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CIBC Announces Third Quarter 2008 Results
TORONTO, Aug. 27 /CNW/ - CIBC (CM: TSX; NYSE) announced net income of
$71 million for the third quarter ended July 31, 2008, compared with net
income of $835 million for the same period last year. Diluted earnings per
share (EPS) were $0.11, compared with diluted EPS of $2.31 a year ago. Cash
diluted EPS were $0.13(1), compared with cash diluted EPS of $2.34(1) a year
ago.
CIBC's Tier 1 capital ratio at July 31, 2008 was 9.8%.Results for the third quarter of 2008 were positively affected by the
following items:
- $30 million ($20 million after tax, or $0.05 per share) positive
impact of changes in credit spreads on the mark-to-market of credit
derivatives in CIBC's corporate loan hedging program;
- $28 million ($20 million after tax and minority interest, or $0.05
per share) gain on the sale of shares in Visa Inc.;
- $27 million ($18 million after tax, or $0.05 per share) of interest
income on income tax reassessments.
Results for the third quarter of 2008 were negatively affected by the
following items:
- $885 million ($596 million after tax, or $1.56 per share) loss on
structured credit run-off activities;
- $55 million ($33 million after tax, or $0.09 per share) of losses and
interest expense related to the pending tax settlement of leveraged
leases;
- $16 million ($11 million after tax, or $0.02 per share) of higher
than normal severance expense.Net income for the third quarter of 2008 compared to a net loss of
$1,111 million for the prior quarter. Diluted EPS and cash diluted EPS for the
third quarter of 2008 compared to diluted loss per share of $3.00 and cash
diluted loss per share of $2.98(1), respectively, for the prior quarter, which
included items of note that aggregated to a negative impact on results of
$4.59 per share.
"While the current environment continues to be challenging, CIBC's
franchise is solid. CIBC's capital position is strong and our core businesses
are well positioned for better performance and growth as market conditions
improve," says Gerald T. McCaughey, President and Chief Executive Officer.
"Our results this quarter were affected by the volatile, and generally
difficult, environment that persisted over much of the third quarter, as well
as by the impact of our ongoing run-off activities and the refocusing of our
core businesses, particularly in CIBC World Markets."
The continued deterioration in securities with exposure to the U.S.
residential mortgage market and financial guarantor credit spreads required
CIBC to record further asset write-downs and counterparty credit valuation
adjustments in its structured credit run-off business.
In addition, these market conditions had a negative impact on performance
in other areas, particularly within CIBC's wholesale and retail brokerage
operations.
Update on business priorities
CIBC's strategy is to deliver consistent and sustainable performance over
the long term. In support of that strategy, CIBC made progress during the
third quarter against its priorities of business strength, productivity and
balance sheet strength.
Business strength
CIBC Retail Markets reported net income of $572 million, down 4% from the
same quarter last year, primarily due to lower treasury revenue allocations
and higher loan losses, which more than offset better expense performance.
Retail Markets revenue was $2,355 million, down 1% from the third quarter
of 2007. Strong volume growth in CIBC's product groups and higher revenue from
FirstCaribbean International Bank were offset by lower treasury revenue
allocations and lower retail brokerage trading volumes.
Overall, CIBC's retail business remains well positioned. CIBC achieved
strong volume growth and has maintained market share in a highly competitive
environment. For the second consecutive quarter, CIBC had growth in unsecured
personal lending volumes, though CIBC is taking a measured approach to credit
given the current environment.
Retail loan losses were $196 million for the third quarter, up
$29 million from the same quarter last year. Continued strong growth in Cards
balances, an increase in the provision relating to the expiry of previous
credit card securitizations, and higher cards loss rates partially offset by
lower personal lending loss rates were the primary drivers of higher loan
losses.During the quarter, CIBC Retail Markets continued to deliver on its
strategy to provide greater access for clients:
- Opened three new branches in Milton, Ontario, Calgary, Alberta and
Smithers, B.C.;
- Expanded hours of operation with additional branches opening on
Saturdays;
- Introduced Sunday banking hours at six more branches in the Greater
Toronto Area and Vancouver;
- Added nearly 100 jobs at the Telephone Banking contact centre in
Montreal and now have the capacity to make one million additional
calls in French and English to clients each year.
During the quarter, CIBC also announced several enhancements to its retail
product capabilities:
- To reward client loyalty, CIBC now offers Aeroplan miles for everyday
banking on the CIBC Unlimited Chequing Account;
- Introduced free everyday banking for students with the new
CIBC Advantage® for Students bank account;
- Clients also began receiving their new CIBC Aerogold Visa Infinite
card, CIBC's newest premium credit card, which provides increased
benefits at no additional fee.CIBC World Markets reported a net loss of $538 million for the third
quarter, which included the loss of $596 million related to CIBC's structured
credit run-off activities and other items of note aggregating to a net loss of
$20 million. This result compares to a loss of $1,637 million last quarter,
which included a loss of $1,672 million related to structured credit run-off
activities and other items of note aggregating to a net loss of $43 million.
Revenue in the third quarter for CIBC's continuing World Markets'
businesses was up from last quarter, primarily due to higher revenue from
fixed income and currencies, loan hedging and merchant banking, partly offset
by lower revenue from global equities and equity new issues as a result of the
continued low levels of market activity in these areas.
CIBC's corporate loan portfolio continues to perform well, with loan
losses of $7 million in the third quarter.
Activities continued during the third quarter on many fronts to
reposition CIBC's wholesale business for more consistent and sustainable
performance.
In its structured credit run-off business, CIBC further reduced notional
exposures through a combination of the termination and amortization of credit
derivative contracts.
Market and economic conditions relating to the financial guarantors may
change in the future, which could result in significant future losses.
During the quarter, the strength of CIBC's World Markets franchise was
evident in several notable achievements:- No. 1 in M&A Activity - CIBC World Markets continues its M&A
leadership in Canada as measured by volume and deal value, as
evidenced by its financial advisor role to the Board of Directors of
EnCana on its approximately $70 billion reorganization of its natural
gas resource assets and its integrated oil businesses into two
separate entities, and to Teck Cominco with respect to its pending
acquisition of Fording Canadian Coal Trust's assets in a transaction
valued at US$14 billion, which includes CIBC's role as co-lead
arranger and underwriter for US$9.8 billion of fully underwritten
bridge and term loans to support the transaction.
- A leader in connecting global players with Canadian markets -
CIBC World Markets continues to deliver on its mission to bring
Canada to the world and the world to Canada, as evidenced by its role
as financial advisor to Saskferco in its $1.6 billion sale of a
nitrogen fertilizer plant to Yara International, a Norwegian chemical
company. Since the opening of its Winnipeg office in early 2007,
CIBC World Markets has strengthened its growing presence in the
agricultural and prairie markets.
- No. 1 in Equity Underwriting - CIBC World Markets retained its
position as the leader in volume of new issues underwritten for the
fiscal year to date, acting as lead manager on a $288 million
financing by H&R REIT and as sole underwriter of a US$150 million
offering by Central Fund of Canada Limited.Productivity
In addition to continuing to invest and position its core businesses for
long term performance, CIBC remains committed to its strategic objective of
achieving a median efficiency ratio among the major Canadian banks.
CIBC's target for 2008 is to hold expenses flat relative to annualized
2006 fourth quarter expenses, excluding expenses related to FirstCaribbean and
its restructuring activities.
Expenses for the third quarter were $1,725 million, down from
$1,819 million a year ago.
"Through a combination of better revenue performance as market conditions
improve, as well as continued focus to adjust our infrastructure support
activities in light of recent business divestitures, we expect to achieve
continued progress in the area of productivity," says McCaughey.
Balance sheet strength
CIBC's third priority is to build balance sheet strength.
In 2008, CIBC is placing additional emphasis on this priority, given the
uncertain market conditions.
Earlier this year, CIBC strengthened its capital position by raising
$2.9 billion of common equity.
The capital raise has enabled CIBC to maintain a strong capital position
despite the impact of deteriorating market conditions on performance.
The primary measure of CIBC's balance sheet strength is its Tier 1
capital ratio. CIBC's Tier 1 ratio of 9.8% at the end of July remains well
above its target of 8.5% and one of the highest among North American banks.
Update on risk management enhancements
In addition to furthering its business priorities, CIBC continues to
enhance its risk management capabilities.
During the quarter, CIBC completed a restructuring of its risk management
department. The new structure is based on the results of a comprehensive
review that began earlier this year and comprises five groups as follows:- Balance Sheet Measurement, Monitoring and Control
- Capital Markets
- Credit Portfolio Management
- Product Risk Management, Card Products, Mortgages & Retail Lending
- Wholesale Credit & Investment Risk ManagementThis new structure consolidates and simplifies CIBC's risk management
structure, while supporting CIBC's objectives to strengthen decision-making,
accountability and communication on risk matters across the department and
within CIBC.
Making a difference in communities
As a leader in community investment, CIBC is committed to supporting
causes that matter to its clients, its employees and its communities. During
the quarter, CIBC continued to demonstrate leadership in this area.- CIBC and the YMCA of Greater Toronto launched CIBC YMCA Access to
Opportunity™ to help newcomers overcome barriers to settling in
Canada. The new program includes financial literacy learning seminars
that provide newcomers with information and advice needed to get
started with banking in Canada as well as a job readiness training
program that helps connect qualified newcomers to employment at CIBC
and in the financial services sector.
- CIBC was the principal sponsor, for the third year, of the Tour CIBC
Charles-Bruneau, a four-day bicycle trip across Quebec that raises
funds for children with cancer. This year, CIBC employees and
clients raised $150,000 and the Tour exceeded its goal by raising
$700,000. The funds raised will be donated to the Centre de
cancérologie Charles-Bruneau at the Sainte-Justine Hospital for
research and treatment of children with cancer.
- CIBC employees throughout B.C. and parts of the Northern Territories
raised more than $415,000 for the 2008 B.C. Children's Hospital
campaign. Since 1995, CIBC employees and clients have raised more
than $3.7 million dollars for B.C. Children's Hospital Foundation.
------------------------------
(1) For additional information, see the "Non-GAAP measures" section.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 third 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 third 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
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Management's discussion and analysis (MD&A) should be read in conjunction
with the unaudited interim consolidated financial statements included in this
report and with the MD&A contained in our 2007 Annual Accountability Report.
The unaudited interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles (GAAP) and
are expressed in Canadian dollars. This MD&A is current as of August 27, 2008.
Additional information relating to CIBC is available on SEDAR at www.sedar.com
and on the U.S. Securities and Exchange Commission's website at www.sec.gov.
No information on CIBC's website (www.cibc.com) should be considered
incorporated herein by reference. Certain comparative amounts have been
reclassified to conform with the presentation adopted in the current period. A
glossary of terms used throughout this quarterly report can be found on pages
149 and 150 of our 2007 Annual Accountability Report.External reporting changes
The following is a summary of the external reporting changes adopted in
the first quarter of 2008:
- We adopted the Internal Convergence of Capital Measurement and
Capital Standards: a Revised Framework, commonly named as Basel II.
See "Management of risk" section for additional details.
- We moved our commercial banking line of business from CIBC World
Markets to CIBC Retail Markets. Prior period information was
restated.
- We moved our securitization-related revenue from the lines of
businesses (cards, mortgages and personal lending) to other within
CIBC Retail Markets. Prior period information was restated.
- We moved the investment consulting service revenue from retail
brokerage to asset management, both within CIBC Retail Markets. Prior
period information was restated.
- We allocated the general allowance for credit losses between the
strategic business lines (CIBC Retail Markets and CIBC World
Markets). Prior to 2008, the general allowance (excluding
FirstCaribbean International Bank) was included within Corporate and
Other. Prior period information was not restated.
- We reclassified the allowance for credit losses related to the
undrawn credit facilities to other liabilities. Prior to 2008, it was
included in allowance for credit losses. Prior period information was
not restated.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 "Summary of third quarter results",
"Update on business priorities", "Overview - Significant events", "Overview -
Outlook", "Run-off businesses", "Other selected activities" and "Financial
performance review - Income taxes" sections, of this report and other
statements about our operations, business lines, financial condition, risk
management, priorities, targets, ongoing objectives, strategies and outlook
for 2008 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" 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: 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; that our estimate of sustainable effective tax rate will not be
achieved; 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; interest rate and
currency value fluctuations; general 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; 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.THIRD QUARTER FINANCIAL HIGHLIGHTS
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As at or for the As at or for the
three months ended nine months ended
-------------------------------- ---------------------
2008 2008 2007 2008 2007
Unaudited Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
--------------------------------------------------- ---------------------
Common share information
Per share
- basic earnings
(loss) $ 0.11 $ (3.00) $ 2.33 $ (7.05) $ 6.75
- cash basic
earnings
(loss)(1) 0.13 (2.98) 2.36 (6.99) 6.81
- diluted earnings
(loss) 0.11 (3.00) 2.31 (7.05) 6.69
- cash diluted
earnings
(loss)(1) 0.13 (2.98) 2.34 (6.99) 6.75
- dividends 0.87 0.87 0.77 2.61 2.24
- book value 28.40 29.01 33.05 28.40 33.05
Share price
- high 76.75 74.17 106.75 99.81 106.75
- low 49.56 56.94 92.37 49.56 92.37
- closing 61.98 74.17 92.50 61.98 92.50
Shares outstanding
(thousands)
- average basic 380,877 380,754 335,755 366,686 336,511
- average diluted 382,172 382,377 338,691 368,352 339,739
- end of period 380,732 380,770 334,595 380,732 334,595
Market
capitalization
($ millions) $ 23,598 $ 28,242 $ 30,950 $ 23,598 $ 30,950
--------------------------------------------------- ---------------------
Value measures
Price to earnings
multiple (12 month
trailing) n/m n/m 10.3 n/m 10.3
Dividend yield
(based on closing
share price) 5.6% 4.8% 3.3% 5.6% 3.2%
Dividend payout ratio n/m n/m 33.0% n/m 33.2%
Market value to
book value ratio 2.18 2.56 2.80 2.18 2.80
--------------------------------------------------- ---------------------
Financial results
($ millions)
Total revenue $ 1,905 $ 126 $ 2,979 $ 1,510 $ 9,120
Provision for
credit losses 203 176 162 551 471
Non-interest
expenses 1,725 1,788 1,819 5,274 5,738
Net income (loss) 71 (1,111) 835 (2,496) 2,412
--------------------------------------------------- ---------------------
Financial measures
Efficiency ratio 90.5% n/m 61.1% n/m 62.9%
Cash efficiency
ratio, taxable
equivalent basis
(TEB)(1) 88.0% n/m 59.4% n/m 61.4%
Return on equity 1.6% (37.6)% 28.3% (30.3)% 28.1%
Net interest margin 1.54% 1.57% 1.41% 1.48% 1.37%
Net interest margin
on average
interest-earning
assets 1.82% 1.85% 1.61% 1.74% 1.56%
Return on average
assets 0.08% (1.29)% 1.00% (0.96)% 0.99%
Return on average
interest-earning
assets 0.10% (1.52)% 1.14% (1.14)% 1.14%
Total shareholder
return (15.25)% 2.59% (4.6)% (36.79)% 8.0%
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On- and off-balance
sheet information
($ millions)
Cash, deposits with
banks and
securities $ 89,468 $ 92,189 $ 102,143 $ 89,468 $ 102,143
Loans and
acceptances 173,386 174,580 167,828 173,386 167,828
Total assets 329,040 343,063 338,881 329,040 338,881
Deposits 228,601 238,203 230,208 228,601 230,208
Common
shareholders'
equity 10,813 11,046 11,058 10,813 11,058
Average assets 343,396 349,005 331,553 345,618 324,572
Average interest-
earning assets 290,598 296,427 290,157 293,373 284,015
Average common
shareholders'
equity 10,664 12,328 10,992 11,384 10,808
Assets under
administration 1,134,843 1,147,887 1,115,719 1,134,843 1,115,719
--------------------------------------------------- ---------------------
Balance sheet
quality measures
Common equity to
risk-weighted
assets(2) 9.1% 9.6% 8.8% 9.1% 8.8%
Risk-weighted assets
($ billions)(2) $ 118.5 $ 114.8 $ 125.0 $ 118.5 $ 125.0
Tier 1 capital
ratio(2) 9.8% 10.5% 9.7% 9.8% 9.7%
Total capital
ratio(2) 14.4% 14.4% 13.7% 14.4% 13.7%
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Other information
Retail/wholesale
ratio(3) 67%/33% 68%/32% 76%/24% 67%/33% 76%/24%
Regular workforce
headcount 40,251 40,345 40,315 40,251 40,315
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(1) For additional information, see the "Non-GAAP measures" section.
(2) Beginning Q1/08, these measures are based upon Basel II framework
whereas the prior quarters were based upon Basel I methodology.
(3) The ratio represents the amount of capital attributed to the
business lines as at the end of the period.
n/m Not meaningful due to the net loss.OVERVIEW
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Net income for the quarter was $71 million, compared to net income of
$835 million for the same quarter last year and a net loss of $1,111 million
for the prior quarter. Net loss for the nine months ended July 31, 2008 was
$2,496 million, compared with net income of $2,412 million for the same period
in 2007.
Our results for the current quarter were affected by the following items:- Loss on the structured credit run-off business of $885 million
($596 million after-tax), which includes gains on index hedges, net
of mark-to-market (MTM) losses on unhedged exposures related to the
U.S. residential mortgage market (USRMM), of $12 million ($8 million
after-tax), charges on credit protection purchased from ACA Financial
Guaranty Corp. (ACA) and other financial guarantors of $904 million
($609 million after-tax), gains on credit hedges on structured credit
counterparties of $74 million ($50 million after-tax), losses on
sales of certain positions, and direct expense related to managing
the run-off activities;
- $16 million ($11 million after-tax) of higher than normal severance
accruals;
- $30 million ($20 million after-tax) positive impact of changes in
credit spreads on the MTM of credit derivatives in our corporate loan
hedging program;
- $28 million ($20 million after-tax and minority interest) gain on
sale of shares in Visa Inc.;
- Interest income on income tax reassessments of $27 million
($18 million after-tax); and
- Losses and interest expense related to leveraged leases of
$55 million ($33 million after-tax).Compared with Q3, 2007
The loss on structured credit run-off business noted above was the main
factor for the decline in revenue from the same quarter last year. Losses
related to leveraged leases, lower gains on credit derivatives in our
corporate loan hedging program, and lower retail spreads attributable to a
lower interest rate environment also contributed to the decline. Revenue
benefited from volume growth in cards, mortgages and deposits. Provision for
credit losses was up mainly due to higher losses in the cards portfolio as a
result of volume growth, an increase in provisions relating to the expiry of
previous credit card securitizations and higher loss rates. Non-interest
expenses were down largely due to lower performance-related compensation,
partially offset by higher severance related expenses.
Compared with Q2, 2008
Revenue was up mainly due to lower charges on credit protection purchased
from financial guarantors and lower MTM losses related to our USRMM positions.
Revenue in the quarter was negatively impacted by lower treasury revenues and
losses and interest expense related to leveraged leases. Non-interest expenses
were down from the prior quarter due to lower litigation expenses, partially
offset by higher performance-related compensation expense.
Compared with the nine months ended July 31, 2007
Revenue in the current period was significantly lower due to the charges
on credit protection purchased from financial guarantors and MTM losses
related to our USRMM positions. Lower revenue from U.S. real estate finance
and the impact of the sale of some of our U.S. businesses, and lower retail
spreads attributable to a lower interest rate environment contributed to the
decline. Revenue benefited from higher gains on our corporate loan credit
derivatives, volume growth in cards, mortgages and deposits, and the
FirstCaribbean International Bank (FirstCaribbean) acquisition. Provision for
credit losses was up mainly due to the reversal of general allowance in the
same period last year and higher losses in the cards portfolio driven by
volume growth, increase in provisions relating to the expiry of previous
credit card securitizations and higher loss rates. Non-interest expenses were
down largely due to lower performance-related compensation and the sale of
some of our U.S. businesses. The loss for the period resulted in a tax
benefit.
Our results for the prior periods were affected by the following items:------------------------------------------------------------------------
Q2, 2008
--------
- Loss on structured credit run-off business of $2.5 billion
($1.7 billion after-tax), which included MTM losses, net of gains on
index hedges, on unhedged exposures related to the USRMM
($114 million, $77 million after-tax), charges on credit protection
purchased from ACA and other financial guarantors ($2.2 billion,
$1.5 billion after-tax), gain on credit hedges on structured credit
counterparties ($63 million, $42 million after-tax), losses on sales
of certain positions, and direct expenses related to managing the
run-off activities;
- $50 million ($34 million after-tax) of valuation charges against
credit exposures to derivatives counterparties, other than financial
guarantors;
- $22 million ($19 million after-tax and minority interest) loss on
Visa Inc.'s initial public offering (IPO) adjustment;
- $26 million ($18 million after-tax) of severance accruals;
- $65 million ($21 million after-tax) foreign exchange loss on the
repatriation of retained earnings from our U.S. operations; and
- $14 million ($9 million after-tax) positive impact of changes in
credit spreads on corporate loan credit derivatives.
Q1, 2008
--------
- $2.3 billion ($1.5 billion after-tax) charge on the credit protection
purchased from ACA;
- $626 million ($422 million after-tax) charge on the credit protection
purchased from financial guarantors other than ACA;
- $473 million ($316 million after-tax) MTM losses, net of gains on
related hedges, on collateralized debt obligations (CDOs) and
residential mortgage-backed securities (RMBS) related to the USRMM;
- $171 million ($115 million after-tax) positive impact of changes in
credit spreads on corporate loan credit derivatives ($128 million,
$86 million after-tax) and financial guarantors credit hedges
($43 million, $29 million after-tax);
- $108 million ($64 million after-tax) combined loss related to the
sale of some of our U.S. businesses to Oppenheimer Holdings Inc.
(Oppenheimer), management changes and the exit and restructuring of
certain other businesses, and
- $56 million positive impact of favourable tax-related items.
Q3, 2007
--------
- $290 million ($190 million after-tax) MTM losses, net of gains on
related hedges, on CDOs and RMBS related to the USRMM;
- $75 million ($70 million after-tax) of net reversal of litigation
accruals;
- $77 million ($50 million after-tax) positive impact of changes in
credit spreads on corporate loan credit derivatives; and
- $48 million of tax recovery.
Q2, 2007
--------
- $91 million of favourable tax recoveries and reversals;
- $24 million ($17 million after-tax) reversal of the general allowance
for credit losses; and
- $10 million ($7 million after-tax) positive impact of changes in
credit spreads on corporate loan credit derivatives.
Q1, 2007
--------
- $6 million ($4 million after-tax) negative impact of changes in
credit spreads on corporate loan credit derivatives.
-------------------------------------------------------------------------Significant events
Global market credit issues
Problems originating in the U.S. subprime mortgage market last year
continued to impact the conditions for credit and liquidity globally. Our
structured credit business, within CIBC World Markets, had losses for the
quarter of $885 million ($6.8 billion for the nine months ended July 31,
2008), primarily due to deterioration in the credit quality of financial
guarantors and MTM losses on the underlying assets, which resulted in
significant increases in valuation adjustments to the value of credit
protection bought. During the quarter, we continued to actively manage our
exposures, reducing notional exposures by approximately $1.5 billion and
unwound related purchased credit derivatives of a similar amount for a total
reduction in notional of approximately US$3 billion.
In April 2008, the Financial Stability Forum (a group of G7 central banks
and supervision groups) tabled recommendations with the G7 countries to
enhance disclosure of what are deemed to be high risk activities. Based on
these recommendations we have presented a number of related disclosures in the
"Run-off businesses" and "Other selected activities" sections of the MD&A.
Sale of some of our U.S. businesses
Effective January 1, 2008, we sold our U.S. based investment banking,
leveraged finance, equities and related debt capital markets businesses and
our Israeli investment banking and equities businesses to Oppenheimer Inc.
During the nine months ended July 31, 2008, we recorded a loss of $80 million
on the sale. It is anticipated that the sale of certain other U.S. capital
markets related activities located in the U.K. and Asia to Oppenheimer will
close in the fourth quarter of 2008.
CIBC restricted share awards (RSAs) held by employees transferred to
Oppenheimer will continue to vest in accordance with their original terms. To
support this compensation arrangement, Oppenheimer will reimburse CIBC for the
cost of these RSAs to the extent they vest, at which time we will record the
reimbursements in other non-interest income.
Pursuant to the sale agreement, CIBC invested in a US$100 million
subordinated debenture issued by Oppenheimer and is providing certain credit
facilities to Oppenheimer and its investment banking clients to facilitate
Oppenheimer's business, with each loan subject to approval by CIBC's credit
committee.
The disposition is not expected to have a significant impact on our
ongoing results of operations.
Issue of share capital
During the first quarter, we issued 45.3 million common shares for net
proceeds of $2.9 billion, through a combination of private placements and a
public offering.
We issued 23.9 million common shares for net proceeds of $1.5 billion,
through a private placement to a group of institutional investors, comprising
Manulife Financial Corporation, Caisse de dépôt et placement du Québec, Cheung
Kong (Holdings) Ltd. and OMERS Administration Corporation.
We also issued 21.4 million common shares for net proceeds of
$1.4 billion, through a public offering.
Visa Inc.
As a result of the worldwide restructuring of Visa in the last quarter of
2007, in March 2008, Visa Inc. proceeded with the IPO of Class A shares at
US$44 per share. As a result of the mandatory redemption of 56.1% of our
shares and the final adjustment process, we recorded a pre-tax loss of $22
million ($19 million after-tax and minority interest) in the second quarter.
In July 2008, we sold our remaining shares in Visa Inc. to another former
bank member in the Visa network as permitted by the terms of Visa's
restructuring agreements and recorded a gain of $28 million ($20 million
after-tax and minority interest).
Global restructuring of ACA
On August 7, 2008, we, together with other institutions reached an
agreement with ACA to restructure the credit derivatives that ACA had in place
with various counterparties. The restructuring resulted in the termination of
the credit derivative contracts and, in return, we received cash of
approximately US$33 million representing our pro-rata share (16%) of an
initial cash payment. We also received, on a pro-rata basis, a counterparty
surplus note (CSN) issued by ACA, valued at US$8 million. The CSN entitles the
holder to receive any residual cash flows of ACA and is subject to the review
and approval of the Maryland Insurance Administration.
We consider that the events of August 7, 2008 represent additional
information relating to our best estimate of the amounts recoverable from ACA
as at July 31, 2008, and have accordingly adjusted our credit valuation
adjustment against ACA resulting in a credit to net income before tax of
US$11 million.
Leveraged leases
Effective November 1, 2007, we adopted the amended CICA Emerging Issues
Committee Abstract (EIC) 46, "Leveraged Leases", which was based upon the
Financial Accounting Standards Board Staff Position FAS 13-2, "Accounting for
a Change or Projected Change in the Timing of Cash Flows Relating to Income
Taxes Generated by a Leveraged Lease Transaction".
The EIC requires that a change in the estimated timing of the cash flows
relating to income taxes result in a recalculation of the timing of income
recognition from the leveraged lease. The adoption resulted in a $66 million
charge to opening retained earnings as at November 1, 2007. An amount
approximating this non-cash charge will be recognized into income over the
remaining lease terms using the effective interest rate method.
On August 5, 2008, CIBC received a settlement offer from the Internal
Revenue Service (IRS) with respect to its leveraged leases. The terms and
conditions of the letter are identical to that received by other industry
participants in these transactions. The effect of the communication is a
further change in the cash flows from the previous offer to settle by the IRS
and from what was reflected in the opening retained earnings amount as
described above. The current quarter income statement includes a pre-tax
charge of $22 million resulting from a GAAP lease income adjustment and a
further pre-tax charge of $33 million for interest payments on deficient tax
installments. The settlement offer includes certain other terms and conditions
which CIBC is attempting to have clarified with the IRS including a "best
efforts" clause to terminate all leases before December 31, 2008 when all
associated tax benefits for leases not terminated will be deemed to end. CIBC
has 60 days from August 5, 2008 to accept this offer. The IRS will provide
additional written information on the offer shortly. While CIBC believes its
provisions and charges to date accurately reflect the terms of the IRS
settlement offer, it is possible that clarification by the IRS of certain
terms and conditions (and agreement on actual numbers) could result in
additional charges in future quarters.
Outlook
Canadian economic growth is expected to remain very sluggish in the final
fiscal quarter of this year, held back by weak exports and the impacts of
recent employment declines on consumer spending. Housing construction is also
showing some tentative signs of a slowdown. Interest rates are likely to
remain generally stable until 2009 as the central bank awaits signs of an
economic pick-up in the U.S.
CIBC Retail Markets should benefit from what are still historically low
unemployment rates that support lending growth and household credit quality. A
slower pace of real estate price increases and home sales may moderate
mortgage growth rates.
For CIBC World Markets, mergers and acquisition and equity activity will
likely remain slower than in the prior year due to credit concerns affecting
global leveraged deals. We expect loan demand to increase due to reduced
investor appetite for asset-backed securities. Economic softness could lead to
a less favourable period for corporate credit risk in certain parts of the
Canadian economy.
RUN-OFF BUSINESSES
-------------------------------------------------------------------------
Given the uncertain market conditions and to focus on our core businesses
in CIBC World Markets, we have curtailed activity in our structured credit and
international leveraged finance businesses and have established a focused team
with the mandate to manage and reduce the residual exposures.-------------------------------------------------------------------------
Background information on special purpose entities
Structured credit activities usually involve special purpose entities
(SPEs). SPEs are legal vehicles, often in the form of trusts, which are
designed to fulfill specific and narrow needs. SPEs are used to provide
market liquidity to clients and to create investment products by
aggregating either pools of homogenous assets or a variety of different
assets, and issuing either single tranche short term debt securities,
referred to as asset-backed commercial paper (ABCP) or longer term
multi-tiered debt instruments which include super senior, senior,
subordinated or mezzanine, and equity tranches. Often SPEs are referred
to by reference to the type of assets that are aggregated within the SPE
such as RMBS which aggregate mortgage loans, or collateralized loan
obligations (CLOs) which aggregate corporate loans. In addition, SPEs can
also aggregate debt securities issued by other SPEs, such as RMBS, and
are referred to as CDOs. In more complex structures, SPEs which aggregate
securities issued by other CDOs and then issue a further tranche of debt
securities are referred to as CDOs squared. Our involvement with SPEs is
discussed in the "Off balance sheet arrangements" section of the MD&A.
-------------------------------------------------------------------------Structured credit run-off business
Overview and results
Our structured credit business, within CIBC World Markets, comprises our
activities as principal and for client facilitation. These activities include
warehousing of assets and structuring of SPEs which could result in the
holding of unhedged positions. Other activities include intermediation,
correlation, and flow trading which earn a spread on matching positions.Exposures
Our exposures largely consist of the following categories:
Unhedged -
- USRMM
- non-USRMM
Hedged -
- financial guarantors (USRMM and non-USRMM)
- other counterparties (USRMM and non-USRMM)
Results - losses before taxes
------------------------------------------------------------ -----------
For the
For the three nine months
months ended ended
------------------------ -----------
2008 2008 2008
$ millions Jul. 31 Apr. 30 Jul. 31
------------------------------------------------------------ -----------
Trading $ 885 $ 2,340 $ 6,603
Available-for-sale (AFS) - 144 230
------------------------------------------------------------ -----------
Total $ 885 $ 2,484 $ 6,833
------------------------------------------------------------ -----------
------------------------------------------------------------ -----------
The structured credit business had losses during the quarter of
$885 million, compared to losses of $2.5 billion in the prior quarter. These
losses were primarily driven by further deterioration in the credit quality of
financial guarantors and the mark-to-market losses of the underlying assets,
which resulted in significant increases in credit valuation adjustments.
Change in exposures
ACA
---
During the quarter, the following events took place with respect to
written credit derivatives against which we purchased protection from ACA:
- US$97 million of notional of our written credit derivatives were
cancelled as a result of default in the underlyings, generating a
loss of US$9 million in the quarter. The corresponding purchased
credit derivatives with ACA were also cancelled.
- We terminated US$339 million of written credit derivatives with a
loss of US$2 million. As a result, the corresponding purchased credit
derivatives with ACA became unmatched protection.
- Normal amortization reduced the notional of our written and
corresponding purchased credit derivatives with ACA by US$28 million.On August 7, 2008, we together with other institutions reached an
agreement with ACA to restructure the credit derivatives that ACA had in place
with various counterparties. The restructuring resulted in the termination of
the credit derivatives contracts and in return, we received cash of
approximately $33 million representing our pro-rata share (16%) of an initial
cash payment. We also received, on a pro-rata basis, a CSN issued by ACA,
valued at $8 million. The CSN entitles the holder to receive any residual cash
flows of ACA and is subject to the review and approval of the Maryland
Insurance Administration.
As a consequence of the restructuring, our investments (notional
US$217 million, fair value US$11 million) and our written credit derivatives,
(notional US$1,226 million, fair value liability US$1,097 million) previously
hedged by ACA, became unhedged as of August 7, 2008.
Others
------
During the quarter, in addition to the reduction of the ACA related
positions noted above we have also reduced exposures in the intermediation,
correlation and flow trading books by approximately US$1.5 billion, and
unwound related purchased credit derivatives of a similar amount for a total
reduction in notional of approximately US$3.0 billion.-------------------------------------------------------------------------
2008 2008
US$ millions, as at Jul. 31 Apr. 30
-------------------------------------------------------------------------
Notional
Investments and loans(1) $ 10,261 $ 10,678
Written credit derivatives(2) 34,128 35,832
-------------------------------------------------------------------------
Total gross exposures $ 44,389 $ 46,510
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Purchased credit derivatives and index hedges $ 43,384 $ 44,963
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Notional for investments and loans represent original investment
costs.
(2) Includes notional amount for written credit derivatives and liquidity
and credit facilities.Total exposures
The exposures held within our structured credit run-off business within
CIBC World Markets are summarized in the table below. Our subsidiary,
FirstCaribbean, within CIBC Retail Markets, also has holdings in securities
with USRMM exposure which are being managed separately and are included in the
table below.US$ millions, as at July 31, 2008
-------------------------------------------------------------------------
Exposures(1) Hedged by
-------------------------------------- -----------
Written credit Purchased
derivatives credit
and liquidity derivatives
and credit and index
Investments & loans facilities(2) hedges
-------------------- ----------------- -----------
Financial
guarantors
-----------
Fair Fair
Notional value(3) Notional value(4) Notional
---------- --------- --------- --------- ---------
USRMM
Unhedged(6)
-----------
Super senior
CDO of mezzanine
RMBS $ - $ - $ 278 $ 264 $ -
Warehouse - RMBS 365 20 - - -
Various(7) 146 11 - - -
Index hedges - - - - -
-------------------------------------------------------------------------
511 31 278 264 -
Hedged
------
Other CDO 1,498 226 4,908 3,867 5,789
Unmatched purchased
credit derivatives(8) - - - - 1,880
-------------------------------------------------------------------------
Total USRMM $ 2,009 $ 257 $ 5,186 $ 4,131 $ 7,669
-------------------------------------------------------------------------
Non-USRMM
Unhedged
--------
CLO(2) $ 257 $ 218 $ 161 $ 12 $ -
Corporate debt 209 187 - - -
Third party sponsored
ABCP conduits(2)(10) 459 270 639 n/a -
Warehouse - non-RMBS 160 78 - - -
Others(2) 254 251 94 n/a -
-------------------------------------------------------------------------
1,339 1,004 894 12 -
Hedged
------
CLO(11) 6,197 5,170 8,284 765 13,967
Corporate debt - - 16,139 872 6,959
CMBS - - 777 191 777
Others 716 585 2,848 303 2,871
Unmatched purchased
credit derivatives - - - - -
-------------------------------------------------------------------------
Total non-USRMM 8,252 6,759 28,942 2,143 24,574
-------------------------------------------------------------------------
Total $ 10,261 $ 7,016 $ 34,128 $ 6,274 $ 32,243
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008 $ 10,678 $ 7,529 $ 35,832 $ 6,073 $ 32,632
-------------------------------------------------------------------------
-------------------------------------------------------------------------
US$ millions, as at July 31, 2008
-------------------------------------------------------------------------
Hedged by Unhedged Unhedged
------------------------------ exposures USRMM
Purchased
credit
derivatives
and index
hedges
------------------------------
Financial
guarantors Others
---------- ------------------- --------- ---------
Fair Net
value Fair Net expo-
(3)(4) Notional value(3) notional sure(5)
---------- --------- --------- --------- ---------
USRMM
Unhedged(6)
-----------
Super senior
CDO of mezzanine
RMBS $ - $ - $ - $ 278 $ 14
Warehouse - RMBS - - - 365 20
Various(7) - - - 146 11
Index hedges - 75 58 (75) (17)
-------------------------------------------------------------------------
- 75 58 714
Hedged
------
Other CDO 4,695 550(9) 361 67
Unmatched purchased
credit derivatives(8) 1,771 - - -
-------------------------------------------------------------------------
Total USRMM $ 6,466 $ 625 $ 419 $ 781
-------------------------------------------------------------------------
Non-USRMM
Unhedged
--------
CLO(2) $ - $ - $ - $ 418
Corporate debt - - - 209
Third party sponsored
ABCP conduits(2)(10) - - - 1,098
Warehouse - non-RMBS - - - 160
Others(2) - - - 348
-------------------------------------------------------------------------
- - - 2,233
Hedged
------
CLO(11) 1,436 529 39 (15)
Corporate debt 415 9,176 475 4
CMBS 192 - - -
Others 381 730 46 (37)
Unmatched purchased
credit derivatives - 81 - -
-------------------------------------------------------------------------
Total non-USRMM 2,424 10,516 560 2,185
-------------------------------------------------------------------------
Total $ 8,890 $ 11,141 $ 979 $ 2,966
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008 $ 8,063 $ 12,331 $ 776 $ 3,435
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) We have excluded from the table above our total holdings of the
following entities, including those related to our treasury
activities, as at July 31, 2008 of notional US$4,187 million and
fair value US$4,149 million. (Total holdings as at April 30, 2008
was notional US$5,309 million and fair value US$5,283 million.
Amounts reported in the prior quarter did not include money market
positions in an offshore subsidiary):
- Debt securities issued by Federal National Mortgage Association
(Fannie Mae) (notional US$1,904 million, fair value
US$1,880 million), Federal Home Loan Mortgage Corporation
(Freddie Mac) (notional US$1,029 million, fair value
US$1,008 million), Government National Mortgage Association
(Ginnie Mae) (notional US$198 million, fair value
US$195 million), Federal Home Loan Banks (notional
US$1,000 million, fair value US$999 million), and Federal Farm
Credit Bank (notional US$400 million, fair value
US$400 million).
- Trading equity securities issued by Fannie Mae (fair value
US$3 million) and Freddie Mac (fair value US$1 million) which
are hedged by short positions in stock indices, and trading
equity securities in, Student Loan Marketing Association
(Sallie Mae) (fair value US$2 million)
- Short positions in debt securities, predominantly To Be
Announced securities, of Fannie Mae (notional US$133 million,
fair value US$131 million) and Freddie Mac (notional US$217
million, fair value US$208 million)
(2) Liquidity and credit facilities to third party sponsored ABCP
conduits amounted to US$639 million, to non-USRMM unhedged CLO
amounted to US$64 million and to non-USRMM unhedged others
amounted to US$94 million.
(3) Gross of valuation adjustments (VA) for purchased credit
derivatives of $6.0 billion.
(4) This is the fair value of the contracts, which were typically
zero, or close to zero, at the time they were entered into.
(5) After write-downs.
(6) As at July 31, 2008, the rating for super senior CDO of Mezzanine
RMBS was CC. The rating for the warehouse RMBS was approximately
46% investment grade and 54% non-investment grade (based on % of
market value).
(7) Includes USRMM exposures held in FirstCaribbean which mature in
25 to 38 years and are rated AA1 to AAA.
(8) During the quarter, we have sold and unwound some of our USRMM
exposures that were previously hedged, leaving the purchased
credit derivatives unmatched.
(9) Hedged with a large American diversified multi-national insurance
and financial services company with which CIBC has market standard
collateral arrangements.
(10) Estimated USRMM exposure in the third party sponsored ABCP
conduits was $110 million as at July 31, 2008.
(11) Investments and loans include unfunded investment commitments with
a notional of US$318 million (April 30, 2008: US$331 million) and
negative fair value of US$44 million (April 30, 2008:
US$31 million).
n/a not applicableUnhedged USRMM exposures
Our remaining unhedged exposure to the USRMM, after write downs, was
US$45 million ($46 million) as at July 31, 2008. To mitigate this exposure, we
also have subprime index hedges with a notional amount of US$75 million
($77 million) and a fair value of US$58 million ($59 million) as at July 31,
2008. During the quarter, we terminated $225 million notional of index hedges
as a result of the reduction in our exposures. We had gains on index hedges,
net of realized and unrealized losses on our unhedged USRMM exposures, in the
quarter of US$12 million ($12 million).
Unhedged non-USRMM exposures
Our unhedged exposures to non-USRMM primarily relates to four categories:
CLO, corporate debt, third party sponsored ABCP conduits, warehouse non-RMBS,
and other. A fifth category, commercial mortgage backed securities (CMBS) in
FirstCaribbean was sold during the quarter.
CLO
Our unhedged CLO assets with notional of US$418 million ($428 million)
were mostly rated AAA as at July 31, 2008, and are backed by diversified pools
of European based senior secured leveraged loans.
Corporate debt
Approximately 21%, 53% and 26% of the unhedged corporate debt exposures
with notional of US$209 million ($214 million) are related to positions in
Europe, Canada and other countries respectively.
Third party sponsored ABCP conduits
We hold positions in and provide liquidity facilities with a total
notional of US$1,098 million ($1,124 million) to ABCP conduits that are
parties to the "Montreal Accord" and ABCP conduits that are not parties to the
Montreal Accord.
Montreal Accord
---------------
As at July 31, 2008 we held $452 million (October 31, 2007: $358 million)
in par value holdings in non-bank sponsored ABCP subject to the Montreal
Accord, including $94 million notional purchased in the third quarter which
was in excess of management's estimate of fair value of these instruments, to
settle claims. These non-bank sponsored ABCP are backed by traditional
securitization assets, and leveraged and unleveraged CDOs, some of which have
U.S sub-prime exposures (estimated notional exposure to U.S sub-prime
mortgages was $110 million as at July 31, 2008).
We also provided a liquidity facility of $270 million to one of these
conduits which was undrawn as at July 31, 2008. The conditions of the facility
require the conduit's notes, which are currently unrated, to be rated R-1
(high) by DBRS, hence it is unlikely to be drawn. If the restructuring plan
set out in the Montreal Accord ultimately prevails as we expect, we will
receive $145 million in senior Class A-1 notes, $153 million in senior Class
A- 2 notes and $152 million in various subordinated and tracking notes and
$2 million in accrued interest in exchange for our existing ABCP with par
value of $452 million in the third quarter. The Class A-1 and Class A-2 notes
pay a variable rate of interest that will be below market levels. The
subordinated notes are expected to be zero coupon in nature paying interest
and principal only after the Class A-1 and Class A-2 notes are settled in
full. The tracking notes will pass through the cash flows of the underlying
assets. All of the notes are expected to mature in December 2016.
Based on our estimate of the $258 million combined fair value of these
notes, we recorded cumulative losses of $170 million, all in previous
quarters.
In addition, pursuant to the restructuring plan, we expect to participate
in a Margin Funding Facility (MFF) to support the collateral requirements of
the restructured conduits. Under the terms of the MFF, we will be committed to
provide a $300 million undrawn loan facility to be used in the unlikely event
that the amended collateral triggers of the related credit derivatives are
breached and the new trusts to be created under the Montreal Accord do not
have sufficient assets to support the collateral requirements. If the loan
facility was fully drawn and more collateral was required, we would then have
the right to limit our commitment to the original $300 million, although the
consequence would likely be the loss of that $300 million loan.
Other ABCP conduits
-------------------
We also provided liquidity and credit related facilities to third party
sponsored ABCP conduits that are not parties to the Montreal Accord. During
the quarter, $100 million and $140 million of the facilities have been
terminated and drawn respectively. The drawn amounts are included in non-USRMM
unhedged others in the table on page 11. As at July 31, 2008, $384 million of
the facilities, all to U.S. conduits, remained undrawn. The underlying assets
of these conduits comprise U.S. auto loans (50%) and U.S. CDO (48%), with
maturities ranging from five to eight years. Of the $384 million, $40 million
was subject to liquidity agreements under which the conduits maintain the
right to put their assets back to CIBC at par. Approximately 87% of the
$40 million is provided to conduits with CDO assets. In addition, as at
July 31, 2008, we had investments and loans of $18 million in third party
sponsored ABCP conduits that are not parties to the Montreal Accord.
Warehouse non-RMBS
Of the unhedged warehouse non-RMBS assets with notional of US$160 million
($164 million), 73% is investment in CLOs backed by diversified pools of U.S.
based senior secured leveraged loans. Approximately 14% is investment in CDOs
backed by trust preferred securities with exposure to U.S. real estate
investment trusts. Another 7% has exposure to the U.S. commercial real estate
market.
Other
Other unhedged exposure with notional of US$254 million ($260 million) is
primarily related to film rights receivables (40%), lottery receivables (23%),
and U.S. mortgage defeasance loans (27%).
Hedged with financial guarantors (USRMM and non-USRMM)
ACA
---
During the quarter, we recorded a charge of US$102 million ($104 million)
on our exposures hedged by ACA. We have increased our valuation adjustments by
US$12 million ($12 million) against the receivable from ACA for unmatched
purchased credit derivatives, bringing the total valuation adjustments for ACA
to US$3.0 billion ($3.1 billion) as at July 31, 2008. With the restructuring
of ACA on August 7, 2008 as noted above, we have reduced our credit valuation
adjustments against ACA resulting in a credit to earnings of US$11 million
($11 million). As a result, the fair value of derivative contracts with ACA
net of valuation adjustments was US$41 million ($42 million) as at July 31,
2008.
Other counterparties
--------------------
We also recorded a charge of US$799 million ($800 million) on the hedging
contracts provided by other financial guarantors to increase their related
valuation adjustments to US$3.0 billion ($3.0 billion) as at July 31, 2008.
The fair value of derivative contracts with other financial guarantors net of
valuation adjustments was US$2.9 billion ($2.9 billion). Further significant
losses could result depending on the performance of both the underlying assets
and the financial guarantors.
Mitigating our exposure to these financial guarantors are credit hedges
with a notional amount of US$205 million ($210 million) and a fair value of
US$65 million ($67 million) as at July 31, 2008. During the quarter, we
recognized a gain of US$66 million ($68 million) net of premium cost on these
remaining hedges and others that were unwound in the quarter. These credit
hedges are market standard contracts and generic to each insurer. They do not
specifically refer to the contracts that we have with each insurer. Subsequent
to July 31, 2008, we terminated these hedges realizing their gains.
In addition, we have loan and tranched securities positions that are
partly secured by direct guarantees from financial guarantors or by bonds
guaranteed by financial guarantors. As at July 31, 2008, these positions were
performing and the total amount guaranteed by financial guarantors was
approximately US$220 million.
The following tables present the notional amounts and fair values of
purchased protection from financial guarantors by counterparty. The fair value
net of valuation adjustments is included in derivative instruments in other
assets on the consolidated balance sheet.US$ millions, as at July 31, 2008
-------------------------------------------------------------------------
USRMM related
------------------------------------- -----------------------------------
Standard Moody's Credit-
Counter- and investor Fitch Fair related
party Poor's services Ratings Notional value(1) VA
-------------------------------------------------------------------------
I AA(2)(3) A2 -(4) $ 75 $ 23 $ (12)
II AA(2)(3) Aa3 -(4) 541 434 (169)
III A-(2) Ba2(5) CCC 618 573 (366)
IV BB(2) B1 CCC 533 494 (333)
V BBB-(2) B2(5)(6) CCC(6) 2,580 1,873 (807)
VI CCC - - 3,322 3,069 (3,028)
VII AAA Aaa(2) AAA - - -
VIII AAA Aaa(2) AAA - - -
IX AAA Aaa(2) AAA - - -
X A(2) A3 -(7) - - -
XI A+ A3 A+(2) - - -
-------------------------------------------------------------------------
Total financial guarantors $ 7,669 $ 6,466 $ (4,715)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008 $ 7,879 $ 6,223 $ (4,667)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-USRMM Total
---------------------- ------------------------------ -------------------
Credit- Net
Counter- Fair related fair
party Notional value(1) VA Notional value
-------------------------------------------------------------------------
I $ 2,031 $ 292 $ (157) $ 2,106 $ 146
II 1,786 319 (125) 2,327 459
III 1,515 185 (118) 2,133 274
IV 2,308 222 (150) 2,841 233
V 2,678 281 (121) 5,258 1,226
VI - - - 3,322 41
VII 5,200 285 (178) 5,200 107
VIII 5,115 481 (218) 5,115 263
IX 1,491 156 (56) 1,491 100
X 2,252 200 (146) 2,252 54
XI 198 3 (1) 198 2
-------------------------------------------------------------------------
Total financial
guarantors $ 24,574 $ 2,424 $ (1,270) $ 32,243 $ 2,905
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008 $ 24,753 $ 1,840 $ (502) $ 32,632 $ 2,894
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Before VA
(2) On credit watch with negative implications
(3) Credit watch removed in August, 2008.
(4) Rating withdrawn in June, 2008. No longer rated by Fitch ratings.
(5) On credit watch
(6) Changed to credit watch with positive implications in August, 2008.
(7) Rating withdrawn in May, 2008. No longer rated by Fitch ratings.
The assets underlying the exposure hedged by financial guarantors are as
follows:
US$ millions, as at July 31, 2008
-------------------------------------------------------------------------
USRMM
related Non-USRMM related
--------- -------------------------------------------------
Notional Notional
-----------------------------------------------------------
Corporate
Counterparty CDO CLO debt CMBS Others Total
-------------------------------------------------------------------------
I $ 75 $ 686 $ - $ 777 $ 568 $ 2,031
II 541 952 - - 834 1,786
III 618 1,387 - - 128 1,515
IV 533 2,010 - - 298 2,308
V 2,580 2,678 - - - 2,678
VI 3,322 - - - - -
VII - - 5,200 - - 5,200
VIII - 4,865 - - 250 5,115
IX - 1,314 - - 177 1,491
X - 75 1,759 - 418 2,252
XI - - - - 198 198
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
financial
guarantors $ 7,669 $ 13,967 $ 6,959 $ 777 $ 2,871 $ 24,574
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008 $ 7,879 $ 14,075 $ 6,959 $ 777 $ 2,942 $ 24,753
-------------------------------------------------------------------------USRMM
Hedged
------
Our USRMM related positions of notional $5.8 billion hedged by financial
guarantors comprise super senior CDOs with underlyings being approximately 45%
subprime RMBS, 28% Alt-A RMBS, 13% ABS CDOs and 14% non-USRMM. Sub-prime and
Alt-A underlyings consist of approximately 22% pre-2006 vintage as well as 78%
2006 and 2007 vintage RMBS. Sub-prime exposures are defined as having Fair
Isaac Corporation (FICO) scores less than 660; and Alt A underlyings as those
exposures that have FICO scores of 720 or below but greater than 660.
Unmatched purchased credit derivatives
--------------------------------------
Underlying reference assets for unmatched credit derivatives of notional
$1.9 billion purchased from financial guarantors represent super senior CDOs
with approximately 81% sub-prime RMBS, 1% Alt-A RMBS, and 18% ABS CDOs. Sub-
prime and Alt-A underlyings consist of approximately 46% pre-2006 vintage and
54% 2006 and 2007 vintage RMBS.
Non-USRMM
The following provides further data and description of the assets
underlying the non-USRMM exposures hedged by financial guarantors:US$ millions, as at July 31, 2008
----------------------------------------------------------------
Total Notional/Tranche
Fair tranches -----------------
Notional value (1) High Low
----------------------------------------------------------------
CLO $13,967 $ 1,436 82 $ 375 $ 25
Corporate debt 6,959 415 11 800 259
CMBS 777 192 2 453 324
Others
Non-US RMBS 481 57 5 178 20
TruPS 873 175 12 128 24
Other 1,517 149 13 270 1
----------------------------------------------------------------
Total $24,574 $2,424 125 $ 2,204 $ 653
----------------------------------------------------------------
----------------------------------------------------------------
-------------------------------------------------------------------------
Weighted
average Invest-
life ment
Fair value/Tranche (WAL) grade(2) Subordination
------------------ in under- -----------------
High Low years lyings Average Range
-------------------------------------------------------------------------
CLO $ 46 $ - 5.4 1% 32% 6-67%
Corporate debt 93 13 4.3 75% 19% 15-30%
CMBS 102 90 6.5 66% 44% 43-46%
Others
Non-US RMBS 22 - 6.9 n/a 32% 1-53%
TruPS 50 3 5.1 n/a 49% 46-57%
Other 68 - 8.0 n/a 17% 0-53%
-------------------------------------
Total $ 381 $ 106
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) A tranche is a portion of a security offered as part of the same
transaction where the underlying may be an asset, pool of assets,
index or another tranche. The value of the tranche depends on the
value of the underlying, subordination and deal specific structures
such as tests/triggers.
(2) Or equivalent based on internal credit ratings.
n/a Not availableCLO
The CLO, which are primarily AAA rated tranches, comprise assets in a
wide range of industries with the highest concentration in the services
(personal and food) industry (30%), the broadcasting, publishing and
telecommunication sector (18%), and the manufacturing sector (15%). Only 4% is
in the real estate sector. Approximately 63% and 32% of the underlyings
represent U.S. and European exposures respectively.
Corporate Debt
The Corporate Debt underlyings consist of 11 super senior synthetic CDO
tranches that reference portfolios of primarily U.S. (56%) and European (34%)
corporate debt in various industries (manufacturing 27%, financial
institutions 14%, cable and telecommunications 10%, retail and wholesale 9%).
CMBS
The two synthetic tranches reference CMBS portfolios, which are backed by
pools of commercial real estate mortgages located primarily in the United
States.
Others
Others are CDOs backed by trust preferred securities (TruPs), which are
Tier II Innovative Capital Instruments issued by U.S. regional banks and
insurers, non-U.S. RMBS (such as European residential mortgages) and other
assets including tranches of CDOs, aircraft leases, railcar leases and movie
receivables.
Hedged with other counterparties
The following table provides the notional amounts and fair values of
purchased credit derivatives from counterparties other than financial
guarantors. Approximately 99% of other counterparties hedging our non-USRMM
exposures have internal credit ratings equivalent to investment grade.USRMM related Non-USRMM
------------------- -------------------
Fair Fair
US$ millions, as at Notional value Notional value
-------------------------------------------------------------------------
Non-bank financial institutions $ 550 $ 361 $ 309 $ 18
Banks - - 948 66
Canadian conduits - - 9,176 475
Governments - - - -
Others - - 2 1
-------------------------------------------------------------------------
Total $ 550 $ 361 $ 10,435 $ 560
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
---------------------------------------
Notional Fair value
------------------- -------------------
2008 2008 2008 2008
US$ millions, as at Jul. 31 Apr. 30 Jul. 31 Apr. 30
-------------------------------------------------------------------------
Non-bank financial institutions $ 859 $ 992 $ 379 $ 305
Banks 948 1,434 62 28
Canadian conduits 9,176 9,256 475 245
Governments - 347 - -
Others 2 2 1 1
-------------------------------------------------------------------------
Total $ 10,985 $ 12,031 $ 917 $ 579
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The assets underlying the exposure hedged by counterparties other than
financial guarantors is as follows:
USRMM Non-USRMM related
related
---------- -----------------------------
Notional Notional
---------- -----------------------------
CDO(1) CLO(2) Corporate Other(3)
US$ millions, as at July 31, 2008 debt
-------------------------------------------------------------------------
Non-bank financial institutions $ 550 $ - $ - $ 309(4)
Banks - 529 - 419(4)
Canadian conduits - - 9,176 -
Governments - - - -
Others - - - 2(4)
-------------------------------------------------------------------------
Total $ 550 $ 529 $ 9,176 $ 730
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008 $ 591 $ 529 $ 9,256 $ 1,655
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The US$550 million represents super senior CDOs with approximately
76% subprime RMBS, 3% Alt-A RMBS, 10% ABS CDOs, and 11% non-USRMM.
Subprime and Alt-A are all pre-2006 vintage.
(2) 3% of underlyings is investment grade. 4% is North American exposure
and 96% is European exposure. Major industry concentration is in the
services industry (40%), the manufacturing sector (20%), the
broadcasting and communication industries (14%); and only 3% is in
the real estate sector.
(3) 71% of underlyings is investment grade or equivalent. 36% is U.S.
exposure and 31% is European exposure. Major industry concentration
is in the banking and finance sector (31%), the broadcasting,
publishing and telecommunication industries (14%), and the mining and
oil and gas sector (12%); only 2% is in the real estate sector.
(4) Consist largely of single name credit default swaps which hedge
written single name credit default swaps and securities.Canadian conduits
We purchase credit derivatives protection from Canadian conduits and
generate revenue by selling the same protection on to third parties. The
reference portfolios consist of diversified indices of corporate loans and
bonds. These conduits are in compliance with their collateral posting
arrangements and have posted collateral exceeding current market exposure. One
of the conduit counterparties, Great North Trust, is sponsored by CIBC and the
remaining conduit counterparties are parties to the Montreal Accord.-------------------------------------------------------------------------
US$ millions, Collateral
as at Mark-to- and
July 31, 2008 Underlying Notional(1) market guarantee(2)
-------------------------------------------------------------------------
Conduits
--------
Great North Trust Investment grade
corporate
credit index(3) $ 4,826 $ 291 $ 406(4)
Nemertes I/ 160 Investment
Nemertes II grade
corporates(5) 4,350 184 462
-------------------------------------------------------------------------
Total $ 9,176 $ 475 $ 868
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008 $ 9,256 $ 245 $ 766
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) These exposures mature within 5 to 8 years.
(2) Comprises investment grade notes issued by third party sponsored
conduits, corporate floating rate notes, commercial paper issued by
CIBC-sponsored securitization conduits, CIBC bankers acceptances, and
funding commitments.
(3) Consists of a static portfolio of 125 North American corporate
reference entities that were investment grade rated when the index
was created. 85% of the entities are rated Baa3 or higher.
123 reference entities are U.S. entities. Financial guarantors
represent approximately 2.4% of the portfolio. Attachment point is
30% and there is no direct exposure to USRMM or the U.S. commercial
real estate market.
(4) Includes US$114 million of funding commitments (with indemnities)
from certain third party investors in Great North Trust.
(5) Consists of a static portfolio of 160 corporate reference entities of
which 91.3% was investment grade on the trade date. 87% entities are
currently rated Baa3 or higher (investment grade). 77 reference
entities are U.S. entities. Financial guarantors represent
approximately 2.5% of the portfolio. Attachment point is 20% and
there is no direct exposure to USRMM or the U.S. commercial real
estate market. Nereus is the sponsor for Nemertes I and Nemertes II
trusts.Leveraged finance business
We provide leveraged finance to non-investment grade customers to
facilitate their buyout, acquisition and restructuring activities. We
generally underwrite leveraged financial loans and syndicate the majority of
the loans, earning a fee during the process.
We sold our U.S. leveraged finance business as part of our sale of some
of our U.S. businesses to Oppenheimer and are exiting our European leveraged
finance (ELF) business.
As with the structured credit run-off business, the risk in the ELF run-
off business is also managed by a focused team with the mandate to reduce the
residual portfolio. As at July 31, 2008, we have funded leveraged loans of
$924 million (April 30, 2008: $851 million), of which $1 million (April 30,
2008: nil) is considered impaired, and unfunded letters of credits and
commitments of $288 million (April 30, 2008: $374 million) of which
$23 million, (April 30, 2008: nil) is considered impaired. Associated with
this, we had a loss of $5 million related to a credit loss provision on
impaired loans and unfunded commitments during the quarter.Exposures of ELF loans by industry are as follows:
------------------------
$ millions, as at July 31, 2008 Drawn(1) Undrawn(1)
-------------------------------------------------------------------------
Construction $ 85 $ 37
Manufacturing 312 111
Services 254 63
Transportation and public utilities 41 33
Wholesale trade 232 44
-------------------------------------------------------------------------
Total $ 924 $ 288
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes impairmentOTHER SELECTED ACTIVITIES
-------------------------------------------------------------------------
In response to the recommendations of the Financial Stability Forum, this
section provides additional details on other selected activities.
Securitization business
Our securitization business provides clients access to funding in the
debt capital markets. We sponsor several multi-seller conduits in Canada that
purchase pools of financial assets from our clients, and finance the purchases
by issuing commercial paper to investors. We generally provide the conduits
with commercial paper backstop liquidity facilities, securities distribution,
accounting, cash management and other financial services.
As at July 31, 2008, our holdings of ABCP issued by our sponsored
conduits were $44 million (October 31, 2007: $3.1 billion), and our committed
backstop liquidity facilities to these conduits were $9.8 billion. We also
provided credit facilities of $60 million to these conduits as at July 31,
2008.
The following table shows the underlying collateral and the average
maturity for each asset type in our multi-seller conduits:-------------------------------------------------------------------------
Estimated
weighted
Funded avg. life
$ millions, as at July 31, 2008 amount (years)
-------------------------------------------------------------------------
Asset class
Residential mortgages $ 3,642 2.3
Auto leases 2,709 1.2
Franchise loans 785 1.7
Auto loans 608 1.1
Credit cards 975 4.6(1)
Dealer floorplan 487 1.3
Equipment leases/loans 351 1.4
Other 26 1.9
-------------------------------------------------------------------------
Total $ 9,583 2.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008 $ 12,160 2.0
-------------------------------------------------------------------------
(1) Based on the revolving period and amortization period contemplated in
the transaction.The short-term notes issued by the conduits are backed by the above
assets. The performance of the above assets has met the criteria required to
retain the ratings of the notes issued by the multi-seller conduits.
In addition, we also securitize our mortgages and credit cards
receivables. Details of our securitization transactions during the quarter are
provided in Note 6 to the consolidated financial statements.
U.S. real estate finance
In our U.S. real estate finance business, we operate a full service
platform which originates commercial mortgages to mid-market clients, under
three programs. The construction program offers floating rate financing to
properties under construction. The interim program offers fixed and floating-
rate financing for properties that are fully leased or with some leasing or
renovation yet to be done. Once the construction and interim phases are
complete and the properties are income producing, borrowers are offered fixed
rate financing within the permanent program. These commercial mortgages are
then sold into CMBS programs. The business also maintains CMBS trading and
distribution capabilities. As at July 31, 2008, the group has a CMBS inventory
with a market value of US$3.3 million. The following table provides a summary
of our positions in this business as at July 31, 2008:-------------------------------------------------------------------------
Unfunded Funded
US$ millions, as at July 31, 2008 commitments loans(2)
-------------------------------------------------------------------------
Construction program $ 298 $ 622
Interim program 164 1,129
Commercial fixed rate mortgages - 151(1)
-------------------------------------------------------------------------
Total $ 462 $ 1,902
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008 $ 413 $ 1,944
-------------------------------------------------------------------------
(1) This represents the market value of funded loans of US$209 million.
(2) Funded loans of US$190 million are economically hedged with interest
rate swap and total rate of return swaps. The loans are provided for
commercial real estate and the maturities of the loans are between
1-2 years.
FINANCIAL PERFORMANCE REVIEW
----------------------------------------------------- -------------------
For the three For the nine
months ended months ended
----------------------------- -------------------
2008 2008 2007 2008 2007
$ millions Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Net interest income $ 1,327 $ 1,349 $ 1,180 $ 3,830 $ 3,318
Non-interest income 578 (1,223) 1,799 (2,320) 5,802
----------------------------------------------------- -------------------
Total revenue 1,905 126 2,979 1,510 9,120
Provision for credit
losses 203 176 162 551 471
Non-interest expenses 1,725 1,788 1,819 5,274 5,738
----------------------------------------------------- -------------------
(Loss) income before
taxes and non-
controlling interests (23) (1,838) 998 (4,315) 2,911
Income tax (benefit)
expense (101) (731) 157 (1,834) 479
Non-controlling interests 7 4 6 15 20
----------------------------------------------------- -------------------
Net income (loss) $ 71 $ (1,111) $ 835 $ (2,496) $ 2,412
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------Net interest income
Net interest income was up $147 million or 12% from the same quarter last
year, mainly due to decreased trading interest expense, volume growth in
retail products, interest income on tax reassessments, and higher interest
income in FirstCaribbean. These factors were offset in part by interest
expense related to leveraged leases.
Net interest income was down $22 million or 2% from the prior quarter,
primarily due to interest expense related to leveraged leases, offset in part
by volume growth in retail products, interest income on tax reassessments, and
the impact of two more days in this quarter.
Net interest income for the nine months ended July 31, 2008 was up
$512 million or 15% from the same period in 2007, mainly due to volume growth
in retail products, decreased trading interest expense, higher interest income
in FirstCaribbean, interest income on tax reassessments, and the impact of one
more day. These factors were offset in part by interest expense related to
leveraged leases.
Non-interest income
Non-interest income was down $1,221 million or 68% from the same quarter
last year, primarily due to charges on credit protection purchased from
financial guarantors and MTM losses related to our exposure to the USRMM. In
addition, lower trading activities, the impact of the sale of some of our U.S.
businesses, lower fair value option (FVO) revenue, and lower gains on
available for sale (AFS) securities also contributed to the decline.
Non-interest income was up $1,801 million from the prior quarter, mainly
due to lower charges on credit protection purchased from financial guarantors
and lower MTM losses related to our exposure to the USRMM. In addition, higher
trading activities, the prior quarter foreign exchange loss on the
repatriation of retained earnings from our U.S. operations, and higher gains
on AFS securities also contributed to the increase.
Non-interest income for the nine months ended July 31, 2008 was down
$8,122 million from the same period in 2007, primarily due to charges on
credit protection purchased from financial guarantors and MTM losses related
to our exposure to the USRMM. In addition, lower trading activities, the
impact of the sale of some of our U.S. businesses, lower FVO revenue, and
lower gains on AFS securities also contributed to the decline. These factors
were partially offset by higher gains on credit derivatives.
Provision for credit losses
Provision for credit losses was up $41 million or 25% from the same
quarter last year, largely due to higher losses in the cards portfolio as a
result of volume growth, an increase in the provision relating to the expiry
of previous credit card securitizations, and higher loss rates. These factors
were partially offset by improvements in the personal lending portfolio.
Higher losses in CIBC World Markets in the U.S. and Europe also contributed to
the increase.
Provision for credit losses was up $27 million or 15% from the prior
quarter, primarily due to higher losses in the cards portfolio as a result of
the reasons noted above.
Provision for credit losses for the nine months ended July 31, 2008 was
up $80 million or 17% from the same period in 2007. Higher losses in the cards
portfolio as a result of the reasons noted above and lower recoveries in
Europe in CIBC World Markets were partially offset by improvements in the
personal lending portfolio. The second quarter of 2007 benefited from the
$24 million reversal of the general allowance.
Non-interest expenses
Non-interest expenses were down $94 million or 5% from the same quarter
last year primarily due to lower performance-related compensation, commission,
pension, telecommunication, and computer expenses. These were offset in part
by higher litigation expenses.
Non-interest expenses were down $63 million or 4% from the prior quarter,
primarily due to lower litigation expenses, partially offset by higher
performance-related compensation.
Non-interest expenses were down $464 million or 8% for the nine months
ended July 31, 2008 from the same period in 2007. The decrease was mainly due
to lower performance-related compensation, partially offset by higher
litigation expenses. The current period also benefited from lower commission,
pension, and communication expenses.
Income taxes
Income tax benefit was $101 million, compared to an expense of
$157 million in the same quarter last year. The change was largely due to
reduced income. The prior period also benefited from income tax recoveries.
The income tax benefit in the current quarter is large relative to the loss
before taxes and non-controlling interests owing to the mix of earnings in
jurisdictions that have different tax rates. Income tax benefit was down
$630 million from the prior quarter, primarily due to a lower loss before tax.
The income tax benefit for the nine months ended July 31, 2008 was
$1,834 million, compared with an expense of $479 million in the same period in
2007. The income tax benefit was due to the loss during the current period.
The effective tax recovery rate was 439.1% for the quarter, compared to
an effective tax rate of 15.7% for the same quarter last year and a tax
recovery rate of 39.8% for the prior quarter. The current quarter recovery
rate is high for the reason noted above. The effective tax recovery rate for
the nine months ended July 31, 2008 was 42.5% compared to an effective tax
rate of 16.5% for the same period in 2007.
At the end of the quarter, our future income tax asset was $1.3 billion,
net of a US$82 million ($84 million) valuation allowance. Included in the
future income tax asset are $954 million related to a Canadian non-capital
loss carryforward which expires in 20 years, and $68 million related to a
Canadian capital loss carryforward which has no expiry date. Accounting
standards require a valuation allowance when it is more likely than not that
all or a portion of a future income tax asset will not be realized prior to
its expiration. Although realization is not assured, we believe that based on
all available evidence, it is more likely than not that all of the future
income tax asset, net of the valuation allowance, will be realized.
Foreign exchange
Our U.S. dollar denominated results are impacted by fluctuations in the
U.S. dollar/Canadian dollar exchange rate. The Canadian dollar appreciated 5%
on average relative to the U.S. dollar from the same quarter last year,
resulting in a $11 million decrease in the translated value of our U.S. dollar
functional earnings.
The Canadian dollar depreciated 1% on average relative to the U.S. dollar
from the prior quarter, resulting in a $1 million increase in the translated
value of our U.S. dollar functional earnings.
The Canadian dollar appreciated 11% on average relative to the U.S.
dollar for the nine months ended July 31, 2008 from the same period in 2007,
resulting in a $223 million decrease in the translated value of our U.S.
dollar functional earnings.Review of quarterly financial information
2008 2007
-------------------------------------------------------------------------
$ millions, except per
share amounts, for the
three months ended Jul. 31 Apr. 30 Jan. 31 Oct. 31
-------------------------------------------------------------------------
Revenue
CIBC Retail Markets $ 2,355 $ 2,239 $ 2,371 $ 2,794
CIBC World Markets (598) (2,166) (2,957) 5
Corporate and Other 148 53 65 147
-------------------------------------------------------------------------
Total revenue 1,905 126 (521) 2,946
Provision for credit losses 203 176 172 132
Non-interest expenses 1,725 1,788 1,761 1,874
-------------------------------------------------------------------------
(Loss) income before taxes and
non-controlling interests (23) (1,838) (2,454) 940
Income tax (benefit) expense (101) (731) (1,002) 45
Non-controlling interests 7 4 4 11
-------------------------------------------------------------------------
Net income (loss) $ 71 $ (1,111) $ (1,456) $ 884
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per share
- basic $ 0.11 $ (3.00) $ (4.39) $ 2.55
- diluted(1) $ 0.11 $ (3.00) $ (4.39) $ 2.53
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
$ millions, except per
share amounts, for the
three months ended Jul. 31 Apr. 30 Jan. 31 Oct. 31
-------------------------------------------------------------------------
Revenue
CIBC Retail Markets $ 2,386 $ 2,309 $ 2,273 $ 2,171
CIBC World Markets 455 606 662 572
Corporate and Other 138 135 156 147
-------------------------------------------------------------------------
Total revenue 2,979 3,050 3,091 2,890
Provision for credit losses 162 166 143 92
Non-interest expenses 1,819 1,976 1,943 1,892
-------------------------------------------------------------------------
(Loss) income before taxes and
non-controlling interests 998 908 1,005 906
Income tax (benefit) expense 157 91 231 87
Non-controlling interests 6 10 4 -
-------------------------------------------------------------------------
Net income (loss) $ 835 $ 807 $ 770 $ 819
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per share
- basic $ 2.33 $ 2.29 $ 2.13 $ 2.34
- diluted(1) $ 2.31 $ 2.27 $ 2.11 $ 2.32
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) In case of a loss, the effect of stock options potentially
exercisable on diluted earnings (loss) per share will be anti-
dilutive; therefore, basic and diluted earnings (loss) per share will
be the same.Our quarterly results are modestly affected by seasonal factors. The
first quarter is normally characterized by increased credit card purchases
over the holiday period. 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 activities.
The acquisition of FirstCaribbean resulted in an increase in revenue in
CIBC Retail Markets since the first quarter of 2007. In addition, revenue was
particularly high in the fourth quarter of 2007 due to the gain recorded on
the Visa restructuring. CIBC World Markets revenue has been adversely affected
since the third quarter of 2007 due to the MTM losses on CDOs and RMBS, and
more significantly in the current three quarters due to the charges on credit
protection purchased from financial guarantors and MTM losses related to our
exposure to the USRMM.
The retail lending provision increased in 2008 largely due to higher
losses in the cards portfolio, attributable to volume growth, an increase in
the provision relating to the expiry of previous credit card securitizations,
and higher loss rates, partially offset by improvements in the personal
lending portfolio. Corporate lending recoveries and reversals have decreased
from the high levels in the past. Reversals of the general allowance were
included in the second quarter of 2007 and the fourth quarter of 2006.
Non-interest expenses were higher in 2007 resulting from the
FirstCaribbean acquisition. Performance-related compensation has been lower
since the third quarter of 2007. The net reversal of litigation accruals also
led to lower expenses in the third and fourth quarters of 2007.
The first three quarters of 2008 had an income tax benefit resulting from
the loss during the period. Income tax recoveries related to the favourable
resolution of various income tax audits and reduced tax contingencies were
included in the last three quarters of 2007 and the last quarter of 2006. Tax-
exempt income has generally been increasing over the period, until the second
and third quarters of 2008. Larger tax-exempt dividends were received in the
fourth quarters of 2007 and 2006. The last quarter of 2007 benefited from a
lower tax rate on the gain recorded on the Visa restructuring and the last two
quarters of 2007 benefited from a lower tax rate on the net reversal of
litigation accruals. Income tax benefit on the foreign exchange loss on the
repatriation of retained earnings from our foreign operations was included in
the second quarter of 2008. Income tax expense on the repatriation of capital
and retained earnings from our foreign operations was included in the fourth
quarter of 2007.
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, 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 financial measures useful
in analyzing financial performance. For a more detailed discussion on our non-
GAAP measures, see page 45 of the 2007 Annual Accountability Report.
The following tables provide a reconciliation of non-GAAP to GAAP
measures related to CIBC on a consolidated basis. The reconciliation of the
non-GAAP measures of our business lines are provided in their respective
sections.----------------------------------------------------- -------------------
For the For the
three months ended nine months ended
$ millions, ----------------------------- -------------------
except per 2008 2008 2007 2008 2007
share amounts Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Net interest income $ 1,327 $ 1,349 $ 1,180 $ 3,830 $ 3,318
Non-interest income 578 (1,223) 1,799 (2,320) 5,802
----------------------------------------------------- -------------------
Total revenue per
financial
statements A 1,905 126 2,979 1,510 9,120
TEB adjustment B 44 60 65 165 181
----------------------------------------------------- -------------------
Total revenue
(TEB)(1) C $ 1,949 $ 186 $ 3,044 $ 1,675 $ 9,301
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Non-interest
expenses
per financial
statements D $ 1,725 $ 1,788 $ 1,819 $ 5,274 $ 5,738
Less: amortization
of other
intangible assets 11 10 11 31 28
----------------------------------------------------- -------------------
Cash non-interest
expenses(1) E $ 1,714 $ 1,778 $ 1,808 $ 5,243 $ 5,710
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
(Loss) income
before taxes and
non-controlling
interests
per financial
statements F $ (23) $ (1,838) $ 998 $ (4,315) $ 2,911
TEB adjustment B 44 60 65 165 181
----------------------------------------------------- -------------------
Income (loss)
before taxes and
non-controlling
interests (TEB)(1) G $ 21 $ (1,778) $ 1,063 $ (4,150) $ 3,092
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Reported income
taxes per
financial
statements H $ (101) $ (731) $ 157 $ (1,834) $ 479
TEB adjustment B 44 60 65 165 181
Other tax
adjustments I - - 69 56 160
----------------------------------------------------- -------------------
Adjusted income
taxes(1) J $ (57) $ (671) $ 291 $ (1,613) $ 820
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Net income (loss)
applicable to
common shares K $ 41 $ (1,141) $ 783 $ (2,586) $ 2,271
Add: after tax-
effect of
amortization of
other intangible
assets 8 8 8 24 21
----------------------------------------------------- -------------------
Cash net income
(loss) applicable
to common
shares(1) L $ 49 $ (1,133) $ 791 $ (2,562) $ 2,292
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Basic weighted-
average common
shares (thousands) M 380,877 380,754 335,755 366,686 336,511
Diluted weighted-
average common
shares (thousands) N 382,172 382,377 338,691 368,352 339,739
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Cash efficiency
ratio (TEB)(1) E/C 88.0% n/m 59.4% n/m 61.4%
Reported
effective
income
tax rate
(TEB)(1)(2) (H+B)/G (271.4)% 37.7% 20.9% 40.2% 21.3%
Adjusted
effective
income tax
rate (1)(2) (H+I)/F 439.1% 39.8% 22.6% 41.2% 22.0%
Adjusted
effective
income tax
rate (TEB)(1)(2) J/G (271.4)% 37.7% 27.4% 38.9% 26.5%
Cash basic
earnings (loss)
per share (1) L/M $ 0.13 $ (2.98) $ 2.36 $ (6.99) $ 6.81
Cash diluted
earnings (loss)
per share (1)(3) L/N $ 0.13 $ (2.98) $ 2.34 $ (6.99) $ 6.75
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
(1) Non-GAAP measure.
(2) For the periods ended July 31, 2008 and April 30, 2008, represents
tax recovery rates applicable to the loss before tax and non-
controlling interests.
(3) In case of a loss, the effect of stock options potentially
exercisable on diluted earnings (loss) per share will be anti-
dilutive; therefore, basic and diluted earnings (loss) per share will
be the same.
n/m Not meaningful due to the net loss.Internal allocations
Treasury impacts the reported financial results of the strategic business
units (CIBC Retail Markets and CIBC World Markets) through two mechanisms:
Internal funds transfer pricing
Each business line is charged a marginal, market based cost of funds on
originated assets and credited with value for funds for any liabilities or
funding provided by the business line. As market rates change, the funds
transfer pricing system immediately reflects these changes for newly
originated balances and this impacts the revenue performance of each business
line.
Treasury revenue allocations
Once the risk inherent in our customer driven assets and liabilities is
transfer priced into Treasury, it is managed within CIBC's risk framework and
limits. The majority of revenues from these activities is allocated to, and
impacts, the "Other" business line within each strategic business unit. A
component of Treasury revenue, earnings on unallocated capital, remains in
Corporate and Other.
CIBC RETAIL MARKETS
-------------------------------------------------------------------------
CIBC Retail Markets provides a full range of financial products and
services to individual and business banking clients, as well as investment
management services globally to retail and institutional clients.Results(1)
----------------------------------------------------- -------------------
For the For the
three months ended nine months ended
----------------------------- -------------------
2008 2008 2007 2008 2007
$ millions Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Revenue
Personal and small
business banking $ 563 $ 540 $ 537 $ 1,647 $ 1,555
Imperial Service 250 239 247 733 716
Retail brokerage 275 264 295 815 891
Cards 460 415 405 1,298 1,214
Mortgages and
personal lending 292 302 367 913 1,104
Asset management 117 116 126 353 373
Commercial banking 127 117 127 370 369
FirstCaribbean 165 122 133 413 333
Other 106 124 149 423 413
----------------------------------------------------- -------------------
Total revenue (a) 2,355 2,239 2,386 6,965 6,968
Provision for credit
losses 196 174 167 525 501
Non-interest
expenses (b) 1,377 1,380 1,406 4,110 4,177
----------------------------------------------------- -------------------
Income before taxes
and non-controlling
interests 782 685 813 2,330 2,290
Income tax expense 203 174 212 579 491
Non-controlling
interests 7 2 5 13 16
----------------------------------------------------- -------------------
Net income (c) $ 572 $ 509 $ 596 $ 1,738 $ 1,783
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Efficiency ratio (b/a) 58.5% 61.6% 58.9% 59.9% 60.0%
Amortization of other
intangible assets (d) $ 7 $ 8 $ 8 $ 23 $ 21
Cash efficiency
ratio(2) ((b-d)/a) 58.2% 61.3% 58.6% 58.7% 59.6%
ROE(2) 45.6% 42.0% 47.8% 47.2% 50.9%
Charge for economic
capital(2) (e) $ (162) $ (154) $ (157) $ (472) $ (447)
Economic profit(2)
(c+e) $ 410 $ 355 $ 439 $ 1,266 $ 1,336
Regular workforce
headcount 28,341 28,253 27,612 28,341 27,612
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
(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 was down $24 million or 4% from the same quarter last year,
largely due to a slight decline in revenue and higher loan losses, partially
offset by lower expenses.
Net income was up $63 million or 12% from the prior quarter, largely due
to the gain on the sale of our remaining Visa Inc. shares, volume growth and
two more days in the quarter, partially offset by higher loan losses.
Net income for the nine months ended July 31, 2008 was down $45 million
or 3% from the same period in 2007, which benefited from a tax recovery of
$80 million. Excluding the tax recovery, net income was up on lower expenses,
partially offset by higher loan losses.
Our internal funds transfer pricing methodology provides a liquidity
payment to business units that source or provide funding and charges a
liquidity cost to business units that use funding. Compared to the prior
quarter and the same quarter last year on an aggregate basis, this has a
minimal impact to the results of CIBC Retail Markets.
Revenue
Revenue was down $31 million or 1% from the same quarter last year.
Continued strong volume growth and the gain on the sale of Visa Inc. shares
were offset by lower treasury revenue allocations. Spreads were relatively
flat as compression from a lower interest rate environment, the continued
shift in our product mix due to growth in secured lending and competitive
market conditions were offset by improvements in FirstCaribbean.
Personal and small business banking revenue was up $26 million, mainly
due to higher deposit revenue driven by 4% volume growth and favourable
internal funds transfer pricing.
Retail brokerage revenue was down $20 million, largely due to lower
trading and new issue activity.
Cards revenue was up $55 million, primarily driven by 12% volume growth,
the gain on the sale of Visa Inc. shares and higher fee income, partially
offset by unfavourable internal funds transfer pricing.
Mortgages and personal lending revenue was down $75 million. Strong
volume growth in residential mortgages of 12% and secured lending of 16% was
more than offset by unfavourable internal funds transfer pricing and lower
mortgage refinancing fees.
FirstCaribbean revenue was up $32 million due to higher deposit spreads,
fee income and securities revenue.
Other revenue was down $43 million, due to lower treasury revenue
allocations, partially offset by increased revenue in President's Choice
Financial as product balances grew 20%.
Revenue was up $116 million or 5% from the prior quarter. Solid volume
growth, the gain on the sale of Visa Inc. shares and the impact of two more
days were partially offset by lower allocated treasury revenue, which also
compressed spreads.
Personal and small business banking revenue was up $23 million, mainly
due to volume growth, two more days and higher fee income, partially offset by
slightly lower spreads.
Cards revenue was up $45 million, primarily due to the sale of Visa Inc.
shares, volume growth and two more days in the quarter.
Mortgages and personal lending revenue was down $10 million largely due
to a lower spreads, partially offset by volume growth and two more days in the
quarter.
Commercial banking revenue was up $10 million, largely due to volume
growth in deposits and higher fee income.
FirstCaribbean revenue was up $43 million, primarily due to higher
securities revenue and the sale of Visa Inc. shares.
Other revenue was down $18 million, primarily due to lower treasury
revenue allocations.
Revenue for the nine months ended July 31, 2008 was down $3 million from
the same period in 2007. Strong volume growth was offset by lower brokerage
revenue. Spreads were relatively flat as compression from a lower interest
rate environment, a change in our product mix due to growth in secured
lending, and competitive market conditions were offset by improvements in
FirstCaribbean.
Personal and small business banking revenue was up $92 million, led by
favourable internal funds transfer pricing and 4% growth in consumer deposits.
Imperial Service revenue was up $17 million, led by volume growth.
Retail brokerage revenue was down $76 million, as a result of lower
trading and new issue activity.
Cards revenue was up $84 million, primarily due to 13% growth in
outstandings and higher fee income, partially offset by unfavourable internal
funds transfer pricing.
Mortgages and personal lending revenue was down $191 million. Strong
volume growth in residential mortgages and secured lending of 12% and 15%
respectively was more than offset by unfavourable internal funds transfer
pricing and lower mortgage refinancing fees. Continued shift of the lending
portfolio to secured lines of credit negatively impacted spreads.
Asset management revenue was down $20 million, primarily due to lower fee
income.
FirstCaribbean revenue was up $80 million as the prior period revenue is
only included from the date of acquisition on December 22, 2006. Prior to
December 22, 2006, FirstCaribbean was equity-accounted and the revenue was
included in other.
Other revenue was up $10 million, due to higher revenue in President's
Choice Financial, partially offset by lower treasury revenue allocations.
Provision for credit losses
Provision for credit losses was up $29 million or 17% from the same
quarter last year, largely due to higher losses in the cards portfolio driven
by volume growth, an increase in the provision relating to the expiry of
previous credit card securitizations and higher loss rates. The impact of the
increase in cards was partially offset by lower losses in the personal lending
portfolio.
Provision for credit losses was up $22 million or 13% from the prior
quarter, largely due to higher losses in the cards portfolio.
Provision for credit losses for the nine months ended July 31, 2008 was
up $24 million or 5% from the same period in 2007, primarily due to higher
losses in the cards portfolio, partially offset by lower losses in the
personal lending portfolio.
Non-interest expenses
Non-interest expenses were down $29 million or 2% from the same quarter
last year, primarily due to lower corporate support costs and performance-
related compensation.
Non-interest expenses for the nine months ended July 31, 2008 were down
$67 million or 2% from the same period in 2007, primarily due to lower
performance-related compensation and corporate support costs, partially offset
by the FirstCaribbean acquisition.
Income taxes
Income tax expense was down $9 million or 4% from the same quarter last
year, mainly due to a decrease in income.
Income tax expense was up $29 million or 17% from the prior quarter,
mainly due to an increase in income.
Income tax expense was up $88 million or 18% for the nine months ended
July 31, 2008 from the same period in 2007, primarily due to the tax recovery
of $80 million in the prior period.
Regular workforce headcount
The regular workforce headcount of 28,341 was up 729 from the same
quarter last year, primarily due to increases in customer-facing staff.
CIBC WORLD MARKETS
-------------------------------------------------------------------------
CIBC World Markets is the corporate and investment banking arm of CIBC.
To deliver on its mandate as a premier client-focused and Canadian-based
investment bank, World Markets provides a wide range of credit, capital
markets, investment banking, merchant banking and research products and
services to government, institutional, corporate and retail clients in Canada
and in key markets around the world.Results(1)
----------------------------------------------------- -------------------
For the For the
three months ended nine months ended
----------------------------- -------------------
2008 2008 2007 2008 2007
$ millions Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Revenue (TEB)(2)
Capital markets $ (689) $ (2,253) $ 28 $ (6,111) $ 828
Investment banking
and credit products 134 102 328 519 779
Merchant banking 20 5 161 34 323
Other (19) 40 3 2 (26)
----------------------------------------------------- -------------------
Total revenue
(TEB)(2) (a) (554) (2,106) 520 (5,556) 1,904
TEB adjustment 44 60 65 165 181
----------------------------------------------------- -------------------
Total revenue (b) (598) (2,166) 455 (5,721) 1,723
Provision for
(reversal of) credit
losses 7 2 (5) 26 (10)
Non-interest
expenses (c) 266 358 319 975 1,264
----------------------------------------------------- -------------------
(Loss) income before
taxes and non-
controlling interests (871) (2,526) 141 (6,722) 469
Income tax benefit (333) (891) (80) (2,390) (85)
Non-controlling
interests - 2 1 2 4
----------------------------------------------------- -------------------
Net (loss) income (d) $ (538) $ (1,637) $ 220 $ (4,334) $ 550
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Efficiency ratio (c/b) n/m n/m 70.0% n/m 73.3%
Efficiency ratio
(TEB)(2) (c/a) n/m n/m 61.3% n/m 66.4%
ROE(2) (101.7)% (293.9)% 53.7% (264.2)% 43.9%
Charge for economic
capital(2) (e) $ (71) $ (73) $ (52) $ (216) $ (159)
Economic (loss)
profit(2) (d+e) $ (609) $ (1,710) $ 168 $ (4,550) $ 391
Regular workforce
headcount 1,060 1,145 1,825 1,060 1,825
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
(1) For additional segmented information, see the notes to the interim
consolidated financial statements.
(2) For additional information, see the "Non-GAAP measures" section.
n/m Not meaningful due to the net loss.Financial overview
Net loss was $538 million, compared to net income of $220 million in the
same quarter last year. CIBC World Markets' results were significantly
affected by the $596 million after-tax charge related to structured credit
run- off activities primarily due to credit valuation charges on credit
protection purchased from financial guarantors.
Net loss was down $1,099 million from the prior quarter, primarily due to
lower credit valuation charges on credit protection purchased from financial
guarantors.
Net loss for the nine months ended July 31, 2008 was up $4,884 million
from the same period in 2007, mainly due to losses related to structured
credit run-off activities.
Revenue
Revenue was down $1,053 million from the same quarter last year mainly
due to higher losses in the run-off businesses and the sale of certain U.S.
businesses. For a more detailed discussion of some of the significant items,
refer to the "Run-off businesses" section of the MD&A.
Capital markets revenue was down $717 million, primarily due to the
credit valuation charges on credit protection purchased from financial
guarantors. Revenue was also lower due to the impact of the sale of our U.S.
equities businesses in the first quarter.
Investment banking and credit products revenue was down $194 million,
primarily due to lower investment banking revenue, including the impact of the
sale of our U.S. investment and corporate banking business, which accounted
for $61 million of the decrease, lower revenue from non-core portfolios
including a charge related to leveraged leases, lower gains associated with
corporate loan hedging programs and lower revenue from U.S. real estate
finance.
Merchant banking revenue was down $141 million, mainly due to lower gains
from third-party managed funds and direct investments.
Other revenue was down $22 million, primarily due to the interest expense
related to leveraged leases.
Revenue was up $1,568 million from the prior quarter.
Capital markets revenue was up $1,564 million, primarily due to lower
credit valuation charges on credit protection purchased from financial
guarantors.
Investment banking and credit products revenue was up $32 million,
primarily due to higher gains associated with corporate loan hedging programs,
partially offset by lower investment banking revenue and the charge related to
leveraged leases.
Merchant banking revenue was up $15 million, primarily due to higher
gains net of write downs.
Other revenue was down $59 million, primarily due to lower net internal
funding credits and the interest expense related to leveraged leases.
Revenue for the nine months ended July 31, 2008 was down $7,444 million
from the same period in 2007.
Capital markets revenue was down $6,939 million, primarily due to the
losses related to structured credit run-off activities, which included a
$6 billion charge on credit protection purchased from financial guarantors and
MTM losses, net of gains on index hedges, of $575 million related to our
un-hedged exposure to the USRMM.
Investment banking and credit products revenue was down $260 million,
primarily due to lower gains from U.S. real estate finance and the impact of
the sale of our U.S. investment and corporate banking business and lower gains
from non-core portfolios including a charge related to leveraged leases,
partially offset by higher gains associated with corporate loan hedging
programs.
Merchant banking revenue was down $289 million, primarily due to lower
gains from direct investments and third-party managed funds.
Other revenue was up $28 million mainly due to higher net internal
funding credits, partially offset by the loss on sale of certain U.S.
businesses and the interest expense related to leveraged leases.
Provision for (reversal of) credit losses
Provision for credit losses was $7 million, compared with a reversal of
$5 million for the same quarter last year due to higher losses in the U.S. and
Europe.
Provision for credit losses for the nine months ended July 31, 2008 was
$26 million, compared to a reversal of $10 million in the same period in 2007,
mainly due to lower recoveries in Europe, higher losses in Canada and the
allocation of general provision for credit losses to strategic business lines
commencing this year, partially offset by lower losses in the U.S.
Non-interest expenses
Non-interest expenses were down $53 million or 17% from the same quarter
last year, primarily due to the impact of the sale of some of our U.S.
businesses and lower performance-related compensation, partially offset by a
reversal of a litigation provision in the prior year quarter.
Non-interest expenses were down $92 million or 26% from the prior
quarter, primarily due to a higher litigation expense in the prior quarter and
lower performance-related compensation.
Non-interest expenses for the nine months ended July 31, 2008 were down
$289 million or 23% from the same period in 2007, primarily due to lower
performance-related compensation and the impact of the sale of some of our
U.S. businesses, partially offset by higher litigation and professional
expenses.
Income taxes
Income tax benefit was $333 million, compared to $80 million in the same
quarter last year, due to the higher credit valuation charges on credit
protection purchased from financial guarantors.
Income tax benefit was down $558 million from the prior quarter, mainly
due to the higher loss in the prior quarter, resulting from the credit
valuation charges on the credit protection purchased from financial guarantors
noted above.
Income tax benefit for the nine months ended July 31, 2008 was
$2,390 million, compared with $85 million for the same period in 2007, mainly
due to the reasons noted above.
Regular workforce headcount
The regular workforce headcount of 1,060 was down 765 from the same
quarter last year primarily due to the sale of some of our U.S. businesses and
the exiting of certain activities, including structured credit and European
leveraged finance.
Regular workforce headcount was down 85 from the prior quarter primarily
due to the restructuring initiative announced in May 2008.
CORPORATE AND OTHER
-------------------------------------------------------------------------
Corporate and Other comprises the five functional groups - Technology and
Operations; Corporate Development; Finance; Administration; and Treasury and
Risk Management (TRM) - that support CIBC's business lines, as well as CIBC
Mellon joint ventures, and other income statement and balance sheet items, not
directly attributable to the business lines. The revenue and expenses of the
functional groups are generally allocated to the business lines.Results(1)
----------------------------------------------------- -------------------
For the For the
three months ended nine months ended
----------------------------- -------------------
2008 2008 2007 2008 2007
$ millions Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Total revenue $ 148 $ 53 $ 138 $ 266 $ 429
Recovery of credit
losses - - - - (20)
Non-interest expenses 82 50 94 189 297
----------------------------------------------------- -------------------
Income before taxes
and non-controlling
interests 66 3 44 77 152
Income tax (benefit)
expense 29 (14) 25 (23) 73
----------------------------------------------------- -------------------
Net income $ 37 $ 17 $ 19 $ 100 $ 79
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Regular workforce
headcount 10,850 10,947 10,878 10,850 10,878
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
(1) For additional segmented information, see the notes to the interim
consolidated financial statements.Financial overview
Net income was up $18 million or 95% from the same quarter last year,
primarily due to the interest income from income tax reassessments.
Net income was up $20 million from the prior quarter, mainly due to the
interest income from reassessments and higher net unallocated revenue from
treasury. The prior quarter was impacted by the foreign exchange loss on the
repatriation of retained earnings from our U.S. operations.
Net income for the nine months ended July 31, 2008 was up $21 million or
27% from the same period in 2007 primarily due to lower unallocated corporate
support costs and higher income tax recoveries, offset by lower unallocated
revenue from treasury and foreign exchange loss on the repatriation noted
above.
Revenue
Revenue was up $10 million or 7% from the same quarter last year,
primarily due to the interest income from reassessments.
Revenue was up $95 million from the prior quarter, mainly due to the
interest income from reassessments, higher net unallocated revenue from
treasury and prior quarter foreign exchange loss on the repatriation noted
above, partially offset by lower revenue from the hedging of stock
appreciation rights (SARs).
Revenue for the nine months ended July 31, 2008 was down $163 million or
38% from the same period in 2007, mainly due to lower unallocated revenue from
treasury, foreign exchange loss on the repatriation noted above, and lower
revenue from the hedging of SARs, offset by the interest income from
reassessments.
Recovery of credit losses
The nine months ended July 31, 2007 included a $20 million reversal of
the general allowance. Commencing 2008, we have allocated the general
allowance for credit losses between the two strategic business lines, CIBC
Retail Markets and CIBC World Markets.
Non-interest expenses
Non-interest expenses were down $12 million or 13% from the same quarter
last year, primarily due to lower unallocated corporate support costs, and
lower expenses related to SARs.
Non-interest expenses were up $32 million or 64% from the prior quarter,
mainly due to higher unallocated corporate support costs, partially offset by
lower expenses related to SARs.
Non-interest expenses for the nine months ended July 31, 2008 were down
$108 million or 36% for the same period in 2007, primarily due to lower
unallocated corporate support costs and lower expenses related to SARs.
Income tax
Income tax expense was up $4 million or 16% from the same quarter last
year, primarily due to higher income.
Income tax expense was $29 million, compared to an income tax benefit of
$14 million in the prior quarter. The prior quarter income tax benefit was due
to the repatriation noted above and income tax recoveries, offset by the tax
effecting of the prior quarter losses at rates in future years that are
expected to be less than the current year statutory rates.
Income tax benefit was $23 million for the nine months ended July 31,
2008, compared to a $73 million income tax expense from the same period in
2007. This change was due to reduced income and tax effecting of a portion of
the losses at prior years' tax rates, which were higher than the current year
statutory rate, partially offset by the tax effecting of a portion of the
losses at rates in future years that are expected to be less than the current
year statutory rates.FINANCIAL CONDITION
-------------------------------------------------------------------------
Review of consolidated balance sheet
-------------------------------------------------------------------------
2008 2007
$ millions, as at Jul. 31 Oct. 31
-------------------------------------------------------------------------
Assets
Cash and deposits with banks $ 12,446 $ 13,747
Securities 77,022 86,500
Securities borrowed or purchased under resale
agreements 25,513 34,020
Loans 164,608 162,654
Derivative instruments 22,967 24,075
Other assets 26,484 21,182
-------------------------------------------------------------------------
Total assets $329,040 $342,178
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and shareholders' equity
Deposits $228,601 $231,672
Derivative instruments 24,812 26,688
Obligations related to securities lent or sold
short or under repurchase agreements 34,531 42,081
Other liabilities 20,668 21,977
Subordinated indebtedness 6,521 5,526
Preferred share liabilities 600 600
Non-controlling interests 163 145
Shareholders' equity 13,144 13,489
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $329,040 $342,178
-------------------------------------------------------------------------
-------------------------------------------------------------------------Assets
Total assets as at July 31, 2008 were down $13.1 billion or 4% from
October 31, 2007.
Securities decreased due to lower trading and AFS securities, offset in
part by higher securities designated at fair value (FVO). Trading securities
decreased due to reduction in the equity portfolio, offset partially by the
purchase of assets at par from third-party structured securitization vehicles.
AFS securities decreased due to the sale of U.S. treasuries and a reduction in
CIBC-sponsored ABCP securities, offset partially by purchase of Government of
Canada bonds. FVO securities increased due to higher mortgage-backed
securities inventory to support our ongoing CIBC-originated residential
mortgage securitization program and to be available for collateral management
purposes.
The decrease in securities borrowed or purchased under resale agreements
was primarily due to normal client-driven business activity.
Loans have increased mainly due to volume growth in consumer loans and
credit cards. Residential mortgages decreased largely due to securitizations,
net of volume growth.
Derivative instruments decreased largely due to lower market valuation on
foreign exchange and equity derivatives, offset in part by higher interest
rate derivatives market valuation. The valuation adjustments related to the
credit protection purchased from financial guarantors was largely offset by
higher market valuation on credit derivatives resulting from widening of
credit spreads.
Other assets increased mainly due to an increase in income tax receivable
and derivatives collateral.
Liabilities
Total liabilities as at July 31, 2008 were down $12.8 billion or 4% from
October 31, 2007.
The decrease in deposits was mainly due to a reduction in our funding
requirements, offset partially by retail volume growth.
Derivative instruments decreased mainly due to lower market valuation on
foreign exchange and equity derivatives, partially offset by higher market
valuation on interest rate and credit derivatives.
The decrease in obligations related to securities lent or sold short or
under repurchase agreements is largely as a result of normal client-driven and
treasury funding activities resulting from a reduction in our funding
requirements.
Subordinated indebtedness increased due to two new issuances, partially
offset by redemptions.
Shareholders' equity
Shareholders' equity as at July 31, 2008 was down $345 million or 3% from
October 31, 2007, due to lower retained earnings resulting from the loss in
the current year to date, partially offset by the issuance of additional share
capital.
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, see pages 54 to 56 of the
2007 Annual Accountability Report.
Regulatory capital
Our minimum regulatory capital requirements are determined in accordance
with guidelines issued by the Office of the Superintendent of Financial
Institutions (OSFI). The OSFI guidelines evolve from the framework of risk-
based capital standards developed by the Bank for International Settlements
(BIS). Commencing November 1, 2007, our regulatory capital requirements are
based on the Basel II framework, as described in detail in the "Management of
risk" section.
BIS standards require that banks maintain minimum Tier 1 and Total
capital ratios of 4% and 8%, respectively. OSFI has established that Canadian
deposit-taking financial institutions maintain Tier 1 and Total capital ratios
of at least 7% and 10%, respectively.
Capital adequacy requirements are applied on a consolidated basis. The
consolidation basis applied to CIBC's financial statements is described in
Note 1 to the 2007 consolidated financial statements. All subsidiaries, except
certain investments and holdings which are not subject to risk assessment
under Basel II and are instead deducted from regulatory capital, are included
for regulatory capital calculation purposes. A deduction approach applies to
investments in insurance subsidiaries, substantial investments and
securitization-related activities. Our Canadian insurance subsidiary, CIBC
Life Insurance Company Limited, is subject to OSFI's Minimum Continuing
Capital Surplus Requirements for life insurance companies.
The following table presents the components of our regulatory capital.
The information as at July 31, 2008 is based on Basel II requirements and
information for October 31, 2007 is based upon Basel I requirements, and hence
the information is not comparable.-------------------------------------------------------------------------
Basel II Basel I
basis basis
2008 2007
$ millions, as at Jul. 31 Oct. 31
-------------------------------------------------------------------------
Tier 1 capital $ 11,626 $ 12,379
Tier 2 capital 5,461 6,304
Total regulatory capital 17,087 17,758
Risk-weighted assets 118,494 127,424
Tier 1 capital ratio 9.8% 9.7%
Total capital ratio 14.4% 13.9%
Assets-to-capital multiple 17.7x 19.0x
-------------------------------------------------------------------------
-------------------------------------------------------------------------Tier 1 ratio was up by 0.1% from the year-end, largely due to the issue
of common shares, and a reduction in risk-weighted assets that resulted from
the change to Basel II methodology commencing November 1, 2007. This was
offset in part by the reduction in retained earnings due to the loss in the
current period, and certain other deductions, which under Basel II are now
subtracted directly from Tier 1 capital.
Total capital ratio was up by 0.5% from the year-end due to the reasons
noted above and the issuance of subordinated debt, partially offset by a
reduction in the Tier 2 capital, as only a portion of the general allowance is
eligible for inclusion in Tier 2 capital under the Basel II methodology.
Significant capital management activities
The following table summarizes our significant capital management
activities:-------------------------------------------------------------------------
For the For the
three nine
months months
ended ended
Jul. 31, Jul. 31,
$ millions 2008 2008
-------------------------------------------------------------------------
Issue of common shares(1) $ 4 $ 2,927
Issue of subordinated indebtedness 1,150 1,150
Redemption of subordinated indebtedness - (339)
Dividends
Preferred shares - classified as equity (30) (90)
Preferred shares - classified as liabilities (7) (23)
Common shares (331) (954)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) After issuance costs, net of tax, (Q3/08: nil; for the nine months
ended July 31, 2008: $33 million).For additional details, see Notes 7 and 8 to the interim consolidated
financial statements.
Off-balance sheet arrangements
We enter into several types of off-balance sheet arrangements in the
normal course of our business. These include securitizations, derivatives,
credit-related arrangements, and guarantees. Details of our off-balance sheet
arrangements are provided on pages 57 to 59 of the 2007 Annual Accountability
Report.
The following table summarizes our exposures to entities involved in the
securitization of third-party assets (both CIBC-sponsored/structured and
third- party structured). This table differs from the Total Exposures on
Page 10 ("Total Exposures") of this report as a consequence of the exclusion
of positions with corporate underlyings which are included in Total Exposures
and the inclusion of CIBC sponsored multi-seller conduits and other non
run-off positions which are excluded from total exposures.-------------------------------------------------------------------------
2008
$ millions, as at Jul. 31
-------------------------------------------------------------------------
Undrawn Written
liquidity credit
and deriv-
Investment credit atives
and facil- (noti-
loans(1) ities onal)(2)
-------------------------------------------------------------------------
CIBC-sponsored multi-seller conduits $ 120 $ 9,828(3) $ -
CIBC structured CDO vehicles 795 70 763
Third-party structured vehicles 7,475 1,218 16,468
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2007
$ millions, as at Oct. 31
-------------------------------------------------------------------------
Undrawn Written
liquidity credit
and deriv-
Investment credit atives
and facil- (noti-
loans(1) ities onal)(2)
-------------------------------------------------------------------------
CIBC-sponsored multi-seller conduits $ 3,029 $12,092(3) $ -
CIBC structured CDO vehicles 647 154 1,147
Third-party structured vehicles 3,083 2,236 31,467
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Amounts are net of mark-to-market losses. Excludes securities issued
by entities established by Canada Mortgage and Housing Corporation
(CMHC), Fannie Mae, Freddie Mac, Ginnie Mae and Sallie Mae.
$6.1 billion (Oct. 31, 2007: $2.0 billion) of the exposure was hedged
by credit derivatives with third parties.
(2) Comprises credit derivatives written options and total return swaps
under which we assume exposures. The fair value recorded on the
consolidated balance sheet was $(5.5) billion (Oct. 31, 2007:
$(3.8) billion). Notional amounts of $16.8 billion (Oct. 31, 2007:
$31.7 billion) were hedged with credit derivatives protection from
third parties, the fair value of these hedges net of the valuation
adjustments was $2.0 billion (Oct. 31, 2007: $3.4 billion).
Accumulated fair value losses amount to $345 million (Oct. 31, 2007:
$484 million) on unhedged written credit derivatives.
(3) Net of $44 million (Oct. 31, 2007: $3,029 million) of investment in
CIBC sponsored multi-seller conduits.During the quarter, we purchased certain reference assets at a par amount
of $189 million ($6.8 billion for the nine months ended July 31, 2008) from
two third-party structured vehicles in consideration for the termination of
the related total return swaps. The reference assets purchased were
categorized as trading securities on our consolidated balance sheet.
For further details on securitizations of our own assets and guarantees
provided by us, see Notes 6 and 13 to the interim consolidated financial
statements.
MANAGEMENT OF RISK
-------------------------------------------------------------------------
Our approach to management of risk is described on pages 60 to 73 of the
2007 Annual Accountability Report.
In addition, in the MD&A, we have provided certain of the required
disclosures under the Canadian Institute of Chartered Accountants (CICA)
handbook section 3862, "Financial Instruments - Disclosures" related to the
nature and extent of risks arising from financial instruments, as permitted by
that standard. These disclosures are included in the sections "Risk overview",
"Credit risk", "Market risk", "Liquidity risk", "Operational risk",
"Reputation and legal risk", and "Regulatory risk". These disclosures have
been shaded 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. Several groups within Risk Management,
independent of the originating businesses, contribute to our management of
risk. During the quarter, we completed a restructuring of our risk management
department. The new structure is based on the results of a comprehensive
review that began earlier this year and comprises five groups as follows:- Capital Markets - provides independent oversight of policies,
procedures and standards concerning the measurement, monitoring and
control of market risks (both trading and non-trading), trading
credit risk and trading operational risk across CIBC's portfolios.
- Credit Portfolio Management - provides direction and leadership in
credit portfolio management and reporting, policies and risk limits,
risk rating methodology and credit systems for both retail and
wholesale portfolios.
- Product Risk Management, Card Products, Mortgages & Retail Lending -
oversees the management of credit and fraud risk in the credit card,
residential mortgages and retail lending portfolios, including the
optimization of lending profitability.
- Wholesale Credit & Investment Risk Management - responsible for the
credit quality of CIBC's risk-rated credits through the global
management of adjudication of small business, commercial and
wholesale credit risks, as well as management of the special loan and
investment portfolios.
- Balance Sheet Measurement, Monitoring & Control - responsible for a
range of activities, including: strategic risk analytics and
assessments of CIBC's portfolio; enterprise-wide oversight of the
measurement, monitoring and control of CIBC's balance sheet resources
including economic capital; management of CIBC's corporate insurance,
business continuity and environmental risk programs; independent
oversight of the measurement, monitoring and control of operational
risk; vetting CIBC's analytic and statistical models; validating
parameters and models used for regulatory capital.In addition to the oversight provided by Risk Management, Treasury
provides enterprise-wide funding and asset/liability, liquidity, cash and
collateral management; manages the capital structure within the constraints of
regulatory requirements; and manages capital in our subsidiaries, affiliates
and legal entities.
Basel II Capital Accord
On November 1, 2007, we adopted a new capital management framework,
commonly called Basel II, which is designed to enhance the risk sensitivity of
regulatory capital. Under the new Basel II Framework, regulatory capital for
the first time includes a charge for operational risk. With respect to credit
risk, the impact of Basel II is primarily on the calculation of risk weighted
assets as we moved from prescribed risk weights to using parameters that are
more closely aligned with our internal measurement of risk. In addition, the
rules permit wider discretion by bank regulators to increase or decrease
capital requirements in line with the circumstances of individual banks. The
rules require greater transparency of risk management information intrinsic to
underlying risks and capital adequacy.
We adopted the Advanced Internal Ratings Based (AIRB) approach for credit
risk for all material portfolios. We received final approval with associated
conditions for the use of the AIRB approach to the calculation of credit risk
capital from OSFI on December 31, 2007. Immaterial portfolios (refer to
"Credit risk" section for details) are initially on the standardized approach,
and in the event that any one of the standardized portfolios becomes material,
management will implement plans to transition it to an AIRB approach as
required by OSFI.
On August 1, 2007, we received Conditional Acceptance from OSFI to
implement the Advanced Measurement Approach (AMA) for operational risk
effective November 1, 2007. OSFI has set the target date for Formal Acceptance
as December 31, 2008 or earlier.
Market risk for the trading books continues to be measured under the pre-
existing OSFI approval for use of the Internal Models Approach.
Credit risk
Credit risk primarily arises from our direct lending activities, and from
our 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.
Process and control
The credit approval process is centrally controlled, with all significant
credit requests submitted to a credit risk management unit that is independent
of the originating businesses. Approval authorities are a function of the risk
and amount of credit requested. In certain cases, credit requests must be
referred to the Risk Management Committee (RMC) for approval.
After initial approval, individual credit exposures continue to be
monitored, with a formal risk assessment including review of assigned ratings
documented at least annually. Higher risk-rated accounts are subject to closer
monitoring and are reviewed at least quarterly. Collections and specialized
loan workout groups handle the day-to-day management of the highest risk loans
to maximize recoveries.
Credit risk limits
Credit limits are established for business and government loans for the
purposes of portfolio diversification and managing concentration. These
include limits for individual borrowers, groups of related borrowers, industry
sectors, country and geographic regions, and products or portfolios. Direct
loan sales, credit derivative hedges or structured transactions are used to
reduce concentrations.
Credit derivatives
We use credit derivatives to reduce industry sector concentrations and
single-name exposures, or as part of portfolio diversification techniques.
Guarantees
We obtain third party guarantees and insurance to reduce the risk in our
lending portfolios. The most material of these guarantees relate to our
residential mortgage portfolio that is guaranteed by CMHC (a Government of
Canada owned corporation) or other investment-grade counterparties.
Collateral
Our credit risk management policies include requirements related to
collateral valuation and management. Valuations are updated periodically
depending on the nature of the collateral. The main types of collateral are
cash, securities, inventory and real estate. We have policies in place to
monitor the existence of undesirable concentration in the collateral
supporting our credit exposure.
Exposure to credit risk
The following table presents the exposure to credit risk which is
measured as exposure at default for on- and off-balance sheet financial
instruments. Details on the calculation of exposure at default are provided on
the next page.$ millions, as at July 31, 2008 April 30, 2008
-------------------------------------------------------------------------
Stand- Stand-
AIRB ardized AIRB ardized
approach approach Total approach approach Total
-------------------------------------------------------------------------
Business and
government
portfolios
Corporate
Drawn $ 35,134 $ 5,569 $ 40,703 $ 35,528 $ 4,999 $ 40,527
Undrawn
commit-
ments 18,491 280 18,771 17,891 373 18,264
Repo-style
trans-
actions 21,376 28 21,404 25,114 18 25,132
Other off-
balance
sheet 5,196 185 5,381 5,235 174 5,409
OTC deri-
vatives 11,431 78 11,509 11,533 60 11,593
-------------------------------------------------------------------------
91,628 6,140 97,768 95,301 5,624 100,925
-------------------------------------------------------------------------
Sovereign
Drawn 33,547 1,718 35,265 22,465 1,722 24,187
Undrawn
commit-
ments 2,734 - 2,734 2,636 - 2,636
Repo-style
trans-
actions 196 - 196 1,055 - 1,055
Other off-
balance
sheet 29 - 29 29 - 29
OTC deri-
vatives 1,692 - 1,692 1,395 - 1,395
-------------------------------------------------------------------------
38,198 1,718 39,916 27,580 1,722 29,302
-------------------------------------------------------------------------
Banks
Drawn 8,469 1,183 9,652 10,206 1,631 11,837
Undrawn
commit-
ments 595 - 595 787 - 787
Repo-style
trans-
actions 47,918 307 48,225 48,647 175 48,822
Other off-
balance
sheet 46,534 - 46,534 50,657 - 50,657
OTC deri-
vatives 5,517 1 5,518 5,407 3 5,410
-------------------------------------------------------------------------
109,033 1,491 110,524 115,704 1,809 117,513
-------------------------------------------------------------------------
Total business
and government
portfolios 238,859 9,349 248,208 238,585 9,155 247,740
-------------------------------------------------------------------------
Retail
portfolios
Real estate
secured
personal
lending
Drawn 101,372 2,083 103,455 103,360 2,033 105,393
Undrawn
commit-
ments 31,539 - 31,539 28,101 - 28,101
-------------------------------------------------------------------------
132,911 2,083 134,994 131,461 2,033 133,494
-------------------------------------------------------------------------
Qualifying
revolving
retail
Drawn 16,739 - 16,739 15,756 - 15,756
Undrawn
commit-
ments 21,855 - 21,855 23,462 - 23,462
-------------------------------------------------------------------------
38,594 - 38,594 39,218 - 39,218
-------------------------------------------------------------------------
Other retail
Drawn 9,179 1,009 10,188 9,207 975 10,182
Undrawn
commit-
ments 2,128 54 2,182 2,104 53 2,157
Other off-
balance
sheet 107 - 107 108 - 108
-------------------------------------------------------------------------
11,414 1,063 12,477 11,419 1,028 12,447
-------------------------------------------------------------------------
Total retail
portfolios 182,919 3,146 186,065 182,098 3,061 185,159
-------------------------------------------------------------------------
Securitization
exposures(1) 13,800 563 14,363 16,204 761 16,965
-------------------------------------------------------------------------
Gross credit
exposure $435,578 $ 13,058 $448,636 $436,887 $ 12,977 $449,864
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Under the internal ratings based approach.The portfolios are categorized based upon how we manage the business and
the associated risks. Amounts provided are after valuation adjustments related
to financial guarantors, and before allowance for credit losses and risk
mitigation, including $63.0 billion (April 30, 2008: $70.3 billion) of
collateral held for our repurchase agreement activities. Non-trading equity
exposures are not included in the table above as they have been deemed
immaterial under the OSFI guidelines, and hence, are subject to 100% risk-
weighting.Exposures subject to AIRB approach
Business and government portfolios (excluding scored small business) -
risk rating methodThe portfolio comprises exposures to corporate, sovereign and bank
obligors. These obligors are individually assessed and assigned a rating that
reflects our estimate of the probability of default. A mapping between our
internal ratings and the ratings used by external ratings agencies is shown in
the table below. As part of our risk-rating methodology, the risk assessment
includes a review of external ratings of the obligor. The obligor rating
assessment takes into consideration our financial assessment of the obligor,
the industry, and the economic environment of the region in which the obligor
operates. In certain circumstances, where a guarantee from a third party
exists, both the obligor and the guarantor will be assessed.Standard Moody's
CIBC & Poor's Investor Services
Grade rating equivalent equivalent
-------------------------------------------------------------------------
Investment grade 00 - 47 AAA to BBB- Aaa to Baa3
-------------------------------------------------------------------------
Non-investment grade 51 - 67 BB+ to B- Ba1 to B3
-------------------------------------------------------------------------
Watchlist 70 - 80 CCC+ to CC Caa1 to Ca
-------------------------------------------------------------------------
Default 90 D C
-------------------------------------------------------------------------We use quantitative modeling techniques to assist in the development of
internal risk-rating systems. The risk-rating systems have been developed
through analysis of internal and external credit risk data. They are used for
portfolio management, risk limit setting, product pricing, and in the
determination of economic capital.
We assess risk exposure using the following three dimensions. Parameter
estimates for each of these dimensions are long-term averages with adjustments
for the impact of any potential change in the credit cycle.- Probability of default (PD) - the probability that the obligor will
default within the next 12 months.
- Exposure at default (EAD) - the estimate of the amount which will be
drawn at the time of default.
- Loss given default (LGD) - the expected severity of loss as the
result of the default, expressed as a percentage of the EAD.The effectiveness of the risk rating systems and the parameters
associated with the risk ratings are monitored within TRM and are subject to
an annual review. The models used in the estimation of the risk parameters are
also subject to independent validation by the Risk Management validation
group, which is independent of both the origination business and the model
development process.
We have counterparty credit exposure that arises from our interest rate,
foreign exchange, equity, commodity and credit derivatives trading, hedging
and portfolio management activities, as explained in Note 14 to the 2007
consolidated financial statements. The PD of our counterparties is measured in
the same manner as our direct lending activity. We establish a valuation
adjustment for expected future credit losses from each of our derivative
counterparties. Traditionally, the valuation adjustment has been a function of
our estimates of the PD, the expected loss/exposure in the event of default,
and other factors such as risk mitigants. Market observed credit spreads where
available are a key factor in establishing valuation adjustments against our
counterparty credit exposures related to financial guarantors (excluding ACA)
In the prior quarter, to reflect the deterioration in general credit
conditions, we added $50 million to our historical, formulaic calculation of
the credit valuation adjustment for non-financial guarantor derivatives
counterparties, and this amount has been maintained in the current quarter.
Credit quality of the risk-rated portfolios
-------------------------------------------
The following table provides the credit quality of the risk-rated
portfolios. Amounts provided are before allowance for credit losses, and after
credit risk mitigation, valuation adjustments related to financial guarantors,
and collateral on repurchase agreement activities. Insured residential
mortgage and student loan portfolios of $48.2 billion (April 30, 2008:
$54.2 billion) are reclassified to either sovereign or corporate exposures in
the table below.$ millions, as at
-------------------------------------------------------------------------
EAD 2008 2008
------------------------------ Jul. 31 Apr.30
Grade Corporate Sovereign Banks Total Total
-------------------------------------------------------------------------
Investment grade $ 35,041 $ 85,510 $ 55,334 $175,885 $176,765
Non-investment grade 27,672 231 13,534 41,437 38,794
Watchlist 414 - - 414 484
Default 206 - - 206 549
-------------------------------------------------------------------------
$ 63,333 $ 85,741 $ 68,868 $217,942 $216,592
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Business and government portfolios (excluding scored small business) -
slotting approachA simplified risk-rating process (slotting approach) is used for
uninsured Canadian commercial mortgages, which comprise non-residential
mortgages and multi-family residential mortgages. These exposures are
individually rated on our rating scale using a risk-rating methodology that
considers the property's key attributes, which include its loan to value and
debt service ratios, the quality of the property, and the financial strength
of the owner/sponsor. All exposures are secured by a lien over the property
and in some cases additionally by mortgage insurance. Insured multi-family
residential mortgages are treated as sovereign exposures in the table above.
Exposure by risk-bands
----------------------
The following table provides the exposure by risk-weight bands.
Facilities in the "satisfactory" category have key attributes that meet our
criteria, while facilities in the "good" and "strong" categories exceed it
with progressively stronger risk metrics. Exposures in the "weak" category
generally were originated at a stronger risk level but have migrated below our
current criteria.2008 2008
$ millions, as at Jul. 31 Apr. 30
-------------------------------------------------------------------------
Strong $ 5,909 $ 5,693
Good 139 131
Satisfactory 42 40
Weak 6 6
Default 7 7
-------------------------------------------------------------------------
6,103 $ 5,877
-------------------------------------------------------------------------
-------------------------------------------------------------------------Retail portfolios
Retail portfolios are characterized by a large number of relatively small
exposures. They comprise: real estate secured personal lending (comprising
residential mortgages, and personal loans and lines secured by residential
property); qualifying revolving retail exposures (credit cards and unsecured
lines of credit); and other retail exposures (loans secured by non-residential
assets, unsecured loans including student loans, and scored small business
loans). These are managed as pools of homogenous risk exposures using external
credit bureau scores and/or other behavioral assessment to group exposures
according to similar credit risk profiles. These pools are assessed through
statistical techniques, such as credit scoring and computer-based models.
Characteristics used to group individual exposures vary by asset category; as
a result, the number of pools, their size, and the statistical techniques
applied to their management differ accordingly.
The following table maps the PD bands to various risk levels:Description PD bands
-------------------------------------------------------------------------
Exceptionally low 0.01% - 0.20%
Very low 0.21% - 0.50%
Low 0.51% - 2.00%
Medium 2.01% - 10.00%
High 10.01% - 99.99%
Default 100.00%
-------------------------------------------------------------------------Credit quality of the retail portfolios
---------------------------------------
The following table presents the credit quality of the retail portfolios.
Amounts provided are before allowance for credit losses and after credit risk
mitigation. Insured residential mortgage and student loan portfolios of
$48.2 billion (April 30, 2008: $54.2 billion) are reclassified to either
sovereign or corporate exposures. Retail portfolios include $3,883 million
(April 30, 2008: $3,913 million) of small business scored exposures.$ millions, as at
-------------------------------------------------------------------------
EAD
-------------------------------
Real estate
secured Qualifying 2008 2008
personal revolving Other Jul. 31 Apr. 30
PD lending retail retail Total Total
-------------------------------------------------------------------------
Exceptionally low $ 33,625 $ 16,819 $ 2,695 $ 53,139 $ 51,240
Very low 24,473 5,367 2,579 32,419 28,734
Low 26,584 10,432 4,278 41,294 40,088
Medium 129 4,124 1,403 5,656 5,644
High 68 1,700 110 1,878 1,867
Default 81 152 106 339 328
-------------------------------------------------------------------------
$ 84,960 $ 38,594 $ 11,171 $134,725 $127,901
-------------------------------------------------------------------------
-------------------------------------------------------------------------Exposures subject to the standardized approach
Exposures within FirstCaribbean, obligations of certain exposures of
individuals for non-business purposes, and certain exposures in the CIBC
Mellon joint ventures have been deemed immaterial, and are subject to the
standardized approach. A detailed breakdown of our standardized exposures
before allowance for credit losses by risk-weight is provided below. Eligible
financial collateral also impacts the risk weighting category for the
exposure.$ millions, as at
-------------------------------------------------------------------------
Risk-weight category
-------------------------------------------------
0% 20% 50% 75% 100% Total
-------------------------------------------------------------------------
Jul. 31, 2008
-------------
Corporate $ - $ 1,118 $ - $ - $ 5,022 $ 6,140
Sovereign 1,366 228 66 - 58 1,718
Banks - 1,487 - - 4 1,491
Real estate
secured
personal
lending - - - 2,078 5 2,083
Other retail - - - 54 1,009 1,063
-------------------------------------------------------------------------
$ 1,366 $ 2,833 $ 66 $ 2,132 $ 6,098 $ 12,495
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008 $ 1,426 $ 2,949 $ 95 $ 2,081 $ 5,665 $ 12,216
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Securitization exposures
The following table provides details on our securitization exposures by
credit ratings under the IRB and standardized approach.
$ millions, as at
-------------------------------------------------------------------------
EAD 2008 2008
-------------------- Jul. 31 Apr. 30
Ratings IRB Standardized Total Total
-------------------------------------------------------------------------
AAA to BBB- $ 13,241 $ 563 $ 13,804 $ 16,621
BB+ to BB- 4 - 4 8
Below BB- 101 - 101 57
Unrated 454 - 454 279
-------------------------------------------------------------------------
$ 13,800 $ 563 $ 14,363 $ 16,965
-------------------------------------------------------------------------
-------------------------------------------------------------------------Concentration of exposures
Concentration of credit risk exists when a number of obligors are engaged
in similar activities, or operate in the same geographical areas or industry
sectors, and have similar economic characteristics so that their ability to
meet contractual obligations is similarly affected by changes in economic,
political or other conditions.
Geographic distribution
The following table provides a geographic distribution of our business
and government exposures under the AIRB approach. The classification of
geography is based upon the country of ultimate risk. Amounts are before
allowance for credit losses and risk mitigation, and after valuation
adjustments related to financial guarantors and $63.0 billion (April 30, 2008:
$70.3 billion) of collateral held for our repurchase agreement activities.$ millions, as at
-------------------------------------------------------------------------
Canada U.S. Europe Other Total
-------------------------------------------------------------------------
Jul. 31, 2008
-------------
Drawn $ 63,232 $ 8,387 $ 3,606 $ 1,925 $ 77,150
Undrawn commitments 19,400 1,769 302 349 21,820
Repo-style transactions 2,441 3,611 338 93 6,483
Other off-balance sheet 32,796 9,929 8,051 983 51,759
OTC derivatives 6,207 7,795 4,017 621 18,640
-------------------------------------------------------------------------
$124,076 $ 31,491 $ 16,314 $ 3,971 $175,852
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008 $113,426 $ 31,987 $ 18,851 $ 4,009 $168,273
-------------------------------------------------------------------------
-------------------------------------------------------------------------For retail portfolios, substantially all of the exposures under the AIRB
approach are based in Canada.
Business and government exposures by industry groups
The following table provides an industry-wide breakdown of our business
and government exposures under the AIRB approach. Amounts are before allowance
for credit losses and risk mitigation, and after valuation adjustments related
to financial guarantors and $63.0 billion (April 30, 2008: $70.3 billion) of
collateral held for our repurchase agreement activities.$ millions, as at
-------------------------------------------------------------------------
Repo- Other
style off- OTC
Undrawn trans- balance deriv-
Drawn commitment actions sheet atives
-------------------------------------------------------------------------
Commercial mortgages $ 5,934 $ 168 $ - $ - $ -
Financial
institutions(1) 14,312 2,620 6,466 46,850 14,617
Retail and wholesale 2,326 1,481 - 205 36
Business and personal
services 3,134 1,026 5 427 355
Manufacturing,
capital goods 1,030 965 1 284 67
Manufacturing,
consumer goods 1,227 931 - 61 50
Real estate and
construction 5,487 1,801 - 638 43
Agriculture 2,538 1,279 - 17 18
Oil and gas 3,456 3,798 - 583 1,111
Mining 1,624 533 - 150 75
Forest products 526 200 1 123 16
Hardware and software 561 431 1 106 12
Telecommunications
and cable 641 635 - 189 425
Publishing, printing
and broadcasting 607 463 - 202 84
Transportation 1,264 529 - 869 49
Utilities 634 1,462 - 667 366
Education, health and
social services 1,438 801 2 159 47
Governments 30,411 2,697 7 229 1,269
-------------------------------------------------------------------------
$ 77,150 $ 21,820 $ 6,483 $ 51,759 $ 18,640
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 2008
$ millions, as at Jul. 31 Apr. 30
-------------------------------------------
Total Total
-------------------------------------------
Commercial mortgages $ 6,102 $ 5,877
Financial
institutions(1) 84,865 88,987
Retail and wholesale 4,048 4,237
Business and personal
services 4,947 4,559
Manufacturing,
capital goods 2,347 2,454
Manufacturing,
consumer goods 2,269 2,176
Real estate and
construction 7,969 8,103
Agriculture 3,852 3,869
Oil and gas 8,948 8,983
Mining 2,382 2,354
Forest products 866 861
Hardware and software 1,111 1,056
Telecommunications
and cable 1,890 1,923
Publishing, printing
and broadcasting 1,356 1,197
Transportation 2,711 2,848
Utilities 3,129 3,248
Education, health and
social services 2,447 2,350
Governments 34,613 23,191
-------------------------------------------
$175,852 $168,273
-------------------------------------------
-------------------------------------------
(1) OTC derivatives include $5.1 billion (April 30, 2008: $5.2 billion)
of EAD with financial guarantors hedging our derivative contracts.
The fair value of these derivative contracts net of the valuation
adjustments was $3.0 billion (April 30, 2008: $2.9 billion).
Impaired loans and allowance and provision for credit losses
-------------------------------------------------------------------------
2008 2007
$ millions, as at Jul. 31 Oct. 31
-------------------------------------------------------------------------
Gross impaired loans
Consumer $ 517 $ 493
Business and government(1) 372 370
-------------------------------------------------------------------------
Total gross impaired loans $ 889 $ 863
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Allowance for credit losses
Consumer $ 384 $ 359
Business and government(1) 211 194
-------------------------------------------------------------------------
Specific allowance 595 553
General allowance 889 890
-------------------------------------------------------------------------
Total allowance for credit losses $ 1,484 $ 1,443
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes scored small business portfolios which are managed on a pool
basis under Basel II.Gross impaired loans were up $26 million or 3% from October 31, 2007.
Consumer gross impaired loans were up $24 million or 5%, whereas business and
government gross impaired loans were up $2 million. The decrease in gross
impaired loans of $28 million in Canada and $9 million in the U.S. was more
than offset by an increase of $63 million in other countries. The overall
increase in gross impaired loans was largely attributed to residential
mortgages outside Canada and the U.S. and the business services sector.
Allowance for credit losses was up $41 million or 3% from October 31,
2007. Specific allowance was up $42 million or 8% from the year-end, primarily
due to increases in credit cards and retail sector. The general allowance
totaled $889 million, down $1 million from the year-end.
For details on the provision for credit losses, see the "Financial
performance review" section.
Market risk
Market risk arises from positions in securities and derivatives held in
our trading portfolios, and from our retail banking business, investment
portfolios and other non-trading activities. Market risk is defined as the
potential for financial loss from adverse changes in underlying market
factors, including interest and foreign exchange rates, credit spreads, and
equity and commodity prices.
Process and control
Market risk exposures are monitored daily against approved risk limits,
and control processes are in place to monitor that only authorized activities
are undertaken. We generate daily risk and limit-monitoring reports, based on
the previous day's positions. Summary market risk and limit compliance reports
are produced and reviewed weekly with the Senior Executive Team, and quarterly
with the RMC.
We have risk tolerance levels, expressed in terms of both statistically
based value-at-risk (VaR) measures and potential worst-case stress losses. We
use a three-tiered approach to set market risk and stress limits on the
amounts of risk that we can assume in our trading and non-trading activities,
as follows:- Tier 1 limits are our overall market risk and worst-case scenario
limits.
- Tier 2 limits are designed to control the risk profile in each
business.
- Tier 3 limits are at the desk level and designed to monitor risk
concentration and the impact of book-specific stress events.Trading activities
We use a number of risk measures such as VaR, and stress testing and
scenario analysis for measuring trading risk.
Value-at-Risk
Our VaR methodology is a statistical technique that measures the
potential worst-case overnight loss within a 99% confidence level. VaR uses
numerous risk factors as inputs and is computed through the use of historical
volatility of each risk factor and the associated historical correlations
among them, evaluated over a one-year period.
The VaR for the three months ending July 31, 2008 disclosed in the table
and backtesting chart on the next page exclude our exposures in our run-off
businesses as described on pages 10 to 16 of the MD&A. Due to the volatile and
illiquid markets in recent months, the quantification of risk for these
positions is subject to a high degree of uncertainty. These positions are
being managed down independent of our trading businesses, and are not subject
to our internal VaR limits.
Stress testing and scenario analysis
Our stress testing measures the effect on portfolio values of extreme
market movements up to a period of one quarter. Scenarios are developed to
model extreme economic events, worst-case historical experiences or potential
future plausible events.
Our core stress tests and scenario analyses are run daily, and further ad
hoc analysis is carried out as required. Scenarios are reviewed and amended as
necessary to ensure they remain relevant. Limits are placed on the maximum
acceptable loss to the aggregate portfolio under any worst-case scenario and
on the impact of stress testing at the detailed portfolio level and by asset
class.
Backtesting
The backtesting process measures that actual profit and loss outcomes are
consistent with the statistical assumptions of the VaR model. This process
also includes the calculation of a hypothetical or static profit and loss.
This represents the theoretical change in value of the prior day's closing
portfolio due to each day's price movements, on the assumption that the
contents of the portfolio remained unchanged.Value-at-risk by risk type (trading portfolios)
-----------------------------------------------
As at or for the three months ended
------------------------------------------------------
Jul. 31, 2008
------------------------------------------------------
$ millions High Low As at Average
-------------------------------------------------------------------------
Interest rate risk $ 12.2 $ 4.9 $ 5.5 $ 8.1
Credit spread risk 6.7 3.8 5.9 5.1
Equity risk 7.0 4.1 5.5 5.2
Foreign exchange risk 1.2 0.2 0.2 0.5
Commodity risk 1.4 0.3 0.7 0.7
Debt Specific Risk 8.9 6.0 6.9 7.6
Diversification
effect(1) n/m n/m (12.1) (14.2)
-------------------------------------------------------------------------
Total risk $ 15.5 $ 11.2 $ 12.6 $ 13.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the nine
As at or for the three months ended months ended
------------------------------------ -----------------
Jul. 31, Jul. 31,
Apr. 30, 2008 Jul. 31, 2007 2008 2007
------------------------------------ -----------------
$ millions As at Average As at Average Average Average
------------------------------------------------------- -----------------
Interest rate risk $ 7.5 $ 7.6 $ 8.4 $ 7.2 $ 7.7 $ 7.1
Credit spread risk 3.6 5.0 11.4 6.9 7.6 4.8
Equity risk 5.0 5.3 4.3 5.3 5.2 5.9
Foreign exchange risk 0.5 0.6 0.4 0.5 0.6 0.4
Commodity risk 0.6 0.8 1.2 1.3 0.8 1.4
Debt Specific Risk 7.8 8.0 n/a n/a 8.7 n/a
Diversification
effect(1) (13.0) (13.3) (14.8) (11.3) (16.3) (10.2)
------------------------------------------------------- -----------------
Total risk $ 12.0 $ 14.0 $ 10.9 $ 9.9 $ 14.3 $ 9.4
------------------------------------------------------- -----------------
------------------------------------------------------- -----------------
(1) Aggregate VaR is less than the sum of the VaR of the different market
risk types due to risk offsets resulting from the effect of portfolio
diversification.
n/m Not meaningful. It is not meaningful to compute a diversification
effect because the high and low may occur on different days for
different risk types.
n/a Not available as we started reporting this measure only in the fourth
quarter of 2007.Total average risk was down 7% from the last quarter, primarily due to
increase in the portfolio diversification. Total average risk was up more than
31% from the same quarter last year, primarily due to inclusion of debt
specific risk measure in VaR starting in the fourth quarter of 2007, as well
as the higher market volatilities used in the calculation of VaR. If the
positions in our run-off businesses had been included for the quarter the
average daily VaR would have been $19.9 million and the VaR at quarter-end
would have been $21.8 million.
Trading revenue
The trading revenue (TEB)(1) and VaR backtesting graph below compares the
current quarter and the three previous quarters' actual daily trading revenue
(TEB)(1) with the previous day's VaR measures.
Trading revenue (TEB)(1) was positive for 67% of the days in the quarter.
Trading losses exceeded VaR for one day during the quarter due to a large move
in short-term interest rates driven by U.S. Federal Reserve's unexpected
decision to leave the overnight rate unchanged. Average daily trading revenue
(TEB)(1) was $1.3 million during the quarter.
The trading revenue (TEB)(1) for the current quarter excludes
$0.6 million related to the consolidation of variable interest entities as
well as trading losses from the run-off businesses including $920 million
related to reductions in fair value of structured credit assets and
counterparty credit-related valuation adjustments and $5.5 million related to
revenue from other positions in the run-off books.Backtesting of trading revenue (TEB)(1) vs. VaR
-----------------------------------------------
(image appears here)
------------------------
(1) For additional information, see the "Non-GAAP measures" section on
pages 45 to 46 of our 2007 Annual Accountability Report.Non-trading activities
Market risks also arise from our retail banking business, equity
investments and other non-trading activities.
Interest rate risk
Non-trading interest rate risk consists primarily of risk inherent in
Asset-Liability Management activities and the activities of domestic and
foreign subsidiaries. Interest rate risk results from differences in the
maturities or repricing dates of assets and liabilities, both on- and off-
balance sheet, as well as from embedded optionality in retail products. A
variety of cash instruments and derivatives, principally interest rate swaps,
futures and options are used to manage and control these risks.
The following table shows the potential impact of an immediate 100 basis
points increase or decrease in interest rates over the next 12 months, as
adjusted for estimated prepayments.-------------------------------------------------------------------------
2008 2008
Jul. 31 Apr. 30
-------------------------------------------------------------------------
$ millions, as at $ US$ Other $ US$ Other
-------------------------------------------------------------------------
100 basis points increase
in interest rates
Net Income $ 42 $ 5 $ 3 $ 51 $ (6) $ (1)
Change in present value of
shareholders' equity 151 17 42 171 16 33
100 basis points decrease
in interest rates
Net Income $ (89) $ (5) $ (3) $ (62) $ 6 $ 1
Change in present value of
shareholders' equity (218) (18) (41) (264) (16) (35)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------
2007
Jul. 31
-------------------------------------------------
$ millions, as at $ US$ Other
-------------------------------------------------
100 basis points increase
in interest rates
Net Income $ 30 $ 2 $ (2)
Change in present value
of equity risk 144 23 39
100 basis points decrease
in interest rates
Net Income $ (99) $ (2) $ 2
Change in present value
of equity risk (217) (22) (38)
-------------------------------------------------
-------------------------------------------------Foreign exchange risk
Non-trading foreign exchange risk, also referred to as structural foreign
exchange risk, arises primarily from our investments in foreign operations.
This risk, predominantly in U.S. dollars, is managed using derivative hedges,
and by funding the investments in foreign currencies. We actively manage this
risk to ensure that the potential impact to earnings is minimized and that
potential impact on our capital ratios is within tolerances set by the RMC.
A 1% appreciation of the Canadian dollar would reduce our shareholders'
equity as at July 31, 2008 by approximately $23.6 million.
Our non-functional currency denominated earnings are converted into the
functional currencies through spot or forward foreign exchange transactions to
reduce exchange rate fluctuations on our consolidated statement of operations.
Foreign functional currency earnings are translated at average monthly
exchange rates as they arise.
We hedge certain anticipated foreign currency expenses using derivatives
which are accounted for as cash flow hedges. As at July 31, 2008, the net
change in fair value of these hedging derivatives included in accumulated
other comprehensive income amounted to an after-tax loss of $59 million
(October 31, 2007: after-tax loss of $73 million). This amount will be
released to income to offset the hedged currency fluctuations as the expenses
are incurred.
Equity risk
Non-trading equity risk arises primarily in our merchant banking
activities and comprises public and private equities, investments in limited
partnerships, and equity-accounted investments.
The following table provides the carrying and fair values of our non-
trading equities, including merchant banking portfolios:Carrying Fair
$ millions, as at value value
-------------------------------------------------------------------------
Jul. 31, 2008 AFS securities $ 1,073 $ 1,534
Other assets(1) 186 213
-------------------------------------------------------------------------
$ 1,259 $ 1,747
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oct. 31, 2007 AFS securities $ 1,415 $ 1,921
Other assets(1) 254 299
-------------------------------------------------------------------------
$ 1,669 $ 2,220
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes equity-accounted investments.Liquidity risk
Liquidity risk arises from our general funding activities and in the
course of managing our assets and liabilities. It is the risk of having
insufficient cash resources to meet current financial obligations without
raising funds at unfavourable rates or selling assets on a forced basis.
Our liquidity risk management strategies seek to maintain sufficient
liquid financial resources to continually fund our balance sheet under both
normal and stressed market environments.
Process and control
Actual and anticipated inflows and outflows of funds generated from on-
and off-balance sheet exposures are managed on a daily basis within specific
short-term asset/liability mismatch limits by geographic location.
Potential cash flows under various stress scenarios are modeled using
balance sheet positions. On a consolidated basis, prescribed liquidity levels
under a selected benchmark stress scenario are maintained for a minimum time
horizon.
Risk measurement
Our liquidity measurement system provides daily liquidity risk exposure
reports for independent monitoring and review by MRM. Senior management and
the RMC oversee liquidity risk exposure reporting. Stress event impacts are
measured through scenario analysis, designed to measure potential impact of
abnormal market conditions on the liquidity risk profile. Treatment of cash
flows under varying conditions is reviewed periodically to determine whether
changes to customer behaviour assumptions are warranted.
Term funding sources and strategies
We source term funding in the wholesale markets from a variety of clients
and geographic locations, borrowing across a range of maturities using a mix
of funding instruments. Core personal deposits remain a primary source of
retail funding. As at July 31, 2008, Canadian dollar deposits from individuals
totalled $89.0 billion (October 31, 2007: $83.8 billion).
Strategies for managing liquidity risk include maintaining diversified
sources of wholesale term funding, asset securitization initiatives, capital
and subordinated debt issuance, and maintenance of segregated pools of high
quality liquid assets that can be sold or pledged as security to provide a
ready source of cash.
The following table summarizes our liquid assets:-------------------------------------------------------------------------
2008 2007
$ billions, as at Jul. 31 Oct. 31
-------------------------------------------------------------------------
Cash $ 1.1 $ 1.0
Deposits with banks 11.3 12.7
Securities(1) 43.1 65.1
Securities borrowed or purchased under resale
agreements 25.5 34.0
-------------------------------------------------------------------------
$ 81.0 $ 112.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes AFS and FVO securities with residual term to contractual
maturity within one year, and trading securities.In the course of our regular business activities, certain assets are
pledged as part of collateral management, including those necessary for
day-to-day clearing and settlement of payments and securities. Pledged assets
as at July 31, 2008 totalled $26.8 billion (October 31, 2007: $27.7 billion).
While conditions have stabilized, the recent turmoil in global capital
markets continues to result in reduced liquidity and increased term funding
costs for financial institutions generally. One factor affecting the access of
financial institutions to unsecured funding markets is credit ratings. No
changes to our ratings were made by the major rating agencies during the third
quarter.
Maturity of financial liabilities
The following table provides the maturity profile of financial
liabilities based upon contractual repayment obligations, and excludes
contractual cash flows related to derivative liabilities. Although contractual
repayments of many deposit accounts are on demand or at short notice, in
practice short-term deposit balances remain stable. Our deposit retention
history indicates that many customers do not request repayment on the earliest
redemption date and the table therefore does not reflect the anticipated cash
flows.-------------------------------------------------------------------------
No
Less than 1 - 3 3 - 5 Over specified
$ millions, as at 1 year years years 5 years maturity
-------------------------------------------------------------------------
Liabilities
Deposits $107,877 $ 24,702 $ 9,015 $ 4,815 $ 82,192
Acceptances 8,778 - - - -
Obligations related to
securities sold short 529 641 896 2,981 2,832
Obligations related to
securities lent or
sold under repurchase
agreements 26,652 - - - -
Other liabilities 551 2,180 - - 9,322
Subordinated
indebtedness - - - 6,521 -
Preferred share
liabilities 600 - - - -
-------------------------------------------------------------------------
$144,987 $ 27,523 $ 9,911 $ 14,317 $ 94,346
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------
2008 2008
Jul. 31 Apr. 30
$ millions, as at Total Total
-------------------------------------------
Liabilities
Deposits $228,601 $238,203
Acceptances 8,778 8,756
Obligations related to
securities sold short 7,879 10,285
Obligations related to
securities lent or
sold under repurchase
agreements 26,652 26,530
Other liabilities 12,053 13,747
Subordinated
indebtedness 6,521 5,359
Preferred share
liabilities 600 600
-------------------------------------------
$291,084 $303,480
-------------------------------------------
-------------------------------------------Maturity of credit and liquidity commitments
The following table provides the contractual maturity of notional amounts
of credit, guarantee and liquidity commitments. Contractual amounts represent
the amounts at risk should contracts be fully drawn upon and clients default.
Since a significant portion of guarantees and commitments are expected to
expire without being drawn upon, the total of the contractual amounts is not
representative of future expected liquidity requirements.Contract amounts expiration per period
-----------------------------------------
Less than 1-3 3-5 Over
$ millions, as at 1 year years years 5 years
-------------------------------------------------------------------------
Unutilized credit commitments(1) $ 27,715 $ 2,625 $ 7,542 $ 1,469
Backstop liquidity facilities 10,948 151 - -
Standby and performance letters
of credit 4,862 495 605 492
Documentary and commercial letters
of credit 255 - - 2
-------------------------------------------------------------------------
$ 43,780 $ 3,271 $ 8,147 $ 1,963
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 2008
Jul. 31 Apr. 30
$ millions, as at Total Total
-----------------------------------------------------
Unutilized credit commitments(1) $ 39,351 $ 39,655
Backstop liquidity facilities 11,099 13,803
Standby and performance letters
of credit 6,454 6,613
Documentary and commercial letters
of credit 257 191
-----------------------------------------------------
$ 57,161 $ 60,262
-----------------------------------------------------
-----------------------------------------------------
(1) Excludes personal lines of credit and credit card lines, which are
revocable at our discretion at any time.Contractual obligations
Details on our contractual obligations are provided on page 71 of the
2007 Annual Accountability Report. There were no significant changes to
contractual obligations that were not in the ordinary course of our business.
Operational risk
Operational risk is the loss resulting from inadequate or failed internal
processes, systems, or from human error or external events.
Process and control
Each line of business has responsibility for the day-to-day management of
operational risk. Infrastructure and governance groups maintain risk and
control self-assessment processes. We maintain a corporate insurance program
to provide additional protection from loss and a global business continuity
management program to mitigate business continuity risks in the event of a
disaster.
Risk measurement
Effective November 1, 2007, under Basel II, we use the AMA to calculate
operational risk regulatory capital. Our operational risk measurement
methodology for economic capital purposes attributes operational risk capital
to expected and unexpected losses arising from the following loss event types:- Legal liability (with respect to third parties, clients and
employees);
- Client restitution;
- Regulatory compliance and taxation violations;
- Loss or damage to assets;
- Transaction processing errors; and
- Theft, fraud and unauthorized activities.Operational risk capital is calculated using a loss distribution approach
with the input parameters based on either actual internal loss experience
where a statistically significant amount of internal historical data is
available, or applying a loss scenario approach based on the available
internal/external loss data and management expertise.
In addition to the capital attributed as described above, adjustments are
made for internal control issues and risks that are not included in the
original operational risk profile.
Under AMA, we are allowed to recognize the risk mitigating impact of
insurance in the measures of operational risk used for regulatory minimum
capital requirements. Although our current insurance policy is tailored to
provide earnings protection from potential high-severity losses, we currently
do not take any capital relief as a result of our insurance program.
Reputation and legal risk
CIBC's reputation and financial soundness are of fundamental importance
to CIBC, its customers, shareholders and employees.
Reputation risk is the potential for negative publicity regarding CIBC's
business conduct or practices which, whether true or not, could significantly
harm our reputation as a leading financial institution, or could materially
and adversely affect our business, operations or financial condition.
Legal risk is the potential for civil litigation or criminal or
regulatory proceedings being commenced against CIBC that, once decided, could
materially and adversely affect our business, operations or financial
condition.
The RMC provides oversight of the management of reputation and legal
risk. The identification, consideration and management of potential reputation
and legal risk is a key responsibility of CIBC and all of its employees.
Our "Global Reputation and Legal Risks Policy" sets standards for
safeguarding our reputation and minimizing exposure to our reputation and
legal risk. The policy is supplemented by business specific procedures for
identifying and escalating transactions that could pose material reputation
risk and/or legal risk. The Reputation and Legal Risk Committee reviews all
transactions brought before it to assess whether CIBC is exposing itself to
any undue reputation and legal risk.
Regulatory risk
Regulatory risk is the risk of non-compliance with regulatory
requirements. Non-compliance with these requirements may lead to regulatory
sanctions and harm to our reputation.
Our regulatory compliance philosophy is to manage regulatory risk
through, among other things, the integration of controls within the business
and infrastructure groups. The foundation of this approach is a legislative
compliance management (LCM) framework. The LCM framework maps regulatory
requirements to internal policies, procedures and controls that govern
regulatory compliance.
Our compliance department is responsible for the development and
maintenance of a regulatory compliance program, including oversight of the LCM
framework. The department is independent of business management, has the
authority to communicate directly to the Audit Committee, and reports to that
committee on a quarterly basis.
Primary responsibility for compliance with all applicable regulatory
requirements rests with senior management of the business and infrastructure
groups, and extends to all employees. The compliance department's activities
support those groups, with particular emphasis on those regulatory
requirements that govern the relationship between CIBC and its clients and
those requirements that help protect the integrity of the capital markets.
Specific activities that assist the business and infrastructure groups include
communication of regulatory requirements, advice, training, testing and
monitoring, and reporting and escalation of control deficiencies and
regulatory risks.
ACCOUNTING AND CONTROL MATTERS
-------------------------------------------------------------------------
Critical accounting policies and estimates
A summary of significant accounting policies is presented in Note 1 to
the 2007 consolidated financial statements.
Certain accounting policies of CIBC are critical to understanding the
results of operations and financial condition of CIBC. These critical
accounting policies require management to make certain judgments and
estimates, some of which may relate to matters that are uncertain. For a
description of the judgments and estimates involved in the application of
critical accounting policies and assumptions made for pension and other
benefit plans, see pages 74 to 77 of the 2007 Annual Accountability Report.
Valuation of financial instruments
The table below presents the amount and percentage of each category of
financial instruments which are fair valued using valuation technique based on
non-market observable inputs.-------------------------------------------------------------------------
2008 2008 2008 2007
$ millions, as at Jul. 31 Jul. 31 Jul. 31 Oct. 31
-------------------------------------------------------------------------
Structured
credit
run-off Total Total Total
business CIBC CIBC CIBC
-------------------------------------------------------------------------
Assets
Trading securities $ 6,404 $ 6,719 15.9% 4.0%
AFS securities 235 669 5.8 3.4
FVO financial
instruments 262 262 1.1 1.8
Derivative instruments 3,355 3,526 15.4 16.1
-------------------------------------------------------------------------
Liabilities
Obligations related to
securities sold short $ - $ - -% 0.6%
Derivative instruments 5,491 5,698 23.0 16.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------Much of our structured credit run-off business requires the application
of valuation techniques using non-market observable inputs. Indicative broker
quotes in an inactive market, which we consider to be non-market observable,
are primarily used for the initial valuation of these positions.
After arriving at these valuations, we consider whether a credit
valuation adjustment is required to recognize the risk that any given
counterparty, from whom we have purchased protection through credit
derivatives, may not ultimately be able to fulfill its obligations. This risk
applies to all counterparties, including financial guarantors.
With respect to our credit valuation adjustments regarding financial
guarantor obligations (excluding ACA), we continued to refine our valuation
methodologies to reflect market developments. Our valuation adjustments
continue to be driven off market observed credit spreads for each of the
financial guarantor counterparties, where such information is available. These
spreads are applied in relation to the weighted average life of the underlying
instruments protected by these guarantors, while considering the probabilities
of default derived from these spreads. Furthermore our approach takes into
account the correlation between the performance of the underlying assets and
the financial guarantors.
With respect to all other derivative counterparty exposures, we continue
to use a methodology that utilizes historical default rates in our calculation
of the credit valuation adjustment. In the prior quarter, we added $50 million
to the calculated adjustment amount to reflect the deterioration in general
credit conditions and this amount has been maintained in the current quarter.
Our unhedged structured credit exposures (USRMM and non-USRMM) are
sensitive to changes in MTM, generally as derived from indicative broker
quotes as described above. A 10% adverse change in mark-to-market of the
underlyings would result in a loss of approximately $5 million in our unhedged
USRMM portfolio and $118 million in our non-USRMM portfolio, before index
hedges.
The credit valuation allowance applied to our hedged portfolio is
sensitive to changes in both the MTM of the protected instruments and to
changes in credit spreads of the financial guarantors for that portion of the
portfolio that is hedged with those guarantors. A 10% adverse change in
mark-to-market of our hedged USRMM and non-USRMM positions would, primarily
through an increase in credit valuation adjustment for financial guarantors
(excluding ACA), result in a loss of approximately $151 million and
$94 million respectively, before credit hedges.
The impact of a 10% widening in financial guarantor credit spreads would
result in an increase in the credit valuation adjustments of approximately
$184 million, before credit hedges.
Risk factors related to fair value adjustments
We believe that we have made appropriate fair value adjustments and have
taken appropriate write-downs to date. The establishment of fair value
adjustments and the determination of the amount of write-downs involve
estimates that are based on accounting processes and judgments by management.
We evaluate the adequacy of the fair value adjustments and the amount of
write-downs on an ongoing basis. The levels of fair value adjustments and the
amount of the write-downs could be changed as events warrant.
We have policies that set standards governing the independent
verification of prices of traded instruments at a minimum on a monthly basis.
Where lack of adequate price discovery in the market results in non-compliance
for a particular position, management is required to assess the need for an
appropriate valuation adjustment to address valuation uncertainties arising
therefrom.
Changes in accounting policy
Leveraged leases
Effective November 1, 2007, we adopted the amended CICA EIC 46,
"Leveraged Leases", which was based upon the Financial Accounting Standards
Board Staff Position FAS 13-2, "Accounting for a Change or Projected Change in
the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged
Lease Transaction".
The EIC requires that a change in the estimated timing of the cash flows
relating to income taxes results in a recalculation of the timing of income
recognition from the leveraged lease. The adoption resulted in a $66 million
charge to opening retained earnings as at November 1, 2007. An amount
approximating this non-cash charge will be recognized into income over the
remaining lease terms using the effective interest rate method.
Capital disclosures
Effective November 1, 2007, we adopted the CICA handbook section 1535,
"Capital Disclosures," which requires an entity to disclose its objectives,
policies and processes for managing capital as well as disclosure of summary
quantitative information about what an entity manages as capital.
Financial instruments
Effective November 1, 2007, we adopted the CICA handbook sections 3862
"Financial Instruments - Disclosures" and 3863 "Financial Instruments -
Presentation".
These sections replace CICA handbook section 3861 "Financial Instruments
- Disclosure and Presentation", and enhance disclosure requirements on the
nature and extent of risks arising from financial instruments and how the
entity manages those risks.
Controls and procedures
Disclosure controls and procedures
CIBC's management, with the participation of the Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness, as at July 31,
2008, of CIBC's disclosure controls and procedures (as defined in the rules of
the SEC and the Canadian Securities Administrators) and has concluded that
such disclosure controls and procedures are effective.
Changes in internal control over financial reporting
There have been no changes in CIBC's internal control over financial
reporting during the quarter ended July 31, 2008 that have materially
affected, or are reasonably likely to materially affect, its internal control
over financial reporting.CIBC INTERIM CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
2008 2007
Unaudited, $ millions, as at Jul. 31 Oct. 31
-------------------------------------------------------------------------
ASSETS
Cash and non-interest-bearing deposits with banks $ 1,546 $ 1,457
-------------------------------------------------------------------------
Interest-bearing deposits with banks 10,900 12,290
-------------------------------------------------------------------------
Securities
Trading 42,195 58,779
Available-for-sale (AFS) 12,448 17,430
Designated at fair value (FVO) 22,379 10,291
-------------------------------------------------------------------------
77,022 86,500
-------------------------------------------------------------------------
Securities borrowed or purchased under resale
agreements 25,513 34,020
-------------------------------------------------------------------------
Loans
Residential mortgages 89,870 91,664
Personal 31,457 29,213
Credit card 10,571 9,121
Business and government 34,108 34,099
Allowance for credit losses (Note 5) (1,398) (1,443)
-------------------------------------------------------------------------
164,608 162,654
-------------------------------------------------------------------------
Other
Derivative instruments 22,967 24,075
Customers' liability under acceptances 8,778 8,024
Land, buildings and equipment 1,913 1,978
Goodwill 1,932 1,847
Other intangible assets 399 406
Other assets (Note 10) 13,462 8,927
-------------------------------------------------------------------------
49,451 45,257
-------------------------------------------------------------------------
$329,040 $342,178
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Personal $ 97,124 $ 91,772
Business and government 115,733 125,878
Bank 15,744 14,022
-------------------------------------------------------------------------
228,601 231,672
-------------------------------------------------------------------------
Other
Derivative instruments 24,812 26,688
Acceptances 8,778 8,249
Obligations related to securities sold short 7,879 13,137
Obligations related to securities lent or sold
under repurchase agreements 26,652 28,944
Other liabilities 11,890 13,728
-------------------------------------------------------------------------
80,011 90,746
-------------------------------------------------------------------------
Subordinated indebtedness (Note 7) 6,521 5,526
-------------------------------------------------------------------------
Preferred share liabilities 600 600
-------------------------------------------------------------------------
Non-controlling interests 163 145
-------------------------------------------------------------------------
Shareholders' equity
Preferred shares 2,331 2,331
Common shares (Note 8) 6,060 3,133
Treasury shares - 4
Contributed surplus 89 96
Retained earnings 5,409 9,017
Accumulated other comprehensive (loss) income (AOCI) (745) (1,092)
-------------------------------------------------------------------------
13,144 13,489
-------------------------------------------------------------------------
$329,040 $342,178
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The accompanying notes and shaded sections in "MD&A - Management of
risk" on pages 30 to 40 are an integral part of these consolidated
financial statements.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
For the
For the three months ended nine months ended
----------------------------------------------------- -------------------
2008 2008 2007 2008 2007
Unaudited, $ millions Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Interest income
Loans $ 2,212 $ 2,310 $ 2,501 $ 7,104 $ 7,155
Securities borrowed or
purchased under resale
agreements 326 419 596 1,274 1,567
Securities 671 697 755 2,032 2,236
Deposits with banks 104 192 212 526 585
----------------------------------------------------- -------------------
3,313 3,618 4,064 10,936 11,543
----------------------------------------------------- -------------------
Interest expense
Deposits 1,483 1,747 2,003 5,438 5,834
Other liabilities 430 452 798 1,445 2,141
Subordinated indebtedness 66 62 76 200 227
Preferred share
liabilities 7 8 7 23 23
----------------------------------------------------- -------------------
1,986 2,269 2,884 7,106 8,225
----------------------------------------------------- -------------------
Net interest income 1,327 1,349 1,180 3,830 3,318
----------------------------------------------------- -------------------
Non-interest income
Underwriting and advisory
fees 68 88 192 332 555
Deposit and payment fees 197 191 205 583 591
Credit fees 58 56 77 174 228
Card fees 81 67 68 225 198
Investment management and
custodial fees 129 131 136 396 396
Mutual fund fees 208 204 226 624 654
Insurance fees, net of
claims 62 63 55 183 175
Commissions on securities
transactions 134 133 224 437 679
Trading revenue (Note 9) (794) (2,401) 35 (6,322) 706
AFS securities gains, net 68 12 137 31 388
FVO revenue (39) (18) 45 (86) 147
Income from securitized
assets 161 146 121 451 386
Foreign exchange other than
trading 88 3 105 223 290
Other 157 102 173 429 409
----------------------------------------------------- -------------------
578 (1,223) 1,799 (2,320) 5,802
----------------------------------------------------- -------------------
Total revenue 1,905 126 2,979 1,510 9,120
----------------------------------------------------- -------------------
Provision for credit
losses (Note 5) 203 176 162 551 471
----------------------------------------------------- -------------------
Non-interest expenses
Employee compensation
and benefits 942 933 1,100 2,869 3,386
Occupancy costs 148 142 152 435 454
Computer and office
equipment 270 265 279 797 821
Communications 67 72 77 213 236
Advertising and business
development 51 58 59 162 175
Professional fees 58 61 45 170 127
Business and capital
taxes 29 35 31 89 100
Other 160 222 76 539 439
----------------------------------------------------- -------------------
1,725 1,788 1,819 5,274 5,738
----------------------------------------------------- -------------------
(Loss) income before
income taxes and
non-controlling
interests (23) (1,838) 998 (4,315) 2,911
Income tax (benefit)
expense (101) (731) 157 (1,834) 479
----------------------------------------------------- -------------------
78 (1,107) 841 (2,481) 2,432
Non-controlling
interests 7 4 6 15 20
----------------------------------------------------- -------------------
Net income (loss) $ 71 $ (1,111) $ 835 $ (2,496) $ 2,412
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Earnings (loss) per
share (in dollars)
(Note 12) -Basic $ 0.11 $ (3.00) $ 2.33 $ (7.05) $ 6.75
-Diluted $ 0.11 $ (3.00) $ 2.31 $ (7.05) $ 6.69
Dividends per common
share (in dollars) $ 0.87 $ 0.87 $ 0.77 $ 2.61 $ 2.24
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
The accompanying notes and shaded sections in "MD&A - Management of
risk" on pages 30 to 40 are an integral part of these consolidated
financial statements.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the
For the three months ended nine months ended
----------------------------------------------------- -------------------
2008 2008 2007 2008 2007
Unaudited, $ millions Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Preferred shares
Balance at beginning of
period $ 2,331 $ 2,331 $ 2,731 $ 2,331 $ 2,381
Issue of preferred
shares - - - - 750
Redemption of preferred
shares - - (400) - (800)
----------------------------------------------------- -------------------
Balance at end of
period $ 2,331 $ 2,331 $ 2,331 $ 2,331 $ 2,331
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Common shares
Balance at beginning
of period $ 6,056 $ 6,049 $ 3,135 $ 3,133 $ 3,064
Issue of common shares
(Note 8) 4 8 15 2,960 86
Issuance costs, net of
related income taxes - (1) - (33) -
Purchase of common
shares for
cancellation - - (29) - (29)
----------------------------------------------------- -------------------
Balance at end of
period $ 6,060 $ 6,056 $ 3,121 $ 6,060 $ 3,121
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Treasury shares
Balance at beginning of
period $ 8 $ 12 $ (4) $ 4 $ (19)
Purchases (2,109) (2,147) (2,045) (7,215) (4,614)
Sales 2,101 2,143 2,038 7,211 4,622
----------------------------------------------------- -------------------
Balance at end of
period $ - $ 8 $ (11) $ - $ (11)
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Contributed surplus
Balance at beginning
of period $ 90 $ 86 $ 76 $ 96 $ 70
Stock option expense 2 2 2 7 5
Stock options exercised - - (2) (1) (7)
Net premium (discount)
on treasury shares - 3 - (11) 8
Other (3) (1) 9 (2) 9
----------------------------------------------------- -------------------
Balance at end of
period $ 89 $ 90 $ 85 $ 89 $ 85
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Retained earnings
Balance at beginning
of period, as
previously reported $ 5,699 $ 7,174 $ 8,200 $ 9,017 $ 7,268
Adjustment for change in
accounting policies - - - (66)(1) (50)(2)
----------------------------------------------------- -------------------
Balance at beginning of
period, as restated 5,699 7,174 8,200 8,951 7,218
Net income (loss) 71 (1,111) 835 (2,496) 2,412
Dividends
Preferred (30) (30) (36) (90) (109)
Common (331) (332) (258) (954) (752)
Premium on redemption of
preferred shares
(classified as equity) - - (16) - (32)
Premium on purchase of
common shares for
cancellations - - (277) - (277)
Other - (2) 2 (2) (10)
----------------------------------------------------- -------------------
Balance at end of
period $ 5,409 $ 5,699 $ 8,450 $ 5,409 $ 8,450
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
AOCI, net of tax
Balance at beginning of
period $ (807) $ (849) $ (382) $ (1,092) $ (442)
Adjustment for change in
accounting policies(2) - - - - 123
Other comprehensive
income (loss) (OCI) 62 42 (205) 347 (268)
----------------------------------------------------- -------------------
Balance at end of
period $ (745) $ (807) $ (587) $ (745) $ (587)
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Retained earnings and
AOCI $ 4,664 $ 4,892 $ 7,863 $ 4,664 $ 7,863
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Shareholders' equity at
end of period $ 13,144 $ 13,377 $ 13,389 $ 13,144 $ 13,389
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
(1) Represents the impact of adopting the amended Canadian Institute of
Chartered Accountants (CICA) Emerging Issues Committee Abstract 46,
"Leveraged Leases".
See Note 1 for additional details.
(2) Represents the transitional adjustment on adoption of the CICA
handbook sections 1530, 3251, 3855, and 3865.
The accompanying notes and shaded sections in "MD&A - Management of
risk" on pages 30 to 40 are an integral part of these consolidated
financial statements.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
For the
For the three months ended nine months ended
----------------------------------------------------- -------------------
2008 2008 2007 2008 2007
Unaudited, $ millions Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Net income (loss) $ 71 $ (1,111) $ 835 $ (2,496) $ 2,412
----------------------------------------------------- -------------------
OCI, net of tax
Foreign currency
translation
adjustments
Net gains (losses)
on investment in
self-sustaining
foreign operations 260 2 (719) 1,235 (1,003)
Net (losses) gains on
hedges of foreign
currency translation
adjustments (203) 25 549 (924) 786
----------------------------------------------------- -------------------
57 27 (170) 311 (217)
----------------------------------------------------- -------------------
Net change in AFS
securities
Net unrealized gains
(losses) on AFS
securities 8 83 (43) 70 (12)
Transfer of net (gains)
losses to net income (5) (65) (17) 36 (44)
----------------------------------------------------- -------------------
3 18 (60) 106 (56)
----------------------------------------------------- -------------------
Net change in cash flow
hedges
Net gains (losses) on
derivatives designated
as cash flow hedges - (5) (31) (41) (13)
Net losses (gains) on
derivatives designated
as cash flow hedges
transferred to net
income 2 2 56 (29) 18
----------------------------------------------------- -------------------
2 (3) 25 (70) 5
----------------------------------------------------- -------------------
Total OCI 62 42 (205) 347 (268)
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Comprehensive income
(loss) $ 133 $ (1,069) $ 630 $ (2,149) $ 2,144
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
-------------------------------------------------------------------------
INCOME TAX (EXPENSE) BENEFIT ALLOCATED TO EACH COMPONENT OF OCI
For the
For the three months ended nine months ended
----------------------------------------------------- -------------------
2008 2008 2007 2008 2007
Unaudited, $ millions Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Foreign currency
translation adjustments
Changes on investment
in self-sustaining
foreign operations $ (1) $ - $ 2 $ (4) $ 2
Changes on hedges of
foreign currency
translation
adjustments 92 (41) (275) 425 (387)
Net change in AFS
securities
Net unrealized (gains)
losses on AFS
securities (4) (50) 27 (39) 4
Transfer of net gains
(losses) to net
income 3 41 9 (45) 24
Net change in cash
flow hedges
Changes on derivatives
designated as cash
flow hedges - 1 16 21 6
Changes on derivatives
designated as cash
flow hedges
transferred to net
income (2) (2) (30) 14 (10)
----------------------------------------------------- -------------------
$ 88 $ (51) $ (251) $ 372 $ (361)
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
The accompanying notes and shaded sections in "MD&A - Management of
risk" on pages 30 to 40 are an integral part of these consolidated
financial statements.
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
For the
For the three months ended nine months ended
----------------------------------------------------- -------------------
2008 2008 2007 2008 2007
Unaudited, $ millions Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Cash flows provided by
(used in) operating
activities
Net income (loss) $ 71 $ (1,111) $ 835 $ (2,496) $ 2,412
Adjustments to reconcile
net income (loss) to
cash flows provided
by (used in)
operating activities:
Provision for credit
losses 203 176 162 551 471
Amortization of
buildings, furniture,
equipment and
leasehold
improvements 50 51 52 153 164
Amortization of other
intangible assets 11 10 11 31 28
Stock-based
compensation (3) 2 (3) (20) 13
Future income taxes (235) (765) 91 (1,053) 205
AFS securities gains,
net (68) (12) (137) (31) (388)
(Gains) losses on
disposal of land,
buildings and
equipment - (1) - (1) -
Other non-cash items,
net (54) (13) 119 (1) 158
Changes in operating
assets and liabilities
Accrued interest
receivable 121 32 (5) 257 (37)
Accrued interest
payable (158) (93) 118 (275) (327)
Amounts receivable
on derivative
contracts 517 (79) (3,033) 1,101 (2,987)
Amounts payable on
derivative
contracts (1,280) (82) 2,214 (2,316) 1,885
Net change in
trading securities 12,701 3,469 (48) 16,584 423
Net change in FVO
securities (6,794) (1,321) (1,496) (12,088) (1,288)
Net change in other
FVO financial
instruments 2,128 (83) - 1,464 1,381
Current income taxes 133 (74) 16 (1,735) (818)
Other, net 1,295 218 (510) (2,266) (927)
----------------------------------------------------- -------------------
8,638 324 (1,614) (2,141) 368
----------------------------------------------------- -------------------
Cash flows (used in)
provided by financing
activities
Deposits, net of
withdrawals (10,995) (1,643) 9,937 (3,794) 11,872
Obligations related to
securities sold short (2,455) 648 (236) (4,883) (319)
Net obligations related
to securities lent or
sold under repurchase
agreements 122 (2,825) 2,272 (2,292) 3,611
Issue of subordinated
indebtedness 1,150 - 288 1,150 347
Redemption of
subordinated
indebtedness - (89) - (339) -
Issue of preferred shares - - - - 750
Redemption of preferred
shares - - (416) - (832)
Issue of common shares,
net 4 7 15 2,927 86
Purchase of common shares
for cancellation - - (306) - (306)
Net proceeds from
treasury shares
(purchased) sold (8) (4) (7) (4) 8
Dividends (361) (362) (294) (1,044) (861)
Other, net (949) 223 (555) (1,171) (356)
----------------------------------------------------- -------------------
(13,492) (4,045) 10,698 (9,450) 14,000
----------------------------------------------------- -------------------
Cash flows provided by
(used in) investing
activities
Interest-bearing
deposits with banks 1,050 4,570 (872) 1,390 (2,346)
Loans, net of repayments (2,801) (4,694) (6,140) (9,542) (10,821)
Proceeds from
securitizations 3,145 933 1,581 6,328 5,816
Purchase of AFS
securities (6,248) (3,286) (1,484) (11,458) (5,889)
Proceeds from sale of
AFS securities 1,073 1,944 1,453 8,887 6,268
Proceeds from maturity
of AFS securities 1,409 1,288 182 7,638 3,564
Net securities borrowed
or purchased under
resale agreements 7,657 2,455 (4,168) 8,507 (9,652)
Net cash used in
acquisition(1) - - - - (1,040)
Purchase of land,
buildings and equipment (32) (23) - (98) (233)
Proceeds from disposal
of land, buildings and
equipment - 2 - 2 -
----------------------------------------------------- -------------------
5,253 3,189 (9,448) 11,654 (14,333)
----------------------------------------------------- -------------------
Effect of exchange rate
changes on cash and
non-interest-bearing
deposits with banks 5 1 (6) 26 (15)
----------------------------------------------------- -------------------
Net increase (decrease)
in cash and
non-interest-bearing
deposits with banks
during period 404 (531) (370) 89 20
Cash and non-interest-
bearing deposits with
banks at beginning of
period 1,142 1,673 1,707 1,457 1,317
----------------------------------------------------- -------------------
Cash and non-interest-
bearing deposits with
banks at end of period $ 1,546 $ 1,142 $ 1,337 $ 1,546 $ 1,337
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Cash interest paid $ 2,144 $ 2,362 $ 2,766 $ 7,381 $ 8,552
Cash income taxes paid $ 2 $ 107 $ 50 $ 955 $ 1,091
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
(1) Related to the acquisition of FirstCaribbean International Bank.
The accompanying notes and shaded sections in "MD&A - Management of
risk" on pages 30 to 40 are an integral part of these consolidated
financial statements.
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The unaudited interim consolidated financial statements of Canadian
Imperial Bank of Commerce and its subsidiaries (CIBC) have been prepared
in accordance with Canadian generally accepted accounting principles
(GAAP). These financial statements follow the same accounting policies
and their methods of application as CIBC's consolidated financial
statements for the year-ended October 31, 2007, except as noted below.
CIBC's interim consolidated financial statements do not include all
disclosures required by Canadian GAAP for annual financial statements
and, accordingly, should be read in conjunction with the consolidated
financial statements for the year-ended October 31, 2007, as set out on
pages 84 to 137 of the 2007 Annual Accountability Report.
1. Change in accounting policy
Leveraged leases
Effective November 1, 2007, we adopted the amended Canadian Institute of
Chartered Accountants (CICA) Emerging Issues Committee Abstract (EIC) 46,
"Leveraged Leases", which was based upon the Financial Accounting
Standards Board Staff Position FAS 13-2, "Accounting for a Change or
Projected Change in the Timing of Cash Flows Relating to Income Taxes
Generated by a Leveraged Lease Transaction". The EIC requires that a
change in the estimated timing of the cash flows relating to income taxes
results in a recalculation of the timing of income recognition from the
leveraged lease.
The adoption of this guidance resulted in a $66 million charge to opening
retained earnings as at November 1, 2007. An amount approximating this
non-cash charge will be recognized into income over the remaining lease
terms using the effective interest rate method.
Capital disclosures
Effective November 1, 2007, we adopted the CICA handbook section 1535,
"Capital Disclosures", which requires an entity to disclose its
objectives, policies, and processes for managing capital. These were
provided in Note 17 to the 2007 consolidated financial statements, and
are unchanged from the prior year. In addition, the section requires
disclosure of summary quantitative information about capital components.
See Note 8 for additional details.
Financial instruments
Effective November 1, 2007, we adopted the CICA handbook sections 3862
"Financial Instruments - Disclosures" and 3863 "Financial Instruments -
Presentation".
These sections replace the CICA handbook section 3861 "Financial
Instruments - Disclosure and Presentation", and enhance disclosure
requirements on the nature and extent of risks arising from financial
instruments and how the entity manages those risks. See Note 15 for
additional details.
2. Fair value of financial instruments
Our approach for fair valuation of financial instruments is presented in
Note 2 to the 2007 consolidated financial statements.
Methodology and sensitivity
Valuation techniques using non-market observable inputs are used for a
number of financial instruments including our U.S. residential mortgage
market (USRMM) and certain non-USRMM positions. Indicative broker quotes
in an inactive market, which we consider to be non-market observable, are
primarily used for the valuation of these positions. Market observed
credit spreads where available are a key factor in establishing valuation
adjustments against our counterparty credit exposures related to
financial guarantors (excluding ACA).
A 10% adverse change in mark-to-market of our unhedged USRMM and
non-USRMM positions would result in a loss of approximately $5 million
and $118 million respectively, before index hedges. A 10% adverse change
in mark-to-market of our hedged USRMM and non-USRMM positions would,
primarily through an increase in credit valuation adjustment for
financial guarantors, result in a loss of approximately $151 million and
$94 million respectively, before credit hedges.
The impact of a 10% widening in financial guarantor credit spreads would
result in an increase in the credit valuation adjustments of
approximately $184 million, before credit hedges.
The total recognized loss in the consolidated financial statements on the
financial instruments outstanding as at the balance sheet date, whose
fair value was estimated using valuation techniques using non-market
observable inputs was $856 million for the quarter ($6.6 billion for the
nine months ended July 31, 2008).
Fair value option
Financial instruments designated at fair value are those that (i) would
otherwise be recognized in income at amortized cost, causing significant
measurement inconsistencies with hedging derivatives and securities sold
short carried at fair value; or (ii) are managed on a fair value basis in
accordance with a documented trading strategy and reported to key
management personnel on that basis.
The fair values of the FVO designated assets and liabilities (excluding
hedges) were $24,182 million and $2,037 million respectively as at
July 31, 2008. The FVO designated items and related hedges resulted in a
net income of $9 million for the quarter and $19 million for the nine
months ended July 31, 2008.
The gross impact of changes in credit spread on FVO designated loans was
a $38 million loss during the quarter (loss of $180 million for the nine
months ended July 31, 2008) and was a $24 million gain net of credit
hedges in the quarter (gain of $14 million for the nine months ended
July 31, 2008).
The impact of CIBC's credit risk on outstanding FVO designated
liabilities was a $6 million gain in the quarter ($6 million gain for the
nine months ended July 31, 2008).
3. Sale of some of our U.S. businesses
Effective January 1, 2008, we sold our U.S.-based investment banking,
leveraged finance, equities and related debt capital markets businesses
and our Israeli investment banking and equities businesses (the
"transferred businesses") to Oppenheimer Holdings Inc. (Oppenheimer). The
sale of certain other U.S. capital markets related businesses located in
the U.K. and Asia to Oppenheimer is anticipated to close in the fourth
quarter of 2008. In consideration, Oppenheimer provided us warrants for
one million shares exercisable at the end of five years, and will pay us
a minimum deferred purchase price of US$25 million at the end of five
years based on the earnings of the transferred businesses. We provided
indemnities in respect of certain costs that Oppenheimer may incur in
integrating the transferred businesses.
We wrote-off the goodwill associated with the transferred businesses,
recognized losses on certain leasehold improvements and computer
equipment and software, and recorded liabilities with respect to certain
contracts that are no longer required as part of our continuing
operations. In addition, we accelerated the recognition of the cost of
certain restricted share awards (RSAs) granted to employees that were
transferred to Oppenheimer.
The RSAs issued by CIBC and held by employees transferred to Oppenheimer
will continue to vest in accordance with their original terms. To support
this compensation arrangement, Oppenheimer will reimburse CIBC for the
cost of these RSAs to the extent they vest, at which time we will record
the reimbursements in other non-interest income.
As a result, we recorded a net pre-tax gain of $11 million ($58 million
loss for the nine months ended July 31, 2008) in other non-interest
income. These amounts include RSA reimbursements that became receivable
from Oppenheimer in the second and third quarters of 2008. We also
recorded impairment and other charges of $9 million ($22 million for the
nine months ended July 31, 2008) in other non-interest expenses related
to our remaining U.S. operations.
Pursuant to the sale agreement, CIBC invested in a US$100 million
subordinated debenture issued by Oppenheimer and is providing certain
credit facilities to Oppenheimer and its investment banking clients to
facilitate Oppenheimer's business, with each loan subject to approval by
CIBC's credit committee.
Excluding the losses noted above, the transferred businesses contributed
the following to our results for the two months ended December 31, 2007:
-------------------------------------------------------------------------
2007
$ millions, for the two months ended Dec. 31
-------------------------------------------------------------------------
Net interest income $ 1
Non-interest income 58
-------------------------------------------------------------------------
Total revenue 59
Non-interest expenses 48
-------------------------------------------------------------------------
Income before taxes and non-controlling interests 11
Income taxes 6
-------------------------------------------------------------------------
Net income $ 5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. Past due loans but not impaired
Past due loans are loans where repayment of principal or payment of
interest is contractually in arrears. The following table provides an
aging analysis of the past due loans. Consumer overdraft balances past
due less than 30 days have been excluded from the table below as the
information is currently indeterminable.
-------------------------------------------------------------- ----------
2008 2008
Less than 31 to Over Jul. 31 Apr. 30
$ millions, as at 30 days 90 days 90 days Total Total
-------------------------------------------------------------- ----------
Residential
mortgages $ 1,397 $ 508 $ 159 $ 2,064 $ 1,895
Personal 528 125 52 705 638
Credit card 500 136 88 724 622
Business and
government 373 139 46 $ 558 403
-------------------------------------------------------------- ----------
$ 2,798 $ 908 $ 345 $ 4,051 $ 3,558
-------------------------------------------------------------- ----------
-------------------------------------------------------------- ----------
5. Allowance for credit losses
-------------------------------------------------------------------------
For the three months ended
--------------------------------------------------
Jul. 31, Apr. 30, Jul. 31,
2008 2008 2007
--------------------------------------------------
Specific General Total Total Total
$ millions allowance allowance allowance allowance allowance
-------------------------------------------------------------------------
Balance at beginning
of period $ 579 $ 889 $ 1,468 $ 1,469 $ 1,516
Provision for credit
losses 202 1 203 176 162
Write-offs (211) - (211) (202) (202)
Recoveries 27 - 27 26 29
Transfer from general
to specific(1) 1 (1) - - -
Other(2) (3) - (3) (1) (5)
-------------------------------------------------------------------------
Balance at end of
period $ 595 $ 889 $ 1,484 $ 1,468 $ 1,500
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprised of:
Loans $ 595 $ 803 $ 1,398 $ 1,384 $ 1,499
Undrawn credit
facilities(3) - 86 86 84 -
Letters of credit(4) - - - - 1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------
For the
nine months ended
--------------------
Jul. 31, Jul. 31,
2008 2007
--------------------
Total Total
$ millions allowance allowance
-------------------------------------------
Balance at beginning
of period $ 1,443 $ 1,444
Provision for credit
losses 551 471
Write-offs (600) (646)
Recoveries 84 104
Transfer from general
to specific(1) - -
Other(2) 6 127
-------------------------------------------
Balance at end of
period $ 1,484 $ 1,500
-------------------------------------------
-------------------------------------------
Comprised of:
Loans $ 1,398 $ 1,499
Undrawn credit
facilities(3) 86 -
Letters of credit(4) - 1
-------------------------------------------
-------------------------------------------
(1) Related to student loan portfolio.
(2) First quarter of 2007 includes $117 million in specific allowance and
$23 million in general allowance related to the acquisition of the
FirstCaribbean International Bank.
(3) Beginning in the first quarter of 2008, allowance on undrawn credit
facilities is included in other liabilities. Prior to 2008, it was
included in allowance for credit losses.
(4) Included in other liabilities.
6. Securitizations and variable interest entities
Securitizations (residential mortgages)
During the quarter, we securitized $10.8 billion of residential insured
mortgages through the creation of mortgage-backed securities. We sold
$3.0 billion to the Canada Housing Trust and retained $7.8 billion as
inventory on our consolidated balance sheet.
In addition, we securitized $185 million of mortgage assets to a
qualifying special purpose entity (QSPE) that holds Prime/Alt A non-
insured mortgages. Total assets in the QSPE as at July 31, 2008 were
$635 million of which $112 million represent Prime mortgages and the
remaining $523 million represent Near Prime/Alt A mortgages. We also hold
another $28 million in inventory that is available for securitization.
The Near Prime/Alt A mortgages do not meet traditional lending criteria
in order to qualify for prime based lending because of either limited
credit history or specific isolated event driven credit issues, but
otherwise have a strong credit profile with an average loss rate over the
past 5 years of 14 bps and an average loan-to-value ratio of 74%. We
retained responsibility for servicing these mortgages.
-------------------------------------------------------------------------
For the three months ended
---------------------------------------
2008 2008 2007
$ millions Jul. 31 Apr. 30 Jul. 31
-------------------------------------------------------------------------
Securitized $ 10,993 $ 2,663 $ 3,843
Sold 3,164 937 1,251
Net cash proceeds 3,145 933 1,235
Retained interests 77 20 19
Gain on sale, net of transaction
costs 34 9 11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained interest assumptions (%)
Weighted-average remaining life
(in years) 3.2 4.0 4.4
Prepayment/payment rate 11.0 - 33.0 11.0 - 35.0 11.0 - 39.0
Discount rate 3.3 - 6.9 2.9 - 3.6 4.0 - 4.9
Expected credit losses 0.0 - 0.1 0.0 - 0.1 0.0 - 0.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
------------------------------------------------------------
For the
nine months ended
--------------------------
2008 2007
$ millions Jul. 31 Jul. 31
------------------------------------------------------------
Securitized $ 19,964 $ 9,049
Sold 6,373 5,507
Net cash proceeds 6,328 5,470
Retained interests 145 86
Gain on sale, net of transaction
costs 57 37
------------------------------------------------------------
------------------------------------------------------------
Retained interest assumptions (%)
Weighted-average remaining life
(in years) 3.5 3.6
Prepayment/payment rate 11.0 - 36.0 11.0 - 39.0
Discount rate 2.9 - 6.9 4.0 - 4.9
Expected credit losses 0.0 - 0.1 0.0 - 0.1
------------------------------------------------------------
------------------------------------------------------------
Variable interest entities (VIEs)
As discussed in Note 6 to our 2007 consolidated financial statements, we
have interests in certain VIEs that are not considered significant
because our interests are hedged with other counterparties.
Under certain total return swap credit derivative arrangements with these
VIEs held in our trading book, we can be called upon to purchase the
underlying reference assets at par with the simultaneous termination of
the credit derivatives. Pursuant to these arrangements, during the third
quarter of 2008, we purchased certain reference assets at a par amount of
$189 million from a third-party structured vehicle in consideration for
the termination of the remaining related total return swaps. This is in
addition to the $6.6 billion of reference assets purchased during the
first and second quarters from two third party structured vehicles also
in consideration for the termination of the related total return swaps.
The reference assets purchased were categorized as trading securities on
our consolidated balance sheet and continue to be hedged.
We continue to support our sponsored conduits from time to time through
the purchase of commercial paper issued by these conduits. As at
July 31, 2008, our direct investment in commercial paper issued by our
sponsored conduits was $120 million. We were not considered to be the
primary beneficiary of any of these conduits. At July 31, 2008, our
maximum exposure to loss relating to CIBC-sponsored multi-seller conduits
and third party structured vehicles was $9.9 billion (October 31, 2007:
$15.1 billion) and $1.3 billion (October 31, 2007: $1.8 billion)
respectively. The maximum exposure to loss relating to these conduits
comprises the fair value for investments and notional amounts of
liquidity and credit facilities.
7. Subordinated indebtedness
On January 21, 2008, in accordance with their terms, we redeemed all
$250 million of our 4.75% Debentures (subordinated indebtedness) due
January 21, 2013, for their outstanding principal amount, plus unpaid
interest accrued to the redemption date.
On February 26, 2008, in accordance with their terms, we redeemed all
$89 million of our 5.89% Debentures (subordinated indebtedness) due
February 26, 2013, for their outstanding principal amount, plus unpaid
interest accrued to the redemption date.
On June 6, 2008, we issued $550 million principal amount of 5.15%
subordinated indebtedness due June 6, 2018 and $600 million principal
amount of 6.00% subordinated indebtedness due June 6, 2023.
8. Share capital
Regulatory capital and ratios
Commencing November 1, 2007, our regulatory capital requirements are
based on the Basel II framework. Refer to "Management of risk" section of
the MD&A for additional details on Basel II.
Bank for International Settlements standards require that banks maintain
minimum Tier 1 and Total capital ratios of 4% and 8%, respectively. The
Office of the Superintendent of Financial Institutions has established
that Canadian deposit-taking financial institutions maintain Tier 1 and
Total capital ratios of at least 7% and 10%, respectively. During the
quarter and nine months ended July 31, 2008, we have complied with these
regulatory capital requirements.
Tier 1 capital comprised common shares excluding short trading positions
in our own shares, retained earnings, preferred shares, non-controlling
interests, contributed surplus, and foreign currency translation
adjustments. Goodwill and gains on sale upon securitization were deducted
from Tier 1 capital. Tier 2 capital comprised subordinated debt and
eligible general allowance. Commencing November 1, 2007, the investment
in insurance subsidiaries and pre-2007 substantial investments were
deducted from Tier 2 capital. Both Tier 1 and Tier 2 capital were subject
to certain other deductions on a 50/50 basis.
Our capital ratios and assets-to-capital multiple are presented in the
following table. The information as at July 31, 2008 is based on Basel II
requirements and information for October 31, 2007 is based upon Basel I
requirements, and hence the information is not comparable.
-------------------------------------------------------------------------
Basel II Basel I
basis basis
-------------------------------------------------------------------------
2008 2007
$ millions, as at Jul. 31 Oct. 31
-------------------------------------------------------------------------
Tier 1 capital $ 11,626 $ 12,379
Total regulatory capital 17,087 17,758
Risk-weighted assets 118,494 127,424
Tier 1 capital ratio 9.8% 9.7%
Total capital ratio 14.4% 13.9%
Assets-to-capital multiple 17.7x 19.0x
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common shares
During the first quarter of 2008, we issued 45.3 million common shares
for net cash proceeds of $2.9 billion, after issuance costs, net of tax,
of $32 million. We also issued 0.2 million common shares for $11 million,
pursuant to stock option plans.
During the second quarter, we issued 0.2 million common shares for
$8 million, pursuant to stock option plans. We also incurred additional
issuance costs net of tax of $1 million related to common shares issued
for cash.
During the third quarter we issued 0.1 million common shares for
$4 million, pursuant to stock option plans.
9. Financial guarantors
We have derivative contracts with financial guarantors to hedge our
exposure on various reference assets, including collateralized debt
obligations and other positions related to the USRMM. During the quarter,
we recorded a charge of US$102 million ($104 million) on our exposures
hedged by ACA. We have increased our valuation adjustments by
US$12 million ($12 million) against the receivable from ACA for unmatched
purchased credit derivatives, bringing the total valuation adjustments
for ACA to US$3.02 billion ($3.09 billion) as at July 31, 2008. With the
restructuring of ACA on August 7, 2008 as discussed in the MD&A, we have
reduced our credit valuation adjustments against ACA resulting in a
credit to earnings of US$11 million ($11 million). As a result, the fair
value of derivative contracts with ACA net of valuation adjustments was
US$41 million ($42 million) as at July 31, 2008.
We also recorded a charge of US$799 million ($800 million) on the hedging
contracts provided by other financial guarantors to increase their
related valuation adjustments to US$3.0 billion ($3.0 billion) as at
July 31, 2008. The fair value of derivative contracts with other
financial guarantors net of valuation adjustments was US$2.9 billion
($2.9 billion).
The amount of the charge is based on the estimated fair value of the
derivative contracts, which in turn is based on market value of the
underlying reference assets.
During the quarter, our methodology in establishing valuation adjustments
against our counterparty credit exposures related to financial guarantors
(excluding ACA) continued to be refined to reflect industry best
practices and market developments.
We believe that we have made appropriate fair value adjustments to date.
The establishment of fair value adjustments involves estimates that are
based on accounting processes and judgments by management. We evaluate
the adequacy of the fair value adjustments on an ongoing basis. Market
and economic conditions relating to these counterparties may change in
the future, which could result in significant future losses.
10. Income taxes
At the end of the quarter, our future income tax asset was $1.3 billion,
net of a US$82 million ($84 million) valuation allowance. Included in the
future income tax asset are $954 million related to a Canadian non-
capital loss carryforward which expires in 20 years, and $68 million
related to a Canadian capital loss carryforward which has no expiry date.
Accounting standards require a valuation allowance when it is more likely
than not that all or a portion of a future income tax asset will not be
realized prior to its expiration. Although realization is not assured, we
believe that based on all available evidence, it is more likely than not
that all of the future income tax asset, net of the valuation allowance,
will be realized.
11. Employee future benefit expenses
----------------------------------------------------- -------------------
For the
For the three months ended nine months ended
----------------------------- -------------------
2008 2008 2007 2008 2007
$ millions Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Defined benefit plans
Pension benefit plans $ 37 $ 38 $ 45 $ 113 $ 140
Other benefit plans 10 13 12 31 31
----------------------------------------------------- -------------------
$ 47 $ 51 $ 57 $ 144 $ 171
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Defined contribution
plans
CIBC's pension plans $ 2 $ 4 $ 3 $ 10 $ 12
Government pension
plans(1) 19 23 19 63 63
----------------------------------------------------- -------------------
$ 21 $ 27 $ 22 $ 73 $ 75
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
(1) Includes Canada Pension Plan, Quebec Pension Plan, and U.S. Federal
Insurance Contributions Act.
12. Earnings (loss) per share (EPS)
----------------------------------------------------- -------------------
For the
For the three months ended nine months ended
----------------------------- -------------------
$ millions, except 2008 2008 2007 2008 2007
per share amounts Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
----------------------------------------------------- -------------------
Basic EPS
Net income (loss) $ 71 $ (1,111) $ 835 $ (2,496) $ 2,412
Preferred share
dividends and premiums (30) (30) (52) (90) (141)
----------------------------------------------------- -------------------
Net income (loss)
applicable to common
shares $ 41 $ (1,141) $ 783 $ (2,586) $ 2,271
----------------------------------------------------- -------------------
Weighted-average common
shares outstanding
(thousands) 380,877 380,754 335,755 366,686 336,511
----------------------------------------------------- -------------------
Basic EPS $ 0.11 $ (3.00) $ 2.33 $ (7.05) $ 6.75
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
Diluted EPS
Net income (loss)
applicable to common
shares $ 41 $ (1,141) $ 783 $ (2,586) $ 2,271
----------------------------------------------------- -------------------
Weighted-average common
shares outstanding
(thousands) 380,877 380,754 335,755 366,686 336,511
Add: stock options
potentially
exercisable(1)
(thousands) 1,295 1,623 2,936 1,666 3,228
----------------------------------------------------- -------------------
Weighted-average diluted
common shares
outstanding(2)
(thousands) 382,172 382,377 338,691 368,352 339,739
----------------------------------------------------- -------------------
Diluted EPS(3) $ 0.11 $ (3.00) $ 2.31 $ (7.05) $ 6.69
----------------------------------------------------- -------------------
----------------------------------------------------- -------------------
(1) Excludes average options outstanding of 2,302,495 with a
weighted-average exercise price of $78.44; average options
outstanding of 2,128,531 with a weighted-average exercise price of
$79.50; and average options outstanding of 8,758 with a
weighted-average exercise price of $100.02 for the three months ended
July 31, 2008, April 30, 2008, and July 31, 2007, respectively, as
the options' exercise prices were greater than the average market
price of CIBC's common shares.
(2) Convertible preferred shares/preferred share liabilities have not
been included in the calculation since we have the right to redeem
them for cash prior to the conversion date.
(3) In case of a loss, the effect of stock options potentially
exercisable on diluted EPS will be anti-dilutive; therefore basic and
diluted EPS will be the same.
13. Guarantees
-------------------------------------------------------------------------
2008 2007
$ millions, as at Jul. 31 Oct. 31
-------------------------------------------------------------------------
Maximum Maximum
potential potential
future Carrying future Carrying
payment(1) amount payment(1) amount
-------------------------------------------------------------------------
Securities lending with
indemnification(2) $ 46,416 $ - $ 43,287 $ -
Standby and performance
letters of credit 6,454 15 6,353 13
Credit derivatives
written options 30,845 6,070 67,283 3,971
Other derivative written
options(3) -(4) 4,089 -(4) 5,612
Other indemnification
agreements -(4) - -(4) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The total collateral available relating to these guarantees was
$50.3 billion (October 31, 2007: $46.8(*) billion).
(2) Comprises the full contract amount of custodial client securities
lent by CIBC Mellon Global Securities Services Company, which is a
50/50 joint venture between CIBC and The Bank of New York Mellon.
(3) Includes $352 million (October 31, 2007: $631 million) related to
total return swaps (TRS).
(4) See narrative on page 127 of the 2007 consolidated financial
statements for further information.
(*) Restated.
14. Segmented information
CIBC has two strategic business lines: CIBC Retail Markets and CIBC World
Markets. These business lines are supported by five functional groups -
Administration, Technology and Operations; Corporate Development;
Finance; Legal and Regulatory Compliance; and Treasury and Risk
Management. The activities of these functional groups are included within
Corporate and Other, with their revenue, expenses and balance sheet
resources generally being allocated to the business lines.
In the first quarter of 2008: (a) we moved commercial banking from CIBC
World Markets to CIBC Retail Markets. Prior period information was
restated; (b) We allocated the general allowance for credit losses
between the strategic business lines (CIBC Retail Markets and CIBC World
Markets). Prior to 2008, the general allowance (excluding FirstCaribbean
International Bank) was included within Corporate and Other. Prior period
information was not restated; and (c) We reclassified the allowance for
credit losses related to the undrawn credit facilities to other
liabilities. Prior to 2008, it was included in allowance for credit
losses. Prior period information was not restated.
-------------------------------------------------------------------------
CIBC CIBC
$ millions, for the Retail World Corporate CIBC
three months ended Markets Markets and Other Total
-------------------------------------------------------------------------
Jul. 31, 2008
Net interest income
(expense) $ 1,299 $ (67) $ 95 $ 1,327
Non-interest income
(expense) 1,055 (531) 54 578
Intersegment revenue(1) 1 - (1) -
-------------------------------------------------------------------------
Total revenue 2,355 (598) 148 1,905
Provision for credit
losses 196 7 - 203
Amortization(2) 27 4 30 60
Other non-interest
expenses 1,350 262 52 1,665
-------------------------------------------------------------------------
Income (loss) before
income taxes and
non-controlling
interests 782 (871) 66 (23)
Income tax expense
(benefit) 203 (333) 29 (101)
Non-controlling interests 7 - - 7
-------------------------------------------------------------------------
Net income (loss) $ 572 $ (538) $ 37 $ 71
-------------------------------------------------------------------------
Average assets(3) $ 242,407 $ 97,357 $ 3,632 $ 343,396
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Apr. 30, 2008
Net interest income $ 1,281 $ 17 $ 51 $ 1,349
Non-interest income
(expense) 956 (2,183) 4 (1,223)
Intersegment revenue(1) 2 - (2) -
-------------------------------------------------------------------------
Total revenue 2,239 (2,166) 53 126
Provision for credit
losses 174 2 - 176
Amortization(2) 28 3 30 61
Other non-interest
expenses 1,352 355 20 1,727
-------------------------------------------------------------------------
Income (loss) before
income taxes and
non-controlling
interests 685 (2,526) 3 (1,838)
Income tax expense
(benefit) 174 (891) (14) (731)
Non-controlling interests 2 2 - 4
-------------------------------------------------------------------------
Net income (loss) $ 509 $ (1,637) $ 17 $ (1,111)
-------------------------------------------------------------------------
Average assets(3) $ 242,219 $ 104,210 $ 2,576 $ 349,005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Jul. 31, 2007
Net interest income
(expense) $ 1,225 $ (129) $ 84 $ 1,180
Non-interest income 1,161 584 54 1,799
Intersegment revenue(1) - - - -
-------------------------------------------------------------------------
Total revenue 2,386 455 138 2,979
Provision for (reversal
of) credit losses 167 (5) - 162
Amortization(2) 29 5 29 63
Other non-interest
expenses 1,377 314 65 1,756
-------------------------------------------------------------------------
Income before income taxes
and non-controlling
interests 813 141 44 998
Income tax expense
(benefit) 212 (80) 25 157
Non-controlling interests 5 1 - 6
-------------------------------------------------------------------------
Net income $ 596 $ 220 $ 19 $ 835
-------------------------------------------------------------------------
Average assets(3) $ 228,201 $ 102,667 $ 685 $ 331,553
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CIBC CIBC
$ millions, for the nine Retail World Corporate CIBC
months ended Markets Markets and Other Total
-------------------------------------------------------------------------
Jul. 31, 2008
Net interest income
(expense) $ 3,839 $ (214) $ 205 $ 3,830
Non-interest income
(expense) 3,122 (5,507) 65 (2,320)
Intersegment revenue(1) 4 - (4) -
-------------------------------------------------------------------------
Total revenue 6,965 (5,721) 266 1,510
Provision for credit
losses 525 26 - 551
Amortization(2) 83 12 88 183
Other non-interest
expenses 4,027 963 101 5,091
-------------------------------------------------------------------------
Income (loss) before
income taxes and
non-controlling
interests 2,330 (6,722) 77 (4,315)
Income tax expense
(benefit) 579 (2,390) (23) (1,834)
Non-controlling
interests 13 2 - 15
-------------------------------------------------------------------------
Net income (loss) $ 1,738 $ (4,334) $ 100 $ (2,496)
Average assets(3) $ 239,952 $ 103,209 $ 2,457 $ 345,618
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Jul. 31, 2007
Net interest income
(expense) $ 3,551 $ (484) $ 251 $ 3,318
Non-interest income 3,413 2,207 182 5,802
Intersegment revenue(1) 4 - (4) -
-------------------------------------------------------------------------
Total revenue 6,968 1,723 429 9,120
Provision for (reversal
of) credit losses 501 (10) (20) 471
Amortization(2) 80 15 97 192
Other non-interest
expenses 4,097 1,249 200 5,546
-------------------------------------------------------------------------
Income before income taxes
and non-controlling
interests 2,290 469 152 2,911
Income tax expense
(benefit) 491 (85) 73 479
Non-controlling interests 16 4 - 20
-------------------------------------------------------------------------
Net income $ 1,783 $ 550 $ 79 $ 2,412
-------------------------------------------------------------------------
Average assets(3) $ 222,497 $ 101,431 $ 644 $ 324,572
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Intersegment revenue represents internal sales commissions and
revenue allocations under the
Manufacturer/Customer Segment/Distributor Management Model.
(2) Includes amortization of buildings, furniture, equipment, leasehold
improvements and finite-lived other intangible assets.
(3) Assets are disclosed on an average basis as this measure is most
relevant to a financial institution and is the measure reviewed by
management.
15. Financial instruments - disclosures
Effective November 1, 2007, we adopted the CICA handbook section 3862,
"Financial Instruments - Disclosures". We have included some of the
disclosures required by the CICA handbook section 3862 in the shaded sections
of the "MD&A - Management of risk", as permitted by the standard. The
following table provides a cross referencing of those disclosures from the
MD&A.
-------------------------------------------------------------------------
Description Section
-------------------------------------------------------------------------
For each type of risk arising from financial Risk overview
instruments, an entity shall disclose: the exposure ------------------
to risk and how they arise; objectives, policies and Credit risk
processes used for managing the risks; methods used ------------------
to measure the risk; and description of collateral. Market risk
------------------
Liquidity risk
------------------
Operational risk
------------------
Reputation and
legal risk
------------------
Regulatory risk
-------------------------------------------------------------------------
Credit risk - gross exposure to credit risk, Credit risk
credit quality, and concentration of exposures.
-------------------------------------------------------------------------
Market risk - trading portfolios - value-at-risk; Market risk
non-trading portfolios - interest rate risk, foreign
exchange risk, and equity risk.
-------------------------------------------------------------------------
Liquidity risk - liquid assets, maturity of financial Liquidity risk
liabilities, and credit and liquidity commitments.
-------------------------------------------------------------------------
We have provided quantitative disclosures related to credit risk
consistent with Basel II guidelines, which requires entities to disclose their
exposures based on how they manage their business and risks. The following
table sets out the categories of the drawn exposure to credit risk under
Advanced Internal Ratings Based and standardized approaches displayed in both
accounting categories and Basel II portfolios.
$ millions, as at July 31, 2008
-------------------------------------------------------------------------
Accounting categories Basel II portfolios
------------------------- ----------------------------------------------
Real estate
secured
personal
Corporate Sovereign Bank lending
------------------------- ----------------------------------------------
Non-interest bearing
deposits with banks $ - $ - $ 430 $ -
Interest-bearing deposits
with banks - 429 2,581 -
Securities
Trading 37 5 - -
AFS 1,989 8,514 29 -
FVO 111 22,264 - -
Loans
Residential mortgages 589 1,086 - 86,823
Personal loans 202 - 19 16,625
Credit card loans - - - -
Business and government
loans 29,222 655 457 -
Customers' liability under
acceptances 7,860 268 650 -
Other assets 693 2,044 5,486 7
-------------------------------------------------------------------------
Total credit exposure $ 40,703 $ 35,265 $ 9,652 $ 103,455
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-----------------------------------------------------------------
Accounting categories Basel II portfolios
------------------------- --------------------------------------
Qualifying
revolving Other
retail retail Securitization
------------------------- --------------------------------------
Non-interest bearing
deposits with banks $ - $ - $ -
Interest-bearing deposits
with banks - - -
Securities
Trading - - 1,847
AFS - - 906
FVO - - 4
Loans
Residential mortgages - - -
Personal loans 6,197 8,075 -
Credit card loans 10,465 106 -
Business and government
loans - 2,000 134
Customers' liability under
acceptances - - -
Other assets 77 7 32
-----------------------------------------------------------------
Total credit exposure $ 16,739 $ 10,188 $ 2,923
-----------------------------------------------------------------
-----------------------------------------------------------------
For further information:
For further information: Investor and analyst inquiries should be directed to John Ferren, Vice-President, Investor Relations, at (416) 980-2088; Media inquiries should be directed to Rob McLeod, Senior Director, Communications and Public Affairs, at (416) 980-3714; or to Mary Lou Frazer, Senior Director, Investor & Financial Communications, at (416) 980-4111
