TORONTO, Aug. 26 /CNW/ - CIBC (CM: TSX; NYSE) announced net income of
$434 million for the third quarter ended July 31, 2009, compared with net
income of $71 million for the same period last year. Diluted earnings per
share were $1.02, compared with $0.11 a year ago. Cash diluted earnings per
share were $1.04(1), compared with $0.13(1) a year ago.
CIBC's Tier 1 and total capital ratios at July 31, 2009 remain strong, at
12.0% and 16.5%, respectively.
"CIBC's third quarter performance was solid, driven by good performances
in our core retail and wholesale banking businesses, continued expense
discipline and a gain from run-off activities following several quarters of
losses," says Gerald T. McCaughey, President and Chief Executive Officer of
CIBC. "In addition, while growing our businesses, we further enhanced our
strong capital position which continues to be a clear strategic advantage for
CIBC."
Results for the third quarter of 2009 were affected by the following items
of note aggregating to a negative impact of $0.32 per share:
- $155 million ($106 million after-tax, or $0.27 per share) of
mark-to-market (MTM) losses on credit derivatives in CIBC's corporate
loan hedging program as a result of the narrowing of credit spreads
during the quarter;
- $95 million ($65 million after-tax, or $0.17 per share) gain on
structured credit run-off activities;
- $83 million ($56 million after-tax, or $0.15 per share) of loan
losses within the leveraged loan and other run-off portfolios;
- $42 million ($29 million after-tax, or $0.07 per share) provision for
credit losses in the general allowance; and
- Other items of note as described on page 7 of CIBC's Third Quarter
2009 Management Discussion and Analysis aggregating to a positive
impact on earnings of $2 million ($3 million after-tax and no impact
on earnings per share).
Net income of $434 million for the third quarter of 2009 compared to a
net loss of $51 million for the prior quarter. Diluted earnings per share and
cash diluted earnings per share of $1.02 and $1.04(1), respectively, for the
third quarter of 2009 compared to a diluted loss per share and a cash diluted
loss per share of $0.24 and $0.21(1), respectively, for the prior quarter. The
prior quarter included items of note that aggregated to a negative impact on
results of $1.65 per share.
Update on business priorities
Capital strength
CIBC continues to emphasize capital strength as a key area of focus.
CIBC's Tier 1 capital ratio of 12.0%, which is among the highest of major
commercial banks in North America, is well above its target of 8.5% and the
regulatory minimum of 7.0%. CIBC's capital strength provides CIBC with
capacity to meet the ongoing investment needs of its core businesses, while
also positioning the bank for future growth opportunities.
Business strength
CIBC Retail Markets reported net income of $416 million.
CIBC's Retail Markets business continues to effectively balance growth
with expense and risk discipline.
Revenue of $2.3 billion was down $32 million from the third quarter of
2008, which included a $28 million gain on the sale of shares in Visa Inc.
Volume growth was offset by lower spreads and the impact of weaker equity
markets.
Expenses of $1,324 million were down $53 million from the third quarter
of 2008. Lower performance-related compensation and effective cost management
were partially offset by the negative impact of a weaker Canadian dollar on
the translated U.S. dollar expenses of FirstCaribbean.
Loan losses of $423 million were up $199 million from the third quarter
of 2008, and included $63 million of higher allowances. Loan losses were
higher in cards and personal lending due to higher delinquencies and
bankruptcies related to the deteriorating economic environment.
During the third quarter of 2009, CIBC Retail Markets continued to deliver
on its strategy of providing clients with greater access, choice and advice by
further strengthening its branch network and enhancing its competitive product
capabilities:
- Retail Markets opened or expanded 11 additional branches in high
growth locations, bringing the year-to-date total to 28 of the 40
planned branch openings in 2009;
- Retail Markets launched the new Renaissance High Interest Savings
Account to positive market response both through the Wood Gundy
brokerage network and also third party channels;
- Retail Markets relaunched its highly successful chequing account and
credit card promotional campaign to acquire new clients to the bank;
and
- Retail Markets was voted the "Best Consumer Internet Bank" in Canada
and the "Best Online Consumer Credit Site" in North America for the
second year in a row by Global Finance magazine.
Wholesale Banking reported net income of $86 million for the third
quarter.
Revenue of $531 million was up $772 million from the prior quarter,
primarily due to gains on structured credit run-off activities compared with
losses on these activities in the prior quarter. In addition, revenue was
higher for Wholesale Banking's core capital markets and investment and
corporate banking businesses, reflecting the combination of progress on the
goals Wholesale Banking set for its businesses last year and improving
financial market conditions.
Expenses of $258 million were up $11 million from the prior quarter,
primarily due to higher employee compensation and benefits and higher
professional expenses, partially offset by lower performance-related
compensation.
Loan losses of $129 million were up $111 million from the prior quarter
primarily due to higher losses in the leveraged loan and other run-off
portfolios and the U.S. real estate finance businesses.
During the quarter, Wholesale Banking participated in several notable
achievements:
- CIBC's wholesale banking business was named Investment Bank of the
Year - North America by ACQ, a U.K.-based acquisition finance
magazine, for its continued leadership in mergers and acquisitions;
- Wholesale Banking launched a set of tradable indices that give
investors greater access to futures contracts involving interest
rates, currencies and commodities. CIBC will be offering a range of
products linked to the indices including over-the-counter
derivatives, swaps, principal at risk notes and principal protected
notes;
- Wholesale Banking solidified its position as the leading equity
trader on the Canadian exchanges for volume and value for the
quarter, building on the leadership position it established during
the second quarter. On a fiscal year-to-date basis CIBC ranked No. 1
with 15.5% market share by value;
- CIBC's wholesale banking business acted as lead manager on an $8.0
billion new issue of Canada Housing Trust No. 1 and acted as lead
manager and joint bookrunner in a $946 million IPO of Genworth MI
Canada Inc.; and
- Wholesale Banking also acted as a senior co-manager in Teck Resources
Limited's US$4.2 billion multi-tranche issuance of senior secured
notes and acted as joint lead and joint bookrunner for a $1.0 billion
offering of medium term notes for Manulife Financial Corporation.
CIBC also made progress during the third quarter in reducing exposures
within its structured credit run-off business:
- CIBC commuted its U.S. residential mortgage market (USRMM) exposure
with a financial guarantor and CIBC's non-USRMM contracts with this
counterparty were transferred to a newly created and capitalized entity. This
commutation and restructuring activity resulted in a gain of $163 million
(US$152 million);
- CIBC terminated $2.8 billion (US$2.6 billion) of written credit
derivatives in its correlation portfolio for a gain of $8 million (US
$8 million);
- CIBC terminated $494 million (US$452 million) of written credit
derivatives with exposures to commercial mortgage-backed securities
for a gain of $49 million (US$45 million); and
- Normal amortization of $215 million (US$200 million) reduced the
notional amount of credit derivatives purchased from financial
guarantors.
As at July 31, 2009, the fair value, net of valuation adjustments, of
purchased protection from financial guarantor counterparties was $1.8 billion
(US$1.7 billion). Further significant losses could result depending on the
performance of both the underlying assets and the financial guarantors.
Productivity
In addition to continuing to invest and position its businesses for
long-term performance, CIBC continues to make progress in the area of expense
discipline.
Non-interest expenses for the third quarter were $1,699 million, down
from $1,725 million a year ago and below its quarterly run-rate target of
$1,776 million.
"We continue to manage our run rate expenses by adjusting our
infrastructure support activities to business changes and evolving market
conditions," says McCaughey. "We expect the largest contributor to further
productivity improvements to come from better revenue performance as market
conditions and the general economy stabilize and improve."
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.
"CIBC continues to make a difference in our communities through corporate
donations, sponsorships and the volunteer spirit of our employees," says
McCaughey.
CIBC's achievements this quarter included:
- Awarding thirty scholarships to students from across Canada under the
CIBC Youthvision Scholarship(TM) program, marking the 10th
anniversary of the program and bringing CIBC's total commitment to
over $10 million since the program's inception in 1999;
- Supporting the launch of a new national public awareness campaign by
the Canadian Centre for Child Protection, the goal of which is to
remind parents of the major role they play in ensuring that their
children grow up smart, strong and safe;
- CIBC clients and employees throughout British Columbia and the Yukon
Territories raised more than $405,000 during the 2009 BC Children's
Hospital fundraising campaign. This brings the total amount raised
since 1995 to $4.2 million, building on $1.3 million in corporate
donations from CIBC; and
- The Tour CIBC Charles Bruneau, a four-day bicycle ride across Quebec
to help children with cancer, raised $1,025,000 in support of the
Fondation Centre de cancerologie Charles-Bruneau, widely surpassing
the $850,000 fundraising goal. Of this, CIBC employees and clients
contributed $250,000 to help fund cancer research and treatment for
children.
In addition to these community endeavours, CIBC was selected by Corporate
Knights as a member of their Best 50 Corporate Citizens list for 2009, which
ranks Canadian companies on corporate sustainability initiatives and
responsible business practices. CIBC was also awarded the 2009 Philanthropy
Award for Outstanding Corporation by the Greater Toronto Chapter of the
Association of Fundraising Professionals, which recognizes contributions of
time, leadership and financial support.
------------------------------
(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 2008 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 26, 2009.
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
167 to 169 of our 2008 Annual Accountability Report.
Contents
5 External reporting changes
6 Third quarter financial highlights
7 Overview
8 Significant events
9 Outlook
10 Run-off businesses and other selected activities
10 Run-off businesses
18 Other selected activities
20 Financial performance review
20 Net interest income
20 Non-interest income
20 Provision for credit losses
21 Non-interest expenses
21 Income taxes
21 Foreign exchange
22 Review of quarterly financial information
23 Non-GAAP measures
23 Business unit allocations
24 Business line overview
24 CIBC Retail Markets
26 Wholesale Banking
28 Corporate and Other
30 Financial condition
30 Review of consolidated balance sheet
30 Capital resources
31 Off-balance sheet arrangements
32 Management of risk
32 Risk overview
32 Credit risk
34 Market risk
35 Liquidity risk
36 Operational risk
36 Other risks
37 Accounting and control matters
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 "Update on business priorities", "Overview -
Significant events", "Overview - Outlook for 2009", "Run-off businesses",
"Financial performance review - Income Taxes", "Management of Risk - Liquidity
risk" and "Accounting and Control Matters" sections, of this report and other
statements about our operations, business lines, financial condition, risk
management, priorities, targets, ongoing objectives, strategies and outlook
for 2009 and subsequent periods. Forward-looking statements are typically
identified by the words "believe", "expect", "anticipate", "intend",
"estimate" and other similar expressions or future or conditional verbs such
as "will", "should", "would" and "could". By their nature, these statements
require us to make assumptions, including the economic assumptions set out in
the "Overview - Outlook for 2009" section of this report, and are subject to
inherent risks and uncertainties that may be general or specific. A variety of
factors, many of which are beyond our control, affect our operations,
performance and results, and could cause actual results to differ materially
from the expectations expressed in any of our forward-looking statements.
These factors include: credit, market, liquidity, strategic, operational,
reputation and legal, regulatory and environmental risk discussed in the
Management of Risk section of this report; legislative or regulatory
developments in the jurisdictions where we operate; amendments to, and
interpretations of, risk-based capital guidelines and reporting instructions;
the resolution of legal proceedings and related matters; the effect of changes
to accounting standards, rules and interpretations; changes in our estimates
of reserves and allowances; changes in tax laws; changes to our credit
ratings; 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 business and economic conditions
worldwide, as well as in Canada, the U.S. and other countries where we have
operations; changes in market rates and prices which may adversely affect the
value of financial products; our success in developing and introducing new
products and services, expanding existing distribution channels, developing
new distribution channels and realizing increased revenue from these channels;
changes in client spending and saving habits; our ability to attract and
retain key employees and executives; 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.
EXTERNAL REPORTING CHANGES
Third Quarter
- Provision for credit losses related to general allowance has been
included within Corporate and Other. Prior period information has
been restated.
Second Quarter
- We have changed the name of our wholesale banking business from CIBC
World Markets to Wholesale Banking.
- We have replaced regular workforce headcount with full time
equivalent employees as a measure of the number of employees.
First Quarter
- We realigned the businesses within CIBC Retail Markets and Wholesale
Banking. Prior period information has been restated to reflect the
changes. The new reported businesses are as follows:
CIBC Retail Markets:
- Personal banking - includes personal deposits and lending, cards,
residential mortgages, and insurance
- Business banking - includes business deposits and lending,
commercial mortgages, and commercial banking
- Wealth management - includes retail brokerage and asset
management
- FirstCaribbean
- Other
Wholesale Banking:
- Capital markets - includes cash equities, global derivatives and
strategic risk, and fixed income, currencies and distribution
businesses
- Corporate and investment banking - includes corporate credit
products, investment banking, U.S. real estate finance, and core
merchant banking
- Other - includes legacy merchant banking, structured credit and
other run-off businesses, exited businesses, and corporate loan
hedging
- We moved the impact of securitization from CIBC Retail Markets to
Corporate and Other. Prior period information has been restated.
- We moved the sublease income and related operating costs of our New
York premises from Wholesale Banking to Corporate and Other. Prior
period information has not been restated.
- We retroactively reclassified intangible assets relating to
application software from "Land, buildings and equipment" to
"Software and other intangible assets" on our consolidated balance
sheet.
THIRD QUARTER FINANCIAL HIGHLIGHTS
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As at or for the As at or for the
three months ended nine months ended
-------------------------------- ---------------------
2009 2009 2008 2009 2008
Unaudited Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31
--------------------------------------------------- ---------------------
Common share
information
Per share
- basic earnings
(loss) $ 1.02 $ (0.24) $ 0.11 $ 1.08 $ (7.05)
- cash basic
earnings
(loss)(1) 1.04 (0.21) 0.13 1.14 (6.99)
- diluted
earnings
(loss) 1.02 (0.24) 0.11 1.08 (7.05)
- cash diluted
earnings
(loss)(1) 1.04 (0.21) 0.13 1.14 (6.99)
- dividends 0.87 0.87 0.87 2.61 2.61
- book value 27.87 27.95 28.40 27.87 28.40
Share price
- high 67.20 54.90 76.75 67.20 99.81
- low 53.02 37.10 49.56 37.10 49.56
- closing 66.31 53.57 61.98 66.31 61.98
Shares outstanding
(thousands)
- average basic 381,584 381,410 380,877 381,300 366,686
- average diluted 382,556 381,779 382,172 381,921 368,352
- end of period 382,657 381,478 380,732 382,657 380,732
Market
capitalization
($ millions) $ 25,374 $ 20,436 $ 23,598 $ 25,374 $ 23,598
--------------------------------------------------- ---------------------
Value measures
Price to earnings
multiple (12 month
trailing) 31.0 43.7 n/m 31.0 n/m
Dividend yield
(based on closing
share price) 5.2% 6.7% 5.6% 5.3% 5.6%
Dividend payout
ratio 85.0% n/m n/m n/m n/m
Market value to
book value ratio 2.38 1.92 2.18 2.38 2.18
--------------------------------------------------- ---------------------
Financial results
($ millions)
Total revenue $ 2,857 $ 2,161 $ 1,905 $ 7,040 $ 1,510
Provision for
credit losses 547 394 203 1,225 551
Non-interest
expenses 1,699 1,639 1,725 4,991 5,274
Net income (loss) 434 (51) 71 530 (2,496)
--------------------------------------------------- ---------------------
Financial measures
Efficiency ratio 59.4% 75.9% 90.5% 70.9% n/m
Cash efficiency
ratio, taxable
equivalent basis
(TEB)(1) 59.0% 74.9% 88.0% 70.1% n/m
Return on equity 14.6% (3.5)% 1.6% 5.1% (30.3)%
Net interest margin 1.59% 1.48% 1.54% 1.50% 1.48%
Net interest margin
on average
interest-earning
assets 1.95% 1.85% 1.82% 1.85% 1.74%
Return on average
assets 0.51% (0.06)% 0.08% 0.20% (0.96)%
Return on average
interest-earning
assets 0.62% (0.07)% 0.10% 0.25% (1.14)%
Total shareholder
return 25.69% 17.03% (15.25)% 27.77% (36.79)%
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On- and off-balance
sheet information
($ millions)
Cash, deposits with
banks and
securities $ 90,872 $ 94,523 $ 89,468 $ 90,872 $ 89,468
Loans and
acceptances 166,040 162,962 173,386 166,040 173,386
Total assets 335,917 347,363 329,040 335,917 329,040
Deposits 214,227 221,912 228,601 214,227 228,601
Common
shareholders'
equity 10,664 10,661 10,813 10,664 10,813
Average assets 340,661 353,819 343,396 354,585 345,618
Average
interest-earning
assets 277,919 282,414 290,598 286,535 293,373
Average common
shareholders'
equity 10,601 10,644 10,664 10,736 11,384
Assets under
administration 1,160,473 1,096,028 1,134,843 1,160,473 1,134,843
--------------------------------------------------- ---------------------
Balance sheet
quality measures
Common equity to
risk-weighted
assets 9.2% 8.9% 9.1% 9.2% 9.1%
Risk-weighted
assets
($ billions) $ 115.4 $ 119.6 $ 118.5 $ 115.4 $ 118.5
Tier 1 capital
ratio 12.0% 11.5% 9.8% 12.0% 9.8%
Total capital
ratio 16.5% 15.9% 14.4% 16.5% 14.4%
--------------------------------------------------- ---------------------
Other information
Retail / wholesale
ratio(2) 69%/31% 64%/36% 67%/33% 69%/31% 67%/33%
Full time
equivalent
employees 42,474 42,305 44,583 42,474 44,583
--------------------------------------------------- ---------------------
--------------------------------------------------- ---------------------
(1) For additional information, see the "Non-GAAP measures" section.
(2) The ratio represents the amount of capital attributed to the business
lines as at the end of the period.
n/m Not meaningful.
OVERVIEW
Net income for the quarter was $434 million, compared to net income of $71
million for the same quarter last year and net loss of $51 million for the
prior quarter.
Our results for the current quarter were affected by the following items:
- $155 million ($106 million after-tax) negative impact of changes in
credit spreads on the mark-to-market (MTM) of credit derivatives in
our corporate loan hedging programs as a result of the narrowing of
credit spreads during the quarter;
- $95 million ($65 million after-tax) gains on the structured credit
run-off business;
- $83 million ($56 million after-tax) loan losses in our leveraged loan
and other run-off portfolios;
- $42 million ($29 million after-tax) provision for credit losses in
the general allowance;
- $27 million ($18 million after-tax) of a higher litigation provision
and other operational costs;
- $26 million ($18 million after-tax) decrease in credit valuation
adjustments (CVA) against other than financial guarantors derivatives
counterparties, on non-structured credit contracts;
- $25 million ($17 million after-tax) interest income on income tax
reassessments; and
- $22 million ($14 million after-tax) of valuation charges related to
certain available for sale (AFS) positions in exited and other
run-off businesses.
Compared with Q3, 2008
Revenue was higher than the same quarter last year, primarily due to
gains in the structured credit run-off business compared to losses in the last
year quarter. The current quarter also benefited from volume growth in most
personal banking products, partially offset by spread compression on retail
products. The current quarter was also impacted by the MTM losses of credit
derivatives in our corporate loan hedging programs, compared to gains in the
last year quarter, lower wealth management related fee income and lower
treasury revenue. The last year quarter included losses and interest expense
related to leveraged leases.
Provision for credit losses was up primarily due to higher losses in the
cards and personal lending portfolios driven by higher delinquencies and
bankruptcies, higher losses in the leveraged loans, other run-off and U.S.
real estate finance businesses, and an increase in allowances, all related to
the deteriorating economic environment.
Non-interest expenses were down from the same quarter last year,
primarily due to lower salaries, benefits, commissions, and advertising
expenses, partially offset by higher performance-related expenses and a higher
litigation provision.
The structured credit losses in the last year quarter resulted in a
higher tax benefit in that quarter.
Compared with Q2, 2009
Revenue was higher in the current quarter, primarily due to gains in the
structured credit run-off business compared to losses in the prior quarter.
The current quarter also benefited from lower valuation charges related to
certain AFS and trading positions in run-off and exited businesses, lower
write-downs in merchant banking portfolios, the impact of three more days,
wider spreads on personal banking products and volume growth on retail
products. These factors were partially offset by lower AFS securities gains.
The prior quarter benefited from a foreign exchange gain on repatriation
activities.
Provision for credit losses was up primarily due to higher losses in the
cards and personal lending portfolios driven by higher delinquencies and
bankruptcies, higher losses in the leveraged loans, other run-off and U.S.
real estate finance businesses, and an increase in allowances, all related to
the difficult economic environment.
Non-interest expenses were higher than the prior quarter, primarily due
to the impact of three more days, a higher litigation provision, salaries,
benefits and commissions, and computer and office equipment, partially offset
by lower performance-related expenses, advertising and occupancy expenses.
The prior quarter included a tax expense related to the foreign exchange
gain on repatriation activities noted above and write-off of future tax assets
due to lower future statutory tax rates. The structured credit losses also
resulted in a higher tax benefit in the prior quarter.
Compared with the nine months ended July 31, 2008
Revenue in the current period was higher than the same period last year,
primarily due to the lower structured credit losses and higher AFS securities
gains. The foreign exchange gain on repatriation activities compared to a
foreign exchange loss in the prior year period, and the prior year loss on the
sale of some of our U.S. businesses also contributed to the increase. The
current period also benefited from volume growth in most personal banking
products and higher interest income from corporate credit products and U.S.
real estate finance. These factors were partially offset by losses associated
with corporate loan hedging programs compared to gains in the prior year
period, lower wealth management related fee income, spread compression on
retail products, higher write-downs in the merchant banking portfolio, an
increase in valuation charges on certain trading and AFS positions in exited
and run-off businesses and lower treasury revenue.
Provision for credit losses was up primarily due to higher losses in the
cards and personal lending portfolios driven by higher delinquencies and
bankruptcies, higher losses in the leveraged loans, other run-off and U.S.
real estate finance businesses, and an increase in allowances, all related to
the deteriorating economic environment.
Non-interest expenses for the nine months ended July 31, 2009 were down
from the same period in 2008, primarily due to lower salaries, benefits and
commissions, computer and office equipment, professional fees, and advertising
expenses, partially offset by higher performance-related expenses.
Income tax expense was up compared to an income tax benefit in the same
period last year, primarily due to higher structured credit losses in the
prior year period.
Our results for the prior periods were affected by the following items:
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Q2, 2009
--------
- $475 million ($324 million after-tax) loss on the structured credit
run-off business;
- $168 million ($115 million after-tax) negative impact of changes in
credit spreads on the MTM of credit derivatives in our corporate loan
hedging programs;
- $159 million foreign exchange gain ($3 million after-tax) on
repatriation activities;
- $100 million of valuation charges ($65 million after-tax) related to
certain trading and AFS positions in exited and other run-off
businesses;
- $65 million ($44 million after-tax) provision for credit losses in
the general allowance;
- $57 million write-off of future tax assets; and
- $49 million ($29 million after-tax) net losses/write-downs in our
legacy merchant banking portfolio.
Q1, 2009
--------
- $708 million ($483 million after-tax) loss on structured credit
run-off business;
- $94 million ($64 million after-tax) positive impact of changes in
credit spreads on corporate loan credit derivatives;
- $92 million ($51 million after-tax) MTM losses relating to
interest-rate hedges for the leveraged lease portfolio that did not
qualify for hedge accounting;
- $87 million ($52 million after-tax) losses/write-downs on our
merchant banking portfolio; and
- $48 million foreign exchange losses ($4 million after-tax gain) on
repatriation activities.
Q3, 2008
--------
- $885 million ($596 million after-tax) loss on structured credit
run-off business;
- $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).
Q2, 2008
--------
- $2.5 billion ($1.7 billion after-tax) loss on structured credit
run-off business;
- $50 million ($34 million after-tax) of valuation charges against
credit exposures to derivatives counterparties, other than financial
guarantors;
- $26 million ($18 million after-tax) of severance accruals;
- $22 million ($19 million after-tax and minority interest) loss on
Visa Inc.'s initial public offering (IPO) adjustment;
- $65 million ($21 million after-tax) foreign exchange loss on
repatriation activities; and
- $14 million ($9 million after-tax) positive impact of changes in
credit spreads on corporate loan credit derivatives.
Q1, 2008
--------
- $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);
- $56 million positive impact of favourable tax-related items;
- $2.8 billion ($1.9 billion after-tax) losses on structured credit
related positions; and
- $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.
-------------------------------------------------------------------------
Significant events
Global market credit issues
Our structured credit business within Wholesale Banking had income,
before taxes, for the quarter of $95 million ($1,088 million loss, before
taxes for the nine months ended July 31, 2009). We continue to reduce our
exposures in this business, through the termination of written and purchased
credit derivatives. These activities are discussed in more detail in our
"Run-off businesses" section.
Innovative Tier 1 Notes
On March 13, 2009, CIBC Capital Trust, a trust wholly owned by CIBC,
issued $1.3 billion of 9.976% CIBC Tier 1 Notes - Series A due June 30, 2108
and $300 million of 10.25% CIBC Tier 1 Notes - Series B due June 30, 2108
(together, the Notes). The Notes qualify as part of Tier 1 regulatory capital.
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 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.
Final closing agreements for leveraged leases were executed with the
Internal Revenue Service (IRS) during the second quarter. CIBC is now engaged
in the process of finalizing amounts with the U.S. revenue authorities for the
various affected taxation years. It is expected this will be concluded, or
substantially concluded, in 2009. While CIBC believes its provisions and
charges to date accurately reflect the terms of the IRS settlement offer and
subsequent clarifications thereto by the IRS, it is possible that additional
charges could occur during the process of finalizing actual amounts with the
U.S. revenue authorities.
Outlook for 2009
A recovery in global financial market sentiment, nascent rebounds in
Canadian housing and retailing in response to low interest rates, and a
potential pickup in export orders could see the Canadian economy return to
growth in the third calendar quarter, a quarter ahead of earlier expectations.
The pace of growth could still be too modest to reduce the unemployment rate
over the remainder of the fiscal year, and interest rates should stay low as
the Bank of Canada provides much needed stimulus.
CIBC Retail Markets is expected to benefit from continued healthy
household credit demand. Personal bankruptcies could remain elevated given
high unemployment levels, while small business bankruptcies are likely to rise
in a lagged response to the recessionary conditions faced earlier in the year.
For Wholesale Banking, provisions for credit losses are likely to
increase as a result of continued weakness in the business climate. Our
investment banking business is operating in an uncertain environment but a
sustained recovery in new issuance of equities and corporate bonds could
support improved corporate finance activities. In corporate credit products,
increased loan demand could be driven by a reduction in lending activity by
foreign-based banks.
RUN-OFF BUSINESSES
Given the uncertain market conditions and to focus on our core businesses
in Wholesale Banking, we curtailed activity in our structured credit and
non-Canadian 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 residential mortgage-backed securities (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 collateralized
debt obligations (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 Wholesale Banking, comprised our
activities as principal and for client facilitation. These activities included
warehousing of assets and structuring of SPEs, which could result in the
holding of unhedged positions. Other activities included intermediation,
correlation, and flow trading, which earned a spread on matching positions.
Exposures
Our exposures largely consist of the following categories:
Unhedged -
- U.S. residential mortgage market (USRMM)
- non-USRMM
Hedged -
- financial guarantors (USRMM and non-USRMM)
- other counterparties (USRMM and non-USRMM)
Results - gains (losses) before taxes
------------------------------------------------------------ ------------
For the
For the nine months
three months ended ended
---------------------- ------------
2009 2009 2009
$ millions Jul. 31 Apr. 30 Jul. 31
------------------------------------------------------------ ------------
Trading $ 83 $ (514) $ (1,189)
Held-to-maturity (HTM) 14 28 111
Available-for-sale (AFS) (2) 11 (10)
------------------------------------------------------------ ------------
------------------------------------------------------------ ------------
Total $ 95 $ (475) $ (1,088)
------------------------------------------------------------ ------------
------------------------------------------------------------ ------------
Results for the current quarter were primarily driven by gains from
restructuring of exposures to a financial guarantor and terminations of credit
derivatives. These gains were partially offset by deterioration in the credit
quality of financial guarantors, which resulted in increases in CVA. The
losses in prior quarters were primarily driven by deterioration in the credit
quality of financial guarantors and MTM losses for certain underlying assets.
Reclassification of certain exposures
As a result of the unprecedented extent of the deterioration in global
market conditions and the lack of an active trading market, in the fourth
quarter of 2008, we changed our intention on certain positions from trading to
held-to-maturity. As a consequence, we reclassified notional of $5,973 million
(US$5,833 million) of CLOs and $455 million (US$444 million) CDOs of trust
preferred securities (TruPs) in our structured credit run-off business from
trading to non-trading held-to-maturity effective August 1, 2008. As at July
31, 2009, the estimated remaining weighted average life (WAL) of the CLOs, and
TruPs was 4.6 years and 15 years respectively. The impact of the
reclassifications is summarized in Note 4 to the 2008 annual consolidated
financial statements.
If the reclassification had not been made, income before taxes would have
increased by $512 million (US$383 million) and $113 million (US$66 million)
for the current quarter and for the nine months ended July 31, 2009,
respectively.
Change in exposures
The following table summarizes our positions within our structured credit
run-off business:
-------------------------------------------------------------------------
2009 2008
US$ millions, as at Jul. 31 Oct. 31
-------------------------------------------------------------------------
Notional
Investments and loans $ 10,734 $ 10,304
Written credit derivatives(1) 23,104 30,931
-------------------------------------------------------------------------
Total gross exposures $ 33,838 $ 41,235
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Purchased credit derivatives $ 32,423 $ 37,039
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes notional amount for written credit derivatives and liquidity
and credit facilities.
Cerberus transaction
In the fourth quarter of 2008, we transacted with Cerberus Capital
Management LP (Cerberus) to obtain downside protection on our USRMM CDO
exposures while retaining upside participation if the underlying securities
recover. As at July 31, 2009, the outstanding principal and fair value of the
limited recourse note issued as part of the Cerberus transaction was $570
million (US$529 million) and $243 million (US$226 million) respectively. The
underlying CDO exposures had a fair value of $379 million (US$351 million) as
at July 31, 2009. We recorded a loss of $6 million (US$7 million) and a gain
of $264 million (US$214 million) on the limited recourse note in the current
quarter and for the nine months ended July 31, 2009 respectively.
Commutation of USRMM contracts and restructuring with a financial
guarantor
In July 2009, we commuted USRMM contracts with a financial guarantor
(reported as counterparty "V") for cash consideration of $207 million (US$192
million) and securities valued at $34 million (US$32 million), for a total of
$241 million (US$224 million). In addition, our non-USRMM contracts with this
counterparty were transferred to a newly created and capitalized entity. This
commutation and restructuring activity resulted in a pre-tax gain of $163
million (US$152 million) and a significant reduction in the gross receivable
and CVA. The underlying USRMM exposures that became unhedged subsequent to the
commutation, are written credit derivatives with a notional $1,923 million
(US$1,785 million) and a fair value of $1,690 million (US$1,568 million) and a
security with a notional of $779 million (US$723 million) and a fair value of
$78 million (US$72 million).
As a result of the commutation, we are considered the primary beneficiary
of certain third-party structured CDOs and are therefore required to
consolidate them. The consolidation resulted in $621 million of mortgages and
asset-backed securities, $428 million of FVO deposits and related interest
rate derivatives with a negative MTM of $193 million, being recognized in the
consolidated balance sheet as at July 31, 2009. Only our direct investments
and exposures through written credit derivatives to these CDOs are included in
the total exposures table on page 12 and the accompanying discussions.
Other changes in exposures
In addition to the termination of the $5.3 billion (US$4.3 billion) of
written credit derivatives and $274 million (US$226 million) of normal
amortization of our purchased credit derivatives in the first and second
quarters, we undertook a number of transactions during the current quarter to
further reduce our exposures, noted below:
- We terminated $2.8 billion (US$2.6 billion) of written credit
derivatives in the correlation book resulting in a pre-tax gain of
$8 million (US$8 million). Subsequent to this transaction,
US$2.6 billion of purchased credit derivatives that previously hedged
these positions became unmatched;
- We terminated $494 million (US$452 million) of written credit
derivatives with exposures to commercial mortgage backed securities
resulting in a pre-tax gain of $49 million (US$45 million).
Subsequent to this transaction, US$452 million of purchased credit
derivatives that previously hedged these positions became unmatched;
and
- Normal amortization reduced the notional of our purchased credit
derivatives with financial guarantors by $215 million
(US$200 million).
Total exposures
The exposures held within our structured credit run-off business within
Wholesale Banking are summarized in the table below. The table below excludes
the Cerberus protection on our USRMM exposures.
-------------------------------------------------------------------------
US$ millions, as at July 31, 2009
-------------------------------------------------------------------------
Exposures(1)
-------------------------------------------------------------------------
Investments & loans(2) Written credit
derivatives
and liquidity and
credit facilities(3)
---------------------------------- ----------------------
Fair Carrying Fair
Notional value value Notional value(5)
---------------------------------------------------------
Hedged
USRMM
-----
Other CDO $ 527 $ 35 $ 35 $ 489 $ 449
-------------------------------------------------------------------------
527 35 35 489 449
Non-USRMM
---------
CLO 210 186 186 7,834 760
CLO HTM(7) 5,726 4,869 5,155 - -
Corporate debt - - - 9,739 462
Corporate debt
(Unmatched)
CMBS - - - 2 2
CMBS
(Unmatched)
Others 241 59 59 1,646 676
Others HTM(8) 707 263 442 - -
Other
unmatched
purchased
credit
derivatives - - - - -
-------------------------------------------------------------------------
Total Hedged $ 7,411 $ 5,412 $ 5,877 $ 19,710 $ 2,349
-------------------------------------------------------------------------
Unhedged
USRMM(9)
--------
Super senior
CDO of
mezzanine
RMBS $ 1,174 $ 73 $ 73 $ 2,331 $ 2,109
Warehouse -
RMBS 281 1 1 - -
Various 342 1 1 343 317
-------------------------------------------------------------------------
1,797 75 75 2,674 2,426
Non-USRMM
---------
CLO 67 1 1 94 9
CLO HTM 209 187 199 - -
Corporate
debt 189 125 125 - -
Montreal
Accord
related
notes(3)(10) 410 199 199 278 n/a
Third party
sponsored
ABCP
conduits(3) 131 131 131 106 n/a
Warehouse -
non-RMBS 155 1 1 - -
Others(3) 192 183 183 242 39
Others HTM 173 148 148 - -
-------------------------------------------------------------------------
Total Unhedged $ 3,323 $ 1,050 $ 1,062 $ 3,394 $ 2,474
-------------------------------------------------------------------------
Total $ 10,734 $ 6,462 $ 6,939 $ 23,104 $ 4,823
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oct. 31, 2008 $ 10,304 $ 6,430 $ 6,952 $ 30,931 $ 5,924
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
US$ millions, as at July 31, 2009
-------------------------------------------------------------------------
Hedged by Unhedged
----------------------------------------------
Purchased credit derivatives and index hedges USRMM
----------------------------------------------------------
Financial guarantors Others
---------------------- --------------------
Fair Fair Net
Notional value(4)(5) Notional value(4)(5) exposure(6)
----------------------------------------------------------
Hedged
USRMM
-----
Other CDO $ 597 $ 527 $ 419 $ 412
-------------------------------------------------------------
597 527 419 412
Non-USRMM
---------
CLO 7,790 765 255 30
CLO HTM(7) 5,521 566 228 27
Corporate debt 2,559 159 7,184 314
Corporate debt
(Unmatched) 4,400 95
CMBS 2 2 - -
CMBS
(Unmatched) 775 642
Others 1,471 808 471 57
Others HTM(8) 709 455 - -
Other
unmatched
purchased
credit
derivatives - - 42 -
-------------------------------------------------------------
Total Hedged $ 23,824 $ 4,019 $ 8,599 $ 840
-------------------------------------------------------------
Unhedged
USRMM(9)
--------
Super senior
CDO of
mezzanine
RMBS $ - $ - $ - $ - $ 295
Warehouse -
RMBS - - - - 1
Various - - - - 27
-------------------------------------------------------------------------
- - - - $ 323
Non-USRMM
---------
CLO - - - -
CLO HTM - - - -
Corporate
debt - - - -
Montreal
Accord
related
notes(3)(10) - - - -
Third party
sponsored
ABCP
conduits(3) - - - -
Warehouse -
non-RMBS - - - -
Others(3) - - - -
Others HTM - - - -
-------------------------------------------------------------
Total Unhedged $ - $ - $ - $ -
-------------------------------------------------------------
Total $ 23,824 $ 4,019 $ 8,599 $ 840
-------------------------------------------------------------
-------------------------------------------------------------
Oct. 31, 2008 $ 27,108 $ 5,711 $ 9,931 $ 1,195
-------------------------------------------------------------
-------------------------------------------------------------
(1) We have excluded our total holdings, including holdings related to
our treasury activities, of notional US$2,134 million with fair
value of US$2,125 million in debt securities issued by Federal
National Mortgage Association (Fannie Mae) (notional US$1,107
million, fair value US$1,102 million), Federal Home Loan Mortgage
Corporation (Freddie Mac) (notional US$259 million, fair value
US$254 million), Government National Mortgage Association (Ginnie
Mae) (notional US$118 million, fair value US$119 million), Federal
Home Loan Banks (notional US$550 million, fair value US$550
million), and Federal Farm Credit Bank (notional US$100 million,
fair value US$100 million).
(2) Excludes equity and surplus notes that we obtained in consideration
for commutation of our USRMM contracts with financial guarantors
with notional $261 million and fair value $39 million, as at July
31, 2009.
(3) Liquidity and credit facilities to Montreal Accord related notes
amounted to US$278 million, third party non-bank sponsored ABCP
conduits amounted to US$106 million, and to unhedged other non-USRMM
amounted to US$37 million.
(4) Gross of CVA for purchased credit derivatives of US$2.3 billion.
(5) This is the gross fair value of the contracts, which were typically
zero, or close to zero, at the time they were entered into.
(6) After write-downs.
(7) Investments and loans include unfunded investment commitments with a
notional of US$275 million.
(8) Represents CDOs with TruPs collateral.
(9) As at July 31, 2009, the rating for the RMBS was non-investment
grade (based on market value).
(10) Includes estimated USRMM exposure of $110 million as at July 31,
2009.
n/a Not applicable.
Purchased protection from financial guarantors (USRMM and non-USRMM)
The total CVA charge for financial guarantors was $148 million (US$125
million) for the current quarter ($1,441 million (US$1,145 million) for nine
months ended July 31, 2009). As at July 31, 2009, CVA on credit derivative
contracts with financial guarantors was $2.5 billion (US$2.3 billion) (October
31, 2008: $4.6 billion (US$3.8 billion)), and the fair value of credit
derivative contracts with financial guarantors net of valuation adjustments
was $1.8 billion (US$1.7 billion) (October 31, 2008: $2.3 billion (US$1.9
billion)). Further significant losses could result depending on the
performance of both the underlying assets and the financial guarantors.
In addition, in our other run-off portfolios, we also have loans 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, 2009, these positions were performing and the total amount
guaranteed by financial guarantors was approximately $82 million (US$76
million).
The following table presents the notional amounts and fair values of
purchased protection from financial guarantors by counterparty. The fair value
net of valuation adjustments is included in derivative instruments in other
assets on the consolidated balance sheet.
-------------------------------------------------------------------------
US$ millions, as at July 31, 2009 USRMM related
---------------------------------------- -------------------------------
Standard Moody's
Counter- and Investor Fitch Fair
party Poor's Services Ratings Notional value(1) CVA
-------------------------------------------------------------------------
I(5) BBB(2) B3(2) -(4) $ 70 $ 37 $ (26)
II CC(3) Caa2(3) -(4) 527 490 (342)
III(6) CC(2) Ba3(3) -(4) - - -
IV -(4) Caa3(2) -(4) - - -
V(5) -(4) -(4) -(4) - - -
VI A(2) Ba1 AA(2) - - -
VII AAA(2) Aa2(2) AA(2) - - -
VIII AAA(2) Aa3(2) AA+(2) - - -
IX BBB-(2) Ba1 -(4) - - -
-------------------------------------------------------------------------
Total
financial
guarantors $ 597 $ 527 $ (368)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oct. 31,
2008 $ 3,786 $ 3,086 $ (2,260)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
US$ millions, as at
July 31, 2009 Non-USRMM Total
------------------------------- ---------------------
Fair
Counter- Fair value
party Notional value(1) CVA Notional less CVA
-------------------------------------------------------------------------
I(5) $ 1,558 $ 804 $ (560) $ 1,628 $ 255
II 1,692 549 (384) 2,219 313
III(6) 1,464 211 (150) 1,464 61
IV 2,157 233 (196) 2,157 37
V(5) 2,640 285 (77) 2,640 208
VI 5,200 204 (66) 5,200 138
VII 4,866 669 (258) 4,866 411
VIII 1,427 235 (107) 1,427 128
IX 2,223 302 (142) 2,223 160
-------------------------------------------------------------------------
Total
financial
guarantors $ 23,227 $ 3,492 $ (1,940) $ 23,824 $ 1,711
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oct. 31,
2008 $ 23,322 $ 2,625 $ (1,520) $ 27,108 $ 1,931
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Before CVA.
(2) Credit watch / outlook with negative implication.
(3) Watch developing.
(4) Rating withdrawn.
(5) Counterparties I and V were restructured in February and July 2009,
respectively, with part of its businesses transferred to new
entities.
(6) Counterparty III was restructured in January 2009.
The referenced assets underlying the protection purchased from financial
guarantors are as follows:
-------------------------------------------------------------------------
US$ millions, USRMM
as at related Non-USRMM related
July 31, --------- -------------------------------------------------
2009 Notional Notional
------------- --------- -------------------------------------------------
Corporate
Counterparty CDO CLO debt CMBS Others Total
-------------------------------------------------------------------------
I $ 70 $ 584 $ - $ 777(1) $ 197 $ 1,558
II 527 873 - - 819 1,692
III - 1,341 - - 123 1,464
IV - 1,885 - - 272 2,157
V - 2,640 - - - 2,640
VI - - 5,200(1) - - 5,200
VII - 4,616 - - 250 4,866
VIII - 1,297 - - 130 1,427
IX - 75 1,759 - 389 2,223
-------------------------------------------------------------------------
Total
financial
guarantors $ 597 $ 13,311 $ 6,959 $ 777 $ 2,180 $ 23,227
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oct. 31,
2008 $ 3,786 $ 13,125 $ 6,959 $ 777 $ 2,461 $ 23,322
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes US$4.4 billion and US$775 million of unmatched purchase
protection related to corporate debt and CMBS respectively.
USRMM
Our USRMM related positions of notional $643 million (US$597 million)
hedged by financial guarantors comprise super senior CDOs with underlyings
being approximately 35% sub-prime RMBS, 43% Alt-A RMBS, 15% asset-backed
securities (ABS) CDO and 7% non-USRMM. Sub-prime and Alt-A underlyings consist
of approximately 42% pre-2006 vintage as well as 58% 2006 and 2007 vintage
RMBS. Sub-prime exposures are defined as having Fair Isaac Corporation (FICO)
scores less than 660; and Alt-A underlyings are defined as those exposures
that have FICO scores of 720 or below, but greater than 660.
Non-USRMM
The following provides further data and description of the non-USRMM
referenced assets underlying the protection purchased from financial
guarantors:
-------------------------------------------------------------------------
Fair
US$ value
millions, of pur- Total Notional/ Fair value/
as at chased tran- tranche tranche
July 31, protec- ches ----------------- -----------------
2009 Notional tion (1) High Low High Low
-------------------------------------------------------------------------
CLO
(includes
HTM) $13,311 $ 1,331 82 $ 375 $ 22 $ 56 $ 2
Corporate
debt 2,559 159 5 800 259 109 9
Corporate
debt
(Unmatched) 4,400 95 6 800 400 45 4
U.S. CMBS 2 2 - 1 1 1 1
U.S. CMBS
(Unmatched) 775 642 2 452 323 361 281
Others
TruPs
(inclu-
des HTM) 803 522 12 128 24 88 16
Non-US
RMBS 166 89 3 73 30 39 16
Other 1,211 652 9 263 5 226 -
-------------------------------------------------------------------------
Total $23,227 $ 3,492 119 $ 2,892 $ 1,064 $ 925 $ 329
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------
Weighted
US$ average
millions, life Subordination/
as at (WAL) attachment(4) Detachment(5)
July 31, in years ----------------- -----------------
2009 (2)(3) Average Range Average Range
-------------------------------------------------------
CLO
(includes
HTM) 4.6 31% 6-67% 99% 50-100%
Corporate
debt 4.3 24% 15-30% 48% 30-60%
Corporate
debt
(Unmatched) 2.5 16% 15-20% 39% 30-45%
U.S. CMBS 5.4 44% 43-46% 100% 100%
U.S. CMBS
(Unmatched) 5.4 44% 43-46% 100% 100%
Others
TruPs
(inclu-
des HTM) 15.0 49% 45-57% 100% 100%
Non-US
RMBS 2.9 53% 53% 100% 100%
Other 6.8 20% 0-53% 100% 100%
-------------------------------------------------------
-------------------------------------------------------
(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) The WAL of the positions is impacted by assumptions on collateral,
interest deferrals and defaults, and prepayments, and for TruPs CDOs,
also the potential for successful future auctions. These assumptions
and the resulting WAL, especially for TruPs CDOs, may change
significantly from quarter to quarter.
(3) The WAL of a tranche will typically be shorter than the WAL for the
underlying collateral for one or more reasons relating to how cash
flows from repayment and default recoveries are directed to pay down
the tranche.
(4) Subordination/attachment points are the level of losses which can
be sustained on the collateral underlying the reference assets
without those losses impacting the tranches shown above.
(5) The detachment points are the level of losses on the collateral
underlying the reference assets at which point any further losses
cease to impact the tranches shown above.
CLO
The CLO underlyings consist of 82 tranches. Approximately 99% of the
total notional amount of the CLO tranches was rated equivalent to AAA with the
remainder rated equivalent to AA, at July 31, 2009. Approximately 2% of the
underlying collateral was rated equivalent to BBB- or higher and 57% of the
underlying collateral was rated equivalent to between B- and B+, at July 31,
2009. The collateral comprise assets in a wide range of industries with the
highest concentration in the services (personal and food) industry (29%); the
broadcasting, publishing and telecommunication sector (17%); and the
manufacturing sector (14%). Only 3% is in the real estate sector.
Approximately 65% 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 (29%)
corporate debt in various industries (manufacturing 28%, financial
institutions 13%, cable and telecommunications 11%, retail and wholesale 9%).
Approximately 66% of the total notional amount of US$6.9 billion of the
corporate debt underlyings were rated equivalent to BBB- or higher with the
remainder rated equivalent to BB+ or lower, at July 31, 2009.
CMBS
The two synthetic tranches reference CMBS portfolios which are backed by
pools of commercial real estate mortgages located primarily in the U.S.
Approximately 27% of the underlyings continue to be rated equivalent to BBB-
or higher with the remainder rated equivalent to BB+ or lower, at July 31,
2009.
Others
Others are CDOs with TruPs collateral, 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, railcar leases and film receivables.
Purchased protection from other counterparties
The following table provides the notional amounts and fair values (before
CVA of US$16 million (October 31, 2008: US$21 million)) of purchased credit
derivatives from counterparties other than financial guarantors, excluding
unmatched purchased credit derivatives:
-------------------------------------------------------------------------
USRMM related Non-USRMM
------------------- -------------------
Fair Fair
US$ millions, as at Notional value Notional value
-------------------------------------------------------------------------
Non-bank financial institutions $ 419 $ 412 $ 101 $ 8
Banks - - 851 106
Canadian conduits - - 7,184 314
Others - - 2 -
-------------------------------------------------------------------------
Total $ 419 $ 412 $ 8,138 $ 428
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total
---------------------------------------
Notional Fair value
------------------- -------------------
2009 2009 2009 2009
US$ millions, as at Jul. 31 Apr. 30 Jul. 31 Apr. 30
-------------------------------------------------------------------------
Non-bank financial institutions $ 520 $ 561 $ 420 $ 441
Banks 851 810 106 121
Canadian conduits 7,184 6,740 314 416
Others 2 2 - -
-------------------------------------------------------------------------
Total $ 8,557 $ 8,113 $ 840 $ 978
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The non-financial guarantor counterparty hedging our USRMM exposures is a
large U.S.-based diversified multinational insurance and financial services
company with which CIBC has market standard collateral arrangements.
Approximately 99% of other counterparties hedging our non-USRMM exposures have
internal credit ratings equivalent to investment grade.
The assets underlying the exposure hedged by counterparties other than
financial guarantors are as below:
-------------------------------------------------------------------------
USRMM Non-USRMM related
related
---------- -----------------------------
Notional Notional
---------- -----------------------------
US$ millions, as at Corporate
July 31, 2009 CDO(1) CLO(2) debt Other(3)
-------------------------------------------------------------------------
Non-bank financial institutions $ 419 $ - $ - $ 101
Banks - 483 - 368
Canadian conduits - - 7,184 -
Others - - - 2
-------------------------------------------------------------------------
Total $ 419 $ 483 $ 7,184 $ 471
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The US$419 million represents super senior CDO with approximately 71%
sub-prime RMBS, 3% Alt-A RMBS, 13% ABS CDO, and 13% non-USRMM.
Sub-prime and Alt-A are all pre-2006 vintage.
(2) All underlyings are non-investment grade. 5% is North American
exposure and 95% is European exposure. Major industry concentration
is in the services industry (40%), the manufacturing sector (18%),
the broadcasting and communication industries (14%), and only 3% is
in the real estate sector.
(3) Approximately 64% of the underlyings are investment grade or
equivalent with the majority of the exposure located in the U.S. and
Europe. The industry concentration is primarily banking and finance,
manufacturing, broadcasting, publishing and telecommunication and
mining, oil and gas, with less than 3% in the real estate sector.
Canadian conduits
We purchased credit derivative protection from Canadian conduits and
generated revenue by selling the same protection onto third parties. The
reference portfolios consist of diversified indices of corporate loans and
bonds. These conduits are in compliance with their collateral posting
arrangements and have posted collateral exceeding current market exposure.
Great North Trust, is sponsored by CIBC and the remaining conduit
counterparty, MAV I was party to the Montreal Accord.
-------------------------------------------------------------------------
Mark-to- Collateral
US$ millions, market and
as at July (before guarantee
31, 2009 Underlying Notional(1) CVA) notionals(2)
-------------------------------------------------------------------------
Conduits
--------
Great North Trust Investment grade
corporate
credit index(3) $ 4,586 $ 247 $ 278(4)
MAV I 160 Investment
grade
corporates(5) 2,598 67 327
-------------------------------------------------------------------------
Total $ 7,184 $ 314 $ 605
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oct. 31, 2008 $ 8,453 $ 660 $ 944
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) These exposures mature within 4 to 8 years.
(2) Comprises investment grade notes issued by third party sponsored
conduits, corporate floating rate notes, banker's acceptances, and
funding commitments. The fair value of the collateral at July 31,
2009 was US$561 million (October 31, 2008: US$921 million).
(3) Consists of a static portfolio of 126 North American corporate
reference entities that were investment grade rated when the index
was created. 80% of the entities are rated BBB- or higher. 98% of the
entities are U.S. entities. Financial guarantors represent
approximately 1.6% of the portfolio. 2.4% of the entities have
experienced credit events. Attachment point is 30% and there is no
direct exposure to USRMM or the U.S. commercial real estate market.
(4) The value of funding commitments (with indemnities) from certain
third party investors in Great North Trust was $ nil as at July 31,
2009 (October 31, 2008:US$219 million).
(5) These transactions were transferred from Nemertes I and Nemertes II
trusts to MAV I and MAV II (before being unwound in March 2009) upon
the restructuring under the Montreal Accord. The underlying portfolio
consists of a static portfolio of 160 corporate reference entities of
which 91.3% were investment grade on the trade date. 83.1% of the
entities are currently rated BBB- or higher (investment grade). 54%
of the entities are U.S. entities. Financial guarantors represent
approximately 2.5% of the portfolio. 1.88% of the entities have
experienced credit events. Attachment point is 20% and there is no
direct exposure to USRMM or the U.S. commercial real estate market.
Unhedged USRMM exposures
Our remaining unhedged exposure (excluding the Cerberus protection) to
the USRMM, after write-downs, was $348 million (US$323million) as at July 31,
2009.
Unhedged non-USRMM exposures
Our unhedged exposures to non-USRMM primarily relate to the following
categories: CLO, corporate debt, Montreal Accord related notes, third party
non-bank sponsored ABCP conduits, warehouse non-RMBS, and other.
CLO
Our unhedged CLO exposures, including HTM, with notional of $399 million
(US$370 million) are mostly tranches rated AAA as at July 31, 2009, and are
backed by diversified pools of European-based senior secured leveraged loans.
Corporate debt
Approximately 20%, 55% and 25% of the unhedged corporate debt exposures
with notional of $204 million (US$189 million) are related to positions in
Europe, Canada and other countries respectively.
Montreal Accord related notes
The standstill and court approved restructuring plan proposed by
signatories to the Montreal Accord was ratified on January 21, 2009. As a
result, we received $141 million in senior Class A-1 notes, $152 million in
senior Class A-2 notes and $178 million of various subordinated and tracking
notes in exchange for our non-bank sponsored ABCP with par value of $471
million. As was the case with the original ABCP instruments, the new notes are
backed by fixed income, traditional securitization and CDO assets as well as
super senior credit default swaps on investment grade corporates. The
underlying assets that have U.S. subprime mortgage exposures have been
isolated and are specifically linked to tracking notes with a notional value
of $110 million as at July 31, 2009. In the current quarter, $6 million of the
tracking notes were paid down at par. As at July 31, 2009, the remaining
notional amount on all the notes was $442 million (US$410 million).
The Class A-1 and Class A-2 notes pay a variable rate of interest below
market levels. The subordinated notes are 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 pass through the cash flows of the
underlying assets. All of the restructured notes are expected to mature in
December 2016.
Based on our estimate of the $214 million combined fair value of the
notes as at July 31, 2009, we recorded a gain of $39 million during the
current quarter ($5 million loss for the nine months ended July 31, 2009).
In addition, pursuant to the restructuring plan, we are a participant in
a Margin Funding Facility (MFF) to support the collateral requirements of the
restructured conduits. Under the terms of the MFF, we have provided a $300
million undrawn loan facility to be used if the amended collateral triggers of
the related credit derivatives are breached and the new trusts created under
the restructuring plan do not have sufficient assets to meet any collateral
calls. If the loan facility was fully drawn and subsequently more collateral
was required due to breaching further collateral triggers, we would not be
obligated to fund any additional collateral, although the consequence would
likely be the loss of that $300 million loan.
Third party non-Bank sponsored ABCP conduits
We provided liquidity and credit related facilities to third party
non-bank sponsored ABCP conduits. As at July 31, 2009, $255 million (US$237
million) of the facilities remained committed. Of this amount, $53 million
(US$51 million), which remained undrawn as at July 31, 2009, was provided to a
conduit, with U.S. auto loan assets, sponsored by a U.S. based auto
manufacturer.
The remaining $200 million (US$186 million) primarily relates to U.S.
CDOs, of which $141 million (US$131 million) was drawn as at July 31, 2009.
$39 million (US$36 million) of the undrawn facilities was subject to liquidity
agreements under which the conduits maintain the right to put their assets
back to CIBC at par. The underlying assets of the U.S. CDOs have maturities
ranging from three to seven years.
Warehouse non-RMBS
Of the unhedged warehouse non-RMBS assets with notional of $167 million
(US$155 million), 75% represents investments in CLOs backed by diversified
pools of U.S.-based senior secured leveraged loans. Approximately 12%
represents investments in CDOs backed by TruPs with exposure to U.S. real
estate investment trusts. Another 8% has exposure to the U.S. commercial real
estate market.
Other
Other unhedged exposures with notional of $468 million (US$434 million)
include $213 million (US$197 million) credit facilities (drawn US$160 million
and undrawn US$37 million) provided to SPEs with film rights receivables
(27%), lottery receivables (22%), and U.S. mortgage defeasance loans (51%).
The remaining $255 million (US$237 million) primarily represents written
protection on mostly AAA tranches of portfolios of high yield corporate debt.
We are only obligated to pay for any losses upon both the default of the
underlying corporate debt as well as that of the primary financial guarantor,
which was restructured in February 2009.
Other HTM unhedged exposures with notional of $186 million (US$173
million) relate to collateral received from the unwinding of MAV II and
primarily represent investment grade commercial paper.
Leveraged finance business
We provided leveraged finance to non-investment grade customers to
facilitate their buyout, acquisition and restructuring activities. We
generally underwrote leveraged financial loans and syndicated the majority of
the loans, earning a fee during the process.
In the prior fiscal year we sold our U.S. leveraged finance business as
part of our sale of some of our U.S. businesses to Oppenheimer and stopped
transacting new business in European leveraged finance (ELF).
As with the structured credit run-off business, the risk in the ELF
run-off business is monitored by a team focused on proactively managing all
accounts in the portfolio. As at July 31, 2009, we have drawn leveraged loans
of $907 million (October 31, 2008: $935 million) of which $113 million
(October 31, 2008: Nil) is considered impaired, and unfunded letters of
credits and commitments of $155 million (October 31, 2008: $210 million).
During the quarter we recognized provisions for credit losses of $65
million on the impaired loans. In addition, non-impaired loans and commitments
with a face value of $466 million were added to the watch list as a result of
deteriorating credit conditions.
Exposures of ELF loans (net of write-downs and allowance for credit
losses) by industry are as below:
-------------------------------------------------------------------------
$ millions, as at July 31, 2009 Drawn Undrawn
-------------------------------------------------------------------------
Publishing and printing $ 45 $ -
Telecommunications 13 14
Manufacturing 282 51
Business services 19 16
Hardware and software 238 23
Transportation 16 8
Wholesale trade 229 43
-------------------------------------------------------------------------
Total $ 842 $ 155
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oct. 31, 2008 $ 935 $ 210
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U.S. total return swaps portfolio
Our U.S. total return swaps (TRS) portfolio consists of TRS on primarily
non-investment grade loans and units in hedge funds. The remaining underlying
loan consists of five term loans to the corporate sector. The underlying
assets are rated Baa2 and below. The portfolio has an average term of 340
days. The total current notional of the TRS portfolio is approximately $136
million (US$126 million). Of this total portfolio, $28 million (US$26 million)
is loan related and backed by $17 million (US$16 million) of cash collateral.
The remaining hedge fund exposures are subject to net asset value tests which
determine margin requirements keeping total assets available at 133% of
notional. The table below summarizes the notional value of our positions in
the portfolio:
-------------------------------------------------------------------------
US$ millions, as at July 31, 2009 Notional
-------------------------------------------------------------------------
Loans $ 26
Hedge Funds 100
-------------------------------------------------------------------------
Total $ 126
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oct. 31, 2008 $ 1,458
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the quarter we continued to reduce the portfolio by closing some
of the TRS and selling off the related underlying assets. The net loss of the
TRS portfolio was $3 million for the quarter ($16 million for nine months
ended July 31, 2009).
OTHER 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 ABCP 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, 2009, our holdings of ABCP issued by our non-consolidated
sponsored conduits that offer ABCP to external investors was $453 million
(October 31, 2008: $729 million) and our committed backstop liquidity
facilities to these conduits was $4.6 billion (October 31, 2008: $8.7
billion). We also provided credit facilities (undrawn) of $40 million (October
31, 2008: $70 million) and banker's acceptances of $70 million (October 31,
2008: $76 million) to these conduits as at July 31, 2009.
The following table shows the underlying collateral and the average
maturity for each asset type in these multi-seller conduits:
-------------------------------------------------------------------------
Estimated
weighted
avg. life
$ millions, as at July 31, 2009 Amount(1) (years)
-------------------------------------------------------------------------
Asset class
Canadian residential mortgages $ 1,454 1.8
Auto leases 907 0.9
Franchise loans 719 0.7
Auto loans 189 0.8
Credit cards 975 3.6(2)
Equipment leases/loans 163 1.1
Other 6 1.2
-------------------------------------------------------------------------
Total $ 4,413 1.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oct. 31, 2008 $ 8,440 1.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The committed backstop facility of these assets was the same as the
amounts noted in the table, other than for franchise loans, for which
the facility was $900 million.
(2) 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 credit ratings of the notes issued by the multi-seller conduits.
$151 million of the $1,454 million Canadian residential mortgages relates
to amounts securitized by the subsidiary of the finance arm of a U.S. auto
manufacturer.
Of the $907 million relating to auto leases, $290 million relates to
balances originated by Canadian fleet leasing companies and the remaining
relates to non-North American auto manufacturers.
Of the $189 million relating to auto loans, approximately $40 million
relates to balances originated by the finance arms of two U.S. auto
manufacturers and the remaining relates to non-North American auto
manufacturers.
In addition, during the first and second quarters, we acquired all of the
commercial paper issued by MACRO Trust, a CIBC-sponsored conduit. During the
second quarter, MACRO Trust acquired auto lease receivables from one of our
multi-seller conduits. The consolidation of the conduit resulted in $111
million of dealer floorplan receivables, $372 million of auto leases, and $13
million of medium term notes backed by Canadian residential mortgages being
recognized in the consolidated balance sheet as at July 31, 2009. The dealer
floor plan and auto lease receivables were originated by the finance arm of a
U.S. auto manufacturer, and have an estimated weighted average life of less
than a year.
We also participated in a syndicated facility for a 364 day commitment of
$475 million to a CIBC-sponsored single-seller conduit that provides funding
to franchisees of a major Canadian retailer. Our portion of the commitment is
$95 million.
