Canadian Imperial Bank of Commerce

TSX:CM

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Good morning. Welcome to the CIBC Quarterly Financial Results Call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Geoff Weiss, SVP, Investor Relations. Please go ahead, Geoff.

[Geoff Weiss, Senior Vice President, Investor Relations]

Thank you, and good morning. We will begin this morning's presentation with opening remarks from Victor Dodig, our President and Chief Executive Officer; followed by Hratch Panossian, our Chief Financial Officer; and Frank Guse, our Chief Risk Officer. Also on the call today are a number of our group heads, including Shawn Beber, U.S. region; Harry Culham, Capital Markets and Direct Financial Services; and Jon Hountalas, Canadian Banking. They are all available to take questions following the prepared remarks.

As noted on Slide 2 of our investor presentation, our comments may contain forward-looking statements, which involve assumptions and have inherent risks and uncertainties. Actual results may differ materially.

With that, I will now turn the call over to Victor.

[Victor Dodig, President and Chief Executive Officer]

Thank you, Geoff, and good morning, everyone. I hope you've all had a nice summer. I'll begin with a few brief comments about our third quarter results including progress update against our strategic priorities. I'll then turn the call over to Hratch, followed by Frank to review our performance in greater detail before we take your questions.

This quarter, we delivered solid core business performance by continuing to execute on our client-focused strategy while building capital, expanding margins and prudently managing expenses. Net earnings of $1.5 billion or $1.52 per share were lower than the prior year and reflect higher provisions for credit losses, while pre-provision pretax earnings were up 5% during the same period.

Due to changes to our forward-looking economic indicators as well as the continuing normalization of credit conditions, we increased provisions in our consumer lending portfolios. The increased provisions in the commercial segment mainly relate to our U.S. office portfolio, which represents less than 1% of our overall loan book. We have a robust balance sheet, ending the quarter with a CET1 ratio of 12.2%.

Going forward, we're focused on continuing to build our capital levels to ensure that we remain well positioned for any changes as well as for any opportunities. We remain focused on our three key strategic priorities: growing our high-growth high-touch segments, including our Imperial Service Platform and North American private wealth franchise; Focusing on our future differentiators which includes delivering leading digital banking solutions to Canadian consumers and enabling and simplifying our bank.

Now let me give you a few highlights on our progress. Our Canadian consumer franchise continues to experience robust growth. Over the last 12 months, we've added over 650,000 net new clients to CIBC which includes 165,000 clients in our Simplii franchise. We also continue to make good progress on our strategic focus to deepen high-touch, high-growth relationships in the affluent segment.

Imperial Service, our unique advice-based relationship offer for our mass affluent clients saw funds managed growth of $14 billion year-to-date, driven by successful client acquisition as well as our focus on ensuring clients are in the right offer to get the advice and solutions they need from CIBC. Imperial Service is an important and differentiated asset for CIBC.

We recently appointed dedicated leadership to directly oversee this key business platform, and we expect to see further momentum in this business. We're also focused on delivering leading digital banking solutions. We recently earned the number one ranking in customer satisfaction for mobile banking apps in Canada from J.D. Power and continue to see increasing client engagement in our digital channels. 32% of our core retail products were sold digitally, and our digital adoption rate has increased to 84%.

Looking at our North American Commercial Banking and Wealth Management businesses, higher volumes and organic client acquisition drove top line growth in commercial banking this quarter, although the pace has moderated from peak levels a year ago. As expected, demand for loans is cool as business owners take a more conservative approach to borrowing in a higher rate environment and slower economy.

In Wealth Management, our top-ranked advisers continue to provide high-quality advice to help our clients achieve their ambitions. Our high-touch personalized advice model supplemented by digital tools supported AUM growth this quarter with positive net flows on both sides of the border and our Private Wealth business. We also continue to benefit from referral activity driven through a focus on connectivity throughout our bank.

In Capital Markets, our well-diversified business model and highly connected team across our bank delivered another solid growth quarter, driven by strong performance in our Global Markets business. Our strategic focus on our sustainability, renewables and energy transition franchise was also recognized by Global Finance as the Best Investment Bank in Canada and for outstanding leadership in sustainable infrastructure finance.

We also continue to invest in optimizing our technology infrastructure and processes to enhance productivity. This includes leveraging the cloud to drive scale and speed to market as well as automation of manual processes to reduce costs and improve cycle time and accuracy. Our efforts have resulted in significant cost savings so far this year and are having a positive client impact with a 40% improvement in our client Net Promoter Scores compared to last year.

So in closing, we have a deep and experienced leadership team to make strategic decisions that position us for success even in the face of challenging conditions. As we laid out on our prior calls, we have a clear momentum in the segments we've identified as strategic growth areas for our bank and we'll continue to focus on them.

We've moderated our expense growth to the mid-single digits while realizing the benefits of the investments we've made heading into this fiscal year. We've continued to build our capital, and we've driven improved margins across our bank. Our business momentum, coupled with prudent risk management and our strong capital position offers us the flexibility to adeptly navigate changing market conditions, adjusting our investments as needed throughout the economic cycle.

Now before I turn the call over to Hratch, I'd like to extend our care and concern to those affected by the devastating wildfires in British Columbia and the Northwest Territories. We are making available financial relief, advice and support to our affected clients including donations to CIBC Foundation's relief funds for the two provinces. Our thoughts are with you all as you begin the process of recovery and rebuilding.

And with that, let me turn the call over to Hratch.

[Hratch Panossian, Chief Financial Officer]

Thanks, Victor, and good morning, all. Thank you for joining us late in the earnings season. I'll start my remarks on Slide 7. This quarter's results reflect the strength of our client franchise as well as team CIBC's ability to proactively manage through a dynamic operating environment. We will continue leaning on these differentiators to sustainably deliver value to our stakeholders.

Improving margins, solid trading results and disciplined expense management allowed us to maintain revenue growth momentum, deliver peer-leading operating leverage and continue to drive strong organic pre-provision earnings growth. This helped partially offset higher credit provisions and a higher share count to deliver diluted earnings per share of $1.47 for the quarter. Excluding items of note, adjusted EPS was $1.52 and ROE was 11.9%. We also continued to strengthen our balance sheet, ending the quarter with capital and liquidity ratios well in excess of current regulatory requirements.

The balance of my presentation will refer to adjusted results, which exclude items of note starting with Slide 8. Adjusted net income of $1.5 billion was down 15% from the prior year, driven by an increase in credit provisions, which Frank will discuss in more detail. Revenues of $5.9 billion were up 6% year-over-year, benefiting from strong P&C margins, balance sheet growth and client trading activity. Expenses were also up 6% from the prior year as inflationary pressures moderate and we continue to focus on both expense discipline and strategic investment. As a result, pre-provision pretax earnings of $2.6 billion increased 5% over the prior year.

Slide 9 and 10 highlight the trends driving our net interest income. Excluding trading, NII was up 8% over the year due to continued balance sheet growth and a disciplined margin management approach, which prioritizes stability and long-term performance. Total bank NIM, excluding trading was up 2 basis points sequentially, benefiting from strong margin expansion in our P&C businesses.

Robust Canadian P&C NIM of 267 basis points reflects the high quality of our Canadian franchise. NIM was up 10 basis points sequentially, including help from nonrecurring items. Excluding this, the key driver was deposit margin expansion in the quarter, supported by higher rates which more than offset moderating pressure on mortgage margins. We have provided incremental disclosure on the factors impacting P&C margin in the appendix.

NIM in our U.S. segment was 346 basis points, up 10 basis points year-over-year and 5 basis points from the prior quarter. The sequential increase was largely due to higher deposit margins and interest income on a recovery, partially offset by lower asset margins and prepayments. Net of the onetime benefits I just referenced, we expect both Canadian P&C and U.S. segment margins to remain relatively stable in the near term, and we maintain our recent guidance of 165 to 170 basis points for overall bank margin.

Moving on to Slide 10. Loan balances averaged $537 billion this quarter, an increase of 5% from the prior year supported by all businesses. Growth in our high-quality deposit franchise outpaced loans increasing 6% from the prior year, with an underlying stabilization of the recent mix shift from notice and demand products to term products. We continue to be focused on growing our balance sheet prudently and profitably with an emphasis on stable client deposits and lending focused on priority clients with strong returns.

Turning to Slide 11. Noninterest income from $2.6 billion was up 13% from the prior year, supported by growth in trading income and higher transaction-related fees. Market-related fees excluding trading, increased 1% year-over-year as stronger underwriting and advisory and investment management and custodial revenues were largely offset by lower revenue from ancillary investments and treasury activities.

Turning to Slide 12. Expense growth continued to slow in line with our guidance, increasing 6% from a year ago as we proactively pace steady strategic investments and emphasize efficiency against the backdrop of slowing revenue growth. On a sequential basis, expenses were up 2%, with more than half of the growth resulting from the impact of more days in the quarter. Our balanced approach has allowed us to revert to positive operating leverage and deliver a solid NIX ratio of 55% this quarter. We continue to manage to mid-single-digit expense growth for the full fiscal year 2023, and we will continue to target positive operating leverage over the medium term.

On to Slide 13 to discuss our balance sheet. Another area that has benefited from our focus on disciplined resource allocation and efficiency. Our CET1 ratio improved from 11.9% to 12.2% sequentially, primarily driven by organic capital generation and share issuance against relatively stable RWA excluding the impact of currency fluctuations. We will continue to be disciplined on capital deployment and expect our CET1 ratio to continue trending higher. Our liquidity position remained well above regulatory requirements throughout the quarter resulting in sequentially higher average LCR of 131%. While we remain cautious in the face of economic uncertainty, our strong balance sheet positions us well to accelerate growth when the economic outlook improves.

Starting on Slide 14, we highlight our strategic business unit results. Net income in Canadian Personal and Business Banking was $527 million, down 17% from the same quarter last year due to a higher provision for credit losses. Pre-provision pretax earnings were up 8% from the prior year and 14% sequentially, reflecting strong growth as a result of our focused strategy. Revenues of $2.4 billion were up 6% year-over-year, helped by robust margin expansion and volume growth. On a sequential basis, revenue was up 7%, driven by the same factors as well as additional days in the quarter. Expenses of $1.3 billion were up 4% from the same period last year, resulting in 2% positive operating leverage.

Moving on to Slide 15. Net income for Canadian Commercial Banking and Wealth Management was $467 million. Revenues of $1.350 billion were up 1% from a year ago, benefiting from 6% loan growth and 8% deposit growth in Commercial Banking, partly offset by a decline in wealth management revenue. Expenses increased 1% from a year ago and operating leverage was neutral.

While wealth management revenues have been impacted by markets, this quarter highlights the quality of our Canadian P&C banking franchise, where we delivered pre-provision pretax earnings growth of 8% from the prior year, supported by strong margin performance and over 2% operating leverage. And while we've been selective recently in commercial loan growth, we have the ability to accelerate support for existing and new clients as the environment improves to provide further momentum to our domestic P&C growth.

We've included slides for the P&C segment in the appendix of this presentation. Net income of US$62 million in U.S. Commercial Banking and Wealth Management was down 62% from the prior year due to higher credit provisions, largely in our office portfolio. Revenues were up 5% over the same period, driven by a 10% increase in net interest income, partially offset by a 5% decline in fees that are impacted by market conditions. NII benefited from 7% loan growth and strong net interest margins, while average deposits decreased 4% sequentially, outflow and remixing trends stabilized through the quarter.

Expenses were stable year-over-year, resulting in positive operating leverage of over 5%, and we expect more moderate expense growth going forward as compared to the recent past. We maintained focus on balanced and profitable growth to scale our U.S. business and our uniquely differentiated franchise is well positioned to meet client needs as the local competitive environment evolves.

Turning to Slide 17. Our Capital Markets business. Net income of $494 million was up 11% year-over-year. Revenues of $1.4 billion were up 13% over the prior year, driven by our differentiated capabilities. Highlights this quarter include 18% growth in Global Markets and continued double-digit growth in Direct Financial Services, which grew 26%, largely due to margin expansion in Simplii.

We also saw increased activity in underwriting and advisory and continued growth in corporate banking. Reflecting the capital market seasonality we've seen in recent years, we expect Q4 revenues to be lower sequentially in this segment with growth reverting to mid- to high single digits over the prior year. Expenses of $673 million were up 13% compared to the prior year, largely due to investments in key growth initiatives undertaken in late '22. We anticipate sequential expense growth to continue moderating.

Slide 18 reflects the results of the Corporate and Other business unit. Net loss of $98 million compared with a net loss of $50 million in the prior year largely due to less favorable treasury revenue and higher corporate expenses, partly offset by higher revenues from International Banking. We continue to maintain our medium-term guidance of $75 million to $125 million quarterly loss in this segment.

In summary, we delivered another quarter of steady, profitable franchise growth as a result of our agility and an unwavering focus on our differentiated strategy. Our strong margins, moderating expense growth and disciplined approach to resource allocation give us significant flexibility to respond to changes in the environment and to seize opportunities that present themselves. We will continue to manage proactively through a fluid environment to support our clients, maintain our balance sheet strength and emphasize profitability.

With that, let me turn the call over to Frank.

[Frank Guse, Chief Risk Officer]

Thank you, Hratch, and good morning, everyone. This quarter, overall, our portfolio performed within our expectations. We saw a build in performing allowances this quarter, reflecting prudent outlook based on the macroeconomic environment. Our impaired loans continue to normalize and remain within expectations. We saw sustained headwinds in the U.S. office sector. However, our exposures remain relatively small at less than 1% of our total loan portfolio and our experienced real estate team is managing the portfolio on a loan-by-loan basis, working closely with our clients. Our other portfolios continue to perform well with demonstrated resilience in the Canadian consumer lending portfolio.

Turning to Slide 22. Our total provision for credit losses was $736 million in Q3 compared to $438 million last quarter. Total allowance coverage increased from 66 basis points in Q2 to 73 basis points this quarter. The $258 million performing provision this quarter, $211 million or 80% are driven by changes to our forward-looking indicators with remaining due to portfolio growth, credit migration and other movements. To build this quarter was primarily a result of higher debt service ratio forecast for the consumer books.

After nearly 18 months of rate hikes, our forecast expects servicing pressures of higher interest rates and rising unemployment. Provisions on impaired loans was $478 million, up $99 million quarter-over-quarter. This increase was driven by our U.S. commercial portfolio, the bulk of which was attributable to our office commercial real estate exposures. We also experienced high impaired losses in our retail portfolio. And overall, our impaired losses continue to perform within our expectations.

Slide 23 summarizes our gross impaired loans and formations. Overall balances were up in Q3 and mainly driven by business and government loans. New formations were also up in Q3 over $515 million is related to our U.S. office exposure. Slide 24 outlines the net write-off of 90-plus day delinquency rates of our Canadian consumer portfolios, which overall continued to remain stable this quarter and in line with our expectations. As communicated in prior quarters, we expect write-offs and delinquencies to continue to revert towards pre-pandemic levels.

Slide 25 provides an overview of our Canadian real estate secured personal lending portfolio, which makes up 54% of our total loan balances. Our overall late-stage delinquencies remain low, especially when compared with pre-pandemic levels. Variable rate mortgages account for 1/3 of our mortgage book. These continue to display strong credit quality and performance. As a result of the interest rate hikes this past quarter, the portion of non-amortizing variable rate mortgages has increased to $50 billion, up from $44 billion last quarter.

We continued our proactive client outreach and see good responses with around 8,000 clients increasing their monthly payments and just over 1,000 clients making lump sum payments, removing themselves from negative amortization status. We will continue to work closely with our clients through this high interest rate environment and other market developments.

On Slide 26, we'll provide further disclosure on our U.S. office exposure. As mentioned, this represents less than 1% of our total loan book. Given the sector headwinds, we increased our allowance coverage from 4.1% to 7.6% quarter-over-quarter. While our maturity profile is weighted more towards fiscal '23 and '24, we have already seen $1.5 billion in net outstandings being renewed, reduced or paid out over the past few quarters. We worked through the balance of maturities. We expect to see losses in and around the current levels for the portfolio for the next few quarters, which is consistent with what we noted last quarter.

I want to close by noting that our overall credit quality and coverage remains robust. Given the economic headwinds and sustained pressures in the U.S. office space, we expect our fiscal '23 loan losses unimpaired to be at the high end of our guidance of 25 to 30 basis points for impaired losses. We believe our additional provisions this quarter continue to provide prudent coverage for market conditions that will evolve.

I will now turn the call back to the operator.

[Operator]

[Operator Instructions] Our first question is from Ebrahim Poonawala with Bank of America. Please go ahead.

[Ebrahim Poonawala, Bank of America]

Good morning. I guess maybe a question for Frank, starting with you on just the performing PCLs, clear what you said. But as we think about -- you mentioned, I think, 80% of the build this quarter was on forward-looking indicators. And what I'm trying to understand is how much of that is just the model output versus your expectation around the macro and how that evolves. So talk to us fundamentally how you see credit playing out in the consumer book. If rates stay higher for longer, I'm assuming your base case is for unemployment to go higher. Within the consumer book, where do you see the loss drivers? And just how quickly can things deteriorate?

[Frank Guse, Chief Risk Officer]

Yes, a couple of things to unpack there. So what I would say is -- it is driven by our model outcomes. It is driven by our forward-looking expectations, as I said, by about 80% of the overall performing build. What we saw this quarter is a higher interest rate expectation. We saw two rate hikes in the market, one of which I would say was necessarily widely expected. And we see that playing out in debt service ratios that have an impact on all of our consumer lending products, probably the biggest one playing out in our unsecured personal books.

And again, those are forward-looking expectations. What I would also say is those are forward-looking expectations for the next couple of years. And I don't want to get too technical, but IFRS 9 in Stage 2 is asking for lifetime expected losses. The average lifetime in our consumer lending book is a couple of years. So what we see as a build this quarter is certainly a reflection of what we would expect to play -- see to play out over a couple of years. So, it's not an imminent change in our outlook. It is an outlook change over those couple of years.

And I think what I would say, as you asked for, it is playing out in the unsecured book, where we do see stress, but we see that stress playing out, as indicated as a normalization of net write-offs that we expected that we are seeing playing out. The other point, I will make on performing allowances overall. There is a large increase this quarter. If you normalize that over the last couple of quarters, if you normalize it year-over-year, it is certainly something that is not unexpected. It is prudent to increase our coverage ratios this quarter, and that's what we're seeing play out.

[Ebrahim Poonawala, Bank of America]

Understood. And maybe one question, just because it is the first time since some of the articles around the mortgage under lighting service in the press. Maybe Victor, for you, I mean, I think you spent a lot of time under your leadership culturally turning around things at commerce from a risk management standpoint. So just to the extent not to make too much of what was out there in the press, but give us your sense both in terms of the risk framework at the bank, to the extent you can discuss that? And also culturally, in terms of leadership, in terms of like what should be made from the outside when we see some of these leaks coming through and making their way through the press? How should we interpret that?

[Victor Dodig, President and Chief Executive Officer]

So let me just first of all say that our regulators play an incredibly important role in ensuring strength and stability in the financial system in Canada, and I think they've done that over a century and a half and they do it well. So as you can appreciate, I can't comment on the specific regulatory matters. I can tell you that we maintain an ongoing transparent engagement with all of our regulators in all of the jurisdictions that we operate and with our Board. We've also got effective controls to ensure compliance with supervisory expectations, and we continue to manage all of our businesses including our mortgage business prudently with a client focus.

So what I will say about articles like that, it's disappointing to see when things are being reported publicly that are presented in a way that simply does not reflect the way we actually operate. There's always going to be a healthy tension in running a large complex business, but I can tell you this, we've got strong governance. We've got an incredibly strong culture. We got really strong employee engagement scores and a team that cares about how we build our business going forward. And that as investors, you need to know, and we're happy to engage with you on anything that's on your mind to the extent that we can, but I can tell you we run it well. We run it prudently. We run it with good governance, and we run it very transparently.

[Operator]

Thank you. Our next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.

[Gabriel Dechaine, National Bank Financial]

A couple of questions here. Thanks for the margin guidance, Hratch. And I'm wondering if this could be like maybe some bouncing around to use that term. The U.S., in particular, I'm thinking about the impact it might have because deposits are down quite a bit sequentially, and that may require you to use more FHLB deposits or wholesale funding? And how does that play into your outlook then, if that's an issue?

[Hratch Panossian, Chief Financial Officer]

Thank you for the question, Gabe. Look, I think everything is playing out in terms of margins as we had guided, right? And as I said in my remarks, we have strong franchises, both in the U.S. and Canada that plays into it. You've got a strong deposit franchise in the U.S. We've got a strong strategy that focuses on the right clients and focuses on profitability. And we have a strong ALM framework. We've talked about this before.

We manage the U.S. balance sheet the same way we do the parent balance sheet where we stabilize for rate fluctuations and we manage for overall margin stability over time. And so that's really what you're starting to see play out. When you have a rate cycle like the one we did and this applies to broader than the U.S., right, rates went up very quickly and intensely and so that plays out a bit different upfront because you did see quite a bit of fluctuation in noninterest deposits going to interest-bearing or to term.

And that actually did not allow as much margin expansion as you would have otherwise expected and what you would compute from doing our interest rate sensitivity calculations based on the disclosures. And so that was muting a little bit the results in margins in all the businesses, including the U.S., but that has stabilized. And I think that goes to the stability of the client franchise, and Shawn can speak to more details, but we did see the demand deposits and the noninterest deposits stabilized this quarter.

We saw the mix shift stabilize. So, I don't expect us to need any funding that will lead to higher costs as you alluded to. And so, we go back to our guidance. With respect to the U.S., there was a little bit of onetime noise, as I mentioned in my remarks, we had a recovery on a loan and the interest on that recovery comes into NII. So you've got to adjust for that a couple of basis points. But outside of that, I would expect stable to slight upward momentum in the U.S. from here.

[Gabriel Dechaine, National Bank Financial]

Okay. And my next question is on capital, very little RWA inflation this quarter and I think very little last quarter as well. I'm wondering, how close are you to the output floor? And especially if we look at the Q1 '24, could we trigger that and see a little RWA inflation? And then I guess also, might as well mention the fundamental review of the trading book in that context, there's any impact there?

[Hratch Panossian, Chief Financial Officer]

Let me comment on capital more broadly, and I'll address your questions. Again, we've been very clear about our goals on capital and how we're managing to it and what we've guided to in terms of forecast. Frankly, we're ahead of that. We're ahead of schedule, and we're very pleased with that. So let me remind you how we look at capital. We look at our capital levels with respect to where regulatory requirements are, where our own needs are, and we like having a bit of capital for flexibility well above those regulatory requirements. We look at the peer group and so forth.

And so with all of that, as we looked at the environment, we managed to try to get to above 12% at the end of this year, as we said, we're ahead of schedule. I think into the mid-12s is what we're forecasting at this point that we would like to get to getting into the next year. And we are very well positioned to do that. How we've been doing that. We've been prudent with how we're allocating our balance sheet. And as I mentioned in my remarks, right, the balance sheet is important. Our ROE is extremely important to us. Costs have gone up. Cost of capital is up. RWA requirements are up, capital requirements are up, and so, all of that is reflected when we deploy capital to support our clients.

And so, we're not necessarily conserving capital, but we're prudently allocating our capital. Where we are now, we can continue growing our business. I don't see constraints on our ability to grow our business to still get to that goal of mid 12% over the next few quarters here. And from a regulatory perspective, I would guide you to net all the impacts that are coming at us the next few quarters a net slight positive from all the changes, including we're working on our U.S. transitioning to the advanced approach, which will be a positive. Once this comes in net of everything else, a net slight positive is what I would expect.

[Gabriel Dechaine, National Bank Financial]

So maybe a dip, but then, I mean, these are my words, but just trying to visualize. You might see a dip early in 2024. And if you could touch upon those two items, I asked about that would be great and then after the conversion of IRB in the U.S. more than offset.

[Hratch Panossian, Chief Financial Officer]

There's a few things there, Gabe. I think you've got the CVA and FRTB changes. You've got the change related to the negative amortization mortgages coming. You've got the floors, obviously, which is not a factor for us at this point in time. And then you've got the U.S. Frankly, the timing of the reg changes has known. The timing of the U.S. going to advance is not known. And so, depending on how that comes in, you could have a little bit of up and then a down. You could have net neutralizing in the same quarters, you could have a little bit of a dip and then going up, but we will see.

[Operator]

Thank you. Our next question is from Meny Grauman with Scotiabank. Please go ahead.

[Meny Grauman, Scotiabank]

I want to go back to credit and follow up on something Ebrahim was talking about. Just in terms of the volatility of your PCL line, it's especially the performing bucket and especially Canadian personal and business banking, the performing line and definitely seeing quite a bounce quarter-to-quarter from a recovery to 279 million build this quarter. And I'm just wondering how should investors interpret that? And is there anything you can do to temper that kind of volatility? Or is there anything you want to do to temper that kind of volatility?

[Frank Guse, Chief Risk Officer]

So, great question. So how do we look at it? One, we look at coverage ratios. We look at how we are building coverage ratios over time. And we think given the macroeconomic uncertainties that is a prudent approach to take. You're absolutely right. And I mentioned that a little bit. We had a slightly more optimistic outlook. Last quarter that drove a release in particular as it related to interest rates, where they would peak and how long they would stay at that peak. That was a little bit more optimistic that has reversed.

We do not like to see that volatility, but part of the IFRS 9 is you have to incorporate those forward-looking indicators and you have to run those outcomes. As you can imagine, it is very tightly governed process. We have lots of discussions around that. We look at those drivers. We look at the outcomes of those drivers. And again, in particular, this quarter, I would stress, it is prudent to take that economic uncertainty into account and to reflect that in our provisions. The other thing I would stress is pointing back to our actual credit results. The Canadian consumer book is holding up very strong.

We see impaired losses normalizing, but we see them normalizing well within our expectations. And again, then it is a little bit of question of how that plays out, and that was what Ebrahim and you probably are asking about as well. I mean that is the uncertainty ahead of us. But everything we are seeing is pointing towards very strong credit quality, quite a good resilience in the Canadian consumer books. And again, if you look at delinquency rates, if you look at impairment rates and so on, we are pleased with that resilience because it is performing better than our expectations.

[Victor Dodig, President and Chief Executive Officer]

And Manny, if I could just build on Frank's comments, but also take us a step back. I think it's really important to focus on the earnings fundamentals of the core bank this quarter, which represent client growth, very robust client growth translating to revenue growth. Margin expansion, which suggests that not only are we conscious of our margins and where we want to take them, but we're also pricing business appropriately with a client and shareholder lens in mind.

Pre-provision earnings that are a top end of the prior group in terms of year-over-year growth, expense management that we are way ahead of the curve in terms of getting that expense management, our investments have been made last year, the year before. So we are in a good place now. We will continue to manage those expenses to a good place. When it comes to credit, I think Frank said it all. I think on a year-to-date basis, when you compare our provisioning on the performing side, we're very much in line with our peer group when you factor in mix differentials across businesses.

So fundamentally, I feel like our business is in a very good place. We don't like the volatility in the models, we'll work toward looking at variables that are more predictive as we go forward because we understand that our investors want consistency and believe me we want to deliver that consistency as well. So fundamentally, we're delivering it. We'll continue to deliver it going forward across all aspects of our P&L.

[Operator]

Thank you. Our next question is from Mike Rizvanovic with KBW Research. Please go ahead.

[Mike Rizvanovic, KBW Research]

Just a quick question for Hratch on the noninterest-bearing deposits. I think sequentially, last quarter, the outflow sort of flat-lined and now it's sort of picked up. I'm guessing it's because of the two rate hikes we had during the quarter. And I'm wondering in your margin guidance or just your outlook overall, like what do you see on the NIB runoff if rates do stay higher for longer? And let's say we don't get any rate relief until maybe mid-2024, how do you see that NIB runoff trajectory from here?

[Hratch Panossian, Chief Financial Officer]

Yes, look, it's a very good question, right? As I mentioned, we've gone through a cycle that we haven't before in terms of the speed of rate rises. And so, I don't think anybody can predict exactly where we go from here. But what we are definitely seeing in the trends is a stabilization, and so if you look at this year, we've had tremendous growth in term product and interest-bearing product and it did come partly at the expense of a reduction in our overall demand deposit balances.

And we've seen on a year-over-year basis, demand deposits will be down, and they'll be down a substantial percentage over the last little while. If you go from the beginning of the rate cycle to now, we've seen about a 10% shift but that is stabilizing. You're right, this quarter, we did see a few billion dollar reduction in demand deposits, but it's a lot more stable than what we've seen over the prior quarters. And we're seeing that in the U.S. as well as in the Canadian franchise.

And so if rates stay where they are now, I think we will continue to see this stability play out. If rates go further, you could see a little bit further fluctuation, right? If you look at it on a historical basis, we were actually starting to converge on the mix of term to non-term products that we've typically had over the last several years. And even if you go back to prior years of very high rates, we're starting to get to within that range. So, if there is more remixing to go, it would be more muted and less than the 10% or so that we've seen so far, but I think it does stabilize around here.

[Mike Rizvanovic, KBW Research]

Okay. That's very helpful. And just a quick follow-up. So in a scenario where rates are, in fact, declining, let's just pick mid-2024 as a sort of talking point. Is it fair to assume that you don't see this number start to reflect like you'd have to -- is it fair to say that you have to have a significant drop in rates before you could potentially get a better mix here? Does it sort of just stabilize and stay roughly at those levels, what [indiscernible] getting at?

[Hratch Panossian, Chief Financial Officer]

Yes, I think that's right, Mike, right? And I think, again, the speed makes a big difference, right? If you go back to our interest rate sensitivity disclosures, which assume a static balance sheet, that hasn't played out this cycle on the way up, right? We had tremendous increase in rates, but very quickly. And what you actually saw is more than half of that. The big driver that has netted off interest rate increased benefits we would have otherwise had and our margins, has been this deposit remixing.

More than half of the benefit you would have gotten has eroded away through this remix. Now on the way back down, I think it all depends, right? It depends again at the speed at which it happens and when it happens and how the markets are and therefore, will money flow to the markets? Will it flow to demand accounts, et cetera. So, lots of factors to consider. But I think your assumption is right as a base case? Is it probably stays more stable for a while if it's a gradual decrease?

[Operator]

Thank you. Our next question is from Lemar Persaud with Cormark Securities. Please go ahead.

[Lemar Persaud, Cormark Securities]

Just for Frank, a question on the U.S. office sector. I appreciate the 7.6% ACL coverage ratio and the increase from 4.1% last quarter. Can you talk to us about how you see that number evolving? Like is the point that you think like we're done building here just given the strong coverage ratio and significant maturities through the end of the year? Or do you see the risk of future material bills, like perhaps that 7.6% to go to north of 10%. How should we think about that?

[Frank Guse, Chief Risk Officer]

Yes. So what I would say is, as I guided in my prepared remarks, we expect provisions to remain elevated in the U.S. office sector, specifically how exactly that will play out from a performing versus an impaired perspective, and then write-offs over time is a little bit uncertain. What I would want to reiterate is, overall, our credit portfolio is performing very well in the U.S. So, it is isolated to the office sector, everything that we are seeing.

And as I said in my prepared remarks, we have worked through 40% by end of year, we will have worked through 50% of the entire book. But we are doing so on a loan-by-loan basis. We are doing so on a very, very granular and very intense basis. And we have a dedicated team doing that. But then again, coming back to your question, how exactly that will play out is a little bit more uncertain, and it is very hard to predict or it's very hard to give you concrete guidance on.

[Lemar Persaud, Cormark Securities]

Okay. And then just sticking with you on the change the debt service ratio that drove the performing build this quarter. Was it all related to the, I guess, the unexpected rate hike? Like is it as simple as that? Or was it a combination of the higher rates and changes in other expectations like lower income expectations or something along those lines? I guess where I'm going is, you suggested there was two rate hikes, one of which was unexpected. It just seems like a relatively sharp build for one unexpected rate hike.

[Frank Guse, Chief Risk Officer]

Yes. And I did comment a little bit about model sensitivity. So to answer your question, it is mainly driven by debt service ratio. It is mainly driven by the interest rate hikes. We actually see income still trending higher. And that would, in part, offset, but not fully offset debt service ratios. So, it is driven by that. And well, as I said, it's coming back to debt service ratios and it is coming back on how that plays out for our Canadian consumer portfolios from an expectations perspective.

[Operator]

Thank you. Our next question is from Mario Mendonca with TD Securities. Please go ahead.

[Mario Mendonca, TD Securities]

So, I want to go back to U.S. commercial real estate. There's no doubt you can look at your supplement, look back a few years that the bank grew U.S. commercial loans, commercial real estate, in particular. There was some robust growth there for a period. So while I think it's fair to say U.S. commercial real estate losses might be messy quarter-to-quarter, that's going to impact the bank's capital in a meaningful way. So what matters more to me now is, does this change CIBC's strategy in the U.S. now that you've seen sort of the uncomfortable side of all that growth, does this sort of have you revisit your growth strategy in the U.S.?

[Shawn Beber, Senior EVP & Group Head U.S.]

Mario, it's Shawn. Thanks very much for the question. So, I'll come back to that question specifically, but just stepping back for a minute for some context. Other than the office portfolio, our U.S. business continues to demonstrate strength and solid performance. Notwithstanding the current environment, we generated strong quality loan growth. We're pleased with our deposit performance, as Hratch talked about seeing that stabilizing with the rate environment stabilizing. We had NIM improvement year-over-year, and our outlook for NIMs are stable. And while we continue to invest in our business, as you've seen, the rate of growth in our expenses has moderated significantly.

And that combined with realizing on the investments we've been making over the last couple of years and staying really focused on the connectivity and bringing all of our businesses and our capabilities across capital markets, wealth management and commercial to our clients, generated double-digit pretax pre-provision earnings. What we are seeing and credit, as a general matter is performing well. So, where we are seeing the issues is in commercial real estate and in particular, in the institutional office space. It's a part of the business we're deemphasizing. And as that transition continues, you'll see CRE wind up being a smaller percentage of the overall U.S. portfolio as our commercial and industrial and our wealth businesses continue to grow.

[Victor Dodig, President and Chief Executive Officer]

And Mario, just to build on those comments from Shawn, we absolutely feel good about the strategic investment thesis that we laid out years ago about investing in the United States. Our investment has been a very good investment. On top of that commercial banking investment, we've built a really strong wealth management business that we're going to continue to grow now, especially when our technology gets implemented this fall. Our capital markets business, as you see in some of the slides that Harry's business has are growing.

And Harry, it might be worthwhile commenting on the capital markets business in the U.S. We've grown our U.S. earnings, pretax, pre-provision from what was 2% many years ago to over 20% today, and we plan to continue to grow that because we think it's a good diversifier for our bank and it's a well-diversified well-managed portfolio aside from the noise of the U.S. commercial office real estate piece, which we will work through. Harry, maybe you want to build on that?

[Harry Culham]

Yes. I'd just add that the U.S. part of our capital markets business is really well connected to Shawn's world and commercial and wealth, like it is in Canada to John's world and commercial and wealth and our retail franchise. And so we're really focused on delivering for clients in the U.S., and that's working really well. We're very, very well diversified. We're specific in the industries we operate in. We're very focused on the new economy. We've got a great team in the U.S., and we're delivering outsized returns. And you see the numbers year-on-year. So we're very pleased with the results, a very highly connected franchise, a really differentiated platform and it's working well.

[Mario Mendonca, TD Securities]

I appreciate all those comments. They certainly resonate with me, but I want to go back to this for a moment. So even if these credit losses on U.S. commercial real estate, other than causing some lumpy quarters, and assuming they don't affect capital, which I strongly suspect they won't. There's still an implication here. What I'm getting at is Commercial real estate and construction lending in the U.S. is the single largest category of loan in the U.S. business and government loans. And if you're deemphasizing that and maybe this is going to Shawn, if you're deemphasizing that Doesn't that necessarily point to slower growth in the U.S. over the next couple of years as you deemphasize that business?

[Shawn Beber, Senior EVP & Group Head U.S.]

Yes, I think it's fair to say relative to the rate of growth that we saw over the last couple of years. Part of that is environment and part of that is going to be strategic choices. And as that portfolio transitions that will mute growth certainly on the CRE side, but we are still looking at -- our outlook is still for single -- mid-single-digit loan growth in the business, and it's going to be driven primarily through our C&I business and our Wealth Management business.

[Victor Dodig, President and Chief Executive Officer]

Businesses that I think if you look at the mix out five years, there'll be more capital light in nature. They're more ROE enhancing in nature. And part of our business model is connectivity concept that Harry touched on, that drives a better ROE. So while that may -- that aspect, the real estate aspect may slow down, I think the team has got a good handle on how we can grow the rest of the business.

[Mario Mendonca, TD Securities]

Just maybe something quick on U.S. margin. I feel like -- like I watched these Canadian banks carefully. I watch the U.S. banks carefully I think CIBC might be the only bank where U.S. margins were actually up in Q3. It's a surprise given what played out for anybody else. Now I also observed that the deposits are down. So what I'm kind of wondering is, if there's going to be a quarter where CIBC decides it needs to protect this deposits there. And we actually see the margins come under pressure like we're seeing for virtually every other bank. So what it appears to me is that CIBC is protecting the margin, but willing to give up some deposit share. Am I reading the tea leaves correctly in that?

[Shawn Beber, Senior EVP & Group Head U.S.]

So what I'd say is our noninterest-bearing deposits held pretty steady this quarter. And you're right, on an average basis quarter-on-quarter, deposits were down. But frankly, on a spot basis, they're actually up somewhat. And so we've had our deposit betas on our interest-bearing are higher than they've been through the cycle.

So we've been paying for deposits with our, but it's a very client-focused strategy, and we're working with our clients to price those deposits. We're also making investments in our deposit franchise in terms of additional capabilities and new products. So we'll be launching those just to enhance our overall deposit franchise. But it's not been ceding deposits, like ceding share for margin. Our margins have held in. On the asset side, spreads have been a help offsetting some of the cost of funds pressure.

And on the deposit margin side, we've had the benefit of both the rising rate environment, but also the impact of the hedging program that Hratch spoke about earlier. So that combined to that couple of basis points, as Hratch mentioned, there was a bit of noise in the quarter, you take a couple to a few basis points off of that increment. But the 2 basis points is not one-time. It's a function of all those elements that I just went through.

[Operator]

Thank you. Our next question is from Nigel D'Souza with Veritas Investment Research. Please go ahead.

[Nigel D'Souza, Veritas Investment Research]

I wanted to follow up with Frank, on the debt service ratio. And should we read into the impact that CIBC has a more interest rate sensitive borrower. And then in terms of the outlook, when I look at your forecast for the debt service ratio, the next 12 months, you expect it to run materially above where it was that in 2019 and kind of remain at the 2019 level for the rest of your forecast period. And you're also forecasting unemployment to roughly be at 2019 levels, maybe a little bit higher. So given that context, wouldn't it be reasonable to expect that your credit losses next year or the next 12 months would run above the losses we saw in 2019?

[Frank Guse, Chief Risk Officer]

Well, so a couple of points. One, I wouldn't take that as an indication that our clients are more interest rate sensitive. There are certainly some elements of mix in there. But overall, we do not see that as being a big driver. As I said before, I think we may be having models that are a little bit more sensitive to changes in that metric, but I don't take that as an indication of a difference in credit for client profiles because we are not seeing that in other data that we clearly use to prepare [indiscernible].

From an outlook perspective, yes, I think part of the indications is if the economic environment plays out as our models predict and as we expect interest rates to come back a little later, we could expect that part of '24 or technically all of '24 runs a little bit ahead of 2019. But again, there is a lot of moving parts here, and it's certainly too early to give you a good outlook on fiscal '24 altogether. But overall, I would say, yes, it's certainly not an indication of credit quality. It is an indication of what we have put into our forward-looking indicators, how our models react to that. And then what we will see over time is how that plays out in reality as the economic environment evolved.

[Operator]

Thank you. Our next question is from Darko Mihelic with RBC Capital Markets. Please go ahead.

[Darko Mihelic, RBC Capital Markets]

Again, going back to Frank, I really appreciate the disclosures that you provide. But sometimes I think the disclosures may not actually help me. And I'm asking you this question, Frank, because your bank had a bit of balance in performing PCLs last quarter was released. So I kind of want to get to the bottom of a couple of things. And really, what I'm looking at is one of your slides, I'm looking at Slide 40, and you show the mortgages that are coming due for renewal this year, $37 billion.

And then you show me the high-risk clients $330 million, which is fairly small. But when I look at the definition of what you're calling a high-risk client, it would miebolically be different from what I'm worried about. I do not care about people who have a shallow relationship with CIBC. What we worry about, I think, our clients with a deep relationship with CIBC that have credit cards and unsecured credit.

We worry about those same clients that might have low bureau scores and clients that are facing a large increase in mortgage payment and don't have cash resources. So that would be my definition of higher risk, not shallow relationships. So am I wrong in thinking that, that is the cohort that I'm describing would be the cohort driving the performing PCL increases and how big is this cohort not just for 2024, but also 2025. And so I realize I'm asking for a lot, and we don't expect you to throw out some numbers right now. But maybe you can tell me where I'm wrong in thinking about what I should really be concerned about.

[Frank Guse, Chief Risk Officer]

I'll probably not throw numbers as you indicated. What we are looking at is deep relationship clients. We know how they behave on their credit card. We know how they behave on their unsecured lines. The deeper the relationship is with us the better the behavior is. The better the actual results are. And one thing that is giving us comfort is we are actually seeing more of their client over time, and we have an opportunity to react faster than we would do on a mortgage only or on a shallow relationship.

So that is why -- and you're absolutely right, we are watching those segments very, very closely, but which is why we may be a little less concerned about those segments just because we have more information. We have more opportunities to work with those clients and addressing that early. The other point I will make is, I mean, we are very, very close monitoring our variable rate mortgage clients. We know their renewal schedules. We look very closely into what payment shocks are, again, under assumptions of where interest rates are over time.

And we do feel comfortable as we disclosed on the slides here that those payment shocks, even though they are high, and they will certainly go higher over time are manageable for those clients. And a couple of points that help in that is One, a lot of those clients would have been qualified at a lot higher rates in the past. And yes, they may still go into an even higher rate. And yes, that is a real payment shortcoming but at least from a qualification perspective. Those clients were tested and underwritten at a lot higher rates.

And one thing I can tell you as well is, we had around call it, close to 100,000 clients already renewed into that higher interest rate environment, $25 billion of mortgages in the last or year-to-date. And what we are doing is we are monitoring that cohort very, very closely from a delinquency rate perspective. And in particular, if you go back to what we call the six- to eight-month performance in that book, so going back to all renewals and refis in Q1 of this year. Those clients are performing broadly in line with what we would have seen in 2019. So, there's no areas of concern that we are seeing so far emerging because clients are absorbing higher payments in ad renewal. I don't know whether that addresses your question, but it's probably all I can mention here.

[Darko Mihelic, RBC Capital Markets]

No, that's I realize I'll have some follow-ups for you after, Frank, and some technical questions around everything you just said. So I appreciate it. I just -- I scramble a little bit because if debt service ratios are climbing. And I appreciate that many of these customers were underwritten with a stress test on interest rates. But I'm not certain that the stress test also would have incorporated high inflation. And I just worry that especially not necessarily in the next 12 months, but the 12 months after, where the payment shock is really high that even if you've seen customers with a bit of a payment shot recently that the outlook could still be quite different. So happy to discuss off-line, Frank, but thank you very much for the answer. It is helpful.

[Operator]

Thank you. Our last question is from Sohrab Movahedi with BMO Capital Markets. Please go ahead.

[Sohrab Movahedi, BMO Capital Markets]

Maybe a couple of quickies. Frank, can you tell us what the loan to value on the office properties are after the allowance and how that compares to last quarter, please?

[Frank Guse, Chief Risk Officer]

Well, I can't give you a number here. It's certainly in line with expectations. I'm not certain what number I could give you here because the biggest driver in itself is certainly not the allowance. It is driven by whenever we get a new appraisal, we see the market evolving. And again, that is a location-by-location answer where the values can go down significantly from what we would have seen in appraisals that we would have gotten six months, nine months or a year ago. And from an LTV perspective, I think that is the biggest driver. But it's also one where we don't have an ongoing review of appraisals for every single file. But we order appraisals whenever we them it's right. And as I said, that is probably the bigger driver, which is why I can't give you real -- give you one number on question.

[Sohrab Movahedi, BMO Capital Markets]

Okay. And maybe just for the broader management team, you get paid a lot of money. Was there any subjectivity exercised over the models specific to performing reserve build this quarter or the releases last quarter or are the models running the bank?

[Frank Guse, Chief Risk Officer]

Yes, there was. And yes, there was in both cases.

[Sohrab Movahedi, BMO Capital Markets]

Did you add or subtract for this quarter? Did the subjectivity add to the provision build this quarter? Or did it hold it back?

[Frank Guse, Chief Risk Officer]

A lot of moving parts, but we certainly reduce the increase that we would have seen in our Canadian personal businesses. And what we do is that expert credit judgment is essentially balancing a little bit what we talked about this call namely, what is the model predicting versus what are we seeing from a credit risk perspective. And we felt the model was going a little bit more sensitive than we would have thought. So we dampened that increase. And why do I say we do see a lot of moving parts, we certainly added a little bit on the U.S. office portfolio. So there's always moving parts. And that is directionally what I would say, for this quarter.

[Hratch Panossian, Chief Financial Officer]

And maybe I'll add on that, Sohrab, right? As you know, look, this isn't just management judgment and gut instinct, right? There's an accounting standard. There are requirements under the accounting standard. We manage to an appropriate allowance that follows the IFRS 9 guidelines, which require us to provision and have an allowance based on the expectation based on Stage 1 for one year and lifetime for anything that's in Stage 2. It's a very governed process, as Frank has said, the models produced the results. We look at that versus expectations, apply the credit judgment, however, is required to get to the right answer and the appropriate prudent allowance number, and then we go through our governance processes in order to finalize that.

[Jon Hountalas]

Okay. Good. And thank you, Sohrab, for that question. As I said earlier, we are going to continue to work on refining our models so that they deliver even greater consistency quarter-to-quarter. Again, on a year-to-date basis, I think it's important to know where we stand relative to the peer group and very much in line on the performing standpoint when you factor in mix differentials. And as I also said during the call, it's really important to focus on the earnings fundamentals of our business. We had solid results on those earning fundamentals due to the strength and diversity of our business model in all of our business units.

In Canadian banking, in our U.S. region and our capital markets, and we've got prudent risk management. I think that stance we have is prudent with a little less volatility, it will even be better. We continue to demonstrate steady organic growth. We have clients building relationships with our bank. It's fueled by a client-focused strategy and it's supported by an increasingly digitized infrastructure, which, in fact, quite frankly, has allowed us to start reducing our costs in certain areas, including head count, which you see on a year-over-year basis. And that, again, stands out differently from our peers.

I think our achievements are a testament to the unwavering dedication of our team whose hard work and commitment have contributed to our success. And I want to extend my sincere appreciation to CIBC team member who is driving better client, Net Promoter Scores, and deeper relationships. We've implemented initiatives that not only address our clients' evolving needs, but also aligned with the long-term strategy to deliver sustained value to our shareholders. And as we continue to navigate a dynamic economic landscape, we remain steadfast in our dedication to the purpose of helping our clients realize their ambition and to deliver value for our shareholders.

So I thank you for your trust and continued support and for your questions, and I look forward to our ongoing engagement with our team as frequently as you would like. Thank you. Have a good day and a good Labor Day weekend.

[Operator]

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