/a       n/a  
  Common Equity Tier 1 ratio         9.6  %     n/a       n/a  
  Tier 1 capital ratio         12.0  %     n/a       n/a  
  Total capital ratio         15.3  %     n/a       n/a  
Basel II                            
  RWA ($ billions)         n/a     $ 115.2      $ 111.5   
  Tier 1 capital ratio         n/a       13.8  %     14.3  %
  Total capital ratio         n/a       17.3  %     18.1  %
Other information                            
Retail / wholesale ratio (2)(7)         78 % / 22 %     77 % / 23 %     78 % / 22 %
Full-time equivalent employees (8)         42,793        42,595        42,181   
(1)   Certain amounts have been reclassified to conform to the presentation adopted in the current period.  
(2)   For additional information, see the "Non-GAAP measures" section.  
(3)   The ratio is calculated as the provision for credit losses on impaired loans to average loans and acceptances, net of allowance for credit losses. The provision for credit losses on impaired loans includes provision for: individual allowance; collective allowance on personal, scored small business and mortgages that are greater than 90 days delinquent; and net credit card write-offs.  
(4)   Average interest-earning assets include interest-bearing deposits with banks, securities, securities borrowed or purchased under resale agreements, and loans net of allowances.
(5)   Net income expressed as a percentage of average assets or average interest-earning assets.  
(6)   Includes the full contract amount of assets under administration or custody under a 50/50 joint venture between CIBC and The Bank of New York Mellon.  
(7)   For the purposes of calculating this ratio, Retail includes Retail and Business Banking, Wealth Management, and International banking operations (reported as part of Corporate and Other). The ratio represents the amount of economic capital attributed to these businesses as at the end of the period.
(8)   Full-time equivalent employees is a measure that normalizes the number of full-time and part-time employees, base plus commissioned employees, and 100% commissioned employees into equivalent full time units based on actual hours of paid work during a given period.  
n/a   Not applicable.  
     

Overview

Financial results
Reported net income for the quarter was $798 million, compared to $835 million for the same quarter last year and $852 million for the prior quarter.

Reported diluted earnings per share (EPS) for the quarter was $1.91, compared to $1.93 for the same quarter last year and $2.02 for the prior quarter.

Adjusted diluted EPS(1) for the quarter was $2.15, compared to $1.97 for the same quarter last year and $2.04 for the prior quarter.

Net income was affected by the following items of note:

  • $148 million ($109 million after-tax) loss from the structured credit run-off business, including the charge in respect of a settlement of the U.S. Bankruptcy Court adversary proceeding brought by the Estate of Lehman Brothers Holdings, Inc.(Wholesale Banking);
  • $16 million ($16 million after-tax) gain, net of associated expenses, on the sale of our Hong Kong and Singapore-based private wealth management business (Corporate and Other); and
  • $5 million ($4 million after-tax) amortization of intangible assets ($2 million after-tax in Retail and Business Banking and $2 million after-tax in Corporate and Other).

The above items of note increased revenue by $28 million, non-interest expenses by $165 million, and decreased income tax expenses by $40 million. In aggregate, these items of note decreased net income by $97 million.

(1) For additional information, see the "Non-GAAP measures" section.

Net interest income
Net interest income was up $13 million or 1% from the same quarter last year, primarily due to higher trading-related net interest income, wider retail spreads, and volume growth across most retail products, partially offset by lower treasury-related net interest income.

Net interest income was up $7 million from the prior quarter, primarily due to higher trading-related net interest income and wider retail spreads, largely offset by lower treasury-related net interest income.

Non-interest income
Non-interest income was up $11 million or 1% from the same quarter last year, primarily due to higher mutual fund and credit fees, and higher gains net of write-downs on available-for-sale (AFS) securities, partially offset by lower trading income.  The current quarter had a gain on sale of the private wealth management business as noted above, while the same quarter last year had a gain relating to an equity-accounted investment in our Wealth Management strategic business unit (SBU), also included as an item of note.

Non-interest income was up $15 million or 1% from the prior quarter. The prior quarter included a loss relating to the change in valuation of collateralized derivatives to an overnight index swap (OIS) basis, and a gain on sale of interests in entities in relation to the acquisition of TMX Group Inc. (TMX Group) by Maple Group Acquisition Corporation (Maple), both included as items of note. The current quarter had a gain on sale of the private wealth management business as noted above, higher gains net of write-downs on AFS securities, and higher mutual fund fees, partially offset by lower income from our equity accounted investments, and underwriting and advisory fees.

Provision for credit losses
The provision for credit losses was down $73 million or 22% from the same quarter last year. In Retail and Business Banking, provisions were down due to lower write-offs and bankruptcies in the cards portfolio. In Wholesale Banking, provisions were down due to lower losses in the U.S. real estate finance portfolio. In Corporate and Other, provisions were down due to lower losses in CIBC FirstCaribbean International Bank (CIBC FirstCaribbean) and higher net provision reversals related to collective allowance reported in this segment.

The provision for credit losses was down $63 million or 19% from the prior quarter. In Retail and Business Banking, provisions were down due to lower losses in the business lending portfolio. In Wholesale Banking, provisions were down due to lower losses in the exited U.S. leveraged finance portfolio. In Corporate and Other, provisions were up due to higher losses in CIBC FirstCaribbean, and the provision for collective allowance reported in this segment was comparable to the prior quarter.

Non-interest expenses
Non-interest expenses were up $196 million or 11% compared to the same quarter last year, primarily due to higher expenses in the structured credit run-off business noted above, and higher employee compensation and benefits.

Non-interest expenses were up $158 million or 9% from the prior quarter, primarily due to higher expenses in the structured credit run-off business noted above, and higher employee compensation and benefits, partially offset by lower advertising, computer and office equipment, and occupancy costs.

Income taxes
Income tax expense was down $62 million or 32% from the same quarter last year, primarily due to lower income and higher tax-exempt income.

Income tax expense was down $19 million or 13% from the prior quarter, mainly due to lower income.

In prior years, the Canada Revenue Agency issued reassessments disallowing the deduction of approximately $3.0 billion of the 2005 Enron settlement payments and related legal expenses. The matter is currently in litigation and on December 21, 2011 (and reconfirmed on July 5, 2012), in connection with a motion by CIBC to strike the Crown's replies, the Tax Court of Canada struck certain portions of the replies and directed the Crown to submit amended replies. Both the Crown and CIBC appealed the ruling to the Federal Court of Appeal, and the appeal was heard on November 21, 2012. A decision has not yet been rendered.

Should we successfully defend our tax filing position in its entirety, we would recognize an additional accounting tax benefit of $214 million and taxable refund interest of approximately $187 million. Should we fail to defend our position in its entirety, we would incur an additional tax expense of approximately $866 million and non-deductible interest of approximately $124 million.

Foreign exchange
The estimated impact of U.S. dollar translation on key lines of our interim consolidated statement of income, as a result of changes in average exchange rates, is as follows:

              Jan. 31, 2013     Jan. 31, 2013  
                vs.     vs.  
$ millions, for the three months ended             Jan. 31, 2012     Oct. 31, 2012  
Estimated increase (decrease) in:                      
  Total revenue           $ (7)   $  
  Provision for credit losses                  
  Non-interest expense             (3)      
  Income taxes                  
  Net income             (4)      
Average US$ appreciation (depreciation) relative to C$             (2) %   %
                       

Impact of items of note in prior periods
Net income for the prior quarters was affected by the following items of note:

Q4, 2012

  • $57 million ($32 million after-tax) loan losses in our exited U.S. leveraged finance portfolio (Wholesale Banking);
  • $51 million ($37 million after-tax) gain from the structured credit run-off business (Wholesale Banking);
  • $33 million ($24 million after-tax) loss relating to the change in valuation of collateralized derivatives to the OIS basis ($23 million after-tax in Wholesale Banking and $1 million after-tax in Corporate and Other);
  • $24 million ($19 million after-tax) gain on sale of interests in entities in relation to the acquisition of TMX Group by Maple, net of associated expenses (Wholesale Banking); and
  • $7 million ($6 million after-tax) amortization of intangible assets ($2 million after-tax in Retail and Business Banking and $4 million after-tax in Corporate and Other).

The above items of note increased revenue by $52 million, provision for credit losses by $53 million, non-interest expenses by $21 million, and decreased income tax expenses by $16 million. In aggregate, these items of note decreased net income by $6 million.

Q1, 2012

  • $37 million ($35 million after-tax) gain relating to an equity-accounted investment (Wealth Management);
  • $35 million ($26 million after-tax) loss from the structured credit run-off business (Wholesale Banking); and
  • $9 million ($7 million after-tax) amortization of intangible assets ($2 million after-tax in Retail and Business Banking and $5 million after-tax in Corporate and Other).

The above items of note increased revenue by $10 million, non-interest expenses by $17 million, and decreased income tax expenses by $9 million. In aggregate, these items of note increased net income by $2 million.

In addition, net income attributable to common shareholders was also affected by the following item of note:

  • $18 million premium paid on preferred share redemptions.

Significant events

Lehman Brothers bankruptcy proceedings
During the quarter, CIBC recognized a US$150 million charge (US$110 million after-tax) in respect of the full settlement of the U.S. Bankruptcy Court adversary proceeding brought by the Estate of Lehman Brothers Holdings, Inc. challenging the reduction to zero of our unfunded commitment on a variable funding note. In 2008, we recognized a US$841 million gain on the variable funding note as further detailed in Note 23 of the 2012 consolidated financial statements.

Private wealth management (Asia)
On January 25, 2013, CIBC sold its stand-alone Hong Kong and Singapore-based private wealth management business. This niche advisory and brokerage business, which was included in International banking within Corporate and Other, provided private banking services to a small number of high-net-worth individuals in the Asia-Pacific region and had assets under management of approximately $2 billion. As a result, CIBC recognized a gain, net of associated expenses, of $16 million ($16 million after-tax) during the quarter. CIBC's other businesses in Asia are unaffected by this transaction.

Outlook for calendar year 2013

Moderate economic growth is likely to continue in both Canada and the U.S. in 2013. Real GDP gains are likely to be in the vicinity of 2% in both Canada and the U.S. in the face of soft growth overseas, and ongoing fiscal tightening. We expect European governments will prevent sovereign debt troubles from spilling over into a larger Eurozone banking crisis but fiscal tightening has left Europe in a mild recession. In the U.S., improving household credit fundamentals and continued recovery in home building will help offset the drag from tighter fiscal policy, although the degree of spending cuts remains to be determined.

Canada's economy will benefit from a pick-up in oil output, but will see somewhat less robust domestic demand. Government spending will remain a slight negative for growth as fiscal tightening continues. Consumer demand will be supported by ongoing job creation, but will be held close to income gains as the appetite for credit is held in check by existing high debt levels, even with the Bank of Canada avoiding interest rate increases through 2013. Housing is turning from a strong growth contributor to a slight negative this year as the impact of softer sales shows up in a modest retreat in construction activity.

Retail and Business Banking is expected to face slightly slower growth in demand for mortgages, while consumer credit demand could continue to see limited growth. Demand for business credit should continue at a healthy growth rate. Slightly slower economic growth is unlikely to result in deterioration in household credit quality, with the unemployment rate holding nearly steady.

Wealth Management should see an improvement in demand for equities and other risk assets over the course of 2013 as global uncertainties are gradually resolved.

Wholesale Banking will continue to benefit from a healthy pace of debt financings as both governments and corporations take advantage of low interest rates and robust market conditions. Equity issuance could improve over the course of the year as global growth uncertainties are gradually resolved, a trend that should also support merger activity. Corporate credit demand should be supported by growth in capital spending, although the public debt market and internal cash flows will be a competitive source of funding.


Review of quarterly financial information
                                                         
$ millions, except per share amounts,                                                    
for the three months ended         2013                       2012                 2011
                                                         
          Jan. 31     Oct. 31 (1)   Jul. 31     Apr. 30     Jan. 31     Oct. 31     Jul. 31     Apr. 30
Revenue                                                    
  Retail and Business Banking       $ 2,065    $ 2,036    $ 2,085    $ 2,004    $ 2,029    $ 2,076    $ 2,035    $ 1,932 
  Wealth Management         432      420      401      418      435      396      404      420 
  Wholesale Banking (2)         563      575      527      463      495      561      503      477 
  Corporate and Other (2)         121      128      136      199      198      162      189      186 
Total revenue       $ 3,181    $ 3,159    $ 3,149    $ 3,084    $ 3,157    $ 3,195    $ 3,131    $ 3,015 
Net interest income       $ 1,855    $ 1,848    $ 1,883    $ 1,753    $ 1,842    $ 1,776    $ 1,785    $ 1,731 
Non-interest income         1,326      1,311      1,266      1,331      1,315      1,419      1,346      1,284 
Total revenue         3,181      3,159      3,149      3,084      3,157      3,195      3,131      3,015 
Provision for credit losses         265      328      317      308      338      306      310      245 
Non-interest expenses         1,987      1,829      1,831      1,764      1,791      1,920      2,005      1,756 
          929      1,002      1,001      1,012      1,028      969      816      1,014 
Income taxes         131      150      160      201      193      212      225      247 
Net income       $ 798    $ 852    $ 841    $ 811    $ 835    $ 757    $ 591    $ 767 
Net income attributable to:                                                    
  Non-controlling interests       $   $   $   $   $   $   $   $
  Equity shareholders           796      850      839      810      832      754      589      764 
Earnings per share                                                    
    - basic       $ 1.91    $ 2.02    $ 2.00    $ 1.90    $ 1.94    $ 1.80    $ 1.35    $ 1.83 
    - diluted         1.91      2.02      2.00      1.90      1.93      1.79      1.33      1.80 
(1)   Certain amounts have been reclassified to conform to the presentation adopted in the current period.  
(2)   Wholesale Banking revenue and income taxes are reported on a taxable equivalent basis (TEB) with an equivalent offset in the revenue and income taxes of Corporate and Other.  
     

Our quarterly results are modestly affected by seasonal factors. The second quarter has fewer days as compared with the other quarters, generally leading to lower earnings. The summer months (July - third quarter and August - fourth quarter) typically experience lower levels of capital markets activity, which affects our brokerage, investment management, and wholesale banking activities.

Revenue
Retail and Business Banking revenue has benefitted from volume growth across most retail products, offset to some extent by the continued low interest rate environment and attrition in our exited FirstLine mortgage business.

Wealth Management revenue has benefitted from continued strong net sales of long-term mutual funds and higher average assets under management. Income from our proportionate share in American Century Investments (ACI) is included from September 1, 2011 and a gain related to this equity-accounted investment was included in the first quarter of 2012.

Wholesale Banking revenue is influenced to a large extent by capital market conditions. Revenue had been adversely affected by losses in the structured credit run-off business up to the third quarter of 2012, while the fourth quarter included a gain. The second quarter of 2012 included the hedge accounting loss on leveraged leases. The fourth quarter of 2012 included a gain on sale of interests in entities in relation to the acquisition of TMX Group by Maple and a loss relating to the change in valuation of collateralized derivatives to an OIS basis.

Corporate and Other had lower unallocated treasury revenue in the second half of 2012 and first quarter of 2013. The current quarter also included a gain on sale of the private wealth management business (Asia).

Provision for credit losses
The provision for credit losses is dependent upon the credit cycle in general and on the credit performance of the loan portfolios. Losses in the cards portfolio improved in 2012 and the first quarter of 2013. Wholesale Banking provisions declined in the second and third quarters of 2011, while the fourth quarter of 2011 had higher losses in the exited European leveraged finance portfolio. During 2012, we had higher losses in U.S. real estate finance and the exited U.S. leveraged finance portfolio.

Non-interest expenses
Non-interest expenses have fluctuated over the period largely due to changes in employee compensation and benefits, including pension expense. An impairment loss relating to CIBC FirstCaribbean goodwill was recognized in the third quarter of 2011. The current quarter had higher expenses in the structured credit run-off business.

Income taxes
Income taxes vary with changes in income subject to tax, and the jurisdictions in which the income is earned. Taxes can also be affected by the impact of significant items. Tax-exempt income has been trending higher since the second quarter of 2011. The above-noted impairment loss relating to CIBC FirstCaribbean goodwill was not tax-effected.

Non-GAAP measures

We use a number of financial measures to assess the performance of our business lines. Some measures are calculated in accordance with GAAP (IFRS), while other measures do not have a standardized meaning under GAAP, and accordingly, these measures may not be comparable to similar measures used by other companies. Investors may find these non-GAAP measures useful in analyzing financial performance. For a more detailed discussion on our non-GAAP measures, see page 19 of the 2012 Annual Report.

The following table provides a reconciliation of non-GAAP to GAAP measures related to CIBC on a consolidated basis.

                    2013       2012       2012  
$ millions, as at or for the three months ended                 Jan. 31       Oct. 31       Jan. 31  
Reported and adjusted diluted EPS                                    
Reported net income attributable to diluted common shareholders       A       $ 771      $ 821      $ 776   
Adjusting items:                                    
  After-tax impact of items of note(1)                 97              16   
Adjusted net income attributable to diluted common shareholders (2)       B       $ 868      $ 827      $ 792   
Reported diluted weighted-average common shares outstanding (thousands)       C         403,770        405,844        401,613   
Reported diluted EPS ($)       A/C       $ 1.91      $ 2.02      $ 1.93   
Adjusted diluted EPS ($) (2)       B/C         2.15        2.04        1.97   
Reported and adjusted efficiency ratio                                    
Reported total revenue       D       $ 3,181      $ 3,159      $ 3,157   
Adjusting items:                                    
  Pre-tax impact of items of note(1)                 (28)       (52)       (10)  
  TEB                 92        92        57   
Adjusted total revenue (2)       E       $ 3,245      $ 3,199      $ 3,204   
Reported non-interest expenses       F       $ 1,987      $ 1,829      $ 1,791   
Adjusting items:                                    
  Pre-tax impact of items of note(1)                 (165)       (21)       (17)  
Adjusted non-interest expenses (2)       G       $ 1,822      $ 1,808      $ 1,774   
Reported efficiency ratio       F/D         62.5  %     57.9  %     56.7  %
Adjusted efficiency ratio (2)       G/E         56.1  %     56.5  %     55.3  %
Reported and adjusted dividend payout ratio                                    
Reported net income attributable to common shareholders       H       $ 771        821        776   
Adjusting items:                                    
  After-tax impact of items of note(1)                 97              16   
Adjusted net income attributable to common shareholders (2)       I       $ 868      $ 827      $ 792   
Dividends paid to common shareholders       J       $ 379      $ 381      $ 360   
Reported dividend payout ratio       J/H         49.2  %     46.4  %     46.5  %
Adjusted dividend payout ratio (2)       J/I         43.7  %     46.1  %     45.5  %
 
   

$ millions, for the three months ended Retail and
Business
Banking
Wealth
Management
Wholesale
Banking
Corporate
and Other
CIBC
Total
Jan. 31 Reported net income $  611  $  90  $  91  $  6  $  798 
2013 Adjusting items:                    
      After-tax impact of items of note(1)    2     -     109    (14)    97 
    Adjusted net income(2) $  613  $  90  $  200  $ (8) $  895 
Oct. 31 Reported net income $  569  $  84  $  193  $  6  $  852 
2012 Adjusting items:                    
      After-tax impact of items of note(1)    2     -    (1)    5     6 
    Adjusted net income(2) $  571  $  84  $  192  $  11  $  858 
Jan. 31 Reported net income $  567  $  100  $  133  $  35  $  835 
2012 Adjusting items:                    
      After-tax impact of items of note(1)    2    (35)    26     5    (2)
    Adjusted net income(2) $  569  $  65  $  159  $  40  $  833 
(1) Reflects impact of items of note under "Financial results" section.
(2) Non-GAAP measure.

 

Strategic business units overview

CIBC has three SBUs - Retail and Business Banking, Wealth Management and Wholesale Banking. These SBUs are supported by six functional groups - Technology and Operations, Corporate Development, Finance, Treasury, Administration, and Risk Management, which form part of Corporate and Other. The revenue, expenses and balance sheet resources of these functional groups are generally allocated to the business lines within the SBUs. Corporate and Other also includes our International banking operations comprising mainly CIBC FirstCaribbean, strategic investments in the CIBC Mellon joint ventures and The Bank of N.T. Butterfield & Son Limited, and other income statement and balance sheet items not directly attributable to the business lines. The key methodologies and assumptions used in reporting financial results of our SBUs are provided on page 22 of the 2012 Annual Report.

Retail and Business Banking

Retail and Business Banking provides clients across Canada with financial advice, banking, investment, and authorized insurance products and services through a strong team of advisors and more than 1,100 branches, as well as our ABMs, mobile sales force, and telephone, online and mobile banking.

Results (1)                                
                                   
                2013       2012       2012  
$ millions, for the three months ended             Jan. 31       Oct. 31       Jan. 31  
Revenue                                
  Personal banking           $ 1,623      $ 1,616      $ 1,563   
  Business banking             380        378        373   
  Other             62        42        93   
Total revenue             2,065        2,036        2,029   
Provision for credit losses             241        255        281   
Non-interest expenses             1,021        1,030        996   
Income before taxes             803        751        752   
Income taxes             192        182        185   
Net income           $ 611      $ 569      $ 567   
Net income attributable to:                                
  Equity shareholders (a)           $ 611      $ 569      $ 567   
Efficiency ratio             49.4  %     50.6  %     49.1  %
Return on equity (2)             58.3  %     57.1  %     58.2  %
Charge for economic capital (2)(b)           $ (132)     $ (126)     $ (130)  
Economic profit (2)(a+b)           $ 479      $ 443      $ 437   
Full-time equivalent employees             22,063        21,857        21,706   
(1)   For additional segmented information, see the notes to the interim consolidated financial statements.  
(2)   For additional information, see the "Non-GAAP measures" section.
     

Financial overview
Net income for the quarter was $611 million, up $44 million or 8% from the same quarter last year, primarily due to lower provision for credit losses and higher revenue, partially offset by higher non-interest expenses.

Net income was up $42 million or 7% compared to the prior quarter, primarily due to higher revenue and lower provision for credit losses.

Revenue
Revenue was up $36 million or 2% from the same quarter last year.

Personal banking revenue was up $60 million or 4%, primarily due to volume growth across most products and wider spreads.

Business banking revenue was up $7 million or 2%, primarily due to volume growth and higher fees, partially offset by narrower spreads.

Other revenue was down $31 million mainly due to lower treasury allocations.

Revenue was up $29 million or 1% from the prior quarter.

Personal banking revenue was up $7 million, primarily due to volume growth.

Business banking revenue was comparable to the prior quarter.

Other revenue was up $20 million due to higher treasury allocations.

Provision for credit losses
Provision for credit losses was down $40 million or 14% from the same quarter last year due to lower write-offs and bankruptcies in the cards portfolio.

Provision for credit losses was down $14 million or 5% from the prior quarter, mainly due to lower losses in the business lending portfolio.

Non-interest expenses
Non-interest expenses were up $25 million or 3% from the same quarter last year, primarily due to increased spending on strategic business initiatives.

Non-interest expenses were down $9 million or 1% from the prior quarter, primarily due to lower advertising costs.

Income taxes
Income taxes were up $7 million or 4% from the same quarter last year due to higher income.

Income taxes were up $10 million or 5% from the prior quarter due to higher income.

Aeorplan Agreement
CIBC and Aimia Canada Inc. (Aimia) are parties to an agreement (the Aeroplan Agreement) pursuant to which CIBC pays Aimia for Aeroplan miles credited to participating CIBC cardholders' accounts, based on the value of the cardholders' purchases using such cards. The Aeroplan Agreement will expire on December 31, 2013 unless extended by the parties or replaced in accordance with its terms. CIBC has engaged in periodic extension discussions with Aimia but is also exploring alternatives to extending the Aeroplan Agreement. At this stage, there can be no assurance that the Aeroplan Agreement will be extended.

Wealth Management

Wealth Management provides relationship-based advisory services and an extensive suite of leading investment solutions to meet the needs of institutional, retail and high net worth clients. Our asset management, retail brokerage and private wealth management businesses combine to create an integrated offer, delivered through nearly 1,500 advisors across Canada.

Results (1)                                
                                 
                2013       2012         2012  
$ millions, for the three months ended             Jan. 31       Oct. 31       Jan. 31  
Revenue                                
  Retail brokerage           $ 259      $ 256      $ 249   
  Asset management             144        138        162   
  Private wealth management             29        26        24   
Total revenue             432        420        435   
Non-interest expenses             315        308        312   
Income before taxes             117        112        123   
Income taxes             27        28        23   
Net income           $ 90      $ 84      $ 100   
Net income attributable to:                                
  Equity shareholders (a)           $ 90      $ 84      $ 100   
Efficiency ratio             73.0  %     73.4  %     71.7  %
Return on equity (2)             19.1  %     18.9  %     24.5  %
Charge for economic capital (2)(b)           $ (58)     $ (55)     $ (52)  
Economic profit (2)(a+b)           $ 32      $ 29      $ 48   
Full-time equivalent employees             3,765        3,783        3,721   
(1)   For additional segmented information, see the notes to the interim consolidated financial statements.
(2)   For additional information, see the "Non-GAAP measures" section.
     

Financial overview
Net income for the quarter was $90 million, a decrease of $10 million or 10% from the same quarter last year due to a gain relating to an equity-accounted investment in the first quarter of 2012 included as an item of note. Excluding this gain, revenue was higher across all lines of business.

Net income was up $6 million or 7% compared to the prior quarter, primarily due to higher revenue, partially offset by higher non-interest expenses.

Revenue
Revenue was down $3 million or 1% compared to the same quarter last year.

Retail brokerage revenue was up $10 million or 4%, primarily due to higher fee-based revenue.

Asset management revenue was down $18 million or 11%, primarily due to a gain in the same quarter last year noted above, partially offset by higher client assets under management driven by higher long-term net sales of mutual funds and improved capital markets.

Private wealth management revenue was up $5 million or 21%, mainly due to higher assets under management driven by client growth, including the impact of the acquisition of the MFS McLean Budden private wealth management business in September 2012.

Revenue was up $12 million or 3% from the prior quarter.

Retail brokerage revenue was up $3 million or 1%, primarily due to higher commissions from equity trading and fee-based revenue.

Asset management revenue was up $6 million or 4%, primarily due to higher client assets under management driven by higher long-term net sales of mutual funds and improved capital markets.

Private wealth management revenue was up $3 million or 12%, mainly due to higher assets under management, including a full quarter impact of the acquisition noted above.

Non-interest expenses
Non-interest expenses were up $3 million or 1% from the same quarter last year, and up $7 million or 2% from the prior quarter, primarily due to higher performance-based compensation.

Income taxes
Income taxes were up $4 million from the same quarter last year mainly due to a lower tax rate on the gain discussed above.

Income taxes were comparable to the prior quarter.

Wholesale Banking

Wholesale Banking provides a wide range of credit, capital markets, investment banking and research products and services to government, institutional, corporate and retail clients in Canada and in key markets around the world.

Results (1)                                
                                   
                2013       2012       2012  
$ millions, for the three months ended             Jan. 31       Oct. 31       Jan. 31  
Revenue                                
  Capital markets           $ 328      $ 295      $ 307   
  Corporate and investment banking             213        206        197   
  Other             22        74        (9)  
Total revenue (2)             563        575        495   
Provision for credit losses             10        66        26   
Non-interest expenses             445        263        289   
Income before taxes             108        246        180   
Income taxes (2)             17        53        47   
Net income           $ 91      $ 193      $ 133   
Net income attributable to:                                
  Equity shareholders (a)           $ 91      $ 193      $ 133   
Efficiency ratio (2)             79.0  %     45.7  %     58.3  %
Return on equity (3)             16.3  %     35.0  %     26.5  %
Charge for economic capital (3)(b)           $ (68)     $ (70)     $ (65)  
Economic profit (3)(a+b)           $ 23      $ 123      $ 68   
Full-time equivalent employees             1,261        1,268        1,214   
(1)   For additional segmented information, see the notes to the interim consolidated financial statements.
(2)   Revenue and income taxes are reported on a TEB basis. Accordingly, revenue and income taxes include a TEB adjustment of $92 million for the three months ended January 31, 2013 ($92 million for the three months ended October 31, 2012 and $57 million for the three months ended January 31, 2012).  The equivalent amounts are offset in the revenue and income taxes of Corporate and Other.
(3)   For additional information, see the "Non-GAAP measures" section.
     

Financial overview
Net income for the quarter was $91 million, down $42 million from the same quarter last year, mainly due to higher non-interest expenses, partially offset by higher revenue, a lower provision for credit losses and lower income taxes.

Net income was down $102 million from the prior quarter, mainly due to higher non-interest expenses, partially offset by a lower provision for credit losses.

Revenue
Revenue was up $68 million or 14% from the same quarter last year.

Capital markets revenue was up $21 million, primarily due to higher revenue from equity derivatives and a reversal of a credit valuation adjustment (CVA) charge against credit exposures to derivative counterparties (other than financial guarantors), partially offset by lower foreign exchange and commodities trading revenue.

Corporate and investment banking revenue was up $16 million as higher revenue from corporate credit products was partially offset by lower revenue from U.S. real estate finance.

Other revenue was up $31 million, primarily due to gains in the structured credit run-off business in the current quarter compared to losses in the prior year quarter.

Revenue was down $12 million or 2% from the prior quarter.

Capital markets revenue was up $33 million, mainly due to higher revenue from fixed income and a reversal of the CVA charge noted above, partially offset by lower revenue from equity derivatives trading.  The prior quarter included a loss relating to the change in valuation of collateralized derivatives to an OIS basis, which was partially offset by a gain on the sale of an interest in an entity in relation to the acquisition of TMX Group by Maple, both included as items of note.

Corporate and investment banking revenue was up $7 million, primarily due to higher investment portfolio gains and higher revenue from corporate credit products, partially offset by lower revenue from U.S. real estate finance.

Other revenue was down $52 million from the prior quarter, primarily due to lower gains in the structured credit run-off business.

Provision for credit losses
Provision for credit losses was down $16 million from the same quarter last year due to lower losses in the U.S. real estate finance portfolio, and down $56 million from the prior quarter due to lower losses in the exited U.S. leveraged finance portfolio.

Non-interest expenses
Non-interest expenses were up $156 million or 54% from the same quarter last year, due to higher expenses in the structured credit run-off business related to the charge in respect of a settlement of the U.S. Bankruptcy Court adversary proceeding brought by the Estate of Lehman Brothers Holdings, Inc. (refer to "Structured credit run-off business" section for further details).

Non-interest expenses were up $182 million or 69% from the prior quarter, primarily due to higher expenses in the structured credit run-off business as noted above, and higher performance-based compensation.

Income taxes
Income tax expense for the quarter was $30 million lower than the prior year quarter, primarily due to lower income in the current quarter.

Income tax expense was $36 million lower than the prior quarter, primarily due to lower income in the current quarter.

Structured credit run-off business

The results of the structured credit run-off business are included in the Wholesale Banking SBU.

Results                            
                             
                2013     2012     2012  
$ millions, for the three months ended             Jan. 31     Oct. 31     Jan. 31  
Net interest income (expense)           $ (14)   $ (19)   $ (15)  
Trading income (loss)              18      31      (8)  
FVO losses             (3)     (1)     (5)  
Other income                 42       
Total revenue                 53      (27)  
Non-interest expenses             154           
Income (loss) before taxes             (148)     51      (35)  
Income taxes             (39)     14      (9)  
Net income (loss)           $ (109)   $ 37    $ (26)  
                             

The net loss for the quarter was $109 million (US$110 million), compared with $26 million (US$26 million) for the same quarter last year and net income of $37 million (US$37 million) for the prior quarter.

The net loss for the quarter was mainly due to a charge in respect of a settlement of the U.S. Bankruptcy Court adversary proceeding brought by the Estate of Lehman Brothers Holdings, Inc., a decrease in the value of receivables related to protection purchased from financial guarantors (on loan assets that are carried at amortized cost), resulting from an increase in the mark-to-market (MTM) of the underlying positions, and net interest expense, partially offset by a CVA gain relating to financial guarantors and gains on unhedged positions.

Position summary
The following table summarizes our positions within our structured credit run-off business:

                                  Written credit                        
                                derivatives, liquidity     Credit protection purchased from
US$ millions, as at January 31, 2013     Investments and loans (1)   and credit facilities     Financial guarantors     Other counterparties
              Fair                                                
              value of     Fair     Carrying                                    
              trading,     value of     value of           Fair                        
              AFS     securities     securities           value of           Fair value           Fair value
              and FVO     classified     classified           written credit           net of           net of
        Notional     securities     as loans     as loans     Notional     derivatives     Notional     CVA     Notional     CVA
USRMM - CDO     $   $   $   $   $ 278    $ 231    $   $   $ 278    $ 232 
CLO       3,804          3,634      3,627      3,129      60      6,031      87      267     
Corporate debt                       4,977      38              4,977      42 
Other       865      559      51      54      641      69      287      27      26     
Unmatched                               134      112      374     
      $ 4,669    $ 559    $ 3,685    $ 3,681    $ 9,025    $ 398    $ 6,452    $ 226    $ 5,922    $ 281 
October 31, 2012     $ 4,742    $ 564    $ 3,731    $ 3,749    $ 9,035    $ 455    $ 6,492    $ 269    $ 5,926    $ 316 
(1)   Excluded from the table above are equity and surplus note AFS securities that we obtained in consideration for commutation of our U.S. residential mortgage market (USRMM) contracts with financial guarantors. The equity securities had a carrying value of US$8 million (October 31, 2012: US$9 million) and the surplus notes had a notional value of US$140 million (October 31, 2012: US$140 million) and a carrying value of US$12 million (October 31, 2012: US$12 million).
     

USRMM - collateralized debt obligation (CDO)
Our net USRMM position, consisting of a written credit derivative, amounted to US$47 million. This position was hedged through protection purchased from a large U.S.-based diversified multinational insurance and financial services company with which we have market-standard collateral arrangements.

Collateralized loan obligation (CLO)
CLO positions consist of super senior tranches of CLOs backed by diversified pools of primarily U.S. (62%) and European-based (36%) senior secured leveraged loans. As at January 31, 2013, approximately 22% of the total notional amount of the CLO tranches was rated equivalent to AAA, 72% was rated between the equivalent of AA+ and AA-, and the remainder was the equivalent of A. As at January 31, 2013, approximately 17% of the underlying collateral was rated equivalent to BB- or higher, 53% was rated between the equivalent of B+ and B-, 7% was rated equivalent to CCC+ or lower, with the remainder unrated. The CLO positions have a weighted-average life of 2.7 years and average subordination of 30%.

Corporate debt
Corporate debt exposure consists of a large matched super senior derivative, where CIBC has purchased and sold credit protection on the same reference portfolio. The reference portfolio consists of highly diversified, predominantly investment grade corporate credit. Claims on these contracts do not occur until cumulative credit default losses from the reference portfolio exceed 30% during the 47 month term of the contract. On this reference portfolio, we have sold protection to an investment dealer.

Other
Our significant positions in Other, as at January 31, 2013, include:

  • US$214 million notional value of CDOs consisting of trust preferred securities (TruPs) collateral, which are Tier I Innovative Capital Instruments issued by U.S. regional banks and insurers. These securities are classified as FVO securities and had a fair value of US$167 million;
  • US$167 million notional value of trading securities with a fair value of US$135 million, and US$292 million notional value of written protection with a fair value of US$67 million, on inflation-linked notes, and CDO tranches with collateral consisting of high-yield corporate debt portfolios, TruPs and non-U.S. residential mortgage-backed securities, with 55% rated between the equivalent of A+ and A-, 36% rated between the equivalent of BBB+ and BBB-, and the majority of the remaining rated equivalent of BB+ or lower;
  • US$58 million notional value of an asset-backed security (ABS) classified as a loan, with fair value of US$49 million and carrying value of US$52 million;
  • Variable rate Class A-1/A-2 notes classified as trading securities with a notional value of US$290 million and a fair value of US$247 million, tracking notes classified as AFS with a notional value of US$10 million and a fair value of US$2 million, and loans with a notional value of US$59 million and fair value and carrying value of nil. These notes were originally received in exchange for our non-bank sponsored asset-backed commercial paper (ABCP) in January 2009, upon the ratification of the Montreal Accord restructuring; and
  • US$296 million of undrawn Margin Funding Facility related to the Montreal Accord restructuring.

Unmatched
The underlyings in our unmatched positions are a reference portfolio of corporate debt and a loan backed by film receivables.

Credit protection purchased from financial guarantors and other counterparties
The following table presents the notional amounts and fair values of credit protection purchased from financial guarantors and other counterparties by counterparty credit quality, based on external credit ratings (Standard & Poor's (S&P) and/or Moody's Investors Service (Moody's)), and the underlying referenced assets. Excluded from the table below are certain performing loans and tranched securities positions in our continuing businesses, with a total notional amount of approximately US$60 million, which are partly secured by direct guarantees from financial guarantors or by bonds guaranteed by financial guarantors.

                                          Credit protection purchased
                                          from financial guarantors
            Notional amounts of referenced assets   and other counterparties
                Corporate     CDO -               Total     Fair value           Fair value
US$ millions as at January 31, 2013         CLO     debt     USRMM     Other   Unmatched     notional     before CVA     CVA     net of CVA
Financial guarantors (1)                                                        
  Investment grade       $ 3,697    $   $   $ 57  $ 134    $ 3,888    $ 223    $ (37)   $ 186 
  Non-investment grade         75              177        252      35      (21)     14 
  Unrated         2,259              53        2,312      50      (24)     26 
            6,031              287    134      6,452      308      (82)     226 
Other counterparties (1)                                                        
  Investment grade         267      20      278      26        591      238          240 
  Unrated             4,957            374      5,331      41          41 
            267      4,977      278      26    374      5,922      279          281 
        $ 6,298    $ 4,977    $ 278    $ 313  $ 508    $ 12,374    $ 587    $ (80)   $ 507 
October 31, 2012       $ 6,284    $ 4,968    $ 298    $ 356  $ 512    $ 12,418    $ 692    $ (107)   $ 585 
(1)     In cases where one credit rating agency does not provide a rating, the classification in the table is based on the rating provided by the other agency. Where ratings differ between agencies, we use the lower rating.
   

The unrated other counterparties are primarily two Canadian conduits. These conduits are in compliance with their collateral posting arrangements and have posted collateral exceeding current market exposure. The fair value of the collateral as at January 31, 2013 was US$360 million relative to US$41 million of net exposure.

Lehman Brothers bankruptcy proceedings
During the quarter, CIBC recognized a US$150 million charge (US$110 million after-tax) in respect of the full settlement of the U.S. Bankruptcy Court adversary proceeding brought by the Estate of Lehman Brothers Holdings, Inc. challenging the reduction to zero of our unfunded commitment on a variable funding note. In 2008, we recognized a US$841 million gain on the variable funding note as further detailed in Note 23 of the 2012 consolidated financial statements.

Corporate and Other

Corporate and Other includes the six functional groups - Technology and Operations, Corporate Development, Finance, Treasury, Administration, and Risk Management - that support CIBC's SBUs. The revenue, expenses and balance sheet resources of these functional groups are generally allocated to the business lines within the SBUs. Corporate and Other also includes our International banking operations comprising mainly CIBC FirstCaribbean, strategic investments in the CIBC Mellon joint ventures and The Bank of N.T. Butterfield & Son Limited, and other income statement and balance sheet items not directly attributable to the business lines.

Results (1)                                
                                 
                2013       2012       2012
$ millions, for the three months ended               Jan. 31       Oct. 31       Jan. 31
Revenue                                
  International banking           $   163    $   149    $   148 
  Other               (42)       (21)       50 
Total revenue (2)               121        128        198 
Provision for credit losses               14              31 
Non-interest expenses               206        228        194 
Income (loss) before taxes               (99)       (107)       (27)
Income taxes (2)               (105)       (113)       (62)
Net income           $     $     $   35 
Net income attributable to:                                
  Non-controlling interests           $     $     $  
  Equity shareholders                           32 
Full-time equivalent employees               15,704        15,687        15,540 
(1)    For additional segmented information, see the notes to the interim consolidated financial statements.  
(2)    TEB adjusted. See footnote 2 in "Wholesale Banking" section for additional details.
     

Financial overview
Net income for the quarter was $6 million, down $29 million from the same quarter last year primarily due to lower revenue.

Net income was comparable to the prior quarter.

Revenue
Revenue was down $77 million or 39% from the same quarter last year.

International banking revenue was up $15 million or 10% from the same quarter last year, primarily due to a gain on sale of the private wealth management business, included as an item of note.

Other revenue was down $92 million from the same quarter last year due to lower unallocated treasury revenue and a higher TEB adjustment.

Revenue was down $7 million or 5% from the prior quarter.

International banking revenue was up $14 million or 9% from the prior quarter, primarily due to a gain on sale of the private wealth management business noted above.

Other revenue was down $21 million from the prior quarter, primarily due to lower unallocated treasury revenue and lower income from equity-accounted investments.

Provision for credit losses
Provision for credit losses was down $17 million compared to the same quarter last year, mainly due to lower losses in CIBC FirstCaribbean and higher provision reversals of collectively assessed credit losses relating to the cards and commercial banking portfolios, partially offset by higher provision in the personal lending portfolio.

Provision for credit losses was up $7 million from the prior quarter, mainly due to higher losses in CIBC FirstCaribbean. Net higher provision reversals of collectively assessed credit losses relating to the cards portfolio were offset by higher provision in the personal lending portfolio.

Non-interest expenses
Non-interest expenses were up $12 million or 6% from the same quarter last year, mainly due to higher unallocated corporate support costs.

Non-interest expenses were down $22 million or 10% from the prior quarter, mainly due to lower unallocated corporate support costs.

Income taxes
Income tax benefit was up $43 million from the same quarter last year, primarily due to a higher TEB adjustment.

Income tax benefit was down $8 million from the prior quarter.

Financial condition

Review of condensed consolidated balance sheet

          2013       2012
$ millions, as at         Jan. 31       Oct. 31
Assets                  
Cash and deposits with banks       $ 5,636      $ 4,727 
Securities         67,020        65,334 
Securities borrowed or purchased under resale agreements         29,058        28,474 
Loans and acceptances, net of allowance         251,139        252,732 
Derivative instruments         25,085        27,039 
Other assets         14,845        15,079 
        $ 392,783      $ 393,385 
Liabilities and equity                  
Deposits       $ 306,304      $ 300,344 
Capital Trust securities         1,669        1,678 
Obligations related to securities lent or sold short or under repurchase agreements         18,289        21,259 
Derivative instruments         24,551        27,091 
Other liabilities         20,004        21,152 
Subordinated indebtedness         4,791        4,823 
Equity         17,175        17,038 
        $ 392,783      $ 393,385 
                   

Assets
As at January 31, 2013, total assets were down $602 million from October 31, 2012.

Cash and deposits with banks increased by $909 million or 19% mostly due to higher treasury deposit placements.

Securities increased by $1.7 billion or 3%, with increases in both AFS securities and trading securities. AFS securities increased mainly in government-issued or guaranteed securities. Trading securities increased largely in the equity portfolios.

Net loans and acceptances decreased by $1.6 billion. Residential mortgages were down $1.1 billion, primarily due to attrition in our FirstLine mortgage business, partially offset by new mortgage originations through CIBC channels. Personal loans were down $556 million and credit card loans were down $330 million due to net repayments. Business and government loans and acceptances were up $348 million due to growth in our domestic and international portfolios.

Derivative instruments decreased by $2.0 billion or 7% largely driven by valuation of interest rate derivatives.

Other assets decreased by $234 million or 2%, mainly due to a decrease in collateral pledged for derivatives, partially offset by an increase in income taxes receivable as a result of payments made in the quarter.

Liabilities
As at January 31, 2013, total liabilities were down $739 million from October 31, 2012.

Deposits increased by $6.0 billion or 2%, primarily driven by business and government and personal volume growth.

Obligations related to securities lent or sold short or under repurchase agreements decreased by $3.0 billion or 14%, primarily due to client-driven activities.

Derivative instruments decreased by $2.5 billion or 9% due to the valuation of interest rate derivatives.

Other liabilities decreased by $1.1 billion or 5%, mainly due to lower acceptances and accrued liabilities.

Equity
As at January 31, 2013, equity increased by $137 million or 1%, primarily due to a net increase in retained earnings, and the issuance of common shares pursuant to the stock option, shareholder investment, and employee share purchase plans (ESPP). These were offset in part by common shares purchased for cancellation, as explained in the "Significant capital management activity" section below.

Capital resources

We actively manage our capital to maintain a strong and efficient capital base, to maximize risk-adjusted returns to shareholders, and to meet regulatory requirements. For additional details on capital resources, see pages 35 to 39 of the 2012 Annual Report.

Basel III and revisions to regulatory capital requirements
Our regulatory capital requirements are determined in accordance with guidelines issued by OSFI.

On December 10, 2012, OSFI issued the final version of revisions to its guidelines for capital adequacy in Canada which incorporate the adoption of the significant capital reforms, referred to as Basel III, issued by the BCBS. The most significant aspects of the reforms are measures to improve the quality of capital and increase capital requirements for the global financial system. These measures are discussed further on page 37 of the 2012 Annual Report.

OSFI expects all institutions to establish target capital ratios that meet or exceed the 2019 all-in (i) minimum ratios plus conservation buffer early in the transition period. For the Common Equity Tier 1 ratio, the target is 7% by the first quarter of 2013. The targets for the Tier 1 capital ratio and Total capital ratio are 8.5% and 10.5%, respectively, to be established by the first quarter of 2014. These targets may be higher for certain institutions or groups of institutions if OSFI feels the circumstances warrant it.

OSFI's capital adequacy guidelines provide for a deferral of the additional capital charge to cover credit valuation charges for bilateral OTC derivatives to January 1, 2014.  The delay provides for a coordinated start on the implementation of this new requirement with other significant jurisdictions

Regulatory capital

Our capital ratios and assets-to-capital multiple (ACM) are presented in the following table:

                          2013       2012  
$ millions, as at                       Jan. 31 (1)     Oct. 31 (1)
Basel III- Transitional basis                                  
Common Equity Tier 1 capital                     $ 15,556        n/a  
Tier 1 capital                       16,718        n/a  
Total capital                       20,689        n/a  
RWA                       134,821        n/a  
Common Equity Tier 1 ratio                       11.5  %     n/a  
Tier 1 capital ratio                       12.4  %     n/a  
Total capital ratio                       15.3  %     n/a  
ACM                       17.9  x     n/a  
Basel III- All-in basis                                  
Common Equity Tier 1 capital                     $ 12,077        n/a  
Tier 1 capital                       15,179        n/a  
Total capital                       19,352        n/a  
RWA                       126,366        n/a  
Common Equity Tier 1 ratio                       9.6  %     n/a  
Tier 1 capital ratio                       12.0  %     n/a  
Total capital ratio                       15.3  %     n/a  
Basel II                                  
Tier 1 capital                       n/a     $ 15,940  (2)
Total capital                       n/a       19,924  (2)
RWA                       n/a       115,229   
Tier 1 capital ratio                       n/a       13.8  %
Total capital ratio                       n/a       17.3  %
ACM                       n/a       17.4  x
(1)   Capital measures for fiscal year 2013 are based on Basel III whereas prior period measures are based on Basel II.
(2)   Incorporates OSFI's IFRS transitional relief election.  
n/a   Not applicable.   
     

Effective in the first quarter of 2013, regulatory capital requirements are based on the Basel III methodology, while requirements for the fourth quarter of 2012 were determined on a Basel II basis. As a result of the change in methodology, the regulatory capital information at October 31, 2012 and January 31, 2013 is not comparable.

All-in basis(i)
On an all-in basis(i) under Basel III, regulatory adjustments are deducted from common equity for the purpose of calculating the new Common Equity Tier 1 ratio. The regulatory adjustments include a broad range of items, such as goodwill, intangible assets, pension assets, deferred tax assets and equity investments in financial entities subject to investment thresholds and limits.

RWAs increased from October 31, 2012. This is largely attributable to the implementation of the following Basel III changes:

  • A 1.25 multiplier is applied to the correlation parameter for exposures to financial institutions under the internal ratings based approach subject to certain criteria;
  • Items that were previously deducted from capital under Basel II (such as significant investments in commercial entities and exposures relating to securitization that were deducted from capital) are now risk-weighted at 1,250%;
  • Significant investments in the equity of financial entities and deferred tax assets arising from temporary differences are only deducted if they exceed certain thresholds; the amounts not deducted are risk weighted at 250%; and
  • Higher capital requirements for exposures that give rise to greater degrees of wrong-way risk.

Transitional basis
Under Basel III, transitional RWAs differ from RWAs on an all-in basis. On a transitional basis certain deductions from capital will be phased in at 20% per year starting in 2014.  The amount not yet deducted from capital is risk-weighted accordingly.

(i) "All-in" is defined by OSFI as capital calculated to include all of the regulatory adjustments that will be required by 2019, but retaining the phase-out rules for non-qualifying capital instruments.

Significant capital management activity
Normal course issuer bid
During the quarter, we purchased and cancelled 3,337,300 common shares under the normal course issuer bid at an average price of $80.69 for a total amount of $269 million.

Off-balance sheet arrangements

We enter into off-balance sheet arrangements in the normal course of our business. We consolidate all of our sponsored trusts that securitize our own assets with the exception of the commercial mortgage securitization trust.

CIBC-sponsored conduits
We sponsor a single-seller conduit and several multi-seller conduits (collectively, the conduits) in Canada.

As at January 31, 2013, the underlying collateral for various asset types in our multi-seller conduits amounted to $1.5 billion (October 31, 2012: $1.6 billion). The estimated weighted-average life of these assets was 1.3 years (October 31, 2012: 9 months). Our holdings of commercial paper issued by our non-consolidated sponsored multi-seller conduits that offer commercial paper to external investors were $15 million (October 31, 2012: $23 million). Our committed backstop liquidity facilities to these conduits were $2.2 billion (October 31, 2012: $2.2 billion). We also provided credit facilities of $30 million (October 31, 2012: $30 million) to these conduits as at January 31, 2013.

We participated in a syndicated facility for a 3-year commitment of $575 million to our single-seller conduit that provides funding to franchisees of a major Canadian retailer. Our portion of the commitment was $110 million (October 31, 2012: $110 million). As at January 31, 2013, we funded $81 million (October 31, 2012: $80 million) through the issuance of bankers' acceptances.

                          2013                       2012  
$ millions, as at                       Jan. 31                     Oct. 31  
                  Undrawn                     Undrawn          
          Investment       liquidity     Written       Investment       liquidity     Written    
          and       and credit     credit       and       and credit     credit    
          loans (1)     facilities     derivatives (2)     loans (1)     facilities     derivatives (2)
CIBC sponsored conduits       $ 96      $ 1,464  $       $ 103      $ 1,554    $  
CIBC structured CDO vehicles         229        42      210        232        40      207   
Third-party structured vehicles                                                
  Structured credit run-off         4,449        370      3,509        4,313        333      4,382   
  Continuing         765        25            1,004        23       
Pass-through investment structures         2,716                  2,182             
Commercial mortgage securitization trust                                    
(1)   Excludes securities issued by, retained interest in, and derivatives with entities established by CMHC, Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Government National Mortgage Association (Ginnie Mae), Federal Home Loan Banks, Federal Farm Credit Bank, and Student Loan Marketing Association (Sallie Mae). $3.8 billion (October 31, 2012: $3.7 billion) of the exposures related to CIBC-structured vehicles and third-party structured vehicles - structured credit run-off were hedged.
(2)   The negative fair value recorded on the interim consolidated balance sheet was $486 million (October 31, 2012: $1.2 billion). Notional of $3.3 billion (October 31, 2012: $3.3 billion) was hedged with credit derivatives protection from third parties. The fair value of these hedges net of CVA was $277 million (October 31, 2012: $307 million). An additional notional of $198 million (October 31, 2012: $1.0 billion) was hedged through a limited recourse note. Accumulated fair value losses were $24 million (October 31, 2012: $26 million) on unhedged written credit derivatives.  
       

Additional details of our structured entities are provided in Note 5 to the interim consolidated financial statements. Details of our other off-balance sheet arrangements are provided on pages 39 to 41 of the 2012 Annual Report. 

Management of risk

Our approach to management of risk has not changed significantly from that described on pages 42 to 68 of the 2012 Annual Report. Certain disclosures in this section have been shaded as they are required under IFRS 7 "Financial Instruments - Disclosures" and form an integral part of the interim consolidated financial statements.

Risk overview
We manage risk and related balance sheet resources within tolerance levels established by our management committees and approved by the Board of Directors and its committees. Key risk management policies are reviewed and approved by the applicable Board and management committees annually. Further details on the Board and management committees, as applicable to the management of risk, are provided on pages 42 and 43 of the 2012 Annual Report.

The five key groups within Risk Management, independent of the originating businesses, contribute to our management of risk:

  • Capital Markets Risk Management - This unit provides independent oversight of the measurement, monitoring and control of market risks (both trading and non-trading), trading credit risk and trading operational risk across CIBC's portfolios;
  • Card Products Risk Management - This unit oversees the management of credit risk in the card products portfolio, including the optimization of credit portfolio quality;
  • Retail Lending and Wealth Risk Management - This unit primarily oversees the management of credit and fraud risk in the retail lines of credit and loans, residential mortgage, and small business loan portfolios, including the optimization of credit portfolio quality. This unit is also responsible for overall risk management oversight of wealth management activities;
  • Wholesale Credit and Investment Risk Management - This unit is responsible for the adjudication and oversight of credit risks associated with our commercial and wholesale lending activities globally, management of the risks of our investment portfolios, as well as management of the special loans portfolios; and
  • Risk Services - This unit is responsible for enterprise-wide analysis and reporting. Risk Services is also responsible for economic capital methodologies and policies, and CIBC's operational risk framework.

Liquidity, funding and interest rate risks are managed by Treasury. The measurement, monitoring and control of these risks are addressed in collaboration with Risk Management, with oversight provided by the Asset Liability Committee (ALCO).

Credit risk

Credit risk primarily arises from our direct lending, trading, investment and hedging activities. Credit risk is defined as the risk of financial loss due to a borrower or counterparty failing to meet its obligations in accordance with contractual terms.

Exposure to credit risk                  
          2013       2012
$ millions, as at         Jan. 31       Oct. 31
Business and government portfolios-advanced internal ratings-based (AIRB) approach                  
Drawn       $ 78,123      $ 75,666 
Undrawn commitments         33,251        33,208 
Repo-style transactions         47,119        56,938 
Other off-balance sheet         54,115        52,322 
Over-the-counter (OTC) derivatives         14,398        14,426 
Gross exposure at default (EAD) on business and government portfolios         227,006        232,560 
Less: repo collateral         37,381        48,152 
Net EAD on business and government portfolios         189,625        184,408 
Retail portfolios-AIRB approach                  
Drawn         193,113        194,586 
Undrawn commitments         60,219        69,778 
Other off-balance sheet         345        370 
Gross EAD on retail portfolios         253,677        264,734 
Standardized portfolios         11,667        11,808 
Securitization exposures         18,872        19,003 
Gross EAD       $ 511,222      $ 528,105 
Net EAD       $ 473,841      $ 479,953 
                   

Real estate secured personal lending
Real estate secured personal lending comprises residential mortgages and personal loans and lines secured by residential property (HELOC). This portfolio is low risk where we have a first charge on the majority of the properties, and second lien on only a small portion of the portfolio. We use the same lending criteria in the adjudication of both first lien and second lien loans.

Under the Bank Act, banks are limited to providing residential real estate loans of no more than 80% of the collateral value. An exception is made for loans with a higher loan-to-value (LTV) ratio if they are insured by either Canada Mortgage and Housing Corporation (CMHC) or a private mortgage insurer. Mortgage insurance protects banks from the risk of default by the borrower, over the term of the coverage. Private mortgage insurers are subject to regulatory capital requirements, which aim to ensure that they are well capitalized.  If a private mortgage insurer becomes insolvent, the Government of Canada has, provided certain conditions are met, obligations in respect of policies underwritten by certain insolvent private mortgage insurers as more fully described in the recently enacted Protection of Residential Mortgage or Hypothecary Insurance Act (PRMHIA).  There is a possibility that losses could be incurred in respect of insured mortgages if, among other things, CMHC or the applicable private mortgage insurer denies a claim, or further, if a private mortgage insurer becomes insolvent and either the conditions under the PRMHIA are not met or the Government of Canada denies the claim.  No material losses are expected in the mortgage portfolio.

The following table provides details on our Canadian residential mortgage and HELOC portfolios:

          Residential mortgages   HELOC (1)   Total
$ billions, as at January 31, 2013           Insured (2)     Uninsured       Uninsured         Insured (2)     Uninsured  
Ontario       $ 49.0      74  %   $ 16.8      26  %   $ 9.5      100  %   $ 49.0      65  %   $ 26.3      35  %
British Columbia         20.8      73        7.7      27        4.0      100        20.8      64        11.7      36   
Alberta         18.1      77        5.3      23        3.0      100        18.1      69        8.3      31   
Quebec         8.4      81        2.0      19        1.5      100        8.4      71        3.5      29   
Other         12.6      82        2.8      18        1.9      100        12.6      73        4.7      27   
Total Canadian portfolio         108.9      76        34.6      24        19.9      100        108.9      67        54.5      33   
October 31, 2012       $ 109.5      76  %   $ 34.8      24  %   $ 20.1      100  %   $ 109.5      67  %   $ 54.9      33  %
(1)   We did not have any insured HELOCs as at January 31, 2013 and October 31, 2012.  
(2)   93% (October 31, 2012: 93%) is insured by CMHC and the remaining by two private Canadian insurers, both rated at least AA (low) by DBRS.  
       

The average LTV ratio(1) for our Canadian uninsured residential mortgages and HELOCs portfolios originated during the quarter are provided in the following table. We did not acquire uninsured residential mortgages and HELOCs from a third party for the periods presented in the table below.

 

For the three months ended January 31, 2013   Residential mortgages     HELOC  
Ontario   67  %   66  %
British Columbia   63      60   
Alberta   68      66   
Quebec   69      67   
Other   70