# 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, 2018, 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 November 28, 2018. Additional information relating to CIBC, including the Annual Information Form, is available on SEDAR at www.sedar.com and on the 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 186 to 191 of this Annual Report. | Section | Page | Section | Page | Section | Page | |---|---|---|---|---|---| | 2 External reporting change | 2 | 7 Non-interest income | 7 | 17 Strategic business units overview | 17 | 41 Management of risk | 41 | | 3 Overview | 3 | 7 Trading activities (TEB) | 7 | 18 Canadian Personal and Small Business Banking | 18 | 79 Accounting and control matters | 79 | | 3 CIBC's strategy | 3 | 8 Provision for credit losses | 8 | 20 Canadian Commercial Banking and Wealth Management | 20 | 79 Critical accounting policies and estimates | 79 | | 3 Performance against objectives | 3 | 9 Non-interest expenses | 9 | 23 U.S. Commercial Banking and Wealth Management | 23 | 84 Accounting developments | 84 | | 4 Economic and market environment | 4 | 9 Taxes | 9 | 25 Capital Markets | 25 | 84 Other regulatory developments | 84 | | 5 Financial performance overview | 5 | 10 Significant events | 10 | 28 Corporate and Other | 28 | 85 Related-party transactions | 85 | | 5 Financial highlights | 5 | 10 Fourth quarter review | 10 | 29 Financial condition | 29 | 85 Policy on the Scope of Services of the Shareholders' Auditors | 85 | | 6 2018 Financial results | 6 | 11 Quarterly trend analysis | 11 | 29 Review of condensed consolidated balance sheet | 29 | 85 Controls and procedures | 85 | | 6 Net interest income and margin | 6 | 12 Review of 2017 financial performance | 12 | 30 Capital resources | 30 | 86 Supplementary annual financial information | 86 | | | | 13 Outlook for calendar year 2019 | 13 | 40 Off-balance sheet arrangements | 40 | | | | | | 14 Non-GAAP measures | 14 | | | | | **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", "Financial performance overview – Taxes", "Financial performance overview – Significant events", "Financial performance overview – Outlook for calendar year 2019", "Strategic business units overview – Canadian Personal and Small 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 resources", "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 – Financial instruments", "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 2019 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 "Financial performance overview – Outlook for calendar year 2019" section of this report, and are subject to inherent risks and uncertainties that may be general or specific. A variety of factors, many of which are beyond our control, affect our operations, performance and results, and could cause actual results to differ materially from the expectations expressed in any of our forward-looking statements. These factors include: credit, market, liquidity, strategic, insurance, operational, reputation and legal, regulatory and environmental risk; 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 Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations issued and to be issued thereunder, 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, public health emergencies, 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 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; currency value and interest rate fluctuations, including as a result of market and oil price volatility; 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 synergies and benefits of the acquisition of PrivateBancorp, Inc. 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 2018 ANNUAL REPORT 1 # External reporting change The following external reporting change was made in 2018. ## IFRS 9 "Financial Instruments" We adopted IFRS 9 "Financial Instruments" (IFRS 9) effective November 1, 2017. As permitted, prior period amounts were not restated. As part of the adoption of IFRS 9, we now recognize provision for credit losses on both impaired (stage 3) and performing (stages 1 and 2) loans in the respective strategic business units (SBUs). In prior periods, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses related to CIBC Bank USA, which was recognized in U.S. Commercial Banking and Wealth Management, and provision for credit losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking. 2 CIBC 2018 ANNUAL REPORT # Overview CIBC is a leading North American financial institution with a market capitalization of $\$50$ billion and a Basel III Common Equity Tier 1 (CET1) ratio of $11.4\%$. Through our four strategic business units – Canadian Personal and Small 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$^{(1)}$ 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 for a modern world, delivering consistent and sustainable earnings growth for our shareholders, and giving back to our communities. ## CIBC's strategy We are building a relationship-oriented bank for a modern world. To achieve our strategic objectives of delivering superior client experience and shareholder returns, we are focused on four key areas: * Building a strong client-focused franchise; * Diversifying our earnings growth; * Optimizing our operational efficiency; and * Maintaining capital and balance sheet discipline. ## 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 five key areas of shareholder value – earnings growth, efficiency ratio, return on common shareholders' equity (ROE), total shareholder return (TSR) 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. ### Earnings growth$^{(2)}$ To assess our earnings growth, we monitor our earnings per share (EPS). Our target beginning in 2018 is average annual EPS growth of $5\%$ to $10\%$. In 2018, we delivered reported and adjusted$^{(2)}$ diluted EPS growth of $4\%$ and $10\%$, respectively. Going forward, we are maintaining our target to deliver average annual EPS growth of $5\%$ to $10\%$. | Reported diluted EPS (\$) | Adjusted diluted EPS$^{(2)}$ (\$) | |---|---| | 7.86, 8.87, 10.70, 11.24, 11.65 (for years 14 to 18) | 8.94, 9.45, 11.11, 11.65, 12.21 (for years 14 to 18) | ### Efficiency ratio$^{(2)}$ To assess how well we use our assets to generate net income, we measure and monitor our efficiency ratio, defined as the ratio of non-interest expenses to total revenue. In 2018, CIBC's reported and adjusted$^{(2)}$ efficiency ratios improved to $57.5\%$ and $55.6\%$, respectively, from $58.8\%$ and $57.2\%$ in 2017. CIBC has set a near-term target of achieving a run rate efficiency ratio of $55\%$ by 2019, and a medium-term target of $52\%$ by 2022. | Reported efficiency ratio (%) | Adjusted efficiency ratio$^{(2)}$ (%) | |---|---| | 63.7, 63.9, 59.7, 58.8, 57.5 (for years 14 to 18) | 59.0, 59.6, 58.0, 57.2, 55.6 (for years 14 to 18) | ### Return on common shareholders' equity$^{(2)}$ ROE is another key measure of shareholder value. In 2018, CIBC's reported and adjusted$^{(2)}$ ROE were strong, at $16.6\%$ and $17.4\%$, respectively, above our target of at least $15\%$. Going forward, we will continue to target a strong ROE of at least $15\%$ through the cycle. | Reported return on common shareholders' equity (%) | Adjusted return on common shareholders' equity$^{(2)}$ (%) | |---|---| | 18.3, 18.7, 18.3, 16.6, 16.6 (for years 14 to 18) | 20.9, 19.9, 19.0, 18.1, 17.4 (for years 14 to 18) | ## Total shareholder return TSR is the ultimate measure of shareholder value, and the output of delivering against the financial targets within our control. We have two shareholder return targets: 1. For many years, we have consistently delivered adjusted 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 2018, our reported and adjusted$^{(1)}$ dividend payout ratios were $45.5\%$ and $43.4\%$, respectively. Going forward, we will continue to target a dividend payout ratio of $40\%$ to $50\%$. 2. We also have an objective to deliver a TSR that exceeds the industry average, which we have defined as the Standard & Poor's Ratings Services (S&P)/Toronto Stock Exchange (TSX) Composite Banks Index, over a rolling five-year period. For the five years ended October 31, 2018, CIBC delivered a TSR of $60.6\%$, which was below the Banks Index return over the same period of $62.0\%$. | Reported dividend payout ratio (%) | Adjusted dividend payout ratio$^{(1)}$ (%) | |---|---| | 50.0, 48.4, 45.6, 45.5, 44.3 (for years 14 to 18) | 44.0, 45.4, 46.4, 46.2, 43.4 (for years 14 to 18) | | Rolling five-year TSR (%) | |---| | Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 | | CIBC 60.6% | | S&P/TSX Composite Index 30.3% | | S&P/TSX Composite Banks Index 62.0% | ## Balance sheet strength Maintaining a strong balance sheet is foundational to our long-term success. Our goal is to maintain strong capital ratios that comfortably exceed regulatory targets. 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. At the end of 2018, our Basel III CET1 ratio on an all-in basis was $11.4\%$, well above the current all-in regulatory target set by the Office of the Superintendent of Financial Institutions (OSFI). In addition to our capital objectives, we remain focused on asset quality and a strong funding profile as key underpinnings of a strong and stable balance sheet. | CET1 ratio (%) | |---| | 10.3, 10.8, 11.3, 10.6, 11.4 (for years 14 to 18) | $^{(1)}$ For additional information, see the "Non-GAAP measures" section. ## Client experience We continue to have a strong and ongoing focus on the client experience. Our Client Experience Index, which is a range of relevant measures from each of our businesses, is aligned to CIBC's client-focused strategy and is a composite of: * External and internal Net Promoter Score studies; * Relationship surveys, which measure the client's overall experience with our bank; * Transactional surveys, which measure a client's experience with a particular interaction; and * Specific business and operational metrics which tightly correlate with the client experience. ## Economic and market environment CIBC operated in an environment of moderate economic growth in Canada, and of accelerating growth in the U.S. in 2018. Canada enjoyed low unemployment rates that supported household credit quality, but both consumer and mortgage credit growth decelerated due to higher interest rates, softer housing inflation, and regulatory policy decisions. Corporate credit quality remained strong despite a slowing in profit growth, while business investment spending and loan demand accelerated. A slower increase in non-financial corporate bond issuance activity was more than offset by the accelerating issuance of financial sector bonds, while equity issuance activity was light. Government debt continued to grow but at a slightly slower pace than 2017. The U.S. economy showed strong growth and robust employment gains as fiscal stimulus more than offset rising interest rates, helping to drive a pick-up in business lending after a slow 2017. U.S. equity markets had a strong start to the year but gave up that ground in the fall on concerns over global growth and rising interest rates. 3 CIBC 2018 ANNUAL REPORT # Financial performance overview ## Financial highlights As at or for the year ended October 31 | Financial results (\$ millions) | 2018 | 2017 | 2016 | 2015 | 2014 | |---|---|---|---|---|---| | Net interest income | 10,065 | 8,977 | 8,366 | 7,915 | 7,459 | | Non-interest income | 7,769 | 7,303 | 6,669 | 5,941 | 5,904 | | Total revenue | 17,834 | 16,280 | 15,035 | 13,856 | 13,363 | | Provision for credit losses | 870 | 829 | 1,051 | 771 | 937 | | Non-interest expenses | 10,258 | 9,571 | 8,971 | 8,861 | 8,512 | | Income before income taxes | 6,706 | 5,880 | 5,013 | 4,224 | 3,914 | | Income taxes | 1,422 | 1,162 | 718 | 634 | 699 | | Net income | 5,284 | 4,718 | 4,295 | 3,590 | 3,215 | | Net income (loss) attributable to non-controlling interests | 17 | 19 | 20 | 14 | (3) | | Preferred shareholders | 89 | 52 | 38 | 45 | 87 | | Common shareholders | 5,178 | 4,647 | 4,237 | 3,531 | 3,131 | | Net income attributable to equity shareholders | 5,267 | 4,699 | 4,275 | 3,576 | 3,218 | | Financial measures | 2018 | 2017 | 2016 | 2015 | 2014 | |---|---|---|---|---|---| | Reported efficiency ratio | 57.5% | 58.8% | 59.7% | 63.9% | 63.7% | | Adjusted efficiency ratio $^{(1)}$ | 55.6% | 57.2% | 58.0% | 59.6% | 59.0% | | Loan loss ratio$^{(2)}$ | 0.26% | 0.25% | 0.31% | 0.27% | 0.38% | | Reported return on common shareholders' equity | 16.6% | 18.3% | 19.9% | 18.7% | 18.3% | | Adjusted return on common shareholders' equity $^{(1)}$ | 17.4% | 18.1% | 19.0% | 19.9% | 20.9% | | Net interest margin | 1.68% | 1.66% | 1.64% | 1.74% | 1.81% | | Net interest margin on average interest-earning assets | 1.88% | 1.85% | 1.88% | 2.00% | 2.05% | | Return on average assets | 0.88% | 0.87% | 0.84% | 0.79% | 0.78% | | Return on average interest-earning assets | 0.99% | 0.97% | 0.96% | 0.91% | 0.89% | | Total shareholder return | 4.70% | 18.30% | 5.19% | 1.96% | 20.87% | | Reported effective tax rate | 21.2% | 19.8% | 14.3% | 15.0% | 17.9% | | Adjusted effective tax rate $^{(1)}$ | 20.0% | 20.3% | 16.6% | 15.5% | 15.4% | | Common share information | Per share (\$) | 2018 | 2017 | 2016 | 2015 | 2014 | |---|---|---|---|---|---|---| | basic earnings | 11.69 | 11.26 | 10.72 | 8.89 | 7.87 | | reported diluted earnings | 11.65 | 11.24 | 10.70 | 8.87 | 7.86 | | adjusted diluted earnings $^{(1)}$ | 12.21 | 11.11 | 10.22 | 9.45 | 8.94 | | dividends | 5.32 | 5.08 | 4.75 | 4.30 | 3.94 | | book value | 73.83 | 66.55 | 56.59 | 51.25 | 44.30 | | Share price (\$) | high | 124.59 | 119.86 | 104.46 | 107.16 | 107.01 | | | low | 110.11 | 97.76 | 83.33 | 86.00 | 85.49 | | | closing | 113.68 | 113.56 | 100.50 | 100.28 | 102.89 | | Shares outstanding (thousands) | weighted-average basic$^{(3)}$ | 443,082 | 412,636 $^{(4)}$ | 395,389 | 397,213 | 397,620 | | | weighted-average diluted | 444,627 | 413,563 $^{(4)}$ | 395,919 | 397,832 | 398,420 | | | end of period$^{(3)}$ | 442,826 | 439,313 $^{(4)}$ | 397,070 | 397,291 | 397,021 | | Market capitalization (\$ millions) | 50,341 | 49,888 | 39,906 | 39,840 | 40,850 | | Value measures | 2018 | 2017 | 2016 | 2015 | 2014 | |---|---|---|---|---|---| | Dividend yield (based on closing share price) | 4.7% | 4.5% | 4.7% | 4.3% | 3.8% | | Reported dividend payout ratio | 45.5% | 45.6% | 44.3% | 48.4% | 50.0% | | Adjusted dividend payout ratio $^{(1)}$ | 43.4% | 46.2% | 46.4% | 45.4% | 44.0% | | Market value to book value ratio | 1.54 | 1.71 | 1.78 | 1.96 | 2.32 | | On- and off-balance sheet information (\$ millions) | 2018 | 2017 | |---|---|---| | Cash, deposits with banks and securities | 119,355 | 107,571 | | Loans and acceptances, net of allowance | 381,661 | 365,558 | | Derivative instruments | 21,431 | 24,342 | | Total assets | 597,099 | 565,264 | | Deposits | 461,015 | 439,706 | | Common shareholders' equity | 32,693 | 29,238 | | Average assets | 598,441 | 542,365 | | Average interest-earning assets | 536,059 | 485,837 | | Average common shareholders' equity | 31,184 | 25,393 | | Assets under administration (AUA)$^{(5)(6)}$ | 2,303,962 | 2,192,947 | | Assets under management (AUM)$^{(6)}$ | 225,379 | 221,571 | | Balance sheet quality (All-in basis) and liquidity measures | 2018 | 2017 | |---|---|---| | Risk-weighted assets (RWA) (\$ millions) | | | | CET1 capital RWA | 216,144 | 203,321 | | Tier 1 capital RWA | 216,303 | 203,321 | | Total capital RWA | 216,462 | 203,321 | | Capital ratios | | | | CET1 ratio | 11.4% | 10.6% | | Tier 1 capital ratio | 12.9% | 12.1% | | Total capital ratio | 14.9% | 13.8% | | Basel III leverage ratio | 4.3% | 4.0% | | Leverage ratio exposure (\$ millions) | 653,946 | 610,353 | | Leverage ratio | 128% | 120% | | Liquidity coverage ratio (LCR)$^{(7)}$ | 124% | 119% | | Other information | 2018 | 2017 | 2016 | 2015 | 2014 | |---|---|---|---|---|---| | Full-time equivalent employees | 44,220 | 44,928 | 43,213 | 44,201 | 44,424 | $^{(1)}$ For additional information, see the "Non-GAAP measures" section. $^{(2)}$ The ratio is calculated as the provision for credit losses on impaired loans to average loans and acceptances, net of allowance for credit losses. In 2018, following our adoption of IFRS 9 on November 1, 2017, provision for credit losses on impaired loans (stage 3) is calculated in accordance with IFRS 9. 2017 and prior amounts were calculated in accordance with IAS 39. $^{(3)}$ Excludes $60,764$ restricted shares as at October 31, 2018 (2017: $190,285$). $^{(4)}$ Excludes $2,010,890$ common shares which were issued and outstanding but which had not been acquired by a third party as at October 31, 2017. These shares were issued as a component of our acquisition of The PrivateBank. $^{(5)}$ 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 $\$1,834.0$ billion as at October 31, 2018 (2017: $\$1,723.9$ billion). $^{(6)}$ AUM amounts are included in the amounts reported under AUA. $^{(7)}$ Average for the three months ended October 31 for each respective year. n/a Not applicable. ## 2018 Financial results Reported net income for the year was $\$5,284$ million, compared with $\$4,718$ million in 2017. CIBC Bank USA contributed $\$407$ million to net income, compared with $\$96$ million in 2017. Last year only included the results of CIBC Bank USA following the acquisition on June 23, 2017. Adjusted net income$^{(1)}$ for the year was $\$5,541$ million, compared with $\$4,665$ million in 2017. Reported diluted EPS for the year was $\$11.65$, compared with $\$11.24$ in 2017. Adjusted diluted EPS$^{(1)}$ for the year was $\$12.21$, compared with $\$11.11$ in 2017. Net income was affected by the following items of note: * $\$115$ million $(\$85$ million after-tax) amortization of acquisition-related intangible assets $(\$9$ million after-tax in Canadian Personal and Small 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 $\$10$ million after-tax in Corporate and Other); * $\$89$ million $(\$65$ million after-tax and minority interest) of incremental losses on debt securities and loans in FirstCaribbean International Bank Limited (CIBC FirstCaribbean) recognized in the fourth quarter resulting from the Barbados government debt restructuring (Corporate and Other); * $\$88$ million charge from net tax adjustments resulting from the U.S. tax reforms enacted in the first quarter of 2018 (Corporate and Other); and * $\$16$ million $(\$14$ million after-tax) in transaction and integration-related costs net of purchase accounting adjustments$^{(2)}$ associated with the acquisitions of The PrivateBank and Geneva Advisors (income of $\$38$ million after-tax in U.S. Commercial Banking and Wealth Management, and charge of $\$52$ million after-tax in Corporate and Other). The above items of note increased revenue by $\$2$ million, provision for credit losses by $\$28$ million, non-interest expenses by $\$194$ million, and income taxes by $\$37$ million. In aggregate, these items of note decreased net income by $\$257$ million and net income attributable to common shareholders by $\$252$ million. ## 2017 Net income was affected by the following items of note: * $\$299$ million $(\$245$ million after-tax) gain on the sale and lease back of certain retail properties (Canadian Personal and Small Business Banking); * $\$104$ million $(\$73$ million after-tax) in transaction and integration-related costs as well as purchase accounting adjustments$^{(2)}$ associated with the acquisition of The PrivateBank and Geneva Advisors $(\$3$ million after-tax in U.S. Commercial Banking and Wealth Management, and $\$70$ million after-tax in Corporate and Other); * $\$45$ million $(\$33$ million after-tax) increase in legal provisions in the third quarter (Corporate and Other); * $\$41$ million $(\$28$ million after-tax) amortization of acquisition-related intangible assets $(\$4$ million after-tax in Canadian Personal and Small Business Banking, $\$1$ million after-tax in Canadian Commercial Banking and Wealth Management, $\$16$ million after-tax in U.S. Commercial Banking and Wealth Management, and $\$7$ million after-tax in Corporate and Other); * $\$98$ million $(\$71$ million after-tax) in fees and charges related to the launch of Simplii Financial and the related wind-down of President's Choice Financial (Canadian Personal and Small Business Banking); and * $\$18$ million $(\$13$ million after-tax) reduction in the portion of the collective allowance recognized in Corporate and Other$^{(3)}$ in the fourth quarter. The above items of note increased revenue by $\$305$ million, provision for credit losses by $\$17$ million and non-interest expenses by $\$259$ million, and decreased income taxes by $\$24$ million. In aggregate, these items of note increased net income by $\$53$ million. $^{(1)}$ For additional information, see the "Non-GAAP measures" section. $^{(2)}$ Transaction costs include legal and other advisory fees, financing costs associated with pre-funding the cash component of the merger consideration, 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, included as items of note beginning in the fourth quarter of 2017, include the accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank, the collective allowance established for new loan originations and renewals of acquired loans (prior to the adoption of IFRS 9 in the first quarter of 2018), and changes in the fair value of contingent consideration relating to the Geneva Advisors acquisition. $^{(3)}$ Relates to collective allowance (prior to the adoption of IFRS 9), except for: (i) residential mortgages greater than 90 days delinquent; (ii) personal loans and scored small business loans greater than 30 days delinquent; (iii) net write-offs for the card portfolio; and (iv) the collective allowance related to CIBC Bank USA, which are all reported in the respective SBUs. ## Net interest income and margin | \$ millions, for the year ended October 31 | 2018 | 2017 | 2016 | |---|---|---|---| | Average interest-earning assets | 536,059 | 485,837 | 445,134 | | Net interest income | 10,065 | 8,977 | 8,366 | | Net interest margin on average interest-earning assets | 1.88% | 1.85% | 1.88% | Net interest income was up $\$1,088$ million or $12\%$ from 2017, primarily due to the inclusion of the results of CIBC Bank USA for the full year, volume growth and wider spreads in Canadian personal and commercial products, and higher treasury revenue. These factors were partially offset by lower trading income. Net interest margin on average interest-earning assets was up three basis points due to higher net interest income. The impact of higher net interest income was partially offset by higher average interest-earning assets, mainly driven by growth across CIBC's businesses. Additional information on net interest income and margin is provided in the "Supplementary annual financial information" section. 6 CIBC 2018 ANNUAL REPORT # Non-interest income | \$ millions, for the year ended October 31 | 2018 | 2017 | 2016 | |---|---|---|---| | Underwriting and advisory fees | 420 | 452 | 446 | | Deposit and payment fees | 877 | 843 | 832 | | Credit fees | 851 | 744 | 638 | | Card fees | 510 | 463 | 470 | | Investment management and custodial fees $^{(1)(2)}$ | 1,247 | 1,034 | 882 | | Mutual fund fees $^{(2)}$ | 1,624 | 1,573 | 1,462 | | Insurance fees, net of claims | 431 | 427 | 396 | | Commissions on securities transactions | 357 | 349 | 342 | | Gains (losses) from financial instruments measured/designated at fair value through profit or loss (FVTPL), net (2017 and 2016: Trading income (loss) and designated at fair value (FVO) gains (losses), net) $^{(3)(4)}$ | 603 | 227 | (71) | | Gains (losses) from debt securities measured at fair value through other comprehensive income (FVOCI) and amortized cost, net (2017 and 2016: Available-for-sale (AFS) securities gains, net) $^{(3)}$ | (35) | 143 | 73 | | Foreign exchange other than trading | 310 | 252 | 367 | | Income from equity-accounted associates and joint ventures $^{(1)}$ | 121 | 101 | 96 | | Other | 453 | 695 | 736 | | **Total** | **7,769** | **7,303** | **6,669** | $^{(1)}$ Custodial fees directly recognized by CIBC are included in Investment management and custodial fees, and 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). $^{(3)}$ Prior period amounts were reclassified to conform to the presentation adopted in the current year. $^{(4)}$ Includes $\$46$ million (2017: $\$1$ million) of income relating to non-trading financial instruments measured/designated at FVTPL. Non-interest income was up $\$466$ million or $6\%$ from 2017. 2017 only included the results of CIBC Bank USA following the acquisition on June 23, 2017. Credit fees were up $\$107$ million or $14\%$, primarily due to higher commercial lending volumes. Investment management and custodial fees were up $\$213$ million or $21\%$, primarily due to average AUM and AUA growth in our wealth management businesses. Mutual fund fees were up $\$51$ million or $3\%$, mainly driven by market appreciation and net sales of mutual funds. Gains (losses) from financial instruments measured/designated at FVTPL, net (2017 and 2016: Trading income (loss) and designated at fair value (FVO) gains (losses), net) was up $\$376$ million or $166\%$, primarily due to higher trading income. See the "Trading activities (TEB)" section which follows for further details. Gains (losses) from debt securities measured at FVOCI and amortized cost, net (2017 and 2016: Available-for-sale (AFS) securities gains, net) were down $\$178$ million or $124\%$, primarily due to losses on debt securities measured at FVOCI as a result of the Barbados government debt restructuring, of which $\$61$ million was shown as an item of note in the fourth quarter of 2018, and lower investment portfolio gains in Capital Markets. Foreign exchange other than trading was up $\$58$ million or $23\%$, primarily due to higher revenue from hedging activities. Other was down $\$242$ million or $35\%$, as the prior year included a gain on the sale and lease back of certain retail properties, shown as an item of note. ## Trading activities (TEB) | \$ millions, for the year ended October 31 | 2018 | 2017 | 2016 | |---|---|---|---| | Trading income (loss) consists of: | | | | | Net interest income $^{(1)}$ | 856 | 1,143 | 1,482 | | Non-interest income | 557 | 226 | (88) | | **Total** | **1,413** | **1,369** | **1,394** | | Trading income by product line: | | | | | Interest rates | 246 | 276 | 293 | | Foreign exchange | 573 | 524 | 511 | | Equities | 452 | 401 | 453 | | Commodities | 94 | 111 | 106 | | Other | 48 | 57 | 31 | | **Total** | **1,413** | **1,369** | **1,394** | $^{(1)}$ Includes taxable equivalent basis (TEB) adjustment of $\$278$ million (2017: $\$298$ million; 2016: $\$474$ million) reported within Capital Markets. See "Strategic business units overview" section for further details. Net interest income comprises interest and dividends relating to financial assets and liabilities associated with trading activities, net of interest expense and interest income associated with funding these assets and liabilities. Non-interest income includes realized and unrealized gains and losses on securities mandatorily measured at FVTPL (2017 and 2016: held-for-trading) and income relating to changes in fair value of derivative financial instruments. Trading activities and related risk management strategies can periodically shift income between net interest income and non-interest income. Therefore, we view total trading revenue as the most appropriate measure of trading performance. Trading income was up $\$44$ million or $3\%$ from 2017, primarily due to higher equity and foreign exchange trading income, partially offset by lower interest rate and commodities trading income. 7 CIBC 2018 ANNUAL REPORT # Provision for credit losses$^{(1)}$ | \$ millions, for the year ended October 31 | 2018 In accordance with IFRS 9 | 2017 In accordance with IAS 39 | 2016 In accordance with IAS 39 | |---|---|---|---| | Provision for (reversal of) credit losses – impaired | | | | | Canadian Personal and Small Business Banking | 760 | 760 | 728 | | Canadian Commercial Banking and Wealth Management | 15 | 16 | 29 | | U.S. Commercial Banking and Wealth Management | 67 | 37 | (2) | | Capital Markets | 8 | (4) | 155 | | Corporate and Other | 102 | 20 | 22 | | **Total** | **952** | **829** | **932** | | Provision for (reversal of) credit losses – performing | | | | | Canadian Personal and Small Business Banking | (19) | 6 | n/a | | Canadian Commercial Banking and Wealth Management | (10) | n/a | n/a | | U.S. Commercial Banking and Wealth Management | 12 | 47 | n/a | | Capital Markets | (38) | n/a | n/a | | Corporate and Other | (27) | (53) | 111 | | **Total** | **(82)** | **119** | | | **Total** | **870** | **829** | **1,051** | $^{(1)}$ As a result of our adoption of IFRS 9 effective November 1, 2017, we now recognize provision for credit losses on both impaired and performing loans in the SBUs. In prior periods, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses related to CIBC Bank USA, which was recognized in U.S. Commercial Banking and Wealth Management, and provision for credit losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking. Provision for credit losses related to CIBC FirstCaribbean continues to be recognized in Corporate and Other. n/a Not applicable. Provision for credit losses was up $\$41$ million or $5\%$ from 2017. Provision for credit losses on impaired loans was up $\$123$ million, primarily due to higher loan losses in CIBC FirstCaribbean and CIBC Bank USA. The higher loan losses in CIBC FirstCaribbean 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. Provision for credit losses on performing loans was down $\$82$ million from 2017, driven by an economic outlook that has improved since our adoption of IFRS 9 on November 1, 2017, and the transfer of certain loans to the impaired portfolio. 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 | 2018 | 2017 | 2016 | |---|---|---|---| | Employee compensation and benefits | | | | | Salaries | 2,934 | 2,738 | 2,741 | | Performance-based compensation | 1,966 | 1,745 | 1,580 | | Benefits | 765 | 715 | 661 | | **Total** | **5,665** | **5,198** | **4,982** | | Occupancy costs | 875 | 822 | 804 | | Computer, software and office equipment | 1,742 | 1,630 | 1,398 | | Communications | 315 | 317 | 319 | | Advertising and business development | 327 | 282 | 269 | | Professional fees | 226 | 229 | 201 | | Business and capital taxes | 103 | 96 | 68 | | Other | 1,005 | 997 | 930 | | **Total** | **10,258** | **9,571** | **8,971** | Non-interest expenses increased by $\$687$ million or $7\%$ from 2017, primarily due to the inclusion of the non-interest expenses of CIBC Bank USA for the full year of $\$666$ million (2017: $\$244$ million). Employee compensation and benefits increased by $\$467$ million or $9\%$, primarily due to higher salaries and performance-based compensation, largely driven by the inclusion of employee compensation and benefits relating to CIBC Bank USA employees for the full year. Computer, software and office equipment increased by $\$112$ million or $7\%$, primarily due to higher spending on strategic initiatives and the inclusion of expenses relating to CIBC Bank USA for the full year. 8 CIBC 2018 ANNUAL REPORT # Taxes | \$ millions, for the year ended October 31 | 2018 | 2017 | 2016 | |---|---|---|---| | Income taxes | 1,422 | 1,162 | 718 | | Indirect taxes $^{(1)}$ | | | | | Goods and Services Tax (GST), Harmonized Sales Tax (HST) and sales taxes | 354 | 390 | 361 | | Payroll taxes | 271 | 242 | 239 | | Capital taxes | 68 | 61 | 38 | | Property and business taxes | 77 | 72 | 71 | | **Total indirect taxes** | **770** | **765** | **709** | | **Total taxes** | **2,192** | **1,927** | **1,427** | | Reported effective tax rate | 21.2% | 19.8% | 14.3% | | Total taxes as a percentage of net income before deduction of total taxes | 29.3% | 29.0% | 24.9% | $^{(1)}$ 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 up $\$265$ million from 2017. Income tax expense was $\$1,422$ million, up $\$260$ million from 2017, primarily due to higher income and net tax adjustments resulting from the U.S. tax reforms enacted in the first quarter of 2018, shown as an item of note. Indirect taxes were up $\$5$ million, primarily due to the inclusion of the results of CIBC Bank USA for the full year, partially offset by lower sales taxes. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (U.S. tax reforms), which reduced the U.S. federal corporate income tax rate to $21\%$ effective January 1, 2018, resulting in a significant decrease in CIBC's U.S. deferred tax assets. The U.S. tax reforms introduced other important changes to U.S. corporate income tax laws including the creation of a new Base Erosion Anti-abuse Tax (BEAT) that subjects certain payments from a U.S. corporation to foreign related parties to additional taxes. The BEAT provision is applicable to CIBC in fiscal 2019. CIBC continues to evaluate the impact of BEAT on our U.S. operations. In prior years, the Canada Revenue Agency (CRA) issued reassessments disallowing the deduction of approximately $\$3$ billion of the 2005 Enron settlement payments and related legal expenses. The Tax Court of Canada trial on the deductibility of the Enron payments is set to commence in January 2019. Should we successfully defend our tax filing position in its entirety, we would recognize an additional accounting tax benefit of $\$231$ million and taxable refund interest of approximately $\$210$ million. Should we fail to defend our position in its entirety, we would incur an additional tax expense of approximately $\$820$ million and non-deductible interest of approximately $\$157$ million. The 2015 Canadian federal budget which became law effective on November 1, 2015, contained new rules for "synthetic equity arrangements" which eliminated the tax deductibility of Canadian inter-corporate dividends for Canadian corporations in certain circumstances. A set of transition rules applied between November 1, 2015 and April 30, 2017. The new rules have resulted in a higher effective tax rate, as the tax deductibility of certain Canadian corporate dividends is diminished. On February 27, 2018, the 2018 Canadian federal budget was released which extended the denial of the deductibility of Canadian inter-corporate dividends for Canadian corporations to include dividends received on share buyback transactions. In prior years, the CRA reassessed CIBC approximately $\$298$ million of additional income tax by denying the tax deductibility of certain 2011 and 2012 Canadian corporate dividends on the basis that they were part of a "dividend rental arrangement". In March 2018, CIBC filed a Notice of Appeal with the Tax Court of Canada with respect to the 2011 taxation year. The matter is now in litigation. The circumstances of the dividends subject to the reassessments are similar to those prospectively addressed by the rules in the 2015 and 2018 Canadian federal budgets. In June 2018, the CRA reassessed CIBC in respect of the 2013 taxation year for approximately $\$229$ million of additional taxes. 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. The statutory income tax rate applicable to CIBC as a legal entity was $26.5\%$ in 2018. The rate is expected to remain the same in future years. For a reconciliation of our income taxes in the consolidated statement of income with the combined Canadian federal and provincial income tax rate, see Note 19 to 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 | 2018 vs. 2017 | 2017 vs. 2016 | 2016 vs. 2015 | |---|---|---|---| | Estimated increase (decrease) in: | | | | | Total revenue | (55) | (36) | 117 | | Provision for credit losses | (2) | (1) | 8 | | Non-interest expenses | (30) | (20) | 61 | | Income taxes | (3) | (1) | 48 | | Net income | (20) | (14) | | | Impact on EPS: | | | | | Basic | $\$(0.05)$ | $\$(0.03)$ | $\$0.12$ | | Diluted | (0.05) | (0.03) | 0.12 | | Average USD appreciation (depreciation) relative to CAD | (1.5)% | (1.3)% | 5.6% | 9 CIBC 2018 ANNUAL REPORT # Significant events ## Launch of CIBC Innovation Banking and acquisition of Wellington Financial On January 8, 2018, CIBC announced the launch of CIBC Innovation Banking, a full service business that delivers strategic advice and funding to North American technology and innovation clients at each stage of their business cycle. As part of the launch of CIBC Innovation Banking, and to further deepen its capabilities and complement CIBC Bank USA's existing commercial banking team, on January 5, 2018, CIBC acquired the loan assets of Wellington Financial Fund V LP (Wellington Financial) and its management team for a combination of cash, common shares, and exchangeable shares. Based in Toronto with a U.S. presence in New York City and Menlo Park, Wellington Financial was a leading, privately-held provider of growth capital to early and mid-stage technology companies. The results of the acquired business have been consolidated from the date of close and are included in our Canadian Commercial Banking and Wealth Management SBU. For additional information, see Note 3 to our consolidated financial statements. ## Aeroplan developments Air Canada announced on May 11, 2017, that it would not be renewing its exclusive Aeroplan partnership with Aimia Inc. (Aimia) upon the expiry of the contract on June 29, 2020. CIBC's Aeroplan clients would not be immediately impacted by this announcement, as Aeroplan members may continue to collect and redeem Aeroplan Miles for Air Canada travel until Aimia's contract with Air Canada expires. On August 21, 2018, Air Canada, The Toronto-Dominion Bank, CIBC and Visa Canada Corporation announced that an agreement in principle with Aimia had been reached for the purchase of the Aeroplan loyalty business for cash of $\$450$ million and the assumption of the Aeroplan Miles liability of approximately $\$1.9$ billion. Definitive agreements were signed on November 26, 2018, including credit card agreements securing CIBC's participation in Air Canada's new loyalty program for a period of $10$ years, conditional upon completion of Air Canada's acquisition of the Aeroplan loyalty business. If finalized, this arrangement will allow our Aeroplan clients to transfer their Aeroplan Miles to Air Canada's new loyalty program, expected to launch in 2020. The agreements are subject to Aimia shareholder approval and certain other closing conditions, including receipt of applicable regulatory approvals. Upon closing, CIBC will contribute $\$200$ million plus applicable sales tax towards this transaction, which we expect to recognize as an expense in 2019. In addition, we will make a payment of $\$92$ million plus applicable sales tax to Air Canada, at closing, as a prepayment to be applied towards future monthly payments in respect of Aeroplan Miles. We expect to recognize this prepayment as a charge to net income over the term of the new credit card agreement with Air Canada as loyalty points are purchased. ## Fourth quarter review | \$ millions, except per share amounts, for the three months ended | Oct. 31 | Jul. 31 | Apr. 30 | 2018 Jan. 31 | Oct. 31 | Jul. 31 | Apr. 30 | 2017 Jan. 31 | |---|---|---|---|---|---|---|---|---| | Canadian Personal and Small Business Banking | 2,201 | 2,176 | 2,090 | 2,138 | 2,093 | 2,039 | 1,937 | 2,303 | | Canadian Commercial Banking and Wealth Management$^{(1)}$ | 986 | 988 | 937 | 954 | 922 | 903 | 886 | 879 | | U.S. Commercial Banking and Wealth Management$^{(1)}$ | 457 | 448 | 429 | 432 | 422 | 239 | 102 | 113 | | Capital Markets$^{(1)}$ | 649 | 752 | 710 | 801 | 622 | 679 | 692 | 830 | | Corporate and Other$^{(1)}$ | 159 | 183 | 210 | 134 | 210 | 244 | 81 | 84 | | **Total revenue** | **4,452** | **4,547** | **4,376** | **4,459** | **4,269** | **4,104** | **3,698** | **4,209** | | Net interest income | 2,539 | 2,577 | 2,476 | 2,473 | 2,464 | 2,276 | 2,095 | 2,142 | | Non-interest income | 1,913 | 1,970 | 1,900 | 1,986 | 1,805 | 1,828 | 1,603 | 2,067 | | Total revenue | 4,452 | 4,547 | 4,376 | 4,459 | 4,269 | 4,104 | 3,698 | 4,209 | | Provision for credit losses$^{(2)}$ | 264 | 241 | 212 | 153 | 229 | 209 | 179 | 212 | | Non-interest expenses | 2,591 | 2,572 | 2,517 | 2,578 | 2,570 | 2,452 | 2,275 | 2,274 | | Income before income taxes | 1,597 | 1,734 | 1,647 | 1,728 | 1,470 | 1,443 | 1,244 | 1,723 | | Income taxes | 329 | 365 | 328 | 400 | 306 | 346 | 194 | 316 | | **Net income** | **1,268** | **1,369** | **1,319** | **1,328** | **1,164** | **1,097** | **1,050** | **1,407** | | Net income attributable to: | | | | | | | | | | Non-controlling interests | 2 | 4 | 6 | 5 | 5 | 4 | 5 | 5 | | Equity shareholders | 1,266 | 1,365 | 1,313 | 1,323 | 1,159 | 1,093 | 1,045 | 1,402 | | EPS | | | | | | | | | | basic | 2.81 | 3.02 | 2.90 | 2.96 | 2.60 | 2.59 | 2.61 | 3.50 | | diluted | 2.80 | 3.01 | 2.89 | 2.95 | 2.59 | 2.59 | 2.59 | 3.50 | $^{(1)}$ Capital Markets and U.S. Commercial Banking and Wealth Management revenue and income taxes are reported on a TEB basis with an equivalent offset in the revenue and income taxes of Corporate and Other. $^{(2)}$ As a result of our adoption of IFRS 9 effective November 1, 2017, we now recognize provision for credit losses on both impaired and performing loans in the SBUs. In prior periods, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses related to CIBC Bank USA, which was recognized in U.S. Commercial Banking and Wealth Management, and provision for credit losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking. Provision for credit losses related to CIBC FirstCaribbean continues to be recognized in Corporate and Other. Compared with Q4/17 Net income for the quarter was $\$1,268$ million, up $\$104$ million or $9\%$ from the fourth quarter of 2017. Net interest income was up $\$75$ million or $3\%$, primarily due to volume growth and wider spreads in personal and commercial products, partially offset by lower trading income. Non-interest income was up $\$108$ million or $6\%$, primarily due to higher trading income and higher investment management and custodial fees driven by higher average AUM and AUA, partially offset by losses on debt securities measured at FVOCI as a result of the Barbados government debt restructuring, of which $\$61$ million was shown as an item of note in the fourth quarter of 2018. Provision for credit losses was up $\$35$ million or $15\%$ from the same quarter last year, primarily due to higher loan losses in CIBC FirstCaribbean, which included losses on sovereign loans resulting from the Barbados government debt restructuring, shown as an item of note. Provision for credit losses on performing loans was down, as the same quarter last year included $\$35$ million relating to the establishment of a collective allowance (prior to our adoption of IFRS 9) for new loan originations and renewals of acquired loans relating to CIBC Bank USA, shown as an item of note. The current quarter included a reversal of credit losses on performing loans arising from model parameter updates related to CIBC FirstCaribbean, whereas the same quarter last year included a reduction in the collective allowance (prior to our adoption of IFRS 9). Non-interest expenses were up $\$21$ million or $1\%$, primarily due to higher spending on strategic initiatives and higher performance-based compensation. The increase was partially offset as the same quarter last year included fees and charges related to the launch of Simplii Financial and the related wind-down of President's Choice Financial, as well as higher transaction and integration-related costs associated with the acquisition of The PrivateBank, both shown as items of note. Income tax expense was up $\$23$ million or $8\%$, primarily due to higher income. ## Compared with Q3/18 Net income for the quarter was down $\$101$ million or $7\%$ from the prior quarter. Net interest income was down $\$38$ million or $1\%$, primarily due to lower trading income partially offset by higher treasury revenue. Non-interest income was down $\$57$ million or $3\%$, primarily due to incremental losses on debt securities measured at FVOCI as a result of the Barbados government debt restructuring noted above, and lower underwriting and advisory fees, partially offset by higher trading income. Provision for credit losses was up $\$23$ million or $10\%$ from the prior quarter, primarily due to a higher provision for credit losses on performing loans relating to CIBC Bank USA, as well as portfolio growth in the personal lending portfolio. The current quarter included negative credit migrations within the performing loan portfolio in CIBC Bank USA, whereas the prior quarter included a reversal of credit losses driven by positive credit migration and transfers to the impaired portfolio. The increase in provision for credit losses on performing loans was partially offset by a lower provision for credit losses on impaired loans in the personal lending and card portfolios, as well as the pre-existing U.S. real estate finance portfolio. Non-interest expenses were up $\$19$ million or $1\%$, primarily due to higher spending on strategic initiatives, partially offset by lower performance-based and employee-related compensation. Income tax expense was down $\$36$ million or $10\%$, primarily due to lower income. ## 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 Small Business Banking revenue has benefited from volume growth over the period. In 2017, strong volume growth was partially offset by narrower spreads attributable to a lower interest rate environment. Interest rates began to rise in the second half of 2017, contributing to a trend of slower volume growth and widening spreads that continued through 2018. The first quarter of 2017 included a gain on the sale and lease back of certain retail properties. Canadian Commercial Banking and Wealth Management has benefited from strong volume growth in deposits and loans, and continued growth in AUA and AUM as a result of market appreciation and positive net sales of long-term mutual funds. In 2017, volume growth was partially offset by a low interest rate environment. Increases in interest rates beginning in the latter half of 2017 contributed to improved margins beginning in the fourth quarter of 2017. U.S. Commercial Banking and Wealth Management includes the revenue of CIBC Bank USA after the close of the acquisition on June 23, 2017. U.S. Commercial Banking and Wealth Management has benefited from volume growth following the close of the acquisition. Capital Markets revenue is influenced, to a large extent, by market conditions and activity in the equity derivatives business, which includes tax-exempt income. Tax-exempt income has been volatile over the periods shown above. The first quarters of 2017 and 2018 included higher trading revenue. Corporate and Other includes the offset related to the TEB component of tax-exempt income reported in the revenue of Capital Markets and U.S. Commercial Banking and Wealth Management. ### Provision for credit losses In the first quarter of 2018, we adopted IFRS 9 and now recognize provision for credit losses on both impaired and performing loans in the SBUs. In prior periods, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses related to CIBC Bank USA, which was recognized in U.S. Commercial Banking and Wealth Management, and provision for credit losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking). Provision for credit losses is dependent upon the credit cycle in general, on the credit performance of the loan portfolios, and, following our adoption of IFRS 9, changes in economic outlook. In Canadian Personal and Small Business Banking, the first quarter of 2018 included a reduction in allowance for performing loans, reflective of a relatively more positive economic outlook that improved in the first quarter of 2018. In Canadian Commercial Banking and Wealth Management, the fourth quarters of 2017 and 2018 included higher losses in the commercial banking portfolio. In U.S. Commercial Banking and Wealth Management, the loan losses of CIBC Bank USA have been included since the acquisition on June 23, 2017. The fourth quarter of 2017 included $\$35$ million relating to the establishment of a collective allowance (prior to our adoption of IFRS 9) for new loan originations and renewals of acquired loans relating to CIBC Bank USA. The third quarters of 2017 and 2018 included higher loan losses in our pre-existing U.S. real estate finance portfolio. The fourth quarter of 2018 included higher loan losses in CIBC Bank USA. In Capital Markets, 2018 included reductions in allowance for performing loans, reflective of better portfolio credit quality and an improved outlook with respect to the oil and gas sector. In Corporate and Other, the third and fourth quarters of 2018 included higher losses on impaired loans in CIBC FirstCaribbean resulting from the Barbados government debt restructuring. All quarters of 2017 included reductions in the collective allowance (prior to our adoption of IFRS 9). ### Non-interest expenses Non-interest expenses have fluctuated over the period largely due to changes in employee-related compensation and benefits, higher spending on strategic initiatives, and movement in foreign exchange rates. The fourth quarter of 2017 included fees and charges related to the launch of Simplii Financial and the related wind-down of the President's Choice Financial branded banking offer. The third quarter of 2017 included an increase in legal provisions in Corporate and Other, shown as an item of note. Non-interest expenses increased in the third quarter of 2017 and onward, as the results of CIBC Bank USA were included after the close of the acquisition on June 23, 2017. ### 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. The first quarter of 2018 included net tax adjustments resulting from U.S. tax reforms, partially offset by the resulting favourable impact on the effective tax rate in U.S. Commercial Banking and Wealth Management. Income taxes have increased beginning in the third quarter of 2017, primarily due to lower tax-exempt income and the inclusion of the results of CIBC Bank USA following the close of the acquisition on June 23, 2017. 11 CIBC 2018 ANNUAL REPORT # Review of 2017 financial performance ## Overview Net income for 2017 was $\$4,718$ million, compared with $\$4,295$ million in 2016. The increase in net income of $\$423$ million was due to higher revenue and a lower provision for credit losses, partially offset by higher non-interest expenses and income taxes. ## Consolidated CIBC ### Net interest income Net interest income was up $\$611$ million or $7\%$ from 2016, primarily due to volume growth across Canadian personal and commercial products, and the inclusion of the results of CIBC Bank USA following the close of the acquisition on June 23, 2017, which included $\$45$ million of accretion of the acquisition date fair value discount on the acquired loans, of which $\$31$ million was included as an item of note in the fourth quarter of 2017. These factors were partially offset by lower trading income and narrower Canadian personal and commercial spreads. ### Non-interest income Non-interest income was up $\$634$ million or $10\%$ from 2016, primarily due to an increase in trading income, investment management and custodial fees, and mutual fund fees. ### Provision for credit losses Provision for credit losses was down $\$222$ million or $21\%$ from 2016. In Canadian Personal and Small Business Banking, the provision was up primarily due to higher write-offs in the card and personal lending portfolios, and higher losses in the mortgage portfolio, partially offset by lower losses in the small business lending portfolio. In Canadian Commercial Banking and Wealth Management, the provision was down primarily due to lower losses in the commercial banking portfolio. In U.S. Commercial Banking and Wealth Management, 2017 included a provision for credit losses compared with a reversal of credit losses in 2016, primarily due to the establishment of a $\$48$ million collective allowance for new loan originations and renewals of acquired loans relating to CIBC Bank USA, of which $\$35$ million was shown as an item of note in the fourth quarter of 2017. In addition, 2017 included losses in the pre-existing U.S. real estate finance portfolio. In Capital Markets, 2017 included a reversal of credit losses compared with a provision for credit losses in 2016, primarily due to better performance in the oil and gas sector. 2016 also included losses in our exited European leveraged finance portfolio, shown as an item of note. In Corporate and Other, 2017 included a reversal of credit losses compared with a provision for credit losses in 2016. 2017 included a reduction in the collective allowance, shown as an item of note, which was net of a higher provision in the Caribbean region mainly due to the year's hurricanes. 2016 included increases in the collective allowance, shown as items of note. ### Non-interest expenses Non-interest expenses increased by $\$600$ million or $7\%$ from 2016, primarily due to higher spending on strategic initiatives, the inclusion of the results of CIBC Bank USA and higher performance-based compensation. 2017 also included higher expenses arising from fees and charges related to the launch of Simplii Financial and the related wind-down of President's Choice Financial, and transaction and integration-related costs associated with the acquisition of The PrivateBank, both shown as items of note. The increase was partially offset by restructuring charges in 2016, primarily relating to employee severance, shown as an item of note. ### Income taxes Income tax expense was $\$1,162$ million, compared with $\$718$ million in 2016, largely due to substantially lower tax-exempt income and higher income in 2017. In addition, 2016 included income tax recoveries from the settlement of transfer pricing-related matters, and a change in our expected utilization of certain tax loss carryforwards, shown as items of note. | \$ millions, for the year ended October 31 | Canadian Personal and Small Business Banking | Canadian Commercial Banking and Wealth Management | U.S. Commercial Banking and Wealth Management $^{(1)}$ | Capital Markets $^{(1)}$ | Corporate and Other $^{(1)}$ | CIBC Total | |---|---|---|---|---|---|---| | 2017 | | | | | | | | Net interest income | 5,752 | 984 | 545 | 1,647 | 49 | 8,977 | | Non-interest income | 2,193 | 3,045 | 331 | 1,164 | 570 | 7,303 | | Intersegment revenue $^{(2)}$ | 427 | (439) | | 12 | | | | Total revenue | 8,372 | 3,590 | 876 | 2,823 | 619 | 16,280 | | Provision for (reversal of) credit losses | 766 | 16 | 84 | (4) | (33) | 829 | | Non-interest expenses | 4,348 | 2,021 | 534 | 1,373 | 1,295 | 9,571 | | Income (loss) before income taxes | 3,258 | 1,553 | 258 | 1,454 | (643) | 5,880 | | Income taxes | 838 | 415 | 55 | 364 | (510) | 1,162 | | Net income (loss) | 2,420 | 1,138 | 203 | 1,090 | (133) | 4,718 | | Net income (loss) attributable to: | | | | | | | | Non-controlling interests | | | | | 19 | 19 | | Equity shareholders | 2,420 | 1,138 | 203 | 1,090 | (152) | 4,699 | | 2016 | | | | | | | | Net interest income | 5,473 | 930 | 169 | 1,958 | (164) | 8,366 | | Non-interest income | 1,896 | 2,732 | 216 | 787 | 1,038 | 6,669 | | Intersegment revenue $^{(2)}$ | 379 | (390) | | 11 | | | | Total revenue | 7,748 | 3,272 | 385 | 2,756 | 874 | 15,035 | | Provision for (reversal of) credit losses | 736 | 29 | (2) | 155 | 133 | 1,051 | | Non-interest expenses | 4,114 | 1,890 | 288 | 1,328 | 1,351 | 8,971 | | Income (loss) before income taxes | 2,898 | 1,353 | 99 | 1,273 | (610) | 5,013 | | Income taxes | 738 | 362 | 12 | 281 | (675) | 718 | | Net income (loss) | 2,160 | 991 | 87 | 992 | 65 | 4,295 | | Net income (loss) attributable to: | | | | | | | | Non-controlling interests | | | | | 20 | 20 | | Equity shareholders | 2,160 | 991 | 87 | 992 | 45 | 4,275 | $^{(1)}$ Capital Markets and U.S. Commercial Banking and Wealth Management revenue and income taxes are reported on a TEB basis with an equivalent offset in the revenue and income taxes of Corporate and Other. $^{(2)}$ Intersegment revenue represents internal sales commissions and revenue allocations under the Manufacturer/Customer Segment/Distributor Management Model. ## Revenue by segment Canadian Personal and Small Business Banking Revenue was up $\$624$ million or $8\%$ from 2016, primarily due to volume growth, higher fees and a gain on the sale and lease back of certain retail properties, shown as an item of note, partially offset by narrower spreads and lower revenue from our exited FirstLine mortgage broker business. Canadian Commercial Banking and Wealth Management Revenue was up $\$318$ million or $10\%$ from 2016. Commercial banking revenue was up primarily due to volume growth and higher fees, partially offset by narrower spreads. Wealth management revenue was up primarily due to higher investment management and custodial fees, and mutual fund fees from higher average AUM and AUA. U.S. Commercial Banking and Wealth Management Revenue was up $\$491$ million or $128\%$ from 2016. Commercial banking revenue was up primarily due to the inclusion of the results of CIBC Bank USA and higher revenue in U.S. real estate finance. Wealth management revenue was up primarily due to the inclusion of the results of CIBC Bank USA, and growth in average AUM mainly due to the acquisition of Geneva Advisors. In addition, in 2017 this SBU included accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank. Capital Markets Revenue was up $\$67$ million or $2\%$ from 2016, primarily due to higher investment portfolio gains, higher debt underwriting activity, and higher revenue from corporate banking, partially offset by lower revenue from our equity derivatives, interest rate, and foreign exchange trading businesses. Corporate and Other Revenue was down $\$255$ million or $29\%$ from 2016, as 2016 included a gain, net of transaction costs, on the sale of our minority investment in American Century Investments (ACI), and a gain on sale of a processing centre, both shown as items of note. The decrease was partially offset by a lower TEB adjustment and higher treasury revenue. ## Outlook for calendar year 2019 Having reached full employment in most provinces, Canada's economy is likely to see a slight moderation in growth in 2019 as monetary policy aims at keeping inflation near $2\%$ over the medium term. Real gross domestic product (GDP) growth is expected to decelerate in 2019 to just under $2\%$, with a further slowing to under $1.5\%$ in 2020 as exports feel the impact of slower economic growth in the U.S. The economy is expected to continue operating at historically low unemployment rates in 2019. The Bank of Canada's overnight rate is expected to plateau at $2.25\%$ in 2019, with inflation remaining moderate and the central bank seeking to keep the Canadian dollar range-bound to allow exports to advance. Housing construction should run at a slower pace, while capital spending by businesses should remain on a moderate growth path, with the energy sector awaiting greater assurance of pipeline access. Global crude oil benchmarks have weakened sharply on signs of slowing global growth, supply increases in the U.S., and a temporary easing of restraints on Iran. Global prices are likely to gradually recover if the Organization of the Petroleum Exporting Countries (OPEC) curtails supply and Iran sanctions re-tighten in 2019. Canadian heavy oil discounts are expected to remain wide by historical standards due to pipeline constraints, but could narrow somewhat as key U.S. refiners return to full production and some Canadian heavy oil producers reduce output. The U.S. economy is expected to decelerate to just over $2\%$ growth in 2019, and it is anticipated that tight labour markets will constrain Midwest regional growth to roughly that pace. A further slowing to $1.4\%$ growth in 2020 is likely if fiscal policy tightens. The U.S. Federal Reserve is looking to moderate growth in order to hold inflation near $2\%$. The absence of fresh tax cut stimulus by 2020 and the potential for government spending restraints to tackle deficits should allow the U.S. Federal Reserve to let its benchmark rate plateau in 2019 near $3\%$, and open the door for an easing in policy in 2020. Canadian Personal and Small Business Banking is expected to see a continuation of slow growth in consumer and mortgage lending, with demand constrained by higher interest rates, softer house price growth, and the past year's regulatory tightening. Moderate growth in corporate earnings should support activity in Capital Markets and Canadian Commercial Banking and Wealth Management. Government bond issuance activity is anticipated to remain elevated due to provincial deficits and capital spending. Credit markets should remain healthy with low unemployment and moderate profit growth. Wealth management should benefit from ongoing growth in the pool of savings, but softer economic growth could constrain the extent to which assets under management benefit from equity price gains. In U.S. Commercial Banking and Wealth Management, commercial banking should benefit from existing capacity constraints affecting many sectors as the need to expand capacity drives incremental financing requirements. Wealth management has benefited from the greater pool of after-tax savings, although a softer path for equity prices is expected to reduce the growth in assets under management. Interest rate hikes should remain mild enough to support growth in commercial lending activity, including real estate finance. 13 CIBC 2018 ANNUAL REPORT # Non-GAAP measures We use a number of financial measures to assess the performance of our business lines as described below. Some measures are calculated in accordance with GAAP (IFRS), while other measures do not have a standardized meaning under GAAP, and accordingly, these measures may not be comparable to similar measures used by other companies. Investors may find these non-GAAP measures useful in understanding how management views underlying business performance. ## Adjusted measures Management assesses results on a reported and adjusted basis and considers both as useful measures of performance. Adjusted results remove items of note from reported results and are used to calculate our adjusted measures noted below. Items of note include the amortization of intangibles, and certain items of significance that arise from time to time which management believes are not reflective of underlying business performance. We believe that adjusted measures provide the reader with a better understanding of how management assesses underlying business performance and facilitate a more informed analysis of trends. While we believe that adjusted measures may facilitate comparisons between our results and those of some of our Canadian peer banks which make similar adjustments in their public disclosure, it should be noted that there is no standardized meaning for adjusted measures under GAAP. We also adjust our results to gross up tax-exempt revenue on certain securities to a TEB basis, 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. ## Adjusted diluted EPS We adjust our reported diluted EPS to remove the impact of items of note, net of income taxes, to calculate the adjusted EPS. ## Adjusted efficiency ratio We adjust our reported revenue and non-interest expenses to remove the impact of items of note and gross up tax-exempt revenue to bring it to a TEB basis, as applicable. ## Adjusted dividend payout ratio We adjust our reported net income attributable to common shareholders to remove the impact of items of note, net of income taxes, to calculate the adjusted dividend payout ratio. ## Adjusted return on common shareholders' equity We adjust our reported net income attributable to common shareholders to remove the impact of items of note, net of income taxes, to calculate the adjusted ROE. ## Adjusted effective tax rate We adjust our reported income before income taxes and reported income taxes to remove the impact of items of note to calculate the adjusted effective tax rate. ## Economic capital Economic capital provides a framework to evaluate the returns of each SBU, commensurate with risk assumed. The economic capital measure is based upon an estimate of equity capital required by the businesses to absorb unexpected losses consistent with our targeted risk rating over a one-year horizon. Economic capital comprises primarily credit, market, operational and strategic risk capital. The difference between our total equity capital and economic capital is held in Corporate and Other. There is no comparable GAAP measure for economic capital. ## Economic profit Net income attributable to equity shareholders, adjusted for a charge on economic capital, determines economic profit. This measures the return generated by each SBU in excess of our cost of capital, thus enabling users of our financial information to identify relative contributions to shareholder value. Reconciliation of net income attributable to equity shareholders to economic profit is provided with segmented information. ## Segmented return on equity We use ROE on a segmented basis as one of the measures for performance evaluation and resource allocation decisions. While ROE for total CIBC provides a measure of return on common equity, ROE on a segmented basis provides a similar metric relating to the economic capital allocated to the segments. As a result, segmented ROE is a non-GAAP measure. 14 CIBC 2018 ANNUAL REPORT The following table provides a reconciliation of non-GAAP to GAAP measures related to CIBC on a consolidated basis. | \$ millions, for the year ended October 31 | 2018 | 2017 | 2016 | 2015 | 2014 | |---|---|---|---|---|---| | **Reported and adjusted diluted EPS** | | | | | | | Reported net income attributable to common shareholders | A | 5,178 | 4,647 | 4,237 | 3,531 | 3,131 | | After-tax impact of items of note $^{(1)}$ | | 257 | (53) | (191) | 232 | 442 | | After-tax impact of items of note on non-controlling interests | | (5) | (2) | (10) | | | Adjusted net income attributable to common shareholders $^{(2)}$ | B | 5,430 | 4,594 | 4,046 | 3,761 | 3,563 | | Diluted weighted-average common shares outstanding (thousands) | C | 444,627 | 413,563 | 395,919 | 397,832 | 398,420 | | Reported diluted EPS (\$) | A/C | 11.65 | 11.24 | 10.70 | 8.87 | 7.86 | | Adjusted diluted EPS (\$) $^{(2)}$ | B/C | 12.21 | 11.11 | 10.22 | 9.45 | 8.94 | | **Reported and adjusted efficiency ratio** | | | | | | | Reported total revenue | D | 17,834 | 16,280 | 15,035 | 13,856 | 13,363 | | Pre-tax impact of items of note $^{(1)}$ | | (305) | (505) | (40) | (276) | | TEB | | 280 | 300 | 474 | 482 | 421 | | Adjusted total revenue (TEB) $^{(2)}$ | E | 18,112 | 16,275 | 15,004 | 14,298 | 13,508 | | Reported non-interest expenses | F | 10,258 | 9,571 | 8,971 | 8,861 | 8,512 | | Pre-tax impact of items of note $^{(1)}$ | | (194) | (259) | (262) | (338) | (539) | | Adjusted non-interest expenses $^{(2)}$ | G | 10,064 | 9,312 | 8,709 | 8,523 | 7,973 | | Reported efficiency ratio | F/D | 57.5% | 58.8% | 59.7% | 63.9% | 63.7% | | Adjusted efficiency ratio $^{(2)}$ | G/E | 55.6% | 57.2% | 58.0% | 59.6% | 59.0% | | **Reported and adjusted dividend payout ratio** | | | | | | | Dividends paid to common shareholders | H | 2,356 | 2,121 | 1,879 | 1,708 | 1,567 | | Reported dividend payout ratio | H/A | 45.5% | 45.6% | 44.3% | 48.4% | 50.0% | | Adjusted dividend payout ratio $^{(2)}$ | H/B | 43.4% | 46.2% | 46.4% | 45.4% | 44.0% | | **Reported and adjusted return on common shareholders' equity** | | | | | | | Average common shareholders' equity | I | 31,184 | 25,393 | 21,275 | 18,857 | 17,067 | | Reported return on common shareholders' equity | A/I | 16.6% | 18.3% | 19.9% | 18.7% | 18.3% | | Adjusted return on common shareholders' equity $^{(2)}$ | B/I | 17.4% | 18.1% | 19.0% | 19.9% | 20.9% | | **Reported and adjusted effective tax rate** | | | | | | | Reported income before income taxes | J | 6,706 | 5,880 | 5,013 | 4,224 | 3,914 | | Pre-tax impact of items of note $^{(1)}$ | | 220 | (29) | (94) | 298 | 408 | | Adjusted income before income taxes $^{(2)}$ | K | 6,926 | 5,851 | 4,919 | 4,522 | 4,322 | | Reported income taxes | L | 1,422 | 1,162 | 718 | 634 | 699 | | Tax impact of items of note $^{(1)}$ | | (37) | 24 | 97 | 66 | (34) | | Adjusted income taxes $^{(2)}$ | M | 1,385 | 1,186 | 815 | 700 | 665 | | Reported effective tax rate | L/J | 21.2% | 19.8% | 14.3% | 15.0% | 17.9% | | Adjusted effective tax rate $^{(2)}$ | M/K | 20.0% | 20.3% | 16.6% | 15.5% | 15.4% | | \$ millions, for the year ended October 31 | Canadian Personal and Small Business Banking | Canadian Commercial Banking and Wealth Management | U.S. Commercial Banking and Wealth Management | Capital Markets | Corporate and Other | CIBC Total | |---|---|---|---|---|---|---| | 2018 | | | | | | | | Reported net income (loss) | 2,547 | 1,307 | 565 | 1,069 | (204) | 5,284 | | After-tax impact of items of note $^{(1)}$ | 9 | 1 | 27 | 220 | 257 | | Adjusted net income $^{(2)}$ | 2,556 | 1,308 | 592 | 1,069 | 16 | 5,541 | | 2017 | | | | | | | | Reported net income (loss) | 2,420 | 1,138 | 203 | 1,090 | (133) | 4,718 | | After-tax impact of items of note $^{(1)}$ | (170) | 1 | 19 | (53) | 97 | | Adjusted net income (loss) $^{(2)}$ | 2,250 | 1,139 | 222 | 1,090 | (36) | 4,665 | | 2016 | | | | | | | | Reported net income | 2,160 | 991 | 87 | 992 | 65 | 4,295 | | After-tax impact of items of note $^{(1)}$ | (25) | 2 | 6 | 28 | (191) | | Adjusted net income (loss) $^{(2)}$ | 2,135 | 993 | 93 | 1,020 | (137) | 4,104 | | 2015 | | | | | | | | Reported net income (loss) | 2,026 | 921 | 104 | 847 | (308) | 3,590 | | After-tax impact of items of note $^{(1)}$ | (28) | 2 | 7 | 8 | 243 | 232 | | Adjusted net income (loss) $^{(2)}$ | 1,998 | 923 | 111 | 855 | (65) | 3,822 | | 2014 | | | | | | | | Reported net income (loss) | 2,459 | 470 | n/a | 869 | (583) | 3,215 | | After-tax impact of items of note $^{(1)}$ | (64) | 15 | n/a | 18 | 473 | 442 | | Adjusted net income (loss) $^{(2)}$ | 2,395 | 485 | n/a | 887 | (110) | 3,657 | $^{(1)}$ Reflects impact of items of note described under "2018 Financial results" section and below. $^{(2)}$ Non-GAAP measure. n/a Not available. 15 CIBC 2018 ANNUAL REPORT # Impact of items of note in prior years ## 2016 Net income was affected by the following items of note: * $\$428$ million $(\$383$ million after-tax) gain, net of related transaction costs, on the sale of our minority investment in ACI (Corporate and Other); * $\$134$ million $(\$98$ million after-tax) in restructuring charges primarily relating to employee severance (Corporate and Other); * $\$109$ million $(\$80$ million after-tax) increase in the portion of the collective allowance recognized in Corporate and Other$^{(1)}$; * $\$77$ million $(\$56$ million after-tax) increase in legal provisions (Corporate and Other); * $\$53$ million $(\$47$ million after-tax) gain, net of related transaction and severance costs, on the sale of a processing centre (Corporate and Other); * $\$40$ million $(\$30$ million after-tax) of loan losses in our exited European leveraged finance portfolio (Capital Markets); * $\$30$ million $(\$22$ million after-tax) amortization of acquisition-related intangible assets $(\$5$ million after-tax in Canadian Personal and Small Business Banking, $\$2$ million after-tax in Canadian Commercial Banking and Wealth Management, $\$6$ million after-tax in U.S. Commercial Banking and Wealth Management, and $\$9$ million after-tax in Corporate and Other); * $\$30$ million income tax recovery due to the settlement of transfer pricing-related matters (Canadian Personal and Small Business Banking); * $\$15$ million income tax recovery arising from a change in our expected utilization of certain tax loss carryforwards, primarily due to the sale of our minority investment in ACI (Corporate and Other); and * $\$3$ million $(\$2$ million after-tax) gain from the structured credit run-off business (Capital Markets). The above items of note increased revenue by $\$505$ million, provision for credit losses by $\$149$ million and non-interest expenses by $\$262$ million, and decreased income taxes by $\$97$ million. In aggregate, these items of note increased net income by $\$191$ million. ## 2015 Net income was affected by the following items of note: * $\$296$ million $(\$225$ million after-tax) in cumulative restructuring charges primarily relating to employee severance (Corporate and Other); * $\$46$ million $(\$34$ million after-tax) gain arising from accounting adjustments on credit card-related balance sheet amounts (Canadian Personal and Small Business Banking); * $\$42$ million $(\$33$ million after-tax) amortization of acquisition-related intangible assets $(\$6$ million after-tax in Canadian Personal and Small Business Banking, $\$2$ million after-tax in Canadian Commercial Banking and Wealth Management, $\$7$ million after-tax in U.S. Commercial Banking and Wealth Management, and $\$18$ million after-tax in Corporate and Other); * $\$29$ million $(\$21$ million after-tax) loss from the structured credit run-off business (Capital Markets); and * $\$23$ million $(\$13$ million after-tax) gain on sale of an investment in our merchant banking portfolio (Capital Markets). The above items of note increased revenue by $\$40$ million and non-interest expenses by $\$338$ million, and decreased income taxes by $\$66$ million. In aggregate, these items of note decreased net income by $\$232$ million. ## 2014 Net income was affected by the following items of note: * $\$543$ million $(\$543$ million after-tax) of charges relating to CIBC FirstCaribbean, comprising a goodwill impairment charge of $\$420$ million $(\$420$ million after-tax) and loan losses of $\$123$ million $(\$123$ million after-tax), reflecting revised expectations on the extent and timing of the anticipated economic recovery in the Caribbean region (Corporate and Other); * $\$190$ million $(\$147$ million after-tax) gain in respect of the Aeroplan transactions with Aimia and The Toronto Dominion Bank (TD), net of costs relating to the development of our enhanced travel rewards program $(\$87$ million after-tax in Canadian Personal and Small Business Banking, and $\$60$ million after-tax in Corporate and Other); * $\$112$ million $(\$82$ million after-tax) charge relating to the incorporation of funding valuation adjustments (FVA) into the valuation of our uncollateralized derivatives (Capital Markets); * $\$78$ million $(\$57$ million after-tax) gain, net of associated expenses, on the sale of an equity investment in our exited European leveraged finance portfolio (Capital Markets); * $\$52$ million $(\$30$ million after-tax) gain within an equity-accounted investment in our merchant banking portfolio (Capital Markets); * $\$36$ million $(\$28$ million after-tax) amortization of acquisition-related intangible assets $(\$4$ million after-tax in Canadian Personal and Small Business Banking, $\$15$ million after-tax in Canadian Commercial Banking and Wealth Management, and $\$9$ million after-tax in Corporate and Other); * $\$26$ million $(\$19$ million after-tax) reduction in the portion of the collective allowance recognized in Corporate and Other$^{(1)}$, including lower estimated credit losses relating to the Alberta floods (Corporate and Other); * $\$26$ million $(\$19$ million after-tax) charge resulting from operational changes in the processing of write-offs in Canadian Personal and Small Business Banking; * $\$22$ million $(\$12$ million after-tax) loan losses in our exited U.S. leveraged finance portfolio (Capital Markets); and * $\$15$ million $(\$11$ million after-tax) loss from the structured credit run-off business (Capital Markets). The above items of note increased revenue by $\$276$ million, provision for credit losses by $\$145$ million, non-interest expenses by $\$539$ million, and income taxes by $\$34$ million. In aggregate, these items of note decreased net income by $\$442$ million. $^{(1)}$ Relates to collective allowance, except for: (i) residential mortgages greater than 90 days delinquent; (ii) personal loans and scored small business loans greater than 30 days delinquent; and (iii) net write-offs for the cards portfolio, which were all reported in the respective SBUs prior to our adoption of IFRS 9. 16 CIBC 2018 ANNUAL REPORT # Strategic business units overview CIBC has four SBUs – Canadian Personal and Small Business Banking, Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets. These SBUs are supported by the following functional groups – Administration, Client Connectivity and Innovation, Finance, Human Resources and Communications, Internal Audit, Risk Management, and Technology and Operations, as well as other support groups, which all form part of Corporate and Other. The expenses of these functional and support groups are generally allocated to the business lines within the SBUs. 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. In 2018, we adopted IFRS 9. See the "External reporting change" section for additional details. ## 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. Once the interest and liquidity risk inherent in our client-driven assets and liabilities is transfer priced into Treasury, it is 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 economic costs with the underlying benefits and risks associated with SBU activities. Earnings on unattributed capital remain in Corporate and Other. 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 Small Business Banking and Canadian Commercial Banking and Wealth Management SBUs, we use a Manufacturer/Customer Segment/Distributor Management Model. The model uses certain estimates and allocation methodologies to process internal payments between lines of business for sales, renewals and trailer commissions to facilitate preparation of segmented financial information. Periodically, the sales, renewals and trailer commission rates paid to customer segments for certain products/services are revised and applied prospectively. Non-interest expenses incurred by our functional groups are attributed to the SBUs to which they relate based on appropriate criteria. As part of our adoption of IFRS 9 on November 1, 2017, we now recognize provision for credit losses on both impaired (stage 3) and performing (stages 1 and 2) loans in the respective SBUs. Prior to November 1, 2017, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses related to CIBC Bank USA, which was recognized in U.S. Commercial Banking and Wealth Management, and provision for credit losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking. ## Revenue, taxable equivalent basis The SBUs evaluate revenue on a TEB basis. In order to arrive at the TEB amount, the SBUs gross up tax-exempt revenue on certain securities to a TEB basis, 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. CIBC 2018 ANNUAL REPORT 17 # Canadian Personal and Small Business Banking Canadian Personal and Small Business Banking provides personal and business clients across Canada with financial advice, products and services through a team in our banking centres, as well as through our direct, mobile and remote channels. ## Our business strategy Our goal is to build a modern consumer and small business relationship bank by focusing on three key strategic priorities: * Winning at relationships * Delivering market-leading solutions * Being easy to bank with ## 2018 progress In 2018, we made good progress on our strategy. | Winning at relationships | Delivering market-leading solutions | Being easy to bank with | |---|---|---| | * For the fourth consecutive year, CIBC was ranked \#1 in Investment Executive magazine's Report Card on Banks, as voted on by our advisors. | * Introduced a suite of U.S. banking solutions for Canadians transacting south of the border including the CIBC U.S. Personal Account, CIBC Bank USA Smart Account, and a U.S. Dollar Aventura Gold Visa Card. | * Launched Simplii Financial, CIBC's direct banking brand in Canada, and continued to invest in enhancing products and services for clients. | | * Introduced new specialized business advisor roles, focused on tailored advice and solutions for business owners, in addition to proactively connecting with thousands of existing and potential business clients through community outreach days. | * Launched enhancements to our premium Aventura Visa card offer, including lounge access and Nexus card rebates. | * Earned the top score among the five largest Canadian banks for mobile banking for the fifth year in a row in Forrester Research's Mobile Banking benchmark study. | | * Continued to invest in mobile advice for clients, bringing banking to our clients on their terms. | * For business owners and professionals in Canada, we introduced the CIBC Advanced Business Operating Account and CIBC Business Plus Credit Cards to help meet the diverse needs of our clients. | * Won the Retail Banker International Best Branch Strategy award which aligns with our recently completed 150th banking centre transformation. This award recognizes the progress we have made in transforming our network to reflect evolving client needs. | | * Launched an enhanced advisor capability program to further reinforce the existing capabilities of our Financial Advisors in our Imperial Service offer across Canada including a focus on accreditation and financial planning. | | * Launched new digital credit card features to enhance the client experience, including features like Lock My Card which allows clients to lock their card remotely using their mobile device if they have lost it or suspect fraud. | | | | * Over the past year, continued to remove time spent on administration-related activities from our banking centres, including implementing cheque imaging and electronic processing, as well as reducing wait times. These efficiencies provide more time for our team members to serve clients. | ## 2018 financial review | Revenue (\$ billions) | Net income (\$ billions) | Efficiency ratio (%) | Average loans and acceptances$^{(1)}$ (\$ billions) | Average deposits (\$ billions) | |---|---|---|---|---| | 7.7, 8.4, 8.6 (for years 16 to 18) | 2.2, 2.4, 2.5 (for years 16 to 18) | 53.1, 51.9, 51.1 (for years 16 to 18) | 219.8, 243.5, 257.0 (for years 16 to 18) | 152.5, 162.9, 166.7 (for years 16 to 18) | $^{(1)}$ Total average loans and acceptances includes FirstLine mortgages. ## Our focus for 2019 To build on our momentum across Canadian Commercial Banking and Wealth Management, we will continue to focus on client relationships by: * Developing and deepening client relationships through a full-service solutions-based approach that includes commercial and private banking, as well as wealth management services; * Investing in financial planning in support of our goal of being Canada's leader in financial advice; and * Simplifying and optimizing our business to align with changing market dynamics, and to better meet the needs of our clients. 18 CIBC 2018 ANNUAL REPORT # 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. In addition, we provide 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 strategic priorities are: * Scaling commercial banking * Increasing agility and efficiency in wealth management * Deepening client relationships across our bank ## 2018 progress In 2018, we made good progress on our strategy. | Scaling commercial banking | Increasing agility and efficiency in wealth management | Deepening client relationships across our bank | |---|---|---| | * Launched CIBC Innovation Banking, a business that delivers strategic advice and banking services to North American technology and innovation clients at each stage of their business cycle, from start-up to initial public offering and beyond. | * Launched the CIBC Multi-Asset Absolute Return Strategy, an alternative investment fund that aims to generate positive returns and manage volatility for clients in all market conditions. | * Completed over 28,000 new financial plans for priority clients. | | * Expanded our commercial banking team by adding cash management client service representatives, and allocated relationship managers to help meet the unique needs of public sector, professional services and not-for-profit companies. | * Continued to focus on enhancing value for our clients by finding opportunities to simplify our product lineup and optimize costs. | * Co-located private bankers and commercial bankers in select locations across Canada to deliver a more integrated offer for clients. | | * Continued to meet clients' needs on both sides of the border through cross-border client referrals with CIBC Bank USA. | | * Increased partnership referrals between private wealth management and commercial banking, deepening client relationships. | ## 2018 financial review * Strong loan and deposit growth of $11\%$ and $12\%$, respectively, reflecting our continued focus on building client relationships * Asset quality remained stable, with non-performing assets representing $0.64\%$ of total assets at October 31, 2018 * Year-over-year growth of $8\%$ in AUA and $2\%$ in AUM * Four CIBC Private Wealth Management Advisors were ranked in Barron's 2018 Top Women Financial Advisors List ## Our focus for 2019 We are building a relationship-focused bank. To build on our momentum, we will continue to align our focus in 2019 to CIBC's overall strategy and priorities. We will do this by: * Growing organically by adding and deepening our client relationships and selectively entering additional markets and specialty businesses; * Continuing to build a strong U.S. operating platform by investing appropriately in our growth, while managing expenses; and * Ensuring we maintain our risk discipline through selective evaluation of new opportunities, portfolio diversification, and quality of funding sources. | Revenue (\$ billions) | Net income (\$ millions) | Efficiency ratio (%) | Average loans (\$ billions) | Average deposits (\$ billions) | |---|---|---|---|---| | 3.3, 3.6, 3.9 (for years 16 to 18) | 991, 1,138, 1,307 (for years 16 to 18) | 53.5, 57.8, 56.3 (for years 16 to 18) | 48.3, 52.8, 53.2 (for years 16 to 18) | 43.4, 48.8, 53.2 (for years 16 to 18) | | Average commercial banking loans (\$ billions) | Average commercial banking deposits (\$ billions) | Assets under administration and management$^{(1)}$ (\$ billions) | Canadian retail mutual funds (\$ billions) | |---|---|---|---| | 46.6, 51.1, 55.8 (for years 16 to 18) | 37.4, 42.7, 47.6 (for years 16 to 18) | 252.0, 274.5, 269.0 (for years 16 to 18) | 90.8, 101.4, 101.1 (for years 16 to 18) | $^{(1)}$ AUM amounts are included in the amounts reported under AUA. 20 CIBC 2018 ANNUAL REPORT # U.S. Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management provides high-touch, relationship-oriented commercial, personal and small business banking, as well as wealth management services to meet the needs of middle-market companies, executives, entrepreneurs, high-net-worth individuals and families in the markets we serve in the U.S. ## Our business strategy Our goal is to build the go-to commercial and wealth management bank for our chosen client segments and markets with a focus 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: * Growing organically through long-term client relationships * Enhancing our U.S. platform * Investing to serve our clients ## 2018 progress In 2018, we made strong progress on our strategy. | Growing organically through long-term client relationships | Enhancing our U.S. platform | Investing to serve our clients | |---|---|---| | * Achieved revenue growth, reflecting solid business performance and our continued focus on building full, profitable client relationships. | * Leveraged the combined strengths and resources of CIBC to better serve clients with cross-border banking needs and to expand relationships with U.S. large corporate clients. | * Managed expenses while appropriately investing in our growth, with an efficiency ratio of $57.9\%$ for 2018. | | * Generated solid loan and deposit growth, as we continue to capitalize on referral opportunities to do more for our combined North American client base. | * Maintained focus on strong asset quality, which overall remained stable. | * Introduced the CIBC Bank USA Smart Account, giving Canadian clients a U.S. based account that links to their Canadian accounts, and the CIBC Agility online savings account for U.S. clients, providing an important granular deposit-generating and brand-building platform. | | * Generated strong growth in AUM and AUA and added private banking services for wealth management clients, reflecting continued client development efforts. | * Unified the North American wealth business under the CIBC Private Wealth Management name to communicate the robust complement of investment management, wealth planning, trust and private banking services that we provide to our clients and their families. | * Opened three new commercial banking offices and added private bankers to existing CIBC Private Wealth Management offices, adding a full complement of solutions in key markets. | ## 2018 financial review * Strong loan and deposit growth of $11\%$ and $12\%$, respectively, reflecting our continued focus on building client relationships * Asset quality remained stable, with non-performing assets representing $0.64\%$ of total assets at October 31, 2018 * Year-over-year growth of $8\%$ in AUA and $2\%$ in AUM * Four CIBC Private Wealth Management Advisors were ranked in Barron's 2018 Top Women Financial Advisors List ## Our focus for 2019 We are building a relationship-focused bank. To build on our momentum, we will continue to align our focus in 2019 to CIBC's overall strategy and priorities. We will do this by: * Growing organically by adding and deepening our client relationships and selectively entering additional markets and specialty businesses; * Continuing to build a strong U.S. operating platform by investing appropriately in our growth, while managing expenses; and * Ensuring we maintain our risk discipline through selective evaluation of new opportunities, portfolio diversification, and quality of funding sources. 23 CIBC 2018 ANNUAL REPORT | Results$^{(1)}$ (\$ millions, for the year ended October 31 | 2018 | 2017$^{(2)}$ | 2016 | |---|---|---|---| | Revenue | | | | | Commercial banking | 1,197 | 532 | 166 | | Wealth management | 563 | 324 | 217 | | Other | 6 | 20 | 2 | | **Total revenue** $^{(3)(4)}$ | **1,766** | **876** | **385** | | Provision for (reversal of) credit losses | | | | | Impaired $^{(5)}$ | 67 | 37 | (2) | | Performing $^{(5)}$ | 12 | 47 | n/a | | **Provision for (reversal of) credit losses** | **79** | **84** | **(2)** | | Non-interest expenses | 1,023 | 534 | 288 | | Income before income taxes | 664 | 258 | 99 | | Income taxes $^{(3)}$ | 99 | 55 | 12 | | **Net income** | **565** | **203** | **87** | | **Net income attributable to:** | | | | | Equity shareholders $^{(a)}$ | **565** | **203** | **87** | | Efficiency ratio | 57.9% | 61.0% | 74.8% | | Return on equity $^{(6)}$ | 8.1% | 7.5% | 17.6% | | Charge for economic capital $^{(6)(b)}$ | (664) | (256) | (48) | | Economic profit $^{(6)(a+b)}$ | (99) | (53) | 39 | | Average assets (\$ billions) | 42.0 | 19.9 | 8.4 | | Average loans (\$ billions) | 30.4 | 15.9 | 8.0 | | Average deposits (\$ billions) | 22.3 | 7.6 | 0.1 | | AUA (\$ billions) | 80.0 | 74.0 | 44.1 | | AUM (\$ billions) | 60.0 | 58.7 | 38.0 | | Full-time equivalent employees | 1,947 | 1,753 | 310 | $^{(1)}$ For additional segmented information, see Note 30 to the consolidated financial statements. $^{(2)}$ Certain information has been reclassified to conform to the funds transfer pricing methodology adopted in the current year relating to CIBC Bank USA. $^{(3)}$ Revenue and income taxes are reported on a TEB basis. Accordingly, revenue and income taxes include a TEB adjustment of $\$2$ million (2017: $\$2$ million; 2016: nil). The equivalent amounts are offset in the revenue and income taxes of Corporate and Other. $^{(4)}$ Included $\$55$ million of accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank, shown as an item of note (2017: $\$45$ million, of which $\$31$ million was included as an item note in the fourth quarter of 2017). $^{(5)}$ As a result of our adoption of IFRS 9 effective November 1, 2017, we now recognize provision for credit losses on both impaired and performing loans in the SBU. In prior years, provision for credit losses on performing loans other than that of CIBC Bank USA was recognized in Corporate and Other. $^{(6)}$ For additional information, see the "Non-GAAP measures" section. n/a Not applicable. ## Financial overview Net income was up $\$362$ million or $178\%$ from 2017, primarily due to the inclusion of the results of CIBC Bank USA for the full year of $\$407$ million (2017: $\$96$ million). The prior year only included the results of CIBC Bank USA following the acquisition on June 23, 2017. ## Revenue Revenue was up $\$890$ million or $102\%$ from 2017. CIBC Bank USA contributed $\$1,257$ million to revenue during the year (2017: $\$448$ million). Commercial banking revenue was up $\$665$ million or $125\%$, primarily due to the inclusion of the results of CIBC Bank USA for the full year, which included accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank. Wealth management revenue was up $\$239$ million or $74\%$, primarily due to the inclusion of the results of CIBC Bank USA for the full year, which included accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank, and growth in average AUA mainly due to the acquisition of Geneva Advisors in the fourth quarter of 2017. Other revenue was down $\$14$ million or $70\%$, primarily due to the treasury activities of CIBC Bank USA. ## Provision for credit losses Provision for credit losses was down $\$5$ million or $6\%$ from 2017. Provision for credit losses on impaired loans was up due to higher loan losses in CIBC Bank USA, partially offset by lower loan losses in the pre-existing U.S. real estate finance portfolio. Provision for credit losses on performing loans was down, primarily due to the establishment of a collective allowance (prior to our adoption of IFRS 9) for new loan originations and renewals of acquired loans relating to CIBC Bank USA in the prior year, of which $\$35$ million was shown as an item of note in the fourth quarter of 2017. ## Non-interest expenses Non-interest expenses were up $\$489$ million or $92\%$ from 2017, primarily due to the inclusion of the non-interest expenses of CIBC Bank USA for the full year of $\$666$ million (2017: $\$244$ million), which included compensation expenses of $\$32$ million (2017: $\$40$ million) related to the retention of key employees. ## Income taxes Income taxes were up $\$44$ million or $80\%$ from 2017, primarily due to higher income from the inclusion of the results of CIBC Bank USA for the full year, partially offset by a lower effective tax rate due to the U.S. tax reforms enacted in the first quarter of 2018. ## Average assets Average assets were up $\$22.1$ billion or $111\%$ from 2017 due to the inclusion of the balances of CIBC Bank USA for the full year and growth in commercial loans. ## Assets under administration AUA were up $\$6.0$ billion or $8\%$ from 2017, primarily due to the favourable impact of foreign exchange rates, net sales, and market appreciation. AUM amounts are included in the amounts reported under AUA. 24 CIBC 2018 ANNUAL REPORT # Capital Markets Capital Markets provides integrated global markets products and services, investment banking advisory and execution, corporate banking and top-ranked research to corporate, government and institutional clients around the world. ## Our business strategy Our goal is to be the leading capital markets franchise for our core clients in Canada and the lead relationship bank for our key clients globally by delivering 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. To deliver on our goal, our three key strategic priorities are: * Becoming 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 better service for clients ## 2018 progress In 2018, we made good progress on our strategy. | Becoming 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 better service for clients | |---|---|---| | * Continued to hold leadership positions in syndicated loans, debt and equity underwriting, advisory services, equity trading, commodities and foreign exchange. | * Completed the systems integration of U.S. based clients into our Chicago-based capital markets platform, enabling us to offer broader products and services to U.S. and cross-border clients. | * Strengthened our no-fee CIBC Global Money Transfer service by increasing the number of countries to 75 and launching Remi, a chatbot making it easier for clients to send money abroad. | | * Supported our clients by investing in our talent, further developing our proprietary technology, expanding our structuring expertise and advice, and leveraging our market expertise. | * Expanded our investment banking leadership and debt and equity capital markets and advisory talent to support commercial and corporate clients. | * Digitalized our Foreign Cash offering enabling online check-out with flexible delivery options to a home address, a CIBC Banking Centre, or Toronto Pearson Airport, increasing convenience for our clients. | | * 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. | * Launched our new U.S. Prime Service business, focused on meeting the needs of U.S. based alternative asset managers and other cross-border clients, and furthering our North American platform for growth. | * Launched our International Student Banking Offer providing international students with access to essential financial solutions to support their new lives in Canada including bank accounts and GICs. | | * Continued to shape our business around the new economy, building out dedicated teams in areas such as renewable energy, private capital, innovation, and infrastructure. | | * Restructured our client teams to enhance partnerships with Commercial Banking and Wealth Management to bring our suite of wealth and capital markets solutions to small businesses, family offices, ultra high-net-worth clients, foundations and endowments. | ## 2018 financial review | Revenue (\$ billions) | Net income (\$ millions) | Efficiency ratio (%) | Average value-at-risk (VaR) (\$ millions) | |---|---|---|---| | 2.8, 2.8, 2.9 (for years 16 to 18) | 992, 1,090, 1,069 (for years 16 to 18) | 48.2, 48.6, 51.2 (for years 16 to 18) | 6.5, 5.8, 5.3 (for years 16 to 18) | As a leading capital markets franchise in Canada and banking partner to our clients around the world, Capital Markets acted as: * Financial advisor to the shareholders of GFL Environmental Inc. on a transaction whereby BC Partners, Ontario Teachers' Pension Plan and other investors agreed to recapitalize the company's ownership at an implied enterprise value of $\$5.1$ billion; * Financial advisor, co-lead arranger and joint bookrunner to Metro Inc. on the $\$4.5$ billion acquisition of the Jean Coutu Group Inc., $\$3.4$ billion committed bank facilities and $\$1.2$ billion senior unsecured notes offering; * Joint lead manager and joint bookrunner on the inaugural $\$1.5$ billion green bond offering for CPPIB Capital Inc., which was the largest-ever Canadian dollar green bond; * Bookrunner on a US $\$650$ million First Mortgage Bond offering for Public Service Electric & Gas representing CIBC's first active bookrunner role for the PSEG family and the third joint bookrunner title; CIBC 2018 ANNUAL REPORT 25 * Lead manager and joint bookrunner on $\$405$ million offering of subscription receipts and flow-through shares for NuVista Energy Ltd. in support of its acquisition of assets from Cenovus Energy Inc. with CIBC acting as exclusive financial advisor; * Financial advisor to Superior Plus LP on its $\$900$ million acquisition of NGL Energy's Retail propane distribution business, as well as joint bookrunner on a concurrent $\$400$ million subscription receipt offering and a $\$150$ million high-yield note offering, and acted as co-underwriter of a $\$400$ million secured bridge loan facility. CIBC also executed related capital markets hedge transactions; * Lead manager and joint bookrunner on $\$288$ million subscription receipts offering, co-lead arranger, joint bookrunner and administrative agent on $\$1.4$ billion in credit facilities for Transcontinental Inc. in support of its acquisition of Coveris Americas; and * Lead manager and joint bookrunner on $\$242$ million initial public offering of common shares for MAV Beauty Brands Inc. ## Capital Markets awards and recognition * The Leader in Canadian Equity Trading – \#1 in Volume, Value and Number of Trades, TSX and ATS Market Share Report, 2009 – present (IRESS Market Technology) * Share Leader by Greenwich Associates in: * Overall Canadian Fixed Income Market Share Canadian Equity Trading Share (2018) * Canadian Equity Algo Trading Share (2018) * Canadian Equity Trading Share (2017 – 2018) * Canadian Equity Research/Advisory Vote Share (2017 – 2018) * Quality Leader in Canadian Foreign Exchange Services Quality (2017 – 2018) by Greenwich Associates * Multi-deal winner at the 2018 IJGlobal Americas Deals of the Year Awards: * North America Transmission Deal of the Year – Alberta Powerline, Fort McMurray West 500 kV Transmission Project * North America Project Bond Deal of the Year – Indiana Toll Road Concession Company * North America Social Infrastructure Deal of the Year – Ohio State University Utility System * North America Airport Deal of the Year – Bermuda Skyport * CIBC Capital Markets was the \#1 initial public offering underwriter in Canada by Bloomberg (2000 – 2018) * Top Canadian Prime Broker, by Alternative IQ (2016-2018) | Revenue – Global markets (\$ millions) | Revenue – Corporate and investment banking (\$ millions) | |---|---| | 1,645, 1,601, 1,674 (for years 16 to 18) | 1,093, 1,216, 1,229 (for years 16 to 18) | ## Our focus for 2019 To support our bank's long-term objectives, Capital Markets remains focused on driving client-focused growth and collaborating with our partners across our bank to deepen and enhance client relationships. We will continue to do this by: * Strengthening our leadership positions in Canada through our focused approach to client coverage; * Growing our North American platform by further expanding our U.S. reach and broadening the services offered to clients, including the rollout of our U.S. Prime Service business, continued collaboration across teams in the U.S. to meet the needs of cross-border and U.S. domiciled clients across corporate and commercial markets; and * Strengthening our connectivity, technology and innovation efforts to bring more of our bank's offering to our clients, including leveraging dedicated resources to drive growth and deepen relationships with personal banking, high-net-worth, and commercial banking clients. 26 CIBC 2018 ANNUAL REPORT | Results$^{(1)}$ (\$ millions, for the year ended October 31 | 2018 | 2017 | 2016 | |---|---|---|---| | Revenue | | | | | Global markets | 1,674 | 1,601 | 1,645 | | Corporate and investment banking | 1,229 | 1,216 | 1,093 | | Other | 9 | 6 | 18 | | **Total revenue** $^{(2)}$ | **2,912** | **2,823** | **2,756** | | Provision for (reversal of) credit losses | | | | | Impaired $^{(3)}$ | 8 | (4) | n/a | | Performing $^{(3)}$ | (38) | (4) | 155 | | **Provision for (reversal of) credit losses** | **(30)** | **(4)** | **155** | | Non-interest expenses | 1,492 | 1,373 | 1,328 | | Income before income taxes | 1,450 | 1,454 | 1,273 | | Income taxes $^{(2)}$ | 381 | 364 | 281 | | **Net income** | **1,069** | **1,090** | **992** | | **Net income attributable to:** | | | | | Equity shareholders $^{(a)}$ | **1,069** | **1,090** | **992** | | Efficiency ratio | 51.2% | 48.6% | 48.2% | | Return on equity $^{(4)}$ | 39.4% | 35.5% | 30.6% | | Charge for economic capital $^{(4)(b)}$ | (266) | (299) | (314) | | Economic profit $^{(4)(a+b)}$ | 803 | 791 | 678 | | Average assets (\$ billions) | 166.2 | 156.4 | 154.8 | | Full-time equivalent employees | 1,396 | 1,314 | 1,260 | $^{(1)}$ For additional segmented information, see Note 30 to the consolidated financial statements. $^{(2)}$ Revenue and income taxes are reported on a TEB basis. Accordingly, revenue and income taxes include a TEB adjustment of $\$278$ million (2017: $\$298$ million; 2016: $\$474$ million). The equivalent amounts are offset in the revenue and income taxes of Corporate and Other. $^{(3)}$ As a result of our adoption of IFRS 9 effective November 1, 2017, we now recognize provision for credit losses on both impaired and performing loans in the SBU. In prior years, provision for credit losses on performing loans was recognized in Corporate and Other. $^{(4)}$ For additional information, see the "Non-GAAP measures" section. n/a Not applicable. ## Financial overview Net income was down $\$21$ million or $2\%$ from 2017, primarily due to higher non-interest expenses and a higher effective tax rate, partially offset by higher revenue and a higher reversal of credit losses. ## Revenue Revenue was up $\$89$ million or $3\%$ from 2017. Global markets revenue was up $\$73$ million or $5\%$, primarily due to higher revenue from our foreign exchange and equity derivatives trading businesses and global markets financing activities, partially offset by lower revenue from the movement in reserves related to derivative client exposure and our commodities trading business. Corporate and investment banking revenue was up $\$13$ million or $1\%$, primarily due to higher corporate banking and advisory revenue, partially offset by lower investment portfolio gains and lower revenue from equity and debt underwriting. Other revenue was comparable with the prior year. ## Provision for (reversal of) credit losses Reversal of credit losses was up $\$26$ million from 2017, primarily due to a reduction in allowance for performing loans in the current year, driven by improvements in the oil and gas sector and an economic outlook that has improved since our adoption of IFRS 9 on November 1, 2017. The current year also included a provision for credit losses on impaired loans compared with a reversal of credit losses on impaired loans in the prior year due to recoveries in the oil and gas sector. ## Non-interest expenses Non-interest expenses were up $\$119$ million or $9\%$ from 2017, primarily due to higher performance-based and employee-related compensation and spending on strategic initiatives. ## Income taxes Income taxes were up $\$17$ million or $5\%$ from 2017, primarily due to the impact of changes in the proportion of income subject to varying rates of tax in different jurisdictions. ## Average assets Average assets were up $\$9.8$ billion or $6\%$ from 2017, primarily due to an increase in securities purchased under resale agreement and loan balances, partially offset by lower trading securities. 27 CIBC 2018 ANNUAL REPORT # Corporate and Other Corporate and Other includes the following functional groups – Administration, Client Connectivity and Innovation, Finance, Human Resources and Communications, Internal Audit, Risk Management, and Technology and Operations, 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 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 | 2018 | 2017 | 2016 | |---|---|---|---| | Revenue | | | | | International banking | 663 | 723 | 722 | | Other | 23 | (104) | 152 | | **Total revenue** $^{(2)}$ | **686** | **619** | **874** | | Provision for (reversal of) credit losses | | | | | Impaired $^{(3)}$ | 102 | 20 | 22 | | Performing $^{(3)}$ | (27) | (53) | 111 | | **Provision for (reversal of) credit losses** | **75** | **(33)** | **133** | | Non-interest expenses | 1,280 | 1,295 | 1,351 | | Loss before income taxes | (669) | (643) | (610) | | Income taxes $^{(2)}$ | (204) | (510) | (675) | | **Net income (loss)** | **(204)** | **(133)** | **65** | | **Net income (loss) attributable to:** | | | | | Non-controlling interests | 17 | 19 | 20 | | Equity shareholders | (221) | (152) | 45 | | Full-time equivalent employees | 21,792 | 22,071 | 21,156 | $^{(1)}$ For additional segmented information, see Note 30 to the consolidated financial statements. $^{(2)}$ Revenue and income taxes of Capital Markets and U.S. Commercial Banking and Wealth Management are reported on a TEB basis. 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 $\$280$ million (2017: $\$300$ million; 2016: $\$474$ million). $^{(3)}$ As a result of our adoption of IFRS 9 effective November 1, 2017, we now recognize provision for credit losses on both impaired and performing loans in the SBUs. In prior years, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses related to CIBC Bank USA, which was recognized in U.S. Commercial Banking and Wealth Management, and provision for credit losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking. Provision for credit losses related to CIBC FirstCaribbean continues to be recognized in Corporate and Other. ## Financial overview Net loss was up $\$71$ million or $53\%$ from 2017, primarily due to a provision for credit losses compared with a reversal of credit losses in 2017 and a lower income tax benefit, partially offset by higher revenue and lower non-interest expenses. ## Revenue Revenue was up $\$67$ million or $11\%$ from 2017. International banking revenue was down $\$60$ million or $8\%$ from 2017, primarily due to losses recognized on debt securities in CIBC FirstCaribbean as a result of the Barbados government debt restructuring, of which $\$61$ million was shown as an item of note in the fourth quarter of 2018. Other revenue was up $\$127$ million or $122\%$ from 2017, primarily due to higher treasury revenue. ## Provision for (reversal of) credit losses Provision for credit losses was $\$75$ million, compared with a reversal of credit losses of $\$33$ million in 2017. Provision for credit losses on impaired loans was up due to higher loan losses in CIBC FirstCaribbean, which included losses on sovereign loans resulting from the Barbados government debt restructuring noted above, of which $\$28$ million was shown as an item of note in the fourth quarter of 2018. Reversal of credit losses on performing loans was down, as the prior year included reductions in the collective allowance (prior to our adoption of IFRS 9), while the current year included a reduction in allowance driven by model parameter updates relating to CIBC FirstCaribbean and the transfer of certain sovereign loans to the impaired portfolio as a result of the Barbados government debt restructuring noted above. ## Non-interest expenses Non-interest expenses were down $\$15$ million or $1\%$ from 2017, primarily due to lower corporate support costs and an increase in legal provisions in 2017, shown as an item of note. The decrease was partially offset by higher spending on strategic initiatives and higher performance-based compensation. ## Income taxes Income tax benefit was down $\$45$ million, 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, partially offset by a $\$19$ million tax recovery relating to realized losses arising from the Barbados government debt restructuring, shown as an item of note, and a $\$16$ million tax recovery relating to the utilization of certain tax loss carryforwards. 28 CIBC 2018 ANNUAL REPORT # Financial condition ## Review of condensed consolidated balance sheet | \$ millions, as at October 31 | 2018 | 2017 | |---|---|---| | **Assets** | | | | Cash and deposits with banks | 17,691 | 14,152 | | Securities | 101,664 | 93,419 | | Securities borrowed or purchased under resale agreements | 48,938 | 45,418 | | Loans and acceptances | 381,661 | 365,558 | | Derivative instruments | 21,431 | 24,342 | | Other assets | 25,714 | 22,375 | | **Total assets** | **597,099** | **565,264** | | **Liabilities and equity** | | | | Deposits | 461,015 | 439,706 | | Obligations related to securities lent or sold short or under repurchase agreements | 47,353 | 43,708 | | Derivative instruments | 20,973 | 23,271 | | Acceptances | 10,296 | 8,828 | | Other liabilities | 18,266 | 15,305 | | Subordinated indebtedness | 4,080 | 3,209 | | Equity | 35,116 | 31,237 | | **Total** | **597,099** | **565,264** | ## Assets Total assets as at October 31, 2018 were up $\$31.8$ billion or $6\%$ from 2017, of which approximately $\$3$ billion was the result of appreciation of the U.S. dollar. Cash and deposits with banks increased by $\$3.5$ billion or $25\%$, mainly due to higher short-term placements in Treasury. Securities increased by $\$8.2$ billion or $9\%$, comprised primarily of an increase in debt securities issued or guaranteed by Canadian governments, partially offset by a decrease in corporate equity and mortgage-backed securities. Further details on the composition of securities are provided in the "Supplementary annual financial information" section and Note 4 to the consolidated financial statements. Securities borrowed or purchased under resale agreements increased by $\$3.5$ billion or $8\%$, primarily due to client-driven activities. Net loans and acceptances increased by $\$16.1$ billion or $4\%$, due to an increase in business and government loans and personal loans. Further details on the composition of loans and acceptances are provided in the "Supplementary annual financial information" section and Note 5 to the consolidated financial statements. Derivative instruments decreased by $\$2.9$ billion or $12\%$, largely driven by a decrease in interest rate and foreign exchange derivatives valuation, partially offset by an increase in other commodity derivatives valuation. Other assets increased by $\$3.3$ billion or $15\%$, primarily due to an increase in broker receivables, collateral pledged for derivatives and current tax receivable. ## Liabilities Total liabilities as at October 31, 2018 were up $\$28.0$ billion or $5\%$ from 2017, of which approximately $\$3$ billion was the result of appreciation of the U.S. dollar. Deposits increased by $\$21.3$ billion or $5\%$, primarily due to increased wholesale funding, and domestic retail volume growth. Further details on the composition of deposits are provided in the "Supplementary annual financial information" section and Note 10 to the consolidated financial statements. Obligations related to securities lent or sold short or under repurchase agreements increased by $\$3.6$ billion or $8\%$, primarily due to client-driven activities. Derivative instruments decreased by $\$2.3$ billion or $10\%$, largely driven by a decrease in foreign exchange and interest rate derivatives valuation, partially offset by an increase in equity derivatives valuation. Acceptances increased by $\$1.5$ billion or $17\%$, driven by changes in client activities. Other liabilities increased by $\$3.0$ billion or $19\%$, primarily due to an increase in broker payables, accounts payable and collateral received for derivatives. Subordinated indebtedness increased by $\$0.9$ billion or $27\%$, mainly due to the issuance in the second quarter of 2018, net of redemptions in the third quarter of 2018. For further details see the "Capital resources" section. ## Equity Equity as at October 31, 2018 increased $\$3.9$ billion or $12\%$ from 2017, primarily due to a net increase in retained earnings, which includes an opening equity charge of $\$0.1$ billion related to the adoption of IFRS 9, and the issuance of common and preferred shares. 29 CIBC 2018 ANNUAL REPORT # Capital resources Our capital strength protects our depositors and creditors from risks inherent in our businesses, allows us to absorb unexpected losses, and enables us to take advantage of attractive business opportunities. It also enables us to maintain a favourable credit standing and to raise additional capital or other funding on attractive terms. Our objective is to maintain a strong and efficient capital base. Capital needs to be monitored and rebalanced continually; we manage and monitor our capital to maximize risk-adjusted return to shareholders and to maintain a sufficient capital buffer to ensure that we meet regulatory requirements. ## Regulatory capital requirements under Basel III Our regulatory capital requirements are determined in accordance with guidelines issued by OSFI, which are based upon the risk-based capital standards developed by the Basel Committee on Banking Supervision (BCBS). Regulatory capital consists of CET1, Tier 1 and Tier 2 capital. OSFI requires all institutions to achieve target capital ratios that meet or exceed the 2019 all-in minimum ratios plus a conservation buffer. "All-in" is defined by OSFI as capital calculated to include all of the regulatory adjustments that will be required by 2019, but retaining the phase-out rules for non-qualifying capital instruments. Certain deductions from CET1 capital that were phased in at a rate of $20\%$ per year from 2014 for the calculation of capital under the transitional rules are now fully deducted, and therefore beginning in the first quarter of 2018, there is no longer a determination of transitional capital. 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 RWAs. In June 2018, OSFI publicly disclosed a $1.5\%$ Domestic Stability Buffer requirement for D-SIBs. See the "Continuous enhancement to regulatory capital requirements" section for additional details. This results in current targets, including all buffer requirements, for CET1, Tier 1 and Total capital ratios of $9.5\%$, $11.0\%$, and $13.0\%$, respectively, for D-SIBs. These targets may be higher for certain institutions at OSFI's discretion. 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. The countercyclical capital buffer applicable to CIBC is insignificant as at October 31, 2018. Capital adequacy requirements are applied on a consolidated basis consistent with our financial statements, except for our insurance subsidiaries (CIBC Reinsurance Company Limited and CIBC Life Insurance Company Limited), which are excluded from the regulatory scope of consolidation. The basis of consolidation applied to our financial statements is described in Note 1 to the consolidated financial statements. Starting January 2018, CIBC Life Insurance Company Limited is subject to OSFI's Life Insurance Capital Adequacy Test. A comparison of the BCBS transitional capital ratio requirements and the OSFI all-in target capital ratio requirements is as follows: ```mermaid bar chart title BCBS Transitional vs. OSFI All-in Capital Requirements section BCBS Transitional Total Capital (10.5%) : 10.5 Tier 1 Capital (8.5%) : 8.5 CET1 Capital (7.0%) : 7.0 section OSFI All-in Total Capital (13.0%) : 13.0 Tier 1 Capital (11.0%) : 11.0 CET1 Capital (9.5%) : 9.5 section Buffers CET 1 Capital Conservation Buffer : 2.5 D-SIB Buffer : 1.5 Domestic Stability Buffer held by D-SIBs : 1.5 Additional Tier 1 : 1.5 Tier 2 : 2.5 ``` 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** * **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 * 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 * Qualifying instruments issued by a consolidated subsidiary to third parties * **Tier 1 capital** * Innovative Tier 1 notes subject to phase-out rules for capital instruments **Lower quality** * **Tier 2 capital** * NVCC subordinated indebtedness * Non-qualifying subordinated indebtedness subject to phase-out rules for capital instruments * Eligible general allowance under the standardized approach * 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 FVO liabilities attributable to changes in own credit risk. 30 CIBC 2018 ANNUAL REPORT # Risk-weighted assets The following table provides a summary of permissible regulatory capital approaches and those adopted by CIBC: | Risk category | Permissible regulatory capital approaches | Approach adopted by CIBC | |---|---|---| | **Credit risk$^{(1)}$** | Basel provides three approaches for calculating credit risk capital requirements – standardized, foundation and advanced internal ratings-based (AIRB). OSFI expects financial institutions in Canada with Total capital in excess of $\$5$ billion to use the AIRB approach for all material portfolios and credit businesses. | We have adopted the AIRB approach for the majority of our credit portfolios. Under this methodology, we utilize our own internal estimates to determine probability of default (PD), loss given default (LGD), maturity, and exposure at default (EAD) for lending products and securities. We utilize the standardized approach for credit portfolios within CIBC Bank USA and CIBC FirstCaribbean. We periodically review portfolios under the standardized approach for consideration of adoption of the AIRB approach. | | | Basel provides three approaches for calculating counterparty credit risk for derivatives and repo-style transactions – current exposure method, standardized approach and internal model method. | We use the current exposure method for counterparty credit risk which reflects the current fair value of the exposure, plus an estimate of the maximum potential future exposure due to changes in market conditions. | | | Permitted approaches for equity positions in the banking book (which includes equity investments in funds) include a standardized approach, a market-based approach, a look-through approach, a mandate-based approach and a fall-back approach. | We use the standardized approach for equity positions in the banking book and both the look-through and mandate-based approaches for equity investments in funds. | | | Basel provides two approaches for calculating credit risk capital requirements for securitization positions in the banking book – standardized and internal ratings-based (IRB) approaches. | We use the IRB approach for securitization exposures, which comprises several calculation approaches (ratings-based, supervisory formula, and the internal assessment approach). | | **Market risk** | Market risk capital requirements can be determined under the standardized or internal models approaches. The latter involves the use of internal VaR models to measure market risk and determine the appropriate capital requirement. The stressed VaR and incremental risk charge (IRC) also form part of the internal models approach. | We use the internal models approach to calculate market risk capital. Our internal market risk models comprise VaR, stressed VaR, and IRC. We also use the IRB approach for trading book securitization positions. | | **Operational risk** | Operational risk capital requirements can be determined under the basic indicator approach, standardized approach or advanced measurement approach (AMA). | We use AMA and standardized approaches based on OSFI rules to calculate operational risk capital. | $^{(1)}$ Includes counterparty credit risk. Since the introduction of Basel II in 2008, OSFI has prescribed a capital floor requirement for institutions that use the AIRB approach for credit risk. Effective in the second quarter of 2018, the capital floor is determined by comparing a capital requirement calculated by reference to the Basel II standardized approach against the Basel III calculation, as specified by OSFI. Any shortfall in the Basel III capital requirement compared with the floor factor (currently set at $75\%$) applied to the capital requirements under the Basel II standardized approach is added to RWAs. Prior to the second quarter of 2018, the capital floor for banks using the AIRB approach for credit risk was determined by reference to the Basel I instead of the Basel II standardized approach calculation. See the "Continuous enhancement to regulatory capital requirements" section for additional details. 31 CIBC 2018 ANNUAL REPORT # 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 | 2018 | 2017 | |---|---|---| | **Common Equity Tier 1 (CET1) capital: instruments and reserves** | | | | Directly issued qualifying common share capital plus related stock surplus | 13,379 | 12,685 | | Retained earnings | 18,537 | 16,101 | | AOCI (and other reserves) | 777 | 452 | | Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) | 118 | 109 | | **CET1 capital before regulatory adjustments** | **32,811** | **29,347** | | **CET1 capital: regulatory adjustments** | | | | Prudential valuation adjustments | 27 | 62 | | Goodwill (net of related tax liabilities) | 5,489 | 5,284 | | Other intangibles other than mortgage-servicing rights (net of related tax liabilities) | 1,661 | 1,654 | | Deferred tax assets excluding those arising from temporary differences (net of related tax liabilities) | 38 | 18 | | Defined benefit pension fund net assets (net of related tax liabilities) | 284 | 160 | | Other | 671 | 551 | | **Total regulatory adjustments to CET1 capital** | **8,170** | **7,729** | | **CET1 capital** | **24,641** | **21,618** | | **Additional Tier 1 (AT1) capital: instruments** | | | | Directly issued qualifying AT1 instruments plus related stock surplus $^{(1)}$ | 2,250 | 1,797 | | Directly issued capital instruments subject to phase out from AT1 $^{(2)}$ | 1,003 | 1,253 | | AT1 instruments issued by subsidiaries and held by third parties (amount allowed in AT1) | 14 | 14 | | **AT1 capital** | **3,267** | **3,064** | | **Tier 1 capital (T1 = CET1 + AT1)** | **27,908** | **24,682** | | **Tier 2 capital: instruments and provisions** | | | | Directly issued qualifying Tier 2 instruments plus related stock surplus $^{(3)}$ | 3,430 | 1,961 | | Directly issued capital instruments subject to phase out from Tier 2 | 579 | 1,204 | | Tier 2 instruments issued by subsidiaries and held by third parties (amount allowed in Tier 2) | 20 | 19 | | General allowances (2017: Collective allowance under IAS 39) | 293 | 263 | | **Tier 2 capital (T2)** | **4,322** | **3,447** | | **Total capital (TC = T1 + T2)** | **32,230** | **28,129** | | **CET1 capital RWA$^{(4)}$** | **216,144** | **203,321** | | **Tier 1 capital RWA$^{(4)}$** | **216,303** | **203,321** | | **Total capital RWA$^{(4)}$** | **216,462** | **203,321** | | **Capital ratios** | | | | CET1 ratio | 11.4% | 10.6% | | Tier 1 capital ratio | 12.9% | 12.1% | | Total capital ratio | 14.9% | 13.8% | $^{(1)}$ Comprises non-cumulative Class A Preferred Shares Series 39, 41, 43, 45 and 47 which are treated as non-viability contingent capital (NVCC) in accordance with OSFI's capital adequacy guidelines. $^{(2)}$ Comprises CIBC Tier 1 Notes - Series A and Series B due June 30, 2108 (together, the Tier 1 Notes). $^{(3)}$ Comprises Debentures due on October 28, 2024, January 26, 2026 and April 4, 2028 which are treated as NVCC in accordance with OSFI's capital adequacy guidelines. $^{(4)}$ RWAs as at October 31, 2017 include a capital floor adjustment. See the "Risk-weighted assets" section for additional details. The CET1 ratio at October 31, 2018 increased $0.8\%$ from October 31, 2017, primarily due to an increase in CET1 capital resulting from internal capital generation (net income less dividends and share repurchases) and common share issuance, net of a reduction due to the impact of our adoption of IFRS 9. The increase in CET1 capital was partially offset by the impact of an increase in CET1 capital RWAs. The Tier 1 capital ratio at October 31, 2018 increased $0.8\%$ from October 31, 2017 primarily for the reasons noted above for the CET1 ratio, as well as the issuance of eligible preferred shares during the year, partially offset by an increase in the phase-out of the Innovative Tier 1 Notes from AT1 capital. The Total capital ratio at October 31, 2018 increased $1.1\%$ from October 31, 2017 for the reasons discussed for the Tier 1 capital ratio, as well as the issuance, net of redemptions, of Tier 2 eligible subordinated indebtedness. We hold regulatory capital against the underlying exposures associated with our credit card securitization trust, CARDS II Trust, as we have in the past provided non-contractual support to the trust. Relative to the securitization framework, holding regulatory capital against the underlying exposures resulted in a reduction of our 2018 CET1, Tier 1 and Total capital ratios by approximately $0.15\%$, $0.16\%$ and $0.18\%$, respectively (2017: $0.12\%$, $0.14\%$ and $0.15\%$, respectively). We will be permitted to apply the securitization framework effective November 1, 2018 as the conditions outlined in OSFI's 2019 CAR Guideline have been met. 32 CIBC 2018 ANNUAL REPORT # Components of risk-weighted assets The components of our RWAs and corresponding minimum total capital requirements are presented in the table below: | \$ millions, as at October 31 | **Credit risk** $^{(3)}$ | Minimum total capital required $^{(1)}$ | RWA $^{(2)}$ | 2017 | Minimum total capital required $^{(1)(2)}$ | |---|---|---|---|---|---| | **Standardized approach** | | | | | | | Corporate | 32,443 | 2,595 | 28,029 | 2,242 | | Sovereign | 2,319 | 185 | 1,597 | 128 | | Banks | 4,314 | 345 | 2,764 | 221 | | Real estate secured personal lending | 903 | 72 | 933 | 75 | | Other retail | 247 | 20 | 187 | 15 | | Trading book | 436 | 35 | 472 | 38 | | Equity | **39,582** | **3,166** | **34,441** | **2,756** | | **AIRB approach** $^{(4)}$ | | | | | | | Corporate | 68,402 | 5,472 | 64,924 | 5,194 | | Sovereign$^{(5)}$ | 2,144 | 171 | 2,093 | 167 | | Banks | 3,547 | 284 | 3,215 | 257 | | Real estate secured personal lending | 16,072 | 1,286 | 14,738 | 1,179 | | Qualifying revolving retail | 18,071 | 1,446 | 17,355 | 1,388 | | Other retail | 7,773 | 622 | 7,579 | 606 | | Equity | 299 | 24 | 314 | 25 | | Trading book | 3,982 | 319 | 3,345 | 268 | | Securitization | 1,050 | 84 | 1,341 | 107 | | Adjustment for scaling factor | 7,280 | 582 | 6,884 | 551 | | **Other credit RWA** $^{(6)}$ | **128,620** | **10,290** | **121,788** | **9,742** | | **Total credit risk (before adjustment for CVA phase-in)** $^{(7)}$ | **178,899** | **14,312** | **167,656** | **13,412** | | **Market risk (Internal Models and IRB Approach)** | | | | | | | VaR | 868 | 70 | 935 | 75 | | Stressed VaR | 2,084 | 167 | 2,058 | 165 | | Incremental risk charge | 2,865 | 229 | 1,843 | 147 | | Securitization and other | 566 | 45 | 556 | 44 | | **Total market risk** | **6,383** | **511** | **5,392** | **431** | | **Operational risk** | **26,626** | **2,130** | **24,664** | **1,973** | | **Total RWA before adjustments for CVA phase-in and capital floor** | **211,908** | **16,953** | **197,712** | **15,816** | | **CVA capital charge** $^{(7)}$ | | | | | | | CET1 RWA | 4,236 | 339 | 3,498 | 280 | | Tier 1 RWA | 4,395 | 352 | 3,741 | 299 | | Total RWA | 4,554 | 364 | 3,935 | 315 | | **Capital floor adjustment** $^{(7)}$ | | | | | | | CET1 RWA | n/a | n/a | 2,111 | 169 | | Tier 1 RWA | n/a | n/a | 1,868 | 150 | | Total RWA | n/a | n/a | 1,674 | 134 | | **Total RWA after adjustments for CVA phase-in and capital floor** $^{(7)}$ | | | | | | | CET1 capital RWA | 216,144 | 17,292 | 203,321 | 16,265 | | Tier 1 capital RWA | 216,303 | 17,305 | 203,321 | 16,265 | | Total capital RWA | 216,462 | 17,317 | 203,321 | 16,265 | $^{(1)}$ Refers to the minimum standard established by the BCBS before the application of the capital conservation buffer and any other capital buffers that may be established by regulators from time to time. It is calculated by multiplying RWA by $8\%$. $^{(2)}$ Certain information has been reclassified to conform to the presentation adopted in the current year. $^{(3)}$ Credit risk includes counterparty credit risk, which comprises derivative and repo-style transactions. Credit risk for CIBC Bank USA and CIBC FirstCaribbean are calculated under the standardized approach. $^{(4)}$ Includes RWAs relating to equity investments in funds and certain commercial loans which are determined using the supervisory slotting approach. $^{(5)}$ Includes residential mortgages insured by Canada Mortgage and Housing Corporation (CMHC), an agency of the Government of Canada, and government guaranteed student loans. $^{(6)}$ Comprises RWAs relating to derivative and repo-style transactions cleared through qualified central counterparties (QCCPs), settlement risk, and 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 which are risk-weighted at $100\%$, significant investments in the capital of non-financial institutions which are risk-weighted at $1250\%$, settlement risk, and amounts below the thresholds for deduction which are risk-weighted at $250\%$. $^{(7)}$ Before any capital floor requirement as applicable, there are three different levels of RWAs for the calculation of the CET1, Tier 1, and Total capital ratios arising from the option CIBC has chosen for the phase-in of the credit valuation adjustment (CVA) capital charge. RWAs as at October 31, 2017 included a capital floor adjustment. See the "Continuous enhancement to regulatory capital requirements" section for additional details. n/a Not applicable. The increase in CET1 capital RWAs was primarily due to organic growth and net foreign exchange movement, partially offset by capital methodology changes, including removal of the Basel I capital floor adjustment (see the "Continuous enhancement to regulatory capital requirements" section for additional details), the impact of portfolio upgrades and migrations, and capital model updates. The increase in credit risk RWAs was primarily due to organic growth across our businesses and net foreign exchange movement, partially offset by portfolio upgrades and migrations. The increase in market risk RWAs was primarily driven by movement in risk levels, which includes changes in open positions and the market rates affecting these positions, capital model updates and foreign exchange movement. The increase in operational risk RWAs was primarily driven by movement in risk levels under the advanced measurement approach, which reflects changes in loss experience, changes in the business environment, internal control factors and gross income, as defined by the BCBS. CIBC 2018 ANNUAL REPORT 33 # Management's discussion and analysis ## 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 | 2018 | 2017 | |---|---|---| | **CET1 capital** | | | | Balance at beginning of year | 21,618 | 19,148 | | Issue of common shares pursuant to the acquisition of The PrivateBank | 194 | 3,443 | | Issue of common shares pursuant to the acquisition of Geneva Advisors | 126 | | | Issue of common shares pursuant to the acquisition of Wellington Financial | 47 | 337 | | Shares issued in lieu of cash dividends | 218 | 208 | | Other issue of common shares | 749 | | | Purchase of common shares for cancellation | (104) | | | Premium on purchase of common shares for cancellation | (313) | (2,173) | | Net income attributable to equity shareholders | 5,267 | 4,699 | | Preferred and common share dividends | (2,445) | (2,173) | | Change in AOCI balances included in regulatory capital | 286 | (376) | | Net foreign currency translation adjustments | (191) | (101) | | Net change in securities measured at FVOCI | (51) | 10 | | Net change in cash flow hedges | 226 | 139 | | Net change in post-employment defined benefit plans | (173) | (191) | | Change in shortfall of allowance to expected losses | (212) | (4,219) | | Change in goodwill and other intangible assets | (63) | 156 | | Other, including change in regulatory adjustments $^{(1)}$ | **24,641** | **21,618** | | **CET1 capital balance at end of year** | | | | **AT1 capital** | | | | Balance at beginning of year | 3,064 | 2,518 | | AT1 eligible capital issues | 450 | 800 | | Phase-out of innovative Tier 1 notes | (251) | (251) | | Other, including change in regulatory adjustments $^{(1)}$ | (3) | 4 | | **AT1 capital balance at end of year** | **3,267** | **3,064** | | **Tier 2 capital** | | | | Balance at beginning of year | 3,447 | 3,417 | | New Tier 2 eligible capital issues | 1,500 | 30 | | Redeemed | (600) | | | Other, including change in regulatory adjustments $^{(1)}$ | (25) | | | **Tier 2 capital balance at end of year** | **4,322** | **3,447** | | **Total capital balance at end of year** | **32,230** | **28,129** | $^{(1)}$ Includes the net impact on retained earnings and AOCI as at November 1, 2017 from our adoption of IFRS 9. For additional details, see Note 1 to the consolidated financial statements. ## Leverage ratio The Basel III requirements include a non-risk-based capital metric, the leverage ratio, to supplement risk-based capital requirements. The leverage ratio is defined as Tier 1 capital divided by the leverage ratio exposure. The leverage ratio exposure is defined under the rules as the sum of: (i) On-balance sheet assets less Tier 1 capital regulatory adjustments; (ii) Derivative exposures; (iii) Securities financing transaction exposures; and (iv) Off-balance sheet exposures (such as commitments, direct credit substitutes, letters of credit, and securitization exposures). OSFI expects federally regulated deposit-taking institutions to have leverage ratios that meet or exceed $3.0\%$. This minimum may be higher for certain institutions at OSFI's discretion. | \$ millions, as at October 31 | 2018 | 2017 | |---|---|---| | Tier 1 capital | A | 27,908 | 24,682 | | Leverage ratio exposure | B | 653,946 | 610,353 | | Leverage ratio | A/B | 4.3% | 4.0% | The leverage ratio at October 31, 2018 increased $0.3\%$ from October 31, 2017, primarily due to an increase in Tier 1 capital (see the "Regulatory capital and ratios" section for additional details), partially offset by an increase in leverage ratio exposure. The increase in leverage ratio exposure was primarily driven by an increase in on- and off-balance sheet assets. ## Continuous enhancement to regulatory capital requirements The BCBS and OSFI have published a number of proposals for changes to the existing regulatory capital requirements to strengthen the regulation, supervision, and practices of banks with the overall objective of enhancing financial stability. The discussion below provides a summary of BCBS and OSFI publications that have been issued since the beginning of the fiscal year, as well as publications issued in previous fiscal years that are not yet effective, other than those discussed in separate sections of the document. In December 2017, the Group of Central Bank Governors and Heads of Supervision (GHOS; the oversight body of the BCBS) announced the finalization of Basel III reforms. Revisions have been included in the finalized framework with the objective of reducing excessive variability in RWAs and improving comparability of capital ratios among banks. Notable changes include: * Major revisions to the standardized approaches to credit and operational risk, market risk, and CVA frameworks, which will be effective January 1, 2022; * Constraints on the use of internally modelled approaches for certain credit exposures; * The Basel III capital output floor will ensure that banks' RWAs generated by internal models are not lower than $72.5\%$ of RWAs as calculated under the Basel III framework's standardized approaches. The new approach to the capital output floor will be phased in beginning at $50\%$ in 2022, increasing by $5\%$ every year thereafter to a rate of $72.5\%$ in 2027; and 34 CIBC 2018 ANNUAL REPORT * Finalized leverage ratio requirements, including a new buffer requirement for global systemically important banks (G-SIBs) starting in 2022. The finalized leverage ratio guideline includes changes to the measurement for derivative exposures, treatment of unsettled trades, and revisions to credit conversion factors related to off-balance sheet items. In January 2018, OSFI issued a letter outlining revisions to the existing capital floor requirements. Since the introduction of Basel II in 2008, OSFI has prescribed a capital floor requirement for institutions that use the AIRB approach for credit or operational risk. Effective in the second quarter of 2018, the capital floor is determined by comparing a capital requirement calculated by reference to the Basel II standardized approach against the Basel III calculation. Any shortfall in the Basel III capital requirement compared with the floor factor applied to the capital requirements under the Basel II standardized approach is added to RWAs. A $70\%$ floor factor was applied in the second quarter of 2018 and was increased to $72.5\%$ in the third quarter of 2018 and to the final $75\%$ floor factor in the fourth quarter of 2018. Prior to the second quarter of 2018, the capital floor for banks using the AIRB approach for credit risk was determined by reference to the Basel I instead of the Basel II standardized approach calculation. In March 2018, the BCBS issued for consultation "Revisions to the minimum capital requirements for market risk", which aims to address issues related to implementation of the market risk standard published in January 2016. In acknowledgment of ongoing challenges related to implementation, the BCBS also extended the implementation date of the market risk standard to January 1, 2022. In May 2018, the BCBS published the final standard "Capital treatment for simple, transparent and comparable short-term securitisations", setting out additional guidance and requirements for eligibility to apply preferential regulatory capital treatment for banks that act as investors in, or sponsors of, simple, transparent and comparable short-term securitizations. In June 2018, OSFI issued a letter advising of disclosure requirements for the Domestic Stability Buffer held by D-SIBs. This buffer requirement is intended to address Pillar 2 risks that are not adequately captured in the Pillar 1 capital requirements described in OSFI's Capital Adequacy Requirements (CAR) Guideline including systemic vulnerabilities related to Canadian consumer and institutional indebtedness, and asset imbalances in the Canadian market. OSFI will undertake a review of the buffer semi-annually, and any changes to the buffer will be made public. Increased transparency of this Pillar 2 capital requirement is intended to support a bank's ability to use this capital buffer in times of stress. The buffer will range from $0\%$ to $2.5\%$ of RWAs and is currently set at $1.5\%$. Increases in the buffer requirement will be phased in while decreases will take effect immediately. While breaches of the Domestic Stability Buffer will not result in automatic constraints on capital distributions, OSFI will require a remediation plan, and supervisory intervention pursuant to OSFI's Guide to Intervention would occur in cases where a remediation plan is not executed in a timely manner satisfactory to OSFI. In July 2018, OSFI issued for public consultation a discussion paper on the proposed implementation of the final Basel III reforms in Canada in response to the BCBS publishing the final Basel III reforms in December 2017, as discussed above. Notable areas where the discussion paper differs from the BCBS guidance include: * Accelerating the implementation of the revised operational risk framework to 2021; * Calibrating the capital output floor to $72.5\%$ starting in 2022; * Applying the higher leverage ratio requirement to Canadian D-SIBs starting in 2022; and * Modifying model parameters and approaches for certain assets under the credit risk framework. In October 2018, OSFI issued proposed revisions to "Guideline B-12: Interest Rate Risk Management" which incorporates guidance contained in the "Interest rate risk in the banking book" standard issued by BCBS in April 2016 with the objective of ensuring institutions have governance processes and controls that remain current and comprehensive with respect to defining a risk control framework for managing interest rate risk in the banking book to prudent levels. The new guideline outlines OSFI's expectations regarding risk measurement, development of stressed shock scenarios, as well as key behavioural and model assumptions. The proposed implementation date for the OSFI guideline is January 1, 2020. In October 2018, OSFI also released revisions to the CAR Guideline for implementation in the first quarter of 2019. The revisions include: * Implementation of the revised standardized approach to counterparty credit risk and central counterparties (CCPs); * Implementation of the revised securitization framework; * Clarification of the capital treatment for right-of-use assets, effective upon institutions' adoption of IFRS 16 "Leases" (IFRS 16), which for CIBC will be November 1, 2019; and * The removal of the CVA phase-in and other transitional arrangements that conclude at the end of 2018. The revisions also codify in the CAR Guideline changes to the capital floor, which were announced in January 2018 and implemented in the second quarter of 2018. In October 2018, OSFI issued revisions to the leverage ratio framework. The changes align the leverage ratio guideline with certain changes to the CAR Guideline in respect of securitization and counterparty credit risk. These changes include the requirement to use the standardized approach to counterparty credit risk for determining derivatives exposures, clarifications to the treatment of securitized assets that meet the requirements for recognition of significant risk transfer, and revisions to the credit conversion factors for certain off-balance sheet securitization exposures. In November 2018, OSFI issued revisions to the leverage ratio disclosure requirements guideline to reflect the necessary changes resulting from the revisions to the leverage ratio framework. The revisions to both the leverage ratio framework and the leverage ratio disclosure requirements are effective November 1, 2018. Prior to this fiscal year, in October 2017, the BCBS issued the final guideline on the identification and management of step-in risk, with an expected implementation timeline of no later than 2020. Step-in risk is the risk that a bank might provide financial support to an unconsolidated entity beyond, or in the absence of, any contractual obligations or equity ties, should the entity experience financial stress. The focus of the guideline is on unconsolidated entities such as securitization conduits, structured investment vehicles, and money market funds. The objective of the guideline is to mitigate this risk through banks' self-assessment and reporting to supervisors, and not by the automatic application of a Pillar I liquidity or capital charge. ## Bank recapitalization (Bail-in) conversion regulations On April 18, 2018, the Department of Finance formally published final bail-in regulations, which became effective September 23, 2018. These regulations provide certain statutory powers to the Canada Deposit Insurance Corporation (CDIC) to enact the bail-in regime, including the ability to convert specified eligible shares and liabilities of D-SIBs into common shares in the event such a bank becomes non-viable. The overarching policy objective is to strengthen financial stability while protecting taxpayers in the event of a D-SIB failure by ensuring that the D-SIB emerges from conversion adequately capitalized. These objectives are also consistent with those of the Financial Stability Board's Total Loss Absorbing Capacity (TLAC) standard applicable to G-SIBs. The Superintendent of Financial Institutions (the Superintendent) is responsible for designating D-SIBs, setting minimum TLAC requirements, and determining that a bank is non-viable. Senior debt issued on or after September 23, 2018, with an original term to maturity of more than 400 days (including 35 CIBC 2018 ANNUAL REPORT explicit or embedded options) that is unsecured or partially secured is subject to bail-in. Consumer deposits, certain derivatives, covered bonds, and certain structured notes would not be eligible for bail-in. On April 18, 2018, OSFI issued the final guidelines on TLAC for Canada's D-SIBs. D-SIBs will be required to maintain a minimum risk-based TLAC ratio and a minimum TLAC leverage ratio set out by the Superintendent. On August 21, 2018, the Superintendent issued an order requiring D-SIBs to maintain a minimum of $23\%$ of TLAC-eligible instruments$^{(1)}$ relative to their RWAs (including the $1.5\%$ Domestic Stability Buffer) and $6.75\%$ relative to their leverage exposures. Liabilities that count towards TLAC must be bail-in eligible and have a residual maturity greater than 365 days, among other requirements. D-SIBs have until the first quarter of 2022 to meet the minimum TLAC requirements. In May 2018, OSFI issued a final guideline on TLAC disclosure requirements which requires D-SIBs to begin disclosing their TLAC ratios in the first quarter of 2019. OSFI also released the final version of the Capital Disclosure Requirements in May 2018, updated to reflect the TLAC regime. OSFI made further amendments to the CAR Guideline, also on April 18, 2018, in respect of the treatment of D-SIBs' holdings of TLAC instruments. The changes are in line with the BCBS' TLAC holdings standard finalized in October 2016. Under the requirements, our investments in certain liabilities issued by other G-SIBs and Canadian D-SIBs are to be deducted from our own Tier 2 capital if our aggregate holdings, together with investments in capital instruments of other financial institutions, exceeds certain thresholds in relation to our own CET1 capital or meets certain other conditions set out in the CAR Guideline. There is also a separate, limited capacity provided to banks to hold certain liabilities issued by G-SIBs and Canadian D-SIBs in their trading books. $^{(1)}$ The sum of a D-SIB's TLAC, subject to certain adjustments, including Tier 1 capital, Tier 2 capital, and prescribed shares and liabilities that are subject to conversion into common shares and meet the eligibility criteria set out in OSFI's TLAC guideline. ## Revised Pillar 3 disclosure requirements In January 2015, the BCBS issued "Revised Pillar 3 disclosure requirements", which set out the first phase of an initiative to replace existing Pillar 3 disclosure requirements for the various types of risk. Pillar 3 aims to promote market discipline through regulatory disclosure requirements, in order to improve comparability and consistency of risk disclosures and increase transparency and confidence about a bank's exposure to risk and the overall adequacy of its regulatory capital. We implemented the first phase of the Pillar 3 disclosure requirements in the fourth quarter of 2018, with the exception of certain market risk related disclosures that have been deferred until the latter phases of the project as permitted by the OSFI guideline issued in April 2017. In March 2017, the BCBS released "Pillar 3 disclosure requirements – consolidated and enhanced framework", a standard establishing the second phase of the project. This standard includes enhancements to the January 2015 requirements, the introduction of several new disclosure requirements, and the consolidation of all existing BCBS disclosure requirements into the Pillar 3 framework. In February 2018, the BCBS issued for consultation "Pillar 3 disclosure requirements – updated framework", a standard establishing the third phase of the project. This consultative document includes enhancements to the January 2015 and March 2017 requirements, and the introduction of several new disclosure requirements. OSFI has not yet released its requirements for the second and third phases of the Pillar 3 framework, but has provided separate guidance regarding the TLAC disclosure requirements contemplated in the second phase. See the "Bank recapitalization (Bail-in) conversion regulations" section for additional details. ## Global systemically important banks – public disclosure requirements On July 5, 2018, the BCBS issued "Global systemically important banks: revised assessment methodology and the higher loss absorbency requirement" as a result of the first review of the G-SIB framework. The core elements of the framework have been maintained. A trading volume indicator has been added to the substitutability category, increasing the existing $12$ indicators to $13$. The scope of consolidation for the G-SIB framework will now include insurance subsidiaries. The revised assessment methodology must be effective by the 2021 G-SIB assessment. The framework will continue to be reviewed every three years with the next review to be completed by 2021. CIBC will continue to monitor and prepare for developments impacting regulatory capital requirements and disclosures. ## Capital management and planning Basel establishes a framework for a bank's Internal Capital Adequacy Assessment Process (ICAAP), which includes oversight by the CIBC Board of Directors (the Board). Our capital management policy is reviewed and approved by the Board in support of the 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 are 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 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, and they encompass all material elements of capital including earnings, dividends, business growth, and corporate initiatives, as well as maturities, redemptions, and new issuances of capital instruments. The annual capital plan establishes targets for the coming year and business plans to achieve those targets. The capital plan also relates the level of capital to our level of risk in a stressed environment as a part of the enterprise-wide stress testing discussed below. ## Capital initiatives The following main capital initiatives were undertaken in 2018: ### Normal course issuer bid On May 31, 2018, we announced that the TSX had accepted the notice of CIBC's intention to commence a normal course issuer bid. Purchases under this bid will terminate upon the earlier of: (i) CIBC purchasing up to a maximum of 9 million common shares; (ii) CIBC providing a notice of termination; or (iii) June 3, 2019. During the year, we purchased and cancelled $3,500,000$ common shares under this bid at an average price of $\$119.22$ for a total amount of $\$417$ million. See Note 15 to the consolidated financial statements for additional information. ### Common share issuance pursuant to the acquisition of The PrivateBank During the first quarter of 2018, CIBC delivered to third parties $1,689,450$ common shares that were issued and outstanding as of October 31, 2017, but which had not yet been delivered to third parties in connection with our acquisition of The PrivateBank. In addition, during the second quarter of 2018, we cancelled $316,390$ shares as it was determined that these shares will not be required for future delivery to third parties. For further details, see Note 3 and Note 15 to the consolidated financial statements. 36 CIBC 2018 ANNUAL REPORT ### Common share issuance pursuant to the acquisition of Wellington Financial On January 5, 2018, we completed the acquisition of Wellington Financial, and in connection therewith, we issued $378,848$ CIBC common shares. For further details, see Note 3 and Note 15 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 $2,880,782$ common shares for consideration of $\$337$ million for the year ended October 31, 2018. ### Dividends Our quarterly common share dividend was increased from $\$1.33$ per share to $\$1.36$ per share for the quarter ended October 31, 2018, and from $\$1.30$ per share to $\$1.33$ per share for the quarter ended April 30, 2018. 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 15 and 16 to the consolidated financial statements. ### Preferred shares On January 18, 2018, we issued $18$ million Non-cumulative Rate Reset Class A Preferred Shares Series 47 (NVCC) with a par value of $\$25.00$ per share, for gross proceeds of $\$450$ million. See the "Outstanding share data" section below and Note 15 to the consolidated financial statements for further details. ### Subordinated indebtedness On June 6, 2018, we redeemed all $\$600$ million of our $6.00\%$ Debentures due June 6, 2023. In accordance with their terms, the Debentures were redeemed at $100\%$ of their principal amount, plus accrued and unpaid interest thereon. On April 4, 2018, we issued $\$1.5$ billion principal amount of $3.45\%$ Debentures due April 4, 2028 (NVCC) (subordinated indebtedness). The Debentures bear interest at a fixed rate of $3.45\%$ per annum (paid semi-annually) until April 4, 2023, and at the three-month bankers' acceptance rate plus $1.00\%$ thereafter (paid quarterly) until maturity on April 4, 2028. ## 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 II 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 subgraph Scenario Development A[Develop macroeconomic scenarios relevant to the current and projected business cycle including emerging risks] end subgraph Risk Identification/Modelling B[Identification of relevant risk drivers] C[Development and validation of stress models and parameters] end D(Translation of financial and macroeconomic factors
(e.g., GDP, unemployment, yield curve, etc.)) E{Quantify impacts} F{Aggregate results} G{Evaluate and review bank-wide impacts} H{Capital Impacts} I{Linkages} J[Internal Capital Adequacy Assessment Process (ICAAP)] A --> D B --> D C --> D D --> E E --> F F --> G G --> H H --> I I --> J J --> K[Risk Appetite] J --> L[Capital Management and Planning] J --> M[Financial Management and Planning] J --> N[Liquidity Management] J --> O[Earnings] J --> P[Other] J --> Q[Recovery and Resolution Planning] J --> R[Risk Management] subgraph E E1[Credit] E2[Market] E3[Operational] E4[Earnings] E5[Liquidity] end subgraph F F1[Earnings] F2[Capital Impacts] end ``` 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 constraints. A key objective of the enterprise-wide stress tests is to identify 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. ## 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: | Shares outstanding | Amount | Maximum conversion price per common share | Maximum number of common shares issuable on conversion/exercise | |---|---|---|---| | Common shares | 442,908,235 | \$ 13,252 | 4 | | | Treasury shares common shares | 7,869 | | | | | 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 | | Treasury shares – preferred shares $^{(1)(2)}$ | | | | | | Subordinated indebtedness $^{(2)(3)}$ | | | | | | 3.00% Debentures due October 28, 2024 (NVCC) | n/a | \$ 1,000 | \$ 5.00 | 300,000,000 | | 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 | | Stock options outstanding | | | | 4,712,482 | $^{(1)}$ 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). 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 $77\%$ based on the number of CIBC common shares outstanding as at October 31, 2018. As described in the Capital Adequacy Guidelines, 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. ## Non-cumulative Rate Reset Class A Preferred Shares Series 39 (NVCC) (Series 39 shares) For the initial five-year period to the earliest redemption date of July 31, 2019, the Series 39 shares pay quarterly cash dividends, if declared, at a rate of $3.90\%$. On July 31, 2019, and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus $2.32\%$. Holders of the Series 39 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 40 (NVCC) (Series 40 shares), subject to certain conditions, on July 31, 2019 and on July 31 every five years thereafter. Holders of the Series 40 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus $2.32\%$. Holders of the Series 40 shares may convert their shares on a one-for-one basis into Series 39 shares, subject to certain conditions, on July 31, 2024 and on July 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 39 shares at par on July 31, 2019, and on July 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 40 shares at par on July 31, 2024, and on July 31 every five years thereafter. ## Non-cumulative Rate Reset Class A Preferred Shares Series 41 (NVCC) (Series 41 shares) For the initial five-year period to the earliest redemption date of January 31, 2020, the Series 41 shares pay quarterly cash dividends, if declared, at a rate of $3.75\%$. On January 31, 2020, and on January 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus $2.24\%$. Holders of the Series 41 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 42 (NVCC) (Series 42 shares), subject to certain conditions, on January 31, 2020 and on January 31 every five years thereafter. Holders of the Series 42 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus $2.24\%$. Holders of the Series 42 shares may convert their shares on a one-for-one basis into Series 41 shares, subject to certain conditions, on January 31, 2025 and on January 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 41 shares at par on January 31, 2020 and on January 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 42 shares at par on January 31, 2025 and on January 31 every five years thereafter. 38 CIBC 2018 ANNUAL REPORT ## Non-cumulative Rate Reset Class A Preferred Shares Series 43 (NVCC) (Series 43 shares) For the initial five-year period to the earliest redemption date of July 31, 2020, the Series 43 shares pay quarterly cash dividends, if declared, at a rate of $3.60\%$. On July 31, 2020, and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus $2.79\%$. Holders of the Series 43 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 44 (NVCC) (Series 44 shares), subject to certain conditions, on July 31, 2020 and on July 31 every five years thereafter. Holders of the Series 44 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus $2.79\%$. Holders of the Series 44 shares may convert their shares on a one-for-one basis into Series 43 shares, subject to certain conditions, on July 31, 2025 and on July 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 43 shares at par on July 31, 2020 and on July 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 44 shares at par on July 31, 2025 and on July 31 every five years thereafter. ## Non-cumulative Rate Reset Class A Preferred Shares Series 45 (NVCC) (Series 45 shares) For the initial five-year period to the earliest redemption date of July 31, 2022, the Series 45 shares pay quarterly cash dividends, if declared, at a rate of $4.40\%$. On July 31, 2022, and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus $3.38\%$. Holders of the Series 45 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 46 (NVCC) (Series 46 shares), subject to certain conditions, on July 31, 2022 and on July 31 every five years thereafter. Holders of the Series 46 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus $3.38\%$. Holders of the Series 46 shares may convert their shares on a one-for-one basis into Series 45 shares, subject to certain conditions, on July 31, 2027 and on July 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 45 shares at par on July 31, 2022 and on July 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 46 shares at par on July 31, 2027 and on July 31 every five years thereafter. ## Non-cumulative Rate Reset Class A Preferred Shares Series 47 (NVCC) (Series 47 shares) For the initial five-year period to the earliest redemption date of January 31, 2023, the Series 47 shares pay quarterly cash dividends, if declared, at a rate of $4.50\%$. On January 31, 2023, and on January 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus $2.45\%$. Holders of the Series 47 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 48 (NVCC) (Series 48 shares), subject to certain conditions, on January 31, 2023 and on January 31 every five years thereafter. Holders of the Series 48 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus $2.45\%$. Holders of the Series 48 shares may convert their shares on a one-for-one basis into Series 47 shares, subject to certain conditions, on January 31, 2028 and on January 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 47 shares at par on January 31, 2023 and on January 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 48 shares at par on January 31, 2028 and on January 31 every five years thereafter. CIBC 2018 ANNUAL REPORT 39 # 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 with the exception of the commercial mortgage securitization trust. ## Non-consolidated structured entities 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 retained interest. 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 $\$55$ million in 2018 (2017: $\$45$ million). All fees earned in respect of activities with the conduits are on a market basis. As at October 31, 2018, the amount funded for the various asset types in the multi-seller conduits amounted to $\$7.0$ billion (2017: $\$5.7$ billion). The estimated weighted-average life of these assets was $1.7$ years (2017: $1.7$ years). Our holdings of commercial paper issued by the non-consolidated sponsored multi-seller conduits that offer commercial paper to external investors were $\$9$ million (2017: nil). Our committed backstop liquidity facilities to these conduits were $\$8.8$ billion (2017: $\$8.7$ billion). We also provided credit facilities of $\$50$ million (2017: $\$40$ million) to these conduits. We participated in a syndicated facility for a three-year commitment 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 (2017: $\$130$ million). As at October 31, 2018, we funded $\$93$ million (2017: $\$94$ 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. Our on- and off-balance sheet amounts related to the structured entities that are not consolidated are set out in the table below. For additional details on our structured entities, see Note 6 to the consolidated financial statements. | \$ millions, as at October 31 | 2018 | | | 2017 | | | |---|---|---|---|---|---|---| | | 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 | 102 | 7,136 $^{(3)}$ | | 94 | 5,741 $^{(3)}$ | 179 | | Third-party structured vehicles – continuing | 3,347 | 1,656 | | 3,025 | 2,259 | | | Structured vehicles run-off | 298 | 13 | 157 | 109 | 114 | | | Other | | | | 528 | 94 | | $^{(1)}$ 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. $\$3$ million (2017: $\$3$ million) of the exposures related to structured vehicles run-off were hedged. $^{(2)}$ Disclosed amounts reflect the outstanding notional of written credit derivatives. The negative fair value recorded on the consolidated balance sheet was $\$131$ million (2017: $\$148$ million). Notional of $\$141$ million (2017: $\$161$ million) was hedged with credit derivatives protection from third parties. The fair value of these hedges net of CVA was $\$115$ million (2017: $\$130$ million). An additional notional of $\$16$ million (2017: $\$18$ million) was hedged through a limited recourse note. $^{(3)}$ Excludes an additional $\$1.7$ billion (2017: $\$3.0$ billion) relating to our backstop liquidity facilities provided to the multi-seller conduits as part of their commitment to fund purchases of additional assets and $\$9$ million (2017: nil) relating to our direct investments in the multi-seller conduits which we consider investment exposure. ## Other financial transactions 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, except in very limited circumstances. 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 12 and 23 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 21 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 12 and 21 to the consolidated financial statements, respectively. 40 CIBC 2018 ANNUAL REPORT # Management of risk We have provided certain disclosures required under IFRS 7 "Financial Instruments – Disclosures" 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 risk", and "Regulatory compliance risk" sections. | 41 Risk overview | 52 Risk measurement | 70 Liquidity risk | |---|---|---| | 42 Risk governance structure | 55 Exposure to credit risk | 70 Governance and management | | 43 Risk management structure | 57 Credit quality of portfolios | 70 Policies | | 44 Risk management process | 60 Credit quality performance | 70 Risk measurement | | 44 Risk appetite statement | 61 Exposure to certain countries and regions | 71 Liquid assets | | 45 Risk policies and limits | 63 Selected exposures in certain activities | 73 Funding | | 45 Risk identification and measurement | 63 Settlement risk | 75 Contractual obligations | | 47 Stress testing | 63 Securitization activities | 76 Other risks | | 47 Risk treatment and mitigation | 64 Market risk | 76 Strategic risk | | 47 Risk monitoring and reporting | 64 Governance and management | 76 Insurance risk | | 47 Top and emerging risks | 64 Policies | 76 Operational risk | | 50 Risks arising from business activities | 64 Process and control | 77 Technology, information and cyber security risk | | 51 Credit risk | 64 Risk measurement | 77 Reputation and legal risk | | 51 Governance and management | 65 Trading activities | 78 Regulatory compliance risk | | 51 Policies | 68 Non-trading activities | 78 Environmental and social risk | | 52 Process and control | 69 Pension risk | | ## 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 and SBU-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 compliance with 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) CIBC's lines of business and functional groups own the risk and are responsible for managing all risks associated with their activities, including identifying, assessing, mitigating and controlling them - this is the first line of defence; (ii) As the second line of defence, CIBC's Risk Management, and other functional groups are responsible for providing guidance and effective independent oversight and challenge of the enterprise-wide risks inherent in CIBC's business activities; and (iii) As the third line of defence, CIBC's internal audit function provides an independent assessment of the design and operating effectiveness of risk management controls, processes and systems. 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 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 2018 ANNUAL REPORT 41 ## Risk governance structure Our risk governance structure is illustrated below: ```mermaid graph TD B(Board of Directors) --> AC(Audit Committee) B --> RMC(Risk Management Committee) B --> MRCC(Management Resources and Compensation Committee) B --> CGC(Corporate Governance Committee) AC -- oversight --> ExCo(Executive Committee) RMC -- oversight --> ExCo MRCC -- oversight --> ExCo CGC -- oversight --> ExCo ExCo -- culture --> B ExCo -- framework --> B ExCo -- escalation --> RMC ExCo -- oversight --> GALCO(Global Asset Liability Committee) ExCo -- oversight --> GRC(Global Risk Committee) ``` Board of Directors (the Board): The Board oversees the enterprise-wide risk management program through approval of our risk appetite 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 policies, procedures and 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 their global oversight of CIBC's human capital strategy, including talent strategy, succession planning and total rewards and their 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 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 committees: * Global Asset Liability Committee (GALCO): This committee, which comprises members from the ExCo and senior Treasury and Risk Management 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 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. 42 CIBC 2018 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 the risks associated with business activities and strategies, and is responsible for providing an effective challenge to the lines of business. The current structure is illustrated below: ```mermaid graph TD CRO(Chief Risk Officer) subgraph Risk Management Structure CM_RM[Capital Markets Risk Management] GCRM[Global Credit Risk Management (including non-U.S. Risk Officers)] GORM[Global Operational Risk Management] RA_RDC[Risk Analytics, Reporting and Credit Decisioning] CRM[Conduct Risk Management] C[Compliance] EALG[Enterprise Anti-Money Laundering Group] USRM[U.S. Risk Management] end CRO --> CM_RM CRO --> GCRM CRO --> GORM CRO --> RA_RDC CRO --> CRM CRO --> C CRO --> EALG CRO --> USRM subgraph Risk Appetite and Management Control Metrics direction LR RPL[Risk Policies and Limits] end subgraph Risk Identification, Measurement and Reporting direction LR RIR[Risk Identification, Measurement and Reporting] end subgraph Effective Challenge as Second Line of Defence direction LR ECSLD[Effective Challenge as Second Line of Defence] end subgraph Stress Testing direction LR ST[Stress Testing] end RPL --> RIR RIR --> ECSLD ECSLD --> ST ``` The Risk Management group performs several important activities including: * Developing CIBC's risk appetite and associated management control metrics; * Setting risk strategy to manage risks in alignment with our risk appetite and business strategy; * Establishing and communicating risk policies, procedures and limits to control risks in alignment with risk strategy; * Measuring, monitoring and reporting on risk levels; * Identifying and assessing emerging and potential strategic risks; * Deciding on transactions that fall outside of risk limits delegated to business lines; and * Ensuring compliance with applicable regulatory and anti-money laundering requirements. The following key groups within Risk Management, independent of the originating businesses, contribute to our management of risk: * **Capital Markets Risk Management** - This group provides independent oversight of the measurement, monitoring and control of market risks (both trading and non-trading), and trading credit risk (also called counterparty credit risk) across CIBC's portfolios, and effective challenge and sound risk management oversight to the treasury/liquidity management function within CIBC. * **Global Credit Risk Management** - This group is responsible for the adjudication and oversight of credit risks (including transaction specific environmental and social risk$^{(1)}$) associated with our commercial, wholesale and wealth management activities, management of the risks in our investment portfolios, as well as management of special loan portfolios. * **Global Operational Risk Management** - This group develops the systems and tools to facilitate the identification of operational risks, and has global accountability for the measurement and monitoring of all operational risk types. * **Risk Analytics, Reporting and Credit Decisioning** - This group is responsible for enterprise-wide analysis, including enterprise-wide stress testing and reporting, risk policy and governance, risk systems and models, recovery and resolution planning, as well as economic and regulatory capital methodologies. In addition, this group manages credit risk in personal and small business products offered through the various distribution channels (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 anti-money laundering outcomes. * **Conduct Risk Management** - This group is responsible for enterprise conduct risk, including sales practice and compensation plan oversight and non-transactional reputation risk. * **Compliance** - This group provides timely and proactive advice and independent oversight of CIBC's compliance with applicable regulatory requirements. * **Enterprise Anti-Money Laundering** - This group is responsible for all aspects of compliance with and oversight of requirements relating to anti-money laundering, anti-terrorist financing, and sanctions measures. * **U.S. Risk Management** - This group carries out the mandate of CIBC Risk Management at a regional level under the leadership of the U.S. CRO, with oversight from the U.S. Risk Management Committee and reporting to the Senior Executive Vice-President, U.S. Region. The group provides independent oversight for the identification, management, measurement, monitoring and control of credit risks in CIBC's U.S. Commercial Banking and Wealth Management SBU. In addition, the CRO also oversees, through a joint oversight structure, the U.S. CRO, to ensure the relevant aspects of the U.S. Risk Management group are consistent with the above-noted practices. $^{(1)}$ See the "Environmental and social risk" section for further details, including oversight of non-transaction specific environmental and social risk, which reports directly into the CRO. CIBC 2018 ANNUAL REPORT 43 ## Risk management process Our risk management process is illustrated below: ```mermaid graph TD A[Risk Appetite Statement] --> B[Risk Policies and Limits] B --> C[Risk Identification and Measurement] C --> D[Stress Testing] D --> E[Risk Treatment / Mitigation] E --> A A -- Reporting --> F[Reporting] E -- Monitoring --> G[Monitor and Review] G --> A ``` ## Risk appetite statement CIBC's risk appetite statement defines the amount of risk we are willing to assume in pursuit of our strategic and financial objectives. Our guiding principle is to practice sound risk management, supported by strong capital and funding positions, as we pursue our client-focused strategy. In defining our risk appetite, we take into consideration our vision, values, and strategy, along with our risk capacity (defined by regulatory constraints). It defines how we conduct business, which is to be consistent with the following objectives: * Doing the right thing for our clients/stakeholders; * Safeguarding our reputation and brand; * Engaging in client-oriented businesses that we understand; * Maintaining a balance between risk and returns; * Retaining a prudent attitude towards tail and event risk; * Meeting regulatory expectations and/or identifying and having plans in place to address any issues in a timely manner; and * Achieving/maintaining an AA rating. Our CIBC risk appetite statement contains metrics with limits that define our risk tolerance levels. In addition, we have SBU risk appetite statements that are integrated with the overall CIBC risk appetite statement that further articulate our business level risk tolerances. Our CIBC risk appetite statement is reviewed annually in conjunction with our strategic, financial and capital planning cycle to ensure alignment and is approved annually by the Board. To help ensure CIBC stays within its risk appetite, the Board, RMC, and senior management regularly receive and review reporting on our risk profile against the risk appetite limits. All strategic business decisions, as well as day-to-day business decisions, are governed by our risk appetite framework. Strategic decisions are evaluated to ensure that the risk exposure is within our risk appetite. Day-to-day activities and decisions are governed by our framework of risk tolerance limits, policies, standards and procedures that support our risk appetite statement. ## Risk culture Risk culture refers to desired attitudes and behaviours relative to risk taking. At CIBC, we strive to achieve a consistent and effective risk culture by: * Promoting, through both formal and informal channels, a shared accountability of risk identification, management and mitigation; * Cultivating an environment of transparency, open communication and robust discussion of risk; * Setting the appropriate "tone at the top" through clear communication and reinforcement; and * Identifying behaviours that are and are not aligned with risk appetite, and reinforce appropriate behaviours. Every year, all employees are required to complete formal training on risk appetite, reputation risk, operational risk, code of conduct, anti-money laundering and other key risk topics. By taking this mandatory training, all employees develop a basic knowledge of risk management in support of our risk culture. This training is supplemented by our risk appetite statement, risk management priorities, documents on our internal website and internal news releases. In addition, we have policies, procedures and limits in place that govern our day-to-day business activity, with escalation procedures for limit breaches outlined accordingly. ## Risk input into performance and compensation At each year-end, Risk Management provides an assessment of adherence to risk appetite and material risk matters across CIBC. Risk Management also considers a number of risk inputs to identify matters which may directly impact individual compensation awards and/or performance ratings. The MRCC oversees the performance management and compensation process. The MRCC is responsible for assisting the Board in their global oversight of CIBC's human capital strategy, including talent strategy, succession planning and total rewards. The MRCC's key compensation-related responsibilities include: * Approving CIBC's compensation philosophy and any material changes to CIBC's compensation principles or practices; * Approving new material compensation policies and changes to existing material compensation policies; * Reviewing and recommending for Board approval new material compensation plans or changes to existing material compensation plans; * Assessing the appropriateness and alignment of compensation relative to actual business performance and risks; 44 CIBC 2018 ANNUAL REPORT * Reviewing and recommending for Board approval incentive compensation funding and allocations, based on an assessment of business performance and risk; * Reviewing and recommending for Board approval individual compensation target and compensation for the ExCo, including the CEO and other key officers; and * Approving individual compensation for employees with total direct compensation above a certain materiality threshold. ## Risk policies and limits Our risk policies and limits framework is intended to ensure that risks are appropriately identified, measured, monitored and controlled in accordance with our risk appetite. For most risks, we have developed an overarching framework document that sets out the key principles for managing the associated risks and our key risk policies and limits. This framework is supported by standards, guidelines, processes, procedures and controls that govern day-to-day activities in our businesses. Oversight is provided by management committees, as well as the Board/Board Committees. Key risk policies and limits are illustrated below: | Risk | Risk Management Framework | |---|---| | | **Risk Appetite Statement and Risk Appetite Framework** | | | Overarching Framework / Policy | Risk Limits | Management Oversight | | Credit | Credit Risk Management Policy | Credit Concentration Limits Delegated Credit Approval Authorities | Credit Committee Personal and Small Business Credit Risk Committee Global Risk Committee | | Market | Trading Credit Risk and Market Risk Management Policies Structural Risk Management Policies | Market Risk Limits Delegated Risk Authorities | Global Risk Committee Global Asset Liability Committee | | Operational | Operational Risk Management Policy Control Framework | Key Risk Indicators | Operational Risk and Control Committee Global Risk Committee | | Reputation | Reputation Risk Management Framework and Policy | Key Risk Indicators | Reputation and Legal Risks Committee | | Liquidity | Liquidity Risk Management Policy Pledging Policy | Liquidity and Funding Limits Pledging Limits | Global Asset Liability Committee Global Risk Committee | | Strategic | Strategic Planning Policy | Risk Appetite Statement | Executive Committee | | Regulatory | Regulatory Compliance Management Policy | Key Risk Indicators | Global Risk Committee | ## Risk identification and measurement Risk identification and measurement are important elements of our risk management framework. Risk identification is a continuous process, generally achieved through: * Regular assessment of risks associated with lending and trading credit exposures; * Ongoing monitoring of trading and non-trading portfolios; * Assessment of risks in new business activities and processes; * Assessment of risks in complex and unusual business transactions; and * Regular monitoring of the overall risk profile considering market developments and trends, and external and internal events. Risk Management has developed a "Risk Register" to list all material risks facing CIBC. The inventory is based on the risks inherent in CIBC's businesses and updated through various processes, illustrated in the following chart, to reflect changes in the nature of the risks we are facing. The Risk Register is used as an input for our ICAAP, either explicitly in the economic and regulatory capital calculations, or implicitly through the buffer of actual capital over economic capital and regulatory capital. ```mermaid graph TD subgraph Risk Identification Processes A[Strategic and Emerging Risk Themes External and Peer Benchmarking Regulatory Reviews] B[Macro and External Risks] C[Assessment of Risk Level (probability / severity considerations)] D[Risks Inherent in CIBC's Businesses] E[Strategic Business Reviews Change Initiative Risk Assessment Process Risk and Control Self Assessments] end A --> F[Risk Register] B --> F C --> F D --> F E --> F F --> G[Internal Capital Adequacy Assessment Process (ICAAP)] ``` The decision to register a new risk is based on a risk assessment through our risk identification processes and includes criteria such as materiality, measurability and probability. Furthermore, the decision to hold capital for a new risk is also based on whether the risk is being mitigated, and whether capital is deemed to be a suitable mitigant. We have enterprise-wide methodologies, models and techniques in place to measure both the quantitative and qualitative aspects of risks, appropriate for the various types of risks we face. These methodologies, models and techniques are subject to independent assessment and review to ensure that the underlying logic remains sound, that model risks have been identified and managed, that use of the models continues to be appropriate and outputs are valid. Risk is usually measured in terms of expected loss, unexpected loss, and economic capital. ## Expected loss Expected loss represents the loss that is statistically expected to occur in the normal course of business, with adjustments for conservatism, in a given period of time. In respect of credit risk, the parameters used to measure expected loss are PD, LGD and EAD. These parameters are updated regularly and are based on our historical experience through the cycle and benchmarking of credit exposures. The PD, LGD and EAD parameters used for regulatory capital purposes are not adjusted for forward-looking information. For trading market risks, VaR is a statistical technique used to measure risk. VaR is an estimate of the loss in market value for a given level of confidence that we would expect to incur in our trading portfolio due to an adverse one-day movement in market rates and prices. We also use stressed VaR to replicate our VaR over a period when relevant market factors are in distress. For trading credit risks associated with market value based products, we use models to estimate exposure relative to the value of the portfolio of trades with each counterparty, giving consideration to market rates and prices. ## Unexpected loss and economic capital Unexpected loss is the statistical estimate of the amount by which actual losses might exceed expected losses over a specified time horizon, computed at a given confidence level. We use economic capital to estimate the level of capital needed to protect us against unexpected losses. Economic capital allows us to assess performance on a risk-adjusted basis. We also use techniques such as sensitivity analysis and stress testing to help ensure that the risks remain within our risk appetite and that our capital is adequate to cover those risks. Our stress testing program includes evaluation of the potential effects of various economic and market scenarios on our risk profile, earnings and capital. Refer to the "Capital resources" section for additional details. ## Model risk management Model risk management encompasses sound development, independent validation, and ongoing monitoring and review of the models as well as governance and controls that are proportionate to the risks. Our model inventory includes, but is not limited to, models that relate to risk measurement (including VaR, economic and regulatory capital), pricing, credit risk rating and scoring models, credit models for the calculation of loss severity and stress testing, and models for the calculation of expected credit losses under IFRS 9. CIBC's approach to provide effective governance and oversight for model risk management is comprised of the following key elements: * Governance and oversight by management committees, including the Model and Parameter Risk Committee (MPRC), senior management and the Board; * Policies, procedures and standards to outline applicable roles and responsibilities of the various oversight groups and to provide guidance to identify, measure, control and monitor model risk throughout the model's life cycle; and * Controls for key operational aspects of model risk management including maintaining a model inventory, model risk ranking, model risk attestation and ongoing monitoring and reporting. The MPRC is a sub-committee of the Global Risk Committee and is responsible for reviewing and approving proposals for new and/or modified regulatory and economic capital models and provides oversight of CIBC's regulatory and economic capital models and parameters for credit, market and operational risks. The MPRC has accountability and responsibility for model and parameter approvals, parameter performance monitoring, validation oversight, and policy oversight. 46 CIBC 2018 ANNUAL REPORT ## Model risk mitigation policies We have policies, procedures, standards and controls to ensure effective model risk management for CIBC. A model review and validation is the independent effective challenge that documents the model risk and ensures models are sound and CIBC can rely on their output. The model review and validation process includes: * Review of model documentation; * Comprehensive, systematic testing of key model parameters on implementation to ensure results are as expected; * Replication of the risk quantification process to determine whether the model implementation is faithful to the model specifications; * Review of whether the model/parameter concepts and assumptions are appropriate and robust; * Accuracy testing to assess the calibration and accuracy of the risk components including, for example, the discriminative power of rating systems and the reasonableness of capital parameters; * Sensitivity testing to analyze the sensitivity of model/parameter outputs to model/parameter assumptions and key inputs; * Scenario and stress testing of the model outputs to key inputs; * Back-testing by comparing actual results with model-generated risk measures; * Benchmarking to other models and comparable internal and external data; * Review of the internal usage of the model/parameter applications to ensure consistency of application; * Reporting of model status to the MPRC, supported through an up-to-date inventory of regulatory models and parameters; * A quarterly attestation process for model owners in order to ensure compliance with the Model Risk and Validation Policy; and * A comprehensive validation report is prepared that identifies the conditions for valid application of the model and summarizes these findings to the model owners, developers and users. Once a model has been approved for use, ongoing monitoring becomes a joint responsibility of model users, owners and validators. ## Stress testing Stress testing supplements our other risk management tools by providing an estimate of tail risk (i.e., low probability, high severity events). Results of stress testing are interpreted in the context of our risk appetite, including metrics for capital adequacy. Enterprise-wide stress testing, capital planning and financial planning processes are integrated for a comprehensive information system. See the "Financial condition" section for detailed discussion on our enterprise-wide stress testing. ## Risk treatment and mitigation Risk treatment and mitigation is the implementation of options for modifying risk levels. CIBC pursues risk mitigation options in order to control its risk profile in the context of its risk appetite. CIBC's objective is to proactively consider risk mitigation options in order to optimize results. Discussions regarding potential risk mitigation strategies are held between Risk Management and the lines of business, and at the GRC or GALCO and at the RMC for governance and oversight, as appropriate. In evaluating possible strategies, considerations include costs and benefits, residual risks (i.e., risks that are retained), secondary risks (i.e., those caused by the risk mitigation actions), and appropriate monitoring and review to track results. ## Risk controls Our risk management framework also includes a comprehensive set of risk controls, designed to ensure that risks are being appropriately identified and managed. Our risk controls are part of CIBC's overall Control Framework, developed based on the Committee of Sponsoring Organizations of the Treadway Commission's (COSO) widely accepted "Internal Control – Integrated Framework". The Control Framework also draws on elements of the OSFI Supervisory Framework and Corporate Governance Guidelines. The Board, primarily through the RMC, approves certain credit risk limits and delegates specific transactional approval authorities to the CEO or jointly to the CEO and CRO. The RMC must approve transactions that exceed delegated authorities. Delegation of authority to business units is controlled to ensure decision-making authorities are restricted to those individuals with the necessary experience levels. In addition, CIBC has rigorous processes to identify, evaluate and remediate risk control deficiencies in a timely manner. Regular reporting is provided to the RMC to evidence compliance with risk limits. Risk limits and the delegation of authority to the CEO or jointly to the CEO and CRO are reviewed annually by the RMC. ## Risk monitoring and reporting To monitor CIBC's risk profile and facilitate evaluation against the risk appetite statement, a number of measurement metrics have been established, with regular reporting against these metrics provided to the GRC and the RMC. This reporting enables decisions on growth and risk mitigation strategies. Exposures are also regularly monitored against limits, with escalation protocols for limit excesses, should they occur. Escalation protocols ensure awareness at appropriate levels and facilitate management of excesses that is consistent with our risk appetite. Regular management reports on each risk type are also prepared to facilitate monitoring and control of risk at a more granular level. ## Top and emerging risks We monitor and review top and emerging risks that may affect our future results, and take action to mitigate potential risks if required. We perform in-depth analyses, which can include stress testing our exposures relative to the risks, and provide updates and related developments to the Board on a regular basis. This section describes the top and emerging risks that we consider to have potential negative implications, as well as regulatory and accounting developments that are material for CIBC. ## Technology, information and cyber security risk Financial institutions like CIBC are evolving their business processes to leverage innovative technologies and the internet to improve client experience and streamline operations. At the same time, cyber threats and the associated financial, reputation and business interruption risks have also increased. These risks continue to be actively managed by us through strategic risk reviews, enterprise-wide technology and information security programs, with the goal of maintaining overall cyber-resilience that prevents, detects, and responds to threats such as data breaches, malware, unauthorized access, and denial-of-service attacks, which can result in damage to CIBC systems and information, theft or disclosure of confidential information, unauthorized or fraudulent activity, and service disruption. Given the importance of electronic financial systems, including secure online and mobile banking provided by CIBC to its clients, CIBC monitors the changing environment globally, including cyber threats, mitigation strategies and evolving regulatory requirements, in order to improve our controls and processes to protect our systems and client information. In addition, we continually perform cyber security preparedness, testing, and recovery exercises to validate our defences, benchmark against best practices and provide regular updates to the Board. CIBC has well-defined cyber incident response protocols CIBC 2018 ANNUAL REPORT 47 and playbooks in the event that a security incident or breach occurs. CIBC also has cyber insurance coverage to help mitigate against certain potential losses associated with cyber incidents. CIBC's insurance coverage is subject to various terms and provisions, including limits on the types and amounts of coverage relating to losses arising from cyber incidents. We periodically assess our insurance coverage based on our risk tolerance and limits. Despite our commitment to information and cyber security, CIBC and its related third parties may not be able to fully mitigate all risks associated with the increased complexity and high rate of change in the threat landscape. CIBC continuously monitors its risk profile for changes and continues to refine approaches to security protection and service resilience to minimize the impact of any incidents that may occur. ## Disintermediation risk Canadian banking clients are increasingly shifting their service transactions from branches to digital platforms. As such, competitive pressure from digital disruptors, both global technology leaders and smaller financial technology entrants, is increasing and the risk of disintermediation is growing due to the level of sophistication of these non-traditional competitors. Cryptocurrencies, such as Bitcoin, are increasingly being recognized by financial institutions as risk factors facing their business operations. One of the major appeals of cryptocurrencies is the anonymity they offer, as participants can transfer assets across the internet without the need for centralized third-party intermediaries such as banks. In view of several shortcomings including their high volatility, the widespread adoption of cryptocurrencies as a substitute for government-issued currencies does not appear to be a near-term prospect. However, the underlying blockchain technology is seen to have vast potential which could contribute to increased disintermediation. Blockchain is a decentralized ledger technology which keeps records that are linked and secured with cryptography. It enables the use of cryptocurrencies, such as Bitcoin. The percentage of global GDP stored on this technology is expected to continue to increase, creating the potential for blockchain to transform business models across multiple industries that focus on transaction and record verification. CIBC manages disintermediation risk through strategic risk reviews as well as investment in emerging channels, in data and analytics capabilities, and in technology and innovation in general, to meet our clients' changing expectations, while working to reduce our cost structure and simplify operations. ## Geo-political risk The level of geo-political risk escalates at certain points in time. While the specific impact on the global economy and on global credit and capital markets would depend on the nature of the event, in general, any major event could result in instability and volatility, leading to widening spreads, declining equity valuations, flight to safe-haven currencies and increased purchases of gold. In the short run, market shocks could hurt the net income of our trading and non-trading market risk positions. Although Canada is unlikely to be directly subject to geo-political risk, the indirect impact of reduced economic growth, as well as potential impacts on commodity prices and the recent rise of protectionism, could have serious negative implications for general economic and banking activities. Currently, there are several areas of concern which have raised the level of uncertainty in global financial markets. These include: heightened tensions in the Middle East in the aftermath of the decision by the U.S. to exit the Joint Comprehensive Plan of Action relating to Iran's nuclear program and recent diplomatic turmoil regarding Saudi Arabia; the U.S. decision to withdraw from the Intermediate-Range Nuclear Forces Treaty with Russia; Brexit negotiations; and continued uncertainty surrounding global trade tensions, especially between the U.S. and China. Moreover, ratification of the renegotiated U.S.-Mexico-Canada (USMCA) deal to replace the North American Free Trade Agreement (NAFTA) may be delayed or prevented in the U.S. House of Representatives following the U.S. mid-term elections. In addition, there remains the potential for U.S. tax reforms to have a negative impact on the competitiveness of the Canadian economy. While it is impossible to predict where new geo-political disruption will occur, we do pay particular attention to markets and regions with existing or recent historical instability to assess the impact of these environments on the markets and businesses in which we operate. ## Canadian consumer debt and the housing market As a consequence of historically low interest rates, Canadians had increased debt levels at a pace that exceeded the growth in their income. Most of the increase in household debt levels was driven by higher levels of mortgage debt, which was tied to the Canadian housing market. The Bank of Canada's recent and potential further increases in interest rates, combined with regulatory measures introduced by OSFI, the Department of Finance, and provincial governments, including taxes on foreign ownership and revised mortgage underwriting guidelines (B-20 guidelines), are having their intended effect. Household credit is currently growing at the slowest pace experienced in any non-recessionary period during the post-war era. OSFI revised its B-20 guidelines on mortgage lending, which came into effect January 1, 2018. See the "Credit risk" section for further details. While we believe that the probability of a severe housing crash that generates significant losses for mortgage portfolios remains low, increases in interest rates and the new regulatory measures put in place elevate the risk associated with an inflated housing market, along with high levels of consumer debt that would be a concern should the economy falter and unemployment rates begin to increase. Currently, we qualify variable rate mortgage borrowers using the Bank of Canada five-year fixed benchmark rate, which is typically higher than the variable rate by approximately two percentage points, which is required as part of the B-20 guidelines. Therefore, our variable rate borrowers should be able to withstand some increase in interest rates. In addition, we run our enterprise-wide statistical stress tests at lower home prices to determine potential direct losses, and have also conducted stress tests to assess the impact of rising unemployment rates on borrowers' ability to repay loan obligations. ## Acquisition risk CIBC seeks out acquisition opportunities that align with its strategy, risk appetite and financial goals. The ability to successfully execute on our strategy to integrate acquisitions, and the ability to anticipate and manage risks associated with acquisitions, are subject to certain factors. These include receiving regulatory and shareholder approval on a timely basis and on favourable terms, retaining clients and key personnel, realizing synergies and efficiencies, controlling integration and acquisition costs, among others, and changes in general business and economic conditions. Although many of the factors are beyond CIBC's control, their impact is partially mitigated by conducting due diligence before completing the transaction, developing and executing appropriate integration plans, and monitoring performance following the acquisition. However, acquisitions involve inherent uncertainty and we cannot determine all potential events, facts and circumstances and there could be an adverse impact on CIBC's operations and financial performance. ## U.S. banking regulation In conjunction with our acquisition of The PrivateBank (subsequently rebranded as CIBC Bank USA), completed on June 23, 2017, our wholly-owned subsidiary, CIBC Bancorp USA Inc. (CIBC Bancorp), became a bank holding company registered under the U.S. Bank Holding Company Act of 1956, as amended, and is subject to regulation as a bank holding company by the U.S. Board of Governors of the Federal Reserve System (Federal Reserve). CIBC Bank USA, as a state-chartered bank with greater than $\$10$ billion of total assets, is subject to regulation by the U.S. Federal Deposit Insurance Corporation (FDIC), the U.S. Bureau of Consumer Financial Protection Board (BCFP), and the Illinois Department of Financial and Professional Regulation. The scope of these regulations could impact our business in a number of ways. For example, both CIBC Bancorp and CIBC Bank USA are required to maintain minimum capital ratios in accordance with Basel III rules adopted by the U.S. bank regulatory agencies, which differ in some respects from Canada's 48 CIBC 2018 ANNUAL REPORT Basel III rules. Under the U.S. bank regulatory framework, both CIBC and CIBC Bancorp are expected to provide a source of strength to the subsidiary bank and may be required to commit additional capital and other resources to CIBC Bank USA in the event that its financial condition were to deteriorate, whether due to overall challenging economic conditions in the U.S., or because of business-specific issues. The Federal Reserve (in the case of CIBC Bancorp) and the FDIC (in the case of CIBC Bank USA) also have the ability to restrict dividends paid by CIBC Bancorp or CIBC Bank USA, which could limit our ability to receive distributions on our capital investment in our U.S. banking operations. Furthermore, the Federal Reserve and the FDIC could also restrict our ability to grow our U.S. banking operation, whether through acquisitions or organically, if, among other things, they have supervisory concerns about risk management, anti-money laundering or compliance programs and practices, governance and controls, and/or capital and liquidity adequacy at CIBC Bancorp or CIBC Bank USA. In October 2018, the Federal Reserve issued a notice of proposed rulemaking that, consistent with the U.S. regulatory relief legislation enacted in May 2018, would establish a revised framework for applying enhanced prudential standards to large U.S. banking organizations based on their risk profile and asset size. The proposed rules generally would exempt U.S. banking organizations with less than $\$100$ billion of consolidated assets from most enhanced prudential standards, and those with between $\$100$ billion and $\$250$ billion of consolidated assets would be exempt from the more stringent standards. The proposed rules, however, expressly do not apply to U.S. banks controlled by foreign banking organizations, although the Federal Reserve has indicated that it intends to issue separate guidance on the applicability of enhanced prudential standards to foreign banking organizations, which may impact CIBC Bancorp given that it has consolidated assets less than $\$100$ billion. Until such further regulations are proposed, however, there is uncertainty as to whether the revised asset thresholds will be applied to foreign banking organizations in a manner similar to U.S. banking organizations. If they are not, CIBC Bancorp could be subject to more significant regulatory compliance burdens, particularly as we seek to grow the size of our U.S. operations, as compared to other similarly-sized U.S. banking organizations that are not owned by a foreign parent. ## Anti-money laundering Recognizing the threat of money laundering, terrorist financing activities and other related crimes to the stability and integrity of a country's financial sector and its broader economy, the international community has made the fight against these illegal activities a priority. Several laws and regulations have been enacted by governments and regulatory bodies globally. As a potential conduit for illegal operations, financial institutions bear a significant responsibility in mitigating the risks associated with these activities. CIBC is committed to adhering to all regulatory requirements pertaining to Anti-Money Laundering (AML) and Anti-Terrorist Financing (ATF) and implementing best practices to minimize the impact of such activities. As such, CIBC has implemented procedures to ensure that relevant regulatory obligations with respect to the reporting of large cash transactions, electronic funds transfers, and cross-border movements of cash and monetary instruments, are met in each jurisdiction. In addition, all employees are required to complete CIBC's AML/ATF training annually. ## Commodity prices Global economic growth is projected to remain relatively healthy in 2019, providing continued support to industrial demand for commodities. While oil prices have been declining recently, with West Texas Intermediate prices dropping below US $\$60$/barrel, of greater concern to the Canadian industry is the significant drop in Canada's heavy oil benchmark, Western Canada Select, which at under $\$17$/barrel, is near the lows set in 2016. However, should OPEC reverse some of the production increases introduced to offset declines in Iranian and Venezuelan output, global crude prices could recover some of the current weakness. CIBC's overall commodity exposure continues to perform within our risk appetite, with losses in our oil and gas portfolio down significantly from peak levels. Clients in our oil and gas portfolio are currently being assessed on the basis of our enhanced risk metrics, and our portfolio is being monitored in a prudent manner. ## Environmental and social governance See the "Environmental and social risk" section for additional information. ## Regulatory developments See the "Taxes", "Capital resources", "Credit risk", "Liquidity risk" and "Accounting and control matters" sections for additional information on regulatory developments. ## Accounting developments See the "Accounting and control matters" section and Note 31 to the consolidated financial statements for additional information on accounting developments. CIBC 2018 ANNUAL REPORT 49 # Risks arising from business activities The chart below shows our business activities and related risk measures based upon regulatory RWAs and economic capital as at October 31, 2018: | SBUs | Canadian Personal and Small Business Banking | Canadian Commercial Banking and Wealth Management | U.S. Commercial Banking and Wealth Management | Capital Markets | Corporate and Other | |---|---|---|---|---|---| | **Business activities** | • Deposits • Residential mortgages • Personal loans • Credit cards • Small business lending • Insurance | • Commercial banking • Full service brokerage • Asset management • Private wealth management | • Commercial banking • Asset management • Private wealth management • Personal and small business banking | • Credit products • Global markets • Investment banking • Investment portfolios | • International banking • Investment portfolios • Joint ventures • Functional and support groups (see page 28) | | **Balance sheet** | Average assets (\$ millions) 259,130 Average deposits (\$ millions) 166,703 | Average assets (\$ millions) 55,713 Average deposits (\$ millions) 53,209 | Average assets (\$ millions) 42,028 Average deposits (\$ millions) 22,309 | Average assets (\$ millions) 166,231 Average deposits (\$ millions) 31,387 | Average assets (\$ millions) 75,339 Average deposits (\$ millions) 181,827 | | **CET1 RWA (All-in basis)** | Credit risk (\$ millions) 47,217 Market risk 11,398 Operational risk | Credit risk (\$ millions) 40,596 Market risk 5,742 Operational risk | Credit risk $^{(1)}$ (\$ millions) 35,835 Market risk 2,660 Operational risk | Credit risk $^{(2)}$ (\$ millions) 41,467 Market risk 6,035 Operational risk | Credit risk $^{(3)}$ (\$ millions) 18,020 Market risk 319 Operational risk | | **Economic capital $^{(4)}$** | Proportion of total CIBC (%) 19 | Proportion of total CIBC (%) 16 | Proportion of total CIBC (%) 33 | Proportion of total CIBC (%) 13 | Proportion of total CIBC (%) 19 | | Comprising: | | | | | | | | Credit risk $^{(5)}$ | 56 | Credit risk $^{(5)}$ | 62 | Credit risk $^{(5)}$ | 35 | Credit risk $^{(5)}$ | 73 | Credit risk $^{(5)}$ | 22 | | Market risk | 34 | Market risk | 3 | Market risk | 2 | Market risk | 13 | Market risk | 17 | | Operational/Strategic risks | 10 | Operational/Strategic risks | 35 | Operational/Strategic risks | 63 | Operational/Strategic risks | 14 | Operational/Strategic risks | 61 | | **Risk profile** | We are exposed to credit, market, liquidity, operational, and other risks, which primarily include strategic, insurance, technology, information and cyber security, reputation and legal, regulatory compliance and environmental risks. | | | | | | $^{(1)}$ Includes counterparty credit risk of $\$83$ million, which comprises derivatives and repo-style transactions. $^{(2)}$ Includes counterparty credit risk of $\$10,956$ million, which comprises derivatives and repo-style transactions. $^{(3)}$ Includes counterparty credit risk of $\$545$ million, which comprises derivatives and repo-style transactions. $^{(4)}$ For additional information, see the "Non-GAAP measures" section. $^{(5)}$ Includes investment risk. 50 CIBC 2018 ANNUAL REPORT # Credit risk Credit risk is the risk of financial loss due to a borrower or counterparty failing to meet its obligations in accordance with contractual terms. Credit risk arises out of the lending businesses in each of our SBUs. Other sources of credit risk consist of our trading activities, which include our over-the-counter (OTC) derivatives, debt securities, and our repo-style transaction activity. In addition to losses on the default of a borrower or counterparty, unrealized gains or losses may occur due to changes in the credit spread of the counterparty, which could impact the carrying or fair value of our assets. ## Governance and management Credit risk is managed through the three lines of defence model. Frontline businesses own the risks and are responsible for identifying and assessing risks inherent in line of business activities, establishing controls to mitigate those risks, and ensuring the ongoing design and operating effectiveness of controls – this is the first line of defence. The second line of defence is Risk Management and other functional groups, which provide guidance and effective independent challenge of the adjudication and oversight of credit risks associated with CIBC's commercial, wholesale and wealth management activities, as well as risk assessments and decisions for the first line of defence. Internal Audit provides the third line of defence, by providing reasonable assurance on the effectiveness of governance practices, risk management processes and internal controls. 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 trading credit risk, including adjudication of trading credit facilities for non-bank financial entities, prime brokerage clients and central clearing counterparties where the client has no other credit relationship with CIBC. In addition, Capital Markets Risk Management is responsible for managing the country risk rating and the country exposure limits processes. Global Credit Risk Management: This group is responsible for the adjudication and oversight of credit risks (including transaction specific environmental and social risk$^{(1)}$) associated with our commercial, wholesale and wealth management activities, 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. Risk Analytics, Reporting and Credit Decisioning: This group is responsible for enterprise-wide analysis, including enterprise-wide stress testing and reporting, risk policy and governance, risk systems and models, recovery and resolution planning, as well as economic and regulatory capital methodologies. In addition, this group manages credit risk in personal and small business products offered through the various distribution channels (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 anti-money laundering 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 United States. ## 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. CIBC 2018 ANNUAL REPORT 51 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 12 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 counterparty credit risk 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 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 economic or legal reasons related to a borrower's financial difficulties, and we may grant a concession in the form of below-market rates or terms that would not otherwise be considered, for the purpose of maximizing recovery of our exposure to the loan. In circumstances where the concession is considered below market, the modification is reported as a troubled debt restructuring (TDR). TDRs are subject to our normal quarterly impairment review which considers, amongst other factors, covenants and/or payment delinquencies. An appropriate level of loan loss provision by portfolio segment is then established. 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. While these solutions often provide more favourable conditions than those originally provided and are intended to increase the ability of borrowers to service their obligation to CIBC overall, we consider these solutions to be at market and comparable to terms and conditions we would have offered to new clients with comparable credit ratings. 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 referred to the Credit Committee, a subcommittee of the GRC, or to the RMC for approval. After initial approval, individual credit exposures continue to be monitored, with a formal risk assessment, including review of assigned ratings, documented at least annually. 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. ## 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 expected credit losses under IFRS 9. See the "Accounting and control matters" section for further details. 52 CIBC 2018 ANNUAL REPORT ### 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 loss given default 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