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CIBC's Tier 1 capital ratio at July 31, 2008 was 9.8%.
<< Results for the third quarter of 2008 were positively affected by the following items: - $30 million ($20 million after tax, or $0.05 per share) positive impact of changes in credit spreads on the mark-to-market of credit derivatives in CIBC's corporate loan hedging program; - $28 million ($20 million after tax and minority interest, or $0.05 per share) gain on the sale of shares in Visa Inc.; - $27 million ($18 million after tax, or $0.05 per share) of interest income on income tax reassessments. Results for the third quarter of 2008 were negatively affected by the following items: - $885 million ($596 million after tax, or $1.56 per share) loss on structured credit run-off activities; - $55 million ($33 million after tax, or $0.09 per share) of losses and interest expense related to the pending tax settlement of leveraged leases; - $16 million ($11 million after tax, or $0.02 per share) of higher than normal severance expense. >>
Net income for the third quarter of 2008 compared to a net loss of $1,111 million for the prior quarter. Diluted EPS and cash diluted EPS for the third quarter of 2008 compared to diluted loss per share of $3.00 and cash diluted loss per share of $2.98(1), respectively, for the prior quarter, which included items of note that aggregated to a negative impact on results of $4.59 per share.
"While the current environment continues to be challenging, CIBC's franchise is solid. CIBC's capital position is strong and our core businesses are well positioned for better performance and growth as market conditions improve," says Gerald T. McCaughey, President and Chief Executive Officer. "Our results this quarter were affected by the volatile, and generally difficult, environment that persisted over much of the third quarter, as well as by the impact of our ongoing run-off activities and the refocusing of our core businesses, particularly in CIBC World Markets."
The continued deterioration in securities with exposure to the U.S. residential mortgage market and financial guarantor credit spreads required CIBC to record further asset write-downs and counterparty credit valuation adjustments in its structured credit run-off business.
In addition, these market conditions had a negative impact on performance in other areas, particularly within CIBC's wholesale and retail brokerage operations.
Update on business priorities
CIBC's strategy is to deliver consistent and sustainable performance over the long term. In support of that strategy, CIBC made progress during the third quarter against its priorities of business strength, productivity and balance sheet strength.
Business strength
CIBC Retail Markets reported net income of $572 million, down 4% from the same quarter last year, primarily due to lower treasury revenue allocations and higher loan losses, which more than offset better expense performance.
Retail Markets revenue was $2,355 million, down 1% from the third quarter of 2007. Strong volume growth in CIBC's product groups and higher revenue from FirstCaribbean International Bank were offset by lower treasury revenue allocations and lower retail brokerage trading volumes.
Overall, CIBC's retail business remains well positioned. CIBC achieved strong volume growth and has maintained market share in a highly competitive environment. For the second consecutive quarter, CIBC had growth in unsecured personal lending volumes, though CIBC is taking a measured approach to credit given the current environment.
Retail loan losses were $196 million for the third quarter, up $29 million from the same quarter last year. Continued strong growth in Cards balances, an increase in the provision relating to the expiry of previous credit card securitizations, and higher cards loss rates partially offset by lower personal lending loss rates were the primary drivers of higher loan losses.
<< During the quarter, CIBC Retail Markets continued to deliver on its strategy to provide greater access for clients: - Opened three new branches in Milton, Ontario, Calgary, Alberta and Smithers, B.C.; - Expanded hours of operation with additional branches opening on Saturdays; - Introduced Sunday banking hours at six more branches in the Greater Toronto Area and Vancouver; - Added nearly 100 jobs at the Telephone Banking contact centre in Montreal and now have the capacity to make one million additional calls in French and English to clients each year. During the quarter, CIBC also announced several enhancements to its retail product capabilities: - To reward client loyalty, CIBC now offers Aeroplan miles for everyday banking on the CIBC Unlimited Chequing Account; - Introduced free everyday banking for students with the new CIBC Advantage(R) for Students bank account; - Clients also began receiving their new CIBC Aerogold Visa Infinite card, CIBC's newest premium credit card, which provides increased benefits at no additional fee. >>
CIBC World Markets reported a net loss of $538 million for the third quarter, which included the loss of $596 million related to CIBC's structured credit run-off activities and other items of note aggregating to a net loss of $20 million. This result compares to a loss of $1,637 million last quarter, which included a loss of $1,672 million related to structured credit run-off activities and other items of note aggregating to a net loss of $43 million.
Revenue in the third quarter for CIBC's continuing World Markets' businesses was up from last quarter, primarily due to higher revenue from fixed income and currencies, loan hedging and merchant banking, partly offset by lower revenue from global equities and equity new issues as a result of the continued low levels of market activity in these areas.
CIBC's corporate loan portfolio continues to perform well, with loan losses of $7 million in the third quarter.
Activities continued during the third quarter on many fronts to reposition CIBC's wholesale business for more consistent and sustainable performance.
In its structured credit run-off business, CIBC further reduced notional exposures through a combination of the termination and amortization of credit derivative contracts.
Market and economic conditions relating to the financial guarantors may change in the future, which could result in significant future losses.
During the quarter, the strength of CIBC's World Markets franchise was evident in several notable achievements:
<< - No. 1 in M&A Activity - CIBC World Markets continues its M&A leadership in Canada as measured by volume and deal value, as evidenced by its financial advisor role to the Board of Directors of EnCana on its approximately $70 billion reorganization of its natural gas resource assets and its integrated oil businesses into two separate entities, and to Teck Cominco with respect to its pending acquisition of Fording Canadian Coal Trust's assets in a transaction valued at US$14 billion, which includes CIBC's role as co-lead arranger and underwriter for US$9.8 billion of fully underwritten bridge and term loans to support the transaction. - A leader in connecting global players with Canadian markets - CIBC World Markets continues to deliver on its mission to bring Canada to the world and the world to Canada, as evidenced by its role as financial advisor to Saskferco in its $1.6 billion sale of a nitrogen fertilizer plant to Yara International, a Norwegian chemical company. Since the opening of its Winnipeg office in early 2007, CIBC World Markets has strengthened its growing presence in the agricultural and prairie markets. - No. 1 in Equity Underwriting - CIBC World Markets retained its position as the leader in volume of new issues underwritten for the fiscal year to date, acting as lead manager on a $288 million financing by H&R REIT and as sole underwriter of a US$150 million offering by Central Fund of Canada Limited. >>
Productivity
In addition to continuing to invest and position its core businesses for long term performance, CIBC remains committed to its strategic objective of achieving a median efficiency ratio among the major Canadian banks.
CIBC's target for 2008 is to hold expenses flat relative to annualized 2006 fourth quarter expenses, excluding expenses related to FirstCaribbean and its restructuring activities.
Expenses for the third quarter were $1,725 million, down from $1,819 million a year ago.
"Through a combination of better revenue performance as market conditions improve, as well as continued focus to adjust our infrastructure support activities in light of recent business divestitures, we expect to achieve continued progress in the area of productivity," says McCaughey.
Balance sheet strength
CIBC's third priority is to build balance sheet strength.
In 2008, CIBC is placing additional emphasis on this priority, given the uncertain market conditions.
Earlier this year, CIBC strengthened its capital position by raising $2.9 billion of common equity.
The capital raise has enabled CIBC to maintain a strong capital position despite the impact of deteriorating market conditions on performance.
The primary measure of CIBC's balance sheet strength is its Tier 1 capital ratio. CIBC's Tier 1 ratio of 9.8% at the end of July remains well above its target of 8.5% and one of the highest among North American banks.
Update on risk management enhancements
In addition to furthering its business priorities, CIBC continues to enhance its risk management capabilities.
During the quarter, CIBC completed a restructuring of its risk management department. The new structure is based on the results of a comprehensive review that began earlier this year and comprises five groups as follows:
<< - Balance Sheet Measurement, Monitoring and Control - Capital Markets - Credit Portfolio Management - Product Risk Management, Card Products, Mortgages & Retail Lending - Wholesale Credit & Investment Risk Management >>
This new structure consolidates and simplifies CIBC's risk management structure, while supporting CIBC's objectives to strengthen decision-making, accountability and communication on risk matters across the department and within CIBC.
Making a difference in communities
As a leader in community investment, CIBC is committed to supporting causes that matter to its clients, its employees and its communities. During the quarter, CIBC continued to demonstrate leadership in this area.
<< - CIBC and the YMCA of Greater Toronto launched CIBC YMCA Access to Opportunity(TM) to help newcomers overcome barriers to settling in Canada. The new program includes financial literacy learning seminars that provide newcomers with information and advice needed to get started with banking in Canada as well as a job readiness training program that helps connect qualified newcomers to employment at CIBC and in the financial services sector. - CIBC was the principal sponsor, for the third year, of the Tour CIBC Charles-Bruneau, a four-day bicycle trip across Quebec that raises funds for children with cancer. This year, CIBC employees and clients raised $150,000 and the Tour exceeded its goal by raising $700,000. The funds raised will be donated to the Centre de cancérologie Charles-Bruneau at the Sainte-Justine Hospital for research and treatment of children with cancer. - CIBC employees throughout B.C. and parts of the Northern Territories raised more than $415,000 for the 2008 B.C. Children's Hospital campaign. Since 1995, CIBC employees and clients have raised more than $3.7 million dollars for B.C. Children's Hospital Foundation. ------------------------------ (1) For additional information, see the "Non-GAAP measures" section. >>
The information on the following pages forms a part of this press release.
(The board of directors of CIBC reviewed this press release prior to it being issued. CIBC's controls and procedures support the ability of the President and Chief Executive Officer and the Chief Financial Officer of CIBC to certify CIBC's third quarter financial report and controls and procedures. CIBC's CEO and CFO will voluntarily provide to the Securities and Exchange Commission a certification relating to CIBC's third quarter financial information, including the attached unaudited interim consolidated financial statements, and will provide the same certification to the Canadian Securities Administrators.)
Management's Discussion And Analysis
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Management's discussion and analysis (MD&A) should be read in conjunction with the unaudited interim consolidated financial statements included in this report and with the MD&A contained in our 2007 Annual Accountability Report. The unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) and are expressed in Canadian dollars. This MD&A is current as of August 27, 2008. Additional information relating to CIBC is available on SEDAR at www.sedar.com and on the U.S. Securities and Exchange Commission's website at www.sec.gov. No information on CIBC's website (www.cibc.com) should be considered incorporated herein by reference. Certain comparative amounts have been reclassified to conform with the presentation adopted in the current period. A glossary of terms used throughout this quarterly report can be found on pages 149 and 150 of our 2007 Annual Accountability Report.
<< External reporting changes The following is a summary of the external reporting changes adopted in the first quarter of 2008: - We adopted the Internal Convergence of Capital Measurement and Capital Standards: a Revised Framework, commonly named as Basel II. See "Management of risk" section for additional details. - We moved our commercial banking line of business from CIBC World Markets to CIBC Retail Markets. Prior period information was restated. - We moved our securitization-related revenue from the lines of businesses (cards, mortgages and personal lending) to other within CIBC Retail Markets. Prior period information was restated. - We moved the investment consulting service revenue from retail brokerage to asset management, both within CIBC Retail Markets. Prior period information was restated. - We allocated the general allowance for credit losses between the strategic business lines (CIBC Retail Markets and CIBC World Markets). Prior to 2008, the general allowance (excluding FirstCaribbean International Bank) was included within Corporate and Other. Prior period information was not restated. - We reclassified the allowance for credit losses related to the undrawn credit facilities to other liabilities. Prior to 2008, it was included in allowance for credit losses. Prior period information was not restated. >>
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including in this report, in other filings with Canadian securities regulators or the U.S. Securities and Exchange Commission and in other communications. These statements include, but are not limited to, statements made in the "Summary of third quarter results", "Update on business priorities", "Overview - Significant events", "Overview - Outlook", "Run-off businesses", "Other selected activities" and "Financial performance review - Income taxes" sections, of this report and other statements about our operations, business lines, financial condition, risk management, priorities, targets, ongoing objectives, strategies and outlook for 2008 and subsequent periods. Forward-looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate" and other similar expressions or future or conditional verbs such as "will", "should", "would" and "could". By their nature, these statements require us to make assumptions, including the economic assumptions set out in the "Overview - Outlook" section of this report, and are subject to inherent risks and uncertainties that may be general or specific. A variety of factors, many of which are beyond our control, affect our operations, performance and results, and could cause actual results to differ materially from the expectations expressed in any of our forward-looking statements. These factors include: legislative or regulatory developments in the jurisdictions where we operate; amendments to, and interpretations of, risk-based capital guidelines and reporting instructions; the resolution of legal proceedings and related matters; the effect of changes to accounting standards, rules and interpretations; changes in our estimates of reserves and allowances; changes in tax laws; that our estimate of sustainable effective tax rate will not be achieved; political conditions and developments; the possible effect on our business of international conflicts and the war on terror; natural disasters, public health emergencies, disruptions to public infrastructure and other catastrophic events; reliance on third parties to provide components of our business infrastructure; the accuracy and completeness of information provided to us by clients and counterparties; the failure of third parties to comply with their obligations to us and our affiliates; intensifying competition from established competitors and new entrants in the financial services industry; technological change; global capital market activity; interest rate and currency value fluctuations; general economic conditions worldwide, as well as in Canada, the U.S. and other countries where we have operations; changes in market rates and prices which may adversely affect the value of financial products; our success in developing and introducing new products and services, expanding existing distribution channels, developing new distribution channels and realizing increased revenue from these channels; changes in client spending and saving habits; and our ability to anticipate and manage the risks associated with these factors. This list is not exhaustive of the factors that may affect any of our forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on our forward-looking statements. We do not undertake to update any forward-looking statement that is contained in this report or in other communications except as required by law.
<< THIRD QUARTER FINANCIAL HIGHLIGHTS ------------------------------------------------------------------------- ------------------------------------------------------------------------- As at or for the As at or for the three months ended nine months ended -------------------------------- --------------------- 2008 2008 2007 2008 2007 Unaudited Jul. 31 Apr. 30 Jul. 31 Jul. 31 Jul. 31 --------------------------------------------------- --------------------- Common share information Per share - basic earnings (loss) $ 0.11 $ (3.00) $ 2.33 $ (7.05) $ 6.75 - cash basic earnings (loss)(1) 0.13 (2.98) 2.36 (6.99) 6.81 - diluted earnings (loss) 0.11 (3.00) 2.31 (7.05) 6.69 - cash diluted earnings (loss)(1) 0.13 (2.98) 2.34 (6.99) 6.75 - dividends 0.87 0.87 0.77 2.61 2.24 - book value 28.40 29.01 33.05 28.40 33.05 Share price - high 76.75 74.17 106.75 99.81 106.75 - low 49.56 56.94 92.37 49.56 92.37 - closing 61.98 74.17 92.50 61.98 92.50 Shares outstanding (thousands) - average basic 380,877 380,754 335,755 366,686 336,511 - average diluted 382,172 382,377 338,691 368,352 339,739 - end of period 380,732 380,770 334,595 380,732 334,595 Market capitalization ($ millions) $ 23,598 $ 28,242 $ 30,950 $ 23,598 $ 30,950 --------------------------------------------------- --------------------- Value measures Price to earnings multiple (12 month trailing) n/m n/m 10.3 n/m 10.3 Dividend yield (based on closing share price) 5.6% 4.8% 3.3% 5.6% 3.2% Dividend payout ratio n/m n/m 33.0% n/m 33.2% Market value to book value ratio 2.18 2.56 2.80 2.18 2.80 --------------------------------------------------- --------------------- Financial results ($ millions) Total revenue $ 1,905 $ 126 $ 2,979 $ 1,510 $ 9,120 Provision for credit losses 203 176 162 551 471 Non-interest expenses 1,725 1,788 1,819 5,274 5,738 Net income (loss) 71 (1,111) 835 (2,496) 2,412 --------------------------------------------------- --------------------- Financial measures Efficiency ratio 90.5% n/m 61.1% n/m 62.9% Cash efficiency ratio, taxable equivalent basis (TEB)(1) 88.0% n/m 59.4% n/m 61.4% Return on equity 1.6% (37.6)% 28.3% (30.3)% 28.1% Net interest margin 1.54% 1.57% 1.41% 1.48% 1.37% Net interest margin on average interest-earning assets 1.82% 1.85% 1.61% 1.74% 1.56% Return on average assets 0.08% (1.29)% 1.00% (0.96)% 0.99% Return on average interest-earning assets 0.10% (1.52)% 1.14% (1.14)% 1.14% Total shareholder return (15.25)% 2.59% (4.6)% (36.79)% 8.0% --------------------------------------------------- --------------------- On- and off-balance sheet information ($ millions) Cash, deposits with banks and securities $ 89,468 $ 92,189 $ 102,143 $ 89,468 $ 102,143 Loans and acceptances 173,386 174,580 167,828 173,386 167,828 Total assets 329,040 343,063 338,881 329,040 338,881 Deposits 228,601 238,203 230,208 228,601 230,208 Common shareholders' equity 10,813 11,046 11,058 10,813 11,058 Average assets 343,396 349,005 331,553 345,618 324,572 Average interest- earning assets 290,598 296,427 290,157 293,373 284,015 Average common shareholders' equity 10,664 12,328 10,992 11,384 10,808 Assets under administration 1,134,843 1,147,887 1,115,719 1,134,843 1,115,719 --------------------------------------------------- --------------------- Balance sheet quality measures Common equity to risk-weighted assets(2) 9.1% 9.6% 8.8% 9.1% 8.8% Risk-weighted assets ($ billions)(2) $ 118.5 $ 114.8 $ 125.0 $ 118.5 $ 125.0 Tier 1 capital ratio(2) 9.8% 10.5% 9.7% 9.8% 9.7% Total capital ratio(2) 14.4% 14.4% 13.7% 14.4% 13.7% --------------------------------------------------- --------------------- Other information Retail/wholesale ratio(3) 67%/33% 68%/32% 76%/24% 67%/33% 76%/24% Regular workforce headcount 40,251 40,345 40,315 40,251 40,315 --------------------------------------------------- --------------------- --------------------------------------------------- --------------------- (1) For additional information, see the "Non-GAAP measures" section. (2) Beginning Q1/08, these measures are based upon Basel II framework whereas the prior quarters were based upon Basel I methodology. (3) The ratio represents the amount of capital attributed to the business lines as at the end of the period. n/m Not meaningful due to the net loss. >>
OVERVIEW
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Net income for the quarter was $71 million, compared to net income of $835 million for the same quarter last year and a net loss of $1,111 million for the prior quarter. Net loss for the nine months ended July 31, 2008 was $2,496 million, compared with net income of $2,412 million for the same period in 2007.
Our results for the current quarter were affected by the following items:
<< - Loss on the structured credit run-off business of $885 million ($596 million after-tax), which includes gains on index hedges, net of mark-to-market (MTM) losses on unhedged exposures related to the U.S. residential mortgage market (USRMM), of $12 million ($8 million after-tax), charges on credit protection purchased from ACA Financial Guaranty Corp. (ACA) and other financial guarantors of $904 million ($609 million after-tax), gains on credit hedges on structured credit counterparties of $74 million ($50 million after-tax), losses on sales of certain positions, and direct expense related to managing the run-off activities; - $16 million ($11 million after-tax) of higher than normal severance accruals; - $30 million ($20 million after-tax) positive impact of changes in credit spreads on the MTM of credit derivatives in our corporate loan hedging program; - $28 million ($20 million after-tax and minority interest) gain on sale of shares in Visa Inc.; - Interest income on income tax reassessments of $27 million ($18 million after-tax); and - Losses and interest expense related to leveraged leases of $55 million ($33 million after-tax). >>
Compared with Q3, 2007
The loss on structured credit run-off business noted above was the main factor for the decline in revenue from the same quarter last year. Losses related to leveraged leases, lower gains on credit derivatives in our corporate loan hedging program, and lower retail spreads attributable to a lower interest rate environment also contributed to the decline. Revenue benefited from volume growth in cards, mortgages and deposits. Provision for credit losses was up mainly due to higher losses in the cards portfolio as a result of volume growth, an increase in provisions relating to the expiry of previous credit card securitizations and higher loss rates. Non-interest expenses were down largely due to lower performance-related compensation, partially offset by higher severance related expenses.
Compared with Q2, 2008
Revenue was up mainly due to lower charges on credit protection purchased from financial guarantors and lower MTM losses related to our USRMM positions. Revenue in the quarter was negatively impacted by lower treasury revenues and losses and interest expense related to leveraged leases. Non-interest expenses were down from the prior quarter due to lower litigation expenses, partially offset by higher performance-related compensation expense.
Compared with the nine months ended July 31, 2007
Revenue in the current period was significantly lower due to the charges on credit protection purchased from financial guarantors and MTM losses related to our USRMM positions. Lower revenue from U.S. real estate finance and the impact of the sale of some of our U.S. businesses, and lower retail spreads attributable to a lower interest rate environment contributed to the decline. Revenue benefited from higher gains on our corporate loan credit derivatives, volume growth in cards, mortgages and deposits, and the FirstCaribbean International Bank (FirstCaribbean) acquisition. Provision for credit losses was up mainly due to the reversal of general allowance in the same period last year and higher losses in the cards portfolio driven by volume growth, increase in provisions relating to the expiry of previous credit card securitizations and higher loss rates. Non-interest expenses were down largely due to lower performance-related compensation and the sale of some of our U.S. businesses. The loss for the period resulted in a tax benefit.
Our results for the prior periods were affected by the following items:
<< ------------------------------------------------------------------------ Q2, 2008 -------- - Loss on structured credit run-off business of $2.5 billion ($1.7 billion after-tax), which included MTM losses, net of gains on index hedges, on unhedged exposures related to the USRMM ($114 million, $77 million after-tax), charges on credit protection purchased from ACA and other financial guarantors ($2.2 billion, $1.5 billion after-tax), gain on credit hedges on structured credit counterparties ($63 million, $42 million after-tax), losses on sales of certain positions, and direct expenses related to managing the run-off activities; - $50 million ($34 million after-tax) of valuation charges against credit exposures to derivatives counterparties, other than financial guarantors; - $22 million ($19 million after-tax and minority interest) loss on Visa Inc.'s initial public offering (IPO) adjustment; - $26 million ($18 million after-tax) of severance accruals; - $65 million ($21 million after-tax) foreign exchange loss on the repatriation of retained earnings from our U.S. operations; and - $14 million ($9 million after-tax) positive impact of changes in credit spreads on corporate loan credit derivatives. Q1, 2008 -------- - $2.3 billion ($1.5 billion after-tax) charge on the credit protection purchased from ACA; - $626 million ($422 million after-tax) charge on the credit protection purchased from financial guarantors other than ACA; - $473 million ($316 million after-tax) MTM losses, net of gains on related hedges, on collateralized debt obligations (CDOs) and residential mortgage-backed securities (RMBS) related to the USRMM; - $171 million ($115 million after-tax) positive impact of changes in credit spreads on corporate loan credit derivatives ($128 million, $86 million after-tax) and financial guarantors credit hedges ($43 million, $29 million after-tax); - $108 million ($64 million after-tax) combined loss related to the sale of some of our U.S. businesses to Oppenheimer Holdings Inc. (Oppenheimer), management changes and the exit and restructuring of certain other businesses, and - $56 million positive impact of favourable tax-related items. Q3, 2007 -------- - $290 million ($190 million after-tax) MTM losses, net of gains on related hedges, on CDOs and RMBS related to the USRMM; - $75 million ($70 million after-tax) of net reversal of litigation accruals; - $77 million ($50 million after-tax) positive impact of changes in credit spreads on corporate loan credit derivatives; and - $48 million of tax recovery. Q2, 2007 -------- - $91 million of favourable tax recoveries and reversals; - $24 million ($17 million after-tax) reversal of the general allowance for credit losses; and - $10 million ($7 million after-tax) positive impact of changes in credit spreads on corporate loan credit derivatives. Q1, 2007 -------- - $6 million ($4 million after-tax) negative impact of changes in credit spreads on corporate loan credit derivatives. ------------------------------------------------------------------------- >>
Significant events
Global market credit issues
Problems originating in the U.S. subprime mortgage market last year continued to impact the conditions for credit and liquidity globally. Our structured credit business, within CIBC World Markets, had losses for the quarter of $885 million ($6.8 billion for the nine months ended July 31, 2008), primarily due to deterioration in the credit quality of financial guarantors and MTM losses on the underlying assets, which resulted in significant increases in valuation adjustments to the value of credit protection bought. During the quarter, we continued to actively manage our exposures, reducing notional exposures by approximately $1.5 billion and unwound related purchased credit derivatives of a similar amount for a total reduction in notional of approximately US$3 billion.
In April 2008, the Financial Stability Forum (a group of G7 central banks and supervision groups) tabled recommendations with the G7 countries to enhance disclosure of what are deemed to be high risk activities. Based on these recommendations we have presented a number of related disclosures in the "Run-off businesses" and "Other selected activities" sections of the MD&A.
Sale of some of our U.S. businesses
Effective January 1, 2008, we sold our U.S. based investment banking, leveraged finance, equities and related debt capital markets businesses and our Israeli investment banking and equities businesses to Oppenheimer Inc. During the nine months ended July 31, 2008, we recorded a loss of $80 million on the sale. It is anticipated that the sale of certain other U.S. capital markets related activities located in the U.K. and Asia to Oppenheimer will close in the fourth quarter of 2008.
CIBC restricted share awards (RSAs) held by employees transferred to Oppenheimer will continue to vest in accordance with their original terms. To support this compensation arrangement, Oppenheimer will reimburse CIBC for the cost of these RSAs to the extent they vest, at which time we will record the reimbursements in other non-interest income.
Pursuant to the sale agreement, CIBC invested in a US$100 million subordinated debenture issued by Oppenheimer and is providing certain credit facilities to Oppenheimer and its investment banking clients to facilitate Oppenheimer's business, with each loan subject to approval by CIBC's credit committee.
The disposition is not expected to have a significant impact on our ongoing results of operations.
Issue of share capital
During the first quarter, we issued 45.3 million common shares for net proceeds of $2.9 billion, through a combination of private placements and a public offering.
We issued 23.9 million common shares for net proceeds of $1.5 billion, through a private placement to a group of institutional investors, comprising Manulife Financial Corporation, Caisse de dépôt et placement du Québec, Cheung Kong (Holdings) Ltd. and OMERS Administration Corporation.
We also issued 21.4 million common shares for net proceeds of $1.4 billion, through a public offering.
Visa Inc.
As a result of the worldwide restructuring of Visa in the last quarter of 2007, in March 2008, Visa Inc. proceeded with the IPO of Class A shares at US$44 per share. As a result of the mandatory redemption of 56.1% of our shares and the final adjustment process, we recorded a pre-tax loss of $22 million ($19 million after-tax and minority interest) in the second quarter.
In July 2008, we sold our remaining shares in Visa Inc. to another former bank member in the Visa network as permitted by the terms of Visa's restructuring agreements and recorded a gain of $28 million ($20 million after-tax and minority interest).
Global restructuring of ACA
On August 7, 2008, we, together with other institutions reached an agreement with ACA to restructure the credit derivatives that ACA had in place with various counterparties. The restructuring resulted in the termination of the credit derivative contracts and, in return, we received cash of approximately US$33 million representing our pro-rata share (16%) of an initial cash payment. We also received, on a pro-rata basis, a counterparty surplus note (CSN) issued by ACA, valued at US$8 million. The CSN entitles the holder to receive any residual cash flows of ACA and is subject to the review and approval of the Maryland Insurance Administration.
We consider that the events of August 7, 2008 represent additional information relating to our best estimate of the amounts recoverable from ACA as at July 31, 2008, and have accordingly adjusted our credit valuation adjustment against ACA resulting in a credit to net income before tax of US$11 million.
Leveraged leases
Effective November 1, 2007, we adopted the amended CICA Emerging Issues Committee Abstract (EIC) 46, "Leveraged Leases", which was based upon the Financial Accounting Standards Board Staff Position FAS 13-2, "Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction".
The EIC requires that a change in the estimated timing of the cash flows relating to income taxes result in a recalculation of the timing of income recognition from the leveraged lease. The adoption resulted in a $66 million charge to opening retained earnings as at November 1, 2007. An amount approximating this non-cash charge will be recognized into income over the remaining lease terms using the effective interest rate method.
On August 5, 2008, CIBC received a settlement offer from the Internal Revenue Service (IRS) with respect to its leveraged leases. The terms and conditions of the letter are identical to that received by other industry participants in these transactions. The effect of the communication is a further change in the cash flows from the previous offer to settle by the IRS and from what was reflected in the opening retained earnings amount as described above. The current quarter income statement includes a pre-tax charge of $22 million resulting from a GAAP lease income adjustment and a further pre-tax charge of $33 million for interest payments on deficient tax installments. The settlement offer includes certain other terms and conditions which CIBC is attempting to have clarified with the IRS including a "best efforts" clause to terminate all leases before December 31, 2008 when all associated tax benefits for leases not terminated will be deemed to end. CIBC has 60 days from August 5, 2008 to accept this offer. The IRS will provide additional written information on the offer shortly. While CIBC believes its provisions and charges to date accurately reflect the terms of the IRS settlement offer, it is possible that clarification by the IRS of certain terms and conditions (and agreement on actual numbers) could result in additional charges in future quarters.
Outlook
Canadian economic growth is expected to remain very sluggish in the final fiscal quarter of this year, held back by weak exports and the impacts of recent employment declines on consumer spending. Housing construction is also showing some tentative signs of a slowdown. Interest rates are likely to remain generally stable until 2009 as the central bank awaits signs of an economic pick-up in the U.S.
CIBC Retail Markets should benefit from what are still historically low unemployment rates that support lending growth and household credit quality. A slower pace of real estate price increases and home sales may moderate mortgage growth rates.
For CIBC World Markets, mergers and acquisition and equity activity will likely remain slower than in the prior year due to credit concerns affecting global leveraged deals. We expect loan demand to increase due to reduced investor appetite for asset-backed securities. Economic softness could lead to a less favourable period for corporate credit risk in certain parts of the Canadian economy.
RUN-OFF BUSINESSES
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Given the uncertain market conditions and to focus on our core businesses in CIBC World Markets, we have curtailed activity in our structured credit and international leveraged finance businesses and have established a focused team with the mandate to manage and reduce the residual exposures.
<< ------------------------------------------------------------------------- Background information on special purpose entities Structured credit activities usually involve special purpose entities (SPEs). SPEs are legal vehicles, often in the form of trusts, which are designed to fulfill specific and narrow needs. SPEs are used to provide market liquidity to clients and to create investment products by aggregating either pools of homogenous assets or a variety of different assets, and issuing either single tranche short term debt securities, referred to as asset-backed commercial paper (ABCP) or longer term multi-tiered debt instruments which include super senior, senior, subordinated or mezzanine, and equity tranches. Often SPEs are referred to by reference to the type of assets that are aggregated within the SPE such as RMBS which aggregate mortgage loans, or collateralized loan obligations (CLOs) which aggregate corporate loans. In addition, SPEs can also aggregate debt securities issued by other SPEs, such as RMBS, and are referred to as CDOs. In more complex structures, SPEs which aggregate securities issued by other CDOs and then issue a further tranche of debt securities are referred to as CDOs squared. Our involvement with SPEs is discussed in the "Off balance sheet arrangements" section of the MD&A. ------------------------------------------------------------------------- >>
Structured credit run-off business
Overview and results
Our structured credit business, within CIBC World Markets, comprises our activities as principal and for client facilitation. These activities include warehousing of assets and structuring of SPEs which could result in the holding of unhedged positions. Other activities include intermediation, correlation, and flow trading which earn a spread on matching positions.
<< Exposures Our exposures largely consist of the following categories: Unhedged - - USRMM - non-USRMM Hedged - - financial guarantors (USRMM and non-USRMM) - other counterparties (USRMM and non-USRMM) Results - losses before taxes ------------------------------------------------------------ ----------- For the For the three nine months months ended ended ------------------------ ----------- 2008 2008 2008 $ millions Jul. 31 Apr. 30 Jul. 31 ------------------------------------------------------------ ----------- Trading $ 885 $ 2,340 $ 6,603 Available-for-sale (AFS) - 144 230 ------------------------------------------------------------ ----------- Total $ 885 $ 2,484 $ 6,833 ------------------------------------------------------------ ----------- ------------------------------------------------------------ ----------- The structured credit business had losses during the quarter of $885 million, compared to losses of $2.5 billion in the prior quarter. These losses were primarily driven by further deterioration in the credit quality of financial guarantors and the mark-to-market losses of the underlying assets, which resulted in significant increases in credit valuation adjustments. Change in exposures ACA --- During the quarter, the following events took place with respect to written credit derivatives against which we purchased protection from ACA: - US$97 million of notional of our written credit derivatives were cancelled as a result of default in the underlyings, generating a loss of US$9 million in the quarter. The corresponding purchased credit derivatives with ACA were also cancelled. - We terminated US$339 million of written credit derivatives with a loss of US$2 million. As a result, the corresponding purchased credit derivatives with ACA became unmatched protection. - Normal amortization reduced the notional of our written and corresponding purchased credit derivatives with ACA by US$28 million. >>
On August 7, 2008, we together with other institutions reached an agreement with ACA to restructure the credit derivatives that ACA had in place with various counterparties. The restructuring resulted in the termination of the credit derivatives contracts and in return, we received cash of approximately $33 million representing our pro-rata share (16%) of an initial cash payment. We also received, on a pro-rata basis, a CSN issued by ACA, valued at $8 million. The CSN entitles the holder to receive any residual cash flows of ACA and is subject to the review and approval of the Maryland Insurance Administration.
As a consequence of the restructuring, our investments (notional US$217 million, fair value US$11 million) and our written credit derivatives, (notional US$1,226 million, fair value liability US$1,097 million) previously hedged by ACA, became unhedged as of August 7, 2008.
Others
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During the quarter, in addition to the reduction of the ACA related positions noted above we have also reduced exposures in the intermediation, correlation and flow trading books by approximately US$1.5 billion, and unwound related purchased credit derivatives of a similar amount for a total reduction in notional of approximately US$3.0 billion.
<< ------------------------------------------------------------------------- 2008 2008 US$ millions, as at Jul. 31 Apr. 30 ------------------------------------------------------------------------- Notional Investments and loans(1) $ 10,261 $ 10,678 Written credit derivatives(2) 34,128 35,832 ------------------------------------------------------------------------- Total gross exposures $ 44,389 $ 46,510 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Purchased credit derivatives and index hedges $ 43,384 $ 44,963 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Notional for investments and loans represent original investment costs. (2) Includes notional amount for written credit derivatives and liquidity and credit facilities. >>
Total exposures
The exposures held within our structured credit run-off business within CIBC World Markets are summarized in the table below. Our subsidiary, FirstCaribbean, within CIBC Retail Markets, also has holdings in securities with USRMM exposure which are being managed separately and are included in the table below.
<< US$ millions, as at July 31, 2008 ------------------------------------------------------------------------- Exposures(1) Hedged by -------------------------------------- ----------- Written credit Purchased derivatives credit and liquidity derivatives and credit and index Investments & loans facilities(2) hedges -------------------- ----------------- ----------- Financial guarantors ----------- Fair Fair Notional value(3) Notional value(4) Notional ---------- --------- --------- --------- --------- USRMM Unhedged(6) ----------- Super senior CDO of mezzanine RMBS $ - $ - $ 278 $ 264 $ - Warehouse - RMBS 365 20 - - - Various(7) 146 11 - - - Index hedges - - - - - ------------------------------------------------------------------------- 511 31 278 264 - Hedged ------ Other CDO 1,498 226 4,908 3,867 5,789 Unmatched purchased credit derivatives(8) - - - - 1,880 ------------------------------------------------------------------------- Total USRMM $ 2,009 $ 257 $ 5,186 $ 4,131 $ 7,669 ------------------------------------------------------------------------- Non-USRMM Unhedged -------- CLO(2) $ 257 $ 218 $ 161 $ 12 $ - Corporate debt 209 187 - - - Third party sponsored ABCP conduits(2)(10) 459 270 639 n/a - Warehouse - non-RMBS 160 78 - - - Others(2) 254 251 94 n/a - ------------------------------------------------------------------------- 1,339 1,004 894 12 - Hedged ------ CLO(11) 6,197 5,170 8,284 765 13,967 Corporate debt - - 16,139 872 6,959 CMBS - - 777 191 777 Others 716 585 2,848 303 2,871 Unmatched purchased credit derivatives - - - - - ------------------------------------------------------------------------- Total non-USRMM 8,252 6,759 28,942 2,143 24,574 ------------------------------------------------------------------------- Total $ 10,261 $ 7,016 $ 34,128 $ 6,274 $ 32,243 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Apr. 30, 2008 $ 10,678 $ 7,529 $ 35,832 $ 6,073 $ 32,632 ------------------------------------------------------------------------- ------------------------------------------------------------------------- US$ millions, as at July 31, 2008 ------------------------------------------------------------------------- Hedged by Unhedged Unhedged ------------------------------ exposures USRMM Purchased credit derivatives and index hedges ------------------------------ Financial guarantors Others ---------- ------------------- --------- --------- Fair Net value Fair Net expo- (3)(4) Notional value(3) notional sure(5) ---------- --------- --------- --------- --------- USRMM Unhedged(6) ----------- Super senior CDO of mezzanine RMBS $ - $ - $ - $ 278 $ 14 Warehouse - RMBS - - - 365 20 Various(7) - - - 146 11 Index hedges - 75 58 (75) (17) ------------------------------------------------------------------------- - 75 58 714 Hedged ------ Other CDO 4,695 550(9) 361 67 Unmatched purchased credit derivatives(8) 1,771 - - - ------------------------------------------------------------------------- Total USRMM $ 6,466 $ 625 $ 419 $ 781 ------------------------------------------------------------------------- Non-USRMM Unhedged -------- CLO(2) $ - $ - $ - $ 418 Corporate debt - - - 209 Third party sponsored ABCP conduits(2)(10) - - - 1,098 Warehouse - non-RMBS - - - 160 Others(2) - - - 348 ------------------------------------------------------------------------- - - - 2,233 Hedged ------ CLO(11) 1,436 529 39 (15) Corporate debt 415 9,176 475 4 CMBS 192 - - - Others 381 730 46 (37) Unmatched purchased credit derivatives - 81 - - ------------------------------------------------------------------------- Total non-USRMM 2,424 10,516 560 2,185 ------------------------------------------------------------------------- Total $ 8,890 $ 11,141 $ 979 $ 2,966 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Apr. 30, 2008 $ 8,063 $ 12,331 $ 776 $ 3,435 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) We have excluded from the table above our total holdings of the following entities, including those related to our treasury activities, as at July 31, 2008 of notional US$4,187 million and fair value US$4,149 million. (Total holdings as at April 30, 2008 was notional US$5,309 million and fair value US$5,283 million. Amounts reported in the prior quarter did not include money market positions in an offshore subsidiary): - Debt securities issued by Federal National Mortgage Association (Fannie Mae) (notional US$1,904 million, fair value US$1,880 million), Federal Home Loan Mortgage Corporation (Freddie Mac) (notional US$1,029 million, fair value US$1,008 million), Government National Mortgage Association (Ginnie Mae) (notional US$198 million, fair value US$195 million), Federal Home Loan Banks (notional US$1,000 million, fair value US$999 million), and Federal Farm Credit Bank (notional US$400 million, fair value US$400 million). - Trading equity securities issued by Fannie Mae (fair value US$3 million) and Freddie Mac (fair value US$1 million) which are hedged by short positions in stock indices, and trading equity securities in, Student Loan Marketing Association (Sallie Mae) (fair value US$2 million) - Short positions in debt securities, predominantly To Be Announced securities, of Fannie Mae (notional US$133 million, fair value US$131 million) and Freddie Mac (notional US$217 million, fair value US$208 million) (2) Liquidity and credit facilities to third party sponsored ABCP conduits amounted to US$639 million, to non-USRMM unhedged CLO amounted to US$64 million and to non-USRMM unhedged others amounted to US$94 million. (3) Gross of valuation adjustments (VA) for purchased credit derivatives of $6.0 billion. (4) This is the fair value of the contracts, which were typically zero, or close to zero, at the time they were entered into. (5) After write-downs. (6) As at July 31, 2008, the rating for super senior CDO of Mezzanine RMBS was CC. The rating for the warehouse RMBS was approximately 46% investment grade and 54% non-investment grade (based on % of market value). (7) Includes USRMM exposures held in FirstCaribbean which mature in 25 to 38 years and are rated AA1 to AAA. (8) During the quarter, we have sold and unwound some of our USRMM exposures that were previously hedged, leaving the purchased credit derivatives unmatched. (9) Hedged with a large American diversified multi-national insurance and financial services company with which CIBC has market standard collateral arrangements. (10) Estimated USRMM exposure in the third party sponsored ABCP conduits was $110 million as at July 31, 2008. (11) Investments and loans include unfunded investment commitments with a notional of US$318 million (April 30, 2008: US$331 million) and negative fair value of US$44 million (April 30, 2008: US$31 million). n/a not applicable >>
Unhedged USRMM exposures
Our remaining unhedged exposure to the USRMM, after write downs, was US$45 million ($46 million) as at July 31, 2008. To mitigate this exposure, we also have subprime index hedges with a notional amount of US$75 million ($77 million) and a fair value of US$58 million ($59 million) as at July 31, 2008. During the quarter, we terminated $225 million notional of index hedges as a result of the reduction in our exposures. We had gains on index hedges, net of realized and unrealized losses on our unhedged USRMM exposures, in the quarter of US$12 million ($12 million).
Unhedged non-USRMM exposures
Our unhedged exposures to non-USRMM primarily relates to four categories: CLO, corporate debt, third party sponsored ABCP conduits, warehouse non-RMBS, and other. A fifth category, commercial mortgage backed securities (CMBS) in FirstCaribbean was sold during the quarter.
CLO
Our unhedged CLO assets with notional of US$418 million ($428 million) were mostly rated AAA as at July 31, 2008, and are backed by diversified pools of European based senior secured leveraged loans.
Corporate debt
Approximately 21%, 53% and 26% of the unhedged corporate debt exposures with notional of US$209 million ($214 million) are related to positions in Europe, Canada and other countries respectively.
Third party sponsored ABCP conduits
We hold
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