# Management's discussion and analysis Management's discussion and analysis (MD&A) is provided to enable readers to assess CIBC's financial condition and results of operations as at and for the year ended October 31, 2020, compared with prior years. The MD&A should be read in conjunction with the audited consolidated financial statements. Unless otherwise indicated, all financial information in this MD&A has been prepared in accordance with International Financial Reporting Standards (IFRS or GAAP) and all amounts are expressed in Canadian dollars. Certain disclosures in the MD&A have been shaded as they form an integral part of the consolidated financial statements. The MD&A is current as of December 2, 2020. Additional information relating to CIBC, including the Annual Information Form, is available on SEDAR at www.sedar.com and on the United States (U.S.) Securities and Exchange Commission's (SEC) website at www.sec.gov. No information on CIBC's website (www.cibc.com) should be considered incorporated herein by reference. A glossary of terms used in the MD&A and the audited consolidated financial statements is provided on pages 196 to 202 of this Annual Report. ## Table of Contents * [2 Performance against objectives](#2-performance-against-objectives) * [5 Financial highlights](#5-financial-highlights) * [6 Economic and market environment](#6-economic-and-market-environment) * [7 Significant events](#7-significant-events) * [8 Financial performance overview](#8-financial-performance-overview) * [19 Strategic business units overview](#19-strategic-business-units-overview) * [30 Financial condition](#30-financial-condition) * [31 Capital management](#31-capital-management) * [43 Management of risk](#43-management-of-risk) * [83 Accounting and control matters](#83-accounting-and-control-matters) * [91 Supplementary annual financial information](#91-supplementary-annual-financial-information) ## A NOTE ABOUT FORWARD-LOOKING STATEMENTS: From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including in this Annual Report, in other filings with Canadian securities regulators or the SEC and in other communications. All such statements are made pursuant to the "safe harbour" provisions of, and are intended to be forward-looking statements under applicable Canadian and U.S. securities legislation, including the U.S. Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements made in the "Message from the President and Chief Executive Officer", "Overview - Performance against objectives", "Economic and market environment - Outlook for calendar year 2021", "Significant events", "Financial performance overview - Taxes", "Strategic business units overview - Canadian Personal and Business Banking", "Strategic business units overview - Canadian Commercial Banking and Wealth Management", "Strategic business units overview - U.S. Commercial Banking and Wealth Management", "Strategic business units overview - Capital Markets", "Financial condition - Capital management", "Financial condition - Off-balance sheet arrangements", "Management of risk - Risk overview", "Management of risk - Top and emerging risks", "Management of risk - Credit risk", "Management of risk - Market risk", "Management of risk - Liquidity risk", "Accounting and control matters - Critical accounting policies and estimates", "Accounting and control matters - Accounting developments", "Accounting and control matters - Other regulatory developments" and "Accounting and control matters - Controls and procedures" sections of this report and other statements about our operations, business lines, financial condition, risk management, priorities, targets, ongoing objectives, strategies, the regulatory environment in which we operate and outlook for calendar year 2021 and subsequent periods. Forward-looking statements are typically identified by the words "believe", "expect", "anticipate", "intend", "estimate", "forecast", "target", "objective" and other similar expressions or future or conditional verbs such as "will", "should", "would" and "could". By their nature, these statements require us to make assumptions, including the economic assumptions set out in the "Economic and market environment - Outlook for calendar year 2021" section of this report, and are subject to inherent risks and uncertainties that may be general or specific. Given the continuing impact of the coronavirus (COVID-19) pandemic on the global economy, financial markets, and our business, results of operations, reputation and financial condition and the expectation that oil prices will remain well below year-ago levels, there is inherently more uncertainty associated with our assumptions as compared to prior periods. A variety of factors, many of which are beyond our control, affect our operations, performance and results, and could cause actual results to differ materially from the expectations expressed in any of our forward-looking statements. These factors include: the occurrence, continuance or intensification of public health emergencies, such as the COVID-19 pandemic, and any related government policies and actions; credit, market, liquidity, strategic, insurance, operational, reputation, legal, conduct, regulatory and environmental and related social risk; currency value and interest rate fluctuations, including as a result of market and oil price volatility; the effectiveness and adequacy of our risk management and valuation models and processes; legislative or regulatory developments in the jurisdictions where we operate, including the Organisation for Economic Co-operation and Development Common Reporting Standard, and regulatory reforms in the United Kingdom and Europe, the Basel Committee on Banking Supervision's global standards for capital and liquidity reform, and those relating to bank recapitalization legislation and the payments system in Canada; amendments to, and interpretations of, risk-based capital guidelines and reporting instructions, and interest rate and liquidity regulatory guidance; the resolution of legal and regulatory proceedings and related matters; the effect of changes to accounting standards, rules and interpretations; changes in our estimates of reserves and allowances; changes in tax laws; changes to our credit ratings; political conditions and developments, including changes relating to economic or trade matters; the possible effect on our business of international conflicts and terrorism; natural disasters, disruptions to public infrastructure and other catastrophic events; reliance on third parties to provide components of our business infrastructure; potential disruptions to our information technology systems and services; increasing cyber security risks which may include theft or disclosure of assets, unauthorized access to sensitive information, or operational disruption; social media risk; losses incurred as a result of internal or external fraud; anti-money laundering; the accuracy and completeness of information provided to us concerning clients and counterparties; the failure of third parties to comply with their obligations to us and our affiliates or associates; intensifying competition from established competitors and new entrants in the financial services industry including through internet and mobile banking; technological change; global capital market activity; changes in monetary and economic policy; general business and economic conditions worldwide, as well as in Canada, the U.S. and other countries where we have operations, including increasing Canadian household debt levels and global credit risks; our success in developing and introducing new products and services, expanding existing distribution channels, developing new distribution channels and realizing increased revenue from these channels; changes in client spending and saving habits; our ability to attract and retain key employees and executives; our ability to successfully execute our strategies and complete and integrate acquisitions and joint ventures; the risk that expected benefits of an acquisition, merger or divestiture will not be realized within the expected time frame or at all; and our ability to anticipate and manage the risks associated with these factors. This list is not exhaustive of the factors that may affect any of our forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on our forward-looking statements. Any forward-looking statements contained in this report represent the views of management only as of the date hereof and are presented for the purpose of assisting our shareholders and financial analysts in understanding our financial position, objectives and priorities and anticipated financial performance as at and for the periods ended on the dates presented, and may not be appropriate for other purposes. We do not undertake to update any forward-looking statement that is contained in this report or in other communications except as required by law. CIBC 2020 ANNUAL REPORT 1 # 2 Performance against objectives ## 2 External reporting changes ### Changes made to our business segments We changed the way that we allocate capital to our strategic business units (SBUs). Previously, we utilized an economic capital model to attribute capital to our SBUs and calculate segmented return on equity. Effective November 1, 2019, capital is allocated to the SBUs based on the estimated amount of regulatory capital required to support their businesses. Segmented return on equity is a non-GAAP measure (see the "Non-GAAP measures" section for additional details). The transfer pricing methodology used by Treasury was enhanced to align with the changes that we made to our capital allocation methodology as discussed above. Concurrently with this change, we also made other updates and enhancements to our funds transfer pricing methodology as well as minor updates to certain allocation methodologies. Prior period amounts have been revised accordingly. The changes impacted the results of our SBUs and how we measure the performance of our SBUs. There was no impact on our consolidated financial results from these changes. ### Adoption of IFRS 16 "Leases" Effective November 1, 2019, we adopted IFRS 16 "Leases" (IFRS 16) using the modified retrospective approach, without restatement of comparative periods. ## Overview CIBC is a leading North American financial institution with a market capitalization of $44 billion and a Basel III Common Equity Tier 1 (CET1) ratio of 12.1% as at October 31, 2020. Through our four SBUs – Canadian Personal and Business Banking, Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets – CIBC provides a full range of financial products and services to 10 million personal banking, business, public sector and institutional clients in Canada, the U.S. and around the world. We have approximately 44,000 employees dedicated to providing our clients with banking solutions for a modern world, delivering consistent and sustainable earnings growth for our shareholders, and giving back to our communities. ### CIBC's strategy At CIBC, our goal is to deliver superior client experience and top-tier shareholder returns while maintaining our financial strength. To achieve this, we are executing on three strategic priorities: * Focusing on key client segments to accelerate our earnings growth; * Simplifying and transforming to deliver a modern relationship-banking proposition; and * Advancing our purpose-driven culture. ## Performance against objectives For many years, CIBC has reported a scorecard of financial measures that we use to evaluate and report on our progress to external stakeholders. These measures can be categorized into four key areas - earnings growth, operational efficiency, profitability, and balance sheet strength. We have set targets for each of these measures over the medium term, which we define as three to five years. On March 11, 2020, the outbreak of COVID-19 was officially declared a pandemic by the World Health Organization (WHO). The COVID-19 pandemic has had a significant adverse impact on the global economy, and has negatively impacted our results in fiscal 2020. Until there is greater certainty concerning the dissemination of an effective mass-produced vaccine, the COVID-19 pandemic is expected to continue to impact our ability to achieve our performance objectives. ### Earnings growth$^{(1)}$ To assess our earnings growth, we monitor our earnings per share (EPS). Our through-the-cycle target is an average annual EPS growth of 5% to 10%. In 2020, against a backdrop of a challenging economic environment, reported and adjusted$^{(1)}$ diluted EPS declined by 27% and 19%, respectively. Going forward, we are maintaining our target to deliver average annual EPS growth of 5% to 10% through the cycle. ```mermaid gantt title Earnings Growth (Reported and Adjusted Diluted EPS) dateFormat YYYY-MM-DD section Reported diluted EPS ($) 16: 10.70, 2016-01-01, 365d 17: 11.24, 2017-01-01, 365d 18: 11.19, 2018-01-01, 365d 19: 11.65, 2019-01-01, 365d 20: 8.22, 2020-01-01, 365d section Adjusted diluted EPS ($) 16: 10.22, 2016-01-01, 365d 17: 11.11, 2017-01-01, 365d 18: 11.92, 2018-01-01, 365d 19: 12.21, 2019-01-01, 365d 20: 9.69, 2020-01-01, 365d ``` $^{(1)}$ Adjusted measures are non-GAAP measures. For additional information, see the "Non-GAAP measures" section. # 5 Financial highlights ## Operational efficiency We have two metrics to measure operational efficiency: ### 1. Efficiency ratio$^{(1)}$ To assess how well we use our resources to generate net income, we measure and monitor our efficiency ratio, defined as the ratio of non-interest expenses to total revenue. In 2020, our reported and adjusted$^{(1)}$ efficiency ratios were 60.6% and 55.8%, respectively, compared with 58.3% and 55.5% in 2019. ### 2. Operating leverage$^{(1)}$ Operating leverage, defined as the difference between the year-over-year percentage change in revenue (on a taxable equivalent basis (TEB)) and year-over-year percentage change in non-interest expenses, is a measure of the relative growth rates of a bank's revenue and expenses. In 2020, our reported and adjusted$^{(1)}$ operating leverage was (4.0)% and (0.6)%, respectively. Going forward, our target is to deliver positive operating leverage through the cycle, which will improve our efficiency ratio over time. ```mermaid gantt title Operational Efficiency dateFormat YYYY-MM-DD section Reported efficiency ratio (%) 16: 59.7, 2016-01-01, 365d 17: 58.8, 2017-01-01, 365d 18: 57.5, 2018-01-01, 365d 19: 58.3, 2019-01-01, 365d 20: 60.6, 2020-01-01, 365d section Adjusted efficiency ratio (%) 16: 58.0, 2016-01-01, 365d 17: 57.2, 2017-01-01, 365d 18: 55.6, 2018-01-01, 365d 19: 55.5, 2019-01-01, 365d 20: 55.8, 2020-01-01, 365d section Reported operating leverage (%) 16: 1.6, 2016-01-01, 365d 17: 1.5, 2017-01-01, 365d 18: 2.4, 2018-01-01, 365d 19: 7.3, 2019-01-01, 365d 20: -4.0, 2020-01-01, 365d section Adjusted operating leverage (%) 16: 0.2, 2016-01-01, 365d 17: 2.8, 2017-01-01, 365d 18: 3.2, 2018-01-01, 365d 19: 1.5, 2019-01-01, 365d 20: -0.6, 2020-01-01, 365d ``` ## Profitability We have three metrics to measure profitability, including two shareholder value targets: ### 1. Return on common shareholders' equity (ROE)$^{(1)}$ ROE is a key measure of profitability. In 2020, our reported and adjusted$^{(1)}$ ROE were at 10.0% and 11.7%, respectively. Going forward, we will continue to target a strong ROE of at least 15% through the cycle. ```mermaid gantt title Return on Common Shareholders' Equity (ROE) dateFormat YYYY-MM-DD section Reported return on common shareholders' equity (%) 16: 19.9, 2016-01-01, 365d 17: 18.3, 2017-01-01, 365d 18: 16.6, 2018-01-01, 365d 19: 14.5, 2019-01-01, 365d 20: 10.0, 2020-01-01, 365d section Adjusted return on common shareholders' equity (%) 16: 19.0, 2016-01-01, 365d 17: 18.1, 2017-01-01, 365d 18: 17.4, 2018-01-01, 365d 19: 15.4, 2019-01-01, 365d 20: 11.7, 2020-01-01, 365d ``` ### 2. Dividend payout ratio$^{(1)}$ We have consistently delivered adjusted$^{(1)}$ dividend payout ratios in the range of 40% to 50% of earnings to common shareholders. Our key criteria for considering dividend increases are our current level of payout relative to our target and our view on the sustainability of our current earnings level through the cycle. In 2020, our reported and adjusted$^{(1)}$ dividend payout ratios were 70.7% and 60.0%, respectively. Going forward, we will continue to target a dividend payout ratio of 40% to 50% through the cycle. ```mermaid gantt title Dividend Payout Ratio dateFormat YYYY-MM-DD section Reported dividend payout ratio (%) 16: 44.3, 2016-01-01, 365d 17: 45.6, 2017-01-01, 365d 18: 45.5, 2018-01-01, 365d 19: 49.9, 2019-01-01, 365d 20: 70.7, 2020-01-01, 365d section Adjusted dividend payout ratio (%) 16: 46.4, 2016-01-01, 365d 17: 46.2, 2017-01-01, 365d 18: 43.4, 2018-01-01, 365d 19: 46.9, 2019-01-01, 365d 20: 60.0, 2020-01-01, 365d ``` $^{(1)}$ Adjusted measures are non-GAAP measures. For additional information, see the "Non-GAAP measures" section. ## 3. Total shareholder return (TSR) TSR is the ultimate measure of shareholder value, and the output of delivering against the financial targets within our control. We have an objective to deliver a TSR that exceeds the industry average, which we have defined as the Standard & Poor's (S&P)/Toronto Stock Exchange (TSX) Composite Banks Index, over a rolling five-year period. For the five years ended October 31, 2020, our TSR was 27.7%, which was below the Banks Index return over the same period of 35.3%. ```mermaid xychart-beta title Rolling five-year TSR (%) x-axis "Date" [Oct-19, Jan-20, Apr-20, Jul-20, Oct-20] y-axis "Rolling five-year TSR (%)" 0 --> 125 line "CIBC 27.7%" [0, 10, 20, 10, 25] line "■ S&P/TSX Composite Index 34.2%" [5, 15, 25, 15, 30] line "S&P/TSX Composite Banks Index 35.3%" [8, 18, 28, 18, 33] ``` ## Balance sheet strength Maintaining a strong balance sheet is foundational to our long-term success. Our goal is to maintain strong capital and liquidity positions. We look to constantly balance our objectives of holding a prudent amount of excess capital for unexpected events and environmental uncertainties, investing in our core businesses, growing through acquisitions and returning capital to our shareholders. ### 1. Basel III Common Equity Tier 1 (CET1) ratio At the end of 2020, our Basel III CET1 ratio was 12.1%, well above the current regulatory target set by the Office of the Superintendent of Financial Institutions (OSFI) of 9.0%. In response to the COVID-19 pandemic, OSFI directed that all federally regulated financial institutions halt share buybacks and dividend increases until further notice. ```mermaid xychart-beta title CET1 ratio (%) x-axis "Year" [16, 17, 18, 19, 20] y-axis "CET1 ratio (%)" 10.0 --> 12.5 bar "CET1 ratio" [11.3, 11.4, 11.6, 12.1, 12.1] ``` ### 2. Liquidity Coverage Ratio (LCR) Our ability to meet our financial obligations is measured through the LCR ratio. It measures unencumbered high quality liquid assets (HQLA) that can be converted into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The LCR standard requires that, absent a situation of financial stress, the value of the ratio be no lower than 100%. For the quarter ended October 31, 2020, our three-month daily average LCR was 145% compared to 125% for the same period last year. ```mermaid xychart-beta title Liquidity coverage ratio (%) x-axis "Year" [16, 17, 18, 19, 20] y-axis "Liquidity coverage ratio (%)" 100 --> 150 bar "LCR" [124, 120, 128, 125, 145] ``` ## Client experience Our ambition is to be the leader in client experience as measured by external client surveys and our internal CIBC Enterprise Net Promoter Score (CIBC CXNPS). Our client-focused culture is resonating with the clients we serve as evidenced by our strongest scores to date from both the IPSOS Customer Service Index and the J.D. Power Client Satisfaction (SAT) study. Our internal CIBC CXNPS is a balanced weighting of internal net promoter scores across our businesses. As of October 31, 2020, the CIBC CXNPS score was 62.8, a 2-point increase over 2019. CIBC was ranked the top performing brand during the pandemic as a result of our focus and commitment to clients. Over 90% of CIBC clients surveyed feel the same or more positive about CIBC as a result of our response to COVID-19. CIBC also received IPSOS Financial Service Excellence awards for our mobile banking, live agent telephone banking and ATMs. Going forward, we will continue to build on this momentum to further enhance the quality and consistency of our service delivery to our clients in support of our purpose-driven culture and strategy to be a modern, innovative relationship-oriented bank. 2 CIBC 2020 ANNUAL REPORT # 6 Economic and market environment ## Year in review – 2020 The North American outbreak of COVID-19 that occurred in the first quarter of 2020 represented a major shock to CIBC's principal markets. Efforts to contain the pandemic in the spring of 2020, including the implementation of public health measures such as travel restrictions and physical distancing, resulted in a steep economic decline in Canada and the U.S., as governments on both sides of the border announced unprecedented fiscal and monetary stimulus measures to bolster the economy. The subsequent relaxation of these public health measures resulted in an uneven recovery that continues to leave both countries with a considerable gap to economic levels at the beginning of the year. Service industries in which physical distancing posed a major impediment were particularly hard-hit, along with the energy sector that faced a soft global demand environment. Impacts on household and business credit quality were cushioned but not eliminated by large-scale government assistance measures and deep cuts in interest rates in Canada and the U.S., with lower rates resulting in reduced lending margins in the banking system. In Canada, household credit growth slowed as sharply weaker non-mortgage credit demand offset growth in mortgages. Lower consumer spending had a negative impact on retail transaction volumes. Housing prices remained firm in most markets. Business credit demand picked up sharply early in the pandemic for liquidity needs, but then decelerated over the balance of the year on slower economic activity, while capital markets activity was boosted by strong corporate and government bond issuance. U.S. equity markets reached new highs in the summer, while Canadian equity markets recovered significantly from the initial lows. ## Outlook for calendar year 2021 The COVID-19 pandemic continues to have a significant adverse impact on the near-term economic outlook for the global economy. Restrictions imposed by governments around the world to limit the impact of subsequent waves of infection, such as travel restrictions, physical distancing measures, and the closure of certain businesses, continue to disrupt the global economy, and will limit the scope for a further recovery until an effective mass-produced vaccine is in place. Recent positive developments related to vaccine development suggest regulatory approval and targeted usage could be expected by early 2021, but uncertainty remains surrounding the timing of mass production, distribution, public acceptance and the subsequent reduction in rates of infection. Our outlook assumes that mass vaccinations will be underway in mid-2021 and allow for stronger global recovery in the latter half of the year. Until then, we assume that temporary restraints on activity in response to subsequent waves will replace the near-complete restrictions that were in place in early and mid-2020. Growth will continue in sectors less impacted by physical distancing measures, but other sectors will experience periods of disruption when regulations are tightened in response to new waves of the virus. We generally expect to see stronger performance in the goods sector of the economy, but continued slack in the services sector. Constrained global activity and its implications on demand for fuel will also result in a slower recovery in crude oil prices through the first half of 2021. In Canada, after a drop of approximately 5.5% in 2020, real gross domestic product (GDP) is expected to advance by about 4% in 2021, with more of the gains expected in the latter half of the calendar year. We expect that this will still leave the unemployment rate averaging over 8%, well above full employment levels. Both businesses and households will benefit from substantial government fiscal support through at least the first half of the year, which will reduce the impact of slower economic growth on insolvencies, business and household credit growth and retail transaction volumes relative to what would have occurred absent these measures. Government bond issuance will remain elevated to cover the resulting federal and provincial deficits. The Bank of Canada will maintain short-term interest rates at their current levels through 2021, although longer-term rates will drift higher as economic growth accelerates, and the central bank eases up on its asset purchase program. In the U.S., real GDP is expected to grow by approximately 3.5% in 2021, after a similarly-scaled decline in 2020, with better gains expected in the latter half of next year. Our outlook assumes that the federal government will enact a second round of fiscal stimulus no later than early 2021 to provide enhanced support for households and businesses impacted by the pandemic, reducing its impact on insolvencies. With no growth over the two-year period of 2020-21, unemployment will average approximately 6.5% in 2021, well above full-employment levels. In response, we expect that the Federal Reserve will maintain near-zero short-term interest rates and continue to engage in asset purchases to slow the climb in long-term rates. The economic challenges from the COVID-19 pandemic impact all our SBUs. From a credit perspective, all our loan portfolios will continue to be negatively impacted by the constrained economic activity associated with measures taken to contain the spread of infection, mitigated to an extent by large-scale government support and relief programs targeting both individuals and businesses. Deposit growth is likely to decelerate as businesses draw down on liquidity raised earlier in the pandemic, and as households spend a greater portion of their income as economic growth accelerates. The persistent low interest environment is expected to continue to have a negative impact on the net interest margins for all our SBUs. For Canadian Personal and Business Banking, mortgage demand growth could see a deceleration, but will continue to remain well supported by low rates, while we expect to see a return to growth in non-mortgage credit demand as pandemic-related constraints begin to ease. Continued demand for business lending products is anticipated as small businesses look to weather the impact of the economic slowdown, but a slower pace of growth is expected relative to 2020. Our Canadian and U.S. wealth management businesses are expected to benefit from a further economic recovery, with investors looking for alternatives to low rates on savings deposits. Our Capital Markets business is expected to benefit from merger and acquisition activity as corporate consolidations increase in the aftermath of the pandemic, as well as increased equity issuance, but will be impacted by lower corporate bond issuance and lower trading revenues from the highs in 2020. Loan demand in our Canadian and U.S. commercial banking businesses could experience slower growth as the need for liquidity during the crisis eases, but will be supported by business expansion plans further into the year. The economic outlook described above reflects numerous assumptions and uncertainties regarding the economic impact of the COVID-19 pandemic, which will ultimately depend on the speed at which an effective vaccine can be developed and administered on a mass scale, and the ability of governments, businesses and health-care systems to effectively limit the epidemiological and economic impacts of the current and possible future resurgences of the virus in the intervening period. The extent to which physical distancing policies restrict economic activity, and the level and effectiveness of government support during this intervening period are material to our expectations for the scale and timing of a further economic rebound in 2021. Expectations reflect currently available expert opinions and are subject to change as new information on transmissibility and epidemiology becomes available. As a result, actual experience may differ materially from expectations. See the "Significant events" section for further details on the impact of the COVID-19 pandemic. # 7 Significant events ## Impact of COVID-19 On March 11, 2020, the outbreak of COVID-19 was officially declared a pandemic by the WHO. As discussed in the "Economic and market environment" section, the COVID-19 pandemic continues to have a significant adverse impact on the global economy. Measures undertaken in the second quarter to contain the spread of the virus, including the closure of non-essential businesses, succeeded in curbing the initial spread of infection, allowing for partial easing of these measures in the third and fourth quarters. As a result, certain sectors of the economy have seen a resumption of activity. However there is a risk that the recent retightening of these measures enacted by governments and businesses in response to the resurgence in infection rates could impact economic activity beyond levels that were previously anticipated. The overall economy continues to operate below pre-pandemic levels in Canada, the U.S. and other regions where we operate. As a result, the COVID-19 pandemic continues to significantly impact our clients, our team, and our business. ### Supporting our clients, team members, and communities during the COVID-19 pandemic Initial measures to curb COVID-19 resulted in the closure or reduced operating hours at a number of our banking centre locations, as well as the provision of certain expanded benefits to our team members in light of the challenges posed by COVID-19. As governments subsequently eased physical distancing measures, we worked closely with regional authorities to align our business practices with prevailing guidelines in the regions in which we operate, resulting in the reopening of our banking centres and adjustment to the expanded employee benefits. We continue to work closely with the relevant government and health authorities as regions respond to the second wave of the pandemic to ensure the safety of our team members and clients. Steps taken to keep our team members and clients safe include the continued support of remote working arrangements and enhanced safety procedures and cleaning protocols. We also continue to support the organizations and charities that are taking care of our communities during this crisis. We have been actively engaged in lending activities to support our clients who were experiencing financial hardship caused by the COVID-19 pandemic, including providing payment deferral programs on various products for personal, corporate and commercial banking clients, and voluntarily reducing interest rates on select credit cards. A number of these programs have now drawn to a close, with the number of additional clients seeking relief reducing significantly relative to prior quarters, resulting in a reduction in the outstanding balances for these programs. See the "CIBC client relief programs in response to COVID-19" section for further details. We continue to be actively engaged with governments, monetary authorities and regulators in the jurisdictions in which we operate, and continue to support our clients through government-led relief programs. See the "Government lending programs in response to COVID-19" and "Off-balance sheet arrangements" sections and Note 2 to our consolidated financial statements for further details regarding our participation in these programs. ### Impact on financial results COVID-19 has negatively impacted our results in 2020. See the "2020 Financial results review" and "Strategic business units overview" sections for further details on our financial performance in 2020, including the impact of the COVID-19 pandemic. On pages 2 to 4 of our 2020 Annual Report, we provided disclosure regarding our scorecard of financial measures that we use to evaluate our performance against our strategic objectives, including the targets that we have set for each of these measures over the medium term. Until there is greater certainty concerning the dissemination of an effective mass-produced vaccine, the COVID-19 pandemic is expected to continue to impact our ability to achieve our performance objectives. The extent to which the COVID-19 pandemic continues to negatively impact our business, results of operations, reputation and financial condition, as well as our regulatory capital and liquidity positions, will depend on future developments, which are highly uncertain. See the "Economic and market environment" section and Note 6 to our consolidated financial statements for further details on how the COVID-19 pandemic has impacted our economic outlook. ### Impact on risk environment We enacted our business continuity plans in the second quarter upon the WHO declaring COVID-19 a pandemic and we developed business priorities and an operating model to support our clients, team members and communities throughout this crisis. See the "Top and emerging risks" section for further details on additional risks associated with the COVID-19 pandemic. ### Unprecedented regulatory and central bank support Governments, monetary authorities, regulators and financial institutions continue to take actions to support the economy, increase liquidity, mitigate unemployment, provide public assistance, provide regulatory flexibility and implement other measures intended to mitigate or counterbalance the adverse economic consequences of the pandemic. See the "Regulatory developments arising from the COVID-19 pandemic" section for further details on regulatory flexibility provided during the quarter in response to the COVID-19 pandemic, and the "Regulatory developments concerning liquidity" section for details on relevant funding and liquidity programs instituted to support market liquidity during this crisis. ### Impact on significant accounting judgments and estimates Ongoing economic uncertainty, including reduced short- and medium-term growth due to the decline in economic activity associated with physical distancing measures and market volatility impact our significant accounting estimates and judgments. While economic activity started to recover in the third and fourth quarters, we continue to be faced with unprecedented circumstances which lead to significant uncertainty regarding the ultimate outcome of the COVID-19 pandemic and its impact on economic growth and consumer behaviour. This results in higher inherent risk associated with estimating the impact of the COVID-19 pandemic on ECL allowances. Further details can be found in the "Accounting and control matters" section, as well as in Note 2 to our consolidated financial statements. ### Restructuring During the first quarter of 2020, we recognized a restructuring charge of $339 million ($250 million after-tax) associated with ongoing efforts to transform our cost structure and simplify our bank, shown as an item of note. This charge consisted primarily of employee severance and related costs and was recognized in Corporate and Other. For additional information, see Note 23 to our consolidated financial statements. # 8 Financial performance overview ## 2020 Financial results review Reported net income for the year was $3,792 million, compared with $5,121 million in 2019. Adjusted net income$^{(1)}$ for the year was $4,447 million, compared with $5,444 million in 2019. Reported diluted EPS for the year was $8.22, compared with $11.19 in 2019. Adjusted diluted EPS$^{(1)}$ for the year was $9.69, compared with $11.92 in 2019. Net income was affected by the following items of note: * $339 million ($250 million after-tax) restructuring charge primarily related to employee severance (Corporate and Other); * $248 million ($248 million after-tax) goodwill impairment charges related to our controlling interest in CIBC FirstCaribbean of which $28 million was recognized in the second quarter and $220 million was recognized in the fourth quarter (Corporate and Other); * $114 million ($84 million after-tax) charge related to the consolidation of our real estate portfolio (Corporate and Other); * $105 million ($80 million after-tax) amortization of acquisition-related intangible assets ($6 million after-tax in Canadian Personal and Business Banking, $1 million after-tax in Canadian Commercial Banking and Wealth Management, $61 million after-tax in U.S. Commercial Banking and Wealth Management, and $12 million after-tax in Corporate and Other); * $79 million ($58 million after-tax) gain as a result of plan amendments related to pension and other post-employment plans (Corporate and Other); and * $70 million ($51 million after-tax) increase in legal provisions (Corporate and Other). The above items of note increased non-interest expenses by $797 million and decreased income taxes by $142 million. In aggregate, these items of note decreased net income by $655 million. ## 2019 Net income was affected by the following items of note: * $227 million ($167 million after-tax) charge for a payment made to Air Canada, including related sales tax and transaction costs, to secure our participation in the new loyalty program (Canadian Personal and Business Banking); * $135 million ($135 million after-tax) goodwill impairment charge related to our controlling interest in CIBC FirstCaribbean (Corporate and Other); * $109 million ($82 million after-tax) amortization of acquisition-related intangible assets ($7 million after-tax in Canadian Personal and Business Banking, $1 million after-tax in Canadian Commercial Banking and Wealth Management, $65 million after-tax in U.S. Commercial Banking and Wealth Management, and $9 million after-tax in Corporate and Other); * $67 million ($49 million after-tax) of interest income related to the settlement of certain income tax matters (Corporate and Other); * $45 million ($33 million after-tax net positive impact) in purchase accounting adjustments net of transaction and integration-related costs$^{(2)}$ associated with the acquisitions of The PrivateBank, Geneva Advisors and Wellington Financial (income of $25 million after-tax in U.S. Commercial Banking and Wealth Management, and $8 million after-tax in Corporate and Other); and * $28 million ($21 million after-tax) increase in legal provisions (Corporate and Other). The above items of note increased revenue by $101 million and non-interest expenses by $488 million, and decreased income taxes by $64 million. In aggregate, these items of note decreased net income by $323 million. $^{(1)}$ Adjusted measures are non-GAAP measures. For additional information, see the "Non-GAAP measures" section. $^{(2)}$ Transaction costs include legal and other advisory fees and interest adjustments relating to the obligation payable to dissenting shareholders. Integration costs are comprised of direct and incremental costs incurred as part of planning for and executing the integration of the businesses of The PrivateBank (subsequently rebranded as CIBC Bank USA) and Geneva Advisors with CIBC, including enabling cross-sell opportunities and expansion of services in the U.S. market, the upgrade and conversion of systems and processes, project management, integration-related travel, severance, consulting fees and marketing costs related to rebranding activities. Purchase accounting adjustments, shown as an item of note from the fourth quarter of 2017 to the fourth quarter of 2019, include changes in the fair value of contingent consideration relating to the Geneva Advisors and Wellington Financial acquisitions. These items are recognized in Corporate and Other. ## Sale of FirstCaribbean International Bank Limited On November 8, 2019, we announced that we had entered into a definitive agreement to sell 66.73% of the outstanding shares of FirstCaribbean International Bank Limited (CIBC FirstCaribbean) to GNB Financial Group Limited (GNB) for total consideration of approximately US$797 million, comprised of approximately US$200 million in cash and secured financing provided by CIBC for the remainder, subject to closing adjustments to reflect certain changes in CIBC FirstCaribbean's book value. The closing of this transaction would result in CIBC retaining a 24.9% minority interest in CIBC FirstCaribbean, which would be accounted for as an investment in associate using the equity method. In the fourth quarter of 2019, we recognized a goodwill impairment charge of $135 million as a result of the valuation implied from the definitive agreement with GNB. Commencing in the first quarter of 2020, the assets and liabilities of CIBC FirstCaribbean were treated as held for sale, and measured at the lower of their aggregate carrying amount and fair value less costs to sell, on the basis that the transaction was highly probable to close in 2020 subject to regulatory approvals. In the second quarter of 2020, we recognized an additional goodwill impairment charge of $28 million based on the estimated impact of the COVID-19 pandemic on the recoverable value of the 24.9% interest in CIBC FirstCaribbean that we expected to retain. As a result of the lengthy regulatory review process, the worsening impact of the COVID-19 pandemic on the Caribbean economy and our revised expectations regarding the likelihood and timing of closing of a potential transaction, we concluded in the fourth quarter of 2020 that held for sale accounting is no longer appropriate. As a result, we were required to assess the recoverable amount of the remaining goodwill based on current market conditions rather than the definitive agreement with GNB. This assessment reflected revised expectations concerning the impact of the COVID-19 pandemic and led to the recognition of an additional goodwill impairment charge of $220 million. While we discontinued the application of held for sale accounting, we continue to pursue the transaction and the regulatory review process. For additional information, see Note 4 and Note 9 to our consolidated financial statements. ## Financial performance overview This section provides a review of our consolidated financial results for 2020. A review of our SBU results follows on pages 19 to 28. Refer to page 14 for a review of our financial performance for 2019. ### 2020 Financial results review Reported net income for the year was $3,792 million, compared with $5,121 million in 2019. | Financial results (\$ millions) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net interest income | \$ 11,044 | \$ 10,551 | \$ 10,065 | \$ 8,977 | \$ 8,366 | | Non-interest income | 7,697 | 8,060 | 7,769 | 7,303 | 6,669 | | Total revenue | 18,741 | 18,611 | 17,834 | 16,280 | 15,035 | | Non-interest expenses | 11,362 | 10,856 | 10,258 | 9,571 | 8,971 | | Income before income taxes | 4,890 | 6,469 | 6,706 | 5,880 | 5,013 | | Income taxes | 1,098 | 1,348 | 1,422 | 1,162 | 718 | | Net income | 3,792 | 5,121 | 5,284 | 4,718 | 4,295 | | Net income attributable to non-controlling interests | 2 | 25 | 17 | 19 | 20 | | Net income attributable to equity shareholders | 3,790 | 5,096 | 5,267 | 4,699 | 4,275 | | Financial measures | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Reported efficiency ratio | 60.6% | 58.3% | 57.5% | 58.8% | 59.7% | | Loan loss ratio$^{(1)}$ | 0.26% | 0.29% | 0.26% | 0.25% | 0.31% | | Reported return on common shareholders' equity | 10.0% | 14.5% | 16.6% | 18.3% | 19.9% | | Net interest margin | 1.50% | 1.65% | 1.68% | 1.66% | 1.64% | | Net interest margin on average interest-earning assets$^{(2)(3)}$ | 1.69% | 1.84% | 1.88% | 1.85% | 1.88% | | Return on average assets$^{(3)}$ | 0.52% | 0.80% | 0.88% | 0.87% | 0.84% | | Net interest margin on average interest-earning assets$^{(2)(3)}$ | 0.58% | 0.89% | 0.99% | 0.97% | 0.96% | | Reported effective tax rate | 22.5% | 20.8% | 21.2% | 19.8% | 14.3% | | Common share information | Per share (\$) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | basic earnings | \$ 8.23 | \$ 11.22 | \$ 11.69 | \$ 11.26 | \$ 10.72 | | diluted | 8.22 | 11.19 | 11.65 | 11.24 | 10.70 | | Closing share price (\$) | 84.05 | 79.87 | 73.83 | 66.55 | 56.59 | | Shares outstanding (thousands) | weighted-average basic | 99.38 | 112.31 | 113.68 | 113.56 | 100.50 | | | weighted-average diluted | 445,435 | 444,324 | 443,082 | 412,636 | 395,389 | | Market capitalization (\$ millions) | end of period | \$ 44,431 | \$ 50,016 | \$ 50,341 | \$ 49,888 | \$ 39,906 | | Value measures | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total shareholder return | (5.90)% | 5.9% | 4.19% | 4.70% | 18.30% | 5.19% | | reported diluted earnings | 70.7% | 49.9% | 45.5% | 45.6% | 44.3% | | dividends | 1.41 | 1.54 | 1.71 | 1.78 | | book value | 1.18 | | | | | | Market value to book value ratio | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Market value to book value ratio | 1.18 | 1.41 | 1.54 | 1.71 | 1.78 | | Selected financial measures - adjusted $^{(4)}$ | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Adjusted efficiency ratio$^{(5)}$ | 55.8% | 55.5% | 55.6% | 57.2% | 58.0% | | Adjusted return on common shareholders' equity | 11.7% | 15.4% | 17.4% | 18.1% | 19.0% | | Adjusted effective tax rate | 21.8% | 20.6% | 20.0% | 20.3% | 16.6% | | Adjusted diluted earnings per share (\$) | \$ 9.69 | \$ 11.92 | \$ 12.21 | \$ 11.11 | \$ 10.22 | | Adjusted dividend payout ratio | 60.0% | 46.9% | 43.4% | 46.2% | 46.4% | | On- and off-balance sheet information (\$ millions) | 2020 | 2019 | | :--- | :--- | :--- | | Cash, deposits with banks and securities | \$ 211,564 | \$ 138,669 | | Loans and acceptances, net of allowance | 416,388 | 398,108 | | Total assets | 769,551 | 651,604 | | Deposits | 570,740 | 485,712 | | Common shareholders' equity | 37,579 | 35,569 | | Average assets | 735,492 | 639,716 | | Average interest-earning assets$^{(2)}$ | 654,142 | 572,677 | | Average common shareholders' equity | 36,792 | 34,467 | | Assets under administration (AUA)$^{(6)(7)}$ | 2,368,904 | 2,425,651 | | Assets under management (AUM)$^{(7)}$ | 265,936 | 252,007 | | Balance sheet quality (All-in basis) and liquidity measures | RWA (\$ millions) | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total RWA | \$ 254,871 | \$ 239,863 | | CET1 capital RWA | 265,938 | n/a | | Tier 1 capital RWA | n/a | 216,303 | | Total capital RWA | n/a | 216,462 | | Capital ratios | | | | CET1 ratio$^{(8)}$ | 12.1% | 11.6% | | Tier 1 capital ratio$^{(8)}$ | 13.6% | 12.9% | | Total capital ratio$^{(8)}$ | 16.1% | 15.0% | | Leverage ratio | 4.7% | 4.3% | | LCR$^{(9)}$ | 145% | 125% | | Other information | 2020 | 2019 | | :--- | :--- | :--- | | Full-time equivalent employees | 43,853 | 45,157 | $^{(1)}$ The ratio is calculated as the provision for credit losses on impaired loans to average loans and acceptances, net of allowance for credit losses. $^{(2)}$ Average interest-earning assets include interest-bearing deposits with banks, interest-bearing demand deposits with Bank of Canada, securities, cash collateral on securities borrowed, securities purchased under resale agreements, loans net of allowances, and certain sublease-related assets. $^{(3)}$ Net income expressed as a percentage of average assets or average interest-earning assets. $^{(4)}$ Adjusted measures are non-GAAP measures. Adjusted measures are calculated in the same manner as reported measures, except that financial information included in the calculation of adjusted measures is adjusted to exclude the impact of items of note. For additional information and a reconciliation of reported results to adjusted results, see the "Non-GAAP measures" section. $^{(5)}$ Calculated on a TEB. $^{(6)}$ Includes the full contract amount of AUA or custody under a 50/50 joint venture between CIBC and The Bank of New York Mellon of $\$1,861.5$ billion as at October 31, 2020 (2019: $\$1,923.2$ billion). $^{(7)}$ AUM amounts are included in the amounts reported under AUA. $^{(8)}$ Effective beginning in the second quarter of 2020, ratios reflect the expected credit loss (ECL) transitional arrangement announced by OSFI on March 27, 2020. $^{(9)}$ Average for the three months ended October 31 for each respective year. n/a Not applicable. # 6 Economic and market environment ## Year in review – 2020 The North American outbreak of COVID-19 that occurred in the first quarter of 2020 represented a major shock to CIBC's principal markets. Efforts to contain the pandemic in the spring of 2020, including the implementation of public health measures such as travel restrictions and physical distancing, resulted in a steep economic decline in Canada and the U.S., as governments on both sides of the border announced unprecedented fiscal and monetary stimulus measures to bolster the economy. The subsequent relaxation of these public health measures resulted in an uneven recovery that continues to leave both countries with a considerable gap to economic levels at the beginning of the year. Service industries in which physical distancing posed a major impediment were particularly hard-hit, along with the energy sector that faced a soft global demand environment. Impacts on household and business credit quality were cushioned but not eliminated by large-scale government assistance measures and deep cuts in interest rates in Canada and the U.S., with lower rates resulting in reduced lending margins in the banking system. In Canada, household credit growth slowed as sharply weaker non-mortgage credit demand offset growth in mortgages. Lower consumer spending had a negative impact on retail transaction volumes. Housing prices remained firm in most markets. Business credit demand picked up sharply early in the pandemic for liquidity needs, but then decelerated over the balance of the year on slower economic activity, while capital markets activity was boosted by strong corporate and government bond issuance. U.S. equity markets reached new highs in the summer, while Canadian equity markets recovered significantly from the initial lows. ## Outlook for calendar year 2021 The COVID-19 pandemic continues to have a significant adverse impact on the near-term economic outlook for the global economy. Restrictions imposed by governments around the world to limit the impact of subsequent waves of infection, such as travel restrictions, physical distancing measures, and the closure of certain businesses, continue to disrupt the global economy, and will limit the scope for a further recovery until an effective mass-produced vaccine is in place. Recent positive developments related to vaccine development suggest regulatory approval and targeted usage could be expected by early 2021, but uncertainty remains surrounding the timing of mass production, distribution, public acceptance and the subsequent reduction in rates of infection. Our outlook assumes that mass vaccinations will be underway in mid-2021 and allow for stronger global recovery in the latter half of the year. Until then, we assume that temporary restraints on activity in response to subsequent waves will replace the near-complete restrictions that were in place in early and mid-2020. Growth will continue in sectors less impacted by physical distancing measures, but other sectors will experience periods of disruption when regulations are tightened in response to new waves of the virus. We generally expect to see stronger performance in the goods sector of the economy, but continued slack in the services sector. Constrained global activity and its implications on demand for fuel will also result in a slower recovery in crude oil prices through the first half of 2021. In Canada, after a drop of approximately 5.5% in 2020, real gross domestic product (GDP) is expected to advance by about 4% in 2021, with more of the gains expected in the latter half of the calendar year. We expect that this will still leave the unemployment rate averaging over 8%, well above full employment levels. Both businesses and households will benefit from substantial government fiscal support through at least the first half of the year, which will reduce the impact of slower economic growth on insolvencies, business and household credit growth and retail transaction volumes relative to what would have occurred absent these measures. Government bond issuance will remain elevated to cover the resulting federal and provincial deficits. The Bank of Canada will maintain short-term interest rates at their current levels through 2021, although longer-term rates will drift higher as economic growth accelerates, and the central bank eases up on its asset purchase program. In the U.S., real GDP is expected to grow by approximately 3.5% in 2021, after a similarly-scaled decline in 2020, with better gains expected in the latter half of next year. Our outlook assumes that the federal government will enact a second round of fiscal stimulus no later than early 2021 to provide enhanced support for households and businesses impacted by the pandemic, reducing its impact on insolvencies. With no growth over the two-year period of 2020-21, unemployment will average approximately 6.5% in 2021, well above full-employment levels. In response, we expect that the Federal Reserve will maintain near-zero short-term interest rates and continue to engage in asset purchases to slow the climb in long-term rates. The economic challenges from the COVID-19 pandemic impact all our SBUs. From a credit perspective, all our loan portfolios will continue to be negatively impacted by the constrained economic activity associated with measures taken to contain the spread of infection, mitigated to an extent by large-scale government support and relief programs targeting both individuals and businesses. Deposit growth is likely to decelerate as businesses draw down on liquidity raised earlier in the pandemic, and as households spend a greater portion of their income as economic growth accelerates. The persistent low interest environment is expected to continue to have a negative impact on the net interest margins for all our SBUs. For Canadian Personal and Business Banking, mortgage demand growth could see a deceleration, but will continue to remain well supported by low rates, while we expect to see a return to growth in non-mortgage credit demand as pandemic-related constraints begin to ease. Continued demand for business lending products is anticipated as small businesses look to weather the impact of the economic slowdown, but a slower pace of growth is expected relative to 2020. Our Canadian and U.S. wealth management businesses are expected to benefit from a further economic recovery, with investors looking for alternatives to low rates on savings deposits. Our Capital Markets business is expected to benefit from merger and acquisition activity as corporate consolidations increase in the aftermath of the pandemic, as well as increased equity issuance, but will be impacted by lower corporate bond issuance and lower trading revenues from the highs in 2020. Loan demand in our Canadian and U.S. commercial banking businesses could experience slower growth as the need for liquidity during the crisis eases, but will be supported by business expansion plans further into the year. The economic outlook described above reflects numerous assumptions and uncertainties regarding the economic impact of the COVID-19 pandemic, which will ultimately depend on the speed at which an effective vaccine can be developed and administered on a mass scale, and the ability of governments, businesses and health-care systems to effectively limit the epidemiological and economic impacts of the current and possible future resurgences of the virus in the intervening period. The extent to which physical distancing policies restrict economic activity, and the level and effectiveness of government support during this intervening period are material to our expectations for the scale and timing of a further economic rebound in 2021. Expectations reflect currently available expert opinions and are subject to change as new information on transmissibility and epidemiology becomes available. As a result, actual experience may differ materially from expectations. See the "Significant events" section for further details on the impact of the COVID-19 pandemic. 6 CIBC 2020 ANNUAL REPORT # 7 Significant events ## Impact of COVID-19 On March 11, 2020, the outbreak of COVID-19 was officially declared a pandemic by the WHO. As discussed in the "Economic and market environment" section, the COVID-19 pandemic continues to have a significant adverse impact on the global economy. Measures undertaken in the second quarter to contain the spread of the virus, including the closure of non-essential businesses, succeeded in curbing the initial spread of infection, allowing for partial easing of these measures in the third and fourth quarters. As a result, certain sectors of the economy have seen a resumption of activity. However there is a risk that the recent retightening of these measures enacted by governments and businesses in response to the resurgence in infection rates could impact economic activity beyond levels that were previously anticipated. The overall economy continues to operate below pre-pandemic levels in Canada, the U.S. and other regions where we operate. As a result, the COVID-19 pandemic continues to significantly impact our clients, our team, and our business. ### Supporting our clients, team members, and communities during the COVID-19 pandemic Initial measures to curb COVID-19 resulted in the closure or reduced operating hours at a number of our banking centre locations, as well as the provision of certain expanded benefits to our team members in light of the challenges posed by COVID-19. As governments subsequently eased physical distancing measures, we worked closely with regional authorities to align our business practices with prevailing guidelines in the regions in which we operate, resulting in the reopening of our banking centres and adjustment to the expanded employee benefits. We continue to work closely with the relevant government and health authorities as regions respond to the second wave of the pandemic to ensure the safety of our team members and clients. Steps taken to keep our team members and clients safe include the continued support of remote working arrangements and enhanced safety procedures and cleaning protocols. We also continue to support the organizations and charities that are taking care of our communities during this crisis. We have been actively engaged in lending activities to support our clients who were experiencing financial hardship caused by the COVID-19 pandemic, including providing payment deferral programs on various products for personal, corporate and commercial banking clients, and voluntarily reducing interest rates on select credit cards. A number of these programs have now drawn to a close, with the number of additional clients seeking relief reducing significantly relative to prior quarters, resulting in a reduction in the outstanding balances for these programs. See the "CIBC client relief programs in response to COVID-19" section for further details. We continue to be actively engaged with governments, monetary authorities and regulators in the jurisdictions in which we operate, and continue to support our clients through government-led relief programs. See the "Government lending programs in response to COVID-19" and "Off-balance sheet arrangements" sections and Note 2 to our consolidated financial statements for further details regarding our participation in these programs. ### Impact on financial results COVID-19 has negatively impacted our results in 2020. See the "2020 Financial results review" and "Strategic business units overview" sections for further details on our financial performance in 2020, including the impact of the COVID-19 pandemic. On pages 2 to 4 of our 2020 Annual Report, we provided disclosure regarding our scorecard of financial measures that we use to evaluate our performance against our strategic objectives, including the targets that we have set for each of these measures over the medium term. Until there is greater certainty concerning the dissemination of an effective mass-produced vaccine, the COVID-19 pandemic is expected to continue to impact our ability to achieve our performance objectives. The extent to which the COVID-19 pandemic continues to negatively impact our business, results of operations, reputation and financial condition, as well as our regulatory capital and liquidity positions, will depend on future developments, which are highly uncertain. See the "Economic and market environment" section and Note 6 to our consolidated financial statements for further details on how the COVID-19 pandemic has impacted our economic outlook. ### Impact on risk environment We enacted our business continuity plans in the second quarter upon the WHO declaring COVID-19 a pandemic and we developed business priorities and an operating model to support our clients, team members and communities throughout this crisis. See the "Top and emerging risks" section for further details on additional risks associated with the COVID-19 pandemic. ### Unprecedented regulatory and central bank support Governments, monetary authorities, regulators and financial institutions continue to take actions to support the economy, increase liquidity, mitigate unemployment, provide public assistance, provide regulatory flexibility and implement other measures intended to mitigate or counterbalance the adverse economic consequences of the pandemic. See the "Regulatory developments arising from the COVID-19 pandemic" section for further details on regulatory flexibility provided during the quarter in response to the COVID-19 pandemic, and the "Regulatory developments concerning liquidity" section for details on relevant funding and liquidity programs instituted to support market liquidity during this crisis. ### Impact on significant accounting judgments and estimates Ongoing economic uncertainty, including reduced short- and medium-term growth due to the decline in economic activity associated with physical distancing measures and market volatility impact our significant accounting estimates and judgments. While economic activity started to recover in the third and fourth quarters, we continue to be faced with unprecedented circumstances which lead to significant uncertainty regarding the ultimate outcome of the COVID-19 pandemic and its impact on economic growth and consumer behaviour. This results in higher inherent risk associated with estimating the impact of the COVID-19 pandemic on ECL allowances. Further details can be found in the "Accounting and control matters" section, as well as in Note 2 to our consolidated financial statements. ### Restructuring During the first quarter of 2020, we recognized a restructuring charge of $339 million ($250 million after-tax) associated with ongoing efforts to transform our cost structure and simplify our bank, shown as an item of note. This charge consisted primarily of employee severance and related costs and was recognized in Corporate and Other. For additional information, see Note 23 to our consolidated financial statements. # 8 Financial performance overview ## 2020 Financial results review Reported net income for the year was $3,792 million, compared with $5,121 million in 2019. Adjusted net income$^{(1)}$ for the year was $4,447 million, compared with $5,444 million in 2019. Reported diluted EPS for the year was $8.22, compared with $11.19 in 2019. Adjusted diluted EPS$^{(1)}$ for the year was $9.69, compared with $11.92 in 2019. Net income was affected by the following items of note: * $339 million ($250 million after-tax) restructuring charge primarily related to employee severance (Corporate and Other); * $248 million ($248 million after-tax) goodwill impairment charges related to our controlling interest in CIBC FirstCaribbean of which $28 million was recognized in the second quarter and $220 million was recognized in the fourth quarter (Corporate and Other); * $114 million ($84 million after-tax) charge related to the consolidation of our real estate portfolio (Corporate and Other); * $105 million ($80 million after-tax) amortization of acquisition-related intangible assets ($6 million after-tax in Canadian Personal and Business Banking, $1 million after-tax in Canadian Commercial Banking and Wealth Management, $61 million after-tax in U.S. Commercial Banking and Wealth Management, and $12 million after-tax in Corporate and Other); * $79 million ($58 million after-tax) gain as a result of plan amendments related to pension and other post-employment plans (Corporate and Other); and * $70 million ($51 million after-tax) increase in legal provisions (Corporate and Other). The above items of note increased non-interest expenses by $797 million and decreased income taxes by $142 million. In aggregate, these items of note decreased net income by $655 million. ## 2019 Net income was affected by the following items of note: * $227 million ($167 million after-tax) charge for a payment made to Air Canada, including related sales tax and transaction costs, to secure our participation in the new loyalty program (Canadian Personal and Business Banking); * $135 million ($135 million after-tax) goodwill impairment charge related to our controlling interest in CIBC FirstCaribbean (Corporate and Other); * $109 million ($82 million after-tax) amortization of acquisition-related intangible assets ($7 million after-tax in Canadian Personal and Business Banking, $1 million after-tax in Canadian Commercial Banking and Wealth Management, $65 million after-tax in U.S. Commercial Banking and Wealth Management, and $9 million after-tax in Corporate and Other); * $67 million ($49 million after-tax) of interest income related to the settlement of certain income tax matters (Corporate and Other); * $45 million ($33 million after-tax net positive impact) in purchase accounting adjustments net of transaction and integration-related costs$^{(2)}$ associated with the acquisitions of The PrivateBank, Geneva Advisors and Wellington Financial (income of $25 million after-tax in U.S. Commercial Banking and Wealth Management, and $8 million after-tax in Corporate and Other); and * $28 million ($21 million after-tax) increase in legal provisions (Corporate and Other). The above items of note increased revenue by $101 million and non-interest expenses by $488 million, and decreased income taxes by $64 million. In aggregate, these items of note decreased net income by $323 million. $^{(1)}$ Adjusted measures are non-GAAP measures. For additional information, see the "Non-GAAP measures" section. $^{(2)}$ Transaction costs include legal and other advisory fees and interest adjustments relating to the obligation payable to dissenting shareholders. Integration costs are comprised of direct and incremental costs incurred as part of planning for and executing the integration of the businesses of The PrivateBank (subsequently rebranded as CIBC Bank USA) and Geneva Advisors with CIBC, including enabling cross-sell opportunities and expansion of services in the U.S. market, the upgrade and conversion of systems and processes, project management, integration-related travel, severance, consulting fees and marketing costs related to rebranding activities. Purchase accounting adjustments, shown as an item of note from the fourth quarter of 2017 to the fourth quarter of 2019, include changes in the fair value of contingent consideration relating to the Geneva Advisors and Wellington Financial acquisitions. These items are recognized in Corporate and Other. ## Net interest income and margin | \$ millions, for the year ended October 31 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Average interest-earning assets | \$ 654,142 | \$ 572,677 | \$ 536,059 | | Net interest income | 11,044 | 10,551 | 10,065 | | Net interest margin on average interest-earning assets | 1.69% | 1.84% | 1.88% | Net interest income was up $493 million or 5% from 2019, primarily due to volume growth across our businesses, higher trading income and higher revenue from Capital Markets financing activities, partially offset by narrower margins driven by changes in the interest rate environment and interest rate relief provided to our credit card clients as part of the CIBC client relief programs offered to support our clients during the COVID-19 pandemic. Net interest margin on average interest-earning assets was down 15 basis points, primarily due to narrower margins largely due to the factors discussed above and excess liquidity costs. Additional information on net interest income and margin is provided in the "Supplementary annual financial information" section. ## Non-interest income | \$ millions, for the year ended October 31 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Underwriting and advisory fees | \$ 468 | \$ 475 | \$ 420 | | Deposit and payment fees | 781 | 908 | 877 | | Credit fees | 1,020 | 958 | 851 | | Card fees | 410 | 458 | 510 | | Investment management and custodial fees$^{(1)(2)}$ | 1,382 | 1,305 | 1,247 | | Mutual fund fees$^{(2)}$ | 1,586 | 1,595 | 1,624 | | Insurance fees, net of claims | 386 | 430 | 431 | | Commissions on securities transactions | 362 | 313 | 357 | | Gains (losses) from financial instruments measured/designated at fair value through profit or loss (FVTPL), net$^{(3)}$ | 694 | 761 | 603 | | Gains (losses) from debt securities measured at fair value through other comprehensive income (FVOCI) and amortized cost, net | 9 | 34 | (35) | | Foreign exchange other than trading | 234 | 304 | 310 | | Income from equity-accounted associates and joint ventures$^{(1)}$ | 79 | 92 | 121 | | Other | 286 | 427 | 453 | | **Total** | **\$ 7,697** | **\$ 8,060** | **\$ 7,769** | $^{(1)}$ Custodial fees directly recognized by CIBC are included in Investment management and custodial fees. Our proportionate share of CIBC Mellon's custodial fees are included within Income from equity-accounted associates and joint ventures. $^{(2)}$ Investment management fees and mutual fund fees are driven by various factors, including the amount of AUM. Investment management fees in our asset management and private wealth management businesses are generally driven by the amount of AUM, while investment management fees in our retail brokerage business are driven by a combination of the amount of AUA and, to a lesser extent, other factors unrelated to the amount of AUA (e.g., flat fees on a per account basis). $^{(3)}$ Includes $\$31$ million of loss (2019: $\$54$ million of loss; 2018: $\$46$ million of income) relating to non-trading financial instruments measured/designated at FVTPL. Non-interest income was down $\$363$ million or 5% from 2019. * Deposit and payment fees were down $\$127$ million or 14%, primarily due to lower client transaction activity in Canadian Personal and Business Banking as a result of the pandemic. * Credit fees were up $\$62$ million or 6%, primarily due to growth in commercial loans. * Card fees were down $\$48$ million or 10%, primarily due to lower client transaction activity as a result of the pandemic and an interchange rate change in Canadian Personal and Business Banking. * Investment management and custodial fees were up $\$77$ million or 6%, primarily due to asset growth in our wealth management businesses. * Commissions on securities transactions were up $\$49$ million or 16%, primarily due to higher trading volume in our retail brokerage business. * Gains (losses) from financial instruments measured/designated at FVTPL, net were down $\$67$ million or 9%, primarily due to lower trading income, partially offset by Treasury activities. * Foreign exchange other than trading was down $\$70$ million or 23%, primarily due to Treasury activities. * Other was down $\$141$ million or 33%, primarily due to lower sublease revenue relating to our adoption of IFRS 16 in the current year that was largely offset in interest income and non-interest expenses, and mark-to-market losses related to economic hedges of certain non-trading activities that were largely offset in net interest income. ## Provision for credit losses | \$ millions, for the year ended October 31 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Provision for (reversal of) credit losses - impaired | | | | | Canadian Personal and Business Banking | \$ 640 | \$ 809 | \$ 760 | | Canadian Commercial Banking and Wealth Management | 162 | 159 | 15 | | U.S. Commercial Banking and Wealth Management | 133 | 68 | 67 | | Capital Markets | 106 | 90 | 8 | | Corporate and Other | 24 | 21 | 102 | | **Total** | **1,065** | **1,147** | **952** | | Provision for (reversal of) credit losses - performing | | | | | Canadian Personal and Business Banking | 579 | 87 | (19) | | Canadian Commercial Banking and Wealth Management | 141 | 4 | (10) | | U.S. Commercial Banking and Wealth Management | 354 | 5 | 12 | | Capital Markets | 175 | 63 | (38) | | Corporate and Other | 175 | (20) | (27) | | **Total** | **1,424** | **139** | **(82)** | | **Total Provision for Credit Losses** | **\$ 2,489** | **\$ 1,286** | **\$ 870** | Provision for credit losses was up $\$1,203$ million or 94% from 2019. Provision for credit losses on performing loans was up $\$1,285$ million, mainly due to increased provisions related to the COVID-19 pandemic. Provision for credit losses on impaired loans was down $\$82$ million, due to lower insolvencies and write-offs in credit cards and personal lending, reflecting the impact of the client relief programs and government support, partially offset by higher provisions in business and government loans. For further details regarding provision for credit losses in our SBUs, refer to the "Strategic business units overview" section. ## Non-interest expenses | \$ millions, for the year ended October 31 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Employee compensation and benefits | | | | | Salaries | \$ 3,529 | \$ 3,081 | \$ 2,934 | | Performance-based compensation | 1,948 | 1,873 | 1,966 | | Benefits | 782 | 772 | 765 | | Occupancy costs | 6,259 | 5,726 | 5,665 | | Computer, software and office equipment | 944 | 892 | 875 | | Communications | 1,939 | 1,874 | 1,742 | | Advertising and business development | 308 | 303 | 315 | | Professional fees | 271 | 359 | 327 | | Business and capital taxes | 203 | 226 | 226 | | Other | 117 | 110 | 103 | | **Total** | **\$ 11,362** | **\$ 10,856** | **\$ 10,258** | Non-interest expenses were up $\$506$ million or 5% from 2019. Employee compensation and benefits were up $\$533$ million or 9%, primarily due to a restructuring charge primarily related to employee severance, shown as an item of note, higher performance-based compensation and additional employee benefits provided to support our employees during the COVID-19 pandemic, partially offset by a gain as a result of plan amendments related to pension and other post-employment plans, shown as an item of note. Occupancy costs were up $\$52$ million or 6%, primarily due to a charge related to the consolidation of our real estate portfolio associated with our upcoming move to our new global headquarters, shown as an item of note, partially offset by lower occupancy costs related to adoption of IFRS 16 in the current year that were largely offset by higher interest expenses. Advertising and business development were down $\$88$ million or 25%, primarily due to lower spending driven by the impact of the COVID-19 pandemic. Other expenses were down $\$45$ million or 3%, as the prior year included a charge for a payment made to Air Canada, including related sales tax and transaction costs, to secure our participation in the new loyalty program, partially offset by higher goodwill impairment relative to the prior year, and an increase in legal provisions, with all of these shown as items of note. ## Taxes | \$ millions, for the year ended October 31 | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Income taxes | \$ 1,098 | \$ 1,348 | \$ 1,422 | | Indirect taxes $^{(1)}$ | | | | | Goods and Services Tax (GST), Harmonized Sales Tax (HST) and sales taxes | 411 | 418 | 354 | | Payroll taxes | 292 | 271 | 271 | | Capital taxes | 79 | 76 | 68 | | Property and business taxes | 76 | 72 | 77 | | Total indirect taxes | 858 | 837 | 770 | | **Total taxes** | **\$ 1,956** | **\$ 2,185** | **\$ 2,192** | | Reported effective tax rate | 22.5% | 20.8% | 21.2% | | Total taxes as a percentage of net income before deduction of total taxes | 34.0% | 29.9% | 29.3% | $^{(1)}$ Certain amounts are based on a paid or payable basis and do not factor in capitalization and subsequent amortization. Income taxes include those imposed on CIBC as a Canadian legal entity, as well as on our domestic and foreign subsidiaries. Indirect taxes comprise GST, HST and sales, payroll, capital, property and business taxes. Indirect taxes are included in non-interest expenses. Total income and indirect taxes were down $\$229$ million from 2019. Income tax expense was $\$1,098$ million, down $\$250$ million from 2019. This was primarily due to lower income, partially offset by an unfavourable impact of changes in the proportion of income subject to varying rates of tax in different jurisdictions. The prior year also included a net tax recovery of $\$38$ million resulting from the Enron settlement discussed below, largely offset by a $\$28$ million revaluation of certain deferred tax assets due to tax rate changes enacted by the Barbados government in the first quarter of 2019. Indirect taxes were up $\$21$ million, primarily due to increased payroll taxes, including social security contributions. The U.S. Tax Cuts and Jobs Act (U.S. tax reforms) reduced the U.S. federal corporate income tax rate effective in 2018 and introduced other important changes to U.S. corporate income tax laws including a Base Erosion Anti-Abuse Tax (BEAT) that subjects certain payments from a U.S. corporation to foreign related parties to additional taxes. The Internal Revenue Service periodically releases proposed and final regulations to implement aspects of the U.S. tax reforms, including BEAT. CIBC continues to evaluate the impact of these regulations on our U.S. operations. In prior years, the Canada Revenue Agency (CRA) issued reassessments disallowing the deduction of Enron settlement payments and related legal expenses (the Enron expenses). In January 2019, CIBC entered into a settlement agreement (the Agreement) with the CRA that provides certainty with respect to the portion of the Enron expenses deductible in Canada. The Agreement resulted in the recognition of a net $\$38$ million tax recovery in the first quarter of 2019. This recovery was determined after taking into account taxable refund interest in Canada and also the portion of the Enron expenses that are expected to be deductible in the United States (the U.S. deduction). The U.S. deduction has not been agreed to by the Internal Revenue Service. It is possible that adjustments may be required to the amount of tax benefits recognized in the U.S. The CRA has reassessed CIBC approximately $\$1,115$ million of additional income tax by denying the tax deductibility of certain 2011 to 2015 Canadian corporate dividends on the basis that they were part of a "dividend rental arrangement". The dividends that were subject to the reassessments are similar to those prospectively addressed by the rules in the 2015 and 2018 Canadian federal budgets. It is possible that subsequent years may be reassessed for similar activities. CIBC is confident that its tax filing positions were appropriate and intends to defend itself vigorously. Accordingly, no amounts have been accrued in the consolidated financial statements. ## Foreign exchange The estimated impact of U.S. dollar translation on key lines of our consolidated statement of income, as a result of changes in average exchange rates, is as follows: | \$ millions, for the year ended October 31 | 2020 vs. 2019 | 2019 vs. 2018 | 2018 vs. 2017 | | :--- | :--- | :--- | :--- | | Estimated increase (decrease) in: | | | | | Total revenue | \$ 50 | \$ 124 | \$ (55) | | Provision for credit losses | 9 | 7 | (2) | | Non-interest expenses | 26 | 66 | (30) | | Income taxes | 5 | (3) | (3) | | Net income | 12 | 46 | (20) | | Impact on EPS: | | | | | Basic | \$ 0.03 | \$ 0.10 | \$ (0.05) | | Diluted | 0.03 | 0.10 | (0.05) | | Average USD appreciation (depreciation) relative to CAD | 1.1% | 3.2% | (1.5)% | ## Fourth quarter review | \$ millions, except per share amounts, for the three months ended | 2020 | 2019 $^{(1)}$ | | :--- | :--- | :--- | | | Oct. 31 | Jul. 31 | Apr. 30 | Jan. 31 | Oct. 31 | Jul. 31 | Apr. 30 | Jan. 31 | | Revenue | | | | | | | | | | Canadian Personal and Business Banking | \$ 2,139 | \$ 2,056 | \$ 2,079 | \$ 2,214 | \$ 2,225 | \$ 2,240 | \$ 2,126 | \$ 2,164 | | Canadian Commercial Banking and Wealth Management | 1,028 | 1,013 | 1,025 | 1,055 | 1,026 | 1,019 | 998 | 984 | | U.S. Commercial Banking and Wealth Management $^{(2)}$ | 515 | 514 | 518 | 507 | 502 | 509 | 474 | 479 | | Capital Markets $^{(2)}$ | 792 | 1,000 | 824 | 871 | 740 | 752 | 756 | 712 | | Corporate and Other $^{(2)}$ | 126 | 125 | 132 | 208 | 279 | 212 | 188 | 226 | | **Total revenue** | **\$ 4,600** | **\$ 4,708** | **\$ 4,578** | **\$ 4,855** | **\$ 4,772** | **\$ 4,732** | **\$ 4,542** | **\$ 4,565** | | Net interest income | \$ 2,792 | \$ 2,729 | \$ 2,762 | \$ 2,761 | \$ 2,801 | \$ 2,694 | \$ 2,460 | \$ 2,596 | | Non-interest income | 1,808 | 1,979 | 1,816 | 2,094 | 1,971 | 2,038 | 2,082 | 1,969 | | **Total revenue** | **4,600** | **4,708** | **4,578** | **4,855** | **4,772** | **4,732** | **4,542** | **4,565** | | Provision for credit losses | 291 | 525 | 1,412 | 261 | 402 | 291 | 255 | 338 | | Non-interest expenses | 2,891 | 2,702 | 2,704 | 3,065 | 2,838 | 2,670 | 2,588 | 2,760 | | Income before income taxes | 1,418 | 1,481 | 462 | 1,529 | 1,532 | 1,771 | 1,699 | 1,467 | | Income taxes | 402 | 309 | 70 | 317 | 339 | 373 | 351 | 285 | | **Net income** | **\$ 1,016** | **\$ 1,172** | **\$ 392** | **\$ 1,212** | **\$ 1,193** | **\$ 1,398** | **\$ 1,348** | **\$ 1,182** | | Net income (loss) attributable to: | | | | | | | | | | Non-controlling interests | \$ 1 | \$ 2 | \$ (8) | \$ 7 | \$ 8 | \$ 6 | \$ 7 | \$ 4 | | Equity shareholders | 1,015 | 1,170 | 400 | 1,205 | 1,185 | 1,392 | 1,341 | 1,178 | | EPS - basic | \$ 2.21 | \$ 2.56 | \$ 0.83 | \$ 2.64 | \$ 2.59 | \$ 3.07 | \$ 2.96 | \$ 2.61 | | diluted | 2.20 | 2.55 | 0.83 | 2.63 | 2.58 | 3.06 | 2.95 | 2.60 | $^{(1)}$ Certain prior period information has been revised. See the "External reporting changes" section for additional details. $^{(2)}$ Capital Markets and U.S. Commercial Banking and Wealth Management revenue and income taxes are reported on a TEB with an equivalent offset in the revenue and income taxes of Corporate and Other. ### Compared with Q4/19 Net income for the quarter was $\$1,016$ million, down $\$177$ million or 15% from the fourth quarter of 2019. Net interest income was down $\$9$ million, primarily due to narrower margins, lower treasury revenue and interest income related to the settlement of certain income tax matters in the same quarter last year, shown as an item of note, partially offset by volume growth across our businesses, higher trading income and higher revenue from financing activities in Capital Markets. Non-interest income was down $\$163$ million or 8%, primarily due to lower trading income, and lower deposit and payment fees. Provision for credit losses was down $\$111$ million or 28% from the same quarter last year. Provision for credit losses on performing loans was up $\$41$ million, primarily due to an unfavourable impact of model parameter updates in Canadian Personal and Business Banking and negative credit migration in U.S. Commercial Banking and Wealth Management. Provision for credit losses on impaired loans was down $\$152$ million, largely due to lower insolvencies and write-offs in credit cards and personal lending, reflecting the impact of the client relief programs and government support. Non-interest expenses were up $\$53$ million or 2%, primarily due to charges related to the consolidation of our real estate portfolio and goodwill impairment related to our controlling interest in CIBC FirstCaribbean, both shown as items of note. The increase was partially offset by a gain as a result of plan amendments related to pension and other post-employment plans this quarter, and an increase in legal provisions in the same quarter last year, both shown as items of note, and lower performance-based compensation this quarter. Income tax expense was up $\$63$ million or 19%, despite lower income, primarily due to the goodwill impairment charge related to our controlling interest in CIBC FirstCaribbean, which is not deductible for tax purposes. ### Compared with Q3/20 Net income for the quarter was down $\$156$ million or 13% from the prior quarter. Net interest income was up $\$63$ million or 2%, primarily due to volume growth in Canadian Personal and Business Banking and higher trading income. Non-interest income was down $\$171$ million or 9%, primarily due to lower trading income. Provision for credit losses was down $\$234$ million or 45% from the prior quarter. Provision for credit losses on performing loans was down $\$112$ million, primarily due to an unfavourable change to our economic outlook in the third quarter, partially offset by increased provisions due to various model parameter updates and unfavourable credit migration in certain portfolios this quarter. Provision for credit losses on impaired loans was down $\$122$ million, due to lower insolvencies and write-offs in personal lending, reflecting the impact of the client relief programs and government support, along with lower provisions in business and government loans. Non-interest expenses were up $\$189$ million or 7%, primarily due to charges for goodwill impairment related to our controlling interest in CIBC FirstCaribbean and the consolidation of our real estate portfolio, both shown as items of note. The increase was partially offset by a gain as a result of plan amendments related to pension and other post-employment plans this quarter and an increase in legal provisions in the prior quarter, both shown as items of note. Income tax expense was up $\$93$ million or 30%, despite lower income, primarily due to the goodwill impairment charge related to our controlling interest in CIBC FirstCaribbean, which is not deductible for tax purposes. 12 CIBC 2020 ANNUAL REPORT # Quarterly trend analysis Our quarterly results are modestly affected by seasonal factors. The second quarter has fewer days as compared with the other quarters, generally leading to lower earnings. The summer months (July - third quarter and August - fourth quarter) typically experience lower levels of market activity, which affects our brokerage, investment management, and Capital Markets activities. ## Revenue **Canadian Personal and Business Banking** revenue has benefited from volume growth, as well as margins widening earlier in the period, with headwinds due to margins and fee income arising in the second to fourth quarters of 2020 due to the COVID-19 pandemic. **Canadian Commercial Banking and Wealth Management** has continued to benefit from increases in both commercial banking deposit and loan volumes, although recent periods have seen muted loan growth as a result of the impact of the government's public health measures on a number of businesses across Canada due to the COVID-19 pandemic. In wealth management, recent market volatility has impacted AUA and AUM balances. **U.S. Commercial Banking and Wealth Management** revenue reflects recent net interest margin pressure, offset by the impact of strong organic growth through to the second quarter of 2020, and fee income growth. **Capital Markets** revenue is influenced, to a large extent, by market conditions affecting client trading and underwriting activity. The first and third quarters of 2020 included higher trading revenue. **Corporate and Other** included the impact of changes relating to our adoption of IFRS 16 in the current year that were largely offset in non-interest expenses (see Note 8 to our consolidated financial statements for further details regarding the impact of our transition to IFRS 16). The fourth quarter of 2019 included interest income related to the settlement of certain income tax matters. ## Provision for credit losses Provision for credit losses is dependent upon the credit cycle in general, on the credit performance of the loan portfolios, and changes in economic outlook. As a result of the impact of the COVID-19 pandemic beginning in the second quarter of 2020, our loan portfolios were negatively impacted by the decline in economic activity associated with physical distancing measures, mitigated to an extent by large-scale government support and relief programs targeting both individuals and businesses. There is considerable judgment involved in the estimation of credit losses in the current environment. The ultimate impact of the COVID-19 pandemic will depend on the speed at which an effective vaccine can be administered on a mass scale, and the ability of governments, businesses and health-care systems to effectively limit the epidemiological and economic impacts of expected resurgences of the virus in the intervening period. The extent to which the recommended public health measures restrict economic activity and the level and effectiveness of government support during this intervening period are material to our expectations for a continued economic rebound in 2021 and our resulting provision for credit losses. The significant increase in provision for credit losses on performing loans in the second and, to a lesser extent, in the third and fourth quarters of 2020 reflects the impacts of the COVID-19 pandemic and continued pressure on oil prices. This has impacted all of our SBUs. We also recognized provisions on performing loans throughout 2019, reflective of the impact of certain unfavourable changes to our economic outlook over that period. In Canadian Personal and Business Banking, the fourth quarter of 2019 included higher provision on impaired loans in the personal lending portfolio. The third and fourth quarters of 2020 included lower insolvencies and write-offs in credit cards. The decrease in insolvencies was in line with the national Canadian trend, as a result of limited consumer filing channels. The low level of write-offs was due to assistance offered to clients from our payment deferral programs, as well as from government support. In Canadian Commercial Banking and Wealth Management, there were higher provisions on impaired loans since the first quarter of 2019 compared with the second half of 2018. The first, third and fourth quarters of 2020, and the fourth quarter of 2019, included provisions on one fraud-related impairment. In U.S. Commercial Banking and Wealth Management, the third quarter of 2019 and the second half of 2020 included higher provisions on impaired loans. Impaired loan provisions in the U.S. remain elevated with no industry or sector trends. In Capital Markets, the first quarter of 2019 included higher provisions on impaired loans due to an impaired loan in the utility sector. The second half of 2019 and the second and third quarters of 2020 included higher provisions on impaired loans in the oil and gas sector. In Corporate and Other, provisions on impaired loans remained relatively stable across 2019 and 2020. ## Non-interest expenses Non-interest expenses have fluctuated over the period largely due to changes in employee-related compensation and benefits, spending on strategic initiatives, and movement in foreign exchange rates. The first quarter of 2019 included a charge for a payment made to Air Canada, including related sales tax and transaction costs, to secure our participation in its new loyalty program. The fourth quarter of 2019 and the second and fourth quarters of 2020 included a goodwill impairment charge related to our controlling interest in CIBC FirstCaribbean. The fourth quarter of 2019 and the third quarter of 2020 included increases in legal provisions in Corporate and Other, shown as an item of note. The first quarter of 2020 included a restructuring charge associated with ongoing efforts to transform our cost structure and simplify our bank. The fourth quarter of 2020 included a charge related to the consolidation of our real estate portfolio as a result of our upcoming move to our new global headquarters and a gain as a result of plan amendments related to pension and other post-employment plans. ## Income taxes Income taxes vary with changes in income subject to tax, and the jurisdictions in which the income is earned. Taxes can also be affected by the impact of significant items and the level of tax-exempt income. CIBC 2020 ANNUAL REPORT 13 # Review of 2019 financial performance ## Overview The following discussion provides a comparison of our results of operations for the years ended October 31, 2019 and 2018. Net income for 2019 was $\$5,121$ million, compared with $\$5,284$ million in 2018. The decrease in net income of $\$163$ million was due to higher non-interest expenses and a higher provision for credit losses, partially offset by higher revenue. ## Consolidated CIBC ### Net interest income Net interest income was up $\$486$ million or 5% from 2018, primarily due to volume growth across our businesses, wider spreads in Canadian Personal and Business Banking, and the impact of foreign exchange translation, partially offset by lower trading income and narrower spreads in U.S. Commercial Banking and Wealth Management. 2019 also included interest income related to the settlement of certain income tax matters, shown as an item of note. ### Non-interest income Non-interest income was up $\$291$ million or 4% from 2018, primarily due to an increase in trading income and credit fees. ### Provision for credit losses Provision for credit losses was up $\$416$ million or 48% from 2018. Provision for credit losses on performing loans was up $\$221$ million from 2018, as 2018 included a reduction in allowance driven by an economic outlook that had improved since our adoption of IFRS 9 "Financial Instruments" (IFRS 9) on November 1, 2017, while 2019 included an increase in allowance, reflective of the impact of certain unfavourable changes to our economic outlook, as well as unfavourable credit migration in certain portfolios. Provision for credit losses on impaired loans was up $\$195$ million, due to higher provisions including one fraud-related impairment in Canadian Commercial Banking and Wealth Management, higher provisions in the utility and the oil and gas sectors within Capital Markets, higher provisions and write-offs in personal lending within Canadian Personal and Business Banking, partially offset by lower provisions in CIBC FirstCaribbean, included in Corporate and Other, as 2018 included losses on sovereign loans resulting from the Barbados government debt restructuring, of which $\$28$ million was shown as an item of note in the fourth quarter of 2018. ### Non-interest expenses Non-interest expenses were up $\$598$ million or 6% from 2018, primarily due to a charge for a payment made to Air Canada, including related sales tax and transaction costs, to secure our participation in the new loyalty program, a goodwill impairment charge related to our controlling interest in CIBC FirstCaribbean, and an increase in legal provisions, all shown as items of note, and higher spending on strategic initiatives. ### Income taxes Income tax expense was down $\$74$ million or 5% from 2018, primarily due to net tax adjustments, resulting from the U.S. tax reforms enacted in the first quarter of 2018, shown as an item of note, as well as lower income in 2019, partially offset by lower tax-exempt income and the goodwill impairment charge related to our controlling interest in CIBC FirstCaribbean, which is not deductible for tax purposes. 2019 also included a net tax recovery of $\$38$ million resulting from the Enron settlement, largely offset by a $\$28$ million revaluation of certain deferred tax assets due to tax rate charges enacted by the Barbados government in the first quarter of 2019. ## Revenue by segment **Canadian Personal and Business Banking** Revenue was up $\$160$ million or 2% from 2018, primarily due to wider spreads and volume growth, partially offset by lower fee income. **Canadian Commercial Banking and Wealth Management** Revenue was up $\$191$ million or 5% from 2018. Commercial banking revenue was up primarily due to volume growth from loans and deposits, and higher fees. Wealth management revenue was up primarily due to higher investment management and custodial fees driven by higher AUM and AUA, wider spreads, and volume growth, partially offset by lower commission revenue and mutual fund fees. **U.S. Commercial Banking and Wealth Management** Revenue was up $\$204$ million or 12% from 2018. Commercial banking revenue was up primarily due to volume growth, and the impact of foreign exchange translation, partially offset by narrower spreads and lower revenue from the accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank, shown as an item of note. Wealth management revenue was up primarily due to volume growth, higher investment management and custodial fees driven by higher AUM, and the impact of foreign exchange translation, partially offset by narrower spreads. **Capital Markets** Revenue was up $\$25$ million or 1% from 2018. Global markets revenue was up primarily due to higher revenue from our interest rate trading business, global markets financing activities, and our commodities and equity trading business, largely offset by lower revenue from our equity derivatives trading business. Corporate and investment banking revenue was down primarily due to lower investment portfolio gains, lower equity underwriting activity, and lower revenue from our run-off business, partially offset by higher corporate banking and advisory revenue. **Corporate and Other** Revenue was up $\$197$ million or 28% from 2018. International banking revenue was up as 2018 included incremental ECL on debt securities in CIBC FirstCaribbean, as a result of the Barbados government restructuring its public debt, of which $\$61$ million was shown as an item of note in the fourth quarter of 2018. 2019 also reflected a favourable impact from foreign exchange translation and better performance in CIBC FirstCaribbean. Other revenue was up primarily due to a lower TEB adjustment and interest income related to the settlement of certain income tax matters, shown as an item of note, partially offset by lower treasury revenue and lower income from equity-accounted associates and joint ventures. 14 CIBC 2020 ANNUAL REPORT # 19 Strategic business units overview ## Business unit allocations Revenue, expenses, and other balance sheet resources related to certain activities are generally allocated to the lines of business within the SBUs. Treasury activities impact the financial results of the SBUs. Each line of business within our SBUs is charged or credited with a market-based cost of funds on assets and liabilities, respectively, which impacts the revenue performance of the SBUs. Consistent with the external reporting changes made in the first quarter of 2020 (see the "External reporting changes" section for additional details), this market-based cost of funds takes into account the cost of maintaining sufficient regulatory capital to support business requirements, including the cost of preferred shares. Once the interest and liquidity risks inherent in our client-driven assets and liabilities are transfer priced into Treasury, they are managed within CIBC's risk framework and limits. The residual financial results associated with Treasury activities are reported in Corporate and Other, with the exception of certain Treasury activities in U.S. Commercial Banking and Wealth Management, which are reported in that SBU. Capital is attributed to the SBUs in a manner that is intended to consistently measure and align the costs with the underlying benefits and risks associated with SBU activities. Earnings on unattributed capital remain in Corporate and Other. Effective November 1, 2019, capital is attributed to the SBUs based on the estimated amount of regulatory capital required to support their businesses (see the "External reporting changes" section for additional details). We review our transfer pricing methodologies on an ongoing basis to ensure they reflect changing market environments and industry practices. To measure and report the results of operations of the lines of business within our Canadian Personal and Business Banking and Canadian Commercial Banking and Wealth Management SBUs, we use a Product Owner/Customer Segment/Distributor Channel allocation management model. The model uses certain estimates and methodologies to process internal transfers between lines of business for sales, renewals and trailer commissions. Periodically, the sales, renewals and trailer commission rates paid to customer segments for certain products/services are revised and applied prospectively. The non-interest expenses of the functional and support groups are generally allocated to the business lines within the SBUs based on appropriate criteria and methodologies. The basis of allocation is reviewed periodically to reflect changes in support to business lines. Other costs not directly attributable to business lines remain in Corporate and Other. We recognize provision for credit losses on both impaired (stage 3) and performing (stages 1 and 2) loans in the respective SBUs. ## Revenue, taxable equivalent basis The SBUs evaluate revenue on a TEB. In order to arrive at the TEB amount, the SBUs gross up tax-exempt revenue on certain securities to a TЕВ, being the amount of fully taxable revenue, which, were it to have incurred tax at the statutory income tax rate, would yield the same after-tax revenue. Simultaneously, an equivalent amount is booked as an income tax expense resulting in no impact on the net income of the SBUs. This measure enables comparability of revenue arising from both taxable and tax-exempt sources. The total TEB adjustments of the SBUs are offset in revenue and income tax expense in Corporate and Other. # Canadian Personal and Business Banking Canadian Personal and Business Banking provides personal and business clients across Canada with financial advice, products and services through banking centres, as well as through direct, mobile and remote channels. ## Our business strategy Our goal is to build a modern consumer and small business relationship bank to help our clients achieve their ambitions by focusing on three key strategic priorities: * Winning at relationships * Delivering market-leading solutions * Being easy to bank with ## 2020 progress In 2020, we continued to make progress on our strategy while managing against the challenges brought on by the COVID-19 pandemic. The change in the economic environment due to the pandemic resulted in lower client transaction activity and associated fee income, and the shift in client spending and savings patterns resulted in lower demand for certain lending products and strong growth in deposit balances. Our continued focus on our three key strategic priorities served us well at a time where clients needed us most. ### Winning at relationships * Led the way during the COVID-19 pandemic by being first to announce convenient ways to access financial relief for personal clients and business owners, including mortgage deferral options and credit card interest rate relief; reducing banking centre locations and hours and having team members work from home to help flatten the curve; providing special support and care for seniors and persons with disabilities, including the "You're Next" policy; and implementing income protection for team members. * Proactively reached out to clients throughout the COVID-19 pandemic by email and personal phone calls to offer assistance. This includes reaching out to hundreds of thousands of seniors by telephone to help them with their banking. * Worked with the Federal Government to make it easy for clients to access government programs in response to the COVID-19 pandemic. * Expanded our business banking specialist team in support of our relationship-based strategy focused on entrepreneurs at all life stages, from start up to expansion, to managing cash flow and business transition. * Helped our clients build their financial knowledge and confidence by offering financial literacy seminars and national education events. Topics included women and wealth and cash flow planning, as well as financial literacy for parents with young children, newcomers, seniors and business owners. * Selected a new client relationship management platform to further transform banking experiences for our clients, with a focus on end-to-end digitization, advanced analytics, and speed to market. * Supported 10 Indigenous communities across the Yukon as the new community banking services partner, providing specialized financial services to First Nations and other local governments, businesses, communities and community organizations. * Recognized frontline health-care workers with 30 million Aventura points to help them recharge and reconnect with family. ### Delivering market-leading solutions * Rolled out CIBC Goal Planner, a holistic financial planning tool, allowing our Imperial Service advisors to better understand our clients' ambitions and spend more time with our clients having advice conversations. * Introduced new alerts to our mobile banking functionality, including the CIBC Smart Balance Alert which proactively notifies clients when they are short of funds for an upcoming scheduled payment. * Announced Revival Rewards to help restart the economy and support local restaurants, by offering our clients 2x points, miles or cash back when using their CIBC credit card to dine-in or take-out from local restaurants. * Launched our CIBC Aventura Visa Infinite Privilege Card, which offers a premium travel experience and exceptional benefits to our clients. * Partnered with Parkland Fuel Corporation on a new Journie Rewards program, to help our clients save at over 1,300 Ultramar, Pioneer, and Chevron stations in Canada. * Started the CIBC Internationally Trained Dentist Program to help newcomers realize their ambition to become accredited, practicing dentists in Canada. ### Being easy to bank with * Expanded Global Money Transfer for Business to over 20 additional countries, increasing our reach to over 90 countries where clients can send money overseas. * Achieved the largest year-over-year Net Promoter Score (NPS) growth of the top 5 Canadian banks in the IPSOS Customer Service Index. * Achieved our highest annual score in the 2020 J.D. Power Client Satisfaction (SAT) study. * Earned top ranking in customer satisfaction for mobile banking apps by J.D. Power. * Named best consumer digital bank in North America by Global Finance, based on servicing digital customers, success in getting clients to use digital offerings, breadth of product offerings, as well as web/mobile site design and functionality. * Continued to significantly invest in technology and innovation to make it easier for our clients to bank with us including expanding our e-signature tool, redesigning business borrowing pages on cibc.com, and introducing eStatements for Personal Line of Credit accounts. * Launched Advice for Today to provide timely online financial advice and information to help Canadians through the COVID-19 pandemic. 20 CIBC 2020 ANNUAL REPORT # 2020 financial review ```mermaid xychart-beta title 2020 Financial Review Highlights (Canadian Personal and Business Banking) x-axis "Metric" [Revenue, Net Income, Efficiency Ratio, Avg Loans, Avg Deposits] y-axis "Value" 0 --> 10 bar "18" [8.6, 2.5, 54.2, 257.0, 166.7] bar "19" [8.8, 2.3, 54.2, 256.7, 177.4] bar "20" [8.5, 2.0, 51.1, 259.3, 194.6] ``` Our focus for 2021 Our objective is to deliver sustainable, market-leading performance with a focus on helping our clients achieve their ambitions. Our strategy is comprised of three key priorities: * Provide our team with the tools to deliver an excellent experience for our clients; * Deliver personalized advice to our clients in a way that is meaningful to them; and * Introduce more opportunities for our clients to deal with us digitally. ## Results$^{(1)}$ | \$ millions, for the year ended October 31 | 2020 | 2019$^{(2)}$ | 2018$^{(2)}$ | | :--- | :--- | :--- | :--- | | Revenue | \$ 8,488 | \$ 8,755 | \$ 8,595 | | Provision for (reversal of) credit losses | | | | | Impaired | 640 | 809 | 760 | | Performing | 579 | 87 | (19) | | Provision for credit losses | 1,219 | 896 | 741 | | Non-interest expenses | 4,603 | 4,745 | 4,395 | | Income before income taxes | 2,666 | 3,114 | 3,459 | | Income taxes | 704 | 825 | 919 | | **Net income** | **\$ 1,962** | **\$ 2,289** | **\$ 2,540** | | Net income attributable to: | | | | | Equity shareholders | \$ 1,962 | \$ 2,289 | \$ 2,540 | | Efficiency ratio | 54.2% | 54.2% | 51.1% | | Return on equity$^{(3)}$ | 28.8% | 35.7% | 40.7% | | Average allocated common equity$^{(3)}$ | \$ 6,808 | \$ 6,403 | \$ 6,245 | | Average assets (\$ billions) | \$ 262.0 | \$ 259.1 | \$ 259.1 | | Average loans and acceptances (\$ billions) | 259.3 | 256.7 | 257.0 | | Average deposits (\$ billions) | \$ 194.6 | \$ 177.4 | \$ 166.7 | | Full-time equivalent employees | 12,879 | 13,431 | 14,086 | $^{(1)}$ For additional segmented information, see Note 31 to the consolidated financial statements. $^{(2)}$ Certain prior period information has been revised. See the "External reporting changes" section for additional details. $^{(3)}$ For additional information, see the "Non-GAAP measures" section. ## Financial overview Net income was down $\$327$ million or 14% from 2019, primarily due to higher provision for credit losses and lower revenue, partially offset by lower non-interest expenses. ### Revenue Revenue was down $\$267$ million or 3% from 2019, primarily due to narrower margins largely due to changes in the interest rate environment and interest rate relief provided to our credit card clients as part of the CIBC client relief programs offered to support our clients during the COVID-19 pandemic, and lower fees driven by lower client transaction activity, partially offset by volume growth. ### Provision for credit losses Provision for credit losses was up $\$323$ million or 36% from 2019. The current year included a higher provision for credit losses on performing loans related to the COVID-19 pandemic and an unfavourable impact from model parameter updates. Provision for credit losses on impaired loans was down due to lower insolvencies and write-offs in credit cards and personal lending, mainly due to the impact of client relief programs and government support. ### Non-interest expenses Non-interest expenses were down $\$142$ million or 3% from 2019, primarily due to a charge for a payment made to Air Canada to secure our participation in its new loyalty program last year, shown as an item of note, partially offset by higher spending on strategic initiatives and additional employee benefits provided to support our employees during the COVID-19 pandemic. ### Income taxes Income taxes were down $\$121$ million or 15% from 2019, primarily due to lower income. ### Average assets Average assets were up $\$2.9$ billion or 1% from 2019, primarily due to growth in residential mortgages. CIBC 2020 ANNUAL REPORT 21 # Canadian Commercial Banking and Wealth Management Canadian Commercial Banking and Wealth Management provides high-touch, relationship-oriented banking and wealth management services to middle-market companies, entrepreneurs, high-net-worth individuals and families across Canada, as well as asset management services to institutional investors. ## Our business strategy We are focused on building and enhancing client relationships, being Canada's leader in financial advice and generating long-term consistent growth. To deliver on this, our three key strategic priorities are: * Delivering and deepening client relationships through a full service, solutions-based approach that includes commercial and private banking, as well as wealth management services * Continuing to invest in financial planning to further our role as a leader in financial advice * Simplifying and optimizing our business to align with changing market dynamics to better meet the needs of our clients ## 2020 progress In 2020, despite an uncertain economic operating environment and volatile markets we continued to make progress on our strategic priorities of deepening client relationships and providing market leading financial advice. In commercial banking, we saw slower loan growth and elevated levels of deposit growth as our clients were prudently conserving cash flow, strengthening their financial position, and adjusting to the challenging environment. In wealth management, we responded to our clients' needs with an increased level of technology enabled touch-points, providing reassurance and financial advice as market volatility created uncertainty. ### Delivering and deepening client relationships through a full service, solutions-based approach that includes commercial and private banking, as well as wealth management services * Increased partnership referrals to deepen client relationships across CIBC and better meet the needs of our clients. * Expanded CIBC Innovation Banking coverage focused on growing geographies and segments, in order to extend our service offering to technology and innovation clients across North America. * Continued to closely collaborate with clients to meet their needs during this difficult period while actively monitoring and managing credit exposure. ### Continuing to invest in financial planning to further our role as a leader in financial advice * Upgraded the financial planning capabilities and capacity of our team through the addition of new analytical tools to support deeper advisory conversations. * Leveraged our Integrated Wealth Offer to bring differentiated value to clients through enhanced financial planning services and expertise from across our bank. * Expanded our Private Banking team capabilities in order to be at the cross-section of all high-net-worth client needs. ### Simplifying and optimizing our business to align with changing market dynamics to better meet the needs of our clients * Continued momentum with our CIBC Smart Investment Solutions all-in-one portfolios that blend active and passive investment strategies to deliver on value and expertise. * Further modernized our investment fulfillment and solutions, driving efficiencies and savings for both our clients and our shareholders. ## 2020 financial review ```mermaid xychart-beta title 2020 Financial Review Highlights (Canadian Commercial Banking and Wealth Management) x-axis "Metric" [Revenue, Net Income, Efficiency Ratio, Avg Loans, Avg Deposits, Avg Comm Loans, Avg Comm Deposits, Assets under Admin/Mgmt, Retail Mutual Funds] y-axis "Value" 0 --> 120 bar "18" [3.8, 1286, 53.9, 57.8, 53.2, 55.8, 47.6, 269.0, 101.1] bar "19" [4.0, 1287, 52.3, 64.7, 54.9, 62.6, 54.9, 289.1, 108.9] bar "20" [4.1, 1202, 52.9, 68.2, 71.1, 66.3, 64.1, 287.7, 111.4] ``` ### Our focus for 2021 To build on our momentum across Canadian Commercial Banking and Wealth Management, we will continue to help our clients achieve their ambitions by: * Delivering focused, risk-controlled growth in our Commercial Bank; * Accelerating the growth of Private Wealth Management; and * Evolving our Asset Management business in response to client needs. ## Results$^{(1)}$ | \$ millions, for the year ended October 31 | 2020 | 2019$^{(2)}$ | 2018$^{(2)}$ | | :--- | :--- | :--- | :--- | | Revenue | | | | | Commercial banking$^{(3)}$ | \$ 1,663 | \$ 1,633 | \$ 1,461 | | Wealth management | 2,458 | 2,394 | 2,375 | | Total revenue$^{(4)(5)}$ | 4,121 | 4,027 | 3,836 | | Provision for (reversal of) credit losses | | | | | Impaired | 162 | 159 | 15 | | Performing | 141 | 4 | (10) | | Provision for credit losses | 303 | 163 | 5 | | Non-interest expenses | 2,179 | 2,106 | 2,067 | | Income before income taxes | 1,639 | 1,758 | 1,764 | | Income taxes$^{(4)}$ | 437 | 471 | 478 | | **Net income** | **\$ 1,202** | **\$ 1,287** | **\$ 1,286** | | Net income attributable to: | | | | | Equity shareholders | \$ 1,202 | \$ 1,287 | \$ 1,286 | | Efficiency ratio | 52.9% | 52.3% | 53.9% | | Return on equity$^{(3)}$ | 18.6% | 21.7% | 23.7% | | Allocated common equity$^{(3)}$ | \$ 6,454 | \$ 5,929 | \$ 5,417 | | Average assets (\$ billions) | \$ 65.8 | \$ 62.6 | \$ 55.7 | | Average loans (\$ billions) | \$ 68.2 | \$ 64.7 | \$ 57.8 | | Average deposits (\$ billions) | \$ 71.1 | \$ 60.2 | \$ 53.2 | | AUA (\$ billions) | \$ 287.7 | \$ 289.1 | \$ 269.0 | | AUM (\$ billions) | \$ 188.9 | \$ 182.4 | \$ 164.6 | | Full-time equivalent employees | 4,984 | 5,048 | 4,999 | $^{(1)}$ For additional segmented information, see Note 31 to the consolidated financial statements. $^{(2)}$ Certain prior period information has been revised. See the "External reporting changes" section for additional details. $^{(3)}$ For additional information, see the "Non-GAAP measures" section. ## Financial overview Net income was down $\$85$ million or 7% from 2019, primarily due to a higher provision for credit losses and higher non-interest expenses, partially offset by higher revenue. ### Revenue Revenue was up $\$94$ million or 2% from 2019. Commercial banking revenue was up $\$30$ million or 2%, primarily due to volume growth and the impact of an additional day in the current year, partially offset by narrower margins and lower fees. Wealth management revenue was up $\$64$ million or 3%, primarily due to higher investment management and custodial fees driven by higher average AUM and AUA and higher commission revenue, as well as higher foreign exchange revenue reflecting higher trading volume in our full-service brokerage business, partially offset by lower mutual fund fees. ### Provision for credit losses Provision for credit losses was up $\$140$ million from 2019. The current year included a higher provision for credit losses on performing loans related to the COVID-19 pandemic. Provision for credit losses on impaired loans was comparable with the prior year. ### Non-interest expenses Non-interest expenses were up $\$73$ million or 3% from 2019, primarily due to higher employee-related compensation and higher spending on strategic initiatives. ### Income taxes Income taxes were down $\$34$ million or 7% from 2019, primarily due to lower income. ### Average assets Average assets were up $\$3.2$ billion or 5% from 2019, primarily due to growth in commercial loans. ## Assets under administration AUA were comparable with 2019. AUM amounts are included in the amounts reported under AUA. 23 CIBC 2020 ANNUAL REPORT # U.S. Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management delivers commercial banking and private wealth services across the U.S., as well as personal and small business banking services in four U.S. Midwestern markets and focuses on middle-market and mid-corporate companies and high-net-worth families. ## Our business strategy Our focus is on developing deep, profitable relationships leveraging the full complement of CIBC's products and services across our North American platform. To deliver on this, our three key strategic priorities are: * Adding new client relationships in commercial banking and wealth management while maintaining our focus on asset quality as well as loan and deposit portfolio diversification * Expanding relationships with existing clients by leveraging cross border and cross business capabilities * Investing appropriately in the growth of our business while managing expenses ## 2020 progress In 2020, our continued focus on deep-rooted relationship banking helped attract new clients and guide existing relationships through a challenging economic environment. This approach continues to generate strong loan, deposit and AUM/AUA growth which in turn, coupled with diligent expense control, helped mitigate revenue pressures associated with margin compression experienced throughout the industry. Our offering of products and services continues to expand as we leverage cross-border capabilities and maintain investment in process, technology and client needs. ### Adding new client relationships in commercial banking and wealth management while maintaining our focus on asset quality as well as loan and deposit portfolio diversification * Maintained focus on strong asset quality especially as clients managed through impacts of the pandemic-related economic downturn. * At the onset of the pandemic, leveraged our relationship banking approach to reach out to commercial businesses and ensure they had access to various government relief programs and other options to manage their short-term cash flow. * Drove solid loan and deposit growth given market conditions, including continued expansion of our private banking business with existing commercial and wealth clients. * Generated strong growth in AUM and AUA, bolstered by the performance of our investment strategies through a volatile year. ### Expanding relationships with existing clients by leveraging cross border and cross business capabilities * Leveraged a strong partnership with Capital Markets to provide a wider range of products and services to U.S. commercial and wealth clients, contributing to non-interest income. * Advanced the implementation of CRM initiatives to further the connectivity between teams, providing a consolidated view of client needs and making it easier to engage the broader team in meeting the full relationship needs of our clients. * Continued to refine client-facing processes, making it easier for clients to bank with us, including offering remote account open capabilities to retail banking clients and enhancing our servicing platform for our commercial banking clients to create efficiencies for our teams in meeting client needs. ### Investing appropriately in the growth of our business while managing expenses * Maintained a disciplined approach to expenses while investing for growth and enabling our team to work efficiently in the pandemic environment. * Continued to maintain a diversified funding strategy through our commercial, private banking and retail clients. ## 2020 financial review ```mermaid xychart-beta title 2020 Financial Review Highlights (U.S. Commercial Banking and Wealth Management) x-axis "Metric" [Revenue, Net Income, Efficiency Ratio, Avg Loans, Avg Deposits, Avg Comm Loans, Assets under Admin/Mgmt] y-axis "Value" 0 --> 100 bar "18" [1.8, 561, 58.1, 30.4, 22.3, 27.7, 80.0] bar "19" [2.0, 682, 57.0, 35.6, 27.2, 32.4, 89.7] bar "20" [2.1, 380, 55.2, 42.4, 35.5, 37.1, 97.6] ``` ## Results$^{(1)}$ | \$ millions, for the year ended October 31 | 2020 | 2019$^{(2)}$ | 2018$^{(2)}$ | | :--- | :--- | :--- | :--- | | Revenue | | | | | Commercial banking$^{(3)}$ | \$ 1,432 | \$ 1,353 | \$ 1,194 | | Wealth management | 622 | 611 | 566 | | Total revenue$^{(4)(5)}$ | 2,054 | 1,964 | 1,760 | | Provision for (reversal of) credit losses | | | | | Impaired | 133 | 68 | 67 | | Performing | 354 | 5 | 12 | | Provision for credit losses | 487 | 73 | 79 | | Non-interest expenses | 1,133 | 1,119 | 1,023 | | Income before income taxes | 434 | 772 | 658 | | Income taxes$^{(4)}$ | 54 | 90 | 97 | | **Net income** | **\$ 380** | **\$ 682** | **\$ 561** | | Net income attributable to: | | | | | Equity shareholders | \$ 380 | \$ 682 | \$ 561 | | Efficiency ratio | 55.2% | 57.0% | 58.1% | | Return on equity$^{(6)}$ | 4.1% | 7.9% | 7.2% | | Allocated common equity$^{(6)}$ | \$ 9,266 | \$ 8,616 | \$ 7,822 | | Average assets (\$ billions) | \$ 55.2 | \$ 47.5 | \$ 41.2 | | Average loans (\$ billions) | \$ 42.5 | \$ 35.6 | \$ 30.4 | | Average deposits (\$ billions) | \$ 35.5 | \$ 27.2 | \$ 22.3 | | AUA (\$ billions) | \$ 97.6 | \$ 89.7 | \$ 80.0 | | AUM (\$ billions) | \$ 76.4 | \$ 68.8 | \$ 60.0 | | Full-time equivalent employees | 2,101 | 2,113 | 1,947 | $^{(1)}$ For additional segmented information, see Note 31 to the consolidated financial statements. $^{(2)}$ Certain prior period information has been revised. See the "External reporting changes" section for additional details. $^{(3)}$ Certain information has been reclassified to conform to the presentation adopted in the first quarter of 2020. Commercial banking now includes the Other line of business, which includes the treasury activities relating to CIBC Bank USA, as these activities primarily support the commercial banking line of business. $^{(4)}$ Revenue and income taxes are reported on a TEB. Accordingly, revenue and income taxes include a TEB adjustment of nil (2019: $\$2$ million; 2018: $\$2$ million). The equivalent amounts are offset in the revenue and income taxes of Corporate and Other. $^{(5)}$ Included $\$20$ million of income relating to the accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank (2019: $\$35$ million; 2018: $\$55$ million). $^{(6)}$ For additional information, see the "Non-GAAP measures" section. ## Financial overview Net income was down $\$302$ million or 44% from 2019, primarily due to higher provision for credit losses, partially offset by higher revenue. ### Revenue Revenue was up $\$90$ million or 5% from 2019. Commercial banking revenue was up $\$79$ million or 6%, primarily due to volume growth and the impact of foreign exchange translation, partially offset by narrower margins. Wealth management revenue was up $\$11$ million or 2%, primarily due to volume growth, higher investment management and custodial fees driven by higher average AUM and the impact of foreign exchange translation, partially offset by narrower margins. ### Provision for credit losses Provision for credit losses was up $\$414$ million from 2019. The current year included a higher provision for credit losses on performing loans primarily related to the COVID-19 pandemic. Provision for credit losses on impaired loans was up mainly due to impairments as a result of certain borrower-specific issues across various sectors. ### Non-interest expenses Non-interest expenses were up $\$14$ million or 1% from 2019, primarily due to higher employee-related compensation, the impact of foreign exchange translation, and higher spending on strategic initiatives, partially offset by lower business development costs, driven by the impact of the COVID-19 pandemic. ### Income taxes Income taxes were down $\$36$ million or 40% from 2019, primarily due to lower income. ### Average assets Average assets were up $\$7.7$ billion or 16% from 2019, primarily due to growth in loans, including loans made under the Paycheck Protection Program (PPP). ## Assets under administration AUA were up $\$7.9$ billion or 9% from 2019, primarily due to the impact of foreign exchange rates, net sales, and market appreciation. AUM amounts are included in the amounts reported under AUA. CIBC 2020 ANNUAL REPORT 25 # Capital Markets Capital Markets provides integrated global markets products and services, investment banking advisory and execution, corporate banking solutions and top-ranked research to corporate, commercial, government and institutional clients around the world. ## Our business strategy Our goal is to deliver leading capital markets solutions to our North American and international clients by providing best-in-class insight, advice and execution. To enable CIBC's strategy and priorities, we collaborate with our partners across our bank to deepen and enhance client relationships. Our three key strategic priorities are: * Being the leading capital markets platform in Canada for our core clients * Building a North American client platform with global capabilities * Increasing connectivity across CIBC to deliver greater value and a better experience for our clients ## 2020 progress In 2020, despite an uncertain economic environment and volatile markets we continued to make progress on our strategic priorities of deepening client relationships, growing in the U.S. and enhancing connectivity across the bank. Global markets had a strong year. Revenue was up as we worked closely with our clients to help them manage their exposures and access global markets. Corporate and investment banking had solid growth this year as a result of higher loans, debt issuances and deposits as we helped manage the funding and liquidity needs of our clients. ### Being the leading capital markets platform in Canada for our core clients * Delivered on our purpose by meeting the needs of our clients, helping them through the pandemic by managing their funding and liquidity needs with expert advice for the long term. * Supported our clients by investing in our talent, further developing our proprietary technology, expanding our structuring expertise and advice, and leveraging our market expertise. * Continued to hold leadership positions in syndicated loans, debt and equity underwriting, advisory services, equity trading, commodities and foreign exchange. * Strengthened our platform by continuing to evolve our research coverage framework and provide specialized advice and solutions, aligned to the macro trends influencing the global economy and our clients, including renewable energy, private capital, technology and innovation. * Established our first continental Europe office in Luxembourg to deliver enhanced capital markets capabilities for clients and provide more options for corporate and institutional investors in Canada and the U.S. to access global markets. ### Building a North American client platform with global capabilities * Continued to drive growth in the U.S. through a strong partnership across our business and close connectivity with U.S. Commercial Banking and Wealth Management. * Issued our inaugural Green Bond Framework to help mobilize capital and develop market-based solutions to support investments that shape a more sustainable economy. * Issued our inaugural Green Bond to help finance new and existing green projects, assets and businesses that mitigate the risks and effects of climate change. * Established our Sustainability Advisory team to meet the needs of clients as they transition to the lower-carbon economy of the future, and expanded research coverage in the renewables and clean energy sector, building on our client-focused growth strategy. ### Increasing connectivity across CIBC to deliver greater value and a better experience for our clients * Expanded CIBC's Global Money Transfer service by increasing partnerships and product enhancements, supporting payment solutions to over 130 countries. * Engaged with clients virtually to help them navigate volatile markets by hosting conference calls and podcasts, and providing industry-leading economic research and insights. As a leading capital markets franchise in Canada and banking partner to our clients around the world, Capital Markets acted as: * Exclusive financial advisor and sole underwriter to Starlight Investments and Kingsett Capital on the acquisition of Northview Apartment REIT for $\$4.9$ billion and associated acquisition financing, also lead on the initial public offering of units of Northview Canadian High Yield Residential Fund, a newly-formed, three-year closed end fund, in connection with the transaction; * Joint lead arranger on WESCO Distribution Inc.'s US$\$3.215$ billion senior unsecured bond bridge facility, joint bookrunner on the US$\$1.5$ billion 5-year and US$\$1.325$ billion 8-year senior notes offerings, joint bookrunner and joint lead arranger on the US$\$1.1$ billion ABL Revolver and participant in the US$\$1.025$ billion securitization; net proceeds of the transactions were used to support the parent company, WESCO International, Inc.'s transformational US$\$4.5$ billion acquisition of Anixter International, Inc. and to refinance existing debt; * Exclusive financial advisor and private placement agent to Ontario Teachers' Pension Plan on its sale of BluEarth Renewables LP to DIF Infrastructure; * Exclusive financial advisor to Ontario Teachers' Pension Plan on its sale of BluEarth Renewables LP to DIF Infrastructure; * Exclusive financial advisor, lead debt underwriter, lead swap agent and sole deal contingent hedge counterparty to a Korean-based consortium comprised of Shinhan Investment Corp., Samtan Co., Ltd, EIP Investment Corp. and KDB KIAMCO on its acquisition of Riverstone Holdings LLC's 50% interest in Utopia Pipeline, a 268-mile ethane pipeline; * Coordinating lead arranger, administrative agent and depository agent on the construction and operation financing of D.E. Shaw Renewable Investments' (DESRI) 198-megawatt Illinois solar portfolio; the transaction marks CIBC's fifth lending transaction with DESRI since August 2017, solidifying the bank's relationship with one of the most active developers in the U.S. renewables market; and * As a leading Canadian underwriter of Green Bonds, CIBC acted as a Senior Co-Lead Manager for the Province of Ontario's $\$1.5$ billion Green Bond offering as well as Joint Bookrunner (lead-left) for Brookfield Renewable Partners' $\$425$ million Green Medium Term Note offering. ## Capital Markets awards and recognition * Ranked the most accurate foreign exchange forecaster globally for Q1 2020 by Bloomberg * Named Canadian Structured Product Issuer of the Year by mtn-i * Named North American financial advisor of the year in 2020 for 20 deals closed in 2019 with a valuation of US\$25 billion by *Infrastructure Journal* * Named the Best Consumer Digital Bank in North America by *Global Finance* magazine, as part of its World's Best Digital Banks 2019 Report * Global M&A Network * U.S.A. Middle Markets Small Mid-Markets Deal of the Year (Healthcare) for the sale of Applewhite Dental Partners LLC, a portfolio company of Tonka Bay Equity Partners, to Coredental Group, a portfolio company of NMS Capital ## 2020 financial review ```mermaid xychart-beta title 2020 Financial Review Highlights (Capital Markets) x-axis "Metric" [Revenue, Net Income, Efficiency Ratio, Avg VaR, Rev Global Markets, Rev Corp & Inv Banking] y-axis "Value" 0 --> 2200 bar "18" [2.9, 1086, 50.8, 5.3, 1694, 1241] bar "19" [3.0, 954, 51.2, 5.7, 1729, 1231] bar "20" [3.5, 1131, 46.9, 8.5, 2143, 1344] ``` ## Our focus for 2021 To support our bank's long-term objectives, Capital Markets remains focused on delivering profitable growth by deepening client relationships and collaborating with our partners across our bank to help make our clients' ambitions a reality. We will continue to do this by: * Maintaining our focused approach to client coverage in Canada; * Growing our North American platform by further expanding our U.S. reach and broadening the services offered to clients; and * Strengthening our connectivity, technology and innovation efforts to bring more of our bank's offerings to our clients. ## Results$^{(1)}$ | \$ millions, for the year ended October 31 | 2020 | 2019$^{(2)}$ | 2018$^{(2)}$ | | :--- | :--- | :--- | :--- | | Revenue | | | | | Global markets | \$ 2,143 | \$ 1,729 | \$ 1,694 | | Corporate and investment banking | 1,344 | 1,231 | 1,241 | | Total revenue$^{(3)}$ | 3,487 | 2,960 | 2,935 | | Provision for (reversal of) credit losses | | | | | Impaired | 106 | 90 | 8 | | Performing | 175 | 63 | (38) | | Provision for (reversal of) credit losses | 281 | 153 | (30) | | Non-interest expenses | 1,634 | 1,516 | 1,492 | | Income before income taxes | 1,572 | 1,291 | 1,473 | | Income taxes$^{(3)}$ | 441 | 337 | 387 | | **Net income** | **\$ 1,131** | **\$ 954** | **\$ 1,086** | | Net income attributable to: | | | | | Equity shareholders | \$ 1,131 | \$ 954 | \$ 1,086 | | Efficiency ratio | 46.9% | 51.2% | 50.8% | | Return on equity$^{(4)}$ | 16.8% | 15.4% | 20.7% | | Allocated common equity$^{(4)}$ | \$ 6,731 | \$ 6,188 | \$ 5,234 | | Average assets (\$ billions) | \$ 221.1 | \$ 184.6 | \$ 166.2 | | Full-time equivalent employees | 1,470 | 1,449 | 1,396 | $^{(1)}$ For additional segmented information, see Note 31 to the consolidated financial statements. $^{(2)}$ Certain prior period information has been revised. See the "External reporting changes" section for additional details. $^{(3)}$ Revenue and income taxes are reported on a TEB. Accordingly, revenue and income taxes include a TEB adjustment of $\$183$ million (2019: $\$177$ million; 2018: $\$278$ million). The equivalent amounts are offset in the revenue and income taxes of Corporate and Other. $^{(4)}$ For additional information, see the "Non-GAAP measures" section. ## Financial overview Net income was up $\$177$ million or 19% from 2019, primarily due to higher revenue, partially offset by a higher provision for credit losses and higher non-interest expenses. ### Revenue Revenue was up $\$527$ million or 18% from 2019. Global markets revenue was up $\$414$ million or 24%, primarily due to higher revenue from our interest rate, foreign exchange and commodities trading businesses and higher revenue from financing activities, partially offset by lower revenue from our equity derivatives trading business. Corporate and investment banking revenue was up $\$113$ million or 9%, primarily due to higher debt and equity underwriting activity and higher corporate banking revenue, partially offset by lower advisory revenue. ### Provision for (reversal of) credit losses Provision for credit losses was up $\$128$ million from 2019. The current year included a higher provision for credit losses on performing loans related to the impact of the COVID-19 pandemic and continued pressure on oil prices. Provision for credit losses on impaired loans was up, primarily due to higher provisions in the oil and gas sector, partially offset by lower provisions in the utility sector. ### Non-interest expenses Non-interest expenses were up $\$118$ million or 8% from 2019, primarily due to higher spending on strategic initiatives and higher employee-related compensation. ### Income taxes Income taxes were up $\$104$ million or 31% from 2019, primarily due to higher income. ### Average assets Average assets were up $\$36.5$ billion or 20% from 2019, primarily due to an increase in derivatives valuation, higher loan balances and securities purchased under resale agreements. 28 CIBC 2020 ANNUAL REPORT # Corporate and Other Corporate and Other includes the following functional groups - Technology, Infrastructure and Innovation, Risk Management, People, Culture and Brand, Finance and Enterprise Strategy, as well as other support groups. The expenses of these functional and support groups are generally allocated to the business lines within the SBUs. The majority of the functional and support costs of CIBC Bank USA are recognized directly in the U.S. Commercial Banking and Wealth Management SBU. Corporate and Other also includes the results of CIBC FirstCaribbean and other strategic investments, as well as other income statement and balance sheet items not directly attributable to the business lines. ## Results$^{(1)}$ | \$ millions, for the year ended October 31 | 2020 | 2019$^{(2)}$ | 2018$^{(2)}$ | | :--- | :--- | :--- | :--- | | Revenue | | | | | International banking | \$ 734 | \$ 798 | \$ 657 | | Other | (143) | 107 | 51 | | Total revenue$^{(3)}$ | 591 | 905 | 708 | | Provision for (reversal of) credit losses | | | | | Impaired | 24 | 21 | 102 | | Performing | 199 | (20) | (27) | | Provision for credit losses | 199 | 1 | 75 | | Non-interest expenses | 1,813 | 1,370 | 1,281 | | Loss before income taxes | (1,421) | (466) | (648) | | Income taxes$^{(3)}$ | (538) | (375) | (459) | | **Net income (loss)** | **\$ (883)** | **\$ (91)** | **\$ (189)** | | Net income (loss) attributable to: | | | | | Non-controlling interests | \$ 2 | \$ 25 | \$ 17 | | Equity shareholders | (885) | (116) | (206) | | Full-time equivalent employees | 22,419 | 23,116 | 21,792 | $^{(1)}$ For additional segmented information, see Note 31 to the consolidated financial statements. $^{(2)}$ Certain prior period information has been revised. See the "External reporting changes" section for additional details. $^{(3)}$ Revenue and income taxes of Capital Markets and U.S. Commercial Banking and Wealth Management are reported on a TEB. The equivalent amounts are offset in the revenue and income taxes of Corporate and Other. Accordingly, revenue and income taxes include a TEB adjustment of $\$183$ million (2019: $\$179$ million; 2018: $\$280$ million). ## Financial overview Net loss was up $\$792$ million from 2019, primarily due to higher non-interest expenses, lower revenue and a higher provision for credit losses. ### Revenue Revenue was down $\$314$ million from 2019. International banking revenue was down $\$64$ million, primarily due to lower revenue in CIBC FirstCaribbean as a result of narrower margins and lower fees. Other revenue was down $\$250$ million, primarily due to lower treasury revenue largely as a result of excess liquidity costs, interest income related to the settlement of certain income tax matters in the prior year, shown as an item of note, and due to lower revenue relating to our adoption of IFRS 16 in the current year that was largely offset in non-interest expenses (see Note 8 to our consolidated financial statements for further details regarding the impact of our transition to IFRS 16). ### Provision for (reversal of) credit losses Provision for credit losses was up $\$198$ million from 2019. The current year included a higher provision for credit losses on performing loans related to the impact of the COVID-19 pandemic. Provision for credit losses on impaired loans was comparable with the prior year. ### Non-interest expenses Non-interest expenses were up $\$443$ million from 2019, primarily due to charges related to restructuring, the consolidation of our real estate portfolio, higher goodwill impairment related to our controlling interest in CIBC FirstCaribbean relative to the prior year, and an increase in legal provisions, all shown as items of note, partially offset by a gain as a result of plan amendments related to pension and other post-employment plans, also shown as an item of note, and lower occupancy costs related to our adoption of IFRS 16 as noted above. ### Income taxes Income tax benefit was up $\$163$ million from 2019, primarily due to higher expenses. 29 CIBC 2020 ANNUAL REPORT # 30 Financial condition ## Review of condensed consolidated balance sheet | \$ millions, as at October 31 | 2020 | 2019 | | :--- | :--- | :--- | | **Assets** | | | | Cash and deposits with banks | \$ 62,518 | \$ 17,359 | | Securities | 149,046 | 121,310 | | Securities borrowed or purchased under resale agreements | 74,142 | 59,775 | | Loans and acceptances | 416,388 | 398,108 | | Derivative instruments | 32,730 | 23,895 | | Other assets | 34,727 | 31,157 | | **Total assets** | **\$ 769,551** | **\$ 651,604** | | **Liabilities and equity** | | | | Deposits | \$ 570,740 | \$ 485,712 | | Obligations related to securities lent or sold short or under repurchase agreements | 89,440 | 69,258 | | Derivative instruments | 30,508 | 25,113 | | Acceptances | 9,649 | 9,188 | | Other liabilities | 22,167 | 19,069 | | Subordinated indebtedness | 5,712 | 4,684 | | Equity | 41,335 | 38,580 | | **Total** | **\$ 769,551** | **\$ 651,604** | Assets Total assets as at October 31, 2020 were up $\$117.9$ billion or 18% from 2019, including an increase of approximately $\$2$ billion due to the appreciation of the U.S. dollar. Cash and deposits with banks increased by $\$45.2$ billion or 260%, primarily due to higher short-term placements in Treasury. Securities increased by $\$27.7$ billion or 23%, primarily due to increases in debt securities in Canadian governments, U.S. Treasury and other agencies, and corporate debt, mainly in Treasury. Further details on the composition of securities are provided in the "Supplementary annual financial information" section and Note 5 to the consolidated financial statements. Securities borrowed or purchased under resale agreements increased by $\$14.4$ billion or 24%, primarily due to client-driven activities. Net loans and acceptances increased by $\$18.3$ billion or 5%, primarily due to increases in Canadian mortgage loans, and U.S. and Canadian business and government loans. Further details on the composition of loans and acceptances are provided in the "Supplementary annual financial information" section and Note 6 to the consolidated financial statements. Derivative instruments increased by $\$8.8$ billion or 37%, largely driven by increases in interest rate, foreign exchange and equity derivatives valuation. Other assets increased by $\$3.6$ billion or 11%, primarily due to an increase in broker receivables and the recognition of right-of-use assets in the current year as a result of our adoption of IFRS 16 (see Note 8 to our consolidated financial statements for additional details), partially offset by decreases in current tax receivable and collateral pledged for derivatives. Liabilities Total liabilities as at October 31, 2020 were up $\$115.2$ billion or 19% from 2019, including an increase of approximately $\$2$ billion due to the appreciation of the U.S. dollar. Deposits increased by $\$85.0$ billion or 18%, primarily due to domestic retail volume growth and increased wholesale funding. Further details on the composition of deposits are provided in the "Supplementary annual financial information" section and Note 11 to the consolidated financial statements. Obligations related to securities lent or sold short or under repurchase agreements increased by $\$20.2$ billion or 29%, primarily due to our participation in the Bank of Canada's enhanced term repo program (see the "Regulatory developments concerning liquidity - Developments related to the COVID-19 pandemic" section) and client-driven activities. Derivative instruments increased by $\$5.4$ billion or 21%, largely driven by increases in equity, interest rate and foreign exchange derivatives valuation. Acceptances increased by $\$0.5$ billion or 5%, driven by client activities. Other liabilities increased by $\$3.1$ billion or 16%, primarily due to the recognition of lease liabilities in the current year as a result of our adoption of IFRS 16, as noted above, and an increase in collateral received for derivatives. Subordinated indebtedness increased by $\$1.0$ billion or 22%, mainly due to an issuance in the third quarter of 2020. For further details see the "Capital management" section. Equity Equity as at October 31, 2020 increased $\$2.8$ billion or 7% from 2019, primarily due to a net increase in retained earnings, which includes an increase of $\$0.1$ billion related to the adoption of IFRS 16, as noted above, and the issuance of the limited recourse capital note. For further details see the "Capital management" section. 30 CIBC 2020 ANNUAL REPORT # 31 Capital management ## Management's discussion and analysis Our capital strength protects our depositors and creditors from risks inherent in our businesses. Our overall capital management objective is to maintain a strong and efficient capital base that: * Acts as a buffer to absorb unexpected losses while providing sustainable returns to our shareholders; * Enables our frontline businesses to grow and execute on our strategy; * Demonstrates balance sheet strength and our commitment to prudent balance sheet management; and * Supports us in maintaining a favourable credit standing and raising additional capital or other funding on attractive terms. We actively manage our capital to maintain a strong and efficient capital base that provides balance sheet strength, enables our businesses to grow and execute on our strategy, and meets regulatory requirements. ## Capital management and planning framework CIBC maintains a capital management policy that helps us achieve our capital management objectives. Our capital management policy is reviewed and approved by the Board of Directors (the Board) in support of our Internal Capital Adequacy Assessment Process (ICAAP). The policy includes guidelines that relate to capital strength, capital mix, dividends and return of capital, and unconsolidated capital adequacy of regulated entities, based on regulatory requirements and our risk appetite. The key guideline relates to our capital strength, which is foundational to our financial strength and supports growth. The guideline on dividends and return of capital is intended to balance the need for retaining capital for strength and growth, while providing an adequate return to our shareholders. The level of capital and capital ratios is continually monitored relative to our regulatory minimums and internal targets and the amount of capital required may change in relation to CIBC's business growth, risk appetite, and business and regulatory environment, including changes in accounting policies. Capital planning is a crucial element of our overall financial planning process and establishment of strategic objectives and is developed in accordance with the capital management policy. Each year, a capital plan and three-year outlook are established as part of the financial plan, which establishes targets for the coming year and business plans to achieve those targets. The capital plan is also stress-tested as a part of our enterprise-wide stress testing process to ensure CIBC is adequately capitalized through severe but plausible stress scenarios (see the "Enterprise-wide stress testing" section for further details). Our capital position and forecasts are monitored throughout the year and assessed against the capital plan. The Board, with endorsement from the Risk Management Committee, provides overall oversight of CIBC's capital management through the approval of our risk appetite, capital policy and plan. The Risk Management Committee is provided with regular updates on our capital position including performance to date, updated forecasts, as well as any material regulatory developments that may impact our future capital position. Treasury is responsible for the overall management of capital including planning, forecasting, and execution of the plan, with senior management oversight provided by the Global Asset Liability Committee. ## Enterprise-wide stress testing We perform enterprise-wide stress testing on at least an annual basis and the results are an integral part of our ICAAP, as defined by Pillar 2 of the Basel III Accord, wherein we identify and measure our risks on an ongoing basis in order to ensure that the capital available is sufficient to cover all risks across CIBC, including the impacts of stress testing. We maintain a process which determines plausible but stressed economic scenarios such as global recessions and housing price shocks, and then apply these stress scenarios to our bank-wide exposures to determine the impact on the consolidated statement of income, RWA requirements, and consequently, key capital ratios. This helps us analyze the potential risks within our portfolios and establish prudent capital levels in excess of the regulatory minimum requirements. All of the elements of capital are monitored throughout the year and the capital plan is adjusted as appropriate. Management determines the range of scenarios to be tested. Macroeconomic stress test scenarios are designed to be both severe and plausible and designed to be consistent with OSFI's stress testing framework to ensure that they are comprehensive. The following diagram summarizes the enterprise-wide stress testing process including the development of scenarios, identification of risk drivers and linkages to our other bank-wide ICAAP processes. The process includes syndication with our economists and lines of business to ensure scenarios are relevant to our businesses and there is a consistent interpretation of the scenarios across CIBC. ```mermaid graph TD A[Scenario Development] --> B{Translation of financial and macroeconomic factors}; C[Risk Identification/Modelling] --> B; B --> D[Quantify impacts]; D --> E[Aggregate results]; E --> F[Evaluate and review bank-wide impacts]; F --> G[Capital Impacts]; G --> H[Linkages]; H --> I[Internal Capital Adequacy Assessment Process (ICAAP)]; subgraph Scenario Development A1[Develop macroeconomic scenarios relevant to the current and projected business cycle including emerging risks] end subgraph Risk Identification/Modelling C1[Identification of relevant risk drivers] C2[Development and validation of stress models and parameters] end subgraph Translation of financial and macroeconomic factors B1[e.g., GDP, unemployment, yield curve, etc.] end subgraph Quantify impacts D1[Credit] D2[Market] D3[Earnings] D4[Operational] D5[Liquidity] D6[Other] end subgraph Evaluate and review bank-wide impacts F1[Earnings] F2[Capital Impacts] F3[Funding and Liquidity] end subgraph Internal Capital Adequacy Assessment Process (ICAAP) I1[Risk Appetite] I2[Capital Management and Planning] I3[Financial Management and Planning] I4[Liquidity Management] I5[Funding and Liquidity] I6[Recovery and Resolution Planning] I7[Risk Management] end A --> A1; C --> C1; C --> C2; D1 & D2 & D3 & D4 & D5 & D6 --> E; F1 & F2 & F3 --> G; G --> H; H --> I1 & I2 & I3 & I4 & I5 & I6 & I7; ``` Stress test scenarios are designed to capture a wide range of macroeconomic and financial variables that are relevant to assess the impact on our specific portfolios. This includes, for example, GDP, unemployment, house prices, interest rates and equity prices. The stress testing process is comprehensive using a bottoms-up analysis of each of our bank-wide portfolios, and results are analyzed on a product, location and sector basis. Our stress testing approach combines the use of statistical models and expert judgment to ensure the results are reasonable in estimating the impacts of the stress scenarios. Stress testing methodologies and results are subject to a detailed review and challenge from both our lines of business and Risk Management. Stress testing results are presented for review to the Risk Management Committee and are also shared with the Board and OSFI. The results of our enterprise-wide stress testing are used to highlight any vulnerabilities and ensure we remain well capitalized against regulatory and management expectations. A key objective of the enterprise-wide stress tests is to identify key areas of exposure and foster discussion of management actions that would be taken to mitigate the impact of stress scenarios. Reverse stress testing is also integrated into our recovery and resolution planning process to determine worst case scenarios that would result in CIBC reaching the point of non-viability from which remedial actions are then considered. Additional information on stress testing is provided in the "Management of risk" section. ## Recovery plan Federally regulated financial institutions must maintain robust and credible recovery plans that identify options to restore financial strength and viability when under severe stress. CIBC continues to maintain and update its recovery plan in line with OSFI requirements. ## Resolution plan In 2019, the Canada Deposit Insurance Corporation (CDIC) issued guidance for a comprehensive resolution plan. CDIC considers it a priority to ensure that banks undertake the necessary work to create resolution plans, demonstrate feasibility, and address any impediments to ensure resolvability can be achieved in an orderly fashion. CIBC continues to develop its resolution plan deliverables in line with guidance, in anticipation of submission to CDIC by October 2021. ## Regulatory capital requirements under Basel III Our regulatory capital requirements are determined in accordance with guidelines issued by OSFI, which are based upon the capital standards developed by the Basel Committee on Banking Supervision (BCBS). Regulatory capital consists of CET1, Tier 1 and Tier 2 capital. The tiers of regulatory capital indicate increasing quality/permanence and the ability to absorb losses. The major components of our regulatory capital are summarized as follows: | | Higher quality | Tier 1 capital | Total capital | | :--- | :--- | :--- | :--- | | **CET1 capital** | | | | | • Common equity (retained earnings, common shares and stock surplus) | | | | | • Accumulated other comprehensive income (AOCI) $^{(1)}$ | | | | | • Qualifying instruments issued by a consolidated banking subsidiary to third parties | | | | | • Certain eligible general allowance resulting from expected credit loss provisioning$^{(2)}$ | | | | | Less regulatory deductions for items such as: | | | | | ➤ Goodwill and other intangible assets | | | | | ➤ Deferred tax assets | | | | | ➤ Net assets related to defined benefit pension plans | | | | | ➤ Certain investments | | | | | **Additional Tier 1 (AT1) capital** | | | | | • Non-viability contingent capital (NVCC) preferred shares | | | | | • Limited recourse capital notes | | | | | • Qualifying instruments issued by a consolidated subsidiary to third parties | | | | | • Innovative Tier 1 notes subject to phase-out rules for capital instruments | | | | | **Tier 2 capital** | | | | | • NVCC subordinated indebtedness | | | | | Lower quality | • Non-qualifying subordinated indebtedness subject to phase-out rules for capital instruments | | | | | | • Eligible general allowance under the standardized approach$^{(2)}$ | | | | | | • Qualifying instruments issued by a consolidated subsidiary to third parties | | | | $^{(1)}$ Excluding accumulated other comprehensive income (AOCI) relating to cash flow hedges and changes to fair value option (FVO) liabilities attributable to changes in own credit risk. $^{(2)}$ OSFI has provided regulatory flexibility by implementing transitional arrangements for the treatment of expected loss provisioning, such that part of the allowances that would otherwise be included in Tier 2 capital will instead qualify for inclusion in CET1 capital subject to certain scalars and limitations until fiscal 2022. See the "Continuous enhancement to regulatory capital requirements" section for additional details. Qualifying regulatory capital instruments must be capable of absorbing loss at the point of non-viability of the financial institution. Non-qualifying Tier 1 and Tier 2 capital instruments are excluded from regulatory capital at a rate of 10% per annum until November 2021, at which point they will have no regulatory value. OSFI requires all institutions to achieve target capital ratios which include buffers. Targets may be higher for certain institutions at OSFI's discretion. CIBC, along with Bank of Montreal, Bank of Nova Scotia, National Bank of Canada, Royal Bank of Canada, and the Toronto-Dominion Bank, have been designated by OSFI as domestic systemically important banks (D-SIBs) in Canada. D-SIBs are subject to a CET1 surcharge equal to 1.0% of RWA and a Domestic Stability Buffer (DSB) requirement intended to address Pillar 2 risks that are not adequately captured in the Pillar 1 capital requirements. The DSB is currently set at 1.0%, but can range from 0% to 2.5% of RWA (see the "Continuous enhancement to regulatory capital requirements" section for details regarding the reduction in the DSB requirement that was effective March 13, 2020). Additionally, banks need to hold an incremental countercyclical capital buffer equal to their weighted-average buffer requirement in Canada and across certain other jurisdictions where they have private sector credit exposures. OSFI's current targets are summarized below: | As at October 31, 2020 | Minimum | Capital conservation buffer | D-SIB buffer | Pillar 1 buffer$^{(1)}$ | Domestic Stability Buffer | Target including all buffer requirements | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | CET1 ratio | 4.5% | 2.5% | 1.0% | 8.0% | 1.0% | 9.0% | | Tier 1 capital ratio | 6.0% | 2.5% | 1.0% | 9.5% | 1.0% | 10.5% | | Total capital ratio | 8.0% | 2.5% | 1.0% | 11.5% | 1.0% | 12.5% | $^{(1)}$ The countercyclical capital buffer applicable to CIBC is insignificant as at October 31, 2020. 32 CIBC 2020 ANNUAL REPORT # 31 Capital management (continued) ## CET1 ratio The CET1 ratio at October 31, 2020 increased 0.5% from October 31, 2019, driven by the increase in CET1 capital partially offset by the impact of an increase in RWA. The increase in CET1 capital was primarily the result of internal capital generation (net income less dividends), an increase in AOCI, and common share issuance partially offset by share repurchases prior to cessation of the issuer bid upon OSFI's March 13, 2020 announcement (see the "Continuous enhancement to regulatory capital requirements" section for further details). While the impact of a higher provision for credit losses on performing loans reduced net income, the impact on CET1 capital was mitigated by the impact of the elimination of the deduction in relation to our expected loss shortfall calculation as well as the ECL transitional arrangement which was effective beginning in the second quarter of 2020 (see the "Transitional arrangements for the capital treatment of expected loss provisioning" section for further details). The COVID-19 pandemic had a less significant impact on our expected loss calculation for regulatory capital purposes, as the parameters used in this calculation reflect long-run experience which incorporates periods of downturn that are applied to the most recently available risk ratings. This contrasts with ECL recognized for accounting purposes, which uses point-in-time parameters based on updated forward-looking information that are more reflective of the current economic environment than the long-term parameters used for regulatory capital. The increase in total RWA was primarily due to organic growth, movement in portfolios and risk levels, changes in regulatory requirements and the impact of foreign exchange translation, partially offset by methodology and parameter updates. The impact of COVID-19 on RWA growth, as well as regulatory expected losses, was partially mitigated by CIBC client relief programs and government support targeting both individuals and businesses in response to the COVID-19 pandemic (see the "Regulatory developments arising from the COVID-19 pandemic" section for further details) that tempered the increase in the delinquency rates that may have otherwise occurred, reductions in balances and utilization rates from lower client spending during the pandemic and the use of the most recently available risk ratings. In addition, the net increase in risk levels primarily relating to market risk RWA was more than offset by the impact of measures introduced by OSFI in response to the COVID-19 pandemic as discussed in the "Regulatory developments arising from the COVID-19 pandemic" section. We anticipate that the combined impact of our expected loss calculation for regulatory capital purposes and credit risk RWA will act as a headwind to the positive impact of earnings growth on our CET1 ratio in future periods to the extent balances increase, utilization and delinquency rates increase and risk ratings and other credit scores deteriorate in line with our forward-looking information. ## Tier 1 capital ratio The Tier 1 capital ratio at October 31, 2020 increased 0.7% from October 31, 2019, primarily due to the factors affecting the CET1 ratio noted above, as well as an issuance of limited recourse capital notes during the fourth quarter of 2020. See the "Capital initiatives" section below for further details. ## Total capital ratio The Total capital ratio at October 31, 2020 increased 1.1% from October 31, 2019, primarily due to the factors affecting the Tier 1 capital ratio noted above, as well as an issuance of subordinated indebtedness during the third quarter of 2020. See the "Capital initiatives" section below for further details. ## Movement in total regulatory capital Changes in regulatory capital under Basel III are presented in the table below: | \$ millions, for the year ended October 31 | 2020 | 2019 | | :--- | :--- | :--- | | **CET1 capital** | | | | Balance at beginning of year | \$ 27,707 | \$ 24,641 | | Shares issued in lieu of cash dividends (add back) | 144 | 194 | | Other issue of common shares | 227 | 183 | | Purchase of common shares for cancellation | (68) | (30) | | Premium on purchase of common shares for cancellation | (166) | (79) | | Net income attributable to equity shareholders | 3,790 | 5,096 | | Preferred and common share dividends | (2,714) | (2,599) | | Change in AOCI balances included in regulatory capital | 180 | (31) | | Net foreign currency translation adjustments | 189 | 196 | | Net change in securities measured at FVOCI | 161 | 131 | | Net change in cash flow hedges | 80 | (220) | | Net change in post-employment defined benefit plans | 575 | 72 | | Change in shortfall of allowance to expected losses | 194 | 117 | | Change in goodwill and other intangible assets | 577 | 36 | | Other, including change in regulatory adjustments$^{(1)(2)}$ | | | | **CET 1 capital balance at end of year** | **\$ 30,876** | **\$ 27,707** | | **AT1 capital** | | | | Balance at beginning of year | \$ 3,144 | \$ 3,267 | | AT1 eligible capital issues$^{(3)}$ | 750 | 575 | | Directly issued capital instruments subject to phase out from AT1$^{(3)}$ | | (251) | | Redeemed | | (452) | | Other, including change in regulatory adjustments$^{(2)}$ | 5 | 5 | | **AT1 capital balance at end of year** | **\$ 3,899** | **\$ 3,144** | | **Tier 2 capital** | | | | Balance at beginning of year | \$ 5,003 | \$ 4,322 | | New Tier 2 eligible capital issues | 1,000 | 1,500 | | Redeemed | (32) | (1,000) | | Other, including change in regulatory adjustments$^{(2)}$ | 223 | 181 | | **Tier 2 capital balance at end of year** | **\$ 6,194** | **\$ 5,003** | | **Total capital balance at end of year** | **\$ 40,969** | **\$ 35,854** | $^{(1)}$ Includes the net impact on retained earnings as at November 1, 2019 from the adoption of IFRS 16. See Note 8 for additional details. $^{(2)}$ Beginning in the second quarter of 2020, includes the impact of the ECL transitional arrangement announced by OSFI on March 27, 2020. The transitional arrangement results in a portion of ECL allowances that would otherwise be included in Tier 2 capital qualifying for inclusion in CET1 capital. The amount is subject to certain adjustments and limitations until 2022. $^{(3)}$ Includes preferred shares and LRCNs. CIBC 2020 ANNUAL REPORT 37 # 43 Management of risk ## Risk overview We have provided certain disclosures required under IFRS 7 "Financial Instruments - Disclosures" (IFRS 7) related to the nature and extent of risks arising from financial instruments in the MD&A, as permitted by that IFRS standard. These disclosures are included in the "Risk overview", "Credit risk", "Market risk", "Liquidity risk", "Operational risk", "Reputation and legal risks", "Conduct risk", and "Regulatory compliance risk" sections. ## 43 Risk overview | Section | Page | Section | Page | Section | Page | | :--- | :--- | :--- | :--- | :--- | :--- | | Risk governance structure | 44 | Process and control | 55 | Non-trading activities | 72 | | Risk management structure | 45 | Risk measurement | 56 | Pension risk | 73 | | Risk management process | 46 | Exposure to credit risk | 58 | Liquidity risk | 74 | | Risk appetite statement | 46 | Trading credit exposures | 59 | Governance and management | 74 | | Risk input into performance and compensation | 47 | Geographic distribution$^{(1)}$ | 60 | Policies | 74 | | Risk policies and limits | 47 | Credit quality of portfolios | 61 | Risk measurement | 75 | | Risk identification and measurement | 48 | Loans contractually past due but not impaired | 66 | Risk appetite | 75 | | Stress testing | 49 | Exposure to certain countries and regions | 66 | Stress testing | 76 | | Risk treatment and mitigation | 49 | Selected exposures in certain activities | 67 | | | | Risk monitoring and reporting | 49 | Market risk | 68 | | | | Top and emerging risks | 50 | Governance and management | 68 | | | | Risks arising from business activities | 53 | Policies | 68 | | | | Credit risk | 54 | Market risk limits | 68 | | | | Governance and management | 54 | Process and control | 68 | | | | Policies | 54 | Risk measurement | 68 | | | ## 50 Top and emerging risks | Section | Page | Section | Page | Section | Page | | :--- | :--- | :--- | :--- | :--- | :--- | | Risks arising from business activities | 53 | Market risk limits | 68 | | | | Credit risk | 54 | Process and control | 68 | | | | Governance and management | 54 | Risk measurement | 68 | | | | Policies | 54 | Trading activities | 69 | | | ## 53 Credit risk ## Governance and management Credit risk is managed through the three lines of defence model. Frontline businesses and control groups must assess and manage the risks associated with their activities. They own the risks and the controls that mitigate the risks - this is the first line of defence. The second line of defence is Risk Management, which takes a broader, independent view and is responsible for the adjudication and oversight of credit risks associated with CIBC's commercial, corporate and wealth management activities. Internal audit is the third line of defence, providing reasonable assurance to senior management and the Audit Committee of the Board on the effectiveness of CIBC's governance practices, risk management processes, and internal control as part of its risk-based audit plan and in accordance with its mandate as described in the Internal Audit Charter. Senior management reports to the GRC and RMC at least quarterly on material credit risk matters, including material credit transactions, compliance with limits, portfolio trends, impaired loans and credit loss provisioning levels. Provision for credit losses is reviewed by the RMC and the Audit Committee quarterly. Specific to the management of credit risk, Risk Management is mandated to provide enterprise-wide oversight of the management of credit risk in CIBC's credit portfolios, including the measurement, monitoring and control of credit risk and the management of credit risk models. Key groups in Risk Management with credit risk responsibility include: * **Capital Markets Risk Management:** This group is responsible for independent oversight of the measurement, monitoring and control of traded and non-traded market risk, liquidity risk and trading credit risk, including adjudication of trading credit facilities for banks, non-bank financial entities, prime brokerage clients and central clearing counterparties. In addition, Capital Markets Risk Management is responsible for the risk management of sovereign and country risk, securitizations and the oversight of the Global Collateral Finance framework covering repos and securities lending. * **Global Credit Risk Management:** This group is responsible for the adjudication and oversight of credit risks (including transaction-specific environmental and related social risk) associated with our commercial, corporate and wealth management credit portfolios, management of the risks in our investment portfolios, as well as management of special loan portfolios. * **Model Validation, Global Operational Risk Management:** This group is responsible for the oversight of model validation practices. Model validation constitutes the independent set of processes, activities and ongoing documentary evidence that models and parameters are sound and CIBC can rely on their output. * **Enterprise Risk Management:** This group is responsible for enterprise-wide analysis, including enterprise-wide stress testing and reporting, risk data systems and models, as well as economic and regulatory capital methodologies. * **Retail Analytics and Credit Decisioning:** This group manages credit risk in personal and small business products offered through the various distribution channels (e.g., residential mortgages, credit cards, personal loans/lines of credit, small business loans) and performs analytics to optimize retail credit performance, along with collections, fraud, and AML outcomes. * **U.S. Risk Management:** This group carries out the mandate of CIBC Risk Management at a regional level and provides independent oversight of the identification, management, measurement, monitoring and control of credit risks in the U.S. Commercial Banking and Wealth Management SBU. Adjudication and oversight above delegated levels is provided by the CRO, GRC and RMC. ## Policies To control credit risk, prudent credit risk management principles are used as a base to establish policies, standards and guidelines that govern credit activities as outlined by the credit risk management policy. The credit risk management policy supplements CIBC's risk management framework and risk appetite framework, and together with CIBC's portfolio concentration limits for credit exposures, CIBC's common risk/concentration risk limits for credit exposures, and other supporting credit risk policies, standards and procedures, assists CIBC in achieving its desired risk profile by providing an effective foundation for the management of credit risk. ## Credit risk limits The RMC approves Board limits, and exposures above Board limits require reporting to, or approval of, the RMC. Management limits are approved by the CRO. Usage is monitored to ensure risks are within allocated management and Board limits. Exposures above management limits require the approval of the CRO. Business lines may also impose lower limits to reflect the nature of their exposures and target markets. This tiering of limits provides for an appropriate hierarchy of decision making and reporting between management and the RMC. Credit approval authority flows from the Board and is further cascaded to officers in writing. The Board's Investment and Lending Authority Resolution sets thresholds above which credits require reporting to, or approval of, the RMC, ensuring an increasing level of oversight for credits of higher risk. CIBC maintains country limits to control exposures within countries outside of Canada and the U.S. ## Credit concentration limits At a bank-wide level, credit exposures are managed to promote alignment to our risk appetite statement, to maintain the target business mix and to ensure that there is no undue concentration of risk. We set limits to control borrower concentrations by risk-rating band for large exposures (i.e., risk-rated credits). Direct loan sales, credit derivative hedges, or structured transactions may also be used to reduce concentrations. We also have a set of portfolio concentration limits in place to control exposures by country, industry, product and activity. Further, our policies require limits to be established as appropriate for new initiatives and implementation of strategies involving material levels of credit risk. Concentration limits represent the maximum exposure levels we wish to hold on our books. In the normal course, it is expected that exposures will be held at levels below the maximums. The credit concentration limits are reviewed and approved by the RMC at least annually. Credit concentration limits are also applied to our retail lending portfolios to mitigate concentration risk. We not only have concentration limits to individual borrowers and geographic regions, but also to different types of credit facilities, such as unsecured credits, rental occupancy purpose credits, condominium secured credits and mortgages with a second or third charge where we are behind another lender. In addition, we limit the maximum insured mortgage exposure to private insurers in order to reduce counterparty risk. ## Credit risk mitigation We may mitigate credit risk by obtaining a pledge of collateral, which improves recoveries in the event of a default. Our credit risk management policies include verification of the collateral and its value and ensuring that we have legal certainty with respect to the assets pledged. Valuations are updated periodically depending on the nature of the collateral, legal environment, and the creditworthiness of the counterparty. The main types of collateral include: (i) cash or marketable securities for securities lending and repurchase transactions; (ii) cash or marketable securities taken as collateral in support of our OTC derivatives activity; (iii) charges over operating assets such as inventory, receivables and real estate properties for lending to small business and commercial borrowers; and (iv) mortgages over residential properties for retail lending. In certain circumstances we may use third-party guarantees to mitigate risk. We also obtain insurance to reduce the risk in our real estate secured lending portfolios, the most material of which relates to the portion of our residential mortgage portfolio that is insured by CMHC, an agency of the Government of Canada. We mitigate the trading credit risk of OTC derivatives, securities lending and repurchase transactions with counterparties by employing the International Swaps and Derivatives Association (ISDA) Master Agreement, as well as Credit Support Annexes (CSAs) or similar master and collateral agreements. See Note 13 to the consolidated financial statements for additional details on the risks related to the use of derivatives and how we manage these risks. ISDA Master Agreements and similar master and collateral agreements, such as the global master repurchase agreement and global master securities lending agreement, facilitate cross transaction payments, prescribe close-out netting processes, and define the counterparties' contractual trading relationship. In addition, the agreements formalize non-transaction-specific terms. Master agreements serve to mitigate our credit risk by outlining default and termination events, which enable parties to close out of all outstanding transactions in the case of a negative credit event on either party's side. The mechanism for calculating termination costs in the event of a close-out are outlined in the master agreement; this allows for the efficient calculation of a single net obligation of one party to another. CSAs and other collateral agreements are often included in ISDA Master Agreements or similar master agreements governing securities lending and repurchase transactions. They mitigate CCR by providing for the exchange of collateral between parties when a party's exposure to the other exceeds agreed upon thresholds, subject to a minimum transfer amount. CSAs and other collateral agreements which operate with master agreements also designate acceptable collateral types, and set out rules for re-hypothecation and interest calculation on collateral. Collateral types permitted under CSAs and other master agreements are set through our trading credit risk management documentation procedures. These procedures include requirements around collateral type concentrations. Consistent with global initiatives to improve resilience in the financial system, we will clear derivatives through central counterparties (CCPs) where feasible. Credit derivatives may be used to reduce industry sector concentrations and single-name exposure. ## Forbearance policy We employ forbearance techniques to manage client relationships and to minimize credit losses due to default, foreclosure or repossession. In certain circumstances, it may be necessary to modify a loan for reasons related to a borrower's financial difficulties, reducing the potential of default. Troubled debt restructurings are subject to our normal quarterly impairment review which considers, amongst other factors, covenants and/or payment delinquencies. Loan loss provisions are adjusted as appropriate. In retail lending, forbearance techniques include interest capitalization, amortization amendments and debt consolidations. We have a set of eligibility criteria which allow our Client Account Management team to determine suitable remediation strategies and propose products based on each borrower's situation. The solutions available to corporate and commercial clients vary based on the individual nature of the client's situation and are undertaken selectively where it has been determined that the client has or is likely to have repayment difficulties servicing its obligations. Covenants often reveal changes in the client's financial situation before there is a change in payment behaviour and typically allow for a right to reprice or accelerate payments. Solutions may be temporary in nature or may involve other special management options. ## Process and control The credit approval process is centrally controlled, with all significant credit requests submitted to a credit adjudication group within Risk Management that is independent of the originating businesses. Approval authorities are a function of the risk and amount of credit requested. In certain cases, credit requests must be escalated to senior management, the CRO, or to the RMC for approval. After initial approval, individual credit exposures continue to be monitored. A formal risk assessment is completed at least annually for all risk rated accounts, including review of assigned ratings. Higher risk-rated accounts are subject to closer monitoring and are reviewed at least quarterly. Collections and specialized loan workout groups handle the day-to-day management of high risk loans to maximize recoveries. Limited approval authorities were delegated to customer contact centres and originating businesses, to ensure we had the ability to respond to customer requests for payment relief on a timely basis as a result of the COVID-19 pandemic. We are closely monitoring these payment relief programs, to ensure that credit performance is realized as expected, including controls on the overall number of deferrals, and maintaining daily monitoring of delinquencies and insolvencies. ## Risk measurement ### Exposures subject to AIRB approach Under the AIRB approach we are required to categorize exposures to credit risk into broad classes of assets with different underlying risk characteristics. This asset categorization may differ from the presentation in our consolidated financial statements. Under the AIRB approach, credit risk is measured using the following three key risk parameters$^{(1)}$: * PD - the probability that the obligor will default within the next 12 months. * EAD - the estimate of the amount which will be drawn at the time of default. * LGD - the expected severity of loss as the result of the default, expressed as a percentage of the EAD. Our credit risk exposures are divided into business and government and retail portfolios. Regulatory models used to measure credit risk exposure under the AIRB approach are subject to CIBC's model risk management process. $^{(1)}$ These parameters differ from those used in the calculation of ECL under IFRS 9. See the "Accounting and control matters" section for further details. ### Business and government portfolios (excluding scored small business) – risk-rating method The portfolios comprise exposures to corporate, sovereign, and bank obligors. Our adjudication process and criteria includes assigning an obligor default rating that reflects our estimate of the financial strength of the borrower, and a facility rating or LGD rating that reflects the collateral amount and quality applicable to secured exposures, the seniority position of the claim, and the capital structure of the borrower for unsecured exposures. The obligor rating takes into consideration our financial assessment of the obligor, the industry, and the economic environment of the region in which the obligor operates. Where a guarantee from a third party exists, both the obligor and the guarantor will be assessed. While our obligor rating is determined independently of external ratings for the obligor, our risk-rating methodology includes a review of those external ratings. CIBC employs a 20-point master internal obligor default rating scale that broadly maps to external agencies' ratings as presented in the table below. | Grade | CIBC rating | S&P equivalent | Moody's equivalent | | :--- | :--- | :--- | :--- | | Investment grade | 00-47 | AAA to BBB- | Aaa to Baa3 | | Non-investment grade | 51-67 | BB+ to B- | Ba1 to B3 | | Watch list | 70-80 | CCC+ to C | Caa1 to Ca | | Default | 90 | D | C | We use quantitative modelling techniques to assist in the development of internal risk-rating systems. The risk-rating systems have been developed through analysis of internal and external credit risk data, supplemented with expert judgment. The risk ratings are used for portfolio management, risk limit setting, product pricing, and in the determination of regulatory and economic capital. Our credit process is designed to ensure that we approve applications and extend credit only where we believe that our client has the ability to repay according to the agreed terms and conditions. Our credit framework of policies and limits defines our appetite for exposure to any single name or group of related borrowers, which is a function of the internal risk rating. We generally extend new credit only to borrowers in the investment and non-investment grade categories noted above. Our credit policies are also defined to manage our exposure to concentration in borrowers in any particular industry or region. In accordance with our process, each obligor is assigned an obligor default rating and the assigned rating is mapped to a PD estimate that represents a long-run average one-year default likelihood. For corporate obligors, PD estimates are calculated using joint maximum likelihood techniques based on our internal default rate history by rating category and longer dated external default rates as a proxy for the credit cycle to arrive at long-run average PD estimates. Estimates drawn from third party statistical default prediction models are used to supplement the internal default data for some rating bands where internal data is sparse. For small and medium corporate enterprises, PD estimates are developed using only internal default history. For bank and sovereign obligors, PD estimates are derived from an analysis based on external default data sets and supplemented with internal data where possible. We examine several different estimation methodologies and compare results across the different techniques. In addition, we apply the same techniques and estimation methodologies to analogous corporate default data and compare the results for banks and sovereigns to the corporate estimates for each technique. A regulatory floor is applied to PD estimates for corporate and bank obligors. Each facility is assigned an LGD rating and each assigned rating is mapped to an LGD estimate that considers economic downturn conditions. For corporate obligors, LGD estimates are primarily derived from internal historical recovery data. Time to resolution is typically 1 to 2 years for most corporate obligors, and 1 to 4 years in the real estate sector. LGD values are based on discounted post-default cash flows for resolved accounts and include material direct and indirect costs associated with collections. External data is used in some cases to supplement our analysis. Economic downturn periods are identified for each portfolio by examining the history of actual losses, default rates and LGD. For bank and sovereign exposures, LGD estimates are primarily driven by expert judgment supplemented with external data and benchmarks where available. Appropriate adjustments are made to LGD estimates to account for various uncertainties associated with estimation techniques and data limitations, including adjustments for unresolved accounts. EAD is estimated based on the current exposure to the obligor together with possible future changes in that exposure driven by factors such as the available undrawn credit commitment amount and the obligor default rating. EAD estimates are primarily based on internal historical loss data supplemented with comparable external data. Economic downturn periods are identified for each portfolio by examining the historical default rates and actual EAD factors. Appropriate adjustments are made to PD, LGD and EAD estimates to account for various uncertainties associated with estimation techniques and data limitations, including adjustments for unresolved accounts (for LGD). A simplified risk-rating process (slotting approach) is used for part of our uninsured Canadian commercial mortgage portfolio, which comprises non-residential mortgages and multi-family residential mortgages. These exposures are individually rated on our rating scale using a risk-rating methodology that considers the property's key attributes, which include its loan-to-value (LTV) and debt service ratios, the quality of the property, and the financial strength of the owner/sponsor. All exposures are secured by a lien over the property. In addition, we have insured multi-family residential mortgages, which are not treated under the slotting approach, but are instead treated as sovereign exposures. ### Retail portfolios Retail portfolios are characterized by a large number of relatively small exposures. They comprise: real estate secured personal lending (residential mortgages and personal loans and lines secured by residential property); qualifying revolving retail exposures (credit cards, overdrafts and unsecured lines of credit); and other retail exposures (loans secured by non-residential assets, unsecured loans including student loans, and scored small business loans). We use scoring models in the adjudication of new retail credit exposures, which are based on statistical methods of analyzing the unique characteristics of the borrower, to estimate future behaviour. In developing our models, we use internal historical information from previous borrowers, as well as information from external sources, such as credit bureaus. The use of credit scoring models allows for consistent assessment across borrowers. There are specific guidelines in place for each product, and our adjudication decision will take into account the characteristics of the borrower, any guarantors, and the quality and sufficiency of the collateral pledged (if any). The lending process will include documentation of, where appropriate, satisfactory identification, proof of income, independent appraisal of the collateral and registration of security. Retail portfolios are managed as pools of homogeneous risk exposures, using external credit bureau scores and/or other behavioural assessments to group exposures according to similar credit risk profiles. These pools are established through statistical techniques. Characteristics used to group individual exposures vary by asset category; as a result, the number of pools, their size, and the statistical techniques applied to their management differ accordingly. The following table maps the PD bands to various risk levels: | Risk level | PD bands | | :--- | :--- | | Exceptionally low | 0.01%-0.20% | | Very low | 0.21%-0.50% | | Low | 0.51%-2.00% | | Medium | 2.01%-10.00% | | High | 10.01%-99.99% | | Default | 100% | For the purposes of the AIRB approach for retail portfolios, additional PD, LGD and EAD segmentation into homogenous risk exposures is established through statistical techniques. The principal statistical estimation technique is decision trees benchmarked against alternative techniques such as regression and random forests. Within real estate secured lending, we have two key parameter estimation models: mortgages and real estate secured personal lines of credit. Within qualifying revolving retail, we have three key parameter estimation models: credit cards, overdraft, and unsecured personal lines. A small percentage of credit cards, overdraft, and unsecured line accounts that do not satisfy the requirements for qualifying revolving retail are grouped into other retail parameter models. Within other retail, we have three key parameter models: margin lending, personal loans, and scored small business loans. Each parameter model pools accounts according to characteristics such as: delinquency, current credit bureau score, internal behaviour score, estimated current LTV ratio, account type, account age, utilization, outstanding balance, or authorized limit. PD is estimated as the average default rate over an extended period based on internal historical data, generally for a 5-to-10-year period, which is adjusted using internal historical data on default rates over a longer period or comparable external data that includes a period of stress. A regulatory floor is applied to our PD estimate for all retail exposures with the exception of insured mortgages and government-guaranteed loans. LGD is estimated based on observed recovery rates over an extended period using internal historical data. In determining our LGD estimate, we exclude any accounts that have not had enough time since default for the substantial majority of expected recovery to occur. This recovery period is product-specific and is typically in the range of 1 to 3 years. Accounts that cure from default and return to good standing are considered to have zero loss. We simulate the loss rate in a significant downturn based on the relationship(s) between LGD and one or more of the following: PD; housing prices, cure rate, and recovery time; or observed LGD in periods with above-average loss rates. We apply appropriate adjustments to address various types of estimation uncertainty including sampling error and trending. A regulatory floor is applied to all real estate secured exposures with the exception of insured mortgages. EAD for revolving products is estimated as a percentage of the authorized credit limit based on the observed EAD rates over an extended period using historical data. We simulate the EAD rate in a significant downturn based on the relationship(s) between the EAD rate and PD and/or the observed EAD rate in periods with above-average EAD rates. For term loan products, EAD is set equal to the outstanding balance. We apply appropriate adjustments to PD, LGD and EAD to address various types of estimation uncertainty including sampling error and trending. ### Back-testing We monitor the three key risk parameters – PD, EAD and LGD - on a quarterly basis for our business and government portfolios and on a monthly basis for our retail portfolios. Every quarter, the back-testing results are reported to OSFI and are presented to the business and Risk Management senior management for review and challenge. For each parameter, we identify any portfolios whose realized values are significantly above or significantly below expectations and then test to see if this deviation is explainable by changes in the economy. If the results indicate that a parameter model may be losing its predictive power, we prioritize that model for review and update. ### Stress testing As part of our regular credit portfolio management process, we conduct stress testing and scenario analyses on our portfolio to quantitatively assess the impact of various historical, as well as hypothetical, stressed conditions, versus limits determined in accordance with our risk appetite. Scenarios are selected to test our exposures to specific industries (e.g., oil and gas and real estate), products (e.g., mortgages and cards), or geographic regions (e.g., Europe and Caribbean). Results from stress testing are a key input into management decision making, including the determination of limits and strategies for managing our credit exposure. See the "Real estate secured personal lending" section for further discussion on our residential mortgage portfolio stress testing. 57 CIBC 2020 ANNUAL REPORT # Exposure to credit risk The portfolios are categorized based upon how we manage the business and the associated risks. Gross credit exposure amounts presented in the table below represent our estimate of EAD, which is net of derivative master netting agreements and CVA but is before allowance for credit losses or credit risk mitigation. Gross credit exposure amounts relating to our business and government portfolios are reduced for collateral held for repo-style transactions, which reflects the EAD value of such collateral. Non-trading equity exposures are not included in the table below as they have been deemed immaterial under the OSFI guidelines, and hence are subject to 100% risk-weighting. | \$ millions, as at October 31 | 2020 | 2019 | | :--- | :--- | :--- | | | AIRB approach $^{(1)}$ | Standardized approach | Total | AIRB approach $^{(1)}$ | Standardized approach | Total | | **Business and government portfolios** | | | | | | | | Corporate | \$ 102,342 | \$ 36,603 | \$ 138,945 | \$ 96,444 | \$ 32,292 | \$ 128,736 | | Drawn | 49,473 | 7,339 | 56,812 | 44,732 | 6,244 | 50,976 | | Undrawn commitments | 139,677 | | 139,677 | 122,776 | 1 | 122,777 | | Repo-style transactions | 14,085 | 1,016 | 15,101 | 14,540 | 981 | 15,521 | | Other off-balance sheet | 10,858 | 786 | 11,644 | 14,125 | 596 | 14,721 | | OTC derivatives | 316,435 | 45,744 | 362,179 | 292,617 | 40,114 | 332,731 | | Sovereign | | | | | | | | Drawn | 133,077 | 22,664 | 155,741 | 73,036 | 13,301 | 86,337 | | Undrawn commitments | 8,354 | | 8,354 | 6,421 | | 6,421 | | Repo-style transactions | 38,904 | | 38,904 | 21,404 | | 21,404 | | Other off-balance sheet | 1,553 | | 1,553 | 1,624 | | 1,624 | | OTC derivatives | 2,187 | 2 | 2,189 | 3,094 | 2 | 3,096 | | | 184,075 | 22,666 | 206,741 | 105,579 | 13,303 | 118,882 | | Banks | | | | | | | | Drawn | 12,846 | 1,241 | 14,087 | 12,689 | 1,862 | 14,551 | | Undrawn commitments | 1,552 | 16 | 1,568 | 1,771 | 6 | 1,777 | | Repo-style transactions | 24,228 | | 24,228 | 25,472 | | 25,472 | | Other off-balance sheet | 59,761 | | 59,761 | 61,532 | | 61,532 | | OTC derivatives | 5,805 | 21 | 5,826 | 9,355 | 18 | 9,373 | | | 104,192 | 1,278 | 105,470 | 110,819 | 1,886 | 112,705 | | **Gross business and government portfolios** | **416,870** | **69,688** | **486,558** | **351,600** | **55,303** | **406,903** | | Less: collateral held for repo-style transactions | 187,832 | | 187,832 | 157,415 | | 157,415 | | **Net business and government portfolios** | **416,870** | **69,688** | **486,558** | **351,600** | **55,303** | **406,903** | | **Retail portfolios** | | | | | | | | Real estate secured personal lending | | | | | | | | Drawn | 231,527 | 4,799 | 236,326 | 222,933 | 4,177 | 227,110 | | Undrawn commitments $^{(2)}$ | 31,390 | | 31,390 | 20,777 | 1 | 20,778 | | | 262,917 | 4,799 | 267,716 | 243,710 | 4,178 | 247,888 | | Qualifying revolving retail | | | | | | | | Drawn | 18,701 | | 18,701 | 19,784 | | 19,784 | | Undrawn commitments $^{(2)}$ | 53,085 | | 53,085 | 49,709 | | 49,709 | | Other off-balance sheet | 271 | | 271 | 275 | | 275 | | | 72,057 | | 72,057 | 69,768 | | 69,768 | | Other retail | | | | | | | | Drawn | 14,869 | 1,326 | 16,195 | 13,478 | 1,268 | 14,746 | | Undrawn commitments $^{(2)}$ | 2,819 | 28 | 2,847 | 2,584 | 26 | 2,610 | | Other off-balance sheet | 35 | | 35 | 36 | | 36 | | | 17,723 | 1,354 | 19,077 | 16,098 | 1,294 | 17,392 | | **Total retail portfolios** | **352,697** | **6,153** | **358,850** | **329,576** | **5,472** | **335,048** | | **Securitization exposures** | **12,276** | **3,509** | **15,785** | **10,688** | **3,511** | **14,199** | | **Gross credit exposure** | **969,675** | **79,350** | **1,049,025** | **849,279** | **64,286** | **913,565** | | **Net credit exposure $^{(3)}$** | **\$ 781,843** | **\$ 79,350** | **\$ 861,193** | **\$ 691,864** | **\$ 64,286** | **\$ 756,150** | $^{(1)}$ See "Securitization exposures" section for securitization exposures that are subject to the standardized approach. $^{(2)}$ Increases in EAD in the current year include the impact of certain parameter updates in our regulatory models that were made in the first quarter of 2020 as part of our ongoing monitoring and review process. $^{(3)}$ Excludes exposures arising from derivative and repo-style transactions that are cleared through QCCPs as well as credit risk exposures arising from other assets that are subject to the credit risk framework but are not included in the standardized or IRB frameworks, including other balance sheet assets that are risk-weighted at 100%, significant investments in the capital of non-financial institutions that are risk-weighted at 1,250%, settlement risk, and amounts below the thresholds for deduction that are risk-weighted at 250%. Net credit exposure increased by $\$105$ billion in 2020, due to increases in our deposits with sovereigns and securities holdings, as well as business growth in our North American lending portfolios. ## Exposure to credit risk The portfolios are categorized based upon how we manage the business and the associated risks. Gross credit exposure amounts presented in the table below represent our estimate of EAD, which is net of derivative master netting agreements and CVA but is before allowance for credit losses or credit risk mitigation. Gross credit exposure amounts relating to our business and government portfolios are reduced for collateral held for repo-style transactions, which reflects the EAD value of such collateral. Non-trading equity exposures are not included in the table below as they have been deemed immaterial under the OSFI guidelines, and hence are subject to 100% risk-weighting. | \$ millions, as at October 31 | 2020 | 2019 | | :--- | :--- | :--- | | | AIRB approach $^{(1)}$ | Standardized approach | Total | AIRB approach $^{(1)}$ | Standardized approach | Total | | **Business and government portfolios** | | | | | | | | Corporate | \$ 102,342 | \$ 36,603 | \$ 138,945 | \$ 96,444 | \$ 32,292 | \$ 128,736 | | Drawn | 49,473 | 7,339 | 56,812 | 44,732 | 6,244 | 50,976 | | Undrawn commitments | 139,677 | | 139,677 | 122,776 | 1 | 122,777 | | Repo-style transactions | 14,085 | 1,016 | 15,101 | 14,540 | 981 | 15,521 | | Other off-balance sheet | 10,858 | 786 | 11,644 | 14,125 | 596 | 14,721 | | OTC derivatives | 316,435 | 45,744 | 362,179 | 292,617 | 40,114 | 332,731 | | Sovereign | | | | | | | | Drawn | 133,077 | 22,664 | 155,741 | 73,036 | 13,301 | 86,337 | | Undrawn commitments | 8,354 | | 8,354 | 6,421 | | 6,421 | | Repo-style transactions | 38,904 | | 38,904 | 21,404 | | 21,404 | | Other off-balance sheet | 1,553 | | 1,553 | 1,624 | | 1,624 | | OTC derivatives | 2,187 | 2 | 2,189 | 3,094 | 2 | 3,096 | | | 184,075 | 22,666 | 206,741 | 105,579 | 13,303 | 118,882 | | Banks | | | | | | | | Drawn | 12,846 | 1,241 | 14,087 | 12,689 | 1,862 | 14,551 | | Undrawn commitments | 1,552 | 16 | 1,568 | 1,771 | 6 | 1,777 | | Repo-style transactions | 24,228 | | 24,228 | 25,472 | | 25,472 | | Other off-balance sheet | 59,761 | | 59,761 | 61,532 | | 61,532 | | OTC derivatives | 5,805 | 21 | 5,826 | 9,355 | 18 | 9,373 | | | 104,192 | 1,278 | 105,470 | 110,819 | 1,886 | 112,705 | | **Gross business and government portfolios** | **416,870** | **69,688** | **486,558** | **351,600** | **55,303** | **406,903** | | Less: collateral held for repo-style transactions | 187,832 | | 187,832 | 157,415 | | 157,415 | | **Net business and government portfolios** | **416,870** | **69,688** | **486,558** | **351,600** | **55,303** | **406,903** | | **Retail portfolios** | | | | | | | | Real estate secured personal lending | | | | | | | | Drawn | 231,527 | 4,799 | 236,326 | 222,933 | 4,177 | 227,110 | | Undrawn commitments $^{(2)}$ | 31,390 | | 31,390 | 20,777 | 1 | 20,778 | | | 262,917 | 4,799 | 267,716 | 243,710 | 4,178 | 247,888 | | Qualifying revolving retail | | | | | | | | Drawn | 18,701 | | 18,701 | 19,784 | | 19,784 | | Undrawn commitments $^{(2)}$ | 53,085 | | 53,085 | 49,709 | | 49,709 | | Other off-balance sheet | 271 | | 271 | 275 | | 275 | | | 72,057 | | 72,057 | 69,768 | | 69,768 | | Other retail | | | | | | | | Drawn | 14,869 | 1,326 | 16,195 | 13,478 | 1,268 | 14,746 | | Undrawn commitments $^{(2)}$ | 2,819 | 28 | 2,847 | 2,584 | 26 | 2,610 | | Other off-balance sheet | 35 | | 35 | 36 | | 36 | | | 17,723 | 1,354 | 19,077 | 16,098 | 1,294 | 17,392 | | **Total retail portfolios** | **352,697** | **6,153** | **358,850** | **329,576** | **5,472** | **335,048** | | **Securitization exposures** | **12,276** | **3,509** | **15,785** | **10,688** | **3,511** | **14,199** | | **Gross credit exposure** | **969,675** | **79,350** | **1,049,025** | **849,279** | **64,286** | **913,565** | | **Net credit exposure $^{(3)}$** | **\$ 781,843** | **\$ 79,350** | **\$ 861,193** | **\$ 691,864** | **\$ 64,286** | **\$ 756,150** | $^{(1)}$ Includes exposures subject to the supervisory slotting approach. $^{(2)}$ Increases in EAD in the current year include the impact of certain parameter updates in our regulatory models that were made in the first quarter of 2020 as part of our ongoing monitoring and review process. $^{(3)}$ Excludes exposures arising from derivative and repo-style transactions that are cleared through QCCPs as well as credit risk exposures arising from other assets that are subject to the credit risk framework but are not included in the standardized or IRB frameworks, including other balance sheet assets that are risk-weighted at 100%, significant investments in the capital of non-financial institutions that are risk-weighted at 1,250%, settlement risk, and amounts below the thresholds for deduction that are risk-weighted at 250%. Net credit exposure increased by $\$105$ billion in 2020, due to increases in our deposits with sovereigns and securities holdings, as well as business growth in our North American lending portfolios. ## Credit quality of portfolios ### Credit quality of risk-rated portfolios The following table provides the credit quality of our risk-rated portfolios under the AIRB approach, net of collateral held for repo-style transactions. The obligor grade is our assessment of the creditworthiness of the obligor, without respect to the collateral held in support of the exposure. The LGD estimate would reflect our assessment of the value of the collateral at the time of default of the obligor. For slotted exposures, the slotting category reflects our assessment of both the creditworthiness of the obligor, as well as the value of the collateral. | \$ millions, as at October 31 | 2020 | 2019 | | :--- | :--- | :--- | | | EAD | EAD | | **Obligor grade** | **Corporate** | **Sovereign** | **Banks** | **Total** | **Total** | | Investment grade | \$ 106,633 | \$ 147,438 | \$ 82,029 | \$ 336,100 | \$ 276,817 | | Non-investment grade | 74,600 | 781 | 1,264 | 76,645 | 72,613 | | Watch list | 2,730 | | 2,730 | 1,239 | | Default | 1,039 | | 1,039 | 579 | | **Total risk-rated exposure** | **\$ 185,002** | **\$ 148,219** | **\$ 83,293** | **\$ 416,514** | **\$ 351,248** | | **LGD estimate** | | | | | | | Corporate | Sovereign | Banks | Total | Total | | Less than 10% | \$ 9,704 | \$ 136,968 | \$ 60,057 | \$ 206,729 | \$ 142,666 | | 10%-25% | 56,615 | 7,881 | 5,090 | 69,586 | 68,790 | | 26%-45% | 84,108 | 3,010 | 17,251 | 104,369 | 110,596 | | 46%-65% | 33,301 | 289 | 893 | 34,483 | 27,733 | | 66%-100% | 1,274 | 71 | 2 | 1,347 | 1,463 | | **Total** | **\$ 185,002** | **\$ 148,219** | **\$ 83,293** | **\$ 416,514** | **\$ 351,248** | | Strong | | | | \$ 265 | \$ 246 | | Good | | | | 71 | 85 | | Satisfactory | | | | 20 | 21 | | Default | | | | | | | **Total slotted exposure** | | | | **\$ 356** | **\$ 352** | | **Total business and government portfolios** | | | | **\$ 416,870** | **\$ 351,600** | The total exposures increased by $\$65.3$ billion from October 31, 2019, due to increases in our deposits with sovereigns and securities holdings, as well as business growth in our North American lending portfolios. The investment grade category increased by $\$59.3$ billion from October 31, 2019, while the non-investment grade category was up $\$4.0$ billion. The increase in watch list and default exposures was largely attributable to credit migration of a number of exposures in the corporate lending portfolio, including exposures within the oil and gas portfolio. ### Credit quality of the retail portfolios The following table presents the credit quality of our retail portfolios under the AIRB approach. | \$ millions, as at October 31 | 2020 | 2019 | | :--- | :--- | :--- | | **Risk level** | **Real estate secured personal lending** | **Qualifying revolving retail** | **Other retail** | **Total** | **Total** | | Exceptionally low | \$ 201,050 | | \$ 3,816 | \$ 254,621 | \$ 239,875 | | Very low | 31,927 | 49,755 | 4,469 | 40,731 | 34,018 | | Low | 25,825 | 10,437 | 6,091 | 42,353 | 39,648 | | Medium | 3,086 | 6,598 | 2,438 | 12,122 | 13,259 | | High | 586 | 763 | 973 | 2,322 | 2,271 | | Default | 443 | 35 | 70 | 548 | 505 | | | \$ 262,917 | \$ 72,057 | \$ 17,723 | \$ 352,697 | \$ 329,576 | ### Securitization exposures The following table provides details on securitization exposures in our banking book, by credit rating: | \$ millions, as at October 31 | 2020 | 2019 | | :--- | :--- | :--- | | **Exposures under the AIRB approach** | EAD | EAD | | S&P rating equivalent | | | | AAA to BBB- | \$ 12,276 | \$ 10,688 | | BB+ to BB- | 12,276 | 10,688 | | Below BB- | 3,509 | 3,511 | | Unrated | | | | **Exposures under the standardized approach** | | | | **Total securitization exposures** | **\$ 15,785** | **\$ 14,199** | # 32 Regulatory capital and ratios The components of our regulatory capital and ratios under Basel III are presented in the table below: | \$ millions, as at October 31 | 2020 | 2019 | | :--- | :--- | :--- | | **Common Equity Tier 1 (CET1) capital: instruments and reserves** | | | | Directly issued qualifying common share capital plus related stock surplus | \$ 14,025 | \$ 13,716 | | Retained earnings | 22,119 | 20,972 | | AOCI (and other reserves) | 1,435 | 881 | | Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) | 128 | 126 | | **CET1 capital before regulatory adjustments** | **37,707** | **35,695** | | **CET1 capital: regulatory adjustments** | | | | Prudential valuation adjustments | 24 | 32 | | Goodwill (net of related tax liabilities) | 5,177 | 5,375 | | Other intangibles other than mortgage-servicing rights (net of related tax liabilities) | 1,662 | 1,658 | | Deferred tax assets excluding those arising from temporary differences (net of related tax liabilities) | 24 | 24 | | Defined benefit pension fund net assets (net of related tax liabilities) | 206 | 138 | | Other deductions or regulatory adjustments to CET1 as determined by OSFI$^{(1)}$ | (592) | 330 | | Other | 761 | 7,988 | | **Total regulatory adjustments to CET1 capital** | **6,831** | **27,707** | | **CET1 capital** | **30,876** | | | **Additional Tier 1 (AT1) capital: instruments** | | | | Directly issued qualifying AT1 instruments plus related stock surplus$^{(2)}$ | 3,575 | 2,825 | | Directly issued capital instruments subject to phase out from AT1$^{(3)}$ | 302 | 302 | | AT1 instruments issued by subsidiaries and held by third parties (amount allowed in AT1) | 22 | 17 | | **AT1 capital** | **3,899** | **3,144** | | **Tier 1 capital (T1 = CET1 + AT1)** | **34,775** | **30,851** | | **Tier 2 capital: instruments and provisions** | | | | Directly issued qualifying Tier 2 instruments plus related stock surplus$^{(4)}$ | 5,035 | 4,015 | | Directly issued capital instruments subject to phase out from Tier 2 | 628 | 630 | | Tier 2 instruments issued by subsidiaries and held by third parties (amount allowed in Tier 2) | 29 | 23 | | General allowances | 502 | 335 | | **Tier 2 capital (T2)** | **6,194** | **5,003** | | **Total capital (TC = T1 + T2)** | **\$ 40,969** | **\$ 35,854** | | **Total RWA** | **\$ 254,871** | **\$ 239,863** | | **Capital ratios** | | | | CET1 ratio | 12.1% | 11.6% | | Tier 1 capital ratio | 13.6% | 12.9% | | Total capital ratio | 16.1% | 15.0% | $^{(1)}$ Beginning in the second quarter of 2020, includes the impact of the ECL transitional arrangement announced by OSFI on March 27, 2020. The transitional arrangement results in a portion of ECL allowances that would otherwise be included in Tier 2 capital qualifying for inclusion in CET1 capital. The amount is subject to certain adjustments and limitations until 2022. $^{(2)}$ Comprised of non-viability contingent capital (NVCC) preferred shares and LRCN. $^{(3)}$ Comprised of CIBC Tier 1 Notes - Series B due June 30, 2108. $^{(4)}$ Comprised of certain debentures which qualify as NVCC. ## CET1 ratio The CET1 ratio at October 31, 2020 increased 0.5% from October 31, 2019, driven by the increase in CET1 capital partially offset by the impact of an increase in RWA. The increase in CET1 capital was primarily the result of internal capital generation (net income less dividends), an increase in AOCI, and common share issuance partially offset by share repurchases prior to cessation of the issuer bid upon OSFI's March 13, 2020 announcement (see the "Continuous enhancement to regulatory capital requirements" section for further details). While the impact of a higher provision for credit losses on performing loans reduced net income, the impact on CET1 capital was mitigated by the impact of the elimination of the deduction in relation to our expected loss shortfall calculation as well as the ECL transitional arrangement which was effective beginning in the second quarter of 2020 (see the "Transitional arrangements for the capital treatment of expected loss provisioning" section for further details). The COVID-19 pandemic had a less significant impact on our expected loss calculation for regulatory capital purposes, as the parameters used in this calculation reflect long-run experience which incorporates periods of downturn that are applied to the most recently available risk ratings. This contrasts with ECL recognized for accounting purposes, which uses point-in-time parameters based on updated forward-looking information that are more reflective of the current economic environment than the long-term parameters used for regulatory capital. The increase in total RWA was primarily due to organic growth, movement in portfolios and risk levels, changes in regulatory requirements and the impact of foreign exchange translation, partially offset by methodology and parameter updates. The impact of COVID-19 on RWA growth, as well as regulatory expected losses, was partially mitigated by CIBC client relief programs and government support targeting both individuals and businesses in response to the COVID-19 pandemic (see the "Regulatory developments arising from the COVID-19 pandemic" section for further details) that tempered the increase in the delinquency rates that may have otherwise occurred, reductions in balances and utilization rates from lower client spending during the pandemic and the use of the most recently available risk ratings. In addition, the net increase in risk levels primarily relating to market risk RWA was more than offset by the impact of measures introduced by OSFI in response to the COVID-19 pandemic as discussed in the "Regulatory developments arising from the COVID-19 pandemic" section. We anticipate that the combined impact of our expected loss calculation for regulatory capital purposes and credit risk RWA will act as a headwind to the positive impact of earnings growth on our CET1 ratio in future periods to the extent balances increase, utilization and delinquency rates increase and risk ratings and other credit scores deteriorate in line with our forward-looking information. ## Tier 1 capital ratio The Tier 1 capital ratio at October 31, 2020 increased 0.7% from October 31, 2019, primarily due to the factors affecting the CET1 ratio noted above, as well as an issuance of limited recourse capital notes during the fourth quarter of 2020. See the "Capital initiatives" section below for further details. ## Total capital ratio The Total capital ratio at October 31, 2020 increased 1.1% from October 31, 2019, primarily due to the factors affecting the Tier 1 capital ratio noted above, as well as an issuance of subordinated indebtedness during the third quarter of 2020. See the "Capital initiatives" section below for further details. ## Movement in total regulatory capital Changes in regulatory capital under Basel III are presented in the table below: | \$ millions, for the year ended October 31 | 2020 | 2019 | | :--- | :--- | :--- | | **CET1 capital** | | | | Balance at beginning of year | \$ 27,707 | \$ 24,641 | | Shares issued in lieu of cash dividends (add back) | 144 | 194 | | Other issue of common shares | 227 | 183 | | Purchase of common shares for cancellation | (68) | (30) | | Premium on purchase of common shares for cancellation | (166) | (79) | | Net income attributable to equity shareholders | 3,790 | 5,096 | | Preferred and common share dividends | (2,714) | (2,599) | | Change in AOCI balances included in regulatory capital | 180 | (31) | | Net foreign currency translation adjustments | 189 | 196 | | Net change in securities measured at FVOCI | 161 | 131 | | Net change in cash flow hedges | 80 | (220) | | Net change in post-employment defined benefit plans | 575 | 72 | | Change in shortfall of allowance to expected losses | 194 | 117 | | Change in goodwill and other intangible assets | 577 | 36 | | Other, including change in regulatory adjustments$^{(1)(2)}$ | | | | **CET 1 capital balance at end of year** | **\$ 30,876** | **\$ 27,707** | | **AT1 capital** | | | | Balance at beginning of year | \$ 3,144 | \$ 3,267 | | AT1 eligible capital issues$^{(3)}$ | 750 | 575 | | Phase-out of innovative Tier 1 notes | | (251) | | Redeemed | | (452) | | Other, including change in regulatory adjustments$^{(2)}$ | 5 | 5 | | **AT1 capital balance at end of year** | **\$ 3,899** | **\$ 3,144** | | **Tier 2 capital** | | | | Balance at beginning of year | \$ 5,003 | \$ 4,322 | | New Tier 2 eligible capital issues | 1,000 | 1,500 | | Redeemed | (32) | (1,000) | | Other, including change in regulatory adjustments$^{(2)}$ | 223 | 181 | | **Tier 2 capital balance at end of year** | **\$ 6,194** | **\$ 5,003** | | **Total capital balance at end of year** | **\$ 40,969** | **\$ 35,854** | $^{(1)}$ Includes the net impact on retained earnings as at November 1, 2019 from the adoption of IFRS 16. See Note 8 for additional details. $^{(2)}$ Beginning in the second quarter of 2020, includes the impact of the ECL transitional arrangement announced by OSFI on March 27, 2020. The transitional arrangement results in a portion of ECL allowances that would otherwise be included in Tier 2 capital qualifying for inclusion in CET1 capital. The amount is subject to certain adjustments and limitations until 2022. $^{(3)}$ Includes preferred shares and LRCNs. CIBC 2020 ANNUAL REPORT 37 # 31 Capital management (continued) ## Capital initiatives In conjunction with OSFI's March 13, 2020 announcement to decrease the DSB to 1.0%, OSFI also announced that it expects all federally regulated financial institutions to cease dividend increases and share buybacks for the time being, in order to ensure that the additional capital available is used to support Canadian lending activities. The following were the main capital initiatives undertaken in 2020: ### Normal course issuer bid Our normal course issuer bid expired on June 3, 2020. During the year, we purchased and cancelled 2,208,600 common shares under this bid at an average price of $\$106.03$ for a total amount of $\$234$ million. ### Dividends On February 25, 2020, the Board approved an increase in our quarterly common share dividend from $\$1.44$ per share to $\$1.46$ per share for the quarter ended April 30, 2020. Common and preferred share dividends are declared quarterly at the discretion of the Board. The declaration and payment of dividends is governed by Section 79 of the Bank Act (Canada), the terms of the preferred shares, and the terms of the Tier 1 notes issued by CIBC Capital Trust, as explained in Notes 16 and 17 to the consolidated financial statements. ### Shareholder investment plan (the plan) Effective with the October 28, 2016 dividend, CIBC has elected to issue shares from Treasury to fulfill the requirements of the plan. Pursuant to the plan, we issued $1,534,320$ common shares for consideration of $\$144$ million for the year ended October 31, 2020. ### Preferred shares **Non-cumulative Rate Reset Class A Preferred Shares Series 41 (NVCC)** Holders of the Non-cumulative Rate Reset Class A Preferred Shares Series 41 (NVCC) (Series 41 shares) had the option to convert their shares into Non-cumulative Floating Rate Class A Preferred Shares Series 42 (NVCC) (Series 42 shares) on a one-for-one basis on January 31, 2020. As the conditions for conversion were not met, no Series 42 shares were issued, and all of the Series 41 shares remain outstanding. The dividend on the Series 41 shares was reset to $3.909\%$, payable quarterly as and when declared by the Board, effective for the five-year period commencing January 31, 2020. **Non-cumulative Rate Reset Class A Preferred Shares Series 43 (NVCC)** Holders of the Non-cumulative Rate Reset Class A Preferred Shares Series 43 (NVCC) (Series 43 shares) had the option to convert their shares into Non-cumulative Floating Rate Class A Preferred Shares Series 44 (NVCC) (Series 44 shares) on a one-for-one basis on July 31, 2020. As the conditions for conversion were not met, no Series 44 shares were issued, and all of the Series 43 shares remain outstanding. The dividend on the Series 43 shares was reset to $3.143\%$, payable quarterly as and when declared by the Board, effective for the five-year period commencing July 31, 2020. See the "Outstanding share data" section below and Note 16 to the consolidated financial statements for further details. ### Limited Recourse Capital Notes On September 16, 2020, we issued $\$750$ million principal amount of $4.375\%$ Limited Recourse Capital Notes Series 1 (NVCC) (subordinated indebtedness). The Notes mature on October 28, 2080 and bear interest at a fixed rate of $4.375\%$ per annum (paid semi-annually) until October 28, 2025. Starting on October 28, 2025, and every five years thereafter until October 28, 2075, the interest rate will be reset to the then current five-year Government of Canada bond yield plus $4.000\%$ per annum. Concurrently with the issuance of the Notes, we issued Non-Cumulative 5-Year Fixed Rate Reset Class A Preferred Shares Series 53 (NVCC) (the Series 53 Preferred Shares) which are held in a newly formed trust (the Limited Recourse Trust) that is consolidated by CIBC and as a result the Series 53 Preferred Shares are eliminated in CIBC's consolidated financial statements. In the event of non-payment by CIBC of the principal amount of, interest on, or redemption price for, the Notes when due, the sole remedy of each Note holder is limited to that holder's proportionate share of the Series 53 Preferred Shares held in the Limited Recourse Trust. Subject to regulatory approval we may redeem the Notes, in whole or in part, every five years during the period from September 28 to and including October 28, commencing in 2025, at par. The Notes and the Series 53 Preferred Shares carry standard NVCC provisions necessary for them to qualify as Tier 1 regulatory capital under Basel III. Upon the occurrence of a Trigger Event, each Series 53 Preferred Share held in the Limited Recourse Trust will automatically and ## Subordinated indebtedness On July 21, 2020, we issued $\$1.0$ billion principal amount of $2.01\%$ Debentures due July 21, 2030 (NVCC) (subordinated indebtedness). The Debentures bear interest at a fixed rate of $2.01\%$ per annum (paid semi-annually) until July 21, 2025, and at the three-month Canadian dollar bankers' acceptance rate plus $1.28\%$ per annum thereafter (paid quarterly) until maturity on July 21, 2030. ## Outstanding share data The table below provides a summary of our outstanding shares, NVCC capital instruments, and the maximum number of common shares issuable on conversion/exercise: | \$ millions, except number of shares and per share amounts, as at November 27, 2020 | Shares outstanding | Minimum conversion price per common share | Maximum number of common shares issuable on conversion/exercise | | :--- | :--- | :--- | :--- | | **Common shares** | Number of shares | Amount | | | | Treasury shares | 447,092,959 | \$ 13,908 | | | | common shares | (11,820) | | | | | **Preferred shares$^{(1)(2)}$** | | | | | | Series 39 (NVCC) | 16,000,000 | \$ 400 | \$ 5.00 | 80,000,000 | | Series 41 (NVCC) | 12,000,000 | 300 | 5.00 | 60,000,000 | | Series 43 (NVCC) | 12,000,000 | 300 | 5.00 | 60,000,000 | | Series 45 (NVCC) | 32,000,000 | 800 | 5.00 | 160,000,000 | | Series 47 (NVCC) | 18,000,000 | 450 | 5.00 | 90,000,000 | | Series 49 (NVCC) | 13,000,000 | 325 | 5.00 | 65,000,000 | | Series 51 (NVCC) | 10,000,000 | 250 | 5.00 | 50,000,000 | | Treasury shares - preferred shares$^{(1)(2)}$ | n/a | | | | | **Limited recourse capital notes$^{(2)(4)}$** | | | | | | 4.375% Limited recourse capital notes Series 1 (NVCC) | n/a | 750 | 5.00 | 150,000,000 | | **Subordinated indebtedness$^{(2)(3)}$** | | | | | | 3.42% Debentures due January 26, 2026 (NVCC) | n/a | 1,000 | 5.00 | 300,000,000 | | 3.45% Debentures due April 4, 2028 (NVCC) | n/a | 1,500 | 5.00 | 450,000,000 | | 2.95% Debentures due June 19, 2029 (NVCC) | n/a | 1,500 | 5.00 | 450,000,000 | | 2.01% Debentures due July 21, 2030 (NVCC) | n/a | 1,000 | 5.00 | 300,000,000 | | **Stock options outstanding** | | | | **5,624,458** | $^{(1)}$ Upon the occurrence of a Trigger Event, each share is convertible into a number of common shares, determined by dividing the par value of $\$25.00$ plus declared and unpaid dividends by the average common share price (as defined in the relevant prospectus supplement) subject to a minimum price per share (subject to adjustment in certain events as defined in the relevant prospectus supplement). Preferred shareholders do not have the right to convert their shares into common shares. $^{(2)}$ The maximum number of common shares issuable on conversion excludes the impact of declared but unpaid dividends and accrued interest. $^{(3)}$ Upon the occurrence of a Trigger Event, the Debentures are convertible into a number of common shares, determined by dividing 150% of the par value plus accrued and unpaid interest by the average common share price (as defined in the relevant prospectus supplement) subject to a minimum price per common share (subject to adjustment in certain events as defined in the relevant prospectus supplement). $^{(4)}$ Upon the occurrence of a Trigger Event, the Series 53 Preferred Shares held in the Limited Recourse Trust in support of the Notes are convertible into a number of common shares, determined by dividing the par value of $\$1,000$ by the average common share price (as defined in the relevant prospectus supplement) subject to a minimum price per common share (subject to adjustment in certain events as defined in the relevant prospectus supplement). See Note 16 to the consolidated financial statements for details on our preferred share and other equity instruments rights and privileges. n/a Not applicable. The occurrence of a "Trigger Event" would result in conversion of all of the outstanding NVCC instruments described above, which would represent a dilution impact of 83% based on the number of CIBC common shares outstanding as at October 31, 2020. As described in the CAR Guideline, a Trigger Event occurs when OSFI determines the bank is or is about to become non-viable and, if after conversion of all contingent instruments and consideration of any other relevant factors or circumstances, it is reasonably likely that its viability will be restored or maintained; or if the bank has accepted or agreed to accept a capital injection or equivalent support from a federal or provincial government, without which OSFI would have determined the bank to be non-viable. In addition to the potential dilution impacts related to the NVCC instruments discussed above, as at October 31, 2020, $\$19,925$ million (2019: $\$8,986$ million) of our outstanding liabilities were subject to conversion to common shares under the bail-in regime. Under the bail-in regime there is no fixed and pre-determined contractual conversion ratio for the conversion of the specified eligible shares and liabilities of CIBC that are subject to a bail-in conversion into common shares, nor are there specific requirements regarding whether liabilities subject to a bail-in conversion are converted into common shares of CIBC or any of its affiliates. CDIC determines the timing of the bail-in conversion, the portion of the specified eligible shares and liabilities to be converted and the terms and conditions of the conversion, subject to parameters set out in the bail-in regime. See the "Total loss absorbing capacity requirements" section for further details. ## Preferred share and other equity instruments rights and privileges See Note 16 to the consolidated financial statements for details on our preferred share and other equity instruments rights and privileges. 40 CIBC 2020 ANNUAL REPORT # 31 Capital management (continued) ## Subordinated indebtedness On July 21, 2020, we issued $\$1.0$ billion principal amount of $2.01\%$ Debentures due July 21, 2030 (NVCC) (subordinated indebtedness). The Debentures bear interest at a fixed rate of $2.01\%$ per annum (paid semi-annually) until July 21, 2025, and at the three-month Canadian dollar bankers' acceptance rate plus $1.28\%$ per annum thereafter (paid quarterly) until maturity on July 21, 2030. ## Outstanding share data The table below provides a summary of our outstanding shares, NVCC capital instruments, and the maximum number of common shares issuable on conversion/exercise: | \$ millions, except number of shares and per share amounts, as at November 27, 2020 | Shares outstanding | Minimum conversion price per common share | Maximum number of common shares issuable on conversion/exercise | | :--- | :--- | :--- | :--- | | **Common shares** | Number | Amount | | | | Treasury shares | 447,092,959 | \$ 13,908 | | | | common shares | (11,820) | | | | | **Preferred shares$^{(1)(2)}$** | | | | | | Series 39 (NVCC) | 16,000,000 | \$ 400 | \$ 5.00 | 80,000,000 | | Series 41 (NVCC) | 12,000,000 | 300 | 5.00 | 60,000,000 | | Series 43 (NVCC) | 12,000,000 | 300 | 5.00 | 60,000,000 | | Series 45 (NVCC) | 32,000,000 | 800 | 5.00 | 160,000,000 | | Series 47 (NVCC) | 18,000,000 | 450 | 5.00 | 90,000,000 | | Series 49 (NVCC) | 13,000,000 | 325 | 5.00 | 65,000,000 | | Series 51 (NVCC) | 10,000,000 | 250 | 5.00 | 50,000,000 | | Treasury shares - preferred shares$^{(1)(2)}$ | n/a | | | | | **Limited recourse capital notes$^{(2)(4)}$** | | | | | | 4.375% Limited recourse capital notes Series 1 (NVCC) | n/a | 750 | 5.00 | 150,000,000 | | **Subordinated indebtedness$^{(2)(3)}$** | | | | | | 3.42% Debentures due January 26, 2026 (NVCC) | n/a | 1,000 | 5.00 | 300,000,000 | | 3.45% Debentures due April 4, 2028 (NVCC) | n/a | 1,500 | 5.00 | 450,000,000 | | 2.95% Debentures due June 19, 2029 (NVCC) | n/a | 1,500 | 5.00 | 450,000,000 | | 2.01% Debentures due July 21, 2030 (NVCC) | n/a | 1,000 | 5.00 | 300,000,000 | | **Stock options outstanding** | | | | **5,624,458** | $^{(1)}$ Upon the occurrence of a Trigger Event, each share is convertible into a number of common shares, determined by dividing the par value of $\$25.00$ plus declared and unpaid dividends by the average common share price (as defined in the relevant prospectus supplement) subject to a minimum price per share (subject to adjustment in certain events as defined in the relevant prospectus supplement). Preferred shareholders do not have the right to convert their shares into common shares. $^{(2)}$ The maximum number of common shares issuable on conversion excludes the impact of declared but unpaid dividends and accrued interest. $^{(3)}$ Upon the occurrence of a Trigger Event, the Debentures are convertible into a number of common shares, determined by dividing 150% of the par value plus accrued and unpaid interest by the average common share price (as defined in the relevant prospectus supplement) subject to a minimum price per common share (subject to adjustment in certain events as defined in the relevant prospectus supplement). $^{(4)}$ Upon the occurrence of a Trigger Event, the Series 53 Preferred Shares held in the Limited Recourse Trust in support of the Notes are convertible into a number of common shares, determined by dividing the par value of $\$1,000$ by the average common share price (as defined in the relevant prospectus supplement) subject to a minimum price per common share (subject to adjustment in certain events as defined in the relevant prospectus supplement). See Note 16 to the consolidated financial statements for details on our preferred share and other equity instruments rights and privileges. n/a Not applicable. The occurrence of a "Trigger Event" would result in conversion of all of the outstanding NVCC instruments described above, which would represent a dilution impact of 83% based on the number of CIBC common shares outstanding as at October 31, 2020. As described in the CAR Guideline, a Trigger Event occurs when OSFI determines the bank is or is about to become non-viable and, if after conversion of all contingent instruments and consideration of any other relevant factors or circumstances, it is reasonably likely that its viability will be restored or maintained; or if the bank has accepted or agreed to accept a capital injection or equivalent support from a federal or provincial government, without which OSFI would have determined the bank to be non-viable. In addition to the potential dilution impacts related to the NVCC instruments discussed above, as at October 31, 2020, $\$19,925$ million (2019: $\$8,986$ million) of our outstanding liabilities were subject to conversion to common shares under the bail-in regime. Under the bail-in regime there is no fixed and pre-determined contractual conversion ratio for the conversion of the specified eligible shares and liabilities of CIBC that are subject to a bail-in conversion into common shares, nor are there specific requirements regarding whether liabilities subject to a bail-in conversion are converted into common shares of CIBC or any of its affiliates. CDIC determines the timing of the bail-in conversion, the portion of the specified eligible shares and liabilities to be converted and the terms and conditions of the conversion, subject to parameters set out in the bail-in regime. See the "Total loss absorbing capacity requirements" section for further details. ## Preferred share and other equity instruments rights and privileges See Note 16 to the consolidated financial statements for details on our preferred share and other equity instruments rights and privileges. CIBC 2020 ANNUAL REPORT 40 # Off-balance sheet arrangements We enter into off-balance sheet arrangements in the normal course of our business. We consolidate all of our sponsored trusts that securitize our own assets. ## Non-consolidated structured entities (SEs) We manage and administer a single-seller conduit and several CIBC-sponsored multi-seller conduits in Canada. The multi-seller conduits acquire direct or indirect ownership or security interests in pools of financial assets from our clients and finance the acquisitions by issuing asset-backed commercial paper (ABCP) to investors. The single-seller conduit acquires financial assets and finances these acquisitions through a credit facility provided by a syndicate of financial institutions. The sellers to the conduits may continue to service the assets and may be exposed to credit losses realized on these assets, typically through the provision of over-collateralization or another form of credit enhancement. The conduits may obtain credit enhancement from third-party providers. We generally provide the multi-seller conduits with commercial paper backstop liquidity facilities, securities distribution, and provide both the single and multi-seller conduits with accounting, cash management, and operations services. The liquidity facilities for the managed and administered multi-seller conduits require us to provide funding, subject to the satisfaction of certain conditions with respect to the conduits, for ABCP not placed with external investors. We may also purchase ABCP issued by the multi-seller conduits for market-making purposes. We are required to maintain certain short-term and/or long-term debt ratings with respect to the liquidity facilities that we provide to the sponsored multi-seller conduits. If we are downgraded below the level specified under the terms of those facilities, we must provide alternative satisfactory liquidity arrangements, such as procuring an alternative liquidity provider that meets the minimum rating requirements. We may also act as the counterparty to derivative contracts entered into by a multi-seller conduit in order to convert the yield of the underlying assets to match the needs of the multi-seller conduit's investors or to mitigate the interest rate, basis, and currency risk within the conduit. We earn fees for providing services related to the non-consolidated single-seller and multi-seller conduits, such as backstop liquidity facilities, distribution, transaction structuring, and conduit administration. These fees totalled $\$65$ million in 2020 (2019: $\$54$ million). All fees earned in respect of activities with the conduits are on a market basis. As at October 31, 2020, the amount funded for the various asset types in the multi-seller conduits amounted to $\$8.4$ billion (2019: $\$7.1$ billion). The estimated weighted-average life of these assets was 2.0 years (2019: 1.6 years). Our holdings of commercial paper issued by the non-consolidated sponsored multi-seller conduits that offer commercial paper to external investors were $\$12$ million (2019: $\$26$ million). Our committed backstop liquidity facilities to these conduits were $\$10.5$ billion (2019: $\$8.8$ billion). We also provided credit facilities of $\$50$ million (2019: $\$50$ million) to these conduits. We participated in a syndicated facility for a three-year commitment, with two years remaining, of $\$700$ million to the single-seller conduit that provides funding to franchisees of a major Canadian retailer. Our portion of the commitment was $\$130$ million (2019: $\$130$ million). As at October 31, 2020, we funded $\$86$ million (2019: $\$87$ million) through the issuance of bankers' acceptances and prime loans. We engage one or more of the four major rating agencies, DBRS Limited (DBRS), Fitch Ratings Inc. (Fitch), Moody's Investors Service, Inc. (Moody's), and S&P, to opine on the credit ratings of asset-backed securities (ABS) issued by our sponsored securitization vehicles. In the event that ratings differ between rating agencies, we use the lower rating. We also have investments in and provide loans, liquidity and credit facilities to certain other third-party and CIBC-managed SEs. The on-balance sheet exposure related to these SEs is included in the consolidated financial statements. Our on- and off-balance sheet amounts related to the SEs that are not consolidated are set out in the table below. For additional details on our SEs, see Note 7 to the consolidated financial statements. | \$ millions, as at October 31 | 2020 | 2019 | | :--- | :--- | :--- | | | Investments and loans $^{(1)}$ | Liquidity, credit facilities and commitments | Written credit derivatives $^{(2)}$ | Investments and loans $^{(1)}$ | Liquidity, credit facilities and commitments | Written credit derivatives $^{(2)}$ | | Single-seller and multi-seller conduits | \$ 107 | \$ 8,390 $^{(3)}$ | \$ 130 | \$ 113 | \$ 7,137 $^{(3)}$ | \$ 139 | | Third-party structured vehicles - continuing | 3,560 | 2,880 | | 3,345 | 2,358 | 127 | | Structured vehicles run-off | 3 | 13 | | 3 | | | Other | 340 | 140 | | 332 | | | **Total** | | | | | | | $^{(1)}$ Excludes securities issued by, retained interest in, and derivatives with entities established by CMHC, Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Government National Mortgage Association, Federal Home Loan Banks, Federal Farm Credit Bank, and Student Loan Marketing Association. $^{(2)}$ Disclosed amounts reflect the outstanding notional of written credit derivatives. The negative fair value recorded on the consolidated balance sheet was $\$107$ million (2019: $\$112$ million). Notional of $\$123$ million (2019: $\$130$ million) was hedged with credit derivatives protection from third parties. The fair value of these hedges net of CVA was $\$98$ million (2019: $\$104$ million). An additional notional of $\$7$ million (2019: $\$9$ million) was hedged through a limited recourse note. $^{(3)}$ Excludes an additional $\$2.1$ billion (2019: $\$1.6$ billion) relating to our backstop liquidity facilities provided to the multi-seller conduits as part of their commitment to fund purchases of additional assets. Also excludes $\$12$ million (2019: $\$26$ million) of our direct investments in the multi-seller conduits which we consider investment exposure. ## Other financial transactions In the second quarter of 2020, in response to the COVID-19 pandemic, we entered into an arrangement with the Government of Canada to facilitate the advancing of loans to CIBC clients who are qualifying borrowers under the CEBA program. As CIBC's involvement in the CEBA program is to administer the CEBA loans, and the funding and risks and rewards associated with the loans, including exposure to payment defaults and principal forgiveness, are assumed by the Government of Canada, loans advanced under the CEBA program are not recognized on our consolidated balance sheet. As part of our involvement in the CEBA program, we receive a fee that is intended as a reimbursement of costs that we incur to administer the loans. For further details regarding this program as well as other government lending programs that we participated in, refer to Note 2 to our consolidated financial statements. We are the sponsor of several mutual and pooled funds, in the form of trusts. We are the administrator of these funds. In addition, we may act in other capacities, including custodian, trustee, and broker. We earn fees at market rates from these trusts. We do not guarantee either principal or returns to investors in these funds. We act as a trustee of a number of personal trusts and have a fiduciary responsibility to act in the best interests of the beneficiaries of the trusts. We earn a fee for acting as a trustee. We also participate in transactions to modify the cash flows of trusts managed by third-party asset managers to create investments with specific risk profiles, or to assist clients in the efficient management of other risks. Typically, these involve the use of derivative products, which transfer the risks and returns to or from a trust. ## Derivatives We participate in derivatives transactions, as a market maker facilitating the needs of our clients or as a principal to manage the risks associated with our funding, investing and trading strategies. All derivatives are recorded at fair value on our consolidated balance sheet. See Notes 13 and 24 to the consolidated financial statements for details on derivative contracts and the risks associated with them. ## Credit-related arrangements Credit-related arrangements are generally off-balance sheet instruments and are typically entered into to meet the financing needs of clients. In addition, there are certain exposures for which we could be obligated to extend credit that are not recorded on the consolidated balance sheet. For additional details of these arrangements, see the "Liquidity risk" section and Note 22 to the consolidated financial statements. ## Guarantees A guarantee is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor failed to make payment when due in accordance with the original or modified terms of a debt instrument. Guarantees include credit derivatives protection sold and standby and performance letters of credit, as discussed in Notes 13 and 22 to the consolidated financial statements, respectively. 42 CIBC 2020 ANNUAL REPORT # 43 Management of risk We have provided certain disclosures required under IFRS 7 "Financial Instruments - Disclosures" (IFRS 7) related to the nature and extent of risks arising from financial instruments in the MD&A, as permitted by that IFRS standard. These disclosures are included in the "Risk overview", "Credit risk", "Market risk", "Liquidity risk", "Operational risk", "Reputation and legal risks", "Conduct risk", and "Regulatory compliance risk" sections. ## 43 Risk overview | Section | Page | Section | Page | Section | Page | | :--- | :--- | :--- | :--- | :--- | :--- | | Risk governance structure | 44 | Process and control | 55 | Non-trading activities | 72 | | Risk management structure | 45 | Risk measurement | 56 | Pension risk | 73 | | Risk management process | 46 | Exposure to credit risk | 58 | Liquidity risk | 74 | | Risk appetite statement | 46 | Credit quality of portfolios | 61 | Governance and management | 74 | | Risk input into performance and compensation | 47 | Credit quality performance | 65 | Policies | 74 | | Risk policies and limits | 47 | Loans contractually past due but not impaired | 66 | Risk measurement | 75 | | Risk identification and measurement | 48 | Exposure to certain countries and regions | 66 | Risk appetite | 75 | | Stress testing | 49 | Selected exposures in certain activities | 67 | Stress testing | 76 | | Risk treatment and mitigation | 49 | Settlement risk | 67 | | | | Risk monitoring and reporting | 49 | Securitization activities | 67 | | | | **Top and emerging risks** | **50** | Market risk | 68 | Other risks | 80 | | Risks arising from business activities | 53 | Governance and management | 68 | Strategic risk | 80 | | Credit risk | 54 | Policies | 68 | Insurance risk | 80 | | Governance and management | 54 | Market risk limits | 68 | Operational risk | 81 | | Policies | 54 | Process and control | 68 | Technology, information and cyber security risk | 81 | | | | Risk measurement | 68 | Reputation and legal risks | 82 | | | | Trading activities | 69 | Conduct risk | 82 | | | | Stress testing and scenario analysis | 71 | Regulatory compliance risk | 82 | | | | Non-exchange traded commodity derivatives | 72 | Environmental and related social risk | 82 | | | | Structural Interest Rate Risk (SIRR) | 72 | | | ## Risk overview CIBC faces a wide variety of risks across all of its areas of business. Identifying and understanding risks and their impact allows CIBC to frame its risk appetite and risk management practices. Defining acceptable levels of risk, and establishing sound principles, policies and practices for managing risks, is fundamental to achieving consistent and sustainable long-term performance, while remaining within our risk appetite. Our risk appetite defines tolerance levels for various risks. This is the foundation for our risk management culture and our risk management framework. Our risk management framework includes: * CIBC, SBU and functional group-level risk appetite statements; * Risk frameworks, policies, procedures and limits to align activities with our risk appetite; * Regular risk reports to identify and communicate risk levels; * An independent control framework to identify and test the design and operating effectiveness of our key controls; * Stress testing to consider the potential impact of changes in the business environment on capital, liquidity and earnings; * Proactive consideration of risk mitigation options in order to optimize results; and * Oversight through our risk-focused committees and governance structure. Managing risk is a shared responsibility at CIBC. Business units and risk management professionals work in collaboration to ensure that business strategies and activities are consistent with our risk appetite. CIBC's approach to enterprise-wide risk management aligns with the three lines of defence model: (i) As the first line of defence, CIBC's SBUs and functional groups own the risks and are accountable and responsible for identifying and assessing risks inherent in their activities in accordance with the CIBC risk appetite. In addition, they establish and maintain controls to mitigate such risks. The first line of defence may include governance groups within the relevant area to facilitate the control framework and other risk-related processes. Control groups provide subject matter expertise to the business lines and/or implement and maintain enterprise-wide control programs and activities. While control groups collaborate with the lines of business in identifying and managing risk, they also challenge risk decisions and risk mitigation strategies. (ii) The second line of defence is independent from the first line of defence and provides an enterprise-wide view of specific risk types, guidance and effective challenge to risk and control activities. Risk Management is the primary second line of defence. Risk Management may leverage or rely on subject matter expertise of other groups (e.g., third parties or control groups) to better inform their independent assessments, as appropriate. (iii) As the third line of defence, CIBC's internal audit function provides reasonable assurance to senior management and the Audit Committee of the Board on the effectiveness of CIBC's governance practices, risk management processes, and internal control as part of its risk-based audit plan and in accordance with its mandate as described in the Internal Audit Charter. A strong risk culture and communication between the three lines of defence are important characteristics of effective risk management. We continuously monitor our risk profile against our defined risk appetite and related limits, taking action as needed to maintain an appropriate balance of risk and return. Monitoring our risk profile includes forward-looking analysis of sensitivity to local and global market factors, economic conditions, and geo-political and regulatory environments that influence our overall risk profile. Regular and transparent risk reporting and discussion at senior management committees facilitates communication of risks and discussion of risk management strategies across the organization. CIBC 2020 ANNUAL REPORT 43 # Risk governance structure Our risk governance structure is illustrated below: ```mermaid graph TD B[Board of Directors] B --> AC(Audit Committee) B --> RMC(Risk Management Committee) B --> MRCC(Management Resources and Compensation Committee) B --> CGC(Corporate Governance Committee) AC --> EC[Executive Committee] RMC --> EC MRCC --> EC CGC --> EC EC --> GALCO(Global Asset Liability Committee) EC --> GRC(Global Risk Committee) B -- oversight --> RMC B -- oversight --> AC B -- oversight --> MRCC B -- oversight --> CGC EC -- escalation --> B EC -- culture --> CGC EC -- framework --> GRC ``` **Board of Directors (the Board):** The Board oversees the enterprise-wide risk management program through approval of our risk appetite, control framework and supporting risk management policies and limits. The Board accomplishes its mandate through its Audit, Risk Management, Management Resources and Compensation, and Corporate Governance committees, described below. **Audit Committee (AC):** The Audit Committee reviews the overall design and operating effectiveness of internal controls and the control environment, including controls over the risk management process. **Risk Management Committee (RMC):** This committee assists the Board in fulfilling its responsibilities for defining CIBC's risk appetite and overseeing CIBC's risk profile and performance against the defined risk appetite. This includes oversight of key frameworks, policies and risk limits related to the identification, measurement, monitoring and controlling of CIBC's principal business risks. **Management Resources and Compensation Committee (MRCC):** This committee is responsible for assisting the Board in its global oversight of CIBC's human capital strategy, including talent and total rewards, and the alignment with CIBC's strategy, risk appetite and controls. **Corporate Governance Committee (CGC):** This committee is responsible for assisting the Board in fulfilling its corporate governance oversight responsibilities. **Executive Committee (ExCo):** The ExCo, led by the Chief Executive Officer (CEO) and including the executives reporting directly to the CEO, is responsible for setting business strategy and for monitoring, evaluating and managing risks across CIBC. The ExCo is supported by the following management governance committees: * **Global Asset Liability Committee (GALCO):** This committee, which comprises members from the ExCo and senior Treasury, Risk Management and lines of business executives, provides oversight regarding capital management, funding and liquidity management, and asset liability management. It also provides strategic direction regarding structural interest rate risk and structural foreign exchange risk postures, approval of funds transfer pricing policies/parameters and approval of wholesale funding plans. * **Global Risk Committee (GRC):** This committee, which comprises selected members of the ExCo and senior leaders from the lines of business, Risk Management and other functional groups, provides a forum for discussion and oversight of risk appetite, risk profile and risk-mitigation strategies. Key activities include reviewing and providing input regarding CIBC's risk appetite statements; monitoring risk profile against risk appetite, reviewing and evaluating business activities in the context of risk appetite; and identifying, reviewing, and advising on current and emerging risk issues and associated mitigation plans. 44 CIBC 2020 ANNUAL REPORT # Risk management structure The Risk Management group, led by our Chief Risk Officer (CRO), is responsible for setting risk strategies and for providing independent oversight of the businesses. Risk Management works to identify, assess, mitigate, monitor and control risks associated with business activities and strategies, and is