EXHIBIT 3 - Management's Discussion and Analysis
Management's Discussion and Analysis for 2002 has been designed to provide
readers with a more meaningful presentation of our businesses and our risk
management approach. Strategic commentary and key messages from each business
line leader have been integrated into the business line review to supplement the
financial analysis.
- --------------------------------------------------------------------------------
Management's Discussion and Analysis
================================================================================
================================================================================
Management's Discussion and Analysis of CIBC's 2002 results and operations is
organized into five sections
- --------------------------------------------------------------------------------
OVERVIEW
To facilitate an understanding of CIBC's 2002 results, this section sets out
CIBC's significant business themes and critical accounting policies. An overview
of the consolidated financial results is also provided to set the framework for
the more detailed business line discussions that follow.
20 Business Themes
21 Critical Accounting Policies
23 Consolidated Financial Results
27 Outlook
BUSINESS LINE REVIEW
This section reviews CIBC's businesses and provides an explanation of CIBC's
reporting structure, which is consistent with how the business is managed. In
addition, each business line leader reviews financial results for the year.
Business line performance is measured against 2002 objectives. Ongoing
objectives and priorities, together with an outlook for 2003 are also provided.
Finally, an in-depth financial review is provided.
28 Business Line Review
29 How CIBC Reports
30 CIBC Retail & Wealth
32 CIBC Retail Markets
36 CIBC Wealth Management
40 CIBC World Markets
45 Amicus
FUNCTIONAL GROUPS
The functional groups provide infrastructure support services to the business
lines. In this section, the business leader for each functional group reviews
the year and establishes priorities going forward.
47 Treasury, Balance Sheet and Risk Management
48 Administration
49 Technology and Operations
50 Corporate Development
CONSOLIDATED FINANCIAL REVIEW
This section provides a discussion of CIBC's consolidated income statements and
consolidated balance sheets, as well as a detailed outline of how CIBC manages
risk and balance sheet resources.
51 Consolidated Income Statements
53 Consolidated Balance Sheets
54 Contractual Obligations and Off-Balance Sheet
Credit-Related Arrangements
55 Management of Risk and Balance Sheet Resources
BUSINESS ENVIRONMENT
This section provides an economic review of the year 2002 and the outlook for
2003, an overview of the regulatory environment in which CIBC operates and
related-party procedures. Accounting and reporting developments complete the
section.
69 Economic
70 Regulatory
70 Related-Party Procedures
70 Accounting and Reporting Developments
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
- --------------------------------------------------------------------------------
BUSINESS THEMES
Disciplined balance sheet management and capital strength continued to be
priorities for CIBC in 2002. The balance sheet management process is aimed at
reallocating economic capital and balance sheet resources to businesses with
strong, stable results and ensuring CIBC remains strongly capitalized. The
performance of every business across CIBC is assessed based on both quantity and
quality of earnings criteria. As a result, CIBC places each of its 37 businesses
into one of the four quadrants in the balance sheet resource allocation matrix
presented below.
BALANCE SHEET RESOURCE ALLOCATION MATRIX
[GRAPHIC OMITTED]
The quantity of earnings is measured on a performance management basis,
including risk-adjusted return on capital (RAROC) and economic profit. RAROC
and economic profit are measured using economic capital, which captures the
inherent risks associated with each business (see page 29). Quality of earnings
considers volatility, sustainability, strategic importance, and growth
potential. These are dynamic assessments based on financial performance and
management judgment, which support the allocation of balance sheet resources to
each business.
Businesses with strong earnings, high strategic importance and long-term
growth potential are considered "Growth" businesses. Examples of businesses in
this quadrant include both cards and the Canadian full-service brokerage, which
continued strong growth in 2002. Balance sheet resources in cards were up 7% in
2002, supporting 15% operating revenue growth. In 2002, CIBC acquired Merrill
Lynch Canada Inc.'s Private Client & Securities Services businesses and Merrill
Lynch Investment Managers Canada Inc., now CM Investment Management Inc. These
acquisitions have enabled CIBC to increase its Canadian full-service brokerage
platform under the CIBC Wood Gundy name. In aggregate, the CIBC Canadian
full-service brokerage business increased its balance sheet resource usage by
over 100% in 2002. The performance of these now integrated businesses
continues to exceed expectations.
Businesses with low current earnings but long-term profitability and growth
potential are considered "Investment" businesses. In 2002, CIBC continued to
invest in the electronic banking operations of Amicus in Canada (President's
Choice Financial) which continues to perform well and is expected to become
profitable in the fourth quarter of 2003. The total number of customers for
President's Choice Financial at the year-end was 1.05 million, up 40% from 2001.
It also experienced strong revenue growth in 2002 due to increasing volumes and
spreads.
"Managed growth" businesses are those that deliver strong financial
results, but have more moderate long-term growth prospects. In 2002, mortgages
grew by over 13%, with revenue up by 30%. CIBC also completed the combination
of its Caribbean retail, corporate and international banking operations with
those of Barclays Bank PLC to form FirstCaribbean International Bank(TM). The
combined operations will be both more efficient and better able to compete in
the region from a position of enhanced market share.
Businesses with low earnings and lower long-term growth potential fall into
the category of "Fix, reduce, exit." CIBC continued to liberate capital and
other balance sheet resources from these businesses and redeploy them to
"Investment" and "Growth" businesses. Examples of activities in 2002 included:
- --------------------------------------------------------------------------------
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements which are made pursuant
to the "safe harbor" provisions of the United States Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, but
are not limited to, statements about the operations, business lines, financial
condition, risk management, priorities, targets, ongoing objectives, strategies
and outlook of CIBC for 2003 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." A forward-looking statement
is subject to inherent risks and uncertainties that may be general or specific.
A variety of factors, many of which are beyond CIBC's control, affect the
operations, performance and results of CIBC and its business lines, and could
cause actual results to differ materially from the expectations expressed in any
of CIBC's forward-looking statements. These factors include: current, pending
and proposed legislative or regulatory developments in the jurisdictions where
CIBC operates, including pending developments in Canadian laws regulating
financial institutions and U.S. regulatory changes affecting foreign companies
listed on a U.S. exchange; political conditions and developments, including
conflict in the Middle East and the war on terrorism; weakened market
conditions; intensifying competition from established competitors and new
entrants in the financial services industry; technological change; global
capital market activity; interest rate fluctuation; currency value fluctuation;
general economic conditions worldwide, as well as in Canada, the United States
and other countries where CIBC has operations; the impact of the events of
September 11, 2001; changes in market rates and prices which may adversely
affect the value of financial products; CIBC's success in developing and
introducing new products and services to a receptive market, expanding existing
distribution channels, developing new ones and realizing increased revenue from
these channels, including electronic commerce-based efforts. This list is not
exhaustive of the factors that may affect any of CIBC's forward-looking
statements. These and other factors should be considered carefully and readers
should not place undue reliance on CIBC's forward-looking statements. CIBC does
not undertake to update any forward-looking statement that is contained in this
annual report.
- --------------------------------------------------------------------------------
20
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(i) The continued reduction of the non-core loan portfolio, through loan sales
credit derivatives and maturities, resulting in the release of more than
34% of balance sheet resources related to this portfolio.
(ii) The decision to close the U.S. electronic banking operations. Operating
losses from these activities will be substantially reduced in 2003.
(iii) The commitment to reduce capital allocated to the corporate loan and
merchant banking portfolios by one-third over the next three years.
CIBC continued to meet its targets for capital strength throughout 2002, with
strong growth in key retail businesses in spite of a difficult economic
environment. Share repurchases were curtailed earlier in the year to ensure
continued capital strength and flexibility.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is presented in Note 1 to the
consolidated financial statements. Certain accounting policies of CIBC are
critical to understanding the results of operations and the financial
condition of CIBC.
These critical accounting policies require management to make certain
judgments and estimates, some of which may relate to matters that are uncertain.
Changes in these judgments and estimates could have a material impact on CIBC's
financial results and financial condition. Management has established control
procedures that are intended to ensure that accounting policies are applied
consistently and that the processes for changing methodologies are well
controlled, and occur in an appropriate and systematic manner. The following
details CIBC's critical accounting policies that require management's judgments
and estimates.
Valuation of financial instruments
CIBC's financial instruments include debt and equity securities, derivatives and
investments in merchant banking activities. Financial instruments that are
classified as held for trading purposes are carried at fair value, and financial
instruments that are classified as held for investment purposes, including those
held in the merchant banking portfolios, are carried at cost and amortized cost
adjusted for write-downs to reflect other-than-temporary impairments in value.
For debt and equity securities carried at fair value, the fair values are
based on quoted market prices, where available; otherwise, fair values are
estimated using quoted market prices for similar securities or other third-party
evidence as available. The fair values are adjusted for bid-offer
considerations, including consideration of concentration exposure, where
appropriate.
For derivative instruments carried at fair value, the fair values are based
on quoted market prices or dealer quotes, where available; otherwise, fair
values are estimated on the basis of pricing models that incorporate current
market measures for interest rates, currency exchange rates, equity prices and
indices, credit spreads, corresponding market volatility levels and other
market-based pricing factors. Where appropriate, fair value includes a
valuation adjustment to cover credit, model and market risks, as well as
administrative costs.
Realized and unrealized gains or losses on securities and derivatives held
for trading purposes are included in trading activities in the consolidated
statements of income.
For financial instruments carried at cost and amortized cost, CIBC
conducts regular reviews to assess whether other-than-temporary impairment has
occurred. Management's assessment is based upon a review of various factors,
including quoted market price of public securities; the investee's financial
results; future prospects and values derived from discounted cash flow models.
Impairment losses that are considered other-than-temporary are recognized in
earnings.
Management uses judgment in the estimation of fair values and impairments
as there is often limited market information. Management has control procedures
in place relating to valuation processes, the process for obtaining external
prices, periodic model review, and the consistent application of control
procedures from period to period. Imprecise estimates can affect the amount of
gain or loss recorded in trading activities and the impairment recorded for a
particular position or portfolio.
For additional details of fair value by type of on- and off-balance sheet
financial instruments, see Note 22 to the consolidated financial statements.
Allowance for credit losses
Management establishes and maintains an allowance for credit losses that it
considers the best estimate of probable credit-related losses existing in
CIBC's portfolio of on- and off-balance sheet financial instruments, giving due
regard to current conditions and credit protection purchased from third parties.
The allowance for credit losses consists of specific and general components. A
number of factors affect management judgment and estimates relating to CIBC's
allowance for credit losses, including probability of default, risk ratings,
expected loss and recovery rates, and the degree of risk inherent in the loan
portfolios. Changes in these estimates due to any number of circumstances can
have a direct impact on the provision for credit losses, and may result in a
change in the allowance.
Management establishes specific allowances against impaired loans for
larger non-homogeneous loan portfolios based on continuous monitoring of these
portfolios. Generally, a loan is classified as impaired when management is of
the opinion that there is no longer a reasonable assurance of the full and
timely collection of principal and interest. Impaired loans are carried at their
estimated realizable values determined by discounting the expected future cash
flows at the interest rate inherent in the loan. When the amount and timing of
future cash flows cannot be estimated reliably, the loan is carried at either
the fair value of the security underlying the loan or the market price of the
loan. Any changes in the estimated realizable amounts over time are reported as
a charge or credit to the allowance for credit losses.
The general allowance is established, based on expected loss rates
associated with different credit portfolios and estimated time period for losses
that are present but yet to be specifically identified, adjusting for
management's view of the current and ongoing economic and portfolio trends.
- --------------------------------------------------------------------------------
21
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CIBC's homogeneous loans include residential mortgages, and personal and
credit card loan portfolios. Management evaluates its homogeneous loan
portfolios for specific allowances by reference to historical write-offs of
balances outstanding. The general allowance for these consumer loan portfolios
is based on CIBC's historical flow and loss rates. Further analysis and
evaluation of the allowance is performed to account for the aging of the
portfolios, along with the impact of economic trends and conditions. For a
further discussion of the methodologies used in establishing CIBC's allowance
for credit losses, see "Management of credit risk" included in the "Management
of Risk and Balance Sheet Resources" section. For details of the allowance for
credit losses, see Note 4 to the consolidated financial statements.
Securitizations
CIBC periodically transfers groups of loans or receivables to special purpose
entities (SPEs) that issue securities to investors. These investors are entitled
to a return of cash flows, based on the principal and interest provided by the
group of loans or receivables transferred. This process is referred to as
securitization.
Securitizations are accounted for as sales when CIBC surrenders control of
the transferred assets and receives consideration other than beneficial
interests in the transferred assets.
Gains or losses on transfers accounted for as sales depend, in part, upon
the allocation of previous carrying amounts to assets sold and retained
interests. These carrying amounts are allocated in proportion to the relative
fair value of the assets sold and retained interests. As market prices are
generally not available for retained interests, CIBC estimates fair values based
on the present value of expected future cash flows. This requires management to
estimate expected credit losses, prepayment rates, discount rates, forward yield
curves, and other factors that influence the value of retained interests.
There are two key accounting determinations to be made relating to
securitizations. First, accounting rules require a determination to be made as
to whether a transfer of a group of loans or receivables should be considered
a sale for accounting purposes. Second, a decision is required whether a
securitization SPE should be considered a subsidiary of CIBC and be consolidated
into the financial statements. If the SPE is sufficiently restricted to meet
certain accounting requirements, the seller of the transferred assets need not
consolidate the SPE.
CIBC's securitizations that meet the accounting criteria are recorded as a
sale of assets and are not consolidated for financial reporting purposes. For
additional information on CIBC's securitizations, see Note 5 to the consolidated
financial statements.
As further discussed in the section "Off-balance sheet arrangements
involving SPEs," CIBC administers several SPEs that purchase pools of
third-party financial assets and may be involved in other financial transactions
involving SPEs. Under current accounting requirements, if the administrator does
not control the SPEs, the administrator need not consolidate the SPEs.
In August 2002, the Canadian Institute of Chartered Accountants (CICA) issued
a draft guideline "Consolidation of Special-Purpose Entities." As well, in June
2002, the Financial Accounting Standards Board in the U.S. issued an exposure
draft addressing the accounting for SPEs. The impact of these exposure drafts on
CIBC's consolidated financial statements is not yet determinable.
Valuation of goodwill and other intangible assets
Effective November 1, 2001, CIBC adopted the requirements of the CICA handbook
section 3062, "Goodwill and Other Intangible Assets." Under this section,
goodwill is no longer subject to amortization. Rather, goodwill is subject to
at least an annual assessment for impairment by applying a fair value-based
test at the reporting unit level. Impairment loss is recognized to the extent
that the carrying amount of goodwill exceeds the implied fair value. Under the
standard, an acquired intangible asset should be separately recognized if the
benefit of the intangible asset is obtained through contractual or other legal
rights, or if the intangible asset can be sold, transferred, licensed, rented,
or exchanged, regardless of the acquirer's intent to do so. Determining the
useful lives of intangible assets requires considerable judgment and
fact-based analysis. Intangible assets with an indefinite life are not amortized
but are tested at least annually for impairment.
The fair values of the reporting units and intangible assets with an
indefinite life are derived from internally and externally developed valuation
models, using a market or income approach. These models consider various
factors, including normalized earnings, projected forward earnings, price
earnings multiples and discount rates. Management uses judgment to estimate
the fair value of the reporting units and intangible assets with an indefinite
life. Imprecise estimates can affect the value reported for goodwill and other
intangible assets with an indefinite life. For details of goodwill and other
intangible assets, see Note 7 to the consolidated financial statements.
Pension and other post-retirement benefits
Pension and other post-retirement benefit costs and obligations are dependent on
assumptions used in calculating such amounts. These assumptions include discount
rates, projected salary increases, expected return on assets, health care cost
trend rates, turnover of employees, retirement age and mortality rates. In
accordance with Canadian generally accepted accounting principles, actual
results that differ from the assumptions are accumulated and amortized over
future periods and, therefore, generally affect recognized expense and the
recorded obligation in future periods.
CIBC's approach to managing its pension plans is based upon a comprehensive
framework to ensure that the pension plans are properly governed, managed, and
operated in each region. This framework is built upon an effective system that
holds its decision-makers accountable for results under changing conditions.
During the year, key assumptions were reviewed and adopted for the principal
CIBC Pension Plan. These assumptions, which affect the October 31, 2002
accrued benefit obligation and funded status of the plan and which will be used
to determine expense for 2003 are as follows:
- --------------------------------------------------------------------------------
22
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
o The discount rate is based on the yield of high-quality debt instruments
with cash flows that match the timing and amount of expected benefit
payments. As at the measurement date of September 30, 2002, the rate was
6.75%, consistent with the prior year.
o The assumed rate of compensation increase was reduced from 4% to 3.5%. The
impact of this assumption change was to decrease the accrued benefit
obligation by $53 million.
o The expected long-term rate of return on plan assets remains at 7.5%. The
rate is based on the long-term market outlook and CIBC Pension Fund
investment policies.
Actual future experience different from that assumed or future changes in
assumptions may affect CIBC's pension and other post-retirement benefit
obligations and future expense.
For a further discussion of the key assumptions used in determining CIBC's
annual pension expense and accrued pension liability, see Note 15 to the
consolidated financial statements.
Income taxes
Management uses judgment in the estimation of income taxes, and future income
tax assets and liabilities. As part of the process of preparing CIBC's
consolidated financial statements, management is required to estimate income
taxes in each of the jurisdictions in which CIBC operates. This process involves
estimating actual current tax exposure, together with assessing temporary
differences that result from different treatment of items for tax and accounting
purposes and the tax loss carryforwards. These temporary differences and tax
loss carryforwards result in future income tax assets and liabilities, which are
included on CIBC's consolidated balance sheets. Substantially all of CIBC's
tax loss carryforwards originated from the U.S. operations in 2002 and expire
in 20 years. In addition, as other future income tax assets naturally reverse
into tax losses in the U.S., CIBC will have 20 years from the date such
temporary differences become tax losses to utilize them before they would begin
to expire under current tax law. Management is required to assess whether it is
more likely than not that future income tax assets will be realized prior to
their expiration and, based on all available evidence, determine if a
valuation allowance is required on all or a portion of its future income tax
assets. The factors used to assess the likelihood of realization are
management's forecast of future net income before taxes, available tax planning
strategies that could be implemented to realize the net future income tax
assets and the remaining expiration period of loss carryforwards. Although
realization is not assured, management believes, based on all available
evidence, that it is more likely than not that all of the future tax assets will
be realized prior to their expiration. In this regard, CIBC has initiated
various expense management initiatives, refocused its business activities and
committed to provide additional capital which will generate additional income.
The amount of the future income tax asset considered realizable, however, could
be reduced in the near term if forecasted income during the carryforward period
is not achieved. Factors that may affect CIBC's ability to achieve sufficient
forecasted income include, but are not limited to, the following: deterioration
of capital and credit markets, a decline in revenue or margins, loss of market
share or increased competition.
For details of CIBC's income taxes, see Note 18 to the consolidated
financial statements.
CONSOLIDATED FINANCIAL RESULTS
Highlights
o Total shareholder return of 34.1% for the three-year period ended October
31, 2002, versus the TSX Banks and Trust Index of 44.5%
o Strong Tier 1 and total capital ratios of 8.7% and 11.3%, respectively
o Reported ROE of 5.1%
Earnings
CIBC's reported earnings were $653 million for the year, down $1,033 million
from 2001. This was primarily due to a restructuring charge in the U.S.
electronic banking operations and other businesses, lower revenue from the CIBC
World Markets business line, and a higher provision for credit losses. This was
partially offset by lower revenue-related compensation and the gain resulting
from the combination of the Caribbean retail, corporate and international
banking operations of CIBC and Barclays Bank PLC, to form FirstCaribbean
International Bank(TM), now reflected as an equity investment. As well, CIBC
benefited from significant tax recoveries in 2002. Reported EPS, diluted, and
reported ROE were $1.35 and 5.1%, respectively, compared with $4.13 and 16.1% in
2001.
CIBC's reported earnings in 2001 were $1,686 million, down $374 million
from 2000. This resulted from a combination of lower revenue, reflecting weaker
markets that were further challenged by the events of September 11, 2001, and
higher expenses related to increased technology spending and a restructuring
charge. Concurrently, CIBC benefited from a relatively lower income tax expense.
Reported EPS, diluted, and reported ROE were $4.13 and 16.1%, respectively,
compared with $4.90 and 20.5% in 2000.
The accompanying table adjusts reported earnings for unusual items and
CIBC's investment in Amicus. Refer to page 29 for more information on operating
earnings.
- --------------------------------------------------------------------------------
23
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
EARNINGS
$ millions, for the years ended October 31 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
Reported earnings $ 653 $ 1,686 $ 2,060
Less:
Gain on sales of corporate assets (1) 200 65 260
Restructuring charge(2) (323) (123) 18
Merrill Lynch acquisition-related costs (3) (112) - -
Events of September 11, 2001(4) (19) (4) -
Adjustment to future income tax assets (5) 52 (66) -
Bulk sale of U.S. corporate loans (6) - (94) -
Restructured ownership of certain U.S.-based loans and leases (7) - 142 -
Specific provision for credit losses (6) (8) - (28) (143)
General provision for credit losses (9) - - (146)
Goodwill amortization (10) - (46) (40)
Other items (11) - (4) (39)
- ------------------------------------------------------------------------------------------------------------
Adjusted earnings(12) 855 1,844 2,150
- ------------------------------------------------------------------------------------------------------------
Less:
Net impact of Amicus (13) (236) (245) (129)
- ------------------------------------------------------------------------------------------------------------
Operating earnings(12) $ 1,091 $ 2,089 $ 2,279
============================================================================================================
EPS(14) - diluted, reported $ 1.35 $ 4.13 $ 4.90
- diluted, adjusted $ 1.91 $ 4.54 $ 5.13
- diluted, operating $ 2.56 $ 5.19 $ 5.46
- ------------------------------------------------------------------------------------------------------------
ROE - reported 5.1% 16.1% 20.5%
- adjusted 7.3% 17.7% 21.5%
- operating 9.7% 20.2% 22.8%
============================================================================================================
(1) During the fourth quarter of 2002, CIBC and Barclays Bank PLC completed the
combination of their Caribbean retail, corporate and international banking
operations. As a result of this combination, CIBC recognized an after-tax
gain of $190 million (pre-tax $190 million). During the third quarter of
2002, a $10 million after-tax gain (pre-tax $13 million) was recognized
relating to the sale of CIBC's investment in Life of Barbados Limited.
Gains in 2001 included the sale of CIBC's two offshore banking
subsidiaries, CIBC Fund Managers (Guernsey) Limited and CIBC Bank and Trust
Company (Channel Islands) Limited, collectively the Guernsey private
banking business, for an after-tax gain of $22 million (pre-tax $22
million) and the sale of the Merchant Card Services business for an
after-tax gain of $43 million (pre-tax $58 million). The after-tax gains in
2000 included $143 million (pre-tax $203 million) from the sale of CIBC's
portfolio of various wholly-owned office properties; $97 million (pre-tax
$97 million) from the sale of CIBC's property and casualty insurance
companies; and $20 million (pre-tax $28 million) from the sale of CIBC
Suisse S.A.
(2) During the fourth quarter of 2002, CIBC recorded an after-tax restructuring
charge of $323 million (pre-tax $514 million). This amount included $232
million (pre-tax $366 million) relating to closing the U.S. electronic
banking operations. During the fourth quarter of 2001, CIBC recorded an
after-tax restructuring charge of $123 million (pre-tax $207 million). The
$18 million after-tax restructuring credit (pre-tax $31 million) in 2000
represented an adjustment of the 1999 after-tax restructuring charge of
$242 million (pre-tax $426 million).
(3) In 2002, CIBC incurred after-tax costs of $112 million (pre-tax $183
million) relating to the acquisition of Merrill Lynch Canada Inc.'s Private
Client & Securities Services businesses. These costs also include
additional compensation to certain investment advisers within CIBC Wood
Gundy.
(4) During 2002, net after-tax expenses of $19 million (pre-tax $32 million)
were recognized relating to losses and incremental expenses incurred for
certain of CIBC's New York operations located at One World Financial
Center, in close proximity to the World Trade Center. In the fourth quarter
of 2001, CIBC recognized an after-tax expense of $4 million (pre-tax $7
million) in respect of such losses and incremental expenses.
(5) During the fourth quarter of 2002, CIBC recorded $52 million in recognition
of certain United Kingdom tax losses related to prior years. In June 2002,
the Ontario Government proposed that the tax rate reductions previously
announced by it be delayed by one year. This measure was substantively
enacted in 2002. During the third quarter of 2001, it was determined that
the provincial income tax rate decreases proposed in the May 9, 2001
Ontario Budget and the July 30, 2001 British Columbia Budget Update were
substantively enacted. As a result, CIBC recognized a $21 million charge to
income tax expense in that quarter, thereby reducing its future income tax
assets, in recognition of the fact that temporary differences will reverse
when the rates are lower. An adjustment of $45 million was recognized in
the first quarter of 2001, resulting from the federal income tax rate
decreases proposed in the October 18, 2000 federal government Economic
Statement and Budget Update.
(6) In the fourth quarter of 2001, CIBC completed a sale of $848 million of
non-investment grade loans and $195 million of undrawn credit commitments.
CIBC recorded an after-tax specific provision for credit losses of $28
million (pre-tax $48 million) related to the loans and incurred an
after-tax loss on the sale of $94 million (pre-tax $162 million).
(7) During the fourth quarter of 2001, CIBC restructured ownership of certain
U.S.-based loans and leases, resulting in a net reduction of income tax
expense of $142 million.
(8) In 2000, CIBC recorded an after-tax additional specific provision of $143
million (pre-tax $250 million) for credit losses related to
government-sponsored student loans.
(9) In 2000, CIBC recorded an after-tax general provision for credit losses of
$146 million (pre-tax $250 million).
(10) On November 1, 2001, CIBC adopted the requirements of the CICA handbook
section 3062, "Goodwill and Other Intangible Assets," which require that
amortization of goodwill, including that relating to equity accounted
investments, cease after October 31, 2001. Accordingly, adjusted earnings
for 2001 and 2000 include adding back amortization of goodwill to present
2001 and 2000 results on a basis comparable to the current year.
(11) In the fourth quarter of 2001, CIBC incurred after-tax costs of $4 million
(pre-tax $8 million) related to the restructured ownership of certain
U.S.-based loans and leases. In 2000, CIBC recorded after-tax costs of $12
million (pre-tax $20 million) for Oppenheimer acquisition-related costs. In
2000, other after-tax costs of $27 million (pre-tax $50 million) related to
CIBC's New York premises consolidation.
(12) Operating earnings exclude items that, in management's opinion, are either
unusual in nature, or that relate to substantial strategic investments,
thereby allowing for the analysis of business trends and the performance of
CIBC's business lines. Adjusted earnings exclude only unusual items. The
words "operating earnings" and "adjusted earnings" do not have standardized
meanings under generally accepted accounting principles and, consequently,
may not be comparable to similar measures presented by other companies.
Refer to the "Operating performance measurements" section in this report
for further details.
(13) During the first quarter of 2002, certain business activities were moved
from CIBC Retail Markets (formerly Retail Products and Retail Markets) to
Amicus. Refer to the "Business line review" section in this report for
further details. Comparative information has been reclassified.
(14) During the first quarter of 2002, CIBC retroactively adopted the CICA
handbook section 3500, "Earnings Per Share." Prior period EPS figures have
been restated.
- --------------------------------------------------------------------------------
24
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Revenue
Reported revenue in 2002 was $11,152 million on a taxable equivalent basis
(TEB), down $154 million from the prior year. The decrease in revenue was
mainly due to lower trading and origination revenue, lower net merchant banking
revenue and write-downs related to collateralized debt obligation and high-yield
portfolios, all as a result of continued weak markets. This decrease was
partially offset by the gain resulting from the combination of the Caribbean
retail, corporate and international banking operations of CIBC and Barclays Bank
PLC. Revenue also benefited from increased net interest income related to
increased volumes in credit products (cards, lending products and mortgages)
and in customer deposits, as well as revenue related to acquired businesses.
- --------------------------------------------------------------------------------
REVENUE
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Reported revenue (TEB) $ 11,152 $ 11,306 $ 12,210
Less:
Gain on sales of corporate assets 203 80 328
Bulk sale of U.S. corporate loans -- (162) --
Amicus 230 148 75
Goodwill amortization -
equity accounted investments -- (22) (17)
- --------------------------------------------------------------------------------
Operating revenue (TEB) $ 10,719 $ 11,262 $ 11,824
================================================================================
Reported revenue in 2001 was $11,306 million, down $904 million from the prior
year. Revenue for the year included gains from sales of CIBC's Merchant Card
Services business and the Guernsey private banking business. These gains were
more than offset by the loss associated with the bulk sale of the U.S. corporate
loans. In 2000, revenue included gains of $328 million related to the sales of
certain office properties, the property and casualty insurance companies and
CIBC Suisse S.A. Reported revenue in 2001 was also lower from 2000 as a result
of revenue declines in CIBC Wealth Management and CIBC World Markets businesses,
reflecting weaker market conditions and the events of September 11, 2001.
Non-interest expenses
CIBC's reported non-interest expenses for the year were $9,129 million, up $903
million from 2001. The increase in non-interest expenses was primarily due to
a higher restructuring charge and the ongoing expenses related to acquired
businesses, as well as acquisition-related costs, partially offset by lower
revenue-related compensation. Details of the restructuring charge are outlined
below.
The reported efficiency ratio was 81.9% in 2002, compared with 72.8% in the
prior year.
At October 31, 2002, CIBC had a regular workforce headcount of 42,552, up
237 from 2001 due to the impact of acquired businesses partly offset by staff
reductions as part of restructuring and the exclusion of the West Indies
workforce. The regular workforce headcount measure comprises regular full-time
and part-time employees, base salaried plus commissioned employees and 100%
commissioned employees.
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Reported non-interest expenses $ 9,129 $ 8,226 $ 8,096
Less:
Restructuring charge 514 207 (31)
Merrill Lynch acquisition-
related costs 183 -- --
Events of September 11, 2001 32 7 --
Amicus 585 535 290
Goodwill amortization -- 24 23
Other items -- 8 70
- --------------------------------------------------------------------------------
Operating non-interest expenses $ 7,815 $ 7,445 $ 7,744
================================================================================
Reported non-interest expenses were $8,226 million in 2001, up $130 million from
the prior year. This was primarily the result of increased Amicus spending and
the restructuring charge related to CIBC's cost-reduction program, partially
offset by lower revenue-related compensation.
Restructuring
In 2002, CIBC recorded a restructuring charge of $366 million relating to the
closing of its U.S. electronic banking operations and an additional $142 million
related to restructuring initiatives in other businesses. These initiatives in
total are expected to result in the elimination of approximately 2,700
positions.
The charge relating to closing the U.S. electronic banking operations,
subject to regulatory approval, consisted of contract termination costs,
termination benefits and other related charges, including the write-down of
assets. The initiative is expected to be substantially completed by the end of
the first quarter of 2003.
CIBC World Markets has reduced staff levels, primarily in the U.S., as a
result of the continued low level of business activity in capital markets and
investment banking. In addition, selective reductions will be made in Asian,
European and commercial banking businesses.
CIBC Retail Markets will reduce staff levels, reconfigure its branch
network and close bizSmart(TM), CIBC's direct banking offer which provided
internet and telephone based banking services to small businesses.
Operations and systems development support for CIBC World Markets, CIBC
Wealth Management and CIBC Retail Markets businesses will rationalize to align
their cost structures with current market conditions.
In 2001, a CIBC-wide cost-reduction program was initiated in response to
changing economic conditions. Significant actions taken in 2002 under the
program included consolidation of branches, rationalization of business support
functions, realignment of the workforce, reorganization of certain operations,
and termination of certain leases. This program was substantially completed in
2002 and the original estimate was revised by a net increase of $6 million.
Events of September 11, 2001
CIBC's New York operations located at One World Financial Center (WFC), in close
proximity to the World Trade Center, were directly affected by the events of
September 11, 2001. These events caused the temporary
- --------------------------------------------------------------------------------
25
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
relocation of employees from WFC to CIBC's other major premises in mid-town
Manhattan, as well as to temporary locations in the vicinity.
For the year ended October 31, 2002, CIBC recorded expenses, net of
insurance recoveries, related to the events of September 11, 2001 of $32 million
(2001: $7 million). CIBC has received payments on account of insurance claims of
$90 million in 2002 (2001: $9 million). Although CIBC is still in discussions
with its insurance carrier as to the ultimate settlement amount, CIBC has
recorded insurance recoveries for amounts for which it considers recovery is
probable. In addition, no insurance recovery amounts are recorded under the
business interruption insurance claim as negotiations are still continuing.
Management is still in the process of evaluating various scenarios concerning
the premises in New York. The full financial impact of these decisions,
including related insurance recoveries, was not determinable at the time of
preparation of the consolidated financial statements.
For details relating to expenses related to the events of September 11,
2001, refer to Note 17 to the consolidated financial statements.
Taxes
CIBC's reported income tax recovery for the year was $279 million, compared with
an income tax expense of $92 million in 2001 primarily due to a higher provision
for credit losses in North America in 2002 and increased restructuring charge
and other losses in CIBC's U.S. operations. Also contributing to the reduced
income tax expense were the gain resulting from the combination of the Caribbean
retail, corporate and international banking operations of CIBC and Barclays Bank
PLC, upon which no tax expense was provided, and the recognition of a future tax
asset in respect of certain United Kingdom tax losses relating to prior years.
CIBC has not provided for a valuation allowance related to future income
tax assets. Included in the tax loss carryforwards amount is $447 million
relating to losses in the U.S. operations in 2002 which expire in 20 years. In
addition, as other future income tax assets naturally reverse into tax losses in
the U.S., CIBC will have 20 years from the date such temporary differences
become tax losses to utilize them before they would begin to expire under
current tax law. Although realization is not assured, CIBC believes that, based
on all available evidence, it is more likely than not that all of the future tax
assets will be realized prior to their expiration. In this regard, CIBC has
initiated various expense management initiatives, refocused its business
activities and committed to provide additional capital which will generate
additional income. See pages 52 and 53 for a more detailed discussion.
Assets
CIBC's balance sheet decreased by $14.2 billion, to $273.3 billion, from October
31, 2001. Decreases were largely driven by reductions in business and government
loans ($4.7 billion), securities borrowed or purchased under a resale agreement
($8.1 billion), trading securities ($7.2 billion), investment securities ($2.3
billion), customers' liability under acceptances ($1.3 billion), and
interest-bearing deposits with banks ($1.6 billion). These decreases were
partially offset by increases in retail assets, such as residential mortgages
($7.9 billion), and personal and credit card loans ($2.4 billion). Large
reductions in balances, specifically in the fourth quarter of 2002, were
partially the result of the combination of the Caribbean retail, corporate and
international banking operations of CIBC and Barclays Bank PLC, and also as a
result of continuing efforts to manage the balance sheet to appropriate levels.
The net unrealized excess of market value over book value of CIBC's
investment portfolio totalled $671 million at year-end. The unrealized gains in
corporate equity of $271 million related mainly to investments held in the
merchant banking portfolio.
Gross impaired loans were $2.28 billion at October 31, 2002, up from $1.70
billion from the prior year. CIBC's total allowance for credit losses, which
includes specific and general allowances, was $2.29 billion at year-end, and
exceeded gross impaired loans by $13 million, compared with $592 million at
October 31, 2001.
The specific provision for credit losses was $1,500 million for the year,
up from $1,100 million in 2001. As at October 31, 2002, the general allowance
remained at $1.25 billion, unchanged from the prior year. The increase in
specific provisions mainly related to the business and government loan portfolio
and reflects the continuing decline in credit conditions experienced in the
U.S. and Europe.
Capital management
CIB's total capital for regulatory purposes was $14.3 billion at October 31,
2002, down $1.3 billion from 2001 mainly as a result of increased deductions for
goodwill (from Tier 1 capital) and for equity accounted investments (from total
regulatory capital). Goodwill increased as a result of acquisitions during the
year. The increase in equity accounted investments resulted from the combination
of the Caribbean retail, corporate and international banking operations of CIBC
and Barclays Bank PLC. CIBC's Tier 1 and total regulatory capital ratios were
8.7% and 11.3%, respectively, at October 31, 2002, compared with 9.0% and 12.0%
a year ago.
Shareholder value
CIBC's common share price was $38.75 at October 31, 2002, compared with $48.82
at the end of 2001. Current dividends of 41 cents per quarter, implying an
annual dividend of $1.64, represent a dividend yield of 4.2% based on the
closing share price for the year. Book value was $25.75 per share, down from
$26.44 per share in 2001.
Under a normal course issuer bid that began on January 9, 2002, CIBC
purchased 5.7 million common shares for cancellation during the year for an
aggregate consideration of $313 million, representing an average price of $55.05
per share. The normal course issuer bid ends January 8, 2003.
Stock option plans
CIBC has two stock option plans: the Employee Stock Option Plan and the
Non-Officer Director Stock Option Plan, as detailed in Note 14 to the
consolidated financial statements.
- --------------------------------------------------------------------------------
26
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
During the year, CIBC early adopted the fair value-based method to account for
stock options. This is further explained in Note 14 to the consolidated
financial statements.
The dilution impact of the stock option plans is summarized in the table below.
The dilution impact is calculated as the new option grants for the year, net of
options forfeited by employees leaving CIBC, divided by the average number of
shares outstanding during the year.
- -------------------------------------------------------------------------------------------------------------
STOCK OPTIONS
As at or for the years ended October 31 2002 2001 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Net options granted (millions) 2.7 2.4 5.1 4.5 3.4 3.4 3.0
Average number of shares
outstanding (millions) 360.6 372.3 388.9 409.8 415.0 413.5 415.0
=============================================================================================================
Net grants during period as % of average
number of shares outstanding 0.8% 0.6% 1.3% 1.1% 0.8% 0.8% 0.7%
=============================================================================================================
OUTLOOK
The current North American economic environment remains uncertain. An
earlier recovery in the U.S. has faltered amid weak gains in employment and
little appetite for renewed capital spending by corporations. In Canada, the
picture is somewhat brighter with relatively strong consumer spending and a
healthy trade surplus, although it is unclear how long this divergence can
continue in light of the conditions south of the border. Ultimately, North
American economic growth is expected to slowly strengthen, particularly during
the latter part of 2003, as low interest rates support retail sales and
companies finally begin re-investing in their businesses. The key uncertainty
in this forecast remains the threat of war in the Middle East.
In light of these challenges, CIBC will continue to shift its business mix
away from the capital and credit markets to its core retail and wealth
management businesses. Loan loss provisions are expected to decline in 2003 and
management's efforts will be focused on improving operational efficiency and
maintaining strong capital ratios.
- --------------------------------------------------------------------------------
27
CIBC ANNUAL REPORT 2002
We have four strategic business lines - CIBC Retail Markets, CIBC Wealth
Management, CIBC World Markets and Amicus. CIBC Retail Markets and CIBC Wealth
Management together comprise our CIBC Retail & Wealth operations. These business
lines are supported by four functional groups - Treasury, Balance Sheet and Risk
Management; Administration; Technology and Operations; and Corporate
Development.
- --------------------------------------------------------------------------------
Business Line Review
================================================================================
========================================================================================================================
BUSINESS LINE REVIEW AVERAGE REPORTED
ASSETS EARNINGS
(% of total) ($ millions)
- ------------------------------------------------------------------------------------------------------------------------
CIBC RETAIL & WEALTH 58.7% $1,347
- ------------------------------------------------------------------------------------------------------------------------
CIBC RETAIL MARKETS
Provides financial services and lending, credit cards, mortgages, deposit,
insurance and investment products to retail and small business 49.4% $1,171
customers through CIBC branches, ABM network, internet and telephone banking.
- ------------------------------------------------------------------------------------------------------------------------
CIBC WEALTH MANAGEMENT
Provides relationship-based advisory sales, services and products through a sales force
of more than 3,000 investment professionals. Products and services include full-service 9.3% $ 176
brokerage in Canada and the U.S., discount brokerage, global private banking and trust
services, asset management, and a variety of other wealth products.
- ------------------------------------------------------------------------------------------------------------------------
CIBC WORLD MARKETS
Provides integrated investment and corporate banking solutions to clients throughout
North America, with niche capabilities in the U.K. and Asia. Areas of specialization 39.5% $ (144)
include mergers and acquisitions; research; sales and trading of securities and
derivatives; merchant banking; and commercial banking.
- ------------------------------------------------------------------------------------------------------------------------
AMICUS
Provides co-branded electronic retail banking services. Operating through pavilions in 1.8% $ (468)
retail locations, Amicus offers a variety of deposit and credit products.
========================================================================================================================
FUNCTIONAL GROUPS
CORPORATE AND OTHER includes the four functional groups that provide
infrastructure support services, with revenue and expenses generally allocated
to the business lines. These functional groups are:
o Treasury, Balance Sheet and Risk Management-manages CIBC's balance sheet
resource allocation process and also measures, monitors and controls CIBC's
exposure to credit, market, liquidity and operational risk.
o Administration - provides governance and support services to CIBC and its
strategic business lines.
o Technology and Operations - provides a wide range of shared technology and
operations services to CIBC's businesses.
o Corporate Development - reinforces an owner-manager mindset among CIBC's
leaders to develop and grow their businesses.
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
How CIBC Reports
- --------------------------------------------------------------------------------
CIBC's four business lines are CIBC Retail Markets, CIBC Wealth Management, CIBC
World Markets and Amicus. CIBC Retail Markets and CIBC Wealth Management
together comprise CIBC Retail & Wealth operations, the focus of CIBC's overall
strategy of concentrating resources and increasing capital to the retail
operations.
- --------------------------------------------------------------------------------
CIBC's business lines are supported by four functional groups: Treasury, Balance
Sheet and Risk Management; Administration; Technology and Operations; and
Corporate Development.
During 2002, CIBC merged most of the businesses within Electronic Commerce,
and Retail and Small Business Banking into a new business line, CIBC Retail
Markets. Amicus (previously part of Electronic Commerce) became a separate
business line, and Technology and Operations became a part of Corporate and
Other. Prior year segmented financial information has been reclassified to
reflect these changes.
CIBC's Manufacturer/Customer Segment/Distributor Management Model is used
to measure and report the results of operations of the four business lines.
Under this model, internal payments for sales commissions and distribution
service fees are made among the business lines. As well, revenue and expenses
relating to certain activities, such as the payments business included in CIBC
Retail Markets, are fully allocated to other business lines. In addition, the
revenue, expenses and balance sheet resources of the four functional groups are
generally allocated to the business lines. Corporate and Other comprises the
four functional groups, as well as CIBC Mellon's custody business and other
revenue and expense items not directly attributable to the business lines.
Management uses this model to better understand the economics of customer
segments, products and delivery channels.
The model employs certain estimates and allocation methodologies in the
preparation of segmented financial information. In 2002, the sales and service
fees paid to segments for certain products were renegotiated among the business
lines. Prior year financial information was not reclassified to reflect these
fee changes.
OPERATING PERFORMANCE MEASUREMENTS
The principal measurements used by CIBC to assess business line performance
include operating earnings; return on equity, which is based on risk-adjusted
(economic) capital; and economic profit. These measurements are outlined in
more detail in the following sections and are provided as part of the business
line performance reviews on pages 30 to 46.
Operating earnings
Management uses operating earnings and adjusted earnings to review and analyse
the performance of the business lines. Operating earnings exclude items that, in
management's opinion, are either unusual in nature or relate to substantial
strategic investments, thereby allowing for the analysis of business trends.
Adjusted earnings exclude only unusual items. Examples of excluded items are the
impact of gains (or losses) on sales of non-strategic assets, restructuring
costs within each business line and the costs related to the events of September
11, 2001. These items are explained in more detail in the footnotes to the table
under earnings on page 24. Business line results show both reported and
operating earnings. The discussions on pages 30 to 46 refer to operating
earnings. In addition, further details on the business lines are provided in
Note 26 to the consolidated financial statements.
Risk-adjusted return on capital (RAROC)
RAROC is a risk-adjusted profitability measurement and management framework for
measuring risk-adjusted financial performance and for providing a consistent
view of profitability across all businesses. RAROC is defined as the ratio of
risk-adjusted return to economic capital.
Economic capital is attributed on the basis of three risk factors:
credit, market and operational risk. The fundamental approaches to managing
these risk factors are described in the "Management of Risk and Balance Sheet
Resources" section. The use of risk-based capital strengthens the risk
management discipline within CIBC's business lines, as the methodologies
employed quantify the level of risk within each business line and attribute
capital accordingly. This process assists CIBC in achieving its objectives of
controlled growth and returns commensurate with the risk taken.
Economic capital methodologies can be applied across products, clients,
lines of business and other segmentations, as required, to measure certain
types of performance. The resulting capital attributed to each business line
provides the financial framework to understand and evaluate sustainable
performance, and to actively manage the composition of the business portfolio.
This enables CIBC to increase shareholder value by reallocating capital to those
businesses with high strategic value and sustainable returns, or with
long-term growth and profitability potential.
Business line return on equity is also measured using risk-adjusted
(economic) capital, which, in many instances, may be different from legal
capital. The difference between economic capital allocated to the business lines
and legal capital is held in Corporate and Other. Periodically, enhancements
are made to CIBC's economic capital allocation model as part of CIBC's risk
measurement process. These changes are made prospectively.
Economic profit
Economic profit elaborates on RAROC by incorporating the cost of equity capital,
which is based on the market required rate of return from holding CIBC's equity
instruments, to assess whether shareholder wealth is being created. Economic
profit measures the return generated by each business in excess of CIBC's cost
of equity capital. Shareholder wealth is increased if capital can be employed at
a return in excess of CIBC's cost of equity capital. Similarly, when returns do
not exceed the cost of equity capital, then shareholder wealth is diminished and
a more effective deployment of that capital is sought.
- --------------------------------------------------------------------------------
29
CIBC ANNUAL REPORT 2002
2002 Results
o Reported earnings of $1,347 million;
including commercial banking, reported
earnings of $1,430 million
o Growth in transaction account balances of
22%
o Growth in personal loans administered of 14%
o Growth in non-institutional assets under
administration of 24%
Our Priorities
o Customer satisfaction
o Proactive sales and service
o Leadership in advice-based wealth management
products and services
o Operational efficiency
[GRAPHIC OMITTED]
================================================================================
[PHOTO OMITTED]
JILL DENHAM
Vice-Chair
CIBC Retail Markets
[PHOTO OMITTED]
GERRY McCAUGHEY
Vice-Chair
CIBC Wealth Management
CIBC Retail & Wealth
- --------------------------------------------------------------------------------
PAT REILLY (above right), Executive Assistant, Corporate Communications and
> Public Affairs, long-time employee and CIBC customer for almost 50 years,
meets with fellow veteran employee Shirley McLellan (above left), CIBC's
Client Care Ambassador, at CIBC's main branch in Toronto.
- --------------------------------------------------------------------------------
CIBC Retail & Wealth comprises CIBC Retail Markets and CIBC Wealth Management
business lines and represents CIBC's combined retail operations. The combination
of these two business lines reflects CIBC's strategy to focus resources in its
retail business. CIBC Retail & Wealth products and services are provided to
customers in Canada, the U.S. and the Caribbean through a variety of channels.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CIBC Retail & Wealth
- --------------------------------------------------------------------------------
SCOPE AND SCALE
Personal transaction
account balances
$ billions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
00 01 02
16.86 17.83 21.78
Personal Loans
administered
$ billions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
00 01 02
Cards 7.69 8.71 15.24
Residential Mortgages 57.01 64.79 75.65
Other Consumer Loans 28.48 28.17 29.56
Non-institutional assets
under administration
$ billions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
00 01 02
163.4 166.4 207
The following tables set out the reported and operating earnings as well as
operating revenue for CIBC Retail & Wealth by business.
In addition, while CIBC manages its commercial banking operations within
CIBC World Markets, some financial institutions include commercial banking with
their retail operations. The accompanying tables also set out the effect of
including CIBC's commercial banking operations under CIBC Retail & Wealth.
Earnings
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Earnings
Reported
CIBC Retail & Wealth and 1251 1331 1430
commercial banking
CIBC Retail & Wealth 1121 1228 1347
Operating
CIBC Retail & Wealth 1150 1216 1292
Commercial banking 130 106 86
Revenue
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Operating Revenue
CIBC Retail & Wealth 6759 6632 7469
Commercial banking 491 481 446
- --------------------------------------------------------------------------------
EARNINGS
$ millions for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
CIBC Retail Markets $ 1,171 $ 917 $ 687
CIBC Wealth Management 176 311 434
- --------------------------------------------------------------------------------
1,347 1,228 1,121
Commercial banking 83 103 130
- --------------------------------------------------------------------------------
Reported earnings 1,430 1,331 1,251
- --------------------------------------------------------------------------------
Less:
Gain on sales of corporate assets 200 65 117
Restructuring charge (36) (42) 6
Merrill Lynch acquisition-related costs (112) -- --
Specific provision for credit losses -- -- (143)
Goodwill amortization -- (14) (9)
- --------------------------------------------------------------------------------
Operating earnings $ 1,378 $ 1,322 $ 1,280
================================================================================
- --------------------------------------------------------------------------------
REVENUE
$ millions for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Operating revenue (TEB)(1)
CIBC Retail Markets
Personal banking $ 1,126 $ 993 $ 952
Small business banking 720 661 681
West Indies 245 281 268
Cards 1,241 1,077 936
Lending products 582 634 624
Mortgages(2) 623 479 332
Insurance 72 50 148
Other 67 163 105
- --------------------------------------------------------------------------------
4,676 4,338 4,046
- --------------------------------------------------------------------------------
Operating revenue (TEB)(1)
CIBC Wealth Management
Imperial Service 667 627 558
Private client investment 1,320 977 1,280
Global private banking and trust 127 123 163
Wealth products 643 486 663
Other 36 81 49
- --------------------------------------------------------------------------------
2,793 2,294 2,713
- --------------------------------------------------------------------------------
7,469 6,632 6,759
Commercial banking 446 481 491
- --------------------------------------------------------------------------------
Operating revenue (TEB) $ 7,915 $ 7,113 $ 7,250
- --------------------------------------------------------------------------------
(1) Operating revenue excludes gain on sales of corporate assets and adds back
goodwill amortization - equity accounted investments.
(2) Comparative figures have been reclassified to conform with the
presentation used in 2002.
- --------------------------------------------------------------------------------
31
CIBC ANNUAL REPORT 2002
2002 Results
o Operating ROE of 44%
o Overall customer loyalty
remained unchanged
o Top rated of the big five
banks for Satisfaction with
Problem Resolution for 2002
o Small business customer
loyalty increased by 4%
Our Priorities
o Improve customer loyalty
o Drive profitable growth
o Continue market leadership in
cards
Our Ongoing Objectives
o Achieve operating earnings
growth of 10% for the year
o Improve customer loyalty
o Become the leading bank for
small business customers
[PHOTO OMITTED]
================================================================================
[PHOTOS OMITTED]
JILL DENHAM
Vice-Chair
CIBC Retail & Wealth -
CIBC Retail Markets
- --------------------------------------------------------------------------------
CIBC'S SMALL BUSINESS BANKING customer Derek Gardner (above centre),
> President, CLO Glass Limited of Concord, Ontario pictured with sons Kevin
(above right) and Paul (above left) who serve as vice-presidents of the
company.
- --------------------------------------------------------------------------------
CIBC Retail Markets serves both personal and small business customers across
Canada. We offer deposit products, personal and student loans, cards, mortgages
and insurance, and small business and agricultural loans through CIBC's Canadian
branch network, telephone banking, internet banking and ABMs. In addition to the
banking services offered in Canada, we have an approximate 44% equity investment
in FirstCaribbean International Bank(TM).
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CIBC Retail & Wealth - CIBC Retail Markets
- --------------------------------------------------------------------------------
2002 marked the first full year of new leadership in CIBC Retail Markets, and
performance was strong, with increased revenue, funds managed and profitability.
With a renewed focus on leveraging the strengths of our retail franchise, we
launched a wide range of initiatives to increase our value to customers,
increase performance and improve the efficiency of our operations.
- --------------------------------------------------------------------------------
Our three-year goal is to become the best relationship retailer of financial
services in Canada. To achieve this goal, we are building on both our current
strengths and new opportunities for competitive advantage.
CURRENT STRENGTHS
Our cards business again experienced significant growth in 2002. Total purchase
volumes were up 13% and balances under administration increased 9% to $9.5
billion as at year end. We maintained our #1 position in market share of card
purchase volumes and average outstanding card balances and remained the leading
issuer of premium credit cards based on purchase volumes.
We are committed to continued growth in this core business through ongoing
product innovation and operating efficiencies. We launched several new card
products during 2002, including the entourage suite of cards as part of our
alliance with American Express Limited. CIBC also launched the CIBC Shoppers
Optimum(TM) VISA card, a co-branded, loyalty-based no-fee credit card with
Shoppers Drug Mart Inc.
Our mortgage business continues to perform exceptionally well. New
residential mortgage originations reached a record high of $26.7 billion this
year, increasing total residential mortgages under administration by 17% and our
market share by a full percentage point. Our multi-brand, multi-channel mortgage
strategy sells mortgages under the CIBC, FirstLine(TM) and President's Choice
Financial brands through CIBC retail channels, Home Loans Canada, independent
brokers and President's Choice Financial channels.
New automated sales management tools and processes introduced this year to
our branch-based sales force played an important role in increasing personal and
small business banking revenues, with a significant increase in revenues per
salesperson.
We continued to develop innovative products with significant customer
appeal. Our new CIBC Better Than Posted Mortgage, the introduction of CIBC Audio
Access(TM) ABM service for elderly customers and those with visual impairments,
and our new email money transfer service are examples of our continued success
at delivering valued products and services.
In small business banking, we introduced a new credit process to give
small business customers faster turnaround on credits up to $30,000 for
unsecured startup ventures. Small business customer loyalty is now at its
highest point in four years. We made the decision to close bizSmart, our direct
banking offer which provided internet and telephone-based banking services to
small businesses.
FirstCaribbean International Bank(TM) was formed on October 11, 2002 as a
result of the combination of our Caribbean retail, corporate and international
banking operations with those of Barclays Bank PLC. The new bank operates in 13
countries in the West Indies, and will leverage one of the largest capital bases
of any Caribbean bank to focus on growth and excellent customer service.
NEW OPPORTUNITIES FOR COMPETITIVE ADVANTAGE
While product excellence in areas such as mortgages and cards is important, our
objective is to be recognized by customers as the bank that can fulfill all of
their financial services needs, at each stage of their lives.
This year, we took a number of steps to achieve stronger relationships
with customers in order to better meet their financial needs. Our detailed
understanding of customer segments is driving our product development, marketing
activities, distribution decisions and our sales focus.
We implemented a sophisticated, new branch technology infrastructure that
has allowed us to introduce automated performance measurement and sales leads,
e-learning for employees, and faster transaction processing times. We continue
to invest in learning and sales management tools for branch staff so that we can
achieve our goals for deepening our customer relationships.
Also, we have begun to streamline our organization by overhauling
processes to improve the customer experience and reduce associated costs and
time.
OUTLOOK FOR 2003
CIBC Retail Markets will grow revenue from initiatives that deepen customer
relationships, increase the sales performance of employees and improve
operational efficiencies.
- --------------------------------------------------------------------------------
33
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
Earnings
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Earnings
Reported earnings 687 917 1,171
Operating earnings 742 907 1,007
Revenue
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Revenue
Reported revenue 4,143 4,389 4,879
Operating revenue 4,046 4,338 4,676
Expenses
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Expenses
Reported non-interest expenses 2,540 2,685 2,831
Operating non-interest expenses 2,530 2,646 2,773
- --------------------------------------------------------------------------------
Financial Results: CIBC Retail & Wealth - CIBC Retail Markets
- --------------------------------------------------------------------------------
EARNINGS
CIBC Retail Markets operating earnings in 2002, as set out in the table below,
were $1,007 million, up $100 million from the prior year due to growth in
operating revenue, partially offset by higher expenses.
In 2001, operating earnings were $907 million, up $165 million from 2000
as a result of strong revenue growth and a lower provision for credit losses,
partially offset by higher expenses.
Reported earnings are set out in the table below.
- --------------------------------------------------------------------------------
EARNINGS - CIBC RETAIL MARKETS
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Total revenue (TEB) $ 4,879 $ 4,389 $ 4,143
Provision for credit losses 418 396 679
Non-interest expenses 2,831 2,685 2,540
- --------------------------------------------------------------------------------
Income before income taxes and
non-controlling interests 1,630 1,308 924
Income taxes and non-controlling interests 459 391 237
- --------------------------------------------------------------------------------
Reported earnings 1,171 917 687
- --------------------------------------------------------------------------------
Less:
Gain on sales of corporate assets 200 43 97
Restructuring charge (36) (19) --
Goodwill amortization -- (14) (9)
Additional student loan provision -- -- (143)
- --------------------------------------------------------------------------------
Operating earnings $ 1,007 $ 907 $ 742
================================================================================
Reported efficiency ratio 58.1% 61.2% 61.3%
Reported ROE 51.4% 36.5% 21.5%
Reported economic profit $ 906 $ 616 $ 277
- --------------------------------------------------------------------------------
Operating efficiency ratio 59.3% 61.0% 62.5%
Operating ROE 43.9% 36.0% 23.3%
Operating economic profit $ 742 $ 606 $ 333
================================================================================
REVENUE
Operating revenue for the year was $4,676 million, up $338 million from 2001 due
to volume growth experienced in all credit products (cards, lending products and
mortgages) and in customer deposits. Spreads improved in cards and mortgages but
declined elsewhere. Revenue also increased due to gains on sales of mortgages,
higher prepayment fees, higher hedging gains from managing prepayment risk, and
higher student loan servicing fees, partially offset by lower student loan
volumes. These increases were partially offset by lower revenue from lending
products as a result of higher internal commissions paid to the segments,
including personal banking and small business banking, the loss of ongoing
revenue from the sale of the Merchant Card Services business in 2001, lower
treasury revenue and lower West Indies revenue due to the change to equity
accounting.
In 2001, operating revenue was $4,338 million, up $292 million from 2000.
The increase was due to volume growth in deposits, cards and mortgages, improved
spreads in mortgages, cards and lending products, and higher treasury earnings,
partially offset by lower deposit spreads and the loss of ongoing revenue from
exiting property and casualty insurance and Merchant Card Services businesses.
Reported revenue is set out in the table below.
- --------------------------------------------------------------------------------
REVENUE - CIBC RETAIL MARKETS
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Reported revenue (TEB)
Personal banking $ 1,126 $ 993 $ 952
Small business banking 720 661 681
West Indies 448 281 268
Cards 1,241 1,128 936
Lending products 582 634 624
Mortgages(1) 623 479 332
Insurance 72 50 245
Other 67 163 105
- --------------------------------------------------------------------------------
4,879 4,389 4,143
- --------------------------------------------------------------------------------
Less:
Gain on sales of corporate assets 203 58 97
Goodwill amortization -- (7) --
- --------------------------------------------------------------------------------
Operating revenue (TEB) $4,676 $ 4,338 $ 4,046
================================================================================
By business:
Personal banking $ 1,126 $ 993 $ 952
Small business banking 720 661 681
West Indies 245 281 268
Cards 1,241 1,077 936
Lending products 582 634 624
Mortgages(1) 623 479 332
Insurance 72 50 148
Other 67 163 105
- --------------------------------------------------------------------------------
Operating revenue (TEB) $ 4,676 $ 4,338 $ 4,046
================================================================================
(1) Comparative figures have been reclassified to conform with the
presentation used in 2002.
Revenue details are as follows:
Personal banking is the individual customer segment (customers other than
those in Imperial Service and global private banking and trust). Revenue is
earned from commission and service fees paid by CIBC's product
- --------------------------------------------------------------------------------
34
CIBC ANNUAL REPORT 2002
- --------------------------------------------------------------------------------
groups, primarily the investments, deposits, mortgages and lending products
businesses. Operating revenue was $1,126 million, up $133 million from 2001 due
to increases in fee revenue and internal commission income, as well as volume
growth in customer deposits, partially offset by the effect of lower interest
rates.
Small business banking is the customer segment supporting small
owner-operated businesses, including owners' personal holdings. Revenue is
earned from commission and service fees paid by CIBC's product groups, primarily
the investments, deposits, mortgages and lending products businesses. Operating
revenue was $720 million, up $59 million from 2001 as a result of higher
internal commission revenue and volume growth in customer deposits, partially
offset by the effect of lower interest rates.
West Indies, prior to October 11, 2002 when FirstCaribbean International
Bank(TM) (FCIB) was formed, was a full-service banking operation in eight
countries, servicing all customer segments through a 42-branch network and
electronic delivery channels. Revenue was earned on net interest spreads, and
sales and service fees. FCIB was formed as a result of the combination of the
Caribbean retail, corporate and international banking operations of CIBC and
Barclays Bank PLC. After the formation of FCIB, revenue represents CIBC's
earnings from its approximate 44% equity investment in FCIB. Operating revenue
was $245 million, down $36 million from 2001 due to the change to equity
accounting.
Cards comprises a portfolio of credit cards. Revenue is earned through
spreads and fees. Operating revenue was $1,241 million, up $164 million from
2001 due to improved spreads and growth in average balances under
administration. These factors more than offset the loss of ongoing revenue from
the sale of the Merchant Card Services business in 2001.
Lending products comprises personal (including student loans), small
business and agricultural lending portfolios. Revenue is earned through net
interest spreads and service fees, less internal commissions paid to the
customer segments. Operating revenue was $582 million, down $52 million from
2001. Volume increases in all products, other than student loans, were more than
offset by higher internal commissions paid to the segments. Fees earned on
managing student loans more than offset the impact of reduced volumes within the
student loan portfolio.
Mortgages includes both residential and commercial mortgages. Revenue is
earned through spreads, fees, mortgage sales and hedging activities, less
internal commissions paid to the customer segments. Operating revenue was $623
million, up $144 million from 2001 due to improved volume and spreads, gains on
sales of mortgages, higher prepayment fees earned and higher hedging gains from
managing prepayment risk.
Insurance provides creditor insurance products. Revenue comprises earned
premiums less claims plus investment income. Operating revenue was $72 million,
up $22 million from 2001 due to increased penetration of creditor insurance
products.
Other includes electronic and self-service banking, and the allocation of
a portion of treasury revenue. Operating revenue was $67 million, down $96
million from 2001 primarily due to reduced treasury earnings.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $418 million in 2002, up $22 million from
the prior year due to higher volumes.
In 2001, the provision for credit losses was $396 million, down $283
million from 2000. In 2000, the provision included $365 million related to
government-sponsored student loans. Excluding the provision of $365 million from
2000, the provision for credit losses in 2001 was up $82 million from 2000
reflecting volume growth in the cards business and weakening economic
conditions.
NON-INTEREST EXPENSES
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES - CIBC RETAIL MARKETS
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Reported non-interest expenses $2,831 $2,685 $2,540
Less:
Restructuring charge 58 32 1
Goodwill amortization -- 7 9
- --------------------------------------------------------------------------------
Operating non-interest expenses $2,773 $2,646 $2,530
================================================================================
Operating non-interest expenses were $2,773 million in 2002, up $127 million
from the prior year due to higher compensation costs and spending on marketing
and technology.
The operating efficiency ratio for 2002 improved to 59.3% from 61.0% in
2001.
In 2001, operating non-interest expenses were $2,646 million, up $116
million from 2000 as a result of spending to support growth in credit products'
volumes, higher compensation and occupancy costs and infrastructure spending,
partially offset by expense declines as a result of businesses exited.
Reported non-interest expenses are set out in the table above.
The regular workforce headcount was 16,978 at year-end, down 1,550 from
the prior year mainly due to the exclusion of the West Indies workforce.
AVERAGE ASSETS
Average assets in 2002 were $144.6 billion, up $13.2 billion from the prior
year, largely related to the growth in residential mortgages.
- --------------------------------------------------------------------------------
35
CIBC ANNUAL REPORT 2002
2002 Results
o Operating ROE was 54%
o Non-institutional assets
under administration,
including acquired assets,
increased by 24%. Excluding
acquired assets, growth was
negative 4%
o Mutual fund assets increased
by 14% for the year,
including acquired assets.
Excluding acquired assets,
growth was negative 1%, vs.
overall mutual fund industry
decline of 3%
Our Priorities
o Capitalize on acquisitions to
support and accelerate our
growth objective
o Continue to increase the
investment advisory
capability of our branch-
based sales force
o Enhance products and services
through additional CIBC and
third-party offerings
Our Ongoing Objectives
o Achieve operating earnings
growth of 10% for the year
o Increase mutual fund assets
by 5%
o Increase non-institutional
assets under administration
by 4%
[PHOTO OMITTED]
================================================================================
[PHOTOS OMITTED]
GERRY McCAUGHEY
Vice-Chair
CIBC Retail & Wealth -
CIBC Wealth Management
- --------------------------------------------------------------------------------
PETER E. MCCAWLEY (above), President of Aramark Canada Ltd. meets with
> CIBC Wealth Management Private Banker Lynne Maxwell in CIBC's Private
Banking Hall to discuss his integrated financial management needs.
- --------------------------------------------------------------------------------
CIBC Wealth Management is focused on providing relationship-based advisory
sales, service and product solutions to the full spectrum of wealth-building
clients. A sales force of more than 3,000 investment professionals in our
Canadian and U.S. full-service brokerages, and our Imperial Service and private
banking branch-based network, deliver investment products and services to help
clients achieve their financial goals.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CIBC Retail & Wealth - CIBC Wealth Management
- --------------------------------------------------------------------------------
Our products and services include asset management, a full range of CIBC and
third-party mutual funds, fixed-term investments, trust services, and a broad
selection of investment and credit products, as well as our online discount
brokerage services. TAL Global Asset Management Inc. (TAL) delivers global
investment services for institutional, private and mutual fund investors.
- --------------------------------------------------------------------------------
Canadian household investible assets are expected to more than double this
decade, rising from $1.6 trillion in 2001 to almost $3.7 trillion in 2010.*
Through our team of investment professionals, we are well positioned to meet
the growing demand for advice and the desire for more sophisticated products.
IMPERIAL SERVICE
This branch-based advisory group provides affluent clients with objective and
comprehensive advice and planning on a broad range of investment, credit and
banking products. We have over 1,200 financial advisers and investment
specialists, of whom more than 850 are licensed to provide investment advice on
a wide range of third-party investment choices, as well as offering CIBC's
complete range of investment, credit and day-to-day banking solutions. In 2003,
our goal is to continue growing our team of fully licensed advisers to more than
1,000 in order to better meet the full financial needs of our clients.
PRIVATE CLIENT INVESTMENT
This group includes CIBC Wood Gundy and CIBC Oppenheimer, CIBC's Canadian and
U.S. full-service brokerages, and focuses on both affluent and high-net-worth
individuals. In 2002, we created the largest full-service brokerage in Canada
through the integration of the Merrill Lynch Canada retail brokerage business
with CIBC Wood Gundy. In 2003, our full-service brokerage operations will
continue to emphasize fee-based financial services and solutions.
GLOBAL PRIVATE BANKING AND TRUST
This group provides a comprehensive range of global solutions, including
investment management, trusts, private banking and global custody, to meet the
financial management needs of high-net-worth individuals, families and
corporations. In 2002, our goal was to further strengthen Private Banking client
relationships by continuing to enhance our services. We achieved this through a
greater focus on our personalized service and through a variety of additional
measures, including a new Internet presence and a new Private Banking
Convenience Card(TM) with ABM messaging. In 2003, our goal is to enhance our
product offer by focusing on managed products sold directly by Private Banking
as well as with the support of our TAL Private Management Ltd. and CIBC Wood
Gundy partners.
WEALTH PRODUCTS
This group includes mutual funds, investment management services, GICs and
discount brokerage services. The acquisition of Merrill Lynch Canada's retail
brokerage business also included CM Investment Management Inc. (formerly Merrill
Lynch Investment Managers Canada Inc.) and has added 39 additional mutual funds
to our proprietary product offering, including what is now the Renaissance
family of funds and Frontiers pools. This acquisition also included what is now
CIBC Wood Gundy Investment Consulting Service(TM), our separately managed
account program.
The above transaction, combined with CIBC Mutual Funds and the Talvest
family of funds, positions us as #2 among the Canadian banks (and #4 in the
industry), in terms of mutual fund assets under management. CIBC ranked #1 in
mutual fund net sales among banks in 2002.
CIBC ranks second in assets under management in the Canadian mutual fund
wrap market. Over the course of the year, CIBC Personal Portfolio Services(R),
our fee-based, discretionary investment management product, grew 10% from $5.9
billion to $6.5 billion. Managed Portfolio Services, CIBC All-In-One Fund
Solution, has recorded total net sales of $444 million since its launch in
February 2002. As well, CIBC Wood Gundy Investment Consulting Service, our
separately managed wrap product, maintained its leadership position in the
market with assets under management growing 2% in 2002.
OUTLOOK FOR 2003
In 2003, we expect to maintain our leadership in advice-based distribution. This
leadership position will allow us to reach our existing and new customers with a
broad range of investment management products and services. In these
unpredictable capital markets, we believe clients will be well served by our
comprehensive, advice-based approach. As well, we will continue to drive scale
efficiencies and to improve our revenue productivity.
*Source Investor Economics, Household Balance Sheet research
- --------------------------------------------------------------------------------
37
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
Earnings
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Earnings
Reported earnings 434 311 176
Operating earnings 408 309 285
Revenue
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Revenue
Reported revenue 2,741 2,316 2,793
Operating revenue 2,713 2,294 2,793
Expenses
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Expenses
Reported non-interest expenses 2,093 1,920 2,551
Operating non-interest expenses 2,104 1,887 2,374
- --------------------------------------------------------------------------------
Financial Results: CIBC Retail & Wealth - CIBC Wealth Management
- --------------------------------------------------------------------------------
EARNINGS
- --------------------------------------------------------------------------------
EARNINGS - CIBC WEALTH MANAGEMENT
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Total revenue (TEB) $ 2,793 $ 2,316 $ 2,741
Provision for credit losses -- -- 1
Non-interest expenses 2,551 1,920 2,093
- --------------------------------------------------------------------------------
Income before income taxes 242 396 647
Income taxes 66 85 213
- --------------------------------------------------------------------------------
Reported earnings 176 311 434
================================================================================
Less:
Gain on sales of corporate assets -- 22 20
Restructuring charge 3 (20) 6
Merrill Lynch acquisition-related costs (112) -- --
- --------------------------------------------------------------------------------
Operating earnings $ 285 $ 309 $ 408
================================================================================
Reported efficiency ratio 91.3% 82.9% 76.4%
Reported ROE 32.6% 72.0% 74.1%
Reported economic profit $ 115 $ 258 $ 356
- --------------------------------------------------------------------------------
Operating efficiency ratio 85.0% 82.3% 77.6%
Operating ROE 53.7% 71.4% 69.7%
Operating economic profit $ 224 $ 255 $ 331
================================================================================
CIBC Wealth Management operating earnings, as set out in the table above, were
$285 million in 2002, down $24 million from the prior year. This was primarily
due to lower retail trading volumes reflecting continued weakness in equity
markets, lower GIC revenue as a result of narrower spreads and lower volumes, as
well as lower treasury earnings. The decrease was partially offset by increased
Imperial Service commission revenue due to increased loan, mortgage and
investment product volumes, higher average asset values generating fee-based
revenue and earnings from the acquisitions noted below.
In 2001, operating earnings were $309 million, down $99 million from 2000
due to lower revenue on retail trading activities, resulting from weaker equity
market conditions that were further challenged by the events of September 11,
2001. The decrease was partially offset by improved Imperial Service revenue
that resulted from product volume increases, and revenue and expense allocations
renegotiated during the year.
Reported earnings are set out in the table above.
REVENUE
- --------------------------------------------------------------------------------
REVENUE - CIBC WEALTH MANAGEMENT
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Reported revenue (TEB)
Imperial Service $ 667 $ 627 $ 558
Private client investment(1) 1,320 977 1,280
Global private banking
and trust 127 145 191
Wealth products(1) 643 486 663
Other 36 81 49
- --------------------------------------------------------------------------------
2,793 2,316 2,741
- --------------------------------------------------------------------------------
Less:
Gain on sales of
corporate assets -- 22 28
- --------------------------------------------------------------------------------
Operating revenue (TEB) $2,793 $2,294 $2,713
================================================================================
By business:
Imperial Service $ 667 $ 627 $ 558
Private client investment(1) 1,320 977 1,280
Global private banking
and trust 127 123 163
Wealth products(1) 643 486 663
Other 36 81 49
- --------------------------------------------------------------------------------
Operating revenue (TEB) $2,793 $2,294 $2,713
================================================================================
(1) Comparative figures have been reclassified to conform with the presentation
used in 2002.
Operating revenue for the year was $2,793 million, up $499 million from 2001
primarily due to the acquisitions of:
o The remaining shares in TAL Global Asset Management Inc. in October 2001;
o The retail brokerage business of Merrill Lynch Canada Inc. in December
2001; and
o CM Investment Management Inc. (formerly Merrill Lynch Investment Managers
Canada Inc.) in January 2002.
In addition, revenue increased due to higher Imperial Service revenue, partially
offset by lower GIC and retail trading revenue.
In 2001, operating revenue was $2,294 million, down $419 million from 2000
as a result of lower annual incentive fees and retail trading volumes associated
with weaker equity markets. Also, the loss of ongoing revenue resulting from the
sales of the Guernsey private banking business in the third quarter of 2001 and
CIBC Suisse S.A. in the fourth quarter of 2000 contributed to the overall
decline in revenue.
Reported revenue is set out in the table above.
- --------------------------------------------------------------------------------
38
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Revenue details are as follows:
Imperial Service is the customer segment offering financial advice to
CIBC's affluent clients. Specially trained financial advisers support the
financial planning and product fulfillment needs of these clients. Revenue is
earned primarily from sales and service fees paid by CIBC's product groups.
Operating revenue was $667 million, up $40 million from 2001 as a result of
increased commissions earned on higher loan, mortgage and investment product
volumes, partially offset by narrower spreads on transaction deposits.
Private client investment generates fees and commissions from full-
service retail brokerage, providing equity and debt investments, mutual fund
products, asset management services and advisory and financial planning services
to individuals in Canada and the U.S. Operating revenue was $1,320 million, up
$343 million from 2001, resulting from the acquisition of the retail brokerage
business of Merrill Lynch Canada Inc. in December 2001. Excluding revenue earned
from the acquired business, revenue was down $43 million from 2001 due to lower
retail trading volumes, reflecting a continued weakness in the equity markets.
Global private banking and trust provides a comprehensive range of global
solutions, including investment management, trusts, private banking and global
custody, to meet the financial management needs of individuals, families and
corporations with significant financial resources. Revenue is earned from net
interest spreads, fees and commissions. Operating revenue was $127 million, up
$4 million from 2001. Excluding foregone revenue related to the exit of the
Guernsey private banking business in July 2001, operating revenue was up $18
million as a result of increased business growth, particularly in the Asian and
Cayman operations.
Wealth products includes mutual funds, investment management services,
GICs and discount brokerage services. These investment products are developed
and distributed to retail, institutional, small business and Imperial Service
customers. Revenue is earned from net interest spreads, fees and commissions.
Operating revenue was $643 million, up $157 million from 2001 due to the
acquisition of the remaining shares in TAL Global Asset Management Inc. in
October 2001, and CM Investment Management Inc. in January 2002. Excluding
revenue earned from the acquired businesses, operating revenue was down $27
million primarily due to lower GIC revenue as a result of narrower spreads and
lower volumes.
Other consists primarily of the allocation of a portion of treasury
revenue. Operating revenue was $36 million, down $45 million from 2001 due to
lower treasury revenue.
NON-INTEREST EXPENSES
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES - CIBC WEALTH MANAGEMENT
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Reported non-interest expenses $ 2,551 $ 1,920 $ 2,093
Less:
Restructuring charge (6) 33 (11)
Merrill Lynch acquisition-related costs 183 -- --
- --------------------------------------------------------------------------------
Operating non-interest expenses $ 2,374 $ 1,887 $ 2,104
================================================================================
Operating non-interest expenses for the year were $2,374 million, up $487
million from 2001. Excluding the ongoing expenses of the acquired businesses,
operating non-interest expenses were down $40 million. This was primarily due to
cost-containment activities, including savings on staff-related costs as a
result of the cost-reduction program announced in the fourth quarter of 2001 and
lower revenue-related compensation.
The operating efficiency ratio for 2002 was 85.0%, up from 82.3% in 2001.
In 2001, operating non-interest expenses were $1,887 million, down $217
million from 2000 as a result of lower revenue-related and staff-related
expenses, combined with active cost-management activities. As well, expenses
were lower due to the reduction of ongoing costs related to the Guernsey private
banking business sold in the third quarter of 2001 and CIBC Suisse S.A. sold in
the fourth quarter of 2000.
Reported non-interest expenses are set out in the table above.
The regular workforce headcount totalled 9,062 at year-end, up 2,032 from
2001 due to the acquisitions noted above, partially offset by integration
synergies from the acquired businesses and the cost-reduction program announced
in the fourth quarter of 2001.
SELECTED INFORMATION
Average assets in 2002 were $27.3 billion, up $4.4 billion from the prior year
primarily due to acquired businesses.
CIBC Wealth Management assets under administration for individuals
totalled $207.0 billion at year-end, an increase of $40.6 billion, or 24.4%,
from 2001 primarily due to acquired businesses.
- --------------------------------------------------------------------------------
CIBC WEALTH MANAGEMENT ASSETS UNDER ADMINISTRATION - FOR INDIVIDUALS
$ billions, as at October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Private client - Canada $ 83.4 $ 38.3 $ 42.5
Private client - U.S. 57.5 61.2 65.4
Global private banking and trust 17.4 18.4 17.1
Wealth products 70.7 63.6 52.6
Intersegment elimination(1) (22.0) (15.1) (14.2)
- --------------------------------------------------------------------------------
$ 207.0 $ 166.4 $ 163.4
================================================================================
(1) Intersegment elimination represents assets under management of wealth
products administered by private client, and global private banking and
trust.
- --------------------------------------------------------------------------------
39
CIBC ANNUAL REPORT 2002
2002 Results
o Operating loss of $160
million
o Operating ROE of (5.9)%
o Merchant banking revenue of
$198 million
Our Priority
o Reduce capital employed in
lending and merchant banking
Our Ongoing Objectives
o Operating earnings of $400
million to $600 million
o Operating ROE of 15% to 20%
[PHOTO OMITTED]
================================================================================
[PHOTO OMITTED]
DAVID KASSIE
Vice-Chair
CIBC World Markets
- --------------------------------------------------------------------------------
GWYN MORGAN (above), President and CEO, of EnCana, one of the world's
> leading independent oil and gas companies. EnCana was formed in 2002
following the merger of Alberta Energy Company Ltd. with PanCanadian Energy
Corp. CIBC World Markets acted as a lead adviser on the deal.
- --------------------------------------------------------------------------------
CIBC World Markets is a full-service investment bank, active throughout North
America, with niche capabilities in the U.K. and Asia. Our strategy is to
provide our full capabilities to targeted sectors and industry groups where we
excel and have strong potential for profitability.
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
CIBC World Markets
- --------------------------------------------------------------------------------
Clearly, 2002 was a difficult year for North America's investment banks. Reports
of corporate malfeasance, coming closely on the heels of the events of September
11, led to a prolonged weakening and near unprecedented volatility in the
capital markets. Our earnings were further affected by higher-than-expected
corporate loan losses, higher write-downs in the collateralized debt obligation
and high-yield debt portfolios, and lower merchant banking net revenue resulting
from higher merchant banking write-downs.
- --------------------------------------------------------------------------------
Given these factors, we did not achieve our operating earnings, operating ROE or
merchant banking revenue targets during 2002 - after averaging $900 million in
operating NIAT and a 20.5% operating ROE for the three years ended October 31,
2001.
Our top priority is to return CIBC World Markets to profitability and to
deliver the level of returns that we, and our shareholders, have come to expect
from our wholesale business.
REDUCING CAPITAL
To achieve this we are aggressively focused on one objective - reducing capital.
Reducing capital is key to addressing the underlying factors that affected our
performance in 2002.
By lowering our economic capital, particularly in the riskier businesses,
we will reduce future earnings volatility; decrease the level of absolute loan
losses; increase the liquidity of capital; and generate higher levels of ROE.
Our target is to bring capital usage down to under $4 billion over the next
three years from its current level of more than $5 billion and improve capital
efficiency and quality.
During the year we initiated several actions in support of this objective
including:
o Changing our philosophy for managing credit: While CIBC World Markets will
continue to be a major underwriter of credit for large corporate clients,
we will do so at less risk by holding less exposure. We have changed our
approach from one of "originating and holding credit," which places
pressure on our balance sheet, to one of "originating and selling credit,"
which will increase the velocity of capital and allow us to increase our
underwriting activities. We've also instituted lower hold levels, by risk
rating and region, which will significantly reduce our risk to future name
exposures.
o Reducing capital in the large corporate loan book: We will use credit
derivatives and hedging strategies to reduce concentrations of core loans
and manage down our remnant portfolio. This strategy has proved successful
in the past in freeing up capital and balance sheet resources.
o Reducing commitments in the merchant banking portfolio: We are reviewing
commitments within the portfolio on a fund-by-fund basis to determine what
additional assets can be sold into the secondary market, as well as
examining bulk portfolio sales or securitizations in order to further
maximize capital relief. Early success has been achieved in this more
recent initiative with the completion of three sales of our private equity
fund investments during 2002, resulting in a decrease in commitments of
approximately $395 million.
REFOCUSING THE U.S. OPERATIONS
During the year, we took steps to rightsize our U.S. operations through the
elimination of 299 positions. These reductions were necessary to align our cost
structure with the particularly weak market conditions. At the same time, we
continued to selectively upgrade talent in sectors or industry groups where we
have the strongest potential for growth and profitability, particularly our
growth and industrial teams. These additions, combined with the realignment of
our resources and the strength of our mid-market strategy, leave our U.S.
business poised for improved performance as markets strengthen.
ENHANCING OUR LEADERSHIP POSITION IN CANADA
In Canada, despite a year that was distinguished by very few deals, our M&A team
achieved the #1 position by advising on 30 transactions worth a total of $33.4
billion. Among our successes was our participation in three of the five biggest
deals of the year, including acting as a lead adviser on the biggest of them
all, the merger of Alberta Energy Company Ltd. with PanCanadian Energy Corp. to
form EnCana. CIBC World Markets also achieved the #1 industry ranking, with
respect to equity financings completed in Canada in 2002, and its research
capabilities were ranked #1 by Canadian fixed income clients for 2002. The
overall strength of our Canadian operations, including having the largest
salesforce, will ensure that we continue to be a dominant player in 2003.
- --------------------------------------------------------------------------------
41
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
GROWING OUR NICHE CAPABILITIES IN THE U.K. AND ASIA
In the U.K., we are well on our way to transforming our business from being
solely focused on providing credit to corporate clients, to a leading leveraged
finance franchise with strong advisory capabilities. In Asia, we continue to
develop our alliance strategy which has demonstrated strong value to both our
Asian and North American client base.
EMPLOYEES - A CORE STRENGTH
While our overall performance fell below our expectations in 2002, our employees
stepped up their commitment in the face of extremely difficult markets. This was
particularly true in our U.S. franchise where the events of September 11 and the
challenge of resuming operations in the face of a weakening environment put our
employees under tremendous stress. Their efforts to continue to battle the
external conditions are an inherent strength of our organization - and will
continue to be a key factor in improving our performance in the months to come.
OUTLOOK FOR 2003
Given the economic outlook, we are expecting flat to modest revenue growth in
2003. Our focus will be on reducing capital usage and managing our business
mix, as a way to reduce earnings volatility and minimize risk. The key risk to
our 2003 outlook continues to be the extent of the current market downturn. The
rate of recovery will play a major role in trading room volumes, origination,
new issues, mergers and acquisitions activities, and loan losses.
- --------------------------------------------------------------------------------
42
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Financial Results: CIBC World Markets
- --------------------------------------------------------------------------------
EARNINGS
CIBC World Markets operating loss, as set out in the table below, was $160
million in 2002, down from operating earnings of $843 million in 2001 due to
significantly lower revenue and a higher provision for credit losses, reflecting
difficult financial markets in the U.S., partially offset by lower non-interest
expenses and increased income tax recoveries.
In 2001, operating earnings were $843 million, down $333 million from 2000
primarily due to decreased revenue and an increase in the provision for credit
losses, reflecting deteriorating market conditions and the effects of the
September 11, 2001 events, partially offset by lower revenue-related expenses
and reduced income taxes.
Reported earnings are set out in the table below.
- --------------------------------------------------------------------------------
EARNINGS - CIBC WORLD MARKETS
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Total revenue (TEB) $ 3,013 $ 4,066 $ 4,781
Provision for credit losses 1,062 694 286
Non-interest expenses 2,518 2,730 2,938
- --------------------------------------------------------------------------------
(Loss) income before income taxes and
non-controlling interests (567) 642 1,557
Income taxes and non-controlling
interests (423) (166) 434
- --------------------------------------------------------------------------------
Reported (loss) earnings (144) 808 1,123
- --------------------------------------------------------------------------------
Less:
Restructuring charge (36) (37) --
Adjustment to future income tax assets 52 -- --
Bulk sale of U.S. corporate loans -- (94) --
Restructured ownership of certain
U.S.-based loans and leases -- 138 --
Specific provisions for
credit losses associated with the
bulk loan sale -- (28) --
New York premises consolidation -- -- (27)
Oppenheimer acquisition-related costs -- -- (12)
Goodwill amortization -- (14) (14)
- --------------------------------------------------------------------------------
Operating (loss) earnings $ (160) $ 843 $ 1,176
================================================================================
Reported efficiency ratio 83.6% 67.1% 61.4%
Reported ROE (5.5)% 18.8% 25.6%
Reported economic (loss) profit $ (598) $ 309 $ 556
- --------------------------------------------------------------------------------
Operating efficiency ratio 81.6% 62.5% 59.7%
Operating ROE (5.9)% 19.7% 26.9%
Operating economic (loss) profit $ (614) $ 343 $ 610
================================================================================
REVENUE
In 2002, operating revenue was $3,013 million, down $1,215 million from the
prior year due to lower trading and origination activities. These results
reflect the impact of difficult financial markets in the U.S. associated with
weak economic conditions. Current year results also include increased net
merchant banking write-downs, and write-downs to CIBC's collateralized debt
obligation and high-yield portfolios (both reported within investment banking
and credit products).
Operating revenue in 2001 was $4,228 million, down $553 million from 2000
due to lower U.S. investment banking revenue, combined with a decrease in net
merchant banking gains. Reported revenue is set out in the table below.
- --------------------------------------------------------------------------------
REVENUE - CIBC WORLD MARKETS
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Reported revenue (TEB)
Capital markets $ 1,288 $ 1,534 $ 1,516
Investment banking
and credit products 1,115 1,474 1,723
Merchant banking 198 569 1,021
Commercial banking 446 481 491
Other (34) 8 30
- --------------------------------------------------------------------------------
$ 3,013 $ 4,066 $ 4,781
- --------------------------------------------------------------------------------
Less:
Bulk sale of U.S.
corporate loans -- (162) --
- --------------------------------------------------------------------------------
Operating revenue (TEB) $ 3,013 $ 4,228 $ 4,781
================================================================================
By business:
Capital markets 1,288 1,534 1,516
Investment banking
and credit products 1,115 1,636 1,723
Merchant banking 198 569 1,021
Commercial banking 446 481 491
Other (34) 8 30
- --------------------------------------------------------------------------------
Operating revenue (TEB) $ 3,013 $ 4,228 $ 4,781
================================================================================
Revenue details are as follows:
Capital markets operates trading, sales and research businesses serving
institutional, corporate and government clients across North America and around
the world. Revenue is generated from fees, commissions, spread-based income and
from taking proprietary positions within prescribed risk parameters. Operating
revenue was $1,288 million, down $246 million from 2001 due to weaker
performance from the equity structured products business and fixed income
activities resulting from the effects of unfavourable market conditions.
- --------------------------------------------------------------------------------
Earnings
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Earnings
Reported (loss) earnings 1,123 808 (144)
Operating (loss) earnings 1,176 843 (160)
Revenue
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Revenue
Reported revenue 4,781 4,066 3,013
Operating revenue 4,781 4,228 3,013
Expenses
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Expenses
Reported non-interest expenses 2,938 2,730 2,518
Operating non-interest expenses 2,854 2,645 2,459
43
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Investment banking and credit products provides advisory services and
underwriting of debt, credit and equity for corporate and government clients
across North America and around the world. Revenue is earned from fees relating
to merger and acquisition services, underwriting activities, advisory services,
and loan syndications. In addition, net interest is earned on spreads on
corporate loans. Operating revenue was $1,115 million, down $521 million from
2001 due to lower origination activities in the U.S. associated with weak
economic conditions. Current year results also include the impact of higher
write-downs to CIBC's collateralized debt obligation and high-yield portfolios.
Merchant banking makes investments to create, grow and recapitalize
companies across a variety of industries. Revenue is generated from fees,
interest and dividends earned on investments and from gains or losses associated
with these investments. Operating revenue was $198 million, down $371 million
from 2001 as a result of the combination of lower realized gains and higher
asset write-downs.
Commercial banking originates financial solutions centred around credit
products for medium-sized businesses in Canada. Revenue is generated from
interest, fees and service charges. Operating revenue was $446 million, down $35
million from 2001 due to decreased asset levels and narrower credit spreads.
Other includes the allocation of a portion of treasury revenue, net of
unallocated funding charges; CEF Capital Limited, an affiliated Asian merchant
bank holding company; and other revenue not directly attributed to the main
businesses listed above. Operating revenue was $(34) million, down $42 million
from 2001 primarily as a result of interest income on a tax reassessment
included in the prior year.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $1,062 million in 2002, up $416 million from
2001, after excluding the provision associated with the bulk loan sale in the
prior year, due to a combination of deteriorating market conditions and specific
provisions relating to Enron Corporation, Global Crossing Ltd. and Teleglobe
Inc.
In 2001, the provision for credit losses was $646 million, after excluding
the provision associated with the bulk loan sale, up $360 million from 2000 due
to general weakening of credit markets in the latter part of the year.
NON-INTEREST EXPENSES
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES - CIBC WORLD MARKETS
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Reported non-interest expenses $2,518 $2,730 $2,938
Less:
Restructuring charge 59 63 --
Restructured ownership of certain
U.S.-based loans and leases -- 8 --
New York premises consolidation -- -- 50
Oppenheimer acquisition-related costs -- -- 20
Goodwill amortization -- 14 14
- --------------------------------------------------------------------------------
Operating non-interest expenses $2,459 $2,645 $2,854
================================================================================
Operating non-interest expenses were $2,459 million in 2002, down $186 million
from the prior year mainly due to lower variable compensation associated with
lower revenue and savings from the cost-reduction program initiated in 2001.
These reductions were partially offset by the impact of consolidation of Juniper
Financial Corporation, expenditures associated with the rising costs of
litigation in the U.S. and higher severance costs.
The operating efficiency ratio for 2002 was 81.6%, up from 62.5% in 2001,
primarily as a result of lower revenue.
In 2001, operating non-interest expenses were $2,645 million, down $209
million from 2000 as a result of lower variable compensation.
Reported non-interest expenses are set out in the table above.
The regular workforce headcount was 3,131 at year-end, up 135 from the end
of 2001. Excluding the impact of consolidation of Juniper Financial Corporation,
regular workforce headcount was down 203 from the end of 2001 as a result of the
cost-reduction program initiated at the end of 2001 and additional 2002 programs
to reduce staff levels.
AVERAGE ASSETS
Average assets in 2002 were $115.4 billion, down $6.6 billion from the prior
year as lower equity securities resulted from the bearish market outlook present
in the U.S. throughout the year. Lending assets were also reduced.
- --------------------------------------------------------------------------------
44
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Amicus
- --------------------------------------------------------------------------------
Amicus comprises the co-branded retail electronic banking businesses, including
President's Choice Financial services (Loblaw Companies Limited), Marketplace
Bank (Winn-Dixie Stores, Inc.), Safeway SELECT Bank (Safeway Inc.) and the
non-branch ABM business. During the year, CIBC decided to close its U.S.
electronic banking operations and focus on operations in Canada where, during
the year, almost 300,000 new customers opened accounts at 212 pavilions across
the country.
- --------------------------------------------------------------------------------
During 2002, CIBC made a commitment to its stakeholders that we would assess
the U.S. operations of Amicus and mitigate the financial impact of this business
by year-end. While we were encouraged by the early performance of Amicus in the
U.S., where there is tremendous opportunity for growth, we knew it was necessary
to weigh this carefully against the costs and risks associated with expansion.
During the year, we assessed the ability of the business to meet CIBC's value
commitment to its shareholders in the timeframe required. Various options were
considered, including potential strategic alliances to assist in this expansion.
In October 2002, it was determined that the closure of the U.S. operations was
necessary to meet CIBC's commitment to significantly reduce losses in 2003. This
will be conducted in a prudent and orderly fashion with regard to customers,
affected employees and the U.S. retailers.
The focus for President's Choice Financial was on expanding products and
services for over one million customers, capitalizing on their satisfaction with
our no fee daily banking offer and convenient in-store pavilions. President's
Choice Financial's customer base grew 40% during the year and funds managed
increased 58%. Funds managed per customer are growing steadily and customer
satisfaction ratings continue to exceed the industry norm. In a recent
independent survey, President's Choice Financial maintained a loyalty index at
17 points above the industry average.
In addition, in the recent Gomez survey of Internet sites of Canadian
banks, President's Choice Financial received top ranking in the Overall Cost
category, confirming the strong value proposition offered to our customers. The
website was ranked third in Customer Confidence, reflecting its reliability,
strong customer service and detailed privacy and security policies and
procedures.
OUTLOOK FOR 2003
For 2003, President's Choice Financial will continue to drive value, balancing
growth and customer acquisition with disciplined cost control. We expect to be
profitable in the fourth quarter of 2003.
- --------------------------------------------------------------------------------
2002 Results
o Added 788,000 new Amicus
customers for the two-year
period ended October 31, 2002
o President's Choice Financial
continued to build a strong
franchise, with 1.05 million
customers and $7.0 billion in
funds managed at October
31, 2002
o The decision was made to
close the U.S. electronic
banking operations
Our Priorities
o Maintain industry leading
customer loyalty and
satisfaction levels
o Continue customer acquisition
Our Ongoing Objectives
o Achieve profitability in
Canada by the end of 2003
o Grow President's Choice
Financial to more than two
million customers
[PHOTO OMITTED]
45
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
Earnings
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Earnings
Reported loss (129) (274) (468)
Adjusted loss (129) (245) (236)
Revenue
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Revenue
Reported revenue 75 148 230
Adjusted revenue 75 148 230
Expenses
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2000 2001 2002
Expenses
Reported non-interest expenses 290 578 951
Adjusted non-interest expenses 290 535 585
- --------------------------------------------------------------------------------
Financial Results: Amicus
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EARNINGS - AMICUS
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Total revenue (TEB) $ 230 $ 148 $ 75
Provision for credit losses 20 10 4
Non-interest expenses 951 578 290
- --------------------------------------------------------------------------------
Loss before taxes (741) (440) (219)
Income taxes (273) (166) (90)
- --------------------------------------------------------------------------------
Reported loss (468) (274) (129)
- --------------------------------------------------------------------------------
Less:
Restructuring charge (232) (26) --
Goodwill amortization -- (3) --
- --------------------------------------------------------------------------------
Adjusted loss $(236) $(245) $(129)
================================================================================
Adjusted loss for the year was $236 million, down $9 million from 2001 due to
revenue growth that more than offset increases in non-interest expenses and the
provision for credit losses. Adjusted loss for 2001 was $245 million, up $116
million from 2000 due to higher spending to support business growth. Adjusted
loss relating to the Canadian operations was $62 million (2001: $83 million;
2000: $63 million).
Reported loss is set out in the table above.
Reported and adjusted revenue for the year were $230 million, up $82
million from 2001 due to increasing volumes and spreads, primarily in Canada.
Revenue in 2001 was $148 million, up $73 million from 2000 due to business
growth.
Provision for credit losses was $20 million for the year, up $10 million
from 2001 due to volume growth. Provision for credit losses in 2001 was $10
million, up $6 million from 2000 for the reason noted above.
Adjusted non-interest expenses for the year, as set out in the table
below, were $585 million. This was up $50 million from 2001 to support business
growth, partially offset by cost-reduction initiatives in Canada and the U.S.
Reported non-interest expenses were up $373 million from the prior year
primarily as a result of the restructuring charge of $366 million to close the
U.S. electronic banking operations.
Non-interest expenses in 2001 were $578 million, up $288 million from 2000
to support volume growth.
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES - AMICUS
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Reported non-interest expenses $951 $578 $290
Less:
Restructuring charge 366 40 --
Goodwill amortization -- 3 --
- --------------------------------------------------------------------------------
Adjusted non-interest expenses $585 $535 $290
================================================================================
The regular workforce headcount totalled 2,349 at year-end, down 371 from 2001
due to cost-reduction initiatives.
- --------------------------------------------------------------------------------
Corporate and Other
- --------------------------------------------------------------------------------
Corporate and Other comprises the four functional groups - Treasury, Balance
Sheet and Risk Management (TBRM); Administration; Technology and Operations; and
Corporate Development - that support CIBC's business lines, as well as CIBC
Mellon's custody business and other revenue and expense items not directly
attributable to the four business lines. The revenue and expenses of these
functional groups are generally allocated to the business lines.
Treasury revenue refers to revenue generated by TBRM from funding and
hedging activities, and is generally allocated to the four business lines. In
2002, market positioning for interest rate movements generated lower revenue
than 2001. This was partially offset by gains on specific risk portfolios
managed by TBRM.
The operating earnings in Corporate and Other reflect the results at the
corporate level after application of CIBC's Manufacturer / Customer Segment /
Distributor Management Model, which is used to measure and report the results of
operations of the four business lines.
Operating loss for the year was $41 million, compared with operating
earnings of $30 million for 2001, primarily due to lower treasury revenue and
write-down of a preferred share investment in 2002, offset by interest income on
a tax reassessment.
- --------------------------------------------------------------------------------
EARNINGS - CORPORATE AND OTHER
$ millions, for the years ended October 31 2002 2001(1) 2000(1)
- --------------------------------------------------------------------------------
Reported (loss) $ (82) $ (76) $ (55)
Less:
Gain on sale of corporate assets -- -- 143
Events of September 11, 2001 (19) (4) --
Restructuring charge (22) (21) 12
Adjustment to future
income tax assets -- (66) --
General allowance -- -- (146)
Goodwill amortization -- (15) (17)
- --------------------------------------------------------------------------------
Operating (loss) earnings $ (41) $ 30 $ (47)
================================================================================
(1) Certain comparative figures have been reclassified to conform with the
presentation used in 2002.
- --------------------------------------------------------------------------------
46
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Treasury, Balance Sheet and Risk Management
- --------------------------------------------------------------------------------
A key success factor behind CIBC's ongoing strategy is the rigorous management
of CIBC's balance sheet and risk resources. The Treasury, Balance Sheet and Risk
Management (TBRM) group facilitates the direction of risk and balance sheet
(including capital) resources to higher-return and/or strategic growth
activities. In 2002, this approach was enhanced through the combination of
Treasury and Balance Sheet Management, with Risk Management, ensuring that
authority and accountability reside in one functional group, and creating
greater efficiency and effectiveness in managing CIBC's balance sheet (including
capital) and risk resources.
TBRM comprises the following services, functions and activities:
o Treasury provides CIBC-wide asset-liability, funding, liquidity, cash and
collateral management. It also ensures that CIBC is strongly and
effectively capitalized and manages capital in CIBC's legal entities.
o Credit Asset and Merchant Banking Portfolio Management applies
market-based techniques and models to the management of capital attributed
to large corporate credit assets and merchant banking investments. By
using direct loan sales, derivative hedges or structured transactions,
risky or concentrated positions are reduced, and selected exposures are
added to the portfolio to increase diversification and returns.
o Balance Sheet Measurement, Monitoring and Control oversees the critically
important balance sheet resource allocation process and is responsible for
the calculation of economic capital, including risk-adjusted return on
capital (RAROC) methodologies.
o TBRM's risk management services and functions identify, measure, monitor
and control CIBC's global credit, market, liquidity and operational risk
exposures. In addition, they develop and recommend risk management
policies and standards, and develop and implement methodologies and
infrastructure necessary to measure, monitor and control risk, in
accordance with these policies and standards.
During 2002, significant highlights for TBRM included:
o The re-engineering of retail credit adjudication services to support
CIBC's future growth in domestic retail activities.
o Continued disciplined management of CIBC's balance sheet and risk
resources, including the mix and use of capital, to optimize shareholder
value through the reduction of lower-quality balance sheet and risk
resources.
o The rigorous balance sheet resource allocation process continued to be
part of a common, CIBC-wide approach and now includes liquidity as a
formally rationed resource. Since the end of 1998, wholesale risk-weighted
assets have declined by almost $30 billion, while retail risk-weighted
assets have increased by $11 billion.
o Continued active management of the large corporate non-core loan portfolio
by the Credit Asset and Merchant Banking Portfolio Management group,
increasing our ability to liquefy our credit assets. In addition, the
group's mandate was expanded to include the governance and oversight of
merchant banking investments.
o The total allowance for credit losses exceeded gross impaired loans by $13
million as at October 31, 2002, compared with $592 million at the end of
2001.
o Maintenance of low aggregate Risk Measurement Unit (RMU) levels during
2002, in spite of continued challenging market conditions. This is
reflected in low RMUs across CIBC's trading and non-trading portfolios.
o Implementation of an enhanced framework of policies and standards for the
identification, measurement, monitoring and control of operational risk
congruent with industry standards.
o Development of a model for strategic risk capital.
OUTLOOK FOR 2003
In 2003, TBRM will play a leading role in reducing CIBC's large corporate credit
and merchant banking exposures as part of its ongoing independent measurement,
monitoring, control and optimization of balance sheet and risk resources. The
group is directing the implementation of a technology program aimed at enhancing
the accuracy, completeness and timeliness of CIBC's credit risk information.
Also, TBRM will continue to enhance its support of the governance of CIBC
through its interaction with the Board of Directors, its Risk Management and
Audit committees, and management committees.
- --------------------------------------------------------------------------------
2002 Results
o Integrated Treasury & Balance
Sheet Management and Risk
Management into an
independent functional group
o Achieved Tier 1 capital ratio
of 8.7%, and total capital
ratio of 11.3%, as at October
31, 2002
o Managed and reallocated
balance sheet and risk
resources to support CIBC's
growth based on economic
performance and other key
metrics
o Developed and enhanced models
for credit, market, liquidity
and operational risk and
introduced a model for
strategic risk
Our Priorities
o Target capital ratios of 8.5%
to 9.5% (Tier 1) and 11.5% to
12.5% (Total)
o Manage and reallocate balance
sheet and risk resources to
support achievement of CIBC's
targets
o Actively lead and participate
in a new technology program
aimed at enhancing the
accuracy, completeness and
timeliness of CIBC's credit
risk information
o Identify, measure, monitor
and control risk
[PHOTOS OMITTED]
WAYNE FOX
Vice-Chair and
Chief Risk Officer
47
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our Priorities
o Target expense growth at less
than the rate of inflation
o Demonstrate excellence in all
corporate governance
practices
o Reinforce performance
measurement and
accountability at both
individual and business
levels
o Improve the frequency and
quality of communications to
our internal and external
audiences
o Extend e-learning strategies
across the enterprise
o Continue to set high
standards for the
Administration group's
customer service levels
o Create attractive career
opportunities for our
employees
[PHOTO OMITTED]
RON LALONDE
Senior Executive Vice-President and
Chief Administrative Officer
- --------------------------------------------------------------------------------
Administration
- --------------------------------------------------------------------------------
The Administration group provides governance and support services to CIBC and
its business lines, and comprises the following functions: finance, corporate
communications and public affairs, human resources, marketing, corporate real
estate, and governance, including legal, audit and compliance.
Our mandate is to establish CIBC-wide processes to ensure that CIBC, its
subsidiaries and businesses operate in an efficient, controlled and integrated
manner, emphasizing a performance measurement and accountability culture
throughout the organization.
An area of ongoing focus is the delivery of the best possible value in
Administration group services. In 2002, we exceeded our expense target by 3%.
For 2003, we are targeting to limit our growth in expenses to less than the rate
of inflation - and we will endeavour to better this target.
One strategy that we have used to achieve efficiency gains has been to
outsource non-core functions to best-in-class service providers. In 2002, our
group engineered a new alliance with IBM to provide electronic training across
the organization. The pilot for this program involved employees in our branch
network and leveraged updated technology installed over the past two years.
Training is a critical activity at CIBC, and we expect to be able to improve our
productivity and the reach of our training programs through this new
relationship.
We are also very proud of the arrangement CIBC made with ChildrenFirst
Ltd. to launch Canada's inaugural back-up childcare centre in August 2002. CIBC
employees now have access to a secure childcare facility in downtown Toronto
when their primary childcare arrangements fall through. One of our objectives
for 2003 will be to extend this innovative capability to other CIBC locations in
Canada.
The Administration group is also taking a leadership role to ingrain a
performance and accountability culture at CIBC, as we continue to work with
senior management to establish operating and financial performance targets, and
to review progress against these targets. These detailed metrics are also
reviewed quarterly with our Board of Directors. The commitment to a performance
culture also extends to individual performance measurement and management. It is
our objective that every employee in the organization will have a personal
performance plan against which performance is measured. These performance plans
are cascaded from the Board of Directors and the chief executive officer to all
levels of the organization to ensure that efforts of all employees are aligned
with our shareholders' objectives.
CIBC has always aspired to the highest levels of corporate governance, and
the Administration group provides expertise and leadership in this area. Our
group has kept abreast with developments in this area over the year, ensuring
that CIBC continues to comply with legal and regulatory requirements. For
example, CIBC's internal financial control accountability process was enhanced
and formalized by our group; this has allowed CIBC to more readily comply with
new standards regarding the certification of financial information.
OUTLOOK FOR 2003
In 2003, the Administration group will continue to focus on the efficient
delivery of a broad range of services within CIBC, including excellence in the
areas of control and corporate governance.
- --------------------------------------------------------------------------------
48
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Technology and Operations
- --------------------------------------------------------------------------------
Technology and Operations (T&O) provides a wide range of shared technology and
operations services to CIBC's businesses, focusing on service quality as
measured from our customers' perspective.
The group is organized into four areas:
Operations:
o Global Operations provides back office processing, middle office and other
support for businesses in Canada, the U.S., Europe and Asia.
o INTRIA Items Inc., a joint venture with Fiserv Solutions of Canada Inc.,
offers a fully integrated suite of back office operations.
Technology Development:
o Technology Development is responsible for the delivery of technology in
support of all CIBC's businesses and customers, combining in-house systems
development and working with leading technology suppliers.
Enterprise Technology Services:
o Enterprise Technology Services is responsible for CIBC-wide technology
architecture and platforms in Canada and around the globe.
Global Sourcing and Payments:
o Creates value and saves time and money for CIBC's businesses by providing
procurement, vendor and supplier cost management disciplines for the CIBC
group of companies.
T&O made significant progress in providing technology and operations leadership
to enhance CIBC's market position. During the year, significant highlights
included:
o A new, seven-year outsourcing agreement with Hewlett-Packard (Canada) Co.
(HP), along with the divestiture of CIBC's interest in INTRIA-HP
Corporation (I-HP). The agreement enables CIBC to reduce technology costs
while concentrating on its core businesses. The new outsourcing
relationship covers technology previously managed by I-HP. A rigorous
structure to track operations performance has been put in place to monitor
service delivery against negotiated levels and to minimize operational
risk.
o Successfully integrated Merrill Lynch's technology and operations to create
a consolidated wealth management operating platform.
o Completed a two-year program to provide new technology to all retail
branches.
o Delivered several infrastructure improvements including the consolidation
to one enterprise-wide email system and launch of a new Corporate
Information Security program that will allow the bank to effectively
manage information security and risk.
o Completed a significant re-build in New York City concluding the 9/11
recovery effort and creating a resilient technology infrastructure.
OUTLOOK FOR 2003
For 2003, T&O's focus will be on providing innovative, cost-effective technology
and operations solutions, resulting in improved service at lower cost. In these
challenging times, the group will concentrate on managing operational risk to
protect the interests of CIBC and its customers. In addition, we will optimize
technology and operations investments through initiatives focused on
simplifying the environment, increasing resiliency and security of systems, and
re-engineering workflow and operations.
- --------------------------------------------------------------------------------
Our Priorities
o Increase shareholder value
through CIBC-wide
efficiencies from Technology
and Operations
o Work with businesses to
expand CIBC's capabilities in
the marketplace
o Create new value through
innovation in CIBC's usage of
technology and operations
o Continue to enhance controls
to safeguard CIBC's
customers' assets and to
ensure integrity of CIBC's
balance sheet
[PHOTOS OMITTED]
MICHAEL WOELLER
Senior Executive Vice-President
and Chief Information Officer
49
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our Priorities
o Reinforce an owner-manager
mindset among CIBC's leaders
to develop and grow their
businesses to increase value
to CIBC shareholders
o Seek, assess and act on
opportunities to maximize the
value of CIBC's portfolio of
businesses through
acquisition, divestiture or
joint venture
[PHOTO OMITTED]
Richard Venn
Senior Executive Vice-President
- --------------------------------------------------------------------------------
Corporate Development
- --------------------------------------------------------------------------------
Corporate Development continued to promote an owner-manager mindset among the
organization's business leaders to further align business decisions with the
interests of shareholders.
The group continuously examines CIBC's activities in light of market
conditions, to identify and capitalize on opportunities to maximize the value of
CIBC's portfolio of businesses.
Over the past few years, Corporate Development has worked with CIBC's
business lines to review ways to accelerate growth, especially in CIBC Wealth
Management and CIBC Retail Markets. In 2002, Corporate Development was integral
in CIBC's successful acquisition of Merrill Lynch Canada's retail brokerage and
asset management businesses. This, coupled with the acquisition of the remaining
shares of TAL Global Asset Management in 2001, has positioned CIBC to build an
exceptional wealth management business in Canada.
In the course of reviewing ways in which CIBC might accelerate growth in
CIBC Retail Markets, Corporate Development assessed the strategic future of our
West Indies operations. We helped initiate discussions with Barclays Bank PLC to
combine our retail, corporate and international banking operations in the
Caribbean to create a new entity with greater scale providing the opportunity to
be a dominant player in this market. During the year, Corporate Development
worked closely with other areas in CIBC to successfully launch this business
combination, FirstCaribbean International Bank(TM) (FCIB). CIBC owns an
approximate 44% equity investment in FCIB.
Corporate Development also seeks to maximize the value of CIBC's
businesses through optimizing and enhancing its relationships with third
parties. We played a key role in the analysis and negotiations of CIBC's new and
competitive outsourcing arrangement with HP. In addition, our group assisted in
the sale of CIBC's interest in the INTRIA-HP joint venture to HP. This allows us
to focus on our core businesses, enhancing alignment in the relationship while
continuing to provide excellent service to CIBC customers.
CIBC had previously established a joint venture, EDULINX Canada
Corporation, with USA Education, Inc. to provide student loans portfolio
administration and other related services to financial institutions and the
federal and provincial government-sponsored student loans industry. During the
year, we facilitated the process whereby CIBC became the sole shareholder of
EDULINX once it was determined that 100% ownership would better allow CIBC to
achieve its objectives.
Corporate Development also manages CIBC's relationship with CIBC Mellon,
the growing and successful joint venture between CIBC and Mellon Financial
Corporation, which provides domestic and global custody, securities lending,
multi-currency, accounting and other services. During the year, CIBC Mellon
acquired TD Bank Financial Group's third-party investment fund custody business
and became TD Bank's primary supplier of internal custodial services. This
transaction affirmed CIBC Mellon's position as an industry-leading provider of
custody services. CIBC Mellon was recognized as Canada's number one
sub-custodian by Global Custodian magazine.
OUTLOOK FOR 2003
In 2003, the group will continue to work with CIBC Retail & Wealth operations to
grow and enhance their businesses. We will maintain our ongoing focus on
operations and assets of CIBC that are under-leveraged and assess opportunities
to maximize their value. Finally, we will review CIBC's major joint venture
relationships to determine if they are appropriately structured and are
continuing to meet CIBC's needs.
- --------------------------------------------------------------------------------
50
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Consolidated Financial Review
- --------------------------------------------------------------------------------
CONSOLIDATED INCOME STATEMENTS
Revenue
Total revenue consists of net interest and non-interest income.
Reported revenue in 2002 was $11,152 million on a taxable equivalent basis
(TEB), down $154 million, or 1.4%, from the prior year due to a decrease in
non-interest income of $1,082 million, offset in part by an increase of $928
million in net interest income.
In 2001, reported revenue was $11,306 million (TEB), down $904 million
from 2000 due to a decrease in non-interest income of $1,184 million, partially
offset by an increase of $280 million in net interest income.
Net interest income and margin
Net interest income includes interest and dividends earned on assets, net of
interest paid on liabilities. Net interest margin is net interest income
expressed as a percentage of average assets.
- --------------------------------------------------------------------------------
NET INTEREST INCOME AND MARGIN
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Average assets $ 292,510 $ 278,798 $ 263,119
Net interest income (TEB) $ 5,621 $ 4,693 $ 4,413
Net interest margin (TEB) 1.92% 1.68% 1.68%
================================================================================
In 2002, net interest income of $5,621 million benefited from the increase in
average assets, particularly in cards and mortgages, and an improvement in
spreads. The increase in net interest margin over 2001 also benefited from lower
funding costs on trading activities. Additional analysis of net interest income
and margin is provided in the supplementary annual financial information on
pages 120 and 121.
In 2001, net interest income was $4,693 million, up $280 million from 2000
as a result of higher average assets and improvement in spreads.
Non-interest income
Non-interest income includes all revenue not classified as net interest income.
Non-interest income of $5,531 million in 2002 was down $1,082 million, or 16.4%,
from the prior year. Non-interest income was adversely affected by lower
origination and trading activities, particularly in the U.S., and increased net
merchant banking write-downs and other write-downs in the collateralized debt
obligation and high-yield portfolios, all associated with weaker market
conditions. This was offset by revenue from acquired businesses and the $190
million gain resulting from the combination of the Caribbean retail, corporate
and international banking operations of CIBC and Barclays Bank PLC.
- --------------------------------------------------------------------------------
NON-INTEREST INCOME
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Fees for services
Underwriting $ 698 $ 614 $ 886
Deposit 605 521 503
Credit 410 493 508
Card 331 363 368
Investment management
and custodial 486 322 379
Mutual funds 561 351 358
Insurance 148 100 124
- --------------------------------------------------------------------------------
3,239 2,764 3,126
Commissions on securities transactions 1,203 1,089 1,480
Trading activities 273 1,343 1,140
Investment securities (losses) gains, net (168) 575 970
Income from securitized assets 177 223 237
Other 807 619 844
- --------------------------------------------------------------------------------
Total non-interest income $ 5,531 $ 6,613 $ 7,797
================================================================================
Fees for services were up $475 million, or 17.2%, from the prior year.
o Underwriting fees increased by 13.7% due to higher new equity issue
volumes and the impact of acquired businesses.
o Deposit fees increased by 16.1% as a result of higher fees earned in
Amicus and CIBC Retail Markets.
o Credit fees were down by 16.8% mainly in CIBC World Markets due to lower
origination activities.
o Investment management and custodial fees increased by 50.9% from 2001,
reflecting the impact of acquired businesses.
o Fees from mutual funds increased by 59.8% mainly due to the impact of the
acquired businesses.
Commissions on securities transactions were up $114 million, or 10.5%, resulting
from the impact of the acquired businesses.
Trading activities were down $1,070 million, or 79.7%, from 2001 mainly
due to weaker performance from equity structured products business and fixed
income activities business. For a detailed discussion of trading activities, see
"Management of market risk" included in the "Management of Risk and Balance
Sheet Resources" section.
Investment securities (losses) gains include realized gains and losses on
disposals, as well as write-downs, to reflect other-than-temporary impairments
in the value of securities held for investment purposes. Revenue was down $743
million, or 129.2%, from 2001 due to higher asset write-downs, as a result of
deteriorating economic conditions. The prior year also benefited from higher
gains on disposal of securities.
Income from securitized assets was down $46 million, or 20.6%, from 2001
primarily due to decreases in revenue from credit card loans securitization,
partially offset by increases in revenue from residential mortgages
securitization.
Other includes the gains and losses on the disposal of fixed assets and
sale of subsidiaries, foreign exchange commissions and fees. Other was up $188
million, or 30.4%, from 2001. Excluding the loss associated with the bulk sale
of U.S. corporate loans and gain on sales of corporate
- --------------------------------------------------------------------------------
51
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
assets in 2001, other was up $106 million over 2001. This increase was mainly
due to the gain resulting from the combination of the Caribbean retail,
corporate and international banking operations of CIBC and Barclays Bank PLC,
and increase in non-trading foreign exchange revenue, partially offset by
write-downs related to investments in limited partnerships and lower revenue
from third-party securitization and advisory fees.
In 2001, non-interest income was $6,613 million, a decrease of $1,184
million from 2000. The decrease resulted from decreased U.S. investment banking
activity, reduced trading volumes, lower net merchant banking gains, all
associated with deteriorating market conditions, and the loss incurred on the
bulk sale of the U.S. corporate loans, and lower gain on sales of corporate
assets.
Non-interest expenses
Non-interest expenses include all of CIBC's costs except interest expenses,
provision for credit losses and income taxes.
In 2002, reported non-interest expenses were $9,129 million, up $903 million, or
11.0%, from 2001. A detailed analysis of non-interest expenses is provided
below.
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Employee compensation and benefits
Salaries $2,620 $2,417 $2,235
Incentive bonuses 933 1,372 1,636
Commissions 767 474 633
Benefits 562 469 433
- --------------------------------------------------------------------------------
4,882 4,732 4,937
Occupancy costs 715 631 634
Computer and office equipment 985 834 758
Communications 441 412 371
Advertising and business development 295 286 273
Professional fees 297 327 240
Business and capital taxes 114 109 108
Restructuring charge 514 207 (31)
Other 886 688 806
- --------------------------------------------------------------------------------
Total non-interest expenses $9,129 $8,226 $8,096
================================================================================
Employee compensation and benefits was up $150 million, or 3.2%, from the prior
year due to higher salary expenses and commissions associated with the impact of
acquired businesses, increased severance costs, particularly in CIBC World
Markets, as well as higher pension and other benefit costs. These increases were
partially offset by lower revenue-related incentive compensation, reflecting the
effect of weaker markets.
Occupancy costs in 2002 were up $84 million, or 13.3%, over the prior year
mainly due to acquired businesses.
Computer and office equipment was up $151 million, or 18.1%, from 2001
primarily due to spending on technology initiatives and the impact of acquired
businesses.
Communications comprises telecommunications, postage, courier and
stationery. Expenses were up $29 million, or 7.0%, from 2001 mainly due to the
impact of acquired businesses.
Advertising and business development was up $9 million, or 3.1%, mainly
due to the impact of acquired businesses.
Professional fees were down $30 million, or 9.2%, mainly because the prior
year included fees relating to certain strategic initiatives.
Business and capital taxes were up $5 million, or 4.6%, over the prior
year.
Restructuring charge of $514 million in 2002 included $366 million
relating to closing of the U.S. electronic banking operations, $142 million
relating to restructuring initiatives in other businesses and a $6 million
revised estimate related to the 2001 cost-reduction program. This was up $307
million from the prior year, which included a charge for a CIBC-wide
cost-reduction program.
Other comprises outside services, unrecoverable losses, other personnel
costs and donations. Other was up $198 million, or 28.8%, from 2001 primarily as
a result of higher non-credit losses, the rising cost of litigation in the U.S.,
costs related to the events of September 11, 2001 and the impact of acquired
businesses.
In 2001, non-interest expenses totalled $8,226 million, up $130 million,
or 1.6%, over 2000. Excluding the restructuring charge of $207 million,
non-interest expenses were down 1% over 2000 mainly due to lower revenue-related
compensation and commissions, offset by increased salaries and costs of
strategic initiatives.
Taxes
- --------------------------------------------------------------------------------
TAXES
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Income taxes
Income taxes $ (279) $ 92 $ 641
Taxable equivalent adjustment 111 144 131
- --------------------------------------------------------------------------------
Total income taxes (TEB) (168) 236 772
- --------------------------------------------------------------------------------
Indirect taxes
Capital taxes 100 98 92
Property and business taxes 44 38 44
Payroll taxes (employer portion) 235 209 202
GST and sales taxes 204 198 182
- --------------------------------------------------------------------------------
Total indirect taxes 583 543 520
- --------------------------------------------------------------------------------
Total taxes (TEB) $ 415 $ 779 $1,292
================================================================================
Combined Canadian federal
and provincial tax rate 38.7% 41.6% 42.8%
Income taxes as a percentage of net
income before income taxes (TEB) (32.1)% 11.9% 26.7%
Total taxes as a percentage of net
income before deduction of total taxes (TEB) 38.6% 31.3% 38.1%
================================================================================
Total income and indirect taxes decreased $364 million, or 46.7%, in 2002.
Income taxes are comprised of income taxes imposed on CIBC non-consolidated (the
"parent"), as well as on CIBC's domestic and foreign subsidiaries.
Total income taxes (TEB) were a tax recovery of $168 million in 2002, down $404
million from an income tax expense of $236 million in 2001. This decrease was
primarily due to increased losses in CIBC's U.S. operations, partially offset by
increased income in the Canadian operations. Also, no taxes were provided for on
the gain resulting from the combination of the Caribbean retail, corporate and
international banking operations of CIBC and Barclays Bank PLC, to form
FirstCaribbean International Bank(TM), now reflected as an equity investment. In
addition, a future tax asset of $52 million was recognized in respect of certain
United Kingdom tax losses relating to prior years. In 2001, there was a tax
reduction arising from the restructured ownership of certain U.S.-based loans
and leases.
- --------------------------------------------------------------------------------
52
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The combined Canadian federal and provincial income tax rate of 38.7%
(2001: 41.6%) is the parent's statutory income tax rate. Variations in this rate
can result from legislative changes to corporate income tax rates enacted by the
federal and provincial governments and from changes in the proportions of income
earned in each of the provinces and in offshore branches of the parent. In 2002,
the rate declined primarily as a result of a reduction in the federal income tax
rate from 27% to 25%, effective January 1, 2002, and a reduction in the Ontario
corporate income tax rate from 14% to 12.5%, effective October 1, 2001. A
substantial proportion of the parent's business is carried on in Ontario.
Income taxes as a percentage of income before income taxes (TEB) declined
from 11.9% in 2001 to (32.1)% in 2002. The decline was attributable to reduced
income levels earned in subsidiaries operating in the U.S., a higher tax
jurisdiction, and a greater proportion of income earned in subsidiaries
operating in lower tax jurisdictions, including the gain resulting from the
combination of the Caribbean retail, corporate and international operations of
CIBC and Barclays Bank PLC. The reduced income levels were caused by various
factors, including increased credit losses, merchant banking losses, and
restructuring charges mainly associated with the decision to close the U.S.
electronic banking operations. In 2001, a permanent income tax reduction of $142
million resulted from the restructured ownership of certain U.S.-based loans and
leases.
CIBC pays tax in a number of jurisdictions. There are continuous
discussions with taxation authorities. These discussions could favourably or
adversely affect CIBC's financial results.
Indirect taxes are comprised of capital, property and business, payroll, and GST
and sales taxes.
Indirect taxes were $583 million, up $40 million, or 7.4%, from 2001, primarily
as a result of an increase in payroll taxes. These increased primarily due to
increases in Canadian government pension plan premiums, provincial medicare
charges and foreign payroll taxes.
Under Canadian generally accepted accounting principles, CIBC is required
to establish a future tax asset in respect of expenses recorded currently for
which a tax deduction will be available in a future period, such as the general
allowance for credit losses and loss carryforwards. The future tax asset is
established using tax rates that will apply in the future period. Federal and
Ontario government tax rate decreases proposed in 2000 continue to be phased in.
CIBC has not provided for a valuation allowance related to future income
tax assets. Included in the tax loss carryforwards amount is $447 million
relating to losses in the U.S. operations in 2002 which expire in 20 years. In
addition, as other future income tax assets naturally reverse into tax losses in
the U.S., CIBC will have 20 years from the date such temporary differences
become tax losses to utilize them before they would begin to expire under
current tax law. Although realization is not assured, CIBC believes that, based
on all available evidence, it is more likely than not that all of the future tax
assets will be realized prior to their expiration. In this regard, CIBC has
initiated various expense management initiatives, refocused its business
activities and committed to provide additional capital which will generate
additional income.
In 2001, total income and indirect taxes decreased to $779 million from
$1,292 million in 2000. This was attributable to decreased total income taxes of
$536 million, which occurred primarily because of decreased income levels in the
North American operations and the permanent income tax reduction of $142 million
discussed above.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
$ millions, as at October 31 2002 2001(1)
- --------------------------------------------------------------------------------
Assets
Cash resources $ 9,512 $ 11,350
- --------------------------------------------------------------------------------
Securities
Securities held for investment and loan
substitutes 20,664 22,996
Securities held for trading 44,628 51,798
- --------------------------------------------------------------------------------
65,292 74,794
- --------------------------------------------------------------------------------
Loans
Residential mortgages 66,612 58,751
Personal and credit card loans 30,784 28,411
Business and government loans,
including acceptances 48,809 54,793
Allowance for credit losses (2,288) (2,294)
- --------------------------------------------------------------------------------
143,917 139,661
- --------------------------------------------------------------------------------
Securities borrowed or purchased under
resale agreements 16,020 24,079
Derivative instruments market valuation 24,717 25,723
Other assets 13,835 11,867
- --------------------------------------------------------------------------------
$273,293 $287,474
================================================================================
Liabilities and shareholders' equity
Deposits $196,630 $194,352
Obligations related to securities sold short 8,436 11,213
Obligations related to securities lent or
sold under repurchase agreements 9,615 21,403
Derivative instruments market valuation 24,794 26,395
Other liabilities and acceptances 17,858 18,212
Subordinated indebtedness 3,627 3,999
Shareholders' equity 12,333 11,900
- --------------------------------------------------------------------------------
$273,293 $287,474
================================================================================
(1) Certain comparative figures have been reclassified to conform with the
presentation used in 2002.
Assets
Total assets were $273.3 billion as at October 31, 2002, down $14.2 billion from
the prior year. Decreases were largely driven by reductions in business and
government loans ($4.7 billion), securities borrowed or purchased under a resale
agreement ($8.1 billion), trading securities ($7.2 billion), investment
securities ($2.3 billion), customers' liability under acceptances ($1.3
billion), and interest bearing deposits with banks ($1.6 billion). These
decreases were partially offset by increases in retail assets, such as
residential mortgages ($7.9 billion), and personal and credit card loans ($2.4
billion). Large reductions in balances, specifically in the fourth quarter of
2002, were partially a result of the combination of the Caribbean retail,
corporate and international banking operations of CIBC and Barclays Bank PLC, to
form FirstCaribbean International Bank(TM), now reflected as an equity
investment, and also as a result of continuing efforts to manage the balance
sheet to appropriate levels.
A detailed discussion of the loan portfolio is included in "Management of
credit risk" included in the "Management of Risk and Balance Sheet Resources"
section.
Liabilities and shareholders' equity
Deposits were $196.6 billion at October 31, 2002, up $2.3 billion from October
31, 2001. The increase related to growth in deposits from businesses and
governments, as well as higher retail deposits. Further details on the
composition of deposits are provided in Note 9 to the consolidated financial
statements and in the supplementary annual financial information on page 126.
- --------------------------------------------------------------------------------
53
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
Obligations related to securities lent or sold under repurchase agreements
were $9.6 billion, down $11.8 billion from 2001 consistent with the reduction in
securities borrowed or purchased under resale agreements.
Subordinated indebtedness was $3.6 billion at October 31, 2002, down $0.4
billion from 2001. Further details on subordinated indebtedness are provided in
Note 11 to the consolidated financial statements.
Shareholders' equity was $12.3 billion at October 31, 2002, up $0.4
billion from the prior year.
- --------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
CIBC has contractual obligations to make future payments on subordinated
indebtedness and lease agreements. Subordinated indebtedness is reflected on the
consolidated balance sheets, while operating lease obligations are not recorded
on the consolidated balance sheets. For further details, see Notes 11 and 27 to
the consolidated financial statements, respectively.
The following table summarizes these obligations based on time periods.
- -------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
Residual term to contract maturity
-------------------------------------------------------
2008 and
$ millions, as at October 31 2003 2004 2005 2006 2007 thereafter Total
- ----------------------------------------------------------------------------------------------------
Subordinated indebtedness $ 64 $ 68 $ 25 $ -- $ -- $3,470 $3,627
Operating leases 423 396 335 286 223 1,038 2,701
- ----------------------------------------------------------------------------------------------------
$ 487 $ 464 $ 360 $ 286 $ 223 $4,508 $6,328
====================================================================================================
CIBC enters into a number of long-term outsourcing contracts as part of normal
business operations. These outsourcing contracts, along with CIBC's other
outstanding contracts, allow the organization to focus on its core businesses
and enhance customer service.
- --------------------------------------------------------------------------------
OFF-BALANCE SHEET CREDIT-RELATED ARRANGEMENTS
The table below summarizes CIBC's credit-related arrangements. For a detailed
description of these arrangements, see Note 24 to the consolidated financial
statements.
- --------------------------------------------------------------------------------------------
CREDIT-RELATED ARRANGEMENTS
Contract amounts expiration per period
------------------------------------------
Less than 1 to 3 4 to 5 Over 2002
$ millions, as at October 31 1 year years years 5 years Total
- --------------------------------------------------------------------------------------------
Lines of credit(1) $ 86,459 $ 5,035 $ 4,507 $ 1,991 $ 97,992
Direct credit substitutes
Financial guarantees 5,818 960 198 369 7,345
Securities lent 17,510 -- -- -- 17,510
Transaction-related contingencies 1,363 195 127 11 1,696
Documentary letters of credit 86 92 5 2 185
Other(2) 367 -- -- -- 367
- --------------------------------------------------------------------------------------------
$111,603 $ 6,282 $ 4,837 $ 2,373 $125,095
============================================================================================
(1) Includes irrevocable lines of credit totalling $76,972 million of which
$63,805 million will expire in one year or less, and excludes lines of
credit for credit cards as the lines are short-term in nature and are
revocable at CIBC's discretion.
(2) Includes forward asset purchases.
- --------------------------------------------------------------------------------
54
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Management of Risk and Balance Sheet Resources
- --------------------------------------------------------------------------------
CIBC exposes itself to risk, including credit, market, liquidity and
operational, in the normal course of its business. CIBC manages risk and related
balance sheet resources within tolerance levels established by its management
committees and approved by the Board of Directors and its committees, with the
objective of optimizing shareholder return. This is achieved through a
comprehensive framework of measurement, monitoring and control policies and
standards that supports active and effective management of CIBC's risk and
capital exposures, resources and levels. The board and management committees,
outlined below, establish risk and capital management, measurement, monitoring
and control policies and standards, approve risk and capital management
strategies, and monitor portfolio performances and trends. In 2002, enhancements
were made to both the board and management committees as a result of the
continuing integration of Treasury and Balance Sheet Management with Risk
Management. As a result, a closer linkage now exists between the board and
management committees (i.e. between the Risk Management Committee and the
Capital & Risk Committee and between the Audit Committee and the Operations &
Administration Committee). Further, the linkage of the Capital & Risk Committee
to the Credit Committee and the Investment Committee, its two most senior
sub-committees, was enhanced in order to optimize the use of risk and capital
resources relating to CIBC's credit assets and equity investments.
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS COMMITTEES
RISK MANAGEMENT COMMITTEE
o Approves policies and standards with respect to credit, market and
liquidity risks
o Monitors adherence to the above policies and standards
o Reviews and approves individual credits and investments
o Reviews wholesale and consumer credit portfolio trends
o Reviews merchant banking investment portfolio trends
o Reviews market and liquidity risk trends
o Reviews results of the Balance Sheet Resource Allocation Process
o Reviews Canada Deposit Insurance Corporation (CDIC) self-assessment
process
o Reports its activities to the full board
Chair: External Director
AUDIT COMMITTEE
o Approves policies and standards with respect to the management of capital
and internal controls
o Reviews operational risk and related policies and standards
o Monitors adherence to the above policies and standards
o Monitors and reviews procedures for dealing with related-party
transactions and conflict of interest issues
o Oversees the financial reporting process, including the review of
financial statements and provision for credit losses
o Liaises with internal and external auditors
o Reviews CDIC self-assessment process
o Reports its activities to the full board
Chair: External Director
- --------------------------------------------------------------------------------
MANAGEMENT COMMITTEES
SENIOR EXECUTIVE TEAM (SET)
o Oversees CIBC-wide governance
o Establishes mandates and membership of management committees
o Establishes CIBC-wide strategic direction and performance targets
o Assesses strategy and monitors asset-liability management
o Approves delegated authorities and limits of the Capital & Risk Committee
o Approves material transactions and strategic investments
Chair: Chairman & CEO
CAPITAL & RISK COMMITTEE (CRC)
o Recommends policies and standards for credit, market and liquidity risks
to the Risk Management Committee for approval
o Approves balance sheet (including capital and funding) resource allocation
and economic capital measurement within parameters established by the SET
o Monitors portfolio performance
o Approves mandates and membership for the Credit Committee and the
Investment Committee, including delegation of limits and authorities
o Approves new material risk and strategic allocation of balance sheet
resources for the introduction of new initiatives
o Refers matters relating to operational risk to the Operations &
Administration Committee
Chair: Vice-Chair and Chief Risk Officer, Treasury, Balance Sheet and Risk
Management (TBRM)
OPERATIONS & ADMINISTRATION COMMITTEE (OAC)
o Approves policies and standards for CIBC-wide management of operational
risk and internal controls, and performs ongoing assessment of
effectiveness
o Reviews internal assessments of adherence to the internal control
framework
o Oversees corrective action concerning significant internal control
weaknesses or emerging control issues
o Monitors implementation and execution of significant initiatives and
intervenes as required
o Refers matters relating to credit, market or liquidity risk, as well as
those having balance sheet resource implications, to the CRC
o Reviews periodic reports from Internal Audit, Legal & Compliance and TBRM
on internal control-related matters
Chair: Vice-Chair, CIBC Wealth Management
CREDIT COMMITTEE*
o Approves credits above limits delegated to individual officers
o Recommends significant credits to the Risk Management Committee for
approval
o Responsible for the integrity, accuracy and timeliness of risk ratings
o Monitors the risk of portfolio concentrations
Chair: Executive Vice-President, Corporate & Commercial Credit Adjudication,
TBRM
INVESTMENT COMMITTEE*
o Advises deal teams during the investigation and negotiation of potential
investments
o Approves all investments for the merchant banking portfolio
o Monitors the performance of previously approved investments
o Ensures investments conform to CIBC corporate governance standards prior
to approval
Chair: Executive Vice-President, Credit Asset & Merchant Banking Portfolio
Management, TBRM
* Sub-committee of the Capital & Risk Committee
- --------------------------------------------------------------------------------
55
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
MANAGEMENT OF CREDIT RISK
Credit risk is the potential for financial loss resulting from the failure of a
borrower or counterparty to fully honour its financial or contractual
obligations, such as repayment of loans or settlement of derivatives contracts.
CIBC's framework for the management of credit risk comprises
infrastructure, policies and standards, and measurement, monitoring and control
practices that are designed to instill a strong sense of accountability and
discipline throughout CIBC.
Infrastructure
The CRC is responsible for reviewing CIBC's credit risk management policies.
These policies are tabled before the board's Risk Management Committee for
review and approval on an annual basis. The CRC is also responsible for ensuring
that these policies are implemented and that procedures are in place to manage
and control credit risk, along with overseeing that the quality of the credit
portfolio is in accordance with these policies. Senior management reports
regularly to the Risk Management Committee on material credit risk matters,
including individual credit transactions, credit concentrations on a related
borrower, industry and geographic basis, impaired loans and credit loss
provisioning levels. In addition, senior management also reviews impaired loan
balances, allowances and credit loss provisioning levels with the Audit
Committee of the board.
The day-to-day responsibility for measuring and monitoring credit risk is
delegated to TBRM. TBRM is independent of the business lines and is responsible
for the initial credit approval and ongoing measurement and monitoring of the
credit portfolio to ensure that credit risk is actively controlled. This is
accomplished through the establishment of lending policies; the approval of all
models used for risk rating and credit scoring of individual loans; the
exercising of approval authority for all significant credit transactions; the
monitoring of exposures against policies and limits; and rigorous management of
past due and impaired loans by specialized groups.
Management of credit risks also takes place within TBRM, which uses
market-based techniques in the management of the credit risk component of
economic capital. It applies enhanced credit models to the analysis of CIBC's
large corporate credit portfolio. Higher risk or concentrated positions are
reduced through the use of direct loan sales, credit derivative hedges or
structured transactions. By the same means, selected credit exposures are added
to the portfolio to enhance diversification and increase returns. Given that the
credit risk component of economic capital is a scarce resource, CIBC endeavours
to allocate and liberate credit risk capital in the most cost-efficient manner.
High risk and impaired loans are managed by a specialized loan workout group.
Merchant banking investments are governed by the Investment Committee, which
reviews the structuring, negotiation and monitoring of new and existing merchant
banking investments.
Policies and standards
CIBC's credit risk management policies outline the credit risk appetite, as well
as the detailed parameters under which credit risk is to be controlled. Policies
and standards establish the basis for how credit is granted, measured,
aggregated, monitored and reported. In this regard, CIBC has policies and
standards for the control of credit risk within both the consumer loan portfolio
and the business and government loan portfolio.
Policies designed to prevent concentrations within CIBC's loan portfolios
are fundamental to the management of credit risk. There are two key policies:
o The common risk/concentration policy manages CIBC's exposure to any
individual borrower or group of related borrowers, based on risk rating.
o The industry concentration policy limit, which manages CIBC's exposure to
45 industry categories, ensures diversification of the loan and securities
portfolios.
Other credit risk policies ensure prudent lending practices address management
of geographic and product concentrations, syndicated bank and bridge credit
exposures, requirements for environmental reviews and real estate appraisals,
maintenance of portfolio lending standards, and conflicts of interest with
respect to mergers and acquisitions.
Measurement, monitoring and control
CIBC continues to develop and enhance its credit risk management measurement,
monitoring and control systems as it prepares for the proposed November 1, 2006
implementation of the Bank of International Settlements (BIS) Capital Accord
proposals.
For consumer loans, the large number of transactions of smaller dollar
size makes statistical techniques, such as credit scoring and computer-based
loan models, well suited to identification and management of risk. CIBC's
consumer loan portfolio is well diversified to ensure that concentrations by
customer and product type are within prudent and acceptable limits. Consumer
loans constitute 67% of CIBC's portfolio, excluding securities borrowed or
purchased under resale agreements. These loans are inherently diversified in
that they represent thousands of borrowers with relatively small individual loan
balances. Residential mortgages, which constitute 69% of the total consumer loan
portfolio, exhibit very low levels of credit risk. Consistent with CIBC's
managed growth strategy for this business, residential mortgages increased by
$7.8 billion from the prior year. CIBC's consumer loan growth strategy resulted
in an increase of 12% in the personal loan portfolio and 10% in the credit card
loan portfolio. The student loan portfolio continued to decrease in 2002 and is
lower by 17% compared with the prior year.
Consumer
loans
$ billions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
2002 2001
Residential mortgages 66.6 58.7
Personal (including students loans) 22.6 21.1
Credit card loans 7.5 6.8
- --------------------------------------------------------------------------------
56
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Within the business and government loan portfolio, specialized lenders assess
each credit transaction, assigning an internal risk rating to each, and for all
significant transactions, independent credit approval is required from TBRM. All
business and government loans are rated on a 13-category scale that is
calibrated to reflect the associated probability of loss. These internal risk
ratings assist in monitoring the portfolio, and are also key inputs used in
CIBC's economic models for the attribution of the credit risk component of
economic capital.
CIBC diversifies the business and government loan portfolio through the
establishment and continual monitoring of exposures against common risk, and
industry and geographic concentration limits. Related borrower risk is managed
through limits on concentrations by risk rating; industry concentrations are
measured against limits for 45 different industry sectors; and geographic
concentrations are measured against limits established for exposure to foreign
countries.
Business and government loans (including acceptances) constitute 33% of
CIBC's portfolio, excluding securities borrowed or purchased under resale
agreements, and are 11% lower than last year before deducting the general
allowance. This is consistent with CIBC's strategy to aggressively manage
balance sheet (including capital) resources. The portfolio is diversified from
an industry perspective with the largest industry group, business services,
constituting approximately 11% of total business and government loans (including
acceptances) before deducting the general allowance in 2002.
Management monitors industry concentrations on an ongoing basis, taking
into consideration the current economic outlook and recent world events.
Geographically, 87% of the business and government loan portfolio is in
North America, with the remaining balance predominantly in the United Kingdom
and Western Europe. Exposure to Asia continues to be managed down to lower
levels through significant repayment and/or recovery experience. Exposures in
Eastern Europe, Latin and South America and elsewhere are limited. The
increasing sophistication of decision-support tools used at origination have
significantly contributed to the maintenance of a well-diversified portfolio.
Country risk is the risk that assets may become frozen in a foreign
country because of imposed exchange controls or other political or economic
disturbances. CIBC actively manages country risk through limits on exposures to
individual countries outside of North America. These limits establish the
maximum amount of acceptable country risk and control its sub-components, such
as bank deposits and trade finance.
The majority of CIBC's credit risk exposure relates to the loan and
acceptances portfolio. However, CIBC also engages in activities that expose it
to off-balance sheet credit risk. These include credit-related arrangements and
derivative instruments as explained in Notes 23, 24 and 25 to the consolidated
financial statements. CIBC manages these exposures through the same credit risk
management framework as described above.
CIBC is active in the credit derivative markets both as a market maker
facilitating the credit hedging needs of its clients and as a principal as part
of managing its own credit portfolios. CIBC is an active user of single-name
credit derivatives in addition to synthetic collateralized loan obligations
(CLOs) to reduce credit risk as part of managing its overall credit portfolio.
Credit derivatives are used to mitigate sector concentrations and single-name
exposure, or as part of portfolio diversification techniques. The largest sector
concentrations hedged through these programs were telecommunications and cable
($724 million), utilities ($354 million) and financial institutions ($346
million). The notional amount outstanding relating to credit protection
(including synthetic CLOs) was $4 billion as at October 31, 2002.
CIBC has counterparty credit exposure that arises from its interest rate,
foreign exchange, equity, commodity and credit derivatives market making and
portfolio management activities. CIBC measures and manages the credit exposure
on its derivative contracts, taking into account both the current mark-to-market
value of each contract, as well as a prudent estimate of the potential future
exposure for each transaction. This is based upon statistically driven
simulation approaches and taking into account any legally enforceable
risk-mitigating techniques for each obligor, such as netting and collateral or
margin arrangements. Under a margin agreement, CIBC obtains collateral from
and/or pledges collateral to its counterparties, consisting primarily of cash or
marketable securities, which are revalued on a regular basis.
CIBC's derivative credit exposure represents a variety of product types.
Investment grade counterparts account for 91% of CIBC's derivative credit
exposure. CIBC actively measures, monitors and limits its credit exposure
arising from its derivative activities. Clear credit policies, processes and
procedures are in place to ensure effective credit exposure management.
Business and government loans (including acceptances) by industry groups -
summarized(1)
[THE FOLLOWING DATA WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
2002
Business service 11.4%
Resource-based industries 11.1%
Manufacturing, consumer and capital goods 10.6%
Real estate and construction 9.0%
Telecommunications, media and technology 8.8%
Agriculture 8.7%
Financial institutions 8.6%
Non-residential mortgages 8.0%
Utilities 5.4%
Retail 5.2%
Transportation 5.1%
Other 4.7%
Publishing, printing and broadcasting 2.6%
Hardware and software 0.8%
[THE FOLLOWING DATA WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
2001
Financial institutions 12.7%
Resource-based industries 11.5%
Manufacturing, consumer and capital goods 11.4%
Business service 11.0%
Telecommunications, media and technology 8.6%
Real estate and construction 7.4%
Agriculture 7.1%
Non-residential mortgages 6.0%
Retail 5.9%
Transportation 5.0%
Utilities 4.4%
Other 4.0%
Publishing, printing and broadcasting 3.3%
Hardware and software 1.7%
(1) Industry classifications provided have been summarized. Refer to the
supplementary annual financial information on pages 122 to 123 for further
details.
- --------------------------------------------------------------------------------
57
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Impaired loans
While CIBC imposes a disciplined approach to risk by continuously monitoring all
credit exposures, it also aggressively manages all impaired accounts. Generally,
a loan is classified as impaired when management is of the opinion that there is
no longer a reasonable assurance of the full and timely collection of principal
and interest. Certain exceptions to this policy are outlined in Note 1 to the
consolidated financial statements.
During the year, $3.36 billion of loans were newly classified as impaired,
up $1,137 million from 2001. The largest increase in gross impaired loans was
within the telecommunications, media and technology industry sector, primarily
in the U.S. and Europe. Overall, Canadian classifications increased by $50
million, while foreign classifications increased by $1,087 million, of which
$784 million were related to classifications in the U.S.
Reductions in gross impaired loans through remediation, repayment or sale
were $1,084 million, up $149 million from 2001. The increase included $95
million related to consumer loans and $54 million in business and government
loans. For the year, write-offs totalled $1,705 million, up $456 million from a
year ago. Business and government loan write-offs accounted for $346 million of
this increase, while consumer loan write-offs increased by $110 million.
- -----------------------------------------------------------------------------------------------------------------------------------
CHANGES IN NET IMPAIRED LOANS(1)
Business Total
and before
$ millions, as at or for government Consumer general General 2002
the years ended October 31 loans loans(2) allowance allowance Total
- -----------------------------------------------------------------------------------------------------------------------------------
Gross impaired loans
Balance at beginning of year $ 1,197 $ 505 $ 1,702 $ -- $ 1,702
New additions 2,354 1,008 3,362 -- 3,362
Returned to performing
status, repaid or sold (583) (501) (1,084) -- (1,084)
- -----------------------------------------------------------------------------------------------------------------------------------
Gross impaired loans prior
to write-offs 2,968 1,012 3,980 -- 3,980
Write-offs (1,104) (601) (1,705) -- (1,705)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,864 $ 411 $ 2,275 $ -- $ 2,275
===================================================================================================================================
Allowances
Balance at beginning of year $ 519 $ 525 $ 1,044 $ 1,250 $ 2,294
Write-offs (1,104) (601) (1,705) -- (1,705)
Provisions 1,097 403 1,500 -- 1,500
Recoveries 92 125 217 -- 217
Foreign exchange and other (9) (9) (18) -- (18)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year(3) $ 595 $ 443 $ 1,038 $ 1,250 $ 2,288
===================================================================================================================================
Net impaired loans
Balance at beginning of year $ 678 $ (20) $ 658 $(1,250) $ (592)
Net change in gross
impaired 667 (94) 573 -- 573
Net change in allowance (76) 82 6 -- 6
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year(3) $ 1,269 $ (32) $ 1,237 $(1,250) $ (13)
===================================================================================================================================
Gross impaired loans less specific allowance as a
percentage of total net loans and acceptances 0.77%
Net impaired loans and acceptances after general allowance:
As a percentage of total net loans and acceptances (0.01)
As a percentage of shareholders' equity (0.11)
===================================================================================================================================
Business Total
and before
$ millions, as at or for government Consumer general General 2001
the years ended October 31 loans loans(2) allowance allowance Total
- --------------------------------------------------------------------------------------------------------------------------------
Gross impaired loans
Balance at beginning of year $ 1,204 $ 457 $ 1,661 $ -- $ 1,661
New additions 1,280 945 2,225 -- 2,225
Returned to performing
status, repaid or sold (529) (406) (935) -- (935)
- --------------------------------------------------------------------------------------------------------------------------------
Gross impaired loans prior
to write-offs 1,955 996 2,951 -- 2,951
Write-offs (758) (491) (1,249) -- (1,249)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,197 $ 505 $ 1,702 $ -- $ 1,702
================================================================================================================================
Allowances
Balance at beginning of year $ 476 $ 510 $ 986 $ 1,250 $ 2,236
Write-offs (758) (491) (1,249) -- (1,249)
Provisions 736 364 1,100 -- 1,100
Recoveries 44 141 185 -- 185
Foreign exchange and other 21 1 22 -- 22
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year(3) $ 519 $ 525 $ 1,044 $ 1,250 $ 2,294
================================================================================================================================
Net impaired loans
Balance at beginning of year $ 728 $ (53) $ 675 $(1,250) $ (575)
Net change in gross
impaired (7) 48 41 -- 41
Net change in allowance (43) (15) (58) -- (58)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year(3) $ 678 $ (20) $ 658 $(1,250) $ (592)
================================================================================================================================
Gross impaired loans less specific allowance as a
percentage of total net loans and acceptances 0.40%
Net impaired loans and acceptances after general allowance:
As a percentage of total net loans and acceptances (0.36)%
As a percentage of shareholders' equity (4.97)%
================================================================================================================================
Business Total
and before
$ millions, as at or for government Consumer general General 2000
the years ended October 31 loans loans(2) allowance allowance Total
- --------------------------------------------------------------------------------------------------------------------------------
Gross impaired loans
Balance at beginning of year $ 1,019 $ 463 $ 1,482 $ -- $ 1,482
New additions 1,008 776 1,784 -- 1,784
Returned to performing
status, repaid or sold (408) (348) (756) -- (756)
- --------------------------------------------------------------------------------------------------------------------------------
Gross impaired loans prior
to write-offs 1,619 891 2,510 -- 2,510
Write-offs (415) (434) (849) -- (849)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 1,204 $ 457 $ 1,661 $ -- $ 1,661
================================================================================================================================
Allowances
Balance at beginning of year $ 505 $ 243 $ 748 $ 1,000 $ 1,748
Write-offs (415) (434) (849) -- (849)
Provisions 346 624 970 250 1,220
Recoveries 44 77 121 -- 121
Foreign exchange and other (4) -- (4) -- (4)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year(3) $ 476 $ 510 $ 986 $ 1,250 $ 2,236
================================================================================================================================
Net impaired loans
Balance at beginning of year $ 514 $ 220 $ 734 $(1,000) $ (266)
Net change in gross
impaired 185 (6) 179 -- 179
Net change in allowance 29 (267) (238) (250) (488)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at end of year(3) $ 728 $ (53) $ 675 $(1,250) $ (575)
================================================================================================================================
Gross impaired loans less specific allowance as a
percentage of total net loans and acceptances 0.44%
Net impaired loans and acceptances after general allowance:
As a percentage of total net loans and acceptances (0.37)%
As a percentage of shareholders' equity (5.06)%
================================================================================================================================
(1) Impaired loans include loan substitute securities of $30 million (2001:
nil; 2000: $13 million) and allowances for credit losses of nil (2001:
nil; 2000: $2 million) relating to loan substitute securities.
(2) Specific allowances for large numbers of homogeneous balances of
relatively small amounts are established by reference to historical ratios
of write-offs to balances outstanding. This may result in negative net
impaired loans as individual loans are generally classified as impaired
when repayment of principal or payment of interest is contractually 90
days in arrears.
(3) Excludes allowances on letters of credit totalling $1 million (2001: $1
million; 2000: $2 million).
- --------------------------------------------------------------------------------
58
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
Provision for credit losses
- ----------------------------------------------------------------------------------
PROVISION FOR (RECOVERY OF) CREDIT LOSSES
$ millions, for the years ended October 31 2002 2001 2000
- ----------------------------------------------------------------------------------
Canada
Residential mortgages $ 3 $ 3 $ 5
Student loans -- (2) 365
Personal loans 108 84 94
Credit card loans 271 270 154
- ----------------------------------------------------------------------------------
Total consumer loans 382 355 618
- ----------------------------------------------------------------------------------
Non-residential mortgages 4 3 5
Financial institutions (3) (2) 2
Service and retail industries 37 49 15
Manufacturing, consumer
and capital goods 25 24 51
Real estate and construction (29) (8) (28)
Agriculture 13 8 5
Resource-based industries 1 7 14
Telecommunications, media
and technology 76 31 (2)
Transportation 3 1 66
Utilities 11 1 6
Other 1 4 1
- ----------------------------------------------------------------------------------
Total business and government loans 139 118 135
- ----------------------------------------------------------------------------------
521 473 753
- ----------------------------------------------------------------------------------
United States
Total consumer loans 18 -- (6)
Financial institutions (2) 2 45
Service and retail industries 12 163 61
Manufacturing, consumer
and capital goods 18 148 29
Real estate and construction 38 (1) (15)
Resource-based industries 292 50 13
Telecommunications, media
and technology 381 227 12
Transportation 27 (2) 13
Utilities 70 8 --
Other -- 28 46
- ----------------------------------------------------------------------------------
854 623 198
- ----------------------------------------------------------------------------------
Other countries
Total consumer loans 3 9 12
Financial institutions (2) (10) 1
Service and retail industries (1) 1 2
Manufacturing, consumer
and capital goods -- (3) 2
Real estate and construction (4) 3 (6)
Agriculture (1) -- 1
Resource-based industries 18 -- --
Telecommunications, media
and technology 108 8 (2)
Transportation -- 1 6
Utilities 4 (5) 4
Other -- -- (1)
- ----------------------------------------------------------------------------------
125 4 19
- ----------------------------------------------------------------------------------
Credit losses charged to income
Specific provision 1,500 1,100 970
General provision -- -- 250
- ----------------------------------------------------------------------------------
Total credit losses charged to the
consolidated statements of income $1,500 $1,100 $1,220
==================================================================================
As a percentage of total net loans
and acceptances 0.94% 0.67% 0.79%
==================================================================================
The provision for credit losses is the amount charged to income that increases
the total allowance for credit losses to a level that management considers
prudent to cover all probable credit-related losses in the portfolio, given due
regard to existing economic conditions and credit derivatives.
The provision for credit losses charged to income in 2002 was $1,500
million, compared with $1,100 million in 2001. The entire 2002 provision was
allocated to specific allowances, with the general allowance remaining unchanged
at $1.25 billion. During 2001, the total provision for credit losses charged to
income of $1,100 million was also allocated to specific allowances. Total
specific provisions for credit losses increased by $400 million in 2002. This
increase was mainly attributable to the business and government loan portfolio,
and reflects the continuing decline in credit conditions experienced in the U.S.
and Europe, primarily in the telecommunications, utilities and resource-based
industry groups.
The specific provision of $970 million in 2000 included a $250 million
additional provision for credit losses related to government-sponsored student
loans, resulting in a total student loan provision of $365 million for the year.
Allowances for credit losses
The total allowance for credit losses consists of specific and general allowance
components. Specific allowances are recorded when loans are identified as
impaired. For business and government loans, specific allowances are established
through ongoing assessments of the portfolio on an account-by-account basis when
impaired loans are identified. Specific allowances for consumer loans are
determined by reference to historical ratios of write-offs to balances
outstanding.
The general allowance provides for credit losses that are present in the
credit portfolios, but which have not yet been specifically identified.
The credit portfolios to which the general allowance applies include
business loans and acceptances, off-balance sheet credit instruments, such as
credit commitments and letters of credit, and consumer loans. The general
allowance does not apply to loans or credit facilities that are impaired, as
appropriate specific provisions are taken to provide for these.
The methodology for determining the appropriate level of general allowance
involves using expected loss rates associated with different credit portfolios,
and for different risk levels within portfolios, estimating a time period over
which losses that are present would be specifically identified and a specific
provision taken, and adjusting for management's view of the current and ongoing
economic and portfolio trends.
Expected loss rates for business loan portfolios are based on the risk
rating of each credit facility and on the probability of default factors
associated with each risk rating, as well as estimates of loss given default.
The probability of default factors reflects CIBC's historical experience over an
economic cycle, and is supplemented by data derived from defaults in the public
debt markets. Loss given default estimates are based on CIBC's experience over
many years. For consumer loan portfolios, expected losses are based on CIBC's
historical flow and loss rates.
The level of general allowance is determined by a number of factors,
including the portfolios' size, the relative risk profiles of the portfolios,
the economic trends and evidence of credit quality improvements or
deterioration.
- --------------------------------------------------------------------------------
59
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The general allowance requirement is assessed using these criteria. On a regular
basis, the parameters that drive the general allowance calculation are updated,
based on CIBC's market experience.
As at October 31, 2002, the specific allowance for credit losses was $1.04
billion, down $6 million from 2001. The change year-over-year was the result of
a decrease related to the consumer loan portfolio of $82 million, and an
increase in respect of the business and government loan portfolio of $76
million.
During 2002, CIBC's general allowance remained unchanged at $1.25 billion,
resulting in a total allowance for credit losses of $2.29 billion. This amount
was viewed as prudent in light of the composition of the credit portfolio, as
well as continued levels of uncertainty of economic performance in CIBC's major
lending markets.
The total allowance for credit losses is reviewed and approved on a
quarterly basis by the SET and the Audit Committee. The total allowance for
credit losses exceeded gross impaired loans by $13 million as at October 31,
2002 compared with $592 million at the end of the prior year. While management
believes that the allowance for credit losses is sufficient at October 31, 2002,
future additions to the allowance will be subject to continuing evaluation of
risks in the loan portfolio and changing economic conditions.
- --------------------------------------------------------------------------------
MANAGEMENT OF MARKET RISK
Market risk is the risk of financial loss arising from changes in values of
financial instruments and includes interest rate, credit spread, foreign
exchange, equity, commodity and liquidity risks. CIBC is exposed to market risk
in its trading and investment portfolios, and through its asset-liability
management activities.
CIBC's framework for the management of market risk comprises
infrastructure, policies and standards, and measurement, monitoring and control
practices, which CIBC believes incorporate best practice risk management
standards. TBRM performs market risk management functions independently of
CIBC's business lines. The risk measurement, monitoring and control processes
ensure that overall market risk and its components are well understood within
CIBC.
Infrastructure
The activities of TBRM are reviewed and approved, as appropriate, by the CRC,
the SET and ultimately by the Risk Management Committee of the board. In
addition to understanding, measuring, monitoring and controlling risks, TBRM
ensures on a daily basis that the individual components and overall market risk
exposures of CIBC are within approved risk limits and that only authorized
activities are undertaken.
The quality and skills of risk managers are critical to achieving
effective risk management. Each business incurring significant market risk is
the focus of an experienced market risk manager, supplemented by regional risk
management professionals located in all major CIBC trading centres, facilitating
comprehensive risk coverage. Data from trading systems around the world are
consolidated in a central risk management database. Centralized risk measurement
and access to large amounts of risk management data support the global
management of market risk through integrated risk reporting and analysis, and
limit monitoring. CIBC generates a detailed risk report and limit-monitoring
summary each morning, based on the previous day's trading. This report provides
a CIBC-wide view of market risk in the trading portfolios and is integral to the
review of risk exposure at CIBC's trading room meeting each morning. A similar
report provides a CIBC-wide view of non-trading market risks. Each day, all risk
positions are monitored against authorized limits by an independent risk
manager, and positions that exceed authorized limits are promptly reported to
senior management. Reports on compliance with risk limits are made weekly to the
CRC and quarterly to the Risk Management Committee.
Policies and standards
CIBC has developed comprehensive policies and standards for market risk
management. These relate to identification and measurement of the various types
of market risk, and to the establishment of limits within which CIBC manages its
overall exposure. The policies explicitly state risk tolerance levels, expressed
in terms of both statistically based Value-at-Risk (VaR) measures and of
potential worst-case stress losses. The Risk Management Committee approves
overall levels of risk that CIBC may assume.
CIBC uses a three-tiered approach to set market risk limits on the amounts
of interest rate, credit spread, foreign exchange, commodity and equity risks
that the organization can assume in its trading and non-trading activities. The
first-tier limits are CIBC's overall market risk and worst-case scenario limits,
and are set by the SET, in keeping with the risk tolerance expressed by the Risk
Management Committee. The second-tier limits are designed to control the risk
profile of positioning activities in each business, and are established by
agreement of TBRM and the businesses, and are approved by the CRC. The
third-tier limits are delegated down to the desk level and are designed to
monitor risk concentration and the impact of book-specific stress events.
Policies also outline requirements for yield curve and valuation model
construction, and link to accounting policies with respect to mark-to-market
methodologies and the independent valuation of positions.
Measurement, monitoring and control
Since no single measure reflects all aspects of market risk, CIBC uses several
different risk measures:
o VaR - CIBC's Risk Measurement Unit (RMU) methodology, which enables the
like-for-like comparison of risk in different businesses and asset
classes.
o Stress testing and scenario analysis, which provide insight into portfolio
behaviour under extreme circumstances.
o Backtesting, which validates the effectiveness of risk quantification
through analysis of actual and theoretical profit and loss outcomes.
RMU methodology
CIBC has developed and adopted a comprehensive VaR market risk measurement
methodology that expresses risk in terms of RMUs. The VaR or RMU methodology is
a statistically defined, probability-based approach that uses volatilities and
correlations to quantify risk in dollar terms.
The RMU is CIBC's market risk measure of the potential loss from adverse
market movements that can occur under normal market conditions, based on
historical data and recent market experience. An RMU is defined as the overnight
loss with less than a 1% probability of occurring in normal markets. The RMU
methodology uses numerous risk factors as inputs, including, for example,
interest rate risk, exposure to multiple yield curve points, exposure to
multiple basis and spread relationships, and
- --------------------------------------------------------------------------------
60
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
exposure to multiple implied volatility points. The RMU is computed through use
of the historical volatility of each risk factor and the associated historical
correlations among them, updated on a regular basis. A composite RMU measure is
determined by aggregating the RMU measures for each of interest rate, credit
spread, equity, foreign exchange and commodity market risks, and the reduction
due to the portfolio effect of combining the risks. The composite RMU is then
expressed as a potential worst-case loss that can occur over one day, no more
than 1% of the time, or equivalently, within a confidence interval of 2.33
standard deviations, in normal markets. The model covers all financial products
traded by CIBC, including foreign exchange products, derivatives, debt
securities, equities and commodities. The RMU methodology is based on a
variance-covariance model, supplemented by an historical simulation model.
Stress testing and scenario analysis
While the RMU methodology captures CIBC's exposure to unlikely events in normal
market conditions, stress testing and scenario analysis are designed to add
insight to the possible outcomes of abnormal market conditions.
CIBC's stress testing measures the effect on portfolio values of a wide
range of extreme moves in market prices, based on historical experience and/or
referenced to specific book concentrations. The stress test methodology assumes
that no actions are taken during the stress event to mitigate risk, reflecting
the decreased liquidity that frequently accompanies market shocks.
CIBC's scenario analysis approach simulates the impact on the portfolio of
extreme market events unfolding over an extended period of up to a full calendar
quarter. In this case, the changing portfolio characteristics and the market
movements are dynamic. This allows analysis of the impact of changes in market
liquidity and potential risk mitigation strategies over time.
Scenarios are developed using actual historical market data during periods
of market disruption, or are based on the hypothetical occurrence of economic
events, political events and natural disasters suggested and designed by
economists, business leaders and risk managers.
As of October 31, 2002, CIBC's scenario analysis program included various
historical and hypothetical scenarios. Among the historical scenarios used were
the 1987 equity market crash, the 1994 period of U.S. Federal Reserve
tightening, the 1998 Russian-led crisis, and the market events following
September 11, 2001. The hypothetical scenarios used include potential market
crises originating in North America and in Asia. Key to the effectiveness of the
scenario analysis program is the timely review of the applicability of the
scenarios.
CIBC's core stress tests and scenario analyses are run daily, with further
ad hoc analyses carried out on a regular basis. Limits are placed on the maximum
acceptable loss to the aggregate portfolio under any worst-case scenario and on
the impact of stress testing at the detailed portfolio level.
A variation of CIBC's scenario analysis model is employed to add insight
to risks in the merchant banking portfolio. In this case, the simulation
framework is extended to quantify potential losses over a full year.
The effectiveness of stress testing and scenario analysis is demonstrated
during actual periods of market disruption.
Backtesting
The process of backtesting is key to the sustained integrity of CIBC's risk
models. For each of CIBC's trading portfolios, and in aggregate, daily RMUs are
compared with trading revenue. The backtesting process serves to confirm that
actual profit and loss (P/L) outcomes are consistent with the statistical
assumptions of the RMU model. This process is further enhanced through the
calculation of a hypothetical or static P/L. This represents the theoretical
change in portfolio value due to each day's price movements, of the prior day's
closing portfolio, on the assumption that it remained unchanged. Comparison of
this daily static P/L with RMU is required by the Office of the Superintendent
of Financial Institutions (OSFI) and serves as a further validation of the
integrity of the RMU model.
Trading activities
CIBC holds positions in both liquid and less liquid traded financial instruments
as a fundamental component of providing integrated financial solutions to meet
client investment and risk management needs. Trading revenue is generated from
these transactions with clients and, to a lesser extent, from proprietary
trading. Traded instruments include debt and equity securities, as well as
foreign exchange, commodity and derivative products. Positions are recorded at
fair values, with realized or unrealized gains and losses from changes in fair
value recognized in trading activities as non-interest income, while net
interest earned on trading positions after funding is reflected as net interest
income in the consolidated statements of income. Trading and related risk
management strategies can periodically shift revenue between trading activities
and net interest income. Therefore, trading revenue includes net interest income
earned on trading portfolios in addition to net gains or losses from trading
activities.
- --------------------------------------------------------------------------------
TRADING REVENUE
$ millions, for the years ended October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Net interest income (TEB) $ 382 $ (201) $ (260)
Trading activities 273 1,343 1,140
- --------------------------------------------------------------------------------
Total trading revenue (TEB) $ 655 $1,142 $ 880
================================================================================
By type:
Interest rate $ 290 $ 505 $ 231
Foreign exchange(1) 152 179 199
Equities 136 391 394
Other(2) 77 67 56
- --------------------------------------------------------------------------------
Total trading revenue (TEB) $ 655 $1,142 $ 880
================================================================================
(1) Revenue earned on foreign exchange for other than trading activities is
included in other non-interest income.
(2) Includes commodities, credit derivatives and secondary loan trading and
sales.
In 2002, total trading revenue (TEB) was $655 million, which decreased by $487
million over the prior year. The decrease was primarily due to difficult
financial conditions associated with weaker economic conditions in the U.S. Both
equity and fixed income activities faced weaker performance as a result of these
market conditions.
In 2001, trading revenue (TEB) was $1,142 million, which increased by $262
million over 2000. The increase was primarily due to a reduction in interest
funding costs on traded instruments as a result of interest rate reductions in
2001, partially offset by the effects of weaker markets in 2001 and the fourth
quarter market impact of September 11, 2001. In addition, trading revenue
benefited in 2001 from increased revenue in the fixed income businesses.
The RMU by risk type table on the next page shows the mix of market risks
through 2002 by type of risk and aggregate risk. These risks are interrelated
and, consequently, are only additive after taking into account the
diversification effect, which reflects the reduction of risk due to portfolio
effects among the trading positions. CIBC's trading risk exposures to interest
- --------------------------------------------------------------------------------
61
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
rates arise from activities in the global debt and money markets, particularly
from transactions in Canadian, U.S., European and Japanese markets. The primary
instruments are government and corporate debt, and interest rate swaps. The bulk
of the trading exposure to foreign exchange risk arises from transactions
involving the U.S. dollar, the Euro, the British pound, and the Japanese yen,
whereas the primary risks of loss in equities are in the U.S., Canadian and
European equity markets. During 2002, aggregate risk levels were generally lower
than in 2001, with reductions concentrated primarily in credit spread risk.
Limitations on significant directional exposure and active securities inventory
management were major components in constraining risk, consistent with CIBC's
goal of low earnings volatility.
The histogram below presents the frequency distribution of daily trading
revenue for 2002. Trading revenue was positive for 74% of the days in 2002,
compared with 81% in 2001 and 74% in 2000. Average daily trading revenue was
$2.5 million in 2002, compared with $4.4 million in 2001 and $3.5 million in
2000.
The trading revenue and RMU backtesting graph below compares the 2002
actual daily trading revenue with the previous day's RMU measures. As indicated
previously, these VaR measures are derived from statistically defined
probability-based models that use CIBC's market positions and prior market
correlations and volatilities under normal market conditions.
- --------------------------------------------------------------------------------
RMU BY RISK TYPE - TRADING PORTFOLIO
2002 2002 2001 2001
$ millions Year-end Average Year-end Average
- --------------------------------------------------------------------------------
Interest rate risk $ 7.32 $ 8.47 $ 6.14 $ 7.05
Credit spread risk 5.65 5.79 6.72 8.50
Equity risk 9.29 8.34 8.33 9.81
Foreign exchange risk 0.53 0.76 0.87 0.81
Commodity risk 2.56 1.02 1.05 1.16
Diversification effect (10.00) (11.46) (11.95) (13.13)
- --------------------------------------------------------------------------------
Total risk $ 15.35 $ 12.92 $ 11.16 $ 14.20
================================================================================
Frequency distribution of daily 2002 trading revenue
Frequency (days)
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
- --------------------------
Trading
revenue Frequency
($ millions) (days)
- --------------------------
-22 0
-21 0
-20 0
-19 0
-18 0
-17 0
-16 0
-15 0
-14 0
-13 0
-12 1
-11 0
-10 2
-9 1
-8 1
-7 4
-6 6
-5 3
-4 7
-3 8
-2 6
-1 14
0 15
1 21
2 24
3 29
4 30
5 16
6 19
7 10
8 12
9 4
10 7
11 3
12 5
13 5
14 2
15 0
16 0
17 1
18 1
19 0
20 1
21 0
22 1
Backtesting of trading revenue vs. RMU
$ millions
[THE FOLLOWING DATA WAS REPRESENTED AS A BAR CHART IN THE PRINTED MATERIAL]
Date RMU Trading Revenue
----------- ------------ ---------------
1-Nov-01 (11.15) 4.71
2-Nov-01 (11.21) 4.33
5-Nov-01 (11.32) 5.49
6-Nov-01 (12.04) 2.65
7-Nov-01 (12.89) 12.93
8-Nov-01 (14.05) 3.08
9-Nov-01 (13.87) 3.47
12-Nov-01 (12.89) 1.86
13-Nov-01 (13.98) (0.43)
14-Nov-01 (13.31) (1.10)
15-Nov-01 (13.27) (1.43)
16-Nov-01 (12.29) 2.96
19-Nov-01 (12.56) 3.50
20-Nov-01 (13.01) 1.18
21-Nov-01 (13.23) 0.09
22-Nov-01 (12.67) 2.63
23-Nov-01 (12.56) (0.81)
26-Nov-01 (12.34) 7.07
27-Nov-01 (12.78) 5.71
28-Nov-01 (12.60) 4.22
29-Nov-01 (11.47) 4.63
30-Nov-01 (12.03) 21.41
3-Dec-01 (12.03) 12.99
4-Dec-01 (11.75) 3.88
5-Dec-01 (11.87) 6.25
6-Dec-01 (13.08) 0.24
7-Dec-01 (13.72) 3.07
10-Dec-01 (14.60) 11.22
11-Dec-01 (13.48) 4.29
12-Dec-01 (14.03) 3.45
13-Dec-01 (12.87) 2.38
14-Dec-01 (13.72) 12.82
17-Dec-01 (12.47) 0.22
18-Dec-01 (13.51) 9.34
19-Dec-01 (14.02) 5.62
20-Dec-01 (13.06) 9.45
21-Dec-01 (14.54) 11.10
24-Dec-01 (14.14) (1.10)
26-Dec-01 (14.29) 0.66
27-Dec-01 (15.10) (0.35)
28-Dec-01 (14.56) 13.45
31-Dec-01 (14.29) 5.89
2-Jan-02 (14.30) 5.86
3-Jan-02 (14.48) 5.16
4-Jan-02 (15.22) 4.35
7-Jan-02 (14.88) 4.25
8-Jan-02 (14.77) 6.55
9-Jan-02 (14.15) 2.51
10-Jan-02 (14.58) 8.67
11-Jan-02 (14.41) 11.22
14-Jan-02 (14.91) 8.18
15-Jan-02 (14.46) 17.14
16-Jan-02 (14.39) 3.26
17-Jan-02 (15.06) 3.88
18-Jan-02 (16.66) (3.06)
21-Jan-02 (15.23) 1.43
22-Jan-02 (14.92) 9.59
23-Jan-02 (13.90) 3.34
24-Jan-02 (14.62) 1.48
25-Jan-02 (15.48) (1.59)
28-Jan-02 (16.01) 2.70
29-Jan-02 (15.51) 7.08
30-Jan-02 (15.40) 2.73
31-Jan-02 (15.26) (2.11)
1-Feb-02 (15.14) 7.94
4-Feb-02 (14.93) 1.35
5-Feb-02 (15.39) 7.04
6-Feb-02 (15.32) (1.47)
7-Feb-02 (15.27) 7.13
8-Feb-02 (15.62) 5.71
11-Feb-02 (15.35) 5.92
12-Feb-02 (15.40) (0.21)
13-Feb-02 (15.20) 1.24
14-Feb-02 (12.38) (2.22)
15-Feb-02 (11.96) 0.99
18-Feb-02 (11.88) 6.37
19-Feb-02 (11.86) 2.91
20-Feb-02 (11.87) (1.94)
21-Feb-02 (11.97) 3.52
22-Feb-02 (12.14) 4.84
25-Feb-02 (12.53) 1.51
26-Feb-02 (12.39) 2.72
27-Feb-02 (12.81) (3.51)
28-Feb-02 (12.49) (10.50)
1-Mar-02 (13.70) 3.46
4-Mar-02 (13.35) (9.02)
5-Mar-02 (14.16) 5.04
6-Mar-02 (14.16) 2.80
7-Mar-02 (14.78) (4.03)
8-Mar-02 (15.90) (1.06)
11-Mar-02 (16.31) 1.06
12-Mar-02 (16.28) 2.80
13-Mar-02 (14.86) 7.65
14-Mar-02 (14.89) (6.09)
15-Mar-02 (15.20) 5.40
18-Mar-02 (14.22) 1.43
19-Mar-02 (15.34) 2.28
20-Mar-02 (15.27) 1.18
21-Mar-02 (15.19) (1.63)
22-Mar-02 (15.19) (1.51)
25-Mar-02 (15.66) 1.67
26-Mar-02 (14.24) 5.81
27-Mar-02 (13.91) 6.21
28-Mar-02 (14.00) 7.40
29-Mar-02 (14.42) (3.53)
1-Apr-02 (14.58) (0.02)
2-Apr-02 (15.25) 5.91
3-Apr-02 (14.55) 9.64
4-Apr-02 (14.37) 2.47
5-Apr-02 (12.59) 4.48
8-Apr-02 (11.73) (0.26)
9-Apr-02 (12.60) 0.32
10-Apr-02 (11.79) 0.70
11-Apr-02 (10.94) 1.82
12-Apr-02 (11.53) 9.38
15-Apr-02 (11.58) (1.60)
16-Apr-02 (11.59) (0.37)
17-Apr-02 (12.17) 9.86
18-Apr-02 (11.36) 2.49
19-Apr-02 (12.01) 10.12
22-Apr-02 (12.15) 2.41
23-Apr-02 (11.26) (0.62)
24-Apr-02 (12.00) 0.97
25-Apr-02 (10.88) 0.23
26-Apr-02 (10.63) 2.12
29-Apr-02 (10.82) 5.96
30-Apr-02 (10.46) (1.83)
1-May-02 (10.40) 0.16
2-May-02 (9.93) 4.13
3-May-02 (10.78) 5.85
6-May-02 (10.24) (3.51)
7-May-02 (10.94) 10.53
8-May-02 (11.03) 5.51
9-May-02 (11.00) 2.83
10-May-02 (10.77) 1.48
13-May-02 (11.45) 2.15
14-May-02 (12.15) (5.89)
15-May-02 (11.88) 6.84
16-May-02 (11.65) 0.62
17-May-02 (11.40) (7.39)
20-May-02 (12.08) 0.70
21-May-02 (12.99) 12.50
22-May-02 (12.25) 3.16
23-May-02 (12.66) 7.52
24-May-02 (13.17) 0.41
27-May-02 (12.38) 0.85
28-May-02 (12.56) 5.62
29-May-02 (11.73) 3.26
30-May-02 (11.56) 1.78
31-May-02 (11.31) 3.74
3-Jun-02 (10.77) 3.11
4-Jun-02 (11.13) 3.12
5-Jun-02 (10.84) 5.64
6-Jun-02 (10.44) 0.65
7-Jun-02 (10.65) (3.19)
10-Jun-02 (10.28) 3.35
11-Jun-02 (9.89) 1.51
12-Jun-02 (9.51) (4.09)
13-Jun-02 (9.01) 9.40
14-Jun-02 (9.46) (0.03)
17-Jun-02 (9.65) (3.63)
18-Jun-02 (9.03) 3.06
19-Jun-02 (8.67) 7.30
20-Jun-02 (9.76) (3.18)
21-Jun-02 (9.34) 3.02
24-Jun-02 (9.99) 1.02
25-Jun-02 (9.78) 4.67
26-Jun-02 (10.03) (6.85)
27-Jun-02 (10.25) 4.87
28-Jun-02 (9.75) 3.53
1-Jul-02 (9.53) (0.02)
2-Jul-02 (9.99) 1.79
3-Jul-02 (9.52) 3.04
4-Jul-02 (9.14) 7.58
5-Jul-02 (9.21) (6.29)
8-Jul-02 (8.50) 2.38
9-Jul-02 (8.36) 3.64
10-Jul-02 (8.62) (0.23)
11-Jul-02 (9.21) 2.66
12-Jul-02 (9.14) 6.37
15-Jul-02 (10.13) (7.25)
16-Jul-02 (10.98) 5.79
17-Jul-02 (10.75) 0.94
18-Jul-02 (9.62) 6.93
19-Jul-02 (8.36) (6.19)
22-Jul-02 (10.74) (7.45)
23-Jul-02 (11.41) (6.24)
24-Jul-02 (13.08) 8.62
25-Jul-02 (10.88) (1.00)
26-Jul-02 (12.55) (3.21)
29-Jul-02 (11.96) 3.06
30-Jul-02 (11.25) 3.26
31-Jul-02 (11.03) 4.85
1-Aug-02 (12.15) 19.09
2-Aug-02 (12.85) (2.71)
5-Aug-02 (12.95) (0.12)
6-Aug-02 (13.74) 3.60
7-Aug-02 (14.24) (10.14)
8-Aug-02 (14.44) 11.87
9-Aug-02 (13.93) 2.25
12-Aug-02 (13.27) 2.22
13-Aug-02 (13.31) (1.61)
14-Aug-02 (13.84) 1.93
15-Aug-02 (12.72) 3.86
16-Aug-02 (12.71) 3.52
19-Aug-02 (13.29) 3.36
20-Aug-02 (12.90) 0.65
21-Aug-02 (13.27) 4.52
22-Aug-02 (13.40) 2.84
23-Aug-02 (13.16) 10.96
26-Aug-02 (13.14) 3.44
27-Aug-02 (12.70) 0.29
28-Aug-02 (13.24) 6.68
29-Aug-02 (12.94) (0.75)
30-Aug-02 (12.81) 16.78
2-Sep-02 (12.41) (0.99)
3-Sep-02 (12.68) (4.02)
4-Sep-02 (13.14) 12.67
5-Sep-02 (14.04) (5.92)
6-Sep-02 (13.45) 8.56
9-Sep-02 (13.03) 2.13
10-Sep-02 (13.06) 2.88
11-Sep-02 (12.46) 7.01
12-Sep-02 (12.96) (4.95)
13-Sep-02 (13.74) 1.90
16-Sep-02 (14.19) 2.79
17-Sep-02 (13.49) 3.52
18-Sep-02 (15.25) 7.98
19-Sep-02 (15.86) (12.85)
20-Sep-02 (16.41) 4.95
23-Sep-02 (14.91) (4.71)
24-Sep-02 (15.38) (2.17)
25-Sep-02 (15.12) 13.38
26-Sep-02 (15.10) (8.08)
27-Sep-02 (15.07) 1.99
30-Sep-02 (15.08) 11.77
1-Oct-02 (15.24) 6.67
2-Oct-02 (14.63) 1.81
3-Oct-02 (15.34) (2.12)
4-Oct-02 (14.19) (0.13)
7-Oct-02 (14.19) 0.39
8-Oct-02 (14.35) (4.11)
9-Oct-02 (14.00) 0.62
10-Oct-02 (14.57) 1.01
11-Oct-02 (14.16) 2.06
14-Oct-02 (14.11) 0.00
15-Oct-02 (14.17) 7.00
16-Oct-02 (13.57) 4.96
17-Oct-02 (13.32) (4.93)
18-Oct-02 (12.55) 2.52
21-Oct-02 (13.24) 5.55
22-Oct-02 (13.17) (1.27)
23-Oct-02 (13.16) 2.20
24-Oct-02 (13.96) 1.58
25-Oct-02 (14.53) (5.09)
28-Oct-02 (14.78) (2.24)
29-Oct-02 (14.22) (6.69)
30-Oct-02 (15.94) 1.68
31-Oct-02 (16.07) (7.24)
- --------------------------------------------------------------------------------
62
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Non-trading activities
CIBC manages market risks, including interest rate, foreign exchange and equity
exposures arising from the retail customer banking business, merchant banking
portfolios and other non-trading activities. Foreign exchange exposures arising
from structural on-balance sheet assets and liabilities and from investments in
foreign operations are also included in non-trading activities.
The RMU by risk type table below shows the mix of non-trading risks by
type of risk and aggregate risk. These risks are interrelated and, consequently,
are only additive after taking into account the diversification effect that
reflects the increases of risk due to portfolio effects among the different
positions. During 2002, risk levels were higher than in 2001, with increases
concentrated primarily in interest rate risk. Despite reduced directional
positions in the asset-liability gap, volatile market conditions led to sharply
higher risk parameters, reflected in higher RMU.
Due to the illiquid nature of many of the merchant banking investments,
CIBC does not employ overnight RMU as a risk measure for these portfolios. In
addition to being measured and monitored in notional terms, CIBC subjects the
portfolio to scenario analysis which simulates potential losses over a one-year
timeframe.
Non-trading interest rate risk consists primarily of risk inherent in
asset-liability management activities and the activities of foreign and domestic
subsidiaries. Interest rate risk results from differences in the maturities or
repricing dates of assets and liabilities, both on- and off-balance sheet, as
well as from embedded optionality in retail products. This optionality arises
predominantly from the prepayment exposures of mortgage products, mortgage
commitments and some GIC products with early redemption features. A variety of
cash instruments and derivatives, principally interest rate swaps, futures and
options, are used to manage and control these risks. Derivatives are used to
modify the interest rate characteristics of related balance sheet instruments
and to hedge anticipated exposures.
- --------------------------------------------------------------------------------
RMU BY RISK TYPE - NON-TRADING PORTFOLIO
2002 2002 2001 2001
$ millions Year-end Average Year-end Average
- --------------------------------------------------------------------------------
Interest rate risk $57.76 $65.41 $50.91 $50.12
Credit spread risk 3.86 2.15 1.52 1.61
Equity risk 3.82 2.91 2.11 8.07
Foreign exchange risk 0.98 0.64 0.64 0.49
Diversification effect (9.03) (5.87) (4.52) (6.16)
- --------------------------------------------------------------------------------
Total risk $57.39 $65.24 $50.66 $54.13
================================================================================
CIBC's total non-trading interest rate risk exposure, as at October 31, 2002, is
included in Note 12 to the consolidated financial statements. On- and
off-balance sheet assets and liabilities are reported in timeframes based on the
earlier of their contractual repricing date or maturity date. It should be noted
that this reported interest rate position presents CIBC's risk exposure only at
a point in time. Exposure can change depending on customer preference for
products and terms, including mortgage prepayment or other option exercise, and
the nature of CIBC's management of the various and diverse portfolios that
comprise the consolidated interest rate risk position. Given CIBC's consolidated
maturity and repricing portfolio profile at October 31, 2002, as adjusted for
estimated prepayments, an immediate 1% increase in interest rates across all
maturities would increase net income after taxes by approximately $48 million
over the next 12 months, and reduce common shareholders' equity as measured on a
present value basis by approximately $263 million.
Non-trading equity exposure arises primarily from merchant banking
activities, as well as from equity-linked retail products (equity-linked GICs),
including embedded optionality, and associated hedges. A variety of cash
instruments and derivatives, including equity swaps, futures and options, are
used to manage and control these risks.
Non-trading foreign exchange risk of the CIBC consolidated balance sheets
arises primarily from structural on-balance sheet assets and liabilities and
from investments in foreign operations. CIBC's approach to the structural
foreign exchange position is designed to ensure this exposure is minimized.
CIBC offers and originates a broad array of retail products with various
market risk characteristics. Changes in market conditions, customer behaviour
and competitive market pressures can have an impact on the market risk exposure
and retail margins earned from these products.
CIBC has $3.1 billion in the active as well as strategic merchant banking
investments. The active portfolio consists of $2.5 billion of debt, equity and
private equity fund investments. This portfolio was down 23% from the prior year
due to a combination of write-downs and efforts to reduce exposures to this type
of investment. The portfolio is diversified from an industry perspective with
over 13 industry groups.
Merchant banking portfolio industry diversification(1)
[THE FOLLOWING DATA WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL]
2002
Industrial growth and services 20.7%
Hardware and software 16.1%
Telecommunications and cable 11.1%
Services 9.6%
Healthcare 9.0%
Retail 7.8%
Financial services 5.2%
Other 4.9%
Media and publishing 4.8%
Resource-based industries 3.1%
Utilities 2.8%
Real estate 2.6%
Entertainment 2.3%
(1) The industry classifications represent those of the debt and equity
securities, including the underlying investees of the fund investments.
Non-exchange traded commodity derivatives
CIBC controls and manages its commodity derivatives risk through its RMU
methodology as described earlier. The following table indicates the fair value
based upon maturity of non-exchange traded commodity contracts as at October 31,
2002.
$ millions Positive Negative Net
- --------------------------------------------------------------------------------
Maturity less than 1 year $ 254 $ (276) $ (22)
Maturity 1 - 3 years 277 (331) (54)
Maturity 4 - 5 years 41 (22) 19
Maturity in excess of 5 years 413 (435) (22)
- --------------------------------------------------------------------------------
Gross fair value of contracts $ 985 $(1,064) $ (79)
================================================================================
- --------------------------------------------------------------------------------
63
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
During the year, CIBC had exposure to energy and other commodity derivatives.
Wherever possible, CIBC independently verifies the fair value of the positions
using third-party pricing sources. In the event that these are not available,
independently approved modelling techniques or other valuation methodologies are
utilized. The table below summarizes the methodology for independently checking
the fair value of the commodity exposures at October 31, 2002.
- ---------------------------------------------------------------------------------------------------------------------------------
SOURCES OF FAIR VALUE
Gross fair value of contracts
------------------------------------------------------
Maturity Maturity in
less than Maturity Maturity excess of
$ millions, as at October 31, 2002 1 year 1 - 3 years 4 - 5 years 5 years Total
- ---------------------------------------------------------------------------------------------------------------------------------
Sources of fair value
Quoted prices from external sources $(22) $(54) $ 19 $ 31 $(26)
Prices based upon models or other valuation methodologies -- -- -- (53) (53)
- ---------------------------------------------------------------------------------------------------------------------------------
$(22) $(54) $ 19 $(22) $(79)
=================================================================================================================================
- --------------------------------------------------------------------------------
MANAGEMENT OF LIQUIDITY RISK
CIBC's liquidity risk framework is designed to ensure the availability of
sufficient funds to honour financial commitments in the most cost-effective
manner possible.
CIBC's approach to managing liquidity exposure is based upon a
comprehensive framework, comprising infrastructure, policies and standards
supporting measurement, monitoring and control techniques. Liquidity risk is
actively managed with emphasis on exposure identification, containment and
mitigation.
Infrastructure
Global liquidity management is the responsibility of TBRM. Major regional
funding centres and operating subsidiaries in North America, Europe and Asia
provide regional liquidity management. Daily monitoring is undertaken to ensure
compliance with approved liquidity guidelines and limits. Measurement systems
and liquidity reports are independently monitored and reviewed.
Policies and standards
CIBC's liquidity policy framework is reviewed and approved annually by the
Risk Management Committee of the board. The policy establishes guidelines and
limits on minimum liquid asset inventories, funding diversification measures and
net cash outflows in both Canadian dollars and foreign currencies.
As CIBC operates in a variety of jurisdictions, the funding process is
designed to ensure compliance with all governing regulatory restrictions on the
inter-company transfer of funds within the CIBC group and to ensure appropriate
liquidity in each region.
Measurement, monitoring and control
CIBC has measurement systems to monitor both actual and anticipated inflows and
outflows of funds on a daily basis from on- and off-balance sheet exposures.
These measurement systems generate detailed liquidity reports that are integral
to the containment of liquidity risk exposure through the use of a prudent
distribution of liability maturities to ensure net cash outflows in any given
time horizon are manageable.
CIBC's liquidity management framework incorporates the use of scenario
analyses, designed to measure the potential impact of abnormal market conditions
on the liquidity risk profile. These scenarios are intended to enhance insight
into potential liquidity risk exposures under extreme market conditions.
Contingency plans for responding to liquidity stress events are reviewed, tested
and updated regularly.
CIBC further mitigates liquidity risk exposure through the maintenance of
segregated term funded pools of higher-quality liquid assets. These liquid
assets may be sold or pledged as secured borrowings to provide a ready source of
cash. Balance sheet liquid assets as at October 31, 2002 include cash of $0.8
billion, securities of $65.3 billion and deposits with banks of $8.7 billion.
CIBC also had $16.0 billion of securities borrowed or purchased under resale
agreements as at October 31, 2002.
In the course of CIBC's regular business activities, certain assets are
pledged as part of collateral management, including repurchase agreements and
security lending. Pledged asset requirements as at October 31, 2002 totalled
$26.8 billion, as outlined in Note 27 to the consolidated financial statements.
A broad base of retail and wholesale funding sources is used to meet
consolidated liquidity needs. CIBC's ability to generate core deposits provides
a stable and secure source of funding. As at October 31, 2002, Canadian dollar
deposits from individuals totalled $61.8 billion.
As at October 31, 2002, CIBC had outstanding $103.8 billion of unsecured
wholesale term debt sourced through various funding instruments and term
profiles as market conditions warranted.
CIBC's access to wholesale funding sources and the cost of that funding is
linked to its credit rating. During 2002, CIBC's credit rating was placed under
review by both Moody's Investors Service and Standard & Poor's credit rating
agencies. Moody's review reaffirmed both the short- and long-term credit ratings
as P-1 and Aa3, respectively. In September 2002, Standard & Poor's rating agency
downgraded CIBC's long-term credit rating by one notch from "AA minus" to "A
plus," revising the outlook to "stable" from "negative." It also lowered the
short-term rating from A-1+ to A-1. As a result of this rating change, the cost
of wholesale funding along with collateral requirements for derivative
transactions has increased marginally.
In addition to the issuance of unsecured wholesale debt, CIBC has
securitized various financial assets, including credit card receivables,
residential and commercial mortgages, and business loans through special purpose
entities.
- --------------------------------------------------------------------------------
64
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
OFF-BALANCE SHEET ARRANGEMENTS INVOLVING SPECIAL PURPOSE ENTITIES (SPEs)
SPEs are an important part of the financial markets, providing market liquidity
by facilitating investors' access to specific portfolios of assets and risks.
SPEs may be formed as a corporation, partnership, limited liability company or
trust. In a securitization, an entity transfers assets to an SPE in exchange for
cash. An SPE may also buy certain pre-defined assets for cash in the marketplace
(where the seller may at times be CIBC). The SPE will fund these purchases by
issuing ownership interests and debt securities in the form of commercial paper
and other evidence of indebtedness to third-party investors. SPEs can be
structured to be bankruptcy remote, thereby insulating investors from the impact
of the creditors of other entities, including the asset seller. Investors can
benefit from, and have recourse to, the SPE assets such as a cash collateral
account and over-collateralization in the form of excess assets or a liquidity
facility. Accordingly, the SPE may obtain a more favourable credit rating from
rating agencies than the transferor could obtain for its own debt issuance,
resulting in lower financing costs.
CIBC's activities with respect to SPEs are consistently undertaken within
a regulatory framework and are subject to standard regulatory review.
CIBC's involvement in SPEs takes one of three forms: securitization of
CIBC's own assets, securitization of third-party assets and other financial
transactions involving SPEs.
Securitization of CIBC's own assets
Securitizations are accounted for as asset sales only when CIBC surrenders
control of the transferred assets and receives consideration other than
beneficial interests in the transferred assets. Accounting regulations require a
determination to be made as to whether the SPE should be considered a subsidiary
of CIBC for the purpose of consolidation into CIBC's consolidated financial
statements. Where the criteria are met allowing recognition of the
securitization as a sale of assets permitting non-consolidation for financial
reporting purposes, CIBC records the sale. When such asset sales occur, CIBC may
retain interest-only strips, one or more senior or subordinated tranches of debt
and cash reserve accounts, all of which are considered "retained interests" in
the securitized assets. CIBC periodically reviews the carrying value of these
retained interests and when a decline in value is identified that is other than
temporary, the affected carrying amount is written down to its fair value. CIBC
continues to service all securitized assets after transfer, except for some
business loans, receiving servicing fees.
CIBC sells credit card receivables to SPEs on a non-recourse basis. CIBC
provides credit enhancement to the SPE using cash collateral accounts and
arranges for third parties to provide credit enhancements to the SPE through
letters of credit. CIBC retains some risk of loss with respect to the
receivables held by the SPE to the extent of its retained interests. CIBC's
credit card securitizations are revolving securitizations, with new credit card
receivables transferred to the SPE each period to replenish receivable amounts
as they are repaid. As at October 31, 2002, outstanding securitized credit card
receivables were $2.4 billion, while retained interests amounted to $43 million.
CIBC securitizes certain residential mortgage loans through the creation
of mortgage-backed securities and transfers to SPEs. CIBC continues to service
securitized residential mortgage loans and may be exposed to risks of the
transferred loans through retained interests. There are no expected credit
losses on the retained interests of securitized residential mortgages as they
are government guaranteed. As at October 31, 2002, outstanding securitized
residential mortgage loans were $3.2 billion and retained interests amounted to
$106 million.
CIBC securitizes commercial mortgages and other business loans, which in
addition to providing a source of liquidity and less expensive funding, may
reduce CIBC's credit exposure. As at October 31, 2002, outstanding securitized
commercial mortgage and business loans were $0.5 billion and retained interests
amounted to $21 million.
Securitization of third-party assets
CIBC administers several SPEs that purchase pools of third-party financial
assets, such as trade receivables, credit cards and mortgages. CIBC has no
ownership interest in these SPEs. Third parties that transfer assets to the SPEs
may continue to service the assets, and may be exposed to credit losses realized
on these assets through provision of collateral or other retained interests. The
SPEs may obtain credit enhancement, if any, from third-party providers. CIBC may
provide commercial paper back-stop liquidity facilities, securities
distribution, accounting, cash management and operations services. All fees
earned in respect of these activities are on a market basis.
Other financial transactions involving SPEs
CIBC provides a wide range of financial products, including mutual funds,
structured notes and other financial instruments for institutional and private
bank clients, including SPEs as counterparties, as well as retail customers.
These financial products are created, from time to time, using an SPE as issuer
or obligor of the financial products. CIBC may provide certain administrative
services and other financial facilities to the SPEs in exchange for market-rate
compensation. In all cases, CIBC would have nominal or no ownership interest in
such SPEs.
- --------------------------------------------------------------------------------
MANAGEMENT OF OPERATIONAL RISK
Operational risk is inherent in all of CIBC's activities and is the potential
loss that could arise from failures in internal controls, which include people,
processes and systems. The resulting losses may be financial or non-financial.
Operational risk excludes potential losses that are directly attributable to
either credit or market risk.
CIBC's framework for the management of operational risk comprises
measurement, monitoring and control policies and standards that are designed to
promote a strong internal control structure within all levels of CIBC.
Infrastructure
Under CIBC's integrated internal control framework, businesses have
responsibility for the day-to-day management of operational risks. TBRM is
responsible for measuring, monitoring and controlling operational risk on a
CIBC-wide basis and also ensures that businesses are managing operational risk
in compliance with policies and standards that were approved by the OAC. CIBC's
infrastructure groups, such as the departments in TBRM, Legal and Compliance,
Technology and Operations, Finance, and Human
- --------------------------------------------------------------------------------
65
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Resources support the businesses in this regard. These groups establish other
internal control-related policies and standards, provide consultative and
advisory services, and perform governance activities. These include a
comprehensive self-assessment process encompassing monitoring of the
effectiveness of controls and reporting back to the board, the Audit Committee,
the SET and the OAC. CIBC's independent Internal Audit function plays an
important role in the governance process through regular reporting to the Audit
Committee, the SET and the OAC on the effectiveness of, and adherence to,
internal control policies and standards.
As previously discussed, the OAC directs the management of operational
risk and oversees the effectiveness of the CIBC internal control framework
within the parameters and strategic objectives established by the SET. The SET
is accountable to the board and the Audit Committee for maintaining a strong and
disciplined internal control environment that provides reasonable assurance of
prudent operational risk management and an effective internal control structure.
Policies and standards
CIBC has a comprehensive set of policies and standards that are designed to
measure, monitor and control operational risk associated with people, processes
and systems, and to promote a sound internal control structure across CIBC.
These policies and standards were formally approved by the OAC during 2002 and
form the basis for operational risk reporting by TBRM to the Audit Committee and
the OAC. Operational risks driven by people are mitigated through human resource
policies and practices, including employee training and development,
comprehensive recruiting and screening programs and selection criteria, as well
as formal compliance and ethical codes of conduct and corporate security
programs. Operational risks driven by processes are mitigated through procedural
controls, such as requirements for clear delegation of authority and
accountability, as well as segregation of incompatible duties, documentation of
policies and standards, safeguarding and record-keeping controls and the
provision of timely, accurate and complete management information for
measurement, monitoring and control purposes. Operational risks driven by
systems are managed through controls over systems development and change
management, as well as through information security programs and system access
controls. As a result, people, processes and systems are managed so that
operational risk is controlled at acceptable levels, given CIBC's strategy and
the environment in which it operates.
While operational risk can be minimized through a sound internal control
structure, it is inherent in CIBC's businesses and, therefore, can never be
fully eliminated. In the event that an operational risk materializes into a
loss, CIBC will seek to cover the loss through earnings, capital and, for
certain types of losses, insurance. Furthermore, the risks of catastrophic loss
are covered through risk avoidance or control programs that reduce the
probability or potential severity of such losses to within acceptable corporate
parameters. For example, CIBC maintains a comprehensive corporate insurance
program to protect its earnings from potential unexpected high-severity losses
arising from criminal activity, property loss or damage, and liability
exposures.
CIBC also has in place a global business continuity management program to
ensure that its key business functions will continue and normal operations will
be restored effectively and efficiently in the event of a major unexpected
disaster affecting CIBC's operations. The business continuity plan is regularly
updated and was thoroughly tested in each of Canada, the U.K. and the U.S. in
September, October and November 2002, respectively, during comprehensive
simulation exercises. CIBC's insurance, business continuity management and other
related programs are overseen by TBRM.
Measurement, monitoring and control
CIBC has developed and continues to enhance an operational risk measurement
methodology with a desire to receive regulatory approval to attribute
operational risk capital using the Advanced Measurement Approach, effective
November 1, 2006, in respect of the BIS Capital Accord proposals. This
measurement methodology uses historical loss information, where available,
supplemented by scenario analyses, to produce loss event frequencies and
severities. These loss event frequencies and severities (or combined expected
losses) are used to determine the operational risk component of economic
capital. In line with the BIS proposals, CIBC's operational risk measurement
methodology attributes operational risk capital to expected losses arising from
the following event types:
o Legal liability (in regard to third parties, clients and employees)
o Client restitution
o Regulatory, compliance and taxation violations
o Loss or damage to assets
o Transaction processing errors
o Theft, fraud and unauthorized activities
- --------------------------------------------------------------------------------
MANAGEMENT OF REGULATORY CAPITAL
Capital strength
Capital strength is important to protect CIBC's depositors and creditors from
risks inherent in CIBC's various businesses, to enable CIBC to take advantage of
attractive business opportunities, and to maintain a favourable credit standing.
Infrastructure
TBRM is responsible for ensuring that CIBC remains strongly capitalized and for
managing capital in CIBC's legal entities, as well as the consolidated bank.
This includes managing the issuance and purchase of common shares, as well as
the issuance, purchase, redemption or conversion of preferred shares and
subordinated indebtedness, in order that CIBC's capital is structured in the
most effective manner.
Policies and standards
The Board of Directors approves CIBC's capital management policies and capital
plan on an annual basis. These policies set CIBC's capital levels to meet or
exceed regulatory requirements specified in guidelines issued by OSFI, market
expectations for capital strength and internal assessments of economic capital.
Internal assessments, which are determined using risk measurement techniques,
are outlined as part of the "Management of Risk and Balance Sheet Resources"
section.
Management of capital resources
CIBC manages its capital level and capital mix within its policy framework to
optimize shareholder value. Consistent with these policies, CIBC repurchases
common shares, redeems expensive preferred shares and issues new ones at lower
cost, and reduces its levels of less important debenture
- --------------------------------------------------------------------------------
66
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
capital, while still maintaining regulatory capital ratios in excess of targets
stipulated by the OSFI.
In the past three years, CIBC has repurchased a total of 49.1 million
common shares for aggregate consideration of $2,252 million. Net new issues of
preferred shares totalled $1,200 million during the same period. Some of the new
preferred shares replaced expensive existing issues which were redeemed early,
while others replaced some of the repurchased common shares. The cumulative
effect of these activities has been to increase the proportion of less costly
preferred shares in CIBC's Tier 1 capital.
CIBC has reduced its debenture capital over the past three years through a
combination of maturities, early redemptions, exchanges for an equivalent amount
of senior debt, and market repurchases. Total debenture reductions during this
period amounted to approximately $1,250 million.
These capital management tools remain available to CIBC, and domestic and
international markets are regularly monitored for attractive opportunities to
implement capital initiatives. Moreover, CIBC's capital needs are continually
re-evaluated on the basis of changing business and market circumstances.
Measurement, monitoring and control
Regulatory capital requirements are determined in accordance with guidelines
issued by OSFI. These requirements are explained in Note 20 to the consolidated
financial statements.
The components of CIBC's regulatory capital are shown in the accompanying
table. Tier 1 capital decreased by $712 million during 2002, reflecting the
impact of common share repurchases, increased goodwill, restructuring charges
and credit losses, partly offset by the issue of $800 million in preferred
shares. Tier 2 capital decreased by $104 million from 2001, which in part
reflects the redemption of debenture issues. Deductions from total capital
increased by $488 million, primarily due to the restructuring of CIBC's
Caribbean retail, corporate and international banking operations.
In April 2002, CIBC issued $400 million of non-cumulative Class A
Preferred Shares Series 25. A portion of the proceeds of these preferred shares,
while structurally qualifying as Tier 1 capital, is temporarily reported as Tier
2 capital because CIBC's total Tier 1 qualifying preferred shares exceed the
limit of 25% of net Tier 1 capital prescribed by OSFI.
As at October 31, 2002, CIBC's Tier 1 ratio was 8.7% and the total capital
ratio was 11.3%. These ratios are in excess of OSFI's target Tier 1 and total
capital ratios of 7% and 10%, respectively. The capital ratio targets presented
on page 5 are established on the basis of a number of factors, including CIBC's
standing among its peers, and the expectations of rating agencies and investors.
Financial institutions must also meet a leverage ratio (or assets-to-capital
multiple) test. CIBC's leverage ratio was 18.3 times capital, within the bank's
permitted maximum of 23 times capital.
REGULATORY CAPITAL AND CAPITAL RATIOS
$ millions, as at October 31 2002 2001 2000
- --------------------------------------------------------------------------------
Tier 1 capital
Common shares $ 2,842 $ 2,827 $ 2,868
Contributed surplus 26 -- --
Retained earnings 6,377 6,774 6,625
Non-cumulative preferred shares 2,759 2,299 1,876
Non-controlling interests in
subsidiaries 111 249 248
Goodwill (1,078) (400) (110)
- --------------------------------------------------------------------------------
11,037 11,749 11,507
- --------------------------------------------------------------------------------
Tier 2 capital
Perpetual debentures 594 638 614
Preferred shares - other 329 -- --
Other debentures (net
of amortization) 2,900 3,259 3,672
General allowance for credit losses(1) 1,107 1,137 997
- --------------------------------------------------------------------------------
4,930 5,034 5,283
- --------------------------------------------------------------------------------
Total Tier 1 and Tier 2 capital 15,967 16,783 16,790
Securitization-related deductions (174) (396) (308)
Investments in unconsolidated
subsidiaries and other
substantial investments (1,497) (787) (428)
- --------------------------------------------------------------------------------
Total capital available for regulatory
purposes $ 14,296 $ 15,600 $ 16,054
================================================================================
Total risk-weighted assets $126,535 $129,938 $132,893
================================================================================
Regulatory capital ratios
Tier 1 capital 8.7% 9.0% 8.7%
Total capital 11.3% 12.0% 12.1%
================================================================================
Leverage ratio 18.3x 17.7x 16.3x
================================================================================
(1) The maximum amount of general allowances for credit losses eligible for
inclusion in Tier 2 capital was increased to 0.875% of risk-weighted
assets effective October 31, 2001.
- --------------------------------------------------------------------------------
67
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RISK-WEIGHTED ASSETS
Risk-weighted assets are calculated in accordance with guidelines issued by
OSFI, as explained in Note 20 to the consolidated financial statements.
As shown in the table below, CIBC's risk-weighted assets were $126.5
billion as at October 31, 2002.
Changes in regulatory capital requirements
In 1999, the BIS launched a major review of the capital requirements as a result
of many changes that have taken place in the financial marketplace. This review
will address more sophisticated techniques for measuring credit risk and will
introduce a capital charge for operational risk. For a description of CIBC's
initiatives regarding BIS requirements for operational risk, see the "Management
of operational risk" section. The expected implementation date for the new BIS
requirements is November 1, 2006.
- -----------------------------------------------------------------------------------------------------------
RISK-WEIGHTED ASSETS
Risk-weighted amounts
2002 ------------------------------
$ millions, as at October 31 Amount 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
On-balance sheet assets
Cash resources $ 9,512 $ 1,027 $ 1,685 $ 1,550
Securities issued or guaranteed by Canada, provinces,
municipalities, OECD banks and governments 38,994 426 810 313
Other securities 26,298 5,049 4,433 4,776
Loans to or guaranteed by Canada, provinces, territories,
municipalities, OECD banks and governments 5,709 504 327 416
Mortgage loans 70,407 22,570 19,501 16,699
Other loans 76,973 61,397 63,997 63,785
Acceptances 6,848 5,557 7,485 8,935
Other assets 38,552 7,832 7,463 6,217
- -----------------------------------------------------------------------------------------------------------
Total on-balance sheet assets $ 273,293 $104,362 $105,701 $102,691
===========================================================================================================
Off-balance sheet instruments
Credit-related arrangements
Lines of credit $ 97,992 $ 7,601 $ 9,121 $ 11,640
Guarantees and letters of credit 9,226 4,758 4,620 5,664
Securities lent 17,510 133 242 354
Other 367 367 310 293
- -----------------------------------------------------------------------------------------------------------
125,095 12,859 14,293 17,951
Derivatives 1,314,021 5,476 6,072 5,583
- -----------------------------------------------------------------------------------------------------------
Total off-balance sheet instruments $1,439,116 $ 18,335 $ 20,365 $ 23,534
- -----------------------------------------------------------------------------------------------------------
Total risk-weighted assets before adjustments for market risk $122,697 $126,066 $126,225
Add: Market risk for trading activity(1) 3,838 3,872 6,668
- -----------------------------------------------------------------------------------------------------------
Total risk-weighted assets $126,535 $129,938 $132,893
===========================================================================================================
(1) Under the BIS 1998 Capital Accord, effective January 1998, trading assets
are subject to market risk calculations.
- --------------------------------------------------------------------------------
68
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Business Environment
- --------------------------------------------------------------------------------
ECONOMIC
Over the past year, the North American economy experienced an uneven recovery
from the 2001 recession. Financial markets have continued to wrestle with the
prior year's lingering damage to investor confidence, corporate profits and
balance sheets, and significant uncertainties remain about the durability of the
emerging recovery.
In the U.S., spurred on by last year's aggressive combination of income
tax and interest rate cuts, consumer spending allowed GDP to return to positive
growth, beginning in the fourth quarter of 2001.
To date, however, the U.S. economy has failed to gather sufficient,
sustained momentum to see a return to health in corporate hiring. The missing
ingredient in the recovery has been business capital spending, which continued
to decline through the first half of 2002.
Canada's economy has fared better, enjoying vigorous job creation in 2002.
The gap with the U.S. was, in part, owing to a reduced weighting in technology
industries and a greater weight in energy and automotive products. Growth in
housing and consumer spending supported CIBC's retail businesses. As a result of
Canada's lighter 2001 downturn and superior 2002 recovery, the Bank of Canada
took steps to reduce monetary stimulus, raising overnight interest rates by 75
basis points over the period April to July 2002.
Longer-term Canadian interest rates, however, did not rise in step, as
through September, investors continued to shift out of stocks into government
bonds, responding to a series of earnings disappointments. The scale of the
equity correction also reflected the high valuations reached during the late
1990s boom, a reduction in longer-term growth expectations for technology, and
accounting scandals that undermined investor confidence. Global uncertainties,
including threats of terrorism or war in the Middle East, also hurt equity
performance. The equity downturn had an adverse impact on related businesses of
CIBC Wealth Management and CIBC World Markets, and led to write-downs in the
merchant banking portfolio.
Corporate debt markets experienced a rise in both downward ratings
adjustments and defaults, particularly in the highly leveraged
telecommunications sector. As a result, the interest rate spread between
corporate bonds and government issues widened markedly. The deterioration in
credit quality had an adverse impact on CIBC's provisions for credit losses.
Stock Price Index
TSX 300 & Dow Jones 30
[THE FOLLOWING DATA WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
TSX 300 Dow Jones 30 S&P 500
Jan-00 8481.11 10940.53 1394.46
Feb-00 9128.99 10128.31 1366.42
Mar-00 9462.39 10921.92 1498.58
Apr-00 9347.61 10733.91 1452.43
May-00 9251.99 10522.33 1420.60
Jun-00 10195.45 10447.89 1454.60
Jul-00 10406.31 10521.98 1430.83
Aug-00 11247.91 11215.10 1517.68
Sep-00 10377.92 10650.92 1436.51
Oct-00 9639.57 10971.14 1429.40
Nov-00 8819.92 10414.49 1314.95
Dec-00 8933.68 10786.85 1320.28
Jan-01 9321.87 10887.36 1366.01
Feb-01 8078.72 10495.28 1239.94
Mar-01 7608.00 9878.78 1160.33
Apr-01 7946.63 10734.97 1249.46
May-01 8161.87 10911.94 1255.82
Jun-01 7736.35 10502.40 1224.42
Jul-01 7689.69 10522.81 1211.23
Aug-01 7399.22 9949.75 1133.58
Sep-01 6838.56 8847.56 1040.94
Oct-01 6885.70 9075.14 1059.78
Nov-01 7425.65 9851.56 1139.45
Dec-01 7688.41 10021.50 1148.08
Jan-02 7648.49 9920.00 1130.20
Feb-02 7637.50 10106.13 1106.73
Mar-02 7851.47 10403.94 1147.39
Apr-02 7663.39 9946.22 1076.92
May-02 7656.13 9925.25 1067.14
Jun-02 7145.61 9243.26 989.82
Jul-02 6605.42 8736.59 911.62
Aug-02 6611.95 8663.50 916.07
Sep-02 6180.42 7591.93 815.28
Oct-02 6248.79 8397.03 885.76
Mortgage Rates and existing home sales
[THE FOLLOWING DATA WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
Mortgage
Canada rates
Existing Home Sales(1) (one year)
Units (%)
Nov-00 28925 7.90
Dec-00 26039 7.70
Jan-01 28572 7.40
Feb-01 29114 7.20
Mar-01 29094 6.70
Apr-01 29553 6.80
May-01 31587 6.70
Jun-01 31633 6.70
Jul-01 31267 6.45
Aug-01 32807 6.20
Sep-01 30837 5.45
Oct-01 32773 4.90
Nov-01 35460 4.60
Dec-01 37759 4.60
Jan-02 41732 4.55
Feb-02 38864 4.55
Mar-02 35508 5.30
Apr-02 36736 5.40
May-02 34097 5.55
Jun-02 32156 5.55
Jul-02 32431 5.35
Aug-02 33489 5.35
Sep-02 34949 5.30
Oct-02 36041 5.30
Outlook
Canadian economic growth is expected to ease to a more moderate pace in 2003. A
weaker U.S. export market, falling global commodity prices, and the completion
of a domestic inventory buildup will all contribute to a slowdown in GDP growth
next year. Economic growth is expected to slow down to below 3% over the first
half of 2003, with growth gradually accelerating over the latter half of next
year.
Consumer price index inflation has increased significantly due to the
distortions caused by the events of September 11 and falling oil prices last
year. However, inflation is expected to fall off markedly thereafter, and should
be running at no more than 2% by the end of next year.
U.S. economic prospects look somewhat less favourable, given the lack of
consumer spending support from job creation and excess capacity in manufacturing
and office space. While next year's U.S. GDP growth is expected to closely track
this year's estimated 2 1/2% advance, the U.S. jobless rate is expected to
increase further next year.
Due to continuing difficulties in North American equity markets and slow
growth in the U.S. economy, the Federal Reserve Board cut interest rates half a
point in early November 2002, with further cuts still possible in early 2003.
While the Treasury yield curve is likely to remain extraordinarily steep,
long-term interest rates are nevertheless expected to decline further.
Stronger economic growth in Canada, as well as somewhat different monetary
policy objectives at the Bank of Canada, stand in the way of Canadian short-term
interest rates following U.S. rates down.
The wider gap between Canadian and U.S. interest rates should be
supportive for a gradual appreciation of the Canadian dollar, particularly once
geopolitical uncertainties pass.
Index of consumer confidence(2)(3)
[THE FOLLOWING DATA WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL]
(Calendar quarter)
Q1 2000 116.2832
Q2 2000 118.925
Q3 2000 119.2013
Q4 2000 109.4623
Q1 2001 109.3816
Q2 2001 113.1
Q3 2001 108
Q4 2001 111
Q1 2002 126.7
Q2 2002 128.4
Q3 2002 123.7
(1) Source: The Canadian Real Estate Association
(2) Based on data available at completion of annual report.
(3) Source: The Conference Board of Canada
- --------------------------------------------------------------------------------
69
CIBC ANNUAL REPORT 2002
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
REGULATORY
CIBC is subject to complex and changing legal and regulatory environments in
Canada and other jurisdictions. The principal regulators include the federal,
provincial and territorial governments in Canada and the governments of the U.S.
and other countries where CIBC conducts business. Securities regulators such as
the Canadian Securities Administrators and the U.S. Securities and Exchange
Commission (SEC); stock exchanges such as the Toronto and the New York stock
exchanges; and other self-regulatory organizations also regulate CIBC's
activities.
During the last year, there have been many Canadian and U.S. developments
affecting corporate governance, corporate accountability and corporate
disclosure. Numerous reports, proposals, guidelines and new laws have been
announced by the Canadian and U.S. securities regulatory authorities,
self-regulatory organizations, accounting organizations and committees
comprising industry specialists.
One of the most significant developments affecting CIBC is the U.S.
Sarbanes-Oxley Act signed into law on July 30, 2002. The Act revises many U.S.
securities laws governing director and officer responsibilities and corporate
disclosure, and increases penalties for violations of securities laws. Many
provisions of the Act apply to CIBC as a non-U.S. public company with securities
listed on a U.S. exchange. The internal controls, processes and policies
established by CIBC's management and the Board of Directors facilitate CIBC's
compliance, and are assessed, reviewed and enhanced on an ongoing basis in light
of operating, risk management, and regulatory requirements.
In Canada, CIBC has long been subject to the bylaws of the Canada Deposit
Insurance Corporation (CDIC) that require adherence to standards of sound
business and financial practices intended to ensure that member institutions are
prudently managed. CIBC has a detailed management self-assessment process to
evaluate adherence to these standards. CIBC makes an annual attestation to CDIC
signed by the Chairman and Chief Executive Officer and by the Chief
Administrative Officer. A supporting resolution of the board is also provided to
CDIC. The frequency of reports to CDIC depends on the annual rating received by
CIBC under the CDIC Differential Premiums Bylaw.
The Government of Canada passed into law major amendments to the
legislation affecting federally regulated financial institutions in October
2001. These amendments also affected certain regulatory agencies, the payments
system and the deposit insurance system. Under the amended laws, the Financial
Consumer Agency of Canada was created to ensure compliance with consumer
provisions of federal financial legislation, as well as to monitor industry
self-regulatory codes, promote consumer awareness and respond to consumer
enquiries. Regulations have been written on many areas of this new law and it is
expected that additional regulations will be issued. On October 24, 2002, the
Deputy Prime Minister and Finance Minister, and the Secretary of State
(International Financial Institutions) requested that the chairs of the House of
Commons Standing Committee on Finance and the Standing Senate Committee on
Banking, Trade and Commerce provide the government with the committees' views on
the "major considerations that should apply in determining the public interest"
with respect to bank merger reviews.
Legislative changes in other countries, as well as their examination,
regulatory and supervisory practices and decisions, also exert considerable
influence over CIBC.
Comprehensive controls, policies and procedures are in place to facilitate
compliance with applicable laws and regulations by CIBC and its subsidiaries,
their directors, management and employees. Management is responsible for ongoing
compliance with such laws and regulations, and CIBC's Compliance and Internal
Audit functions each have a mandate to assess and report on the performance of
management in discharging its governance responsibilities.
- --------------------------------------------------------------------------------
RELATED-PARTY PROCEDURES
The Bank Act contains related-party rules and other self-dealing provisions.
Generally, these rules are designed to prevent related parties from misusing
their position for personal benefit, potentially putting a bank at risk from
such transactions.
CIBC's senior management has established written procedures to identify
related parties and to maintain a list of related parties. CIBC's related
parties include directors, certain senior officers, their spouses, minor
children and entities controlled by any of these parties.
CIBC's related-party procedures were initially reviewed by CIBC's Risk
Management and Conduct Review Committee (renamed the Risk Management Committee
in June 2002) of the board. In June 2002, the Audit Committee assumed the
responsibility of reviewing related-party transactions. The procedures set out
how related-party transactions are approved and monitored, and where required,
reported to the Audit Committee for review.
- --------------------------------------------------------------------------------
ACCOUNTING AND REPORTING DEVELOPMENTS
Compliance with U.S. generally accepted accounting principles
As a Canadian company, CIBC's consolidated financial statements are prepared in
accordance with Canadian generally accepted accounting principles (GAAP).
Effective November 13, 1997, CIBC was listed on the New York Stock
Exchange. Accordingly, CIBC's financial statements include additional note
disclosure in accordance with U.S. GAAP. To a large extent, Canadian and U.S.
GAAP are consistent. However, in those instances where Canadian and U.S. GAAP
are not consistent, Canadian GAAP prevails. Material differences are explained
and quantified in Note 28 to the consolidated financial statements.
Future accounting policy changes
The impact of recently issued Canadian accounting standards to be implemented in
the future is explained in Note 29 to the consolidated financial statements. The
impact of recently issued U.S. accounting standards to be implemented in the
future is explained in Note 28 to the consolidated financial statements.
- --------------------------------------------------------------------------------
70
CIBC ANNUAL REPORT 2002