Darko Mihelic

Darko Mihelic followed up on private credit exposures (non-deposit-taking financial institutions), asking about CIBC's risk appetite for this area, given its strong growth and low losses, and how far the bank is willing to push this segment as a proportion of its total balance sheet.

Answer

Harry Culham (President and CEO, CIBC) emphasized that this business is core to their client-focused strategy, delivering robust risk-adjusted returns, aligned with client activity moving to private markets, and is a broad-based, highly diversified portfolio with meaningful risk mitigants. Christian Exshaw (Senior EVP and Group Head, CIBC Capital Markets) added that while there has been rapid growth to catch up, future growth in this specific area will not be as high. He stated that CIBC needs to diversify resources and does not want to concentrate all funding or capital in one area, expecting high single-digit growth in this segment for the coming year.

Darko Mihelic from RBC Capital Markets followed up on the global credit financing business, asking about CIBC's risk appetite, how far they are willing to push growth in this area, and if it could become a larger part of the total balance sheet, given its strong growth and low losses.

Answer

Harry Culham, President and CEO, emphasized that this business is core to CIBC's client-focused strategy, delivering robust risk-adjusted returns, and is highly diversified with meaningful risk mitigants. Christian Exshaw, Senior EVP and Group Head, CIBC Capital Markets, clarified that while there has been rapid growth to catch up, future growth will not be as aggressive. He stated that CIBC needs to diversify resources and does not want to concentrate all funding or capital in one area, expecting high single-digit growth in this business going forward.

Darko Mihelic of RBC Capital Markets requested an update on CIBC's Imperial Service strategy, asking about adviser hiring, productivity, and its overall contribution to the wealth management business.

Answer

CEO Victor Dodig and Hratch Panossian, Group Head of Personal and Business Banking, described Imperial Service as a core driver of the mass affluent strategy with record-high client satisfaction. Panossian stated they are 'just getting started,' with ongoing investments in adviser growth, productivity tools using AI, and digitization. He highlighted a significant, untapped opportunity to move more of CIBC's existing clients into the Imperial Service offer, which drives a more than 50% increase in managed funds in the first year.

Darko Mihelic requested more detail on the U.S. portfolio reshaping, specifically the timeline for the commercial real estate runoff and its impact on NIM and loan growth. He also asked about the proportion of syndicated loans and changes to origination.

Answer

Shawn Beber, head of the U.S. Region, indicated the CRE headwind could last a couple more quarters, with overall loan growth remaining modest and NIMs stable in the near term. He clarified that the origination model is unchanged, with CIBC as lead or sole bank on over 75% of its loans, and that infrastructure builds are focused on client experience and regulatory compliance.

Darko Mihelic asked Aris Bogdaneris about the expected strength in Canadian banking's fee revenue for 2026, specifically inquiring about the contribution and forecast for private equity gains, including their annual size and source. He then directed a question to Travis MacHen and Phil Thomas regarding Scotiabank's on-balance sheet and off-balance sheet exposure to private credit, and what losses for this business would look like in a stress test scenario.

Answer

Raj Viswanathan (CFO) clarified that private equity gains were over CAD 30 million in Q1 and over CAD 10 million this quarter, primarily from the Roynat business, but are hard to forecast and unlikely to reach CAD 50 million in 2026. Aris Bogdaneris (Group Head of Canadian Banking) outlined four key fee components for acceleration in F 2026: mutual fund fees, card fees (repositioning to premium cards), insurance, and cash management in commercial/small business, expecting close to double-digit fee growth. Travis MacHen (Global Banking and Markets) stated CAD 31 billion in non-bank financials loans, with half in private credit (further split into subscription finance and CLO business), all highly rated (A to A-plus/double A). Scott Thomson (President and CEO) clarified that the other half of the non-bank financials exposure consists of traditional insurance companies, pension funds, and other highly rated holding companies. Phil Thomas (Chief Risk Officer) confirmed rigorous stress tests, indicating that even in extreme scenarios, projected losses in this book would remain a fraction of the net revenue generated.

Darko Mihalic inquired about Scotiabank's Canadian banking fee revenue outlook for 2026, specifically the contribution and future expectations for private equity gains, and sought details on the bank's exposure to private credit and its resilience under stress tests.

Answer

CFO Raj Viswanathan provided figures for private equity gains, noting their unpredictability. Group Head of Canadian Banking Aris Bogdaneris outlined four key fee drivers for Canadian banking: mutual fund, card, insurance, and cash management. Group Head of Global Banking and Markets Travis MacHen detailed CAD 31 billion in non-bank financial loans, with half in highly-rated private credit. Chief Risk Officer Phil Thomas confirmed rigorous stress tests show minimal losses even in extreme scenarios.

Darko Mihelic from RBC Capital Markets asked for the magnitude of the client deselection program in International Banking and whether the decline in investment-grade commercial loans signaled a strategic shift.

Answer

Francisco Aristeguieta, Group Head of International Banking, explained that the client deselection process is largely complete and that 2026 will be a 'pivot to growth' year. He clarified the loan mix change was not a shift to non-investment grade but a disciplined effort to improve returns and deepen wallet share, supported by new global transaction banking capabilities.

Darko Mihelic questioned the drivers of Scotiabank's Canadian asset growth, noting strong mortgage growth but weakness elsewhere relative to peers. He also asked about specific strategies to improve the mix of demand deposits versus term deposits, where the bank has historically lagged.

Answer

Aris Bogdaneris (Canadian Banking) attributed the loan growth trends to market dynamics, stating the bank is not chasing volume and remains disciplined on margins. He detailed a multi-pronged strategy to grow core deposits, including frontline incentives, marketing, digital product improvements, and leveraging the Mortgage+ bundle to capture day-to-day accounts. Scott Thomson (CEO) added that improving the business mix in Canada is a key priority and that the mortgage growth reflects a large renewal cohort from 2022.

Darko Mihelic asked about the drivers of Canadian loan growth, noting the divergence between strong mortgage growth and weakness in other categories. He also questioned the strategy to improve the mix of demand deposits versus term deposits.

Answer

Aris Bogdaneris, Head of Canadian Banking, attributed strong mortgage growth to high renewal retention from a large upcoming cohort, while noting weaker demand in other lending categories was market-driven, not a strategic pivot. He detailed an end-to-end strategy to grow core deposits through frontline incentives, marketing, and product enhancements. Scott Thomson, CEO, added that the overall business mix is improving, citing strong growth in cards and small business over the last eight quarters.

Darko Mihelic questioned the size of the Stage 2 provision build, asking why the bank didn't build a larger reserve given the uncertainty, perhaps by applying a more pessimistic scenario weighting.

Answer

Chief Risk Officer Philip Thomas explained that the bank was limited by accounting rules to what was known as of January 31st. The build of just under $100 million reflected modest tariff assumptions. He noted that 95% of this build was Stage 2 and a more significant adjustment would be made in the quarter that tariffs are finalized and become certain.

Darko Mihelic asked Francisco Aristeguieta about the progress of client deselection in International Banking and the potential for future revenue pressure from further dispositions.

Answer

Francisco Aristeguieta, Head of International Banking, explained that the strategy is driven by profitability and returns, which involves both targeting high-value clients and improving efficiency. He stated that revenue growth in the 6-7% range is sustainable, supported by strong expense control. He confirmed the repositioning is not complete and they will continue to redeploy capital from underperforming assets if required returns are not achievable.

Darko Mihelic asked about the noise in the corporate segment, specifically a negative CSM, and how to model this business unit going forward. He also inquired about the Asia agent count, whether it's declining, its impact on sales power, and the expected earnings drag from the India build-out over the next couple of years.

Answer

Colin Simpson, CFO, explained that the corporate segment's noise was largely due to a withholding tax accrual release related to the Comvest acquisition. He expects a future result of $300 million-$400 million, reflecting central product investments, and clarified the negative CSM is an intercompany settlement related to the Coley product, not a focus area. Steve Finch, President and CEO of Manulife Asia, stated the focus is on high-quality, professional agency, not just agent numbers, noting significant growth in APE and NBV per active agent. He highlighted investments in training, development, and AI tools. Phil Witherington, President and CEO, added that the capital cost for India is expected to be around $400 million over the next decade, with $140 million-$150 million in the first five years, but no specific earnings drag projections are available yet.

Darko Mihelic asked about the corporate segment, specifically addressing noise, a negative CSM, and how to model this business unit going forward. He also inquired about the declining agent count in Asia, its impact on sales power, and the expected earnings drag from the India build-out over the next couple of years.

Answer

Colin Simpson, CFO, explained the corporate segment's noise was largely due to a withholding tax accrual release, expecting a $300-$400 million result going forward. Steve Finch, President and CEO of Manulife Asia, stated the focus is on high-quality agency, with APE and NBV per active agent growing significantly. Phil Witherington, President and CEO, added that the capital cost for India over the next decade is expected to be around $400 million.

Darko Mihelic followed up on the medical stop loss business, asking if Sun Life is still targeting a 7% return and if, with a hardening market, the company expects to gain market share in 2026. He also sought clarification on whether the reserving this quarter, based on 30% claims experience, differed from the 50% reports typically received by this time of year.

Answer

David Healy, President of Sun Life U.S., stated that the group benefits after-tax margin was 6.9%, slightly below the 7%+ target, and that they price for a higher margin in medical stop loss. Kevin Strain, President and CEO, clarified that Sun Life will maintain pricing discipline, expecting to keep its scale and competitive position, but market share will depend on competitors' actions. David Healy explained that stop loss is an accumulation product with reserves held for 26 months, and while 30% of claims are seen by Q3, another 30% are expected in Q4 and Q1.

Darko Mihelic followed up on stop loss, asking if the targeted 7% return is still applicable and if Sun Life expects to gain market share in 2026 amidst a hardening market. He also sought clarification on whether the Q3 stop loss reserving, based on 30% claims experience, differed from typical 50% reports by this time of year.

Answer

David Healy, President of Sun Life U.S., stated that the group benefits after-tax margin was 6.9%, slightly below the 7%+ target, and they price for a higher margin in medical stop loss. Kevin Strain, President and CEO, clarified that Sun Life is holding its pricing discipline, and while others face high loss ratios, Sun Life's scale and risk selection capabilities position it to maintain scale, not necessarily gain share, but remain competitive. David Healy clarified that for the accumulation product, 30% of claims are typically seen by Q3, with another 30% in Q4.

Darko Mihelic of RBC Capital Markets asked if key metrics like CSM and AUM trends signal slower future EPS growth for Sun Life relative to peers, and whether this would require increased share buyback activity.

Answer

President & CEO Kevin Strain disagreed with the premise of slowing growth, stating the company is on track to meet its medium-term objectives, including 10% EPS growth. He highlighted strong momentum in Asia, Canada, and SLC, and pointed to robust year-to-date growth in sales and flows. He affirmed that the company's strong capital position provides flexibility for both buybacks and growth initiatives.

Darko Mihelic of RBC Capital Markets asked for a high-level perspective on whether slower CSM growth and AUM trends relative to peers signal slower future EPS growth for Sun Life, and if this would require more share buybacks.

Answer

President & CEO Kevin Strain disagreed with the premise, stating the company is on track to meet its medium-term objectives, including 10%+ EPS growth. He highlighted strong momentum in Asia, Canada, and SLC Management, and noted the business mix, with its large group and asset management components, means CSM is not the only key driver. He pointed to strong year-to-date growth in sales and new business CSM and reaffirmed the company's commitment to its active buyback program, supported by a strong capital position.

Darko Mihelic sought to reconfirm the USD 100 million underlying earnings target for the dental business in 2025. He also asked if the 14% stop-loss price increases were leading to customer losses.

Answer

Daniel Fishbein (executive) confirmed the USD 100 million dental earnings target for 2025 remains in place. He stated that despite the price increases, the stop-loss book of business grew by about 5% as of January 1, which, while smaller than in recent years, was a pleasing result given the responsible pricing approach.

Darko Mihelic from RBC Capital Markets sought to clarify the conditions under which the $600 million performing reserve for trade uncertainty would be released, asking if outcomes like the USMCA being unchanged would trigger a release.

Answer

Ajai Bambawale, Chief Risk Officer, confirmed that was the correct way to view it. If tariffs are lower than the bank's assumptions, reserves would be reassessed for a potential release. He also noted that if the credit migration occurs as modeled, the reserves will be drawn down to cover it, and he expects impaired PCLs to rise gradually as a result.

Darko Mihelic from RBC Capital Markets sought to understand the specific triggers for a potential release of the $600 million credit reserve, asking if outcomes like an unchanged USMCA or tariffs matching European levels would be sufficient.

Answer

Chief Risk Officer Ajai Bambawale confirmed that was the correct framework. A release would be considered if tariffs are lower than assumed, while higher tariffs would require a larger reserve. He emphasized that if credit migration occurs as anticipated, the existing reserve will be utilized, and he expects impaired PCLs to rise gradually from current levels.

Darko Mihelic from RBC Capital Markets questioned the drivers of the performing credit reserve build, noting it seemed small relative to negative shifts in GDP and housing forecasts, and asked for a better definition of the 'migration risk' assessed for tariff-sensitive loans.

Answer

CRO Ajai Bambawale explained the $500M reserve build was a combination of updated macro forecasts and a judgmental overlay, and that the bank feels well-reserved. CFO Kelvin Tran noted immigration policy constrains unemployment projections. Ajai Bambawale clarified 'migration' refers to assessing the potential credit rating downgrade of individual borrowers within exposed industries.

Darko Mihelic questioned the sustainability of the high 500 basis points of operating leverage in Canadian P&C, suggesting it might indicate excessive short-term expense cuts that could require future reinvestment. He asked for the long-term operating leverage target for the business.

Answer

Raymond Chun, Group Head of Canadian Personal Banking, explained the strong leverage is driven by sustainable productivity gains, such as optimizing the staff mix in branches from service to advisory roles in response to lower transaction volumes, while still investing in digital and risk. CEO Bharat Masrani added that strong revenue momentum is a key factor and that while there's no specific target, the goal is to continue delivering good positive operating leverage.

Darko Mihelic asked for a description of BMO's exposure to tariff-sensitive industries and questioned why this detail was not included in the investor presentation.

Answer

CRO Piyush Agrawal explained that the portfolio is well-diversified. He noted that higher-risk sectors like agriculture and auto manufacturing represent about 6% of the portfolio, but the higher-risk individual files within those sectors constitute only about 1% of total exposure. He identified manufacturing as the largest component of this risk, affecting clients in both Canada and the U.S.

Darko Mihelic from RBC Capital Markets asked for a description of BMO's exposure to tariff-related industries and questioned why this detail was not included in the presentation deck.

Answer

CRO Piyush Agrawal explained that the bank's portfolio is well-diversified. He noted that higher-risk sectors like agriculture, auto manufacturing, and lumber constitute about 6% of the portfolio, but the truly higher-risk individual files within those sectors represent only about 1% of total exposure. The manufacturing sector was identified as the most impacted due to its low margins and supply chain sensitivity.

Darko Mihelic was in the queue to ask a question but indicated that his query had already been addressed by previous analysts.

Answer

No answer was provided as the analyst's question was previously asked and answered during the call.

Darko Mihelic of RBC Capital Markets questioned the persistent negative organic movement in the Contractual Service Margin (CSM), particularly in Canada, and asked for guidance on how to model its trajectory given recent assumption changes.

Answer

CFO Jon Nielsen addressed the question, explaining that the Q3 assumption changes strengthened the CSM in Europe and CRS but resulted in lower CSM and subsequent amortization in Canada. He stated that the company feels good about its overall assumptions post-reset, noting positive trends in most businesses and that the minor noise in Canada in Q4 does not give them pause.