Canadian Imperial Bank of Commerce - Earnings Call - Q2 2025

Transcript

Operator (participant)

Morning. Welcome to the CIBC Q2 quarterly results conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Geoff Weiss, Senior Vice President, Investor Relations. Please go ahead, Geoff.

Geoff Weiss (VP of Investor Relations)

Thank you and good morning. We'll begin this morning's presentation with opening remarks from Victor Dodig, our President and Chief Executive Officer, followed by Harry Culham, our Chief Operating Officer, Rob Sedran, 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, Hratch Panossian, Personal and Business Banking Canada, and Susan Rimmer, Commercial Banking and Wealth Management Canada. They are all available to take questions following the prepared remarks. We have a hard stop at 8:30 and would like to give everyone a chance to participate, so we ask that you please limit your questions to one and re-queue in the Q&A. We'll make ourselves available after the call for any follow-ups.

As noted on slide two 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. I would also remind listeners that the bank uses non-GAAP financial measures to arrive at adjusted results. Management measures performance on a reported and adjusted basis and considers both to be useful in assessing underlying business performance. With that, I will now turn the call over to Victor.

Victor Dodig (President and CEO)

Thanks, Geoff, and good morning, everyone. I'm pleased to report that we delivered strong results and continued our momentum in the second quarter. Our performance reaffirms that our strategy is working. Our resilience through heightened uncertainty showcases the depth of our client relationships, our credit quality, and the strength of our balance sheet. Before I turn to our second quarter performance, I'd like to make a brief comment on the leadership announcements we made on March 13th. As you know, I'll be retiring as CEO of our bank at the end of our first fiscal year. It's been an incredible journey over the past 10+ years, and I'm proud of what we've accomplished together across our CIBC team. I'm also proud and excited to be passing the baton to Harry Culham, the result of a thoughtful and multi-year succession planning process.

As part of the transition, Harry was named Chief Operating Officer and will assume the role of President and CEO on November the 1st. His global experience, growth-oriented mindset, and track record for delivering results make him the ideal person to lead CIBC into the future. I look forward to working closely with Harry and our leadership team to ensure a smooth transition over the next several months. Before I continue with our second quarter highlights, I'd like to invite Harry to make a few comments. Over to you, Harry.

Harry Culham (COO)

Thank you, Victor. Good morning, everyone. Let me start by expressing how honored I am to be taking on the role of President and CEO of CIBC. I would just like to take a moment to recognize Victor for his dedication and positive influence on our bank, his support over the years, and his continued leadership through this transition. We will continue to operate with the hallmarks his leadership has instilled over the past decade, including the relentless client focus, connected and purpose-led culture, and consistent execution to deliver results for all of our stakeholders. Over the last few months, I've spent a lot of time meeting with our broader CIBC team and our clients and other stakeholders to gather perspectives. My takeaways reinforce my belief that we have something special. Our team members are proud, our partnerships are strong, and our clients value our differentiated advice.

I'm also excited about the opportunity to work alongside our exceptional leadership team, each of whom has had a hand in crafting and executing the client-focused strategy that is driving our success. Today, we will continue to build on our momentum and drive CIBC to new heights. I will turn it back to you, Victor.

Victor Dodig (President and CEO)

Okay, thanks, Harry. Over to our performance. Slide four, turning to our adjusted second quarter results, we delivered net income of CAD 2 billion and earnings per share of CAD 2.05, both up 17% from the prior year. Pre-provision pretax earnings were up 19%, supported by broad-based growth across all of our operating units and another strong quarter of operating leverage. Credit remains resilient while we continue to closely monitor and stress-test our portfolios for a range of scenarios. Our return on equity was 13.9%, which is up 50 basis points year over year, coupled with a healthy CET1 ratio of 13.4%. We repurchased 6 million common shares during the quarter and continue to maintain flexibility to drive organic growth.

We delivered these results in a challenging environment, and while we can't predict where the ongoing discussions around trade policy will ultimately land, we have the confidence in our strategy and the balance sheet to support our clients. It is in this type of environment where our clients turn to us for guidance to help keep their ambitions on track. Earlier this week, our bank received the Forrester Customer Obsessed Enterprise Award for North America, which recognizes organizations that place their clients at the center of their leadership, strategy, and operations. This is, in effect, who CIBC is. With our client-centric focus, we're meaningfully advancing our four strategic priorities. First, we're growing our mass affluent and private wealth franchise. In Imperial Service, more Canadians are recognizing the benefit of working with a dedicated advisor to help them reach their financial goals.

Our clients are rewarding our personalized experience with higher Imperial Service net promoter scores, which reached another all-time high during the quarter. Second, we are expanding our digital-first personal banking capabilities. Many of our clients are increasingly looking for seamless digital experiences to respond to rapidly evolving market conditions. We are also tailoring our products and solutions to meet our clients' needs. This quarter, we launched the CIBC Adapta Mastercard, delivering flexibility to cardholders to earn bonus points on their personal top three spend categories each month. Third, we are bringing all of CIBC to bear for our clients through our connected platform and team. In Canada, 32% of our commercial clients have a CIBC private wealth relationship. In the U.S., that number is now 20%. Both metrics have increased from the prior year and demonstrate our franchising progress and demonstrate our connected culture.

Our US footprint continues to expand across our bank as well, including US Region Capital Markets revenue, which is up 37% from the prior year. Finally, our fourth strategic priority is to enable, to simplify, and to protect our bank. We are looking to continue to drive efficiencies, operational resilience, and improve the experience for both our clients and our employees. Our technology investments are paying off, including our CIBC AI platform, which has saved our team members an estimated 200,000 hours during a successful pilot and is now rolling out across our entire organization. We are building our AI capabilities on a strong foundation of governance and transparency. Earlier this year, CIBC became the first major Canadian bank to sign the Government of Canada's Voluntary Code of Conduct for generative artificial intelligence. In closing, our second quarter performance demonstrated continued momentum and continued consistency amid a volatile backdrop.

We delivered robust top-line growth and strong operating leverage while ensuring that our defensive attributes remain best in class, including prudent credit reserves and a robust balance sheet. As the economic environment continues to evolve, we will do what we have always done. We will stay close to our clients and communicate transparently with our shareholders. Our strategy and diversified platform put us in a position to outperform in a wide range of outcomes. With that, I will turn it over to my colleague, Rob Sedran, for a review of our financial results. Over to you, Rob.

Rob Sedran (CFO)

Thank you, Victor, and good morning, everyone. Let me start with three takeaways from our results. First, revenue growth was strong, with each business unit performing well, reflecting the consistent execution of our client-focused strategy across our bank. Second, even with more than 4% operating leverage this quarter, we continue to invest to develop competitive differentiators that drive sustainable long-term stakeholder value. Third, we repurchased 6 million shares during the quarter, and both capital and liquidity remained strong, which positions us to support our clients and execute our strategy against an uncertain operating environment. Please turn to slide eight. Earnings per share were CAD 2.04 for the second quarter of 2025, or CAD 2.05 on an adjusted basis, and adjusted ROE was 13.9%. As I noted, our balance sheet remains strong, with ratios that are well above normal course operating targets. Let's move on to a detailed review of our performance.

I'm on slide nine. Adjusted net income of CAD 2 billion increased 17%, supported by strong performance across all business units. Pre-provision pretax earnings were up 19%, and revenues were up 14%, driven by strong trading activity, expanding margins, volume growth, and higher fee income. We also continue to manage expenses relative to revenues, delivering 430 basis points of operating leverage. Total provisions for credit losses were up 18% from a year ago, largely driven by higher performing provisions, reflecting the uncertainty in the macroeconomic outlook. Impaired losses remain within our previous guidance range. Frank will discuss credit in detail in his presentation. Slide 10 highlights key drivers of net interest income. Excluding trading, NII was up 16%, driven by continued balance sheet growth and expanding margins. All bank margin ex-trading was up 16 basis points from the prior year and down 1 basis point sequentially.

Canadian P&C NIM of 273 basis points was up 1 basis point. We continue to expect our all bank and P&C margins to be stable to gradually higher based on the current forward curve. In the U.S. segment, NIM of 372 basis points was down 6 basis points from the prior quarter, driven by normalization of our loan margins, partly offset by ongoing strength in deposits. We expect margins in the U.S. to normalize to the 365-370 basis point range, subject to the evolution of our business mix. Turning to slide 11, non-interest income of CAD 3.2 billion was up 12% from the prior year amid growth in trading, as well as higher market-sensitive revenues that drove a 21% increase in market-related fees. Transaction-related fees were down 15%, mainly due to the revenue-neutral impact of benchmark reform, lower card, and FX fees.

Slide 12 highlights our ongoing balanced approach to expense management. Excluding performance-based compensation linked to the strong revenues, expenses grew 6%, as investments and the impact of FX were partly offset by the benefits of prior initiatives to improve efficiency and deliver a better experience for our clients and our team. We continue to invest to harden and protect our bank, modernizing our infrastructure and simplifying our processes. We expect to deliver positive operating leverage on a full-year basis and to manage expense growth to the mid-single digits for the balance of fiscal 2025. Slide 13 highlights the strength of our balance sheet. Our CET1 ratio ended the quarter at 13.4% and was down 10 basis points sequentially. Solid organic capital generation was more than offset by the ongoing share buyback program, from which we have now repurchased 14.5 million shares.

During the quarter, we returned CAD 1.4 billion in capital to our shareholders, including roughly CAD 500 million of share repurchases. Our liquidity position remains strong, with an average LCR of 131%. Starting on slide 14, with personal and business banking, we highlight our strategic business unit results. Adjusted net income increased 4% due to higher revenue growth, partially offset by higher expenses and a higher total provision for credit losses. Supported by core business momentum, pre-provision pretax earnings were up 11%, as our client-focused strategy continues to deliver results. Revenues were up 8%, helped by volume growth on both sides of the balance sheet and a 23 basis point increase in the net interest margin. Our strategic investments, including in our exclusive partnerships, are driving client acquisition in our targeted segments, adding over 500,000 net new personal clients over the last 12 months.

We also continue to drive growth by deepening relationships with existing clients through personalized advice and offers. Expenses were up 5% due to investments in strategic initiatives and in our team. Many of these investments are streamlining our operations and enhancing both client and team member experiences, driving record net promoter and team engagement scores. On slide 15, we show Canadian commercial banking and wealth management, where net income and pre-provision pretax earnings were up 13% and 14% from a year ago, respectively. Revenues were up 13% from last year. Wealth management growth was driven by higher average fee-based assets on both increased client activity and market appreciation, despite the market slowdown in Q2. Commercial banking revenues were up 12%, driven by robust volume growth. We continue to focus on referrals within our business, as well as strengthening our partnerships and connectivity across our bank.

Expenses increased 11% from a year ago, mainly from higher compensation linked to the strong wealth management revenues. Across commercial banking and wealth management, we have been modernizing our processes and technology while maintaining our commitment to client relationships, advice, and credit discipline. Additional details on Canadian P&C are in the appendix. Turning to U.S. commercial banking and wealth management on slide 16. Net income of $125 million was up $46 million, or 58% from the prior year, mainly from lower loan loss provisions and a 10% increase in pre-provision pretax earnings. Revenues were up 10% from last year. Deposit growth of 15% and loan growth of 4% resulted in higher net interest income, while most fee categories increased as we continue to deepen our client relationships. Expenses were also up 10%, with the increase largely related to employee compensation.

We remain committed to our three key strategic priorities in this segment: expanding private wealth management with a focus on high-touch relationships and building scale, growing commercial banking by delivering industry expertise and unique solutions, and investing in technology and infrastructure to scale our platform, drive connectivity, and improve resilience. Turning to slide 17 and our capital markets segment, net income was up 34% year over year. Revenues of CAD 1.5 billion were up 32%, driven by strong results across the capital markets platform. We had strong performance in all global markets businesses, which saw increased client activity on the back of higher volatility. Solid corporate and investment banking revenues benefited from higher volumes and margins in corporate banking and higher debt underwriting activity in investment banking. We are leveraging our investments to deliver a differentiated, cross-border, and highly connected platform.

Our capital markets segment is a well-diversified business with a growing presence in the United States that contributed 37% of segment revenue this quarter. Expenses were up 23%, largely due to higher performance-based and employee-related compensation, continued investments in growth initiatives, and higher volume-driven expenses. Slide 18 reflects the results of the corporate and other business unit. Net loss of CAD 15 million compares with the net loss of CAD 9 million in the prior year and is inside the range we project for this segment of a loss of between CAD 0 and CAD 50 million. In closing, we delivered another quarter of strong results. While there continues to be an increased level of volatility in the operating environment, owing particularly to trade-related uncertainty, our results have been built upon a resilient and consistent strategy: the strength of our balance sheet, our diversified business mix, our disciplined resource allocation, and our team.

As always, we focus on the things we can control to deliver profitable growth. With that, I'll turn it over to Frank.

Frank Guse (Chief Risk Officer)

Thank you, Rob, and good morning, everyone. Our credit performance in Q2 was strong and continues to trend at the lower end of our guidance, despite the ongoing uncertainty in the global economy. While the macro environment continues to evolve, we are actively monitoring our portfolios and maintaining close relationships with our clients to effectively navigate through the uncertainties. We continue to build on our already strong allowance this quarter, with coverage that positions us well to manage potential risks or challenges ahead. Turning to slide 22, our total provision for credit losses was CAD 605 million in Q2, compared to CAD 573 million last quarter. Our allowance coverage increased quarter over quarter by one basis point to 77 basis points. In year to date, our allowance is up by CAD 341 million, or 8%.

Our performing provision was CAD 142 million this quarter, driven by an unfavorable change in our overall economic outlook, including an increase in uncertainties related to the trade environment, partially offset by a release driven by portfolio movements. Our provision on impaired loans was CAD 463 million, up CAD 17 million quarter over quarter. This was due to higher provisions in the Canadian personal and business banking and Canadian commercial banking portfolios, partially offset by lower provisions in Capital Markets, US commercial, and CIBC Caribbean. Turning to slide 23, overall Q2 portfolio performance remained in line with our expectations, with our impaired provisions ratio increasing slightly this quarter to 33 basis points. Consistent with our prior guidance, personal and business banking impaired PCL trended up, mainly due to higher write-offs and an allowance increase for impaired balances.

In Canadian commercial, we saw an increase in impaired provisions, driven by a small number of new impairments across unrelated sectors. We continue to see no systemic risk in any specific sector. Our capital markets portfolio continues to perform well, with solid results in Q2. In U.S. commercial, we saw improved performance again this quarter, mainly attributable to lower provisions in the commercial real estate sector. Slide 24 summarizes our gross impaired loans and formations. Our gross impaired loan ratio was flat at 57 basis points, with a modest increase in retail, offset by a decrease in our business and government loans. While mortgages experienced a slight increase this quarter, the current loan-to-value ratios for impaired balances remain low at approximately 60%, and we do not expect any material increase in net write-offs.

In addition, new formations in the portfolio trended lower in Q2, attributable to both retail and business and government lending. Slide 25 summarizes the net write-offs and 90+ day delinquency rates of our Canadian consumer portfolios. Our credit card and personal lending write-offs trended higher quarter over quarter, which continued to be impacted by elevated unemployment rates, along with some seasonality this quarter. In our mortgage portfolio, there was a slight increase in 90+ day delinquencies. We do not expect meaningful losses, given the strong average loan-to-value in the book. We remain comfortable with the overall strength of our Canadian consumer portfolios. In closing, despite the economic challenges, our impaired losses continue to be at the low end of our guidance, supported by the strong performance of our credit portfolios.

We will continue to monitor the developments surrounding trade policy and other macroeconomic changes, while prioritizing our efforts to assist clients in navigating through the ongoing headwinds. We are pleased with our strong performance in the first half of the year and remain comfortable with our full-year guidance on impaired losses. I will now ask the operator to open the line for questions.

Operator (participant)

Thank you. Please press one at this time if you have a question. Our first question is from Matthew Lee Canaccord Genuity? Please go ahead.

Matthew Lee (Analyst)

Good morning. Thanks for taking my questions. The performing PCL you put through in the quarter on a basis points basis looks a little lighter than the peer group. I wanted to dig in a bit on your assumptions: 1% Canadian GDP growth, 7% unemployment. I think data coming out recently suggests that that forecast might be a bit optimistic. Do you think that your expert credit judgment overlay kind of prepares CIBC for a more challenging environment, or could we see more performing builds if those assumptions change?

Victor Dodig (President and CEO)

Yeah, Mathew, thank you for your question. I think you are highlighting a couple of elements that go into our performing allowance on top of the PUI FLI forecast that you see in the disclosures. One is the scenario weighting, so how much a weight is being put on the base case versus the downside versus the upside case. In addition, of course, in times like this, with a lot of uncertainty, expert credit judgment does play a meaningful role. I would not necessarily expect any changes to those FLIs, translating one-to-one into changes in our allowances, because we did reflect some of that uncertainty through our expert credit judgment.

Matthew Lee (Analyst)

Okay, that's helpful. Maybe if I could sneak one more in. On the CIBC side, I think CIBC was the only bank that really showed progress there. I might have missed it, but was there any single large deal in the quarter that drove that? Should we be thinking about CIBC's investment banking team as positioned any differently than any of the Canadian peer group in general?

Harry Culham (COO)

Hi, good morning. It's Harry. I'll take that question. The first thing I'd say is we are seeing very strong growth across all of the different businesses that we have under the capital markets umbrella. It really is part of that long-term strategy, where we're building a North American platform. We are seeing it north of the border, south of the border, in a very diversified manner. I think this is a good example of our franchise in action, as we see elevated activity on the back of volatile or uncertain markets or times where our clients really rely on our advice and execution. You are seeing the results of that deep client focus that we've had for many years and a consistent strategy.

I do not think where we are different is we are not trying to be all things to all people, but we are very focused on building deep relationships with our clients, and they rely on us in these times. We target the 7%-10% target that we put out at Investor Day several years ago. We have been achieving at the high end of that, of course, for the recent past.

Matthew Lee (Analyst)

All right, that's helpful. I'll pass the line. Thanks, guys.

Operator (participant)

Thank you. The following question is from John Aken from Jefferies. Please go ahead.

John Akin (Analyst)

Good morning. Rob, as you're pretty well aware from your former life on the south side, that strong results usually beg questions. I'm focusing in in terms of the success that you've had on your operating leverage. Basically, what I'd like to hear from you is where we stand in terms of the momentum that had been built up from the previous cost-cutting regime and what the outlook is moving forward. I know you gave us the mid-single-digit expense growth for the second half of the year, but I would like to hear where you think that you are in terms of what inning are you in in terms of the previous cost-cutting initiatives, and then how replicable is that on a go-forward basis based on the investments that you've been making to date?

Rob Sedran (CFO)

Thanks, John. Good morning. You know, I guess I would phrase it a little bit differently in terms of how we think about operating leverage and how we think about efficiency. It's kind of an always-on approach. We aim for some big rocks from an efficiency perspective, but even more importantly, we try to get the entire organization looking through to find the small rocks in terms of efficiency opportunities as well. We don't feel like we're on a program that has an expiration date or that is going to be tailing off. This is just built into the way we plan. The planning posture we tend to take is we don't plan for double-digit revenue growth and therefore double-digit expense growth.

We try to moderate both so that if the revenue environment turns out to be better, we can let some rope in and let some expense growth and some of the investments accelerate. The efficiencies that we have that we're recognizing, we expect to continue to recognize them. We plan for annual operating leverage. That does not mean we're—and we target it quarterly. It does not mean we're going to deliver it quarterly, but we're comfortable with the annual operating leverage posture that we have. Like I said, there's not an expiration date to the programs that we're on.

Victor Dodig (President and CEO)

John, if I can just build on Rob's comment, which was exceptional, given that you've played both sides of the market in terms of the south side now being our CFO, the results that we have is a reflection of what we've been doing over the past decade. We've been transforming the base foundational technology of our bank. We've been transforming the user experience at the front end of our bank. I think the next iteration of efficiency is going to come from embracing data, embracing artificial intelligence, embracing how that can actually transform and, quite frankly, make life more pleasant for our employees and for our clients. That, I think, you'll see in every single business, and I think it'll be reflected in our financial results as well.

It's just part of a plan that we've had, a plan that we have going forward, and I'm very confident about how we can repurpose our legacy costs and reinvest it for future growth in our business.

John Akin (Analyst)

Thanks, guys. I'll reach you.

Operator (participant)

Thank you. The following question is from Ebrahim Poonawala, Bank of America. Please go ahead.

Ebrahim Poonawala (Analyst)

Hey, good morning. I guess maybe, Frank, following up with you, I guess you reiterated comfort in your impaired PCL guidance. You have taken the reserve builds for the last couple of quarters. Just talk to us in terms of what you are seeing in terms of the ground reality, Canadian consumer, Canadian businesses, how much stress is on them, and how that informs the visibility that you have on credit. What gives you confidence that three months from now, things may not look much worse on impaired PCL outlook than what you think, how you are thinking about it today? Thanks.

Frank Guse (Chief Risk Officer)

Yeah, and thank you for the question, Ebrahim. I mean, everything I said is built on a very thorough assessment of the portfolio. Even if you look into our disclosures, one leading indicator a little bit could be our delinquency rates. While we did see a little bit of an increase in net write-offs on the PBB side, we did see delinquency rates come down in Q2. There is always a little bit of seasonality in the Q2 numbers. Overall, we feel very confident and comfortable with the credit quality. As I said, a lot of analysis and a lot of different angles of how we are looking at it is going into, of course, our guidance and our commentary. I would take a look at the delinquency rates that we disclosed and them coming down.

That should give us some comfort of what we are seeing in the portfolio.

Ebrahim Poonawala (Analyst)

Got it. I guess, again, tied to that, maybe, Victor, for you, you've been very vocal in terms of policies the administration should take to kind of get Canada's Canadian economy going. Just give us a view of your optimism around that, and should you expect proof points on that over the next 3, 6, 12 months? How should we think about that as we think about how the banks could grow over the next year? Thanks.

Victor Dodig (President and CEO)

Predicting the economy is one thing. Predicting politics is another. Although I will say that I do think that in the region that we primarily operate in, there is a bias to economic growth. In Canada specifically, I think that the government that has come in place is looking to do that through interprovincial trade barriers being dropped, through incentives on the housing front, by getting Canada's natural resources to market. I do think that there are two areas that I would encourage them to focus on to drive further growth, aside from those three policies, and actually getting to a better place with our trading partner, the United States and Mexico, and reigniting CUSMA 2.0.

One is, can we put policies in place to actually develop a base of more risk capital in the country to make sure that we can deliver growth in a diversified set of industries beyond the family business, which are natural resources and agriculture, beyond housing, and into technology, into healthcare, into a diversified manufacturing base? I think there is plenty of capital in the country. I think some incentives need to be developed for not only our pension plans, but also affluent Canadian investors to help make sure that economic base is diversified. The second thing I would ask them to think about is doing something for young people.

Young people may be thinking about how you can raise the tax exemption threshold for young people so they can actually generate more income if it's tied to savings and putting money into TFSAs, RRSPs, and first-time home buyer plans and helping them achieve the dream of homeownership through their hard work and effort over time. I believe that over time, we will have some sort of detente on the trade front. The strongest economic region in the world today is the North American region. I think governments are increasingly recognizing that. It will look different than it did late last year going forward, but I still think that there'll be an integrated approach to economic growth across three countries.

Ebrahim Poonawala (Analyst)

Thank you.

Operator (participant)

Thank you. The following question is from Gabriel Dechaine, National Bank Financial. Please go ahead.

Gabriel Dechaine (Analyst)

Hey, good morning. Victor, I guess you've got the next, you're on the Q3 call, so I'll save my best wishes for then. Just a question for Frank on credits. If I recall correctly, your guidance was for a full-year impaired loss rate of mid-30s and it would rate down over the course of the year. Correct me if I'm wrong there. Regardless, I just wanted to get a sense for if you can prognosticate on peak PCLs. I know that's a term that comes up every now and then, and it seems to have been a moving target the last few years. I'm wondering if we look ahead to 2026, we could have a similar year to this year where the impaired loan losses stay elevated because businesses aren't hiring today. They're letting people go.

There is just a bit of a lagged effect of what is going on today that could filter into next year.

Frank Guse (Chief Risk Officer)

Yeah. Gabriel, thank you for the question. Again, I would reiterate our guidance, which was in the mid-30s for the full year. It's probably a little bit too early to talk about what 2026 brings. What the rest of the year brings, I mean, speaking about and reiterating our guidance, even being at the lower end, we could expect some moderate increases in Q3 potentially. We expect it to moderate for the latter half or the last quarter of the year in our plans. A lot of that will be driven by the ongoing macroeconomic development, some of the trade uncertainties that we are seeing. Unemployment will continue to be a headwind. Some of the interest rate decisions will be a tailwind. We will see a lot of that play out in the next couple of quarters.

Over time, I think we will see some clarity on the macroeconomic and trade policy front. That will certainly help getting us more comfortable with a 2026 forecast as well.

Gabriel Dechaine (Analyst)

Okay. Mid-30s. I may have misspoke there. Maybe more looked at a different way, these are still good numbers. You're coming in below your guidance. We're seeing in a few other banks where impaired loans are coming down, not going up, which was the expectation. Is it possible that there may have been a cohort of borrowers that was kind of put to the side during the pandemic and then never came back? What we're seeing really is a higher grade overall just by a higher quality borrower overall because of that phenomenon. I don't know if that's a valid theory.

Frank Guse (Chief Risk Officer)

I think what is important to keep in mind is a little bit anchoring us back to our strategy. We are focused on building client relationships. We are focusing on getting to the mass affluent client. I think that's what you're seeing. That's what you're seeing in our business and government portfolio, which is performing exceptionally well. As we said in the past, those portfolios can be episodic. You could see something happening there at some point, but there's nothing systemic going on. We do not see any sectors or areas of particular concern. You also see it in our retail portfolios, which also are performing very, very well. As you said, those are very strong results, and we feel very comfortable with those results.

Gabriel Dechaine (Analyst)

Thank you.

Operator (participant)

Thank you. The following question is from Mike Rizvanovic, Scotiabank. Please go ahead.

Mike Rizvanovic (Analyst)

Hey, good morning. Just a quick numbers question for Rob. I know there's been a lot of good momentum on NIM at the all-bank level. The way I'm looking at it, just to clarify, I'm taking out the trading-related NII from the numerator and trading-related securities from the denominator. I'm not sure if you guys look at it the same way, but I think it had been outperforming quite a bit the last few quarters, and it looks like it was flattish this quarter. I'm wondering if there's any change. Sorry if I missed this in your prepared remarks, but any updates on your view on how the hedging is playing out, and what's your expectations all-bank level going forward?

Rob Sedran (CFO)

Hey, Mike, it's Rob. Good morning. I have been providing guidance over the last few quarters on this line that said flat to gradually higher, and it has only been going higher over the last several quarters. The reason that I always say the flat part when we give the guidance is that from time to time, business mix can play a role as well. That is kind of what we saw this quarter. Even the non-trading securities were up a little bit. It is positive to NII, but not necessarily positive to margin. Just the evolution of our business mix this quarter, you saw the U.S. down slightly, Canadian Commercial and Wealth down slightly. It held back the overall.

The guidance going forward or the view going forward continues to be that given the forward curve, we still expect the benefit of that tractoring strategy, which is, again, intended to deliver what it's delivering, the stable NIM over time. It is delivering that performance. We continue to expect that flat to gradually higher sequentially from here, which, given where the forward curves are, should continue for a bit.

Mike Rizvanovic (Analyst)

That's very helpful. Then a quick one for Hratch, just on the mortgage business. Obviously, a flat result this quarter sequentially, it's not that different from the peers. I'm guessing it might have helped your margin a little bit in the quarter. Just in terms of the revenue contribution, I just want to see if you're comfortable providing a similar type of guidance that you have in the past. I think it's been a couple of years since it was provided. I believe it was somewhere around 17% of your segment's revenue. This goes back a couple of years again. Is that still within the realm of what the mortgage business contributes, not just the spread, but the fees earned around volumes and originations?

Is that still a number we could use as a rough proxy on how much mortgages actually contribute to your top line in the segment?

Hratch Panossian (CFO)

Thank you for the question. Maybe I'll start by taking a bit of a step back. As we've talked about in the past, and it links a bit to Frank's comments and the comments made by Rob, we have a strategy that's focused on our clients and a strategy of building the best relationship-focused bank in the country for retail consumers and small businesses. That's what we're following. We don't have a specific product-based strategy. For us, mortgages are just one of those key products that our consumers need, and we're always going to be there for them. That said, as we're focusing on leading with best-in-class experiences in everyday banking, leadership, and advice across our franchise, and some of the economics, frankly, of the mortgage business, the mortgage business is becoming a smaller and smaller part of the contributors to revenues.

We're focusing more on those deep relationships. As I've said in a few of the calls recently, on mortgages, our approach is very simple. Where we have key relationships with clients, we want to have their mortgage. We want to have a fulsome relationship with clients. It creates a virtuous cycle of us knowing the client better, being able to offer better advice, improving the economics of the relationship for both the client and us. It leads to some of the better risk results that Frank actually touched on. That's what we've been doing on mortgages. If we don't have a relationship with a client, we're always taking an eye to could we have a fulfilling relationship for the client and a profitable relationship for us over time with that client, in which case, again, we'll compete for that business on the mortgage.

Outside of that, we're only looking at the economics of the mortgage. By taking that strategy over time, what has happened is the margins over the last year in the mortgage business have improved by about 25%. The number of mortgages that have other products with us are at an all-time high. The number of single-product mortgage clients is coming down. When you look at the economics of the mortgage business, while they are still strong, it is a much smaller contributor for us today than it is. Going forward, I would see more of the same. I would see us focused on the products that are allowing us to grow high single-digit revenue despite a slower market. That is demand deposits where we're growing double digits. That is cards where we're growing high single digits. That is investments where we've been leading the IFIX tables.

That is how we're going to keep driving our strategy. I would say you could focus less on mortgages going forward, but it still is a key product that if clients need it, we'll be there for them.

Mike Rizvanovic (Analyst)

Thanks for the insight. Again, I just wanted to maybe ask a different way. You mentioned diminishing contribution. Is it significantly different than what it would have been a couple of years ago? The reason I'm asking, just thinking through a downturn on the mortgage side, obviously, tariffs seem to be playing a role and people may be holding back. Maybe there's some pent-up demand that comes in at some point later in the year. Ultimately, it does look like a potential revenue headwind. Can we use that prior guidance as at least a guidepost on what it contributes to your top line? Maybe at a diminished level, a little bit lower.

Hratch Panossian (CFO)

Yeah, absolutely. As I said earlier, it is a lower contributor. Your 17% number today would be significantly higher than where we are. Some of that has been margins. Remember, margins on mortgages in the portfolio have come down significantly. Today, it is a higher percentage of our earnings than it was a year ago. That is because margins on the portfolio are expanding. Margins and volume both play obviously a role in revenue. Today, I would say it is a significantly smaller portion of our revenues. Like I said, margins may go up, but in terms of our focus, I would not expect it to become a materially larger portion over time.

Mike Rizvanovic (Analyst)

Okay. That's super helpful. Thanks for the color.

Operator (participant)

Thank you. Following question is from Sohrab Movahedi. BMO Capital Markets, please go ahead.

Sohrab Movahedi (Analyst)

Thank you, Hratch. If I can just stay with you, can you just talk a little bit more broadly about the margin dynamics between deposit margins and, I guess, asset yields? I think you covered mortgages here, but just more broadly, what are you seeing and what are you expecting?

Hratch Panossian (CFO)

Yeah. Thanks for the question, Sohrab. We have covered this before. I think there are a number of things that are helping margins in our business. Part of it is environment, but part of it is also our strategy. I will start with our strategy. I will not repeat what I just said in the other question, but our strategy is one that leads to, we believe, a more profitable business and a higher margin business. I think you have been seeing that come to bear recently. Even though the balance sheet has been growing on both sides, the balance sheet is slower. We are growing more, and we are gaining share in the areas that we are focused on. Demand deposits, we grew double digits over the last year. On the GIC front, there was a 9% decline in balances on a year-over-year basis. That mix shift is margin accretive.

Part of that is client behavior. Clients coming out of GICs that are paying 5%+ and looking for alternatives when those deals are no longer available on GICs. This is where our advice comes in. When a client has any type of a financial need, we take a step back with the client. We look at the planning that we have done with them. We look at all of their assets. They look at the financial goals and ambitions into the future, and we come up with the right solution for that client. Our team's been doing that. I'm very proud of the way they have managed through some of the changes in market. What that has actually transpired in over the last year, most of those deposits coming out of GICs going into demand or going into our mutual fund sales, which is what is driving the strength there.

We talk a lot about our Imperial Service, but I also have to highlight the success of our personal banking team outside of Imperial Service. Yes, Imperial Service is about twice the volume we get out of the rest of the business, but both parts of our business have been contributing to that growth in demand deposits and growth in investment sales. On the asset side of the business, again, we're focused on margin management and delivering for our clients and on products like mortgages. We've been selective. I think that allowed us to increase margins in the mortgage business itself. The mix is also playing a role with cards and other areas growing faster than mortgages over time. That is what all comes together to lead to margin increase over 20 basis points over the last year, three basis points quarter over quarter.

I think that's going to continue, Sohrab. We expect to see a few basis points a quarter, roughly plus or minus going forward. Some of that is coming from rates, which will be with us for the foreseeable future, but some of that is our strategy, and that will be with us on a continued basis.

Sohrab Movahedi (Analyst)

Thank you.

Operator (participant)

Thank you. The following question is from Mario Mendonca, TD Securities. Please go ahead.

Mario Mendonca (Analyst)

Good morning. This might be best for Rob, maybe Hratch as well, because you just addressed it a moment ago. This tailwind of the tractor's tailwind, which exists for any asset-sensitive bank we're seeing across the group, it appears from if rates were to stay where they are, that that tailwind becomes a headwind by mid-next year and possibly a meaningful headwind by late next year. Is that something you can address, or is that just too fine a point to make on this call?

Rob Sedran (CFO)

Yeah. Hey, Mario, it's Rob. I'll give it a shot. If we want to dig in deeper, we can certainly take it offline. The way we look at the forward curves, we see, and what's been happening of late actually, is a bit of a steepening of that five and ten-year part of the curve. We see this going through 2026 and into 2027 before those lines start to converge. It does not really become a headwind as much as it starts to level off. Hratch talked a lot about product margins, and so business mix and the rest obviously plays a role when we are talking about margin. In terms of that tractoring benefit, it seems to start to level off somewhere into 2027. Again, that is just based on the forward curves.

I'm not really giving you too much CIBC commentary there, but we'd be consistent with that in terms of what we see for our margin as well.

Mario Mendonca (Analyst)

Would you want me to look at the U.S. curves or Canadian? Because on the Canadian, it would look like it does not quite make it to 2027. I can see the comment on the U.S. What would you point me to?

Rob Sedran (CFO)

Yeah, the Canadian. I'm talking mainly about the Canadian curves, but we see it on both. Like I said, we can certainly take it offline if we want to compare notes.

Mario Mendonca (Analyst)

Slightly different question. Frank, over to you. Along the same lines as Gabriel was asking, I think a lot of us on this call spend time looking for correlations. One in particular is what economic growth and unemployment means to loan growth and PCLs. Focusing on PCLs for a moment. It would appear that those long-standing correlations could break down here. I want your view on this. What might cause those long-standing relationships between, call it unemployment or economic growth, and what that means to credit losses? Why might those correlations break down this time? Is it something to do with excess deposits, changing spending behavior, government support, sort of akin to what we saw during COVID? Do you have a view on this, Frank? Could these correlations break down, or are they breaking down?

Frank Guse (Chief Risk Officer)

I would not say we are seeing them break down as of yet. I mean, unemployment is up as are our impaired losses. We continue to expect impaired losses being driven by the unemployment rate. I think a lot of the elements you mentioned, changes to employment insurance, other forms of economic stimulus, some of the excess deposits that we continue to see with our clients, are slightly changing the correlations. I would not necessarily say they are breaking down the correlations. Unemployment will continue to be a big driver for our loan loss expectations on the retail side, for sure. We continue to see that. I think there are a couple of dampening or slightly lowering the correlations factors. As you said, it is excess deposits. It is some of the economic stimulus. It is some of the changes we are seeing to programs.

Mario Mendonca (Analyst)

I guess the bottom line is use the correlations, but do it with some care and some judgment because they're not perfect.

Rob Sedran (CFO)

Yeah, I agree.

Mario Mendonca (Analyst)

Thank you.

Operator (participant)

Thank you. The following question is from Lemar Persaud, Cormark Securities. Please go ahead.

Lemar Persaud (Analyst)

Yeah, thanks. Maybe for Rob or Victor, can you give us some kind of refreshed thoughts on the deployment of capital? What's the targeted CET1 ratio in this uncertain macroeconomic environment? Your appetite to continue along the buyback path and views on, I guess, potential tuck-in M&A?

Victor Dodig (President and CEO)

Sure. Thanks for the question, Lemar. Let me start, and then I'll pass it on to Rob for the further subtleties. We've always had the four-pronged approach to capital. We've been working to have a robust capital level so that we can activate all four levers when needed. The first primary one is obviously dividend and dividend growth, which we do once a year in line with our earnings expectations. The second is to grow organically. Our business is to help our clients grow. That's what we really want to do day in and day out. You've seen some more muted loan growth as we go through the trade policy uncertainty, which I think once gets settled, you'll see that pick up. The third is buybacks. We were active.

We plan to continue to be active to wrap up our buyback and using that as an active lever going forward. Obviously, tuck-in M&A, which we've suggested would be in capital-light businesses that would enhance our ROE over time. Rob, anything you'd like to add to that?

Rob Sedran (CFO)

Yeah, just maybe just quickly, Victor, thank you. When we announced the buyback last year, the CET1 ratio was sitting at 13.3%. We bought back around 15 million shares on that buyback now, and we're sitting at 13.4%. We use that buyback as just the method to manage our share count, manage our capital position, stable, steady, predictable, consistent, all those words that we love around here, is how we like to run the bank, how we like to run the strategy, and it's how we like to run the buyback as well. The capital deployment, we're trying to be as predictable as we can, and you should expect that consistency to continue from us.

Victor Dodig (President and CEO)

All of it's tied to an ambition of getting our ROE over 15% over the medium term, and we're making progress on that.

Lemar Persaud (Analyst)

What's the targeted CET1 ratio that you'd allow the bank to go down to, Rob?

Rob Sedran (CFO)

We've said in the past, we've got a couple of gates when we think about our target CET1 ratio. We want to stay 75-100 basis points clear of the regulatory minimum, which today would put that in the 12.5% range. Depending on the level of uncertainty, sometimes a little bit higher. The second gate, though, is also where the competitive dynamic is. We do not want to be too much of a negative outlier relative to our competitors. It creates too much noise around that consistent execution of our strategy. With where the regulatory minimums are today, we're comfortable that we've got a significant amount of excess capital.

Lemar Persaud (Analyst)

Thank you.

Operator (participant)

Thank you. The following question is from Doug Young. Desjardins Capital Markets, please go ahead.

Doug Young (Analyst)

Hi, good morning. Victor, back to the comment you just made on target ROE 15%+ this quarter, and adjusted ROE was 13.9%. Kind of where I'm going with this is, is there anything in this quarter that leaned in your favor, or is this kind of a reasonable way to think about the starting point? Is everything set for essentially the achieve that target in a normal credit environment, or do you need to pull some levers on expenses or whatnot, improve different business lines to kind of drive it? Can you hit that target ROE with, call it a 13% CET1 ratio over the medium term?

Victor Dodig (President and CEO)

I think we can. I think the way to look at the dynamic in ROE is what's happening year over year. We're seeing year-over-year improvements. Doug, it's all tied back to our strategy. If you have deeper relationships with your clients, with our clients, whether it's personal and business banking, Canadian commercial banking and wealth, US commercial banking and wealth, our capital markets business, everyone is working to have those deeper relationships, which by definition delivers a higher ROE. We believe that there's plenty of room to grow within each of those businesses and plenty of room to continue to deepen those relationships. The second piece is just our focus on efficiencies over time. I mean, if you look at our NIX ratio today, we'd be closer to the top of the league tables amongst our peer group.

We have been working really hard to be thoughtful about how we manage investments in our bank, how we remove legacy costs, and how we can invest in the future. That done right will be accretive to ROE. The third point is we will use any excess capital for growth and/or the purchase of shares. Rob said we are operating within that 12.5 kind of range. That in and of itself would improve our ROE over time. We are on that path. We said that on investor day. We have reaffirmed those targets under Harry's leadership. I know that will continue with the team to make sure that we can deliver a premium ROE in the market, deliver on our earnings expectations, and earn that premium multiple that we think we are working toward from our shareholders.

Lemar Persaud (Analyst)

Appreciate it. Just one quick number question, Rob. You talked about higher severance in the expense section. Can you quantify that? Is there anything else unusual on the expense side? Because I do not think you backed that out, if I recall.

Rob Sedran (CFO)

No, there were no adjusting items this quarter, Doug, correct. We have not quantified the number. We kind of look at severance as one of those run rate items that is just, it is embedded in our operating philosophy. We are taking the opportunity to right-size the employee network and make some changes, particularly when the revenues are in a strong place like they are. We have not called it out, and I think we are probably going to keep it that way.

Lemar Persaud (Analyst)

Appreciate the time. Thank you.

Rob Sedran (CFO)

Thanks, Doug.

Operator (participant)

Thank you. The following question is from Shalabh Garg. Veritas Investment Research, please go ahead.

Shalabh Garg (Analyst)

Hi, thank you. Can you walk us through the risk mitigation activities undertaken in the cards portfolio? Is that in any way linked to the decline in card fees year over year?

Frank Guse (Chief Risk Officer)

I can walk you through the risk mitigations. Generally, I would say we constantly work on risk strategies. We constantly work on risk mitigations. We have taken actions, like we do in a lot of parts of our book, fairly early when we expected unemployment to rise. I would say over a year ago. That would include technical changes to how you treat pre-delinquent clients, investments into our collections efforts, and so on. Maybe over to Hratch or Rob. In a nutshell, it is not related to changes in our fees, but over to you, Hratch.

Rob Sedran (CFO)

Thank you, Frank. Maybe I'll address it quickly. Our cards portfolio continues to have strong momentum. Sometimes it is impacted by elements of transaction volumes and so forth. Nothing to call out that would be risk mitigation related as of this quarter. The other thing I would say is that cards fee line item that you see includes revenues and contra revenues that are expenses against the generation of cards points, etc. There can be noise in there. This quarter, mostly I would point out some noise relative to last quarter and relative to last year. If you look through the last few quarters, that's probably a good average to take as a run rate, but we expect that to grow over time from there.

Shalabh Garg (Analyst)

Okay, appreciate the color. Thank you.

Operator (participant)

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

Sohrab Movahedi (Analyst)

Okay. Hopefully, Frank, you can address this quickly. You've gotten your allowance to about 77 basis points allowance for credit losses. And you've been in that mid-70 basis point range for the quarters at least you show on your slide. Is this the right level, or do you think this will have to get adjusted up or down?

Frank Guse (Chief Risk Officer)

Yeah, Sohrab, very quickly, it is the right level. It's a prudent coverage for everything we know so far. I mean, we will have to assess, as you know, every quarter based on all the information that is available. It is a good level to be at where we are and everything we know right now.

Sohrab Movahedi (Analyst)

Thank you.

Operator (participant)

Thank you. I would now like to turn the meeting over to Victor.

Victor Dodig (President and CEO)

Oh, thank you, operator, and thank you all for joining us this morning. I know you all have a call to get to in about two minutes. I wanted to quickly reiterate what you heard from our team this morning. Number one, we've got a diversified business model that's driving strong top-line results and positive operating leverage. Number two, we have a strong balance sheet with a resilient credit quality. Finally, and equally importantly, number three, we have a strategy that's working and supported by a dedicated leadership team, a dedicated frontline, a dedicated back office, an entire CIBC team that's dedicated with a strong execution track record to continue to deliver. While market conditions will continue to evolve each day, we're going to stick to our game plan. We're going to stay close to our clients, and we're going to lead for all our stakeholders.

With that, I'd like to thank our CIBC team for putting our clients at the center of everything we do each day. I want to wish you a great summer, and we'll talk to you at the end of August and many conversations in between. Thank you.

John Akin (Analyst)

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.