Canadian Imperial Bank of Commerce Annual Report 2016

Plain-text annual report

T R O P E R L A U N N A 6 1 0 2 C B I C Who We Are CIBC is a leading Canadian-based ﬁnancial institution with a market capitalization of $40 billion and a Basel III Common Equity Tier 1 capital ratio of 11.3%. Through our three major business units – Retail and Business Banking, Wealth Management and Capital Markets – our more than 43,000 employees provide a full range of ﬁnancial products and services to 11 million individual, small business, commercial, corporate and institutional clients in Canada, the U.S. and around the world. Our Strategy At CIBC, we are building a strong, innovative, relationship-oriented bank. We are accelerating our transformation by concentrating on three bank-wide priorities: 1. Focusing on our clients 2. Innovating for the future 3. Simplifying our bank Creating Value for Our Shareholders At CIBC, we are committed to delivering sustainable earnings growth to our shareholders. We have embarked on initiatives to free up resources that will allow us to reinvest in our business to accelerate revenue growth and reduce structural cost base. We will do so with a keen focus on industry-leading fundamentals in capital, expenses and risk management. Table of Contents 2016 Performance at a Glance i Message from the President and Chief Executive Ofﬁcer Executive Team v Message from the Chair of the Board vii Enhanced Disclosure Task Force 1 Management’s Discussion and Analysis 92 Consolidated Financial Statements 101 Notes to the Financial Statements 167 Quarterly Review 169 Ten-Year Statistical Review 172 Glossary 178 Shareholder Information $40 BILLION Market Capitalization 19.9% RETURN on Equity 11 MILLION Clients 2016 Performance at a Glance In 2016 we advanced our client-focused strategy, created value for our shareholders and delivered strong earnings growth. Balanced Scorecard Financial Financial highlights Business Mix % adjusted net income(1) For the year ended October 31 (Canadian $ in billions, except as noted) Capital Markets 26.9% Financial results Revenue Wealth Provision for credit losses Management Non-interest expenses 11.9% Net income Corporate and Other Financial measures (%) -3.7% Adjusted efﬁ ciency ratio(1) Return on common shareholders ’ equity (ROE) Net interest margin Total shareholder return Common share information Market capitalization Dividends (%) Dividend yield Adjusted dividend payout ratio(1) Net income by Strategic Business Unit Retail and Business Banking Wealth Management Capital Markets 2016 2015 Retail and Business Banking 64.9% 15.0 1.1 9.0 4.3 58.0 19.9 1.64 5.2 39.9 4.7 46.4 2.7 0.9 1.1 13.9 0.8 8.9 3.6 59.6 18.7 1.74 2.0 39.8 4.3 45.4 2.5 0.5 1.0 Total revenue ($ billions) 15.0 13.4 13.9 Net income ($ billions) Adjusted diluted earnings per share(1) ($) Adjusted return on common shareholders’ equity(1) (%) 4.3 3.6 3.2 10.22 9.45 8.94 20.9 19.9 19.0 Dividend ($/share) 4.75 4.30 3.94 14 15 16 14 15 16 14 15 16 14 15 16 14 15 16 Client Experience Metrics(2): Change from 2014 to 2016 J.D. Power Canadian Retail Banking Satisfaction Study Ipsos CSI Net Promoter Score Business Mix % adjusted net income(1) +19.0 +6.7 +10.5 +1.8 Peer Avg. CIBC Peer Avg. CIBC (1) For additional information, see the "Non-GAAP measures" section of the MD&A. (2) Peer Avg. includes BMO, BNS, RBC and TD. Capital Markets 26.9% Wealth Management 11.9% Corporate and Other -3.7% Target 2016 Reported Results 2016 Adjusted Results(1) Diluted earnings per share (EPS) growth 5% to 10% on average, annually(2) $10.70, up 21% from 2015 $10.22, up 8% from 2015 Return on equity (ROE) 18% to 20%(2) 19.9% 19.0% Efﬁ ciency ratio 55% by 2019 59.7%, an improvement of 420 basis points from 2015 58.0%, an improvement of 160 basis points from 2015 Basel III CET1 ratio Strong buffer to regulatory minimum 11.3% Dividend payout ratio Approximately 50% 44.3% 46.4% Total shareholder return Outperform the S&P/TSX Composite Banks Index over a rolling ﬁ ve-year period CIBC – 68.6% Banks Index – 85.9% ( 1) For additional information, see the “Non-GAAP measures” section of the MD&A. (2) Going forward, our medium term EPS and ROE targets are at least 5% and at least 15%, respectively. Non-ﬁ nancial 2016 Accomplishments Clients Help our clients prosper and grow • Introduced the new CIBC Smart account, with a ﬂ exible fee that is capped monthly • Delivered Apple Pay to our clients the ﬁ rst day it was available in Canada • Launched simpliﬁ ed ﬁ nancial planning tool for client relationship managers, generating over 15,000 new ﬁ nancial plans for our clients • Expanded capital markets product capabilities to help our clients grow at home and abroad Employees • Our Employee Net Promoter Score, which measures willingness to recommend CIBC as a place to work and do business, Create an environment where all employees can reach their full potential Community Make a real difference in our communities where we live and work reached its highest level on record • Increased Employee Commitment Index in our annual employee survey • Invested more than $61 million in corporate-wide learning and development • 89% of our team agree that CIBC is a great place to work and 88% are proud to be identiﬁ ed with our bank • Contributed more than $65 million to community organizations across Canada through more than 1,500 charitable donations. This includes $44 million in corporate giving and nearly $2 1 million in employee-led fundraising to support initiatives such as CIBC Miracle Day and United Way • In its 20th year of partnership with the Canadian Breast Cancer Foundation (CBCF), the 15,000 members of Team CIBC contributed nearly $3 million to the estimated $17 million raised in 60+ communities through the 2016 CBCF CIBC Run for the Cure • Supported Canadian athletes during their 2016 Paralympic Summer Games journey, through CIBC Team Next and as Premier Partner of the Canadian Paralympic Team Retail and Business Banking 64.9% Environment Demonstrate environmental responsibility in all activities • $1.6 billion in lending to renewable power projects over the last ﬁ ve years • 98 % of paper used across the organization was Forest Stewardship Council certiﬁ ed • Employees helped to clean up Canadian shorelines to celebrate CIBC Environment Day Governance Be a leader in governance practices • 35% women on the CIBC Board of Directors • Scored 9 8 out of 100, or second place, in The Globe and Mail’s Board Games 201 6 annual review of corporate governance practices • 100% of employees completed CIBC Mandatory Training and Testing Total revenue ($ billions) 15.0 13.4 13.9 Net income ($ billions) Adjusted diluted earnings per share(1) ($) Adjusted return on common shareholders’ equity(1) (%) 4.3 3.6 3.2 10.22 9.45 8.94 20.9 19.9 19.0 Dividend ($/share) 4.75 4.30 3.94 14 15 16 14 15 16 14 15 16 14 15 16 14 15 16 2016 Performance at a Glance In 2016 we advanced our client-focused strategy, created value for our shareholders and delivered strong earnings growth. Balanced Scorecard Financial Financial highlights Business Mix % adjusted net income(1) For the year ended October 31 (Canadian $ in billions, except as noted) Capital Markets 26.9% Financial results Revenue Wealth Provision for credit losses Management Non-interest expenses 11.9% Net income Corporate and Other Financial measures (%) -3.7% Adjusted efﬁ ciency ratio(1) Return on common shareholders ’ equity (ROE) Net interest margin Total shareholder return Common share information Market capitalization Dividends (%) Dividend yield Adjusted dividend payout ratio(1) Net income by Strategic Business Unit Retail and Business Banking Wealth Management Capital Markets 2016 2015 Retail and Business Banking 64.9% 15.0 1.1 9.0 4.3 58.0 19.9 1.64 5.2 39.9 4.7 46.4 2.7 0.9 1.1 13.9 0.8 8.9 3.6 59.6 18.7 1.74 2.0 39.8 4.3 45.4 2.5 0.5 1.0 Total revenue ($ billions) 15.0 13.4 13.9 Net income ($ billions) Adjusted diluted earnings per share(1) ($) Adjusted return on common shareholders’ equity(1) (%) 4.3 3.6 3.2 10.22 9.45 8.94 20.9 19.9 19.0 Dividend ($/share) 4.75 4.30 3.94 14 15 16 14 15 16 14 15 16 14 15 16 14 15 16 Client Experience Metrics(2): Change from 2014 to 2016 J.D. Power Canadian Retail Banking Satisfaction Study Ipsos CSI Net Promoter Score Business Mix % adjusted net income(1) +19.0 +6.7 +10.5 +1.8 Peer Avg. CIBC Peer Avg. CIBC (1) For additional information, see the "Non-GAAP measures" section of the MD&A. (2) Peer Avg. includes BMO, BNS, RBC and TD. Capital Markets 26.9% Wealth Management 11.9% Corporate and Other -3.7% Target 2016 Reported Results 2016 Adjusted Results(1) Diluted earnings per share (EPS) growth 5% to 10% on average, annually(2) $10.70, up 21% from 2015 $10.22, up 8% from 2015 Return on equity (ROE) 18% to 20%(2) 19.9% 19.0% Efﬁ ciency ratio 55% by 2019 59.7%, an improvement of 420 basis points from 2015 58.0%, an improvement of 160 basis points from 2015 Basel III CET1 ratio Strong buffer to regulatory minimum 11.3% Dividend payout ratio Approximately 50% 44.3% 46.4% Total shareholder return Outperform the S&P/TSX Composite Banks Index over a rolling ﬁ ve-year period CIBC – 68.6% Banks Index – 85.9% ( 1) For additional information, see the “Non-GAAP measures” section of the MD&A. (2) Going forward, our medium term EPS and ROE targets are at least 5% and at least 15%, respectively. Non-ﬁ nancial 2016 Accomplishments Clients Help our clients prosper and grow • Introduced the new CIBC Smart account, with a ﬂ exible fee that is capped monthly • Delivered Apple Pay to our clients the ﬁ rst day it was available in Canada • Launched simpliﬁ ed ﬁ nancial planning tool for client relationship managers, generating over 15,000 new ﬁ nancial plans for our clients • Expanded capital markets product capabilities to help our clients grow at home and abroad Employees • Our Employee Net Promoter Score, which measures willingness to recommend CIBC as a place to work and do business, Create an environment where all employees can reach their full potential Community Make a real difference in our communities where we live and work reached its highest level on record • Increased Employee Commitment Index in our annual employee survey • Invested more than $61 million in corporate-wide learning and development • 89% of our team agree that CIBC is a great place to work and 88% are proud to be identiﬁ ed with our bank • Contributed more than $65 million to community organizations across Canada through more than 1,500 charitable donations. This includes $44 million in corporate giving and nearly $2 1 million in employee-led fundraising to support initiatives such as CIBC Miracle Day and United Way • In its 20th year of partnership with the Canadian Breast Cancer Foundation (CBCF), the 15,000 members of Team CIBC contributed nearly $3 million to the estimated $17 million raised in 60+ communities through the 2016 CBCF CIBC Run for the Cure • Supported Canadian athletes during their 2016 Paralympic Summer Games journey, through CIBC Team Next and as Premier Partner of the Canadian Paralympic Team Retail and Business Banking 64.9% Environment Demonstrate environmental responsibility in all activities • $1.6 billion in lending to renewable power projects over the last ﬁ ve years • 98 % of paper used across the organization was Forest Stewardship Council certiﬁ ed • Employees helped to clean up Canadian shorelines to celebrate CIBC Environment Day Governance Be a leader in governance practices • 35% women on the CIBC Board of Directors • Scored 9 8 out of 100, or second place, in The Globe and Mail’s Board Games 201 6 annual review of corporate governance practices • 100% of employees completed CIBC Mandatory Training and Testing Total revenue ($ billions) 15.0 13.4 13.9 Net income ($ billions) Adjusted diluted earnings per share(1) ($) Adjusted return on common shareholders’ equity(1) (%) 4.3 3.6 3.2 10.22 9.45 8.94 20.9 19.9 19.0 Dividend ($/share) 4.75 4.30 3.94 14 15 16 14 15 16 14 15 16 14 15 16 14 15 16 Message from the President and Chief Executive Ofﬁ cer Victor G. Dodig President and Chief Executive Ofﬁ cer Building the bank of the future In 2016, CIBC’s transformation to build the bank of the future gained momentum, as we relentlessly focused on our clients, innovated to meet their needs, and simpliﬁ ed the way we do business. CIBC reported record net income of $4.3 billion in 2016. Adjusted net income was a record $4.1 billion or $10.22 per share, compared with $ 3.8 billion or $9.45 per share a year ago. Our adjusted return on common shareholders’ equity was strong at 19.0%. It’s been an exciting year at CIBC – we’re undergoing a profound transformation to build a strong, innovative and relationship-oriented bank that will better serve our clients and enhance shareholder value. This was reﬂ ected in our 2016 performance – we delivered record net income, industry-leading capital strength and the highest return on equity of the major North American banks. All three of our strategic business units delivered strong performance this year, despite a challenging macroeconomic environment. Our reported and adjusted EPS growth were 21% and 8%, respectively, and our strong business results supported solid capital generation. We ended 2016 with an industry -leading Basel III Common Equity Tier 1 ratio of 11.3%, placing CIBC in a strong position for future growth. CIBC 2016 ANNUAL REPORT i Message from the President and Chief Executive Ofﬁ cer (continued) Message from the President and Chief Executive Ofﬁ cer (continued) Executive Team Steve Geist Senior Executive Vice-President and Group Head, Wealth Management Kevin Patterson Senior Executive Vice-President, Technology and Operations Sandy Sharman Executive Vice-President and Chief Human Resources Officer Michael G. Capatides Senior Executive Vice-President, Chief Administrative Officer and General Counsel Victor G. Dodig President and Chief Executive Officer We’ve made some very support of our entire team behind it. A Relentless Focus on Our Clients Over the past year, we’ve seen a real shift within our bank – a move from understanding to action – it’s all part of our journey to become #1 in client experience. It’s a goal we’ve set for the medium term, and we have the full We’ve made some very positive gains year-over-year, including strong and consistent improvement in client loyalty, as indicated by our Ipsos CSI Net Promoter Score. In fact, over the past four years, CIBC’s score has continued to improve and has outpaced our Canadian banking peers. Other metrics also indicate we’re on the right track – the latest JD Power Canadian Retail Banking Satisfaction Study results show signiﬁ cant improvements in day- to-day client satisfaction among our clients. As part of our client-focused strategy, we are following our clients where they bank. Our planned acquisition of PrivateBancorp, Inc. builds on our existing U.S. capital markets presence and our 2014 acquisition of Atlantic Trust, which offers private wealth management services to U.S. clients. On closing, the PrivateBancorp transaction will also allow us to create a broader, diversiﬁ ed, and more valuable CIBC for our clients and shareholders by providing our CIBC and Atlantic Trust clients with access to U.S. banking capabilities. positive gains year-over-year, including strong and consistent improvement in client loyalty. ii CIBC 2016 ANNUAL REPORT Kevin Glass Senior Executive Vice-President and Chief Financial Officer Harry Culham Senior Executive Vice-President and Group Head, Capital Markets Christina Kramer Executive Vice-President, Retail Distribution and Channel Strategy Jon Hountalas Executive Vice-President, Business and Corporate Banking David Williamson Senior Executive Vice-President and Group Head, Retail and Business Banking Laura Dottori-Attanasio Senior Executive Vice-President and Chief Risk Officer CIBC 2016 ANNUAL REPORT iii Extending Our Leadership in Innovation To better meet our clients’ changing needs, we’re also taking a client- focused approach to innovation. As technology rapidly reshapes banking, we’ve been investing in the technologies and partnerships that will help transform our bank and deepen client relationships. Innovations like CIBC Global Money Transfer, which allows our clients to send money to 45 countries worldwide, including the U.S., with no upfront transfer fee. And partnerships that help us stay on the cutting edge of innovations – like with ﬁ ntech innovators Thinking Capital and Borrowell, which brought ‘one click lending’ to our clients – a ﬁ rst in Canada. As well, our unique alliance with National Australia Bank and Israel’s Bank Leumi is enabling three banks on three continents to collaborate and share innovation strategies and insights to enhance our respective client experiences. Simplifying to Make it Easier to Bank with Us We are simplifying our banking processes and changing the way we do things to make it easier for our clients to bank and do business with us, and easier for our teams to get things done. In tandem, this enables us to free up resources that are being reinvested into our businesses to further strengthen our bank. We exceeded our target run-rate cost savings for 2016 of approximately $100 million, and reinvested most of our savings in strategic initiatives to support our growth and transformation. Message from the President and Chief Executive Ofﬁcer (continued) As we head into 2017, we’ll focus on building on our momentum and accelerating our transformation to build the bank of the future, while maintaining our ﬁnancial strength and solid proﬁtability. Accelerating Our Transformation As we head into 2017, we’ll focus on building on our momentum and accelerating our transformation to build the bank of the future, while maintaining our ﬁnancial strength and solid proﬁtability. We’ll also continue to stay close to our clients and accelerate our focus on simpliﬁcation and innovation. In closing, I’d like to thank our clients for their business and ongoing loyalty. I’d like to thank our Board, which continues to provide exceptional guidance and oversight of our business. And I’d also like to take this opportunity to acknowledge the late Hon. Jim Prentice, our former Vice-Chairman, who sadly passed away this year. Jim joined CIBC in 2011 and left a lasting mark on our bank during his time with us. His commitment to CIBC and Canada was evident in everything he did. The success of our bank is a direct result of the efforts made each and every day by our more than 43,000 team members on behalf of our clients. I would like to take this opportunity to thank them for their unwavering passion, commitment and diversity of ideas which make everything we do possible. At a time when relationships matter more than ever, they are our #1 client champions. They are why I am conﬁdent we can build a strong, innovative, relationship-oriented bank. Victor G. Dodig President and Chief Executive Ofﬁcer iv CIBC 2016 ANNUAL REPORT Message from the Chair of the Board Honourable John Manley Chair Creating long-term shareholder value CIBC has the right strategy to drive continued success, and the right team in place to build a strong, innovative, relationship-oriented bank. As strategic advisors to management, your Board continued to prudently balance growth opportunities – such as the proposed acquisition of PrivateBancorp, Inc. – with risk discipline and shareholder value creation. We have worked closely with CIBC’s President and CEO, Victor Dodig, and the senior management team to build momentum for our bank’s transformation by focusing on three integrated bank-wide priorities: client focus, innovation and simpliﬁ cation. Your Board recognizes the progress made over the past year across these priorities, including building stronger and deeper relationships with clients, as the team strives toward our goal of being #1 in client experience. Progress has also been made on the innovation and simpliﬁ cation front, as we delivered new technologies that improved the banking experience for clients and simpliﬁ ed processes making it easier to do business with us. Board Renewal During ﬁ scal 2016, we welcomed Nanci Caldwell and Christine Larsen to your Board. Ms. Caldwell brings more than 25 years’ operating experience in the global technology and software industries, while Ms. Larsen has more than 20 years’ operating experience in the ﬁ nancial services industry. CIBC 2016 ANNUAL REPORT v Message from the Chair of the Board (continued) Your Board is steadfast in its commitment to move the bar on gender diversity. Thirty-ﬁve percent of our directors are women, following the elections at our Annual Meeting in April 2016, exceeding our goal of at least 30% women by 2017. Corporate Governance CIBC is committed to being a leader in corporate governance. In 2016, progress was achieved in executive development and talent management, stakeholder engagement, risk management, board renewal and compensation practices. For example, we introduced a new annual incentive plan design for our global leadership team that is aligned to the achievement of CIBC’s three bank-wide priorities. Your Board is steadfast in its commitment to move the bar on gender diversity. Thirty-ﬁve percent of our directors are women, following the elections at our Annual Meeting in April 2016, exceeding our goal of at least 30% women by 2017. CIBC and your Board are proud supporters of the Catalyst Accord and the 30% Club Canada, nonproﬁt organizations dedicated to expanding opportunities for women in business and enhancing gender balance at all levels. Community Investment We are proud to support the communities in which we work and live. In 2016, CIBC invested more than $65 million to support organizations and causes across Canada. Our employees and retirees share this commitment and raised nearly $21 million and volunteered 200,000 hours to support key initiatives such as the Canadian Breast Cancer Foundation CIBC Run for the Cure, CIBC Miracle Day and the United Way. Looking Ahead 2017 promises to be a pivotal year at CIBC. The expected closing of our acquisition of PrivateBancorp, along with the strong collective focus on our three bank-wide priorities, will accelerate our transformation and create shareholder value. I’m conﬁdent that CIBC has a winning strategy and the right team to deliver growth to shareholders over the medium term. In closing, I would like to sincerely thank our management team, which delivered excellent results this year, as well as my fellow directors. I would like to warmly thank CIBC’s employees for their passion in serving our clients and for the strong performance in all of our businesses. Honourable John Manley Chair of the Board vi CIBC 2016 ANNUAL REPORT Enhanced Disclosure Task Force The Enhanced Disclosure Task Force (EDTF) was established by the Financial Stability Board in 2012. The stated goal of the EDTF is to improve the quality, comparability, and transparency of risk disclosures. On October 29, 2012, the EDTF released its report “Enhancing the Risk Disclosures of Banks”, which included thirty-two disclosure recommendations, principally in the areas of risk governance, credit risk, market risk, liquidity risk, and capital adequacy. The index below provides the listing of disclosures prepared in response to the recommendations of the EDTF, along with their locations. EDTF disclosures are located in our management’s discussion and analysis, consolidated financial statements, and supplementary packages, which may be found on our website (www.cibc.com). No information on CIBC’s website, including the supplementary packages, should be considered incorporated herein by reference. Topics Recommendations Disclosures Management’s discussion and analysis Consolidated financial statements Page references Supplementary regulatory capital disclosure General Risk governance, risk management and business model Capital adequacy and risk- weighted assets Liquidity Funding Market risk Credit risk Other risks 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Index of risk information – current page Risk terminology and measures (1) Top and emerging risks 46 Key future regulatory ratio requirements 34, 69, 72 139 Risk management structure Risk culture and appetite Risks arising from business activities Bank-wide stress testing Minimum capital requirements Components of capital and reconciliation to the consolidated regulatory balance sheet Regulatory capital flow statement Capital management and planning Business activities and risk-weighted assets Risk-weighted assets and capital requirements Credit risk by major portfolios Risk-weighted assets flow statement 41, 42 40, 43, 44 44, 48 36, 46, 52, 57, 64, 68, 74 29 31 33 35 32 – 34, 48 30, 32 51 – 55 33 – 34 Back-testing of models 45, 51, 63, 74 139 139 29 6 1 – 4 5 7 7 13 – 20 8 21, 22 Liquid assets Encumbered assets Contractual maturity of assets, liabilities and off-balance sheet instruments Funding strategy and sources Reconciliation of trading and non-trading portfolios to the consolidated balance sheet Significant trading and non-trading market risk factors Model assumptions, limitations and validation procedures Stress testing and scenario analysis Analysis of credit risk exposures Impaired loan and forbearance policies Reconciliation of impaired loans and the allowance for credit losses Counterparty credit risk arising from derivatives Credit risk mitigation Other risks Discussion of publicly known risk events 68 69 72 70 62 62 – 66 62 – 66 36, 64 52 – 60 50, 57, 77 50, 57 121 – 123, 163 9 – 12 103 121 49, 53 133 – 134 12, 28 (2) 49, 50, 55 133 – 134 12, 25 73 – 75 74 153 CIBC 2016 ANNUAL REPORT vii (1) A detailed glossary of our risk and capital terminology is included on page 174. (2) Included in supplementary financial information package. Management’s discussion and analysis 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, 2016, 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. This MD&A is current as of November 30, 2016. 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 172 to 177 of this Annual Report. 2 External reporting changes 3 Overview 3 CIBC’s strategy 3 Performance against objectives 4 Economic and market environment 5 Financial performance overview 5 Financial highlights 6 2016 Financial results 6 Net interest income and margin 7 Non-interest income Trading activities (TEB) 7 Provision for credit losses 8 Non-interest expenses 8 Taxes 8 Foreign exchange 9 9 Significant events 10 Fourth quarter review 10 Quarterly trend analysis 11 Review of 2015 financial performance 12 Outlook for calendar year 2017 13 Non-GAAP measures 16 Strategic business units 76 Accounting and control overview matters 17 Retail and Business Banking 20 Wealth Management 23 Capital Markets 27 Corporate and Other 28 Financial condition 28 Review of condensed consolidated balance sheet 29 Capital resources 38 Off-balance sheet arrangements 40 Management of risk 76 Critical accounting policies and estimates 80 Financial instruments 80 Accounting developments 82 Regulatory developments 82 Related-party transactions 82 Policy on the Scope of Services of the Shareholders’ Auditors 83 Controls and procedures 84 Supplementary annual financial information A NOTE ABOUT FORWARD-LOOKING STATEMENTS: From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including in this Annual Report, in other filings with Canadian securities regulators or the SEC and in other communications. All such statements are made pursuant to the “safe harbour” provisions of, and are intended to be forward-looking statements under applicable Canadian and U.S. securities legislation, including the U.S. Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements made in the “Message from the President and Chief Executive Officer”, “Overview – Performance against objectives”, “Financial performance overview – Taxes”, “Financial performance overview – Significant events”, “Financial performance overview – Outlook for calendar year 2017”, “Strategic business units overview – Retail and Business Banking”, “Strategic business units overview – 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 – 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 2017 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 2017” 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 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; the possible effect on our business of international conflicts and the war on terror; natural disasters, public health emergencies, disruptions to public infrastructure and other catastrophic events; reliance on third parties to provide components of our business infrastructure; 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 or the possibility that the acquisition does not close when expected or at all because required regulatory, shareholder or other approvals are not received or other conditions to the closing are not satisfied on a timely basis 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 2016 ANNUAL REPORT 1 Management’s discussion and analysis External reporting changes The following external reporting changes were made in 2016. Prior period amounts were reclassified accordingly. The changes impacted the results of our strategic business units (SBUs), but there was no impact on consolidated net income resulting from these reclassifications. (cid:129) (cid:129) In the corporate and investment banking and business banking lines of business within Capital Markets and Retail and Business Banking, respectively, our client segmentation was redefined in a manner that reinforced our client-focused strategy, and resulted in a greater degree of industry specialization and expertise, while providing enhanced client coverage. We transferred client accounts accordingly between these lines of business. The transfer pricing methodology used by Treasury to charge and credit the SBUs for the cost and benefit of funding assets and liabilities, respectively, was enhanced to better align to our liquidity risk models. In addition: Within Capital Markets: (cid:129) Equity and debt underwriting revenue, previously shared between the global markets and corporate and investment banking lines of business, was transferred to be reported entirely within the corporate and investment banking line of business. Within Wealth Management: (cid:129) The wealth advisory services business previously reported in the asset management line of business was transferred to the retail brokerage line of business. An “other” line of business was established to include the results of American Century Investments (ACI), previously reported in the asset management line of business. For further details of the sale of our minority investment in ACI, see the “Significant events” section. (cid:129) 2 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Overview CIBC is a leading Canadian-based financial institution with a market capitalization of $40 billion and a Basel III Common Equity Tier 1 (CET1) ratio of 11.3%. Through our three main businesses, Retail and Business Banking, Wealth Management, and Capital Markets, CIBC provides a full range of financial products and services to 11 million individual, small business, commercial, corporate and institutional clients in Canada, the U.S. and around the world. We have more than 43,000 employees dedicated to providing our clients with banking that fits their lives, delivering consistent and sustainable earnings growth for our shareholders, and giving back to our communities. CIBC’s strategy At CIBC, we are building a strong, innovative, relationship-oriented bank. We are accelerating our transformation by concentrating on three strategic bank-wide priorities: (cid:129) (cid:129) (cid:129) Client focus – we are targeting to be #1 in client experience. Innovation – we have a long history of innovating for our clients and we are continuing to build on our leadership position. Simplification – we are simplifying our bank to make it easier to bank at CIBC and easier to get work done. This allows us to redeploy resources for reinvestment in our business for future growth and improved efficiency. 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(1) To assess our earnings growth, we monitor our earnings per share (EPS). For several years, CIBC has communicated an average annual EPS growth target of 5% to 10%. In 2016, we achieved our target, delivering reported and adjusted(1) diluted EPS growth of 21% and 8%, respectively. Going forward, our target is to deliver average annual EPS growth of at least 5%. Reported diluted EPS ($) Adjusted diluted EPS(1) ($) 7.76 8.11 7.86 8.87 10.70 10.22 9.45 8.65 8.94 7.98 Efficiency ratio(1) 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 2016, CIBC’s reported and adjusted(1) efficiency ratios improved to 59.7% and 58.0%, respectively, from 63.9% and 59.6% in 2015. CIBC has set a medium-term target of achieving an efficiency ratio of 55% by 2019. 12 13 14 15 16 12 13 14 15 16 Reported efficiency ratio (%) Adjusted efficiency ratio(1) (%) 57.7 59.9 63.7 63.9 59.7 56.0 56.5 59.0 59.6 58.0 12 13 14 15 16 12 13 14 15 16 Return on common shareholders’ equity(1) ROE is another key measure of shareholder value. In 2016, CIBC’s reported and adjusted(1) ROE were strong, at 19.9% and 19.0%, respectively, within our target range of 18% to 20%. Going forward, our target is to maintain a strong ROE of at least 15%. Reported return on common shareholders’ equity (%) Adjusted return on common shareholders’ equity(1) (%) 22.2 21.4 18.3 18.7 19.9 22.8 22.9 20.9 19.9 19.0 (1) For additional information, see the “Non-GAAP measures” section. 12 13 14 15 16 12 13 14 15 16 CIBC 2016 ANNUAL REPORT 3 Management’s discussion and analysis 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 targeted and maintained an average dividend payout ratio of 40% to 50% of earnings to common shareholders. A year ago, we refined our target to deliver an adjusted dividend payout ratio near the top end of our target range. 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 2016, our reported and adjusted(1) dividend payout ratios were 44.3% and 46.4%, respectively. 2. We also have an objective to deliver a TSR that exceeds the industry average, which we have defined as the S&P/TSX Composite Banks Index, over a rolling five-year period. For the five years ended October 31, 2016, CIBC delivered a TSR of 68.6%, which was below the Bank Index return over the same period of 85.9%. Reported dividend payout ratio (%) 46.9 46.8 50.0 48.4 44.3 Adjusted dividend payout ratio(1) (%) 45.6 43.9 44.0 45.4 46.4 12 13 14 15 16 12 13 14 15 16 Rolling five-year total shareholder return (%) 125 100 75 50 25 0 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 CIBC 68.6% S&P/TSX Composite Index 40.3% S&P/TSX Composite Banks Index 85.9% CET1 ratio(2) (%) 11.3 10.8 10.3 9.4 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 2016, our Basel III CET1 ratio on an all-in basis was 11.3%, 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. For additional information, see the “Non-GAAP measures” section. (1) (2) CET1 ratio was effective beginning in 2013. 13 14 15 16 Economic and market environment CIBC operated in an environment of modest economic growth in Canada and abroad in 2016. After climbing in the prior year, Canada’s unemployment rate stabilized. Weakness in energy sector capital spending and flat total export volumes were offset by growth in housing and consumer spending, both supported by low interest rates. Household borrowing accelerated on growth in both mortgage and consumer credit, while business credit slowed as strong growth in bank lending was offset by declines in commercial paper and bankers’ acceptances. Canadian capital markets saw firmer issuance activity in government and corporate bonds in Canada, and steady levels of equity issuance activity versus 2015. 4 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Financial performance overview Financial highlights As at or for the year ended October 31 Financial results ($ millions) Net interest income Non-interest income Total revenue Provision for credit losses Non-interest expenses Income before income taxes Income taxes Net income Net income (loss) attributable to non-controlling interests Preferred shareholders Common shareholders Net income attributable to equity shareholders Financial measures Reported efficiency ratio Adjusted efficiency ratio (1) Loan loss ratio (2) Reported return on common shareholders’ equity Adjusted return on common shareholders’ equity (1) Net interest margin Net interest margin on average interest-earning assets Return on average assets Return on average interest-earning assets TSR Reported effective tax rate Adjusted effective tax rate (1) Common share information Per share ($) Share price ($) Shares outstanding (thousands) – basic earnings – reported diluted earnings – adjusted diluted earnings (1) – dividends – book value – high – low – closing – weighted-average basic – weighted-average diluted – end of period Market capitalization ($ millions) Value measures Dividend yield (based on closing share price) Reported dividend payout ratio Adjusted dividend payout ratio (1) Market value to book value ratio On- and off-balance sheet information ($ millions) Cash, deposits with banks and securities Loans and acceptances, net of allowance Total assets Deposits Common shareholders’ equity Average assets Average interest-earning assets Average common shareholders’ equity Assets under administration (AUA) (3)(4) Assets under management (AUM) (4) Balance sheet quality (All-in basis) and liquidity measures (5) Basel III – All-in basis Risk-weighted assets (RWA) ($ millions) CET1 capital RWA Tier 1 capital RWA Total capital RWA Capital ratios CET1 ratio Tier 1 capital ratio Total capital ratio Basel II RWA ($ millions) Tier 1 capital ratio Total capital ratio Basel III leverage ratio Leverage ratio exposure ($ millions) Leverage ratio Liquidity coverage ratio (LCR) (6) Other information Full-time equivalent employees 2016 2015 2014 2013 2012 $ $ $ $ $ $ 8,366 6,669 15,035 1,051 8,971 5,013 718 4,295 20 38 4,237 4,275 59.7 % 58.0 % 0.31 % 19.9 % 19.0 % 1.64 % 1.88 % 0.84 % 0.96 % 5.19 % 14.3 % 16.6 % 10.72 10.70 10.22 4.75 56.59 104.46 83.33 100.50 395,389 395,919 397,070 39,906 4.7 % 44.3 % 46.4 % 1.78 101,588 319,781 501,357 395,647 22,472 509,140 445,134 21,275 2,041,887 183,715 $ $ $ $ $ $ 7,915 5,941 13,856 771 8,861 4,224 634 3,590 14 45 3,531 3,576 63.9 % 59.6 % 0.27 % 18.7 % 19.9 % 1.74 % 2.00 % 0.79 % 0.91 % 1.96 % 15.0 % 15.5 % 8.89 8.87 9.45 4.30 51.25 107.16 86.00 100.28 397,213 397,832 397,291 39,840 4.3 % 48.4 % 45.4 % 1.96 93,619 290,981 463,309 366,657 20,360 455,324 395,616 18,857 1,846,142 170,465 $ $ $ $ $ $ 7,459 5,904 13,363 937 8,512 3,914 699 3,215 (3) 87 3,131 3,218 63.7 % 59.0 % 0.38 % 18.3 % 20.9 % 1.81 % 2.05 % 0.78 % 0.89 % 20.87 % 17.9 % 15.4 % 7.87 7.86 8.94 3.94 44.30 107.01 85.49 102.89 397,620 398,420 397,021 40,850 3.8 % 50.0 % 44.0 % 2.32 73,089 268,240 414,903 325,393 17,588 411,481 362,997 17,067 1,703,360 151,913 $ $ $ $ $ $ $ $ $ $ $ $ 7,453 5,252 12,705 1,121 7,608 3,976 626 3,350 (2) 99 3,253 3,352 59.9 % 56.5 % 0.44 % 21.4 % 22.9 % 1.85 % 2.12 % 0.83 % 0.95 % 18.41 % 15.8 % 16.5 % 8.11 8.11 8.65 3.80 40.36 88.70 74.10 88.70 400,880 401,261 399,250 35,413 4.3 % 46.8 % 43.9 % 2.20 78,363 256,380 398,006 315,164 16,113 403,546 351,687 15,167 1,499,885 105,123 $ 168,996 169,322 169,601 $ 156,107 156,401 156,652 $ 141,250 141,446 141,739 $ 136,747 136,747 136,747 7,326 5,159 12,485 1,291 7,202 3,992 689 3,303 9 158 3,136 3,294 57.7 % 56.0 % 0.53 % 22.2 % 22.8 % 1.84 % 2.15 % 0.83 % 0.97 % 9.82 % 17.3 % 18.0 % 7.77 7.76 7.98 3.64 35.83 78.56 68.43 78.56 403,685 404,145 404,485 31,776 4.6 % 46.9 % 45.6 % 2.19 70,061 252,732 393,119 300,344 14,491 397,155 341,053 14,116 1,445,870 89,223 n/a n/a n/a n/a n/a n/a 11.3 % 12.8 % 14.8 % n/a n/a n/a 10.8 % 12.5 % 15.0 % n/a n/a n/a $ 545,480 $ 502,552 4.0 % 124 % 3.9 % 119 % 10.3 % 12.2 % 15.5 % 9.4 % 11.6 % 14.6 % n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a $ 115,229 13.8 % 17.3 % n/a n/a n/a 43,213 44,201 44,424 43,039 42,595 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 $1,640.2 billion (2015: $1,465.7 billion). For additional information, see the “Non-GAAP measures” section. (1) (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. (3) (4) AUM amounts are included in the amounts reported under AUA. (5) Capital measures for fiscal years 2013 to 2016 are based on Basel III whereas measures for 2012 are based on Basel II. (6) Average for the three months ended October 31 for each respective year. n/a Not applicable. CIBC 2016 ANNUAL REPORT 5 Management’s discussion and analysis 2016 Financial results Reported net income for the year was $4,295 million, compared with $3,590 million in 2015. Adjusted net income(1) for the year was $4,104 million, compared with $3,822 million in 2015. Reported diluted EPS for the year was $10.70, compared with $8.87 in 2015. Adjusted diluted EPS(1) for the year was $10.22, compared with $9.45 in 2015. 2016 Net income was affected by the following items of note: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) $428 million ($383 million after-tax) gain, net of related transaction costs, on the sale of our minority investment in ACI (Wealth Management); $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(2); $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 intangible assets ($5 million after-tax in Retail and Business Banking, $9 million after-tax in Wealth Management, and $8 million after-tax in Corporate and Other); $30 million income tax recovery due to the settlement of transfer pricing-related matters (Retail and 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). (cid:129) (cid:129) (cid:129) 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: (cid:129) (cid:129) $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 (Retail and Business Banking); $42 million ($33 million after-tax) amortization of intangible assets ($6 million after-tax in Retail and Business Banking, $18 million after-tax in Wealth Management, and $9 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). (cid:129) (cid:129) (cid:129) 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. Net interest income and margin $ millions, for the year ended October 31 Average interest-earning assets Net interest income Net interest margin on average interest-earning assets 2016 2015 2014 $ 445,134 8,366 1.88 % $ 395,616 7,915 2.00 % $ 362,997 7,459 2.05 % Net interest income was up $451 million or 6% from 2015, primarily due to volume growth across retail products, higher trading income, and higher corporate banking revenue. These factors were partially offset by lower treasury revenue, a gain arising from accounting adjustments on credit card-related balance sheet amounts in 2015, shown as an item of note, and lower revenue from our exited FirstLine mortgage broker business. Net interest margin on average interest-earning assets was down 12 basis points due to higher average interest-earning assets, primarily driven by growth across CIBC’s businesses and higher short-term placements in treasury, partially offset by higher net interest income. Additional information on net interest income and margin is provided in the “Supplementary annual financial information” section. For additional information, see the “Non-GAAP measures” section. (1) (2) 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 are all reported in the respective SBUs. 6 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Non-interest income $ millions, for the year ended October 31 Underwriting and advisory fees Deposit and payment fees Credit fees Card fees Investment management and custodial fees (1)(2) Mutual fund fees (2) Insurance fees, net of claims Commissions on securities transactions Trading income (loss) Available-for-sale (AFS) securities gains, net Designated at fair value (FVO) gains (losses), net Foreign exchange other than trading Income from equity-accounted associates and joint ventures (1) Other $ 2016 446 832 638 470 882 1,462 396 342 (88) 73 17 367 96 736 $ 2015 427 830 533 449 814 1,457 361 385 (139) 138 (3) 92 177 420 $ 2014 444 848 478 414 677 1,236 356 408 (176) 201 (15) 43 226 764 $ 6,669 $ 5,941 $ 5,904 (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 (2) within Income from equity-accounted associates and joint ventures. 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). Non-interest income was up $728 million or 12% from 2015. Credit fees were up $105 million or 20%, primarily due to higher lending volumes in Retail and Business Banking and Capital Markets. Investment management and custodial fees were up $68 million or 8%, mainly due to AUM and AUA growth in our retail brokerage and Atlantic Trust Private Wealth Management (Atlantic Trust) businesses. Mutual fund fees were comparable with the prior year, as an increase due to higher AUM in our asset management business, driven by net sales of long- term mutual funds and market appreciation, was partially offset by lower annual performance fees earned by Atlantic Trust, and lower mutual fund trailer fees in our retail brokerage business. Commissions on securities transactions were down $43 million or 11%, primarily due to lower commissions in our retail brokerage business. Trading loss was down $51 million or 37%. See the “Trading activities (TEB)” section which follows for further details. AFS securities gains, net, were down $65 million or 47%, primarily due to lower gains in our treasury and merchant banking portfolios, partially offset by a gain from the structured credit run-off business, shown as an item of note. Foreign exchange other than trading was up $275 million, largely driven by a portion of the gain on the sale of our minority investment in ACI, shown as an item of note, and higher revenue from economic hedging activities. Income from equity-accounted associates and joint ventures was down $81 million or 46%, as we ceased recognition of income relating to ACI following the announcement of the sale in December 2015. Other was up $316 million or 75%, as the current year included a portion of the gain related to ACI noted above, and a gain on the sale of a processing centre, both shown as items of note. Trading activities (TEB) $ millions, for the year ended October 31 Trading income (loss) consists of: Net interest income (1) Non-interest income Trading income (loss) by product line: Interest rates Foreign exchange Equities Commodities Structured credit Other $ $ $ 2016 1,444 (88) 1,356 255 511 453 106 14 17 $ $ $ 2015 1,259 (139) 1,120 109 471 414 78 – 48 $ 1,356 $ 1,120 2014 1,049 (176) 873 (22) 392 369 48 35 51 873 $ $ $ $ (1) Includes taxable equivalent basis (TEB) adjustment of $474 million (2015: $482 million; 2014: $421 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 held-for-trading and income relating to changes in fair value of derivative financial instruments. Trading activities and related risk management strategies CIBC 2016 ANNUAL REPORT 7 Management’s discussion and analysis 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 $236 million or 21% from 2015, as the current year had higher trading income in interest rates, foreign exchange, equities, and commodities. Provision for credit losses $ millions, for the year ended October 31 Retail and Business Banking Wealth Management Capital Markets Corporate and Other $ 2016 765 – 153 133 2015 (1) $ 670 (1) 54 48 $ 1,051 $ 771 2014 731 – 43 163 937 $ $ (1) Certain information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. Provision for credit losses was up $280 million or 36% from 2015. In Retail and Business Banking, the provision was up primarily due to higher write-offs and bankruptcies in the card and the personal lending portfolios, and higher losses in the business banking portfolio. In Capital Markets, the provision was up primarily due to higher losses in the oil and gas sector and losses in our exited European leveraged finance portfolio, shown as an item of note, partially offset by lower losses in our U.S. real estate finance portfolio. In Corporate and Other, the provision was up due to increases in the collective allowance, shown as items of note, primarily relating to deterioration in the commodities sector and other changes in economic conditions, partially offset by lower losses in FirstCaribbean International Bank Limited (CIBC FirstCaribbean). Non-interest expenses $ millions, for the year ended October 31 Employee compensation and benefits Salaries Performance-based compensation Benefits Occupancy costs Computer, software and office equipment Communications Advertising and business development Professional fees Business and capital taxes Other $ 2016 2,741 1,580 661 4,982 804 1,398 319 269 201 68 930 $ 2015 2,826 1,568 705 5,099 782 1,292 326 281 230 68 783 $ 2014 2,502 1,483 651 4,636 736 1,200 312 285 201 59 1,083 $ 8,971 $ 8,861 $ 8,512 Non-interest expenses increased by $110 million or 1% from 2015. Employee compensation and benefits decreased by $117 million or 2%, as the prior year included higher restructuring charges primarily relating to employee severance, shown as items of note in both years. Computer, software and office equipment increased by $106 million or 8%, primarily due to higher spending on strategic initiatives. Other increased by $147 million or 19%, primarily due to legal provisions related to certain matters, shown as an item of note. Taxes $ millions, for the year ended October 31 Income taxes Indirect taxes (1) Goods and Services Tax (GST), Harmonized Sales Tax (HST) and sales taxes Payroll taxes Capital taxes Property and business taxes Total indirect taxes Total taxes Reported effective tax rate Total taxes as a percentage of net income before deduction of total taxes (1) Certain amounts are based on a paid or payable basis and do not factor in capitalization and subsequent amortization. 2016 718 $ 2015 634 $ 2014 699 $ 361 239 38 71 709 342 239 39 68 688 330 216 34 59 639 $ 1,427 $ 1,322 $ 1,338 14.3 % 24.9 % 15.0 % 26.9 % 17.9 % 29.4 % 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 $105 million from 2015. 8 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Income tax expense was $718 million, compared with $634 million in 2015, primarily due to higher income in the current year. This was partially offset by income tax recoveries from the settlement of transfer pricing-related matters, and a change in our expected utilization of certain tax loss carryforwards, primarily due to the sale of our minority investment in ACI, both shown as items of note. Indirect taxes were up $21 million, mainly due to higher sales taxes. In prior years, the Canada Revenue Agency issued reassessments disallowing the deduction of approximately $3 billion of the 2005 Enron settlement payments and related legal expenses. The matter is currently in litigation. The Tax Court of Canada trial on the deductibility of the Enron payments is expected to commence in late 2017. 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 $190 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, released on April 21, 2015, contained new rules for “synthetic equity arrangements” which would eliminate the tax deductibility of Canadian inter-corporate dividends for Canadian corporations in certain circumstances. A revised draft of the rules was released on July 31, 2015. The rules became law effective as of November 1, 2015, with a set of transition rules that apply between November 1, 2015 and April 30, 2017. In June 2016, the Canada Revenue Agency reassessed CIBC for approximately $118 million of additional income tax by denying the tax deductibility of certain 2011 Canadian corporate dividends on the basis that they were part of a “dividend rental arrangement”. The circumstances of the dividends subject to the reassessment are similar to those prospectively addressed by the rules in the 2015 Canadian federal budget. CIBC is confident that its tax filing position was 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 2016. 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 20 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 Estimated increase (decrease) in: Total revenue Provision for credit losses Non-interest expenses Income taxes Net income Impact on EPS: Basic Diluted Average USD appreciation (depreciation) relative to CAD $ 2016 vs. 2015 117 8 61 – 48 $ 2015 vs. 2014 281 7 145 5 124 $ 2014 vs. 2013 131 17 83 5 26 $ 0.12 0.12 $ 0.31 0.31 $ 0.07 0.07 5.6 % 14.7 % 6.9 % Significant events Restructuring In the fourth quarter of 2016, we recorded restructuring charges of $134 million ($98 million after-tax) in Corporate and Other. The charges primarily relate to employee severance and include Program Clarity, a bank-wide priority focused on simplifying our bank. Program Clarity will make it easier to bank at CIBC and easier to get work done, improve efficiency and enable reinvestment. Sale and lease back of certain retail properties On November 15, 2016, we entered into a definitive agreement to sell and lease back 89 retail properties located mainly in Ontario and British Columbia. The closing of the agreement is expected to occur in the first quarter of 2017, and will result in the recognition of an after-tax gain of approximately $247 million in our Retail and Business Banking SBU. Acquisition of PrivateBancorp, Inc. On June 29, 2016, we announced that we had entered into a definitive agreement to acquire PrivateBancorp, Inc. (PrivateBancorp) and its subsidiary, The PrivateBank and Trust Company (PrivateBank). PrivateBank is a Chicago-based middle-market commercial bank with private banking and wealth management capabilities. CIBC will pay US$18.80 in cash and 0.3657 of a CIBC common share for each share of PrivateBancorp common stock. Based on the June 28, 2016 closing price of CIBC’s common shares on the New York Stock Exchange (US$77.11), the total transaction value is approximately US$3.8 billion (C$4.9 billion) or US$47.00 of value per share of PrivateBancorp common stock at announcement. The transaction is expected to close in the first calendar quarter of 2017 and is subject to customary closing conditions, including regulatory approvals and the approval of PrivateBancorp’s common shareholders. Sale of equity investment We completed the sale of our minority investment in ACI to Nomura Holding America Inc. on May 19, 2016 for proceeds of US$1,045 million. We recognized a gain, net of related transaction costs, of $428 million ($383 million after-tax), in our Wealth Management SBU as a result of the sale, shown as an item of note. CIBC 2016 ANNUAL REPORT 9 Management’s discussion and analysis Fourth quarter review $ millions, except per share amounts, for the three months ended 2016 2015 (1) Oct. 31 Jul. 31 Apr. 30 Jan. 31 Oct. 31 Jul. 31 Apr. 30 Jan. 31 Revenue Retail and Business Banking Wealth Management Capital Markets (2) Corporate and Other (2) Total revenue Net interest income Non-interest income Total revenue Provision for credit losses Non-interest expenses Income before income taxes Income taxes Net income Net income attributable to: Non-controlling interests Equity shareholders EPS – basic – diluted $ $ $ $ $ $ $ 2,290 620 673 98 3,681 2,110 1,571 3,681 222 2,347 1,112 181 931 4 927 2.32 2.32 $ $ $ $ $ $ $ 2,225 1,035 809 67 4,136 2,113 2,023 4,136 243 2,218 1,675 234 1,441 6 1,435 3.61 3.61 $ $ $ $ $ $ $ 2,150 583 750 148 3,631 2,037 1,594 3,631 324 2,242 1,065 124 941 5 936 2.35 2.35 $ $ $ $ $ $ $ 2,190 601 683 113 3,587 2,106 1,481 3,587 262 2,164 1,161 179 982 5 977 2.44 2.43 $ $ $ $ $ $ $ 2,176 607 571 129 3,483 2,043 1,440 3,483 198 2,383 902 124 778 2 776 1.93 1.93 $ $ $ $ $ $ $ 2,118 628 691 83 3,520 2,021 1,499 3,520 189 2,179 1,152 174 978 5 973 2.42 2.42 $ $ $ $ $ $ $ 2,029 614 657 94 3,394 1,895 1,499 3,394 197 2,104 1,093 182 911 4 907 2.25 2.25 $ $ $ $ $ $ $ 2,083 619 701 56 3,459 1,956 1,503 3,459 187 2,195 1,077 154 923 3 920 2.28 2.28 (1) Certain information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. (2) Capital Markets revenue and income taxes are reported on a TEB basis with an equivalent offset in the revenue and income taxes of Corporate and Other. Compared with Q4/15 Net income for the quarter was $931 million, up $153 million or 20% from the fourth quarter of 2015. Net interest income was up $67 million or 3%, primarily due to volume growth across retail products, partially offset by lower treasury revenue. Non-interest income was up $131 million or 9%, due to higher interest rate and commodity trading income, higher credit fees, and higher investment management and custodial fees driven by higher average AUM and AUA. Provision for credit losses was up $24 million or 12%. In Retail and Business Banking, the provision was up due to higher write-offs in the card and personal lending portfolios, and higher losses in the business banking portfolio. In Capital Markets, the provision was down due to lower losses in the oil and gas sector. In Corporate and Other, the provision was comparable with the same quarter last year. Non-interest expenses were down $36 million or 2%, mainly due to lower restructuring charges primarily relating to employee severance, shown as items of note in both quarters, partially offset by higher spending on strategic initiatives. Income tax expense was up $57 million or 46%, primarily due to higher income. Compared with Q3/16 Net income for the quarter was $931 million, down $510 million or 35% from the prior quarter. Net interest income was comparable with the prior quarter, as the volume growth across retail products was offset by lower treasury revenue. Non-interest income was down $452 million or 22%, primarily due to the gains related to ACI and the structured credit run-off business, shown as items of note in the prior quarter, and lower underwriting and advisory fees. Provision for credit losses was down $21 million or 9%. In Retail and Business Banking, the provision was up primarily due to higher losses in the business banking portfolio. In Capital Markets, the provision was down, as the prior quarter included losses in the exited European leveraged finance portfolio, shown as an item of note. In Corporate and Other, the provision was up due to higher losses in CIBC FirstCaribbean, and an increase in the collective allowance. Non-interest expenses were up $129 million or 6%, primarily due to the restructuring charges noted above, and higher spending on strategic initiatives, partially offset by lower performance-based compensation. Income tax expense was down $53 million or 23%, 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 Retail and Business Banking revenue has benefited from volume growth, partially offset by the continued low interest rate environment, and attrition in our exited FirstLine mortgage broker business. The first quarter of 2015 included the gain arising from accounting adjustments on credit card-related balance sheet amounts. In Wealth Management, we recognized a gain, net of related transaction costs, on the sale of our minority investment in ACI in the third quarter of 2016. We ceased recognition of income from equity-accounted associates relating to ACI following the announcement of the sale in the first quarter of 2016. Capital Markets revenue is influenced, to a large extent, by market conditions and activity in the equity derivatives business, which includes tax- exempt income. The third quarter of 2016 included a gain from the structured credit run-off business. The first quarter of 2015 included a gain on sale of an investment in our merchant banking portfolio. Corporate and Other includes the offset related to the TEB component of tax-exempt income reported in Capital Markets revenue. The second quarter of 2016 included a gain on sale of a processing centre. Provision for credit losses Provision for credit losses is dependent upon the credit cycle in general and on the credit performance of the loan portfolios. In Retail and Business Banking, losses in the card and personal lending portfolios trended higher after the first quarter of 2016. In Capital Markets, losses in the oil and gas sector were elevated in the fourth quarter of 2015 and the first half of 2016. The third quarter of 2016 had higher losses in our exited European leveraged 10 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis finance portfolio. In Corporate and Other, the second and first quarters of 2016 included increases in the collective allowance, primarily relating to deterioration in the commodities sector and other changes in economic conditions. 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 2016 and the fourth and first quarters of 2015 included restructuring charges primarily relating to employee severance. The second quarter of 2016 included legal provisions in Corporate and Other related to certain matters. 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 second quarter of 2016 included an income tax recovery due to the settlement of transfer pricing-related matters. The first quarter of 2016 included an 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. Review of 2015 financial performance $ millions, for the year ended October 31 2015 (2) Net interest income Non-interest income Intersegment revenue (3) 2014 (2) Total revenue Provision for (reversal of) credit losses Non-interest expenses Income (loss) before income taxes Income taxes Net income (loss) Net income (loss) attributable to: Non-controlling interests Equity shareholders Net interest income Non-interest income Intersegment revenue (3) Total revenue Provision for credit losses Non-interest expenses Income (loss) before income taxes Income taxes Net income (loss) Net income (loss) attributable to: Non-controlling interests Equity shareholders Retail and Business Banking $ $ $ $ $ $ 5,879 2,080 447 8,406 670 4,309 3,427 897 2,530 – 2,530 5,587 2,239 397 8,223 731 4,219 3,273 814 2,459 – 2,459 Wealth Management Capital Markets (1) Corporate and Other (1) $ $ $ $ $ $ 203 2,722 (457) 2,468 (1) 1,784 685 167 518 – 518 196 2,408 (404) 2,200 – 1,582 618 148 470 2 468 $ $ $ $ $ $ 1,870 740 10 2,620 54 1,332 1,234 277 957 – 957 1,540 849 7 2,396 43 1,225 1,128 259 869 – 869 $ $ $ $ $ $ (37) 399 – 362 48 1,436 (1,122) (707) (415) 14 (429) 136 408 – 544 163 1,486 (1,105) (522) (583) (5) (578) CIBC Total 7,915 5,941 – 13,856 771 8,861 4,224 634 3,590 14 3,576 7,459 5,904 – 13,363 937 8,512 3,914 699 3,215 (3) 3,218 $ $ $ $ $ $ (1) Capital Markets 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) Certain information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. (3) Intersegment revenue represents internal sales commissions and revenue allocations under the Manufacturer/Customer Segment/Distributor Management Model. The following discussion provides a comparison of our results of operations for the years ended October 31, 2015 and 2014. Overview Net income for 2015 was $3,590 million, compared with $3,215 million in 2014. The increase in net income of $375 million was due to higher revenue, a lower provision for credit losses and lower income taxes, partially offset by higher non-interest expenses. Revenue by segment Retail and Business Banking Revenue was up $183 million or 2% from 2014, primarily due to volume growth, higher fees, and a gain arising from accounting adjustments on credit card-related balance sheet amounts, shown as an item of note. 2014 included a portion of the gain relating to the Aeroplan transactions with Aimia Canada Inc. (Aimia) and the Toronto-Dominion Bank (TD), shown as an item of note. Wealth Management Revenue was up $268 million or 12% from 2014, primarily due to higher AUM, and the inclusion of a full year of Atlantic Trust results in 2015 versus ten months in 2014. Capital Markets Revenue was up $224 million or 9% from 2014, as 2014 included a charge relating to the incorporation of funding valuation adjustments (FVA) into the valuation of our uncollateralized derivatives, shown as an item of note. 2015 included higher revenue from foreign exchange, equity derivatives, interest rate and commodities trading. 2014 included a gain on the sale of an equity investment in our exited European leveraged finance portfolio, shown as an item of note. Corporate and Other Revenue was down $182 million or 33% from 2014, primarily due to lower treasury revenue and a higher TEB adjustment, partially offset by favourable foreign exchange rates. 2014 included a portion of the gain relating to the Aeroplan transactions with Aimia and TD, shown as an item of note. CIBC 2016 ANNUAL REPORT 11 Management’s discussion and analysis Consolidated CIBC Net interest income Net interest income was up $456 million or 6% from 2014, primarily due to volume growth across retail products, higher trading income, and a gain arising from accounting adjustments on credit card-related balance sheet amounts, shown as an item of note. These factors were partially offset by lower treasury revenue, and lower card revenue as a result of the Aeroplan transactions in 2014. Non-interest income Non-interest income was up $37 million or 1% from 2014, primarily due to higher AUM in our asset management business, driven by net sales of long- term mutual funds and market appreciation, and AUM and AUA growth in other areas within our Wealth Management SBU. 2014 included the gains relating to the Aeroplan transactions and the sale of an equity investment in our exited European leveraged finance portfolio, both shown as items of note. Provision for credit losses Provision for credit losses was down $166 million or 18% from 2014. In Retail and Business Banking, the provision was down as lower loan losses in the card portfolio reflected credit improvements, and the sold Aeroplan portfolio, while 2014 included a charge resulting from operational changes in the processing of write-offs, shown as an item of note. In Capital Markets, the provision was up mainly due to higher losses in the oil and gas sector, while 2014 included loan losses in our exited U.S. leveraged finance portfolio, shown as an item of note. In Corporate and Other, the provision was down as 2014 included loan losses relating to CIBC FirstCaribbean, partially offset by a reduction in the collective allowance, including lower estimated credit losses relating to the Alberta floods, both shown as items of note. Excluding items of note, 2015 still had lower losses in CIBC FirstCaribbean, partially offset by an increase in the collective allowance versus a reduction in 2014. Non-interest expenses Non-interest expenses increased by $349 million or 4% from 2014, mainly due to restructuring charges primarily relating to employee severance, shown as an item of note, higher salaries, performance-based compensation and benefits, and higher spending on strategic initiatives. 2014 included a goodwill impairment charge relating to CIBC FirstCaribbean, shown as an item of note. Income taxes Income tax expense was $634 million, compared with $699 million in 2014. Income tax expense was lower, notwithstanding higher income in 2015, primarily due to no tax recovery being booked in 2014 in respect of the CIBC FirstCaribbean goodwill impairment charge and loan losses, and the impact of higher tax-exempt income in 2015. Outlook for calendar year 2017 Global growth in gross domestic product in 2017 is expected to be marginally better than the moderate pace seen in 2016. Emerging markets should see some support from earlier interest rate cuts. The U.S. should improve to a roughly 2% growth rate, driven by consumer spending and housing, while Europe should be steady with growth in the 1.5% range, as diminished fiscal tightening should help offset the impact of political uncertainties. The U.S. Federal Reserve could raise rates gently over the course of the year, but the federal funds rate will remain very low by historical standards. Canada’s economic growth rate should accelerate from 2016 while remaining below 2%. A diminished drag from declines in energy capital spending and additions to government infrastructure spending should counter a reduced growth contribution from housing. Canada’s 2017 growth could be impacted if the U.S. pursues a protectionist policy that extends to Canadian exports. Short-term interest rates and the Canadian dollar are expected to be generally stable, but long-term interest rates could drift higher under the pull of higher U.S. treasury yields. In Retail and Business Banking, we could see a more moderate expansion of consumer credit due to steps taken by the government to slow price appreciation in the housing market. Business credit demand should remain healthy, given very low interest rates and somewhat faster economic growth. An improving environment for corporate profits and low interest rates should support equity-related business in Capital Markets and Wealth Management, and Capital Markets should see continued strength in the issuance of government debt tied to accelerating infrastructure spending. Credit quality should remain healthy overall, with somewhat firmer oil prices diminishing risks in the energy sector. 12 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis 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 analyzing financial 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 results of our structured credit run-off business, 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, and any other item specified in the table on the following page 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. 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. CIBC 2016 ANNUAL REPORT 13 Management’s discussion and analysis 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 Reported and adjusted diluted EPS Reported net income attributable to common shareholders After-tax impact of items of note (1) After-tax impact of items of note on non-controlling interests Adjusted net income attributable to common shareholders (2) Diluted weighted-average common shares outstanding (thousands) Reported diluted EPS ($) Adjusted diluted EPS ($) (2) Reported and adjusted efficiency ratio Reported total revenue Pre-tax impact of items of note (1) TEB Adjusted total revenue (2) Reported non-interest expenses Pre-tax impact of items of note (1) Adjusted non-interest expenses (2) Reported efficiency ratio Adjusted efficiency ratio (2) Reported and adjusted dividend payout ratio Dividends paid to common shareholders Reported dividend payout ratio Adjusted dividend payout ratio (2) Reported and adjusted return on common shareholders’ equity Average common shareholders’ equity Reported return on common shareholders’ equity Adjusted return on common shareholders’ equity (2) Reported and adjusted effective tax rate Reported income before income taxes Pre-tax impact of items of note (1) Adjusted income before income taxes (2) Reported income taxes Tax impact of items of note (1) Adjusted income taxes (2) Reported effective tax rate Adjusted effective tax rate (2) $ millions, for the year ended October 31 2016 Reported net income (loss) After-tax impact of items of note (1) Adjusted net income (loss) (2) 2015 (3) Reported net income (loss) After-tax impact of items of note (1) Adjusted net income (loss) (2) 2014 (3) Reported net income (loss) After-tax impact of items of note (1) Adjusted net income (loss) (2) 2013 Reported net income (loss) After-tax impact of items of note (1) Adjusted net income (loss) (2) 2012 Reported net income After-tax impact of items of note (1) Adjusted net income (2) A B C A/C B/C D E F G F/D G/E H H/A H/B I A/I B/I J K L M L/J M/K 2016 2015 2014 2013 $ $ $ $ $ $ $ 4,237 (191) – 4,046 395,919 10.70 10.22 15,035 (505) 474 15,004 8,971 (262) 8,709 $ $ $ $ $ $ $ 3,531 232 (2) 3,761 397,832 8.87 9.45 13,856 (40) 482 14,298 8,861 (338) 8,523 $ $ $ $ $ $ $ 3,131 442 (10) 3,563 398,420 7.86 8.94 13,363 (276) 421 13,508 8,512 (539) 7,973 $ $ $ $ $ $ $ 3,253 219 – 3,472 401,261 8.11 8.65 12,705 (30) 357 13,032 7,608 (249) 7,359 2012 3,136 88 – 3,224 404,145 7.76 7.98 12,485 (9) 281 12,757 7,202 (63) 7,139 $ $ $ $ $ $ $ 59.7 % 58.0 % 63.9 % 59.6 % 63.7 % 59.0 % 59.9 % 56.5 % 57.7 % 56.0 % $ 1,879 $ 1,708 $ 1,567 $ 1,523 $ 1,470 44.3 % 46.4 % 48.4 % 45.4 % 50.0 % 44.0 % 46.8 % 43.9 % 46.9 % 45.6 % $ 21,275 $ 18,857 $ 17,067 $ 15,167 $ 14,116 19.9 % 19.0 % 18.7 % 19.9 % 18.3 % 20.9 % 21.4 % 22.9 % 22.2 % 22.8 % $ $ $ $ 5,013 (94) 4,919 718 97 815 $ $ $ $ 4,224 298 4,522 634 66 700 14.3 % 16.6 % 15.0 % 15.5 % Retail and Business Banking Wealth Management $ $ $ $ $ $ $ $ $ $ 2,689 (25) 2,664 2,530 (28) 2,502 2,459 (64) 2,395 2,377 38 2,415 2,156 8 2,164 $ $ $ $ $ $ $ $ $ $ 864 (374) 490 518 18 536 470 15 485 385 4 389 335 (34) 301 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 3,914 408 4,322 699 (34) 665 $ $ $ $ 3,976 298 4,274 626 79 705 17.9 % 15.4 % 15.8 % 16.5 % Capital Markets Corporate and Other 1,076 28 1,104 957 8 965 869 18 887 699 118 817 589 67 656 $ $ $ $ $ $ $ $ $ $ (334) 180 (154) (415) 234 (181) (583) 473 (110) (111) 59 (52) 223 17 240 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 3,992 107 4,099 689 49 738 17.3 % 18.0 % CIBC Total 4,295 (191) 4,104 3,590 232 3,822 3,215 442 3,657 3,350 219 3,569 3,303 58 3,361 (1) Reflects impact of items of note under “2016 Financial results” section and below. (2) Non-GAAP measure. (3) Certain information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. 14 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Impact of items of note in prior years 2014 Net income was affected by the following items of note: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) $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 TD, net of costs relating to the development of our enhanced travel rewards program ($87 million after-tax in Retail and Business Banking, and $60 million after-tax in Corporate and Other); $112 million ($82 million after-tax) charge relating to the incorporation of 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 intangible assets ($4 million after-tax in Retail and Business Banking, $15 million after-tax in 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 Retail and 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. 2013 Net income was affected by the following items of note: (cid:129) $114 million ($84 million after-tax) loss from the structured credit run-off business, including the charge in respect of a settlement of the U.S. Bankruptcy Court adversary proceeding brought by the Estate of Lehman Brothers Holdings, Inc. (Capital Markets); $39 million ($37 million after-tax) restructuring charge relating to CIBC FirstCaribbean (Corporate and Other); $38 million ($28 million after-tax) increase in the portion of the collective allowance recognized in Corporate and Other(1), including $56 million of estimated credit losses relating to the Alberta floods; $35 million ($19 million after-tax) impairment of an equity position associated with our exited U.S. leveraged finance portfolio (Capital Markets); $24 million ($18 million after-tax) costs relating to the development of our enhanced travel rewards program and to the Aeroplan transactions with Aimia and TD (Retail and Business Banking); $23 million ($19 million after-tax) amortization of intangible assets(2) ($5 million after-tax in Retail and Business Banking, $4 million after-tax in Wealth Management, and $10 million after-tax in Corporate and Other); $21 million ($15 million after-tax) loan losses in our exited European leveraged finance portfolio (Capital Markets); $20 million ($15 million after-tax) charge resulting from a revision of estimated loss parameters on our unsecured lending portfolios (Retail and Business Banking); and $16 million ($16 million after-tax) gain, net of associated expenses, on the sale of our Hong Kong and Singapore-based private wealth management business (Corporate and Other). The above items of note increased revenue by $30 million, provision for credit losses by $79 million and non-interest expenses by $249 million, and decreased income taxes by $79 million. In aggregate, these items of note decreased net income by $219 million. 2012 Net income was affected by the following items of note: (cid:129) (cid:129) (cid:129) $57 million ($32 million after-tax) loan losses in our exited U.S. leveraged finance portfolio (Capital Markets); $37 million ($35 million after-tax) gain relating to an equity-accounted investment (Wealth Management); $33 million ($24 million after-tax) loss relating to the change in valuation of collateralized derivatives to an overnight index swap (OIS) basis ($23 million after-tax in Capital Markets and $1 million after-tax in Corporate and Other); $30 million ($25 million after-tax) amortization of intangible assets ($8 million after-tax in Retail and Business Banking, $1 million after-tax in Wealth Management and $16 million after-tax in Corporate and Other); $28 million ($16 million after-tax) hedge accounting loss on leveraged leases (Capital Markets); $24 million ($19 million after-tax) gain on sale of interests in entities in relation to the acquisition of TMX Group Inc. by Maple Group Acquisition Corporation, net of associated expenses (Capital Markets); and $20 million ($15 million after-tax) loss from the structured credit run-off business (Capital Markets). The above items of note increased revenue by $9 million, provision for credit losses by $53 million and non-interest expenses by $63 million, and decreased income taxes by $49 million. In aggregate, these items of note decreased net income by $58 million. In addition, net income attributable to common shareholders was also affected by the following item of note: (cid:129) $30 million premium paid on preferred share redemptions. (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 are all reported in the respective SBUs. (2) Beginning in the fourth quarter of 2013, also includes amortization of intangible assets for equity-accounted associates. CIBC 2016 ANNUAL REPORT 15 Management’s discussion and analysis Strategic business units overview CIBC has three SBUs – Retail and Business Banking, Wealth Management, and Capital Markets. These SBUs are supported by the following functional groups – Technology and Operations, Finance (including Treasury), Administration, Risk Management, and Internal Audit, 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. Corporate and Other also includes our international banking operations comprising mainly CIBC FirstCaribbean, strategic investments in the CIBC Mellon joint ventures, and other income statement and balance sheet items not directly attributable to the business lines. CIBC’s investment in The Bank of N.T. Butterfield & Son Limited was included in Corporate and Other results until it was sold on April 30, 2015. External reporting changes were made in 2016, affecting the results of our SBUs. See “External reporting changes” for additional details. Business unit allocations Treasury activities impact the reported 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. 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 Retail and Business Banking and Wealth Management SBUs, we use a Manufacturer/Customer Segment/Distributor Management Model. The model uses certain estimates and allocation methodologies in the preparation of segmented financial information. Under this model, internal payments for sales, renewals, trailer commissions and the recovery of distribution service costs are made among the lines of business and SBUs. Periodically, the sales, renewals and trailer commission rates paid to customer segments for certain products/services are revised and applied prospectively. Non-interest expenses are attributed to the SBUs to which they relate based on appropriate criteria. Revenue, expenses, and other balance sheet resources related to certain activities are fully allocated to the lines of business within the SBUs. The individual allowances and related provisions are reported in the respective SBUs. The collective allowances and related provisions are reported in Corporate and Other 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 card portfolio, which are all reported in the respective SBUs. All allowances and related provisions for CIBC FirstCaribbean are reported in Corporate and Other. 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. 16 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Retail and Business Banking Retail and Business Banking provides personal and business clients across Canada with financial advice, products and services through a strong team of advisors and relationship managers, in our banking centres or through remote channels such as mobile advisors, telephone, online or mobile banking. Our business strategy We are focused on being the number one Retail and Business Bank in Canada in client experience and profitable revenue growth. To deliver on our objectives, our efforts are aligned to CIBC’s three strategic bank-wide priorities of client focus, innovation, and simplification. 2016 progress In 2016, we made good progress on our strategy. Enhancing the client experience Accelerating profitable revenue growth (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Improved our Net Promoter Score in 2016 for the second consecutive year, and have led our peers in improvement over the last four years. Opened CIBC LiveLabs at MaRS, an innovation hub based in Toronto that allows us to work in partnership with business and technology teams to develop the next wave of banking innovations for our clients in a collaborative, cooperative lab environment. Continued to identify key moments in client relationships and adjust processes to be simpler and more client centric. For example, our collections processes were enhanced to include more proactive solutions for clients experiencing financial challenges to help them manage cash flow and get back on track financially. Earned the top score among the five largest Canadian banks for mobile banking for the third year in a row in Forrester Research’s annual Mobile Banking benchmark study. Earned the top score among the five largest Canadian banks for online banking functionality for the second consecutive year in Forrester Research’s Online Banking benchmark study. Ranked #1 for a second consecutive year by our advisors in Investment Executive magazine’s annual Report Card on Banks and Credit Unions. Participated in a successful blockchain proof of concept, as part of our commitment to focus on innovative opportunities that may benefit clients in future years. Delivered Apple Pay to our clients the first day it was available in Canada, giving our clients the flexibility to pay with their Apple device at their favourite retailers. We were the first bank in Canada to bring Samsung Pay to our clients, providing them with another mobile payment option. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Continued to transform our physical banking centre network, adding iPads, Wi-Fi, and enhanced ATMs to a number of banking centre locations while creating a new, open concept that allows for more conversations about financial needs and goals with our clients. Continued to invest in advice by converting service roles to advice roles, while leveraging digital channels for more day-to-day banking transactions from clients across our network. Introduced the new CIBC Smart Account, a first-of-its-kind bank account with a flexible fee that is capped monthly, and that automatically adjusts with lower fees when clients’ banking needs are less. Launched the innovative CIBC Smart Prepaid Visa Card, the first reloadable foreign currency prepaid card available through a major Canadian bank, delivering a more secure and convenient payment experience for clients while they are traveling. Introduced Digital Account Open, allowing clients to open a new CIBC bank account entirely from their mobile device – supporting growth for CIBC and delivering on the needs of “digital first” clients who prefer to transact and meet their financial needs through their mobile device or online. Launched the CIBC Hello Home app, developed at our CIBC LiveLabs innovation facility. The new app allows Canadians to apply for a mortgage end-to-end using only their mobile device, without needing to visit a banking centre. Brought “one-click lending” to market in partnership with fintech lenders – Borrowell, for personal banking, and Thinking Capital, for small businesses, enabling qualified existing clients to be approved for a loan instantly and receive funds within one day – significantly faster and simpler than the current process across the industry. CIBC 2016 ANNUAL REPORT 17 Management’s discussion and analysis 2016 financial review Revenue(1) ($ billions) 8.2 8.4 8.9 Net income(1) ($ billions) 2.5 2.5 2.7 Average loans and acceptances(1)(2) ($ billions) 266.0 244.6 231.3 Average deposits(1) ($ billions) Efficiency ratio(1) (%) 186.0 172.2 162.5 51.3 51.3 50.5 14 15 16 14 15 16 14 15 16 14 15 16 14 15 16 Personal banking (cid:129) Total average loans and acceptances growth of 13% (excluding FirstLine mortgages) Total average deposits growth of 7% Leading mortgage market share growth Increased the number of Mobile Sales Advisors by 17% in the year 60% of our clients are now engaged with CIBC digitally, and growing Product use count of new clients 12 months after joining up 50% since 2013 (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Average loans and acceptances(2) ($ billions) Average deposits ($ billions) 217.1 192.5 201.4 119.8 113.6 128.2 Business banking (cid:129) (cid:129) (cid:129) Total average loans and acceptances growth of 13% Total average deposit growth of 10% Leading market share growth in both business deposits and business loans 14 15 16 14 15 16 Average loans and acceptances(1) ($ billions) 48.9 43.2 38.8 Average deposits(1) ($ billions) 57.8 52.4 48.9 14 15 16 14 15 16 (1) Certain prior period information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. (2) Total average loans and acceptances includes FirstLine mortgages. Our focus for 2017 We are building a strong, innovative, relationship-oriented bank. To accelerate our transformation, we will deliver on our objective to be the best retail and business bank in Canada by maintaining a focus on: (cid:129) (cid:129) Improving the client experience by making it easier for our clients to bank when, where, and how they want Profitable revenue growth achieved by helping our clients grow and prosper through deeper relationships and advice 18 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Results(1) $ millions, for the year ended October 31 Revenue Personal banking Business banking Other Total revenue Provision for credit losses Non-interest expenses Income before income taxes Income taxes Net income Net income attributable to: Equity shareholders (a) Efficiency ratio Return on equity (3) Charge for economic capital (3) (b) Economic profit (3) (a+b) Average assets ($ billions) Average loans and acceptances ($ billions) Average deposits ($ billions) Full-time equivalent employees 2016 2015 (2) 2014 (2) $ $ $ $ $ $ $ $ 7,066 1,726 63 8,855 765 4,472 3,618 929 2,689 2,689 50.5 % 51.0 % (513) 2,176 265.8 266.0 186.0 20,280 $ $ $ $ $ $ $ $ 6,693 1,623 90 8,406 670 4,309 3,427 897 2,530 2,530 51.3 % 55.6 % (547) 1,983 243.8 244.6 172.2 21,532 $ $ $ $ $ $ $ $ 6,305 1,531 387 8,223 731 4,219 3,273 814 2,459 2,459 51.3 % 62.6 % (485) 1,974 230.5 231.3 162.5 21,862 For additional segmented information, see Note 28 to the consolidated financial statements. (1) (2) Certain information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. (3) For additional information, see the “Non-GAAP measures” section. Financial overview Net income was up $159 million or 6% from 2015, primarily due to higher revenue, partially offset by higher non-interest expenses, and a higher provision for credit losses. Revenue Revenue was up $449 million or 5% from 2015. Personal banking revenue was up $373 million or 6%, primarily due to volume growth, favourable pricing, higher fees, and an additional day in the current year. The prior year included a gain arising from accounting adjustments on credit card-related balance sheet amounts, shown as an item of note. Business banking revenue was up $103 million or 6%, primarily due to volume growth, and higher fees, partially offset by narrower spreads. Other revenue was down $27 million or 30%, mainly due to lower revenue from our exited FirstLine mortgage broker business. Provision for credit losses Provision for credit losses was up $95 million or 14% from 2015, primarily due to higher write-offs and bankruptcies in the card and personal lending portfolios, and higher losses in the business banking portfolio. Non-interest expenses Non-interest expenses were up $163 million or 4% from 2015, primarily due to higher spending on strategic initiatives, including innovation to further our retail transformation. Income taxes Income taxes were up $32 million or 4% from 2015, primarily due to higher income, partially offset by an income tax recovery from the settlement of transfer pricing-related matters, shown as an item of note. Average assets Average assets were up $22 billion or 9% from 2015 due to growth across all products. CIBC 2016 ANNUAL REPORT 19 Management’s discussion and analysis Wealth Management Wealth Management provides integrated advice and investment solutions to meet the needs of institutional, retail, and high net worth clients. Our asset management, retail brokerage and private wealth management businesses combine to create an integrated offer, delivered through approximately 1,600 advisors across Canada and the U.S. The results of ACI are included in the Other business line. For further details regarding the sale of our minority investment in ACI, see the “Significant events” section. Our business strategy Our growth strategy is aligned to CIBC’s three strategic bank-wide priorities of client focus, innovation and simplification. We are focused on enhancing the client experience, driving asset growth, and simplifying and optimizing our business platform. 2016 progress We made good progress in 2016 on our strategy. Enhance the client experience Drive asset growth (cid:129) (cid:129) Both CIBC Wood Gundy, our full service brokerage, and CIBC Investor’s Edge, our self-directed brokerage, made solid progress in the most recent J.D. Power Canadian Investor Satisfaction Surveys. Enhanced internal client referral framework to serve our clients’ banking and investment needs. (cid:129) (cid:129) (cid:129) (cid:129) Strong net flows of $11 billion driven by all of our Wealth Management businesses. Expanded CIBC Personal Portfolio Services (PPS) offer with three new Income Generation Portfolios. Launched the Renaissance Private Investment Program for high net worth clients, and other products. Solid asset growth across all lines of business. Simplify and optimize our business platform (cid:129) (cid:129) (cid:129) Brought our Canadian private wealth management and Wood Gundy businesses together, aligning our high net worth advisor businesses under one platform. Launched e-statements for CIBC PPS and CIBC Mutual Fund accounts, further simplifying investment statement management for clients. Expanded Delaware Trust services in Atlantic Trust. 2016 financial review Revenue(1) ($ billions) Net income(1) ($ millions) Assets under administration and management(2) ($ billions) 2.8 2.5 2.2 864 325.5 304.8 518 470 288.6 Canadian retail mutual funds(3) ($ billions) 90.8 84.2 77.0 14 15 16 14 15 16 14 15 16 14 15 16 (1) Certain prior period information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. (2) AUM amounts are included in the amounts reported under AUA. (3) Included in AUM. AUM 183.2 169.9 151.5 20 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Retail brokerage (cid:129) (cid:129) Strong growth in both AUM and AUA, up 17% and 7%, respectively Strong Investment Executive 2016 Brokerage Report Card results, achieving the second highest average rating by investment advisors among the Big 6 bank-owned brokerage firms Launched new CIBC Mobile Wealth app (cid:129) Asset management (cid:129) (cid:129) (cid:129) 6% growth in AUM Launched several new products to deliver superior results for our clients Realignment of trailing commissions and management fees for a simpler and more consistent pricing approach for clients Private wealth management (cid:129) (cid:129) (cid:129) 7% growth in both AUM and AUA Achieved record net flows in our Canadian private wealth management business Achieved above industry average Net Promoter Score in CIBC Private Banking Assets under administration and management(1) ($ billions) 160.6 149.4 150.0 25.0 21.3 18.2 14 15 16 AUM Assets under administration and management(1) ($ billions) 111.1 103.0 118.0 14 15 16 AUM Assets under administration and management(1) ($ billions) 46.9 43.7 36.2 40.2 37.5 30.3 14 15 16 AUM (1) AUM amounts are included in the amounts reported under AUA. Our focus for 2017 We are building a strong, innovative, relationship-oriented bank. To build on our momentum and accelerate our transformation, we will continue to align our focus in 2017 to CIBC’s three strategic bank-wide priorities. We will do this by: (cid:129) (cid:129) (cid:129) Enhancing the client experience Driving asset growth through advice and an integrated offer for clients to meet their broader wealth management needs Simplifying and optimizing our business platform to make it easier to invest with our bank CIBC 2016 ANNUAL REPORT 21 Management’s discussion and analysis Results(1) $ millions, for the year ended October 31 Revenue Retail brokerage Asset management Private wealth management Other Total revenue Provision for (reversal of) credit losses Non-interest expenses Income before income taxes Income taxes Net income Net income attributable to: Non-controlling interests Equity shareholders (a) Efficiency ratio Return on equity (3) Charge for economic capital (3) (b) Economic profit (3) (a+b) Average assets ($ billions) Average loans ($ billions) Average deposits ($ billions) AUA ($ billions) AUM ($ billions) Full-time equivalent employees 2016 1,269 746 381 443 2,839 – 1,753 1,086 222 864 – 864 61.7 % 43.5 % (193) 671 4.5 2.1 9.8 325.5 183.2 4,295 $ $ $ $ $ $ $ $ $ $ 2015 (2) 2014 (2) $ $ $ $ $ $ $ $ $ $ 1,282 707 379 100 2,468 (1) 1,784 685 167 518 – 518 72.3 % 22.4 % (276) 242 4.8 2.1 9.0 304.8 169.9 4,350 $ $ $ $ $ $ $ $ $ $ 1,232 601 275 92 2,200 – 1,582 618 148 470 2 468 71.9 % 22.3 % (256) 212 4.4 1.9 8.5 288.6 151.5 4,169 For additional segmented information, see Note 28 to the consolidated financial statements. (1) (2) Certain information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. (3) For additional information, see the “Non-GAAP measures” section. Financial overview Net income was up $346 million or 67% from 2015, mainly due to the gain, net of transaction costs, on the sale of our minority investment in ACI, shown as an item of note. Revenue Revenue was up $371 million or 15% from 2015. Retail brokerage revenue was down $13 million or 1%, primarily due to lower commission revenue as a result of a decline in transaction volume, partially offset by higher investment management and custodial fees, driven by higher average AUM and AUA. Asset management revenue was up $39 million or 6%, primarily due to higher average AUM, driven by net sales of long-term mutual funds and market appreciation, and mark-to-market gains on seed capital investments in recently launched mutual funds and institutional pools. Private wealth management revenue was up $2 million or 1%, primarily due to higher average AUM, including the favourable impact of foreign exchange rates, and volume growth in loans and deposits. This was partially offset by lower annual performance fees earned by Atlantic Trust. Other revenue was up $343 million due to the gain on sale of ACI noted above, partially offset by lower ACI revenue following the announcement of the sale. Non-interest expenses Non-interest expenses were down $31 million or 2% from 2015, primarily due to lower performance-based compensation. Income taxes Income taxes were up $55 million or 33% from 2015, primarily due to the gain on sale of ACI noted above. Assets under administration AUA were up $21 billion or 7% from 2015, from market appreciation and strong net flows. AUM amounts are included in the amounts reported under AUA. 22 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis 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 in Canada and the lead relationship bank for our key clients globally by delivering best-in-class insight, advice, execution and innovation. 2016 progress We made solid progress in 2016 on our strategy. Strengthen and expand leadership positions in Canada Build a North American platform and expand coverage in key sectors globally Deliver innovation to clients across CIBC (cid:129) (cid:129) (cid:129) Continued to hold leadership positions in syndicated loans, debt and equity underwriting, advisory services, equity trading, commodities and foreign exchange. Launched specialized new advisory teams to add value for clients in the areas of technology and innovation, private capital, and corporate finance solutions. Continued to strengthen our platform by further aligning our talent and expertise to today’s dominant economic and market sectors. (cid:129) (cid:129) (cid:129) Expanded our product capabilities and invested in talent to help meet client needs at home and abroad. Helped our clients navigate market movements and volatility through proactive advice and trading solutions. Continued to strengthen U.S. coverage and execution capabilities, with a focus on the energy, infrastructure and power and utilities sectors. (cid:129) (cid:129) (cid:129) Introduced CIBC Air Canada AC Conversion Visa Prepaid Card, a first-of-its-kind in Canada, allowing travellers to purchase and store up to 10 currencies on a single card that can be used at retailers around the globe. Enhanced the no-fee CIBC Global Money Transfer service by adding it to CIBC’s mobile banking app, and by increasing the number of countries to which clients can send money, including the U.S. Launched new training workshops for over 200 client CFOs and finance professionals to enhance their understanding of public capital markets. 2016 financial review Revenue(1) ($ billions) 2.9 2.6 2.4 Net income(1) ($ millions) 1,076 957 869 Efficiency ratio (%) 51.1 50.8 47.9 Average value-at-risk (VaR) ($ millions) 5.8 4.0 3.5 14 15 16 14 15 16 14 15 16 14 15 16 (1) Certain prior period information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. (cid:129) (cid:129) (cid:129) As a leading capital markets franchise in Canada and banking partner to clients in core Canadian industries in the rest of the world, Capital Markets acted as: Financial advisor to Suncor Energy Inc. on its $7 billion acquisition of Canadian Oil Sands Limited, as well as joint bookrunner on Suncor’s $2.9 billion (cid:129) bought common share offering, one of the largest-ever equity bought deals in Canada; Financial advisor, financing co-underwriter and lead agent on related foreign exchange to Lowe’s Companies Inc. on its $3.2 billion acquisition of RONA Inc.; Financial advisor, lead left bookrunner on $525 million of subscription receipts, sole lead arranger, underwriter and bookrunner on $1.8 billion of credit facilities and sole foreign exchange provider supporting Stantec’s acquisition of MWH Global Inc.; Exclusive financial advisor, administrative agent and joint bookrunner on $925 million in credit facilities supporting Cheung Kong Infrastructure Holdings Limited’s and Power Assets Holdings Limited’s acquisition of a 65% interest in midstream assets from Husky Energy Inc.; Lead financial advisor and financing co-underwriter, joint bookrunner and co-lead arranger to Shaw Communications Inc. on its $1.6 billion acquisition of Wind Mobile Corp.; Exclusive financial advisor to InnVest REIT on the sale of the company to Bluesky Hotels and Resorts for $2.1 billion; Lead bookrunner on a $460 million Initial Public Offering for Aritzia Inc.; Exclusive financial advisor to Baybridge Seniors Housing Inc. on its $1 billion acquisition of Amica Mature Lifestyles Inc.; Lead left bookrunner on a $1 billion convertible debenture offering and administrative agent and joint lead arranger on a US$1.6 billion bridge facility for Algonquin Power & Utilities Corp. in support of its acquisition of Empire District Electric Company; and Joint bookrunner on Enbridge Inc.’s $2.3 billion bought common share offering. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) CIBC 2016 ANNUAL REPORT 23 Management’s discussion and analysis Capital markets awards and recognition (cid:129) (cid:129) Canada Derivatives House Of The Year – 2016 GlobalCapital Americas Derivatives Awards The leader in Canadian Equity Trading – #1 in volume, value and number of trades – TSX and ATS Market Share report 2009 – present (as provided by IRESS Market Technology as at October 31, 2016) In 2016, CIBC economics and equity research analysts held Top 3 rankings in several sectors as recognized by Brendan Wood International and Thomson Reuters. Research sectors included – Economics, Agriculture, Auto Components, Banks and Diversified Financials, Chemicals & Fertilizers, Energy Equipment Services, Insurance, REITS & Hospitalities, Telecom and Utilities 2016 Canadian Hedge Fund Award for Top Canadian Prime Broker – Alternative IQ The leading IPO underwriter in Canada – Bloomberg as at September 30, 2016 North American M&A Deal of the Year: Indiana Toll Road Acquisition 2016 – IJGlobal Americas Deals of the Year Awards Ranked #1 for number of deals led in Canadian Loan Syndication Thomson Reuters and Bloomberg Lead Arranger League Tables, January-September 2016 (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Revenue – Global markets(1) ($ millions) 1,640 1,353 991 Revenue – Corporate and investment banking(1) ($ millions) 1,294 1,273 1,259 (1) Certain prior period information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. 14 15 16 14 15 16 Our focus for 2017 We are building a strong, innovative, relationship-oriented bank. To build on our position of strength and accelerate our transformation, we will continue to align our focus in 2017 to CIBC’s three strategic bank-wide priorities of client focus, innovation and simplification. We will do this by: (cid:129) (cid:129) (cid:129) Strengthening and expanding leadership positions in Canada Building a North American platform and expanding coverage in key sectors globally Delivering innovation to clients across CIBC Results(1) $ millions, for the year ended October 31 Revenue Global markets Corporate and investment banking Other Total revenue (3) Provision for credit losses Non-interest expenses Income before income taxes Income taxes (3) Net income Net income attributable to: Equity shareholders (a) Efficiency ratio Return on equity (4) Charge for economic capital (4) (b) Economic profit (4) (a+b) Average assets ($ billions) Full-time equivalent employees 2016 1,640 1,259 16 2,915 153 1,398 1,364 288 1,076 1,076 47.9 % 30.6 % (341) 735 162.8 1,324 $ $ $ $ $ $ 2015 (2) 2014 (2) $ $ $ $ $ $ 1,353 1,273 (6) 2,620 54 1,332 1,234 277 957 957 50.8 % 35.8 % (320) 637 141.8 1,342 $ $ $ $ $ $ 991 1,294 111 2,396 43 1,225 1,128 259 869 869 51.1 % 37.1 % (288) 581 121.9 1,306 For additional segmented information, see Note 28 to the consolidated financial statements. (1) (2) Certain information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. (3) Revenue and income taxes are reported on a TEB basis. Accordingly, revenue and income taxes include a TEB adjustment of $474 million (2015: $482 million; 2014: $421 million). The equivalent amounts are offset in the revenue and income taxes of Corporate and Other. For additional information, see the “Non-GAAP measures” section. (4) 24 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Financial overview Net income was up $119 million or 12% from 2015, primarily due to higher revenue, partially offset by a higher provision for credit losses, and higher non-interest expenses. Revenue Revenue was up $295 million or 11% from 2015. Global markets revenue was up $287 million or 21%, primarily due to higher interest rate and foreign exchange trading revenue, and higher revenue from global markets financing activity. Corporate and investment banking revenue was down $14 million or 1%, primarily due to lower investment portfolio gains, as the prior year included a gain on sale of an investment in our merchant banking portfolio, shown as an item of note, and lower revenue from U.S. real estate finance. This decrease was partially offset by higher corporate banking revenue and higher equity issuance activity. Other revenue was up $22 million, primarily due to a gain on the sale of an AFS equity investment in our structured credit run-off business, partially offset by higher mark-to-market losses on corporate loan hedges. Provision for credit losses Provision for credit losses was up $99 million from 2015, primarily due to higher losses in the oil and gas sector and losses in our exited European leveraged finance portfolio, shown as an item of note, partially offset by lower losses in our U.S. real estate finance portfolio. Non-interest expenses Non-interest expenses were up $66 million or 5% from 2015, primarily due to higher employee-related costs and higher spending on strategic initiatives. Income taxes Income taxes were up $11 million or 4% from 2015, primarily due to higher income. Average assets Average assets were up $21 billion or 15% from 2015, primarily due to higher global markets financing activity, higher interest rate trading inventory, and higher loan balances in corporate banking and U.S. real estate finance. Structured credit run-off business The results of the structured credit run-off business are included in the Capital Markets SBU. Results $ millions, for the year ended October 31 Net interest expense Non-interest income (loss) Total revenue (loss) Non-interest expenses Income (loss) before income taxes Income taxes Net income (loss) 2016 (30) 49 19 16 3 1 2 $ $ 2015 2014 $ $ (17) (2) (19) 10 (29) (8) (21) $ $ (30) 19 (11) 4 (15) (4) (11) Net income for the year was $2 million (US$2 million), compared with a net loss of $21 million (US$17 million) in 2015, primarily due to a gain on the sale of an AFS equity investment. Position summary The following table summarizes our positions within the structured credit run-off business: US$ millions, as at October 31, 2016 Investment and loans (1) Written credit derivatives, liquidity and credit facilities Credit protection purchased from Financial guarantors Other counterparties Fair value of trading, AFS and FVO securities Fair value of securities classified as loans Carrying value of securities classified as loans $ $ $ – – – 252 – 252 305 $ $ $ – 223 – 13 – 236 597 $ $ $ – 223 – 13 – 236 596 Notional $ $ $ – 225 – 386 – 611 1,057 Fair value of written credit derivatives $ $ $ 103 – – 17 – 120 148 Notional $ $ $ 136 72 3,312 175 – 3,695 4,259 Fair value net of credit valuation adjustment (CVA) $ $ $ – 2 – – – 2 9 Notional $ $ $ – 279 – 3 – 282 947 Fair value net of CVA $ $ $ 103 – – – – 103 119 Notional $ $ $ 136 – 3,312 – 373 3,821 3,947 USRMM – CDO CLO Corporate debt Other Unmatched October 31, 2015 (1) Excluded from the table above are equity AFS securities that we obtained in consideration for commutation of our U.S. residential mortgage market (USRMM) contracts with financial guarantors with a carrying value of US$5 million (2015: US$22 million). USRMM – collateralized debt obligation (CDO) Our USRMM position consists of a written credit derivative, which amounted to US$136 million. This position was hedged through protection purchased from a large U.S.-based diversified multinational insurance and financial services company with which we have market-standard collateral arrangements. CIBC 2016 ANNUAL REPORT 25 Management’s discussion and analysis Collateralized loan obligation (CLO) CLO positions consist of first priority tranches of CLOs backed by diversified pools of primarily U.S. (64%) and European-based (33%) senior secured leveraged loans. As at October 31, 2016, 100% of the total notional amount of the CLO tranches was rated Aaa by Moody’s Investors Service, Inc. (Moody’s). As at October 31, 2016, approximately 24% of the underlying collateral was rated equivalent to BB- or higher, 52% was rated between the equivalent of B+ and B-, 12% was rated equivalent to CCC+ or lower, with the remainder unrated. The CLO positions have a weighted-average life of 1.4 years and average subordination of 71%. Corporate debt Corporate debt exposure consists of a large matched super senior derivative, where CIBC has purchased and sold credit protection on the same reference portfolio. The reference portfolio consists of highly diversified, predominantly investment grade corporate credit. Claims on these contracts do not occur until cumulative credit default losses from the reference portfolio exceed 30% during the remaining 2-month term of the contract. Other Our significant positions in the Investments and loans section within Other, as at October 31, 2016, include: (cid:129) Variable rate Class A-1/A-2 notes classified as trading securities with a notional value of US$176 million and a fair value of US$175 million, tracking notes classified as AFS with a notional value of US$4 million and a fair value of US$2 million, and loans with a notional value of US$50 million and fair value and carrying value of nil. These notes were originally received in exchange for our non-bank sponsored asset-backed commercial paper (ABCP) in January 2009, upon the ratification of the Montreal Accord restructuring; US$90 million notional value of CDOs consisting of trust preferred securities (TruPs) collateral, which are Tier I Innovative Capital Instruments issued by U.S. regional banks and insurers. These securities are classified as FVO securities and had a fair value of US$70 million; and US$14 million notional value of an asset-backed security (ABS) classified as a loan, with fair value of US$13 million and carrying value of US$13 million. (cid:129) (cid:129) Our significant positions in the written credit derivatives, liquidity and credit facilities section within Other include US$154 million notional value of written credit derivatives with a fair value of US$17 million, on inflation-linked notes and TruPs, as at October 31, 2016. Unmatched The underlying in our unmatched position is a reference portfolio of corporate debt. Credit protection purchased from financial guarantors and other counterparties The following table presents the notional amounts and fair values of credit protection purchased from financial guarantors and other counterparties by counterparty credit quality, based on external credit ratings (Standard & Poor’s Ratings Services (S&P) and/or Moody’s), and the underlying referenced assets. US$ millions, as at October 31, 2016 Financial guarantors (1) Investment grade Unrated Other counterparties (1) Investment grade Unrated Total October 31, 2015 Notional amounts of referenced assets Credit protection purchased from financial guarantors and other counterparties Corporate debt USRMM – CDO Other Unmatched Total notional Fair value before CVA Fair value net of CVA CVA $ $ $ $ – – – – 3,312 3,312 3,312 3,397 $ $ $ $ – – – 136 – 136 136 168 $ $ $ $ 3 – 3 – – – 3 10 $ $ $ $ – – – – 373 373 373 382 $ $ $ $ 211 71 282 136 3,685 3,821 4,103 4,894 $ $ $ $ 2 – 2 103 – 103 105 130 $ $ $ $ – – – – – – – (2) $ $ $ $ 2 – 2 103 – 103 105 128 CLO 208 71 279 – – – 279 937 $ $ $ $ (1) In cases where more than one credit rating agency provides ratings and those ratings differ, we use the lowest rating. The unrated other counterparty is a Canadian conduit. The conduit is in compliance with collateral posting arrangements and has posted collateral exceeding current market exposure. The fair value of the collateral as at October 31, 2016 was US$224 million relative to nil net exposure. 26 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Corporate and Other Corporate and Other includes the following functional groups – Technology and Operations, Finance (including Treasury), Administration, Risk Management, and Internal Audit, as well as other support groups. The expenses of these functional and support groups are generally allocated to the business lines within the SBUs. Corporate and Other also includes our international banking operations comprising mainly CIBC FirstCaribbean, strategic investments in the CIBC Mellon joint ventures, and other income statement and balance sheet items not directly attributable to the business lines. CIBC’s investment in The Bank of N.T. Butterfield & Son Limited was included in Corporate and Other results until it was sold on April 30, 2015. Results(1) $ millions, for the year ended October 31 Revenue International banking Other Total revenue (3) Provision for credit losses Non-interest expenses Loss before income taxes Income taxes (3) Net loss Net income (loss) attributable to: Non-controlling interests Equity shareholders Full-time equivalent employees 2016 2015 (2) 2014 (2) $ $ $ 722 (296) 426 133 1,348 (1,055) (721) (334) 20 (354) $ $ $ 678 (316) 362 48 1,436 (1,122) (707) (415) 14 (429) 17,314 16,977 $ $ $ 600 (56) 544 163 1,486 (1,105) (522) (583) (5) (578) 17,087 For additional segmented information, see Note 28 to the consolidated financial statements. (1) (2) Certain information has been restated/reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. (3) TEB adjusted. See footnote 3 in the “Capital Markets” section for additional details. Financial overview Net loss was $334 million compared with a net loss of $415 million in 2015, primarily due to lower non-interest expenses and higher revenue, partially offset by a higher provision for credit losses. Revenue Revenue was up $64 million or 18% from 2015. International banking revenue was up $44 million or 6% from 2015, primarily due to the favourable impact of foreign exchange rates. Other revenue was up $20 million or 6% from 2015, primarily due to a gain on sale of a processing centre, shown as an item of note, and a lower TEB adjustment, partially offset by lower Treasury revenue. Provision for credit losses Provision for credit losses was up $85 million, due to increases in the collective allowance, shown as items of note, primarily relating to deterioration in the commodities sector and other changes in economic conditions, partially offset by lower losses in CIBC FirstCaribbean. Non-interest expenses Non-interest expenses were down $88 million or 6% from 2015, as the prior year included higher restructuring charges primarily relating to employee severance, shown as items of note in both years. The current year also included legal provisions relating to certain matters, shown as an item of note. Income taxes Income tax benefit was up $14 million, mainly due to an income tax recovery arising from a change in our expected utilization of certain tax loss carryforwards and to the impact of changes in the proportion of income subject to varying rates of tax in different jurisdictions. CIBC 2016 ANNUAL REPORT 27 Management’s discussion and analysis Financial condition Review of condensed consolidated balance sheet $ millions, as at October 31 Assets Cash and deposits with banks Securities Trading AFS FVO Securities borrowed or purchased under resale agreements Loans and acceptances Residential mortgages Personal Credit card Business and government Allowance for credit losses Derivative instruments Other assets Liabilities and equity Deposits Personal Business and government Bank Secured borrowings Obligations related to securities lent or sold short or under repurchase agreements Derivative instruments Acceptances Other liabilities Subordinated indebtedness Equity 2016 2015 $ 14,165 $ 18,637 49,915 37,253 255 87,423 33,810 187,298 38,041 12,332 83,801 (1,691) 319,781 27,762 18,416 46,181 28,534 267 74,982 33,334 169,258 36,517 11,804 75,072 (1,670) 290,981 26,342 19,033 $ 501,357 $ 463,309 $ 148,081 190,240 17,842 39,484 395,647 24,550 28,807 12,395 12,919 3,366 23,673 $ 137,378 178,850 10,785 39,644 366,657 20,149 29,057 9,796 12,223 3,874 21,553 $ 501,357 $ 463,309 Assets Total assets as at October 31, 2016 were up $38.0 billion or 8% from 2015, of which approximately $2 billion was the result of appreciation of the U.S. dollar. Cash and deposits with banks decreased by $4.5 billion or 24%, mainly due to lower short-term placements in Treasury. Securities increased by $12.4 billion or 17%, primarily due to an increase in Canadian government and corporate debt AFS securities as a result of Treasury-related activities, and higher trading equity securities in Capital Markets. 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 $476 million or 1%, mainly due to normal business activity. Net loans and acceptances increased by $28.8 billion or 10% due to increases in residential mortgages and business and government loans and acceptances. 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 increased by $1.4 billion or 5%, largely driven by an increase in foreign exchange derivatives valuation, partially offset by a decrease in interest rate derivatives valuation. Other assets decreased by $617 million or 3%, primarily due to the sale of ACI during the current year, partially offset by an increase in collateral pledged for derivatives. 28 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Liabilities Total liabilities as at October 31, 2016 were up $35.9 billion or 8% from 2015, of which approximately $2 billion was the result of appreciation of the U.S. dollar. Deposits increased by $29.0 billion or 8%, primarily due to domestic retail volume growth, higher corporate banking deposits and increased funding in Treasury. 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 $4.4 billion or 22%, primarily due to client-driven activities. Derivative instruments decreased by $250 million or 1%, largely driven by a decrease in other commodities and interest rate derivatives valuation, partially offset by an increase in foreign exchange derivatives valuation. Acceptances increased by $2.6 billion or 27%, driven by growth in corporate and commercial banking. Other liabilities increased by $696 million or 6%, primarily due to an increase in accrued liabilities, defined benefit pension liabilities, broker payables, and collateral received for derivatives. Subordinated indebtedness decreased by $508 million or 13%, primarily due to a redemption, partially offset by an issuance during the current year. See the “Capital management and planning” section for further details. Equity Equity as at October 31, 2016 was up $2.1 billion or 10% from 2015, primarily due to a net increase in retained earnings. 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 are phased in at 20% per year from 2014 for the determination of capital under the transitional rules. Amounts not yet deducted from capital under OSFI’s transitional rules are risk weighted, creating a difference between RWAs on a transitional and all-in basis. Additionally, CIBC, along with the Bank of Montreal, the Bank of Nova Scotia, the National Bank of Canada, the Royal Bank of Canada, and the Toronto-Dominion Bank, have been designated by OSFI as domestic systemically important banks (D-SIBs) in Canada, and they are subject to a 1% CET1 surcharge commencing January 1, 2016. This results in current minimum targets for CET1, Tier 1 and Total capital ratios of 8%, 9.5%, and 11.5%, respectively. These targets may be higher for certain institutions at OSFI’s discretion. Capital adequacy requirements are applied on a consolidated basis. The consolidation basis applied to our financial statements is described in Note 1 of the consolidated 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. CIBC Life Insurance Company Limited is subject to OSFI’s Minimum Continuing Capital Surplus Requirements for life insurance companies. A comparison of the BCBS transitional capital ratio requirements and the OSFI all-in target capital ratio requirements is as follows: Transitional basis (BCBS) All-in basis (OSFI) 8.6% 2.0% 1.5% 0.6% 9.3% 2.0% 1.5% 1.3% 11.5% 11.5% 11.5% 11.5% 9.9% 2.0% 1.5% 1.9% 10.5% 2.0% 1.5% 2.5% Total Capital (10.5%) Tier 1 Capital (8.5%) CET1 Capital (7.0%) 2.0% 1.5% 1.0% 2.5% 2.0% 1.5% 1.0% 2.5% 2.0% 1.5% 1.0% 2.5% 2.0% 1.5% 1.0% 2.5% Total Capital (11.5%) Tier 1 Capital (9.5%) CET1 Capital (8.0%) 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 2016 2017 2018 2019 2016 2017 2018 2019 CET 1 Capital Conservation Buffer Additional Tier 1 Tier 2 CET 1 Capital Conservation Buffer D-SIB Buffer Additional Tier 1 Tier 2 CIBC 2016 ANNUAL REPORT 29 Management’s discussion and analysis 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 (cid:129) Common Equity (Common Shares and Retained Earnings) (cid:129) Accumulated Other Comprehensive Income (AOCI)(1) (cid:129) Qualifying instruments issued by a consolidated banking subsidiary to third parties (cid:129) 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 (cid:129) Non-Viability Contingent Capital (NVCC) preferred shares (cid:129) Qualifying instruments issued by a consolidated subsidiary to third parties (cid:129) Innovative Tier 1 notes subject to phase-out rules for capital instruments Lower Quality Tier 2 Capital (cid:129) NVCC subordinated indebtedness (cid:129) Non-qualifying subordinated indebtedness subject to phase-out rules for capital instruments (cid:129) Eligible collective allowance under the standardized approach (cid:129) Qualifying instruments issued by a consolidated subsidiary to third parties (1) Excluding AOCI relating to cash flow hedges and changes to FVO liabilities attributable to changes in own credit risk. Risk-weighted assets The following table provides a summary of permissible regulatory capital approaches and those adopted by CIBC: T i e r 1 C a p i t a l T o t a l C a p i t a l Risk category Permissible regulatory capital approaches Approach adopted by CIBC Credit risk 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 assets 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. 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, 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. Some portfolios deemed immaterial remain on the standardized 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 the operational risk capital. 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. The capital floor is determined by comparing a capital requirement calculated by reference to Basel I against the Basel III calculation, as specified by OSFI. Any shortfall in the Basel III capital requirement compared with the Basel I floor is added to RWAs. The capital floor has not impacted CIBC’s capital ratios for the periods presented in the tables that follow. 30 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Regulatory capital and ratios The components of our regulatory capital and ratios under Basel III (all-in basis) are presented in the table below: $ millions, as at October 31 2016 2015 Common Equity Tier 1 (CET1) capital: instruments and reserves Directly issued qualifying common share capital plus related stock surplus Retained earnings AOCI (and other reserves) Common share capital issued by subsidiaries and held by third parties (amount allowed in group CET1) $ CET1 capital before regulatory adjustments CET1 capital: regulatory adjustments Prudential valuation adjustments Goodwill (net of related tax liabilities) Other intangibles other than mortgage–servicing rights (net of related tax liabilities) Deferred tax assets excluding those arising from temporary differences (net of related tax liabilities) Defined benefit pension fund net assets (net of related tax liabilities) Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) Other Total regulatory adjustments to CET1 CET1 capital Additional Tier 1 (AT1) capital: instruments Directly issued qualifying AT1 instruments plus related stock surplus (1) Directly issued capital instruments subject to phase out from AT1 (2) Additional Tier 1, Instruments issued by subsidiaries and held by third parties (amount allowed in AT1) AT1 capital before regulatory adjustments AT1 capital: regulatory adjustments Other deductions from Tier 1 capital as determined by OSFI Total regulatory adjustments to AT1 capital AT1 capital Tier 1 capital (T1= CET1 + AT1) Tier 2 capital: instruments and provisions Directly issued qualifying Tier 2 instruments plus related stock surplus (3) Directly issued capital instruments subject to phase out from Tier 2 Tier 2 instruments issued by subsidiaries and held by third parties (amount allowed in Tier 2) Collective allowances Tier 2 capital before regulatory adjustments Total regulatory adjustments to Tier 2 capital 8,096 13,584 790 113 22,583 69 1,461 1,258 70 156 – 421 3,435 19,148 1,000 1,504 14 2,518 – – 2,518 21,666 2,001 1,323 19 74 3,417 – $ 7,889 11,433 1,038 94 20,454 50 1,824 1,080 62 385 – 224 3,625 16,829 1,000 1,679 12 2,691 – – 2,691 19,520 1,000 2,828 16 70 3,914 – Tier 2 capital (T2) Total capital (TC= T1 + T2) CET1 capital RWA (4) Tier 1 capital RWA (4) Total capital RWA (4) Capital ratios (4) CET1 ratio Tier 1 capital ratio Total capital ratio $ $ 3,417 25,083 168,996 169,322 169,601 $ $ 3,914 23,434 156,107 156,401 156,652 11.3 % 12.8 % 14.8 % 10.8 % 12.5 % 15.0 % (1) Comprises non-cumulative Class A Preferred Shares Series 39, 41 and 43, 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 due June 30, 2108 and Series B due June 30, 2108 (together, the Tier 1 Notes). (3) Comprises Debentures due on October 28, 2024 and January 26, 2026 which are treated as NVCC in accordance with OSFI’s capital adequacy guidelines. (4) 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 CVA capital charge. The components of our regulatory capital and ratios on a transitional basis are presented in the table below: $ millions, as at October 31 CET1 capital Tier 1 capital Total capital RWA CET1 ratio Tier 1 ratio Total capital ratio $ 2016 20,751 22,596 25,949 173,902 $ 2015 19,147 20,671 24,538 163,867 11.9 % 13.0 % 14.9 % 11.7 % 12.6 % 15.0 % CIBC 2016 ANNUAL REPORT 31 Management’s discussion and analysis The components of our RWAs and corresponding minimum total capital requirements are presented in the table below: $ millions, as at October 31 Credit risk Standardized approach Corporate Sovereign Banks Real estate secured personal lending Other retail Trading book AIRB approach Corporate Sovereign (2) Banks Real estate secured personal lending Qualifying revolving retail Other retail Equity Trading book Securitization Adjustment for scaling factor Other credit RWA Total credit risk (before adjustment for CVA phase-in) (3) Market risk (Internal Models and IRB Approach) VaR Stressed VaR Incremental risk charge Securitization and other Total market risk Operational risk Total RWA before adjustment for CVA phase-in CVA adjustment (3) CET1 RWA Tier 1 RWA Total RWA Total RWA after adjustment for CVA phase-in (3) CET1 capital RWA Tier 1 capital RWA Total capital RWA 2016 RWA (All-in basis) Minimum total capital required (1) $ $ $ $ 3,645 780 521 2,181 667 123 7,917 64,856 2,185 3,526 12,115 17,512 7,813 705 3,576 2,218 6,860 121,366 10,815 140,098 881 1,623 1,624 47 4,175 21,746 166,019 2,977 3,303 3,582 168,996 169,322 169,601 $ $ $ $ 292 62 42 174 53 10 633 5,188 175 282 969 1,401 625 56 286 177 549 9,708 865 11,206 70 130 130 4 334 1,740 13,280 238 264 287 13,518 13,544 13,567 RWA (All-in basis) 3,614 753 327 2,213 649 10 7,566 58,917 2,081 4,088 10,477 16,106 7,272 725 2,930 2,011 6,266 110,873 12,381 130,820 719 2,051 1,606 32 4,408 18,194 153,422 2,685 2,979 3,230 156,107 156,401 156,652 $ $ $ $ 2015 Minimum total capital required (1) $ $ $ $ 289 60 26 177 52 1 605 4,713 166 327 838 1,288 582 58 234 161 501 8,868 990 10,463 58 164 128 3 353 1,456 12,272 215 238 258 12,487 12,510 12,530 (1) Refers to the minimum standard established by the BCBS before the application of the capital conservation buffer and any other capital buffers including but not limited to the (2) capital surcharge for global/domestic systemically important banks that may be established by regulators from time to time. It is calculated by multiplying RWA by 8%. Includes residential mortgages insured by Canada Mortgage and Housing Corporation (CMHC), an agency of the Government of Canada, and government guaranteed student loans. (3) As a result of the option that CIBC chose for calculating the CVA capital charge, the calculation of CET1, Tier 1 and Total capital ratios are based on different RWAs. The charge will be phased-in during 2014 to 2019 and relates to bilateral over-the-counter (OTC) derivatives included in the credit risk RWA. CET1 ratio (All-in basis) The CET1 ratio at October 31, 2016 increased 0.5% from October 31, 2015. CET1 capital increased sufficiently to counteract the impact of an increase in RWAs. The increase in CET1 capital was the result of internal capital generation (net income less dividends and share repurchases), as well as a decrease in regulatory capital deductions. CET1 capital RWAs increased $12.9 billion from October 31, 2015, primarily due to increased exposures, portfolio migration, capital model updates, and net foreign exchange movement, partially offset by the sale of ACI. We hold regulatory capital against the underlying exposures associated with our credit card securitization trust, CARDS II Trust, as we have provided non-contractual support to the trust. Applying this treatment resulted in a reduction of our 2016 Basel III CET1, Tier 1 and Total capital ratios by approximately 0.08%, 0.08% and 0.08%, respectively (2015: 0.12%, 0.13% and 0.14%, respectively). 32 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Movement in regulatory capital and CET1 capital RWAs Changes in regulatory capital (all-in basis) under Basel III are presented in the table below: $ millions, for the year ended October 31 Balance at beginning of year Issue of common shares Issue of preferred shares Issue of subordinated indebtedness Purchase of common shares for cancellation Redemption of preferred shares Net income attributable to equity shareholders Preferred and common share dividends Premium on purchase of common shares for cancellation Shares issued in lieu of cash dividends Change in AOCI balances included in regulatory capital Net foreign currency translation adjustments Net change in AFS securities Net change in cash flow hedges Net change in post-employment defined benefit plans Change in shortfall of allowance to expected losses Goodwill and other intangible assets Redemption of subordinated indebtedness (1) Other, including change in regulatory adjustments Balance at end of year $ 2016 23,434 109 – 1,000 (61) – 4,275 (1,917) (209) 164 79 67 1 (390) (162) 185 (1,500) 8 $ 2015 21,989 30 600 – (2) (631) 3,576 (1,753) (9) – 722 (164) (4) 374 (93) (415) (447) (339) $ 25,083 $ 23,434 (1) Due to the application of the cap on inclusion of non-qualifying capital instruments, $653 million of the $1.1 billion of subordinated debentures redeemed in April 2015 did not impact regulatory capital. The following tables show the movement in CET1 capital RWAs (all-in basis) relating to credit, market and operational risks. Credit risk $ millions, for the year ended October 31 Balance at beginning of year Book size (2) Book quality (3) Model updates (4) Methodology and policy (5) Acquisitions and disposals Foreign exchange movements Other Balance at end of year (6) Market risk $ millions, for the year ended October 31 Balance at beginning of year Movement in risk levels (7) Model updates (4) Methodology and policy (5) Acquisitions and disposals Foreign exchange movements Other Balance at end of year Operational risk $ millions, for the year ended October 31 Balance at beginning of year Movement in risk levels (8) Methodology and policy (5) Acquisitions and disposals Balance at end of year 2016 Of which counterparty 2015 Of which counterparty Credit risk credit risk (1) Credit risk credit risk (1) $ 133,505 13,456 1,779 (1,600) – (1,712) 565 (2,918) $ 7,898 1,402 (408) – – – 44 (75) $ 119,884 7,892 1,667 (524) 292 – 4,507 (213) $ 5,068 1,010 158 – 292 – 347 1,023 $ 143,075 $ 8,861 $ 133,505 $ 7,898 $ 2016 4,408 (268) (46) 5 – 76 – $ 2015 4,046 444 364 – – (446) – $ 4,175 $ 4,408 $ 2016 18,194 1,154 2,398 – $ 2015 17,320 874 – – $ 21,746 $ 18,194 (1) Comprises derivatives and repo-style transactions. (2) Relates to net increase/decrease in the underlying exposures. (3) Relates to changes in credit risk mitigation and credit quality of the borrower/counterparty. (4) Relates to internal model or parameter changes. (5) Relates to regulatory changes implemented on an industry-wide basis (i.e., Basel III) and any capital methodology changes implemented within CIBC for our portfolios. (6) (7) Relates to changes in open positions and market data. (8) Relates to changes in loss experience and business environment and internal control factors. Includes $2,977 million (2015: $2,685 million) of CET1 CVA RWAs relating to bilateral OTC derivatives. CIBC 2016 ANNUAL REPORT 33 Management’s discussion and analysis Movement in CET1 capital RWAs Credit risk The increase in credit risk RWAs mainly reflect the organic growth in our retail and capital markets portfolios throughout the year. The increase due to book quality reflects the impact of various downgrades experienced during the year. Model updates include refinements and normal course updates to our underlying AIRB models and parameters, such as, PD, LGD and EAD. Acquisitions and disposals reflect the sale of ACI. Market risk The overall decrease in market risk RWAs is primarily driven by the movement in risk levels, which includes changes in open positions and the market rates affecting these positions. Operational risk The movement in risk level under the AMA approach reflects changes in loss experience, changes in the business environment, internal control factors and gross income, as defined by the BCBS. Methodology and policy updates reflect capital methodology changes implemented within CIBC for our portfolios. Continuous enhancement to risk-based capital requirements The BCBS has published a number of proposals for changes to the existing risk-based capital requirements, and continues to do so with the objective of clarifying and increasing the capital requirements for certain business activities. Since the start of the fiscal year, the BCBS publications have included the proposals discussed below. In October 2016, the BCBS published the final standard for the regulatory capital treatment of banks’ investment in instruments that comprise total loss-absorbing capacity (TLAC) of global systemically important banks (G-SIBs). Under the new standard, internationally active banks must deduct holdings of TLAC instruments from their Tier 2 capital subject to certain threshold conditions provided. The standard aims to reduce the risk of contagion within the financial system should a G-SIB enter resolution. The implementation date is set for January 2019. In September 2016, OSFI published a draft of revisions to the Capital Adequacy Requirements Guideline for public consultation. The changes will be effective in the first quarter of 2017. Incorporated in the draft are revisions to effect the following: (cid:129) Details of the domestic implementation of the Basel III countercyclical buffer. The purpose of this buffer is to build capital reserves early in the credit cycle as protection against potential future losses associated with the build-up of system-wide risk arising from excess aggregate credit growth; Application of the BCBS equity investment in funds rules to ensure adequate capital is held against these investments by looking through to the underlying assets of the fund in order to more properly reflect the risk of the investment in the fund; and Revisions to the treatment of insured residential mortgages as first set out in OSFI’s December 2015 letter to the industry, which is discussed below. (cid:129) (cid:129) OSFI published a letter in December 2015, followed by a consultative paper in April 2016, with proposals to update capital requirements for residential mortgage loans in response to evolving risks, such as risks associated with elevated house prices in certain markets, and increasing levels of household debt. Final guidelines have not yet been published, but the banks and OSFI have consulted extensively. The key change is a risk sensitive floor for LGD that will be tied to increases in local property prices over the previous three years and/or to house prices that are high relative to borrower income. This guideline will apply to banks using internal models to determine RWA, with implementation by November 1, 2016 for reporting beginning in the first quarter of 2017. Only new mortgage originations and mortgages that are renewed or refinanced will be subject to the new rules on a go-forward basis. However, an increase in RWA is expected, due to the increase in house prices in several key markets over the last three years. In July 2016, the BCBS published revisions to the securitization framework, with an effective date of January 2018, which aim to strengthen the capital standards for securitization exposures. In April 2016, the BCBS issued the final standard for Interest Rate Risk in the Banking Book (IRRBB). This standard represents a Pillar 2 supervisory approach, which promotes enhanced disclosures and improves comparability through providing extensive guidance to banks’ IRRBB management processes. These rules, which are effective for the first quarter of 2018, aim to promote sufficient capital to cover potential losses from exposures to changes in interest rates, and to limit incentives for capital arbitrage between the banking and trading books. In March 2016, the BCBS issued two consultative papers: “Reducing variation in credit risk-weighted assets – constraints on the use of internal model approaches” aims to limit the use of IRB approaches and adopt exposure-level, model-parameter floors for certain exposures. The proposed changes aim to: (i) reduce complexity; (ii) improve comparability; and (iii) address excessive variability in the capital requirements for credit risk. “Standardised Measurement Approach for Operational Risk” proposed further revisions to the operational risk capital frameworks, with the stated objective of providing a balance between simplicity, comparability, and risk sensitivity. A non-model-based standardized measurement approach is proposed to replace the existing standardized approach and AMA. The proposed method combines a financial statement-based measure with past operational losses for the estimation of operational risk capital. In January 2016, the BCBS published final standards for its market risk framework, which aims to ensure that the standardized and internal model approaches to market risk deliver credible capital outcomes and promote consistent implementation across jurisdictions. The BCBS will require banks to report under the new standards by the end of 2019. OSFI has not yet established a timeline for Canadian banks. “Revisions to the Standardised Approach for credit risk” was released in December 2015, with the purpose of reducing variability in RWAs and promoting comparability across banks and jurisdictions. Key changes from the initial paper include the use of external credit ratings and the methodology for risk weighting real estate loans. This consultative document, along with the new standardized approaches to operational and market risk, is designed to complement the capital floors proposal published in December 2014 titled “Capital floors: the design of a framework based on standardized approaches”, with the objective of mitigating model risk and measurement errors stemming from internal models, and to address excessive variability in RWA calculations between banks. CIBC will continue to monitor and prepare for developments in these areas. Basel III leverage ratio The Basel III capital reforms included 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: On-balance sheet assets less Tier 1 capital regulatory adjustments; Derivative exposures; Securities financing transaction exposures; and (i) (ii) (iii) (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 Basel III leverage ratios that meet or exceed 3%. The minimum may be higher for certain institutions at OSFI’s discretion. 34 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis $ millions, as at October 31 Transitional basis Tier 1 capital Leverage ratio exposure Leverage ratio All-in basis Tier 1 capital Leverage ratio exposure Leverage ratio 2016 2015 $ $ 22,596 546,136 4.1 % 21,666 545,480 4.0 % $ $ 20,671 503,504 4.1 % 19,520 502,552 3.9 % A B A/B C D C/D Leverage ratio (All-in basis) The leverage ratio at October 31, 2016 increased by 0.1% from October 31, 2015, due to an increase in Tier 1 capital, which was partially offset by an increase in the leverage ratio exposure. The increase in Tier 1 capital was mainly driven by internal capital generation, as well as a decrease in regulatory capital deductions. The increase in the leverage ratio exposure was primarily driven by an increase in on-balance sheet assets. Proposed revisions to leverage ratio framework In April 2016, the BCBS issued a consultative document “Revisions to the Basel III leverage ratio framework” for comment. At this time, there is no change to the minimum leverage ratio requirement of 3%. However, consideration is being given to additional requirements for G-SIBs. Areas subject to proposed changes include measurement for derivative exposures, treatment of regular-way purchases and sales of financial assets, and revisions to credit conversion factors for off-balance sheet items. The implementation date is expected to be January 1, 2018. Revised Pillar 3 disclosure requirements In January 2015, the BCBS issued “Revised Pillar 3 disclosure requirements”, which set out the first phase of a two-phase project by the BCBS to replace existing Pillar 3 disclosure requirements for credit (including counterparty credit), market, operational, interest rate and securitization risks. Pillar 3 aims to promote market discipline through regulatory disclosure requirements, in order to improve comparability and consistency of disclosures and increase transparency and confidence about a bank’s exposure to risk and the overall adequacy of its regulatory capital. In January 2016, OSFI issued a draft guideline confirming its expectations for domestic implementation of the BCBS Pillar 3 first phase requirements. In August 2016, OSFI confirmed that implementation is required beginning in the fourth quarter of 2018. In March 2016, the BCBS released “Pillar 3 disclosure requirements – consolidated and enhanced framework”, a consultative document establishing the second phase of the project. The proposals in this document include enhancements to the January 2015 requirements, the introduction of several new disclosure requirements, and the incorporation into Pillar 3 of other proposed disclosure requirements arising from ongoing reforms to the regulatory framework. CIBC continues to monitor the requirements and prepare for developments in this area. Taxpayer Protection and Bank Recapitalization Regime The Department of Finance published a consultation paper on August 1, 2014 on the Taxpayer Protection and Bank Recapitalization (bail-in) regime. The overarching policy objective is to preserve financial stability while protecting taxpayers in the event of a large bank (D-SIB) failure, and is consistent with the objectives of the Financial Stability Board’s rules for TLAC applicable to G-SIBs. The bail-in regime is designed to enable the expedient conversion, in whole or in part, of certain bank liabilities (bail-in debt) into common equity, thus ensuring that the D-SIB emerges from conversion as adequately capitalized. Bail-in debt includes long-term senior unsecured debt that is tradable and transferable, and has an original term to maturity of over 400 days. Consumer deposits are excluded. The rules would not be applied retroactively to liabilities outstanding as of the implementation date. The Federal Budget released on March 22, 2016 confirmed the Government’s intention to introduce framework legislation for the bail-in regime. A Budget Implementation Bill (Bill C-15) was released on April 20, 2016 and has received Royal Assent. It included amendments to existing legislation, such as the Canada Deposit Insurance Corporate (CDIC) and Bank Acts, to enable appropriate statutory powers to enact the forthcoming law. Highlights from Bill C-15 include: (cid:129) (cid:129) (cid:129) Specified eligible shares and liabilities of D-SIBs may only be converted into common shares; The CDIC will set the terms and conditions of a conversion, including its timing; and OSFI shall establish the amount of the higher loss absorbency requirement for D-SIBs. Additional details on implementation, scope, and timing are expected to follow through regulations and by-laws. 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, established by the Board, is reviewed and approved biennially in support of the ICAAP. The policy includes a set of guiding principles that relate to capital strength, capital mix, dividends and return of capital, and the unconsolidated capital adequacy of regulated entities, in alignment with our risk appetite. The key guidelines relate to capital strength and mix – the former being the overriding guideline, while the latter specifically relates to maintaining a cost effective capital structure. CIBC’s 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 needs to be monitored continually and rebalanced as needed as retained earnings grow, term instruments mature or are redeemed, share options are exercised, and the environment changes. Furthermore, the amount of capital required may change in relation to CIBC’s business growth, risk appetite, and business and regulatory environment. 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 developed, which encompass all of the key elements of capital including forecasts of sources and uses, maturities, redemptions, new issuances, corporate initiatives and business growth. 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. CIBC 2016 ANNUAL REPORT 35 Management’s discussion and analysis Capital initiatives The following main capital initiatives were undertaken in 2016: Normal course issuer bid Our normal course issuer bid (NCIB) expired on September 17, 2016. We purchased and cancelled 3,081,300 common shares under this bid at an average price of $87.50 for a total amount of $270 million during the year ended October 31, 2016. See Note 15 to the consolidated financial statements for additional information. On January 5, 2016, we announced that the Ontario Securities Commission had issued an issuer bid exemption order (the Order) permitting CIBC to make private agreement purchases of up to 2,666,667 of CIBC’s common shares from an arm’s length third-party seller. The Toronto Stock Exchange also accepted an amended NCIB notice permitting CIBC to make purchases of common shares by way of private agreement under the Order. Any such purchases would be at a discount to the prevailing market price and were required to occur prior to March 29, 2016. Pursuant to the Order, 1,400,000 common shares were purchased and cancelled under a private agreement at an average price of $86.94 for a total amount of $122 million on January 8, 2016. Shareholder Investment Plan Effective with the October 28, 2016 dividend, CIBC has elected to issue shares from Treasury to fulfill the requirements of the plan. Pursuant to the plan, we issued 1,662,972 common shares for consideration of $164 million for the year ended October 31, 2016. Dividends On November 30, 2016, the Board approved an increase in our quarterly common share dividend from $1.21 per share to $1.24 per share for the quarter ending January 31, 2017. Our quarterly common share dividend was increased from $1.18 per share to $1.21 per share for the quarter ended July 31, 2016, from $1.15 per share to $1.18 per share for the quarter ended April 30, 2016, and from $1.12 per share to $1.15 per share for the quarter ended January 31, 2016. 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. Subordinated indebtedness On August 3, 2016, we purchased and cancelled $21 million (US$16 million) of our Floating Rate Debenture Notes Due 2084. On January 26, 2016, we issued $1.0 billion principal amount of 3.42% Debentures (subordinated indebtedness). The Debentures bear interest at a fixed rate of 3.42% per annum (paid semi-annually) until January 26, 2021, and at the three-month bankers’ acceptance rate plus 2.57% thereafter (paid quarterly) until maturity on January 26, 2026. The Debentures include an NVCC provision, necessary for the Debentures to qualify as Tier 2 regulatory capital under Basel III. As such, the Debentures are automatically converted into common shares upon the occurrence of the Trigger Event. On November 2, 2015, we redeemed all $1.5 billion of our 3.15% Debentures (subordinated indebtedness) due November 2, 2020. In accordance with their terms, the Debentures were redeemed at 100% of their principal amount, plus accrued and unpaid interest thereon. 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 the businesses to ensure scenarios are relevant to our businesses and there is a consistent interpretation of the scenarios across CIBC. 36 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Enterprise-wide Stress Testing Scenario Development (cid:129) Develop macroeconomic scenarios relevant to the current and projected business cycle including emerging risks Risk Identification/Modelling (cid:129) Identification of relevant risk drivers (cid:129) Development and validation of stress models and parameters Translation of financial and macroeconomic factors (e.g., GDP, unemployment, yield curve, etc.) Quantify impacts Credit Market Operational Liquidity Earnings Other Aggregate results Earnings Evaluate and review bank-wide impacts Capital Impacts Funding and Liquidity Linkages Internal Capital Adequacy Assessment Process (ICAAP) Risk Appetite Capital Management and Planning Financial Management and Planning Liquidity Management Recovery and Resolution Planning Risk Management 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 bottom-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 the businesses 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: $ millions, except number of shares and per share amounts, as at November 25, 2016 Common shares (1) Preferred shares (2)(3) Series 39 (NVCC) Series 41 (NVCC) Series 43 (NVCC) Subordinated indebtedness (3)(4) 3.00% Debentures due October 28, 2024 (NVCC) 3.42% Debentures due January 26, 2026 (NVCC) Stock options outstanding Total Shares outstanding Number of shares 397,261,241 16,000,000 12,000,000 12,000,000 n/a n/a $ $ Amount 8,045 400 300 300 1,000 1,000 $ 3,000 Minimum conversion price per common share Maximum number of common shares issuable on conversion/exercise $ 5.00 5.00 5.00 5.00 5.00 80,000,000 60,000,000 60,000,000 300,000,000 300,000,000 3,990,034 803,990,034 (1) Net of treasury shares. (2) 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. (3) The maximum number of common shares issuable on conversion excludes the impact of declared but unpaid dividends and accrued interest. (4) 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. CIBC 2016 ANNUAL REPORT 37 Management’s discussion and analysis The occurrence of a “Trigger Event”, as described in the capital adequacy guidelines, would result in conversion of all of the outstanding NVCC instruments described above, which would represent a dilution impact of 67% based on the number of CIBC common shares outstanding as at October 31, 2016. 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. 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. 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. CIBC-sponsored conduits We manage and administer a single-seller conduit and several CIBC-sponsored multi-seller conduits in Canada. Our 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 ABCP to investors. Our 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 our 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 our 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 our own 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 $36 million in 2016 (2015: $27 million). All fees earned in respect of activities with the conduits are on a market basis. As at October 31, 2016, the amount funded for the various asset types in our multi-seller conduits amounted to $5.4 billion (2015: $4.0 billion). The estimated weighted-average life of these assets was 1.5 years (2015: 1.2 years). Our holdings of commercial paper issued by our non-consolidated sponsored multi-seller conduits that offer commercial paper to external investors were $10 million (2015: $59 million). Our committed backstop liquidity facilities to these conduits were $7.2 billion (2015: $4.9 billion). We also provided credit facilities of $40 million (2015: $40 million) to these conduits. 38 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis We participated in a syndicated facility for a three-year commitment of $700 million to our single-seller conduit that provides funding to franchisees of a major Canadian retailer. Our portion of the commitment was $130 million (2015: $105 million). As at October 31, 2016, we funded $103 million (2015: $94 million) through the issuance of bankers’ acceptances and prime loans. We engage one or more of the four major rating agencies, Moody’s, DBRS Limited (DBRS), S&P, and Fitch Ratings, Inc. (Fitch), to opine on the credit ratings of 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 (SEs) that are not consolidated are set out in the table below. For additional details on our SEs, see Note 6 to the consolidated financial statements. $ millions, as at October 31 2016 Investments and loans (1) Liquidity, credit facilities and commitments Written credit derivatives (2) Investments and loans (1) Single-seller and multi-seller conduits Third-party structured vehicles – continuing Pass-through investment structures Commercial mortgage securitization trust CIBC Capital Trust CIBC-managed investment funds CIBC-structured CDO vehicles Third-party structured vehicles – run-off $ 113 4,647 395 7 6 33 10 900 $ 5,500 (3) 1,398 – – 75 – 28 – $ – – – – – – – 319 $ 153 3,490 605 13 7 – 9 1,449 2015 Liquidity, credit facilities and commitments Written credit derivatives (2) $ 3,972 (3) 985 – – 75 – 27 57 $ – – – – – – 23 827 (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. $0.5 billion (2015: $1.0 billion) of the exposures related to CIBC-structured vehicles and third-party 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 $174 million (2015: $214 million). Notional of $0.3 billion (2015: $0.8 billion) was hedged with credit derivatives protection from third parties. The fair value of these hedges net of CVA was $139 million (2015: $159 million). An additional notional of $36 million (2015: $52 million) was hedged through a limited recourse note. Accumulated fair value losses were nil (2015: $1 million) on unhedged written credit derivatives. (3) Excludes an additional $1.8 billion (2015: $0.9 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 $10 million (2015: $59 million) 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. Since 2008, we have ceased activities in the following areas: (cid:129) (cid:129) Credit derivative contracts with clients to enable them to create synthetic exposures to meet their needs; and Intermediation trades that assume credit risks of clients through credit derivatives, and in turn offset these risks by entering into credit derivative contracts with third-party financial institutions. All derivatives are recorded at fair value on our consolidated balance sheet. See Notes 12 and 24 to the consolidated financial statements for details on derivative contracts and the risks associated with them. Credit-related arrangements Credit-related arrangements are generally off-balance sheet instruments and are typically entered into to meet the financing needs of clients. In addition, there are certain exposures for which we could be obligated to extend credit that are not recorded on the consolidated balance sheet. For additional details of these arrangements, see the “Liquidity risk” section and Note 22 to the consolidated financial statements. Guarantees A guarantee is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor failed to make payment when due in accordance with the original or modified terms of a debt instrument. Guarantees include standby and performance letters of credit and credit derivatives protection sold, as discussed in Notes 22 and 12 to the consolidated financial statements, respectively. CIBC 2016 ANNUAL REPORT 39 Management’s discussion and analysis 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. These disclosures have been shaded and form an integral part of the consolidated financial statements. 40 Risk overview 41 Risk governance structure 42 Risk management structure 43 Risk management process 43 Risk appetite statement 44 Risk policies and limits 44 Risk identification and measurement 46 Stress testing 46 Risk treatment/mitigation 46 Top and emerging risks 48 Risks arising from business activities 49 Credit risk 49 Governance and management 49 Policies 50 Process and control 51 Risk measurement 52 Exposure to credit risk 55 Credit quality of portfolios 57 Credit quality performance 58 Exposure to certain countries and regions 60 Selected exposures in certain selected activities 60 Settlement risk 67 Liquidity risk 67 Governance and management 67 Policies 67 Process and control 67 Risk measurement 68 Liquid and encumbered assets 70 Funding 72 Contractual obligations 61 Market risk 61 Governance and management 61 Policies 61 Process and control 61 Risk measurement 62 Trading activities 65 Non-trading activities 66 Pension risk 73 Other risks 73 Strategic risk 73 Insurance risk 74 Operational risk 75 Technology, information and cyber security risk 75 Reputation and legal risk 75 Regulatory compliance risk 75 Environmental 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: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 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 and support groups are responsible for all risks associated with their activities – this is the first line of defence; As the second line of defence, CIBC’s Risk Management, including Compliance, and other oversight functions, are responsible for independent oversight of the enterprise-wide risks inherent in CIBC’s business activities; and (ii) (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. 40 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Risk governance structure Our risk governance structure is illustrated below: Risk Governance Structure Board of Directors h t e rsi g v o n e s c a l a ti o Audit Committee Risk Management Committee Management Resources and Compensation Committee Corporate Governance Committee c ulture Executive Committee fra m e w ork Global Asset Liability Committee 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: The Audit Committee reviews the overall adequacy and the 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 fulfilling its governance and supervisory responsibilities for strategic oversight of CIBC’s human capital, including organization effectiveness, succession planning and compensation, and the alignment of compensation with CIBC’s strategy of consistent and sustainable performance, its risk appetite and control framework. Corporate Governance Committee: The primary function of the Corporate Governance Committee is to assist 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: (cid:129) 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 and liquidity 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. GALCO is supported by four subcommittees – Liquidity Risk Management Committee, Asset Liability Management Committee, Balance Sheet Resource Committee, and Funds Transfer Pricing Committee – that are composed of senior executives with business and oversight responsibilities for the respective activities. Global Risk Committee (GRC): This committee, which comprises the ExCo and senior leaders from the lines of business, Risk Management and other infrastructure 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. (cid:129) CIBC 2016 ANNUAL REPORT 41 Management’s discussion and analysis 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: Risk Management Structure Chief Risk Officer Global Regulatory Affairs and Risk Control Capital Markets Risk Management Global Credit Risk Management (including Regional Risk Officers) Wealth Risk Management Retail Risk Management Global Operational Risk Management Enterprise Risk Management Compliance Risk Appetite Statement and Management Control Metrics Risk Policies and Limits Risk Identification, Measurement and Reporting Effective Challenge as Second Line of Defence Stress Testing The Risk Management group performs several important activities including: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 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 eight key groups within Risk Management, independent of the originating businesses, contribute to our management of risk: (cid:129) Global Regulatory Affairs and Risk Control – This team provides expertise in risk, controls and regulatory reporting, and oversees regulatory interactions across CIBC to ensure coordinated communication and the effective development of and adherence to action plans. Capital Markets Risk Management – This unit 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 unit includes our regional CROs, and is responsible for the adjudication and oversight of credit risks associated with our commercial and wholesale activities globally, management of the risks in our investment portfolios, as well as management of special loan portfolios. Wealth Risk Management – This unit is responsible for the independent governance and oversight of the wealth management business/activities in CIBC globally. Retail Risk Management – This unit oversees the management of credit risk in the retail lines of business (residential mortgages, credit cards, personal loans and lines of credit, small business loans). Global Operational Risk Management – This team 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. Enterprise Risk Management – This unit is responsible for enterprise-wide analysis, including enterprise-wide stress testing and reporting, risk policy and governance, risk systems and models, as well as economic capital methodologies. Compliance – This unit provides timely and proactive advice and independent oversight of CIBC’s compliance with applicable regulatory and anti- money laundering requirements. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 42 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Risk management process Our risk management process is illustrated below: g n i t r o p e R Risk Management Process Risk Appetite Statement Risk Policies and Limits Risk Identification and Measurement Stress Testing Risk Treatment / Mitigation i w e v e R d n a r o t i n o M 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: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Safeguarding our reputation and brand; Doing the right thing for our clients/stakeholders; 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 through a due diligence process to ensure that the risk exposure is within our risk appetite; these decisions require approval from the ExCo and/ or the Board before implementation. 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: (cid:129) (cid:129) (cid:129) (cid:129) 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, 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 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 consolidated CIBC, Retail and Business Banking, Wealth Management and Capital Markets with respect to adherence to risk appetite. 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 rating and compensation process. The Committee is responsible for assisting the Board in fulfilling its governance and supervisory responsibilities for the strategic oversight of CIBC’s human capital and overseeing CIBC’s compensation policies, processes and practices. The MRCC’s key compensation-related responsibilities include: (cid:129) (cid:129) Establishing the compensation governance process; Reviewing an assessment of CIBC’s business performance against CIBC’s risk appetite, control environment, and the underlying risks associated with business performance; CIBC 2016 ANNUAL REPORT 43 Management’s discussion and analysis (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Approving and recommending for Board approval incentive compensation funding and allocations, based on an assessment of business performance and risk; Evaluating any discretionary adjustments that may be recommended by the CEO to better align pay and performance; Approving individual compensation for employees with compensation above a certain threshold; Approving and recommending for Board approval individual compensation for the ExCo and other key officers, including any discretionary adjustments to business multipliers and/or individual compensation recommendations; and Approving and recommending for Board approval new material incentive compensation plans or changes to existing material plans. 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. Enterprise-wide Risk Management Framework Risk Appetite Statement and Risk Appetite Framework Risk Overarching Framework / Policy Risk Limits Management Oversight Credit Market Operational Reputation Liquidity Credit Risk Management Policy Capital Markets Risk Management Policies Structural Risk Management Policy Credit Concentration Limits Delegated Credit Approval Authorities Market Risk Limits Delegated Risk Authorities Operational Risk Management Framework Control Framework Key Risk Indicators Credit Committees Global Risk Committee Capital Markets Authorized Products Committee Global Risk Committee Global Asset Liability Committee Operational Risk and Control Committee Global Risk Committee Reputation Risk Management Framework and Policy Key Risk Indicators Reputation and Legal Risks Committee 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: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 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 chart below, 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. 44 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Risk Identification Processes Strategic and Emerging Risk Themes External and Peer Benchmarking Regulatory Reviews Macro and External Risks Risks Inherent in CIBC’s Businesses Strategic Business Reviews Material Risk Assessment Process Risk and Control Self Assessments Assessment of Risk Level (probability / severity considerations) Risk Register 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 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 and benchmarking of credit exposures. 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 mitigation policies We have policies, procedures, standards and controls that surround the introduction, independent review, usage and parameter selection of pricing and hedge ratio models, risk models (VaR, economic and regulatory capital), retail credit scoring models (e.g., application and behavioural scorecards), credit models for the calculation of loss severity, and models for monitoring of scorecard performance. A model review and validation is the independent and ongoing documentary evidence that risk quantification and pricing models, rating or scoring systems and parameters are sound and CIBC can rely on its output. The following procedures provide evidence of this review: (cid:129) (cid:129) Review of model documentation; Comprehensive, systematic testing of the model implementation with respect to pricing, hedge ratio, and parameter estimation routines (as applicable); Replication of the risk quantification process helps determine whether the model implementation is faithful to the model specifications; Review of the appropriateness and robustness of the model/parameter concepts and assumptions; 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 is conducted 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; Reviewing the internal usage of the model/parameter applications to ensure consistency of application; Maintaining an inventory of regulatory models and parameters and reporting their status to the Model and Parameter Risk Committee; Maintaining a Risk Register to ensure that all material risks are captured to support the end-to-end validation of ICAAP methods; and A comprehensive report that identifies the conditions for valid application of the model and summarizing these findings for the Model and Parameter Risk Committee. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) CIBC 2016 ANNUAL REPORT 45 Management’s discussion and analysis 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/mitigation Risk treatment/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 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 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. Onward 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 with 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. CIBC has cyber insurance coverage to help mitigate loss associated with cyber incidents. 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. Given the importance of electronic financial systems, including secure online and mobile banking provided by CIBC to its clients, CIBC continues to develop controls and processes to protect our systems and client information from damage and unauthorized disclosure. CIBC monitors the changing environment globally, including cyber threats, evolving regulatory requirements, and mitigation strategies. In addition, we benchmark against best practices and provide regular updates to the Board. 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. However, CIBC continuously monitors its risk posture for changes and continues to refine security protection approaches 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. 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, could have serious negative implications for general economic and banking activities. The upcoming change in leadership in the White House poses new economic policy uncertainties that could either add or subtract to Canadian economic activity. The downside risks would be associated with an increase in protectionism, should that fail to exempt Canadian goods and services, as well as heightened competition for business investment as the U.S. eases up on corporate taxes and regulations. There could also be positive implications for Canada if U.S. growth accelerates due to fiscal stimulus. We will monitor these policy developments as details emerge over the coming year. 46 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis The notable impact thus far of the outcome of the U.K. referendum to exit the European Union has been the decline in the value of the British Pound. Moreover, the uncertainty created by the decision has exacerbated an already challenging environment in global credit markets, where risks have been increasing in line with higher debt levels. While the negative economic effects are likely to be concentrated in the U.K., they will have ramifications for the rest of Europe, adding to existing economic challenges in the region. Credit is also a concern for emerging markets, where economies have yet to return to pre-crisis levels, and their credit ratings are showing signs of stress. Our direct exposure to many of these identified areas of concern is limited. However, we continue to actively monitor and assess the global business and geo-political environment for adverse developments. 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. Commodity prices Most commodity prices remain at low levels as growth in global demand continues to be subdued and excess supply persists. Lower commodity prices have placed pressure on corporate margins, which, in turn, have resulted in reduced Canadian tax revenues. Should commodity prices remain at these levels for a protracted period of time, vulnerable companies in the sector will face additional stress. So far, our overall commodity exposure continues to perform within our risk appetite. However, we have experienced losses in our oil and gas portfolio, and if the trend continues, we could experience further losses. 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. We have run our enterprise statistical stress tests at lower oil prices to determine potential direct losses, and have also conducted stress tests to assess the secondary impacts of lower oil prices on our retail portfolio for the affected regions, where we could see higher losses if unemployment continues to trend negatively. Canadian consumer debt and the housing market As a consequence of historically low interest rates, Canadians have increased debt levels at a pace that has exceeded growth in their income. Most of the increase in household debt levels has been driven by higher levels of mortgage debt, which is tied to the Canadian housing market. While interest rates are expected to remain relatively low in the foreseeable future, concerns remain that an external shock, such as higher unemployment rates, could affect the ability of Canadians to repay their loans, potentially triggering a correction in the housing market, which in turn could result in credit losses to banks. In an attempt to mitigate the risks associated with the housing market, the Canadian government recently introduced regulatory changes, and announced a public consultation on other measures. Earlier, a tax was introduced on purchases of residential property by foreign buyers in Vancouver. See the “Real estate secured personal lending” section for additional details. Currently, we qualify all variable rate mortgage borrowers using the Bank of Canada 5-year fixed benchmark rate, which is typically higher than the variable rate by approximately two percentage points. If there were an interest rate increase, our variable rate borrowers should be able to withstand some increase in the interest rate. We believe the risk of a severe housing crash that generates significant losses for mortgage portfolios is unlikely, but the risk associated with high levels of consumer debt would be a concern should the economy falter and unemployment rates increase. China economic policy risk While meeting the government-set quarterly targets, China’s economy continues to be on a slower growth trajectory as, in addition to cyclical factors, the country tries to rebalance growth from an export-oriented and investment-driven performance to a more sustainable service-oriented and consumption- driven economy. We continue to monitor economic policy both within the country and the region for signs of stress or directional change and have taken a prudent stance in addressing our tolerance for exposure to the country. We currently have little direct exposure to China, but any negative impact from the Chinese economic slowdown may affect clients that export to China or sell into a market where prices have been pushed down by weakness in Chinese demand, and may raise the credit risk associated with our exposure to trading counterparties. Acquisition risk CIBC seeks out acquisition opportunities which align with its financial goals and strategies. The ability to successfully execute these strategies to integrate acquisitions, and the ability to anticipate and manage risks associated with them, are subject to certain factors. These include receiving regulatory and shareholder approval on a timely basis and on favourable terms, changes in general business and economic conditions, and the ability to control integration and acquisition costs, among others. Although many of the factors are beyond CIBC’s control, their impact is mitigated by conducting thorough due diligence before completing the transaction, developing and executing appropriate action plans to ensure successful integration, and monitoring performance following the acquisition. Environmental risks and pandemic outbreaks A number of environmental events have occurred over the past several years, including hurricanes, tsunamis, earthquakes, wildfires, droughts and floods, oil spills, and industrial accidents. There is also concern that the outbreak of certain illnesses could have the potential to reach pandemic levels. In addition to the humanitarian impact, these phenomena, along with the potential impact of climate change, introduce uncertainty and pose risks to the global economy, as well as our clients and our operations. CIBC monitors these events and has measures in place including disaster recovery, insurance and business continuity programs, to ensure client needs continue to be met. Regulatory developments See the “Capital resources”, “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 32 to the consolidated financial statements for additional information on accounting developments. CIBC 2016 ANNUAL REPORT 47 Management’s discussion and analysis 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, 2016: CIBC Corporate and Other SBUs Business activities Balance sheet CET1 RWA (All-in basis) Economic capital (3) Retail and Business Banking Wealth Management Capital Markets (cid:129) Deposits (cid:129) Residential mortgages (cid:129) Personal loans (cid:129) Credit cards (cid:129) Business lending (cid:129) Insurance (cid:129) Retail brokerage (cid:129) Asset management (cid:129) Private wealth management (cid:129) Credit products (cid:129) Global markets (cid:129) Investment banking (cid:129) Investment portfolios (cid:129) International banking (cid:129) Investment portfolios (cid:129) Joint ventures (cid:129) Functional and support groups (see page 27) Average assets Average deposits ($ millions) 265,760 186,034 Average assets Average deposits ($ millions) 4,482 9,817 Average assets Average deposits ($ millions) 162,842 21,781 Average assets Average deposits ($ millions) ($ millions) ($ millions) Credit risk Market risk Operational risk 79,659 – 9,529 Credit risk Market risk Operational risk 470 – 3,888 Credit risk (1) Market risk Operational risk 46,200 3,771 6,956 Credit risk (2) Market risk Operational risk ($ millions) 76,056 181,439 ($ millions) 16,746 404 1,373 Proportion of total CIBC Comprising: Credit risk (4) Market risk Operational/Strategic risks (%) 40 71 19 10 Proportion of total CIBC Comprising: Credit risk (4) Market risk Operational/Strategic risks (%) 11 3 4 93 Proportion of total CIBC Comprising: Credit risk (4) Market risk Operational/Strategic risks (%) 25 78 7 15 Proportion of total CIBC Comprising: Credit risk (4) Market risk Operational/Strategic risks (%) 24 25 7 68 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) (2) (3) (4) Includes counterparty credit risk of $1,375 million, which comprises derivatives and repo-style transactions. Includes counterparty credit risk of $7,486 million, which comprises derivatives and repo-style transactions. For additional information, see the “Non-GAAP measures” section. Includes investment risk. 48 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis 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 mainly from our Retail and Business Banking and our Capital Markets lending businesses. Other sources of credit risk include our trading activities, including our 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. Front line businesses are responsible for originating and managing the risk – this is the first line of defence. The second line of defence is Risk Management, which provides enterprise-wide adjudication. Adjudication and portfolio management decisions are based on our risk appetite, as reflected in our policies, standards, and limits. Credit approval authorities are controlled to ensure decisions are made by qualified personnel. Compliance and other oversight functions also provide independent oversight of the management of credit risk in our credit portfolios. Internal Audit provides the third line of defence, by providing independent assessment of the design and operating effectiveness of the risk management controls, processes and systems. 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. Key units in Risk Management with credit risk responsibility include: Global Credit Risk Management: This unit is responsible for the adjudication of risk-rated credit (including trading credit facilities) for Retail and Business Banking, Wealth Management, and Capital Markets clients. This excludes adjudication of some non-bank financial entities, prime brokerage clients and central clearing counterparties trading credit risks where the client has no other credit relationship – adjudication and oversight for these credits is managed by Capital Markets Risk Management. Retail Risk Management: This unit is responsible for providing independent oversight of the management of credit risk for mortgages, personal and scored small business lending, and credit card portfolios. This includes establishing credit risk strategies to ensure the portfolio performs within approved limits, and credit adjudication for retail and scored small business credits. Wealth Risk Management: This unit is responsible for the adjudication of private banking credits, the establishment of associated credit procedures, and the oversight of associated credit exposures. Capital Markets Risk Management: This unit is responsible for independent oversight of trading credit risk, including adjudication of trading credit facilities for non-bank financial institutions 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. 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. 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 CIBC 2016 ANNUAL REPORT 49 Management’s discussion and analysis 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 with counterparties by employing the International Swaps and Derivatives Association (ISDA) Master Agreement, as well as Credit Support Annexes (CSAs) or similar 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 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 are often included in ISDA Master Agreements. 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 also designate acceptable collateral types, and set out rules for re-hypothecation and interest calculation on collateral. Consistent with global initiatives to improve resilience in the financial system, we will clear derivatives through central counterparties (CCPs) where feasible. Credit derivatives may be used to reduce industry sector concentrations and single-name exposure. Forbearance policy We employ forbearance techniques to manage client relationships and to minimize credit losses due to default, foreclosure or repossession. In certain circumstances, it may be necessary to modify a loan for 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. During the year, $192 million (2015: $28 million) of loans have undergone TDR. 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. 50 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Risk measurement Exposures subject to AIRB approach Business and government portfolios (excluding scored small business) – risk-rating method This section describes the portfolio rating categories. The portfolio comprises exposures to corporate, sovereign, and bank obligors. Our adjudication process and criteria includes assigning an obligor rating that reflects our estimate of the financial strength of the borrower, and a facility rating that reflects the security applicable to the exposure. The obligor rating takes into consideration our financial assessment of the obligor, the industry, and the economic environment of the region in which the obligor operates. Where a guarantee from a third-party exists, both the obligor and the guarantor will be assessed. While our obligor rating is determined independently of external ratings for the obligor, our risk-rating methodology includes a review of those external ratings. A mapping between our internal ratings and the ratings used by external ratings agencies is presented in the table below. Grade Investment grade Non-investment grade Watch list Default Corporate and Banks Sovereigns PD bands CIBC rating S&P equivalent Moody’s equivalent Grade PD bands CIBC rating S&P equivalent Moody’s equivalent 0.03% – 0.42% 10 – 47 AAA to BBB- Aaa to Baa3 Ba1 to B3 CCC+ to C Caa1 to Ca C 0.43% – 12.11% 51 – 67 12.12% – 99.99% 70 – 80 90 BB+ to B- 100% D Investment grade Non-investment grade Watch list Default 0.01% – 0.42% 00 – 47 AAA to BBB- Aaa to Baa3 Ba1 to B3 CCC+ to C Caa1 to Ca C 0.43% – 12.11% 51 – 67 12.12% – 99.99% 70 – 80 90 BB+ to B- 100% D We use quantitative modelling techniques to assist in the development of internal risk-rating systems. The risk-rating systems have been developed through analysis of internal and external credit risk data. The risk ratings are used for portfolio management, risk limit setting, product pricing, and in the determination of economic capital. Our credit process is designed to ensure that we approve applications and extend credit only where we believe that our client has the ability to repay according to the agreed terms and conditions. Embedded in our credit policies and criteria is an assessment of risk exposure using the following three dimensions: (cid:129) (cid:129) (cid:129) 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 framework of policies and limits defines our appetite for exposure to any single name or group of related borrowers, which is a function of the internal risk rating. We generally extend new credit only to borrowers in the investment and non-investment grade categories noted above. Our credit policies are also defined to manage our exposure to concentration in borrowers in any particular industry or region. A simplified risk-rating process (slotting approach) is used for part of our uninsured Canadian commercial mortgage portfolio, which comprises non-residential mortgages and multi-family residential mortgages. These exposures are individually rated on our rating scale using a risk-rating methodology that considers the property’s key attributes, which include its loan-to-value (LTV) and debt service ratios, the quality of the property, and the financial strength of the owner/sponsor. All exposures are secured by a lien over the property. In addition, we have insured multi-family residential mortgages, which are not treated under the slotting approach, but are instead treated as sovereign exposures. Retail portfolios Retail portfolios are characterized by a large number of relatively small exposures. They comprise: real estate secured personal lending (residential mortgages and personal loans and lines secured by residential property); qualifying revolving retail exposures (credit cards and unsecured lines of credit); and other retail exposures (loans secured by non-residential assets, unsecured loans including student loans, and scored small business loans). We use scoring models in the adjudication of new retail credit exposures, which are based on statistical methods of analyzing the unique characteristics of the borrower, to estimate future behaviour. In developing our models, we use internal historical information from previous borrowers, as well as information from external sources, such as credit bureaus. The use of credit scoring models allows for consistent assessment across borrowers. There are specific guidelines in place for each product, and our adjudication decision will take into account the characteristics of the borrower, any guarantors, and the quality and sufficiency of the collateral pledged (if any). The lending process will include documentation of, where appropriate, satisfactory identification, proof of income, independent appraisal of the collateral and registration of security. Retail portfolios are managed as pools of homogeneous risk exposures, using external credit bureau scores and/or other behavioural assessments to group exposures according to similar credit risk profiles. These pools are assessed through statistical techniques, such as credit scoring and computer-based models. Characteristics used to group individual exposures vary by asset category; as a result, the number of pools, their size, and the statistical techniques applied to their management differ accordingly. The following table maps the PD bands to various risk levels: Risk level Exceptionally low Very low Low Medium High Default PD bands 0.01% – 0.20% 0.21% – 0.50% 0.51% – 2.00% 2.01% – 10.00% 10.01% – 99.99% 100% Back-testing We monitor the three key risk parameters – PD, EAD, and LGD – on a monthly basis. Every quarter, the back-testing results are reported to OSFI and are presented to the business and Risk Management senior management for review and challenge. For each parameter, we identify any portfolios whose realized values are significantly above or significantly below expectations and then test to see if this deviation is explainable by changes in the economy. If the results indicate that a parameter model may be losing its predictive power, we prioritize that model for review and update. CIBC 2016 ANNUAL REPORT 51 Management’s discussion and analysis Stress testing As part of our regular credit portfolio management process, we conduct stress testing and scenario analyses on our portfolio to quantitatively assess the impact of various historical, as well as hypothetical, stressed conditions, versus limits determined in accordance with our risk appetite. Scenarios are selected to test our exposures to specific industries (e.g., oil and gas and real estate), products (e.g., mortgages and cards), or geographic regions (e.g., Europe and Caribbean). Results from stress testing are a key input into management decision making, including the determination of limits and strategies for managing our credit exposure. See the “Real estate secured personal lending” section for further discussion on our residential mortgage portfolio stress testing. Exposure to credit risk The following table presents the exposure to credit risk, which is measured as EAD for on- and off-balance sheet financial instruments. EAD represents the estimate of the amount which will be drawn at the time of default. The portfolios are categorized based upon how we manage the business and the associated risks. Amounts provided are net of the CVA related to financial guarantors, derivative master netting agreements, and before allowance for credit losses and other risk mitigation. Non-trading equity exposures are not included in the table below as they have been deemed immaterial under the OSFI guidelines, and hence, are subject to 100% risk-weighting. $ millions, as at October 31 Business and government portfolios Corporate Drawn Undrawn commitments Repo-style transactions Other off-balance sheet OTC derivatives $ 2016 Total 76,177 36,990 53,677 18,579 9,001 $ AIRB approach Standardized approach $ $ 64,578 37,496 31,447 15,694 7,481 AIRB approach Standardized approach 72,807 36,845 53,644 18,350 9,001 190,647 44,055 4,670 10,020 753 3,581 63,079 10,715 1,011 22,720 62,107 6,005 102,558 356,284 76,263 280,021 201,580 18,375 219,955 21,597 47,140 319 69,056 9,671 2,026 32 11,729 300,740 18,863 675,887 76,263 $ 3,370 145 33 229 – 3,777 4,773 – – – – 4,773 1,940 – – – 167 2,107 10,657 – 10,657 2,645 – 2,645 – – – – 794 26 – 820 3,465 – 14,122 – 194,424 156,696 48,828 4,670 10,020 753 3,581 67,852 12,655 1,011 22,720 62,107 6,172 104,665 366,941 76,263 290,678 204,225 18,375 222,600 21,597 47,140 319 69,056 10,465 2,052 32 12,549 304,205 18,863 690,009 76,263 37,498 4,812 7,410 884 3,666 54,270 12,889 877 33,800 61,022 5,153 113,741 324,707 64,407 260,300 182,779 21,396 204,175 20,435 44,983 304 65,722 9,268 1,888 36 11,192 281,089 15,876 621,672 64,407 $ 2015 Total 67,768 37,608 31,459 16,156 7,481 160,472 42,702 4,812 7,410 884 3,666 59,474 14,263 877 33,800 61,022 5,179 115,141 335,087 64,407 270,680 185,381 21,396 206,777 20,435 44,983 304 65,722 10,030 1,914 36 11,980 284,479 15,876 635,442 64,407 3,190 112 12 462 – 3,776 5,204 – – – – 5,204 1,374 – – – 26 1,400 10,380 – 10,380 2,602 – 2,602 – – – – 762 26 – 788 3,390 – 13,770 – Sovereign Drawn Undrawn commitments Repo-style transactions Other off-balance sheet OTC derivatives Banks Drawn Undrawn commitments Repo-style transactions Other off-balance sheet OTC derivatives Gross business and government portfolios Less: Repo-style transaction collateral Net business and government portfolios Retail portfolios Real estate secured personal lending Drawn Undrawn commitments Qualifying revolving retail Drawn Undrawn commitments Other off-balance sheet Other retail Drawn Undrawn commitments Other off-balance sheet Total retail portfolios Securitization exposures (1) Gross credit exposure Less: Repo-style transaction collateral Net credit exposure (1) Under IRB approach. $ 599,624 $ 14,122 $ 613,746 $ 557,265 $ 13,770 $ 571,035 Net credit exposure increased by $42.7 billion in 2016, primarily due to business growth in our Canadian lending portfolios, as well as the impact of the appreciation of the U.S. dollar. 52 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Exposures subject to the standardized approach Exposures within CIBC FirstCaribbean and certain exposures to individuals for non-business purposes do not have sufficient historical data to support the AIRB approach for credit risk, and are subject to the standardized approach. The standardized approach utilizes a set of risk weightings defined by the regulators, as opposed to the more data intensive AIRB approach. A detailed breakdown of our standardized exposures before allowance for credit losses by risk-weight category is provided below. $ millions, as at October 31 Risk-weight category Corporate Sovereign Bank Real estate secured personal lending Other retail 0% $ – $ 3,673 – – – 20% – 315 1,595 – – $ 3,673 $ 1,910 35% 50% $ $ – – – – – – $ $ – 182 327 – – 509 $ 75% – – – 2,382 751 $ 100% 3,737 558 185 – – 150% $ 40 $ 45 – 263 69 $ 2016 Total 3,777 4,773 2,107 2,645 820 2015 Total 3,776 5,204 1,400 2,602 788 $ 3,133 $ 4,480 $ 417 $ 14,122 $ 13,770 Trading credit exposures We have trading credit exposure (also called counterparty credit exposure) that arises from our OTC derivatives and our repo-style transactions. The nature of our derivatives exposure and how it is mitigated is further explained in Note 12 to the consolidated financial statements. Our repo-style transactions consist of our securities bought or sold under repurchase agreements, and our securities borrowing and lending activity. The PD of our counterparties is estimated using models consistent with the models used for our direct lending activity. Due to the fluctuations in the market values of interest rates, exchange rates, and equity and commodity prices, counterparty credit exposure cannot be quantified with certainty at the inception of the trade. Counterparty credit exposure is estimated using the current fair value of the exposure, plus an estimate of the maximum potential future exposure due to changes in the fair value. Credit risk associated with these counterparties is managed within the same process as our lending business, and for the purposes of credit adjudication, the exposure is aggregated with any exposure arising from our lending business. The majority of our counterparty credit exposure benefits from the credit risk mitigation techniques discussed above, including daily re-margining, and posting of collateral. We are also exposed to wrong-way risk. Specific wrong-way risk arises when CIBC receives financial collateral issued (or an underlying reference obligation of a transaction is issued) by the counterparty itself, or by a related entity that would be considered to be part of the same common risk group. General wrong-way risk arises when the exposure and/or collateral pledged to CIBC is highly correlated to that of the counterparty. Exposure to wrong-way risk with derivative counterparties is monitored by Capital Markets Risk Management. Where we may be exposed to wrong-way risk, our adjudication procedures subject those transactions to a more rigorous approval process. The exposure may be hedged with other derivatives to further mitigate the risk that can arise from these transactions. We establish a CVA for expected future credit losses from each of our derivative counterparties. The expected future credit loss is a function of our estimates of the PD, the estimated loss in the event of default, and other factors such as risk mitigants. Rating profile of OTC derivative mark-to-market (MTM) receivables $ billions, as at October 31 Investment grade Non-investment grade Watch list Default Unrated 2016 Exposure (1) $ 7.36 1.43 0.03 0.05 0.02 82.8 % 16.1 0.3 0.6 0.2 $ 7.59 0.80 0.01 – 0.10 2015 89.3 % 9.4 0.1 – 1.2 $ 8.89 100.0 % $ 8.50 100.0 % (1) MTM of the OTC derivative contracts is after the impact of master netting agreements, but before any collateral. Concentration of exposures Concentration of credit risk exists when a number of obligors are engaged in similar activities, or operate in the same geographical areas or industry sectors, and have similar economic characteristics so that their ability to meet contractual obligations is similarly affected by changes in economic, political, or other conditions. Geographic distribution The following table provides a geographic distribution of our business and government exposures under the AIRB approach. The classification of geography is based upon the country of ultimate risk. Amounts are before allowance for credit losses and risk mitigation, and net of the CVA related to financial guarantors and $76.3 billion (2015: $64.4 billion) of collateral held for our repurchase agreement activities. $ millions, as at October 31, 2016 Drawn Undrawn commitments Repo-style transactions Other off-balance sheet OTC derivatives October 31, 2015 $ Canada 75,116 32,082 7,497 54,925 8,887 $ $ 178,507 159,525 U.S. 38,792 7,923 1,675 21,077 3,885 73,352 76,685 $ $ $ $ Europe 5,244 1,725 460 4,717 3,687 $ Other 8,425 796 489 491 2,128 $ $ 15,833 15,689 $ 12,329 $ 8,401 Total 127,577 42,526 10,121 81,210 18,587 280,021 260,300 $ $ $ CIBC 2016 ANNUAL REPORT 53 Management’s discussion and analysis Business and government exposure by industry groups The following table provides an industry-wide breakdown of our business and government exposures under the AIRB approach. Amounts are before allowance for credit losses and risk mitigation, and net of the CVA related to financial guarantors and $76.3 billion (2015: $64.4 billion) of collateral held for our repurchase agreement activities. $ millions, as at October 31 Commercial mortgages Financial institutions Retail and wholesale Business services Manufacturing – capital goods Manufacturing – consumer goods Real estate and construction Agriculture Oil and gas Mining Forest products Hardware and software Telecommunications and cable Broadcasting, publishing and printing Transportation Utilities Education, health, and social services Governments $ Drawn 1,674 36,700 4,184 5,807 1,984 2,722 27,502 5,159 6,873 1,908 444 631 818 523 3,039 3,382 2,588 21,639 Undrawn commitments Repo-style transactions Other off- balance sheet OTC derivatives $ 20 4,388 2,450 2,294 2,111 1,530 5,864 1,279 7,825 2,407 461 437 839 183 1,728 4,873 796 3,041 $ – 9,574 – 18 – – – – – – – – – – – – 29 500 $ – 73,442 273 489 269 229 978 61 963 731 137 29 265 172 512 2,233 96 331 $ – $ 10,623 (1) 60 74 287 65 205 83 1,994 58 30 11 118 11 588 709 115 3,556 2016 Total 1,694 134,727 6,967 8,682 4,651 4,546 34,549 6,582 17,655 5,104 1,072 1,108 2,040 889 5,867 11,197 3,624 29,067 $ 2015 Total 8,066 127,879 6,806 7,312 4,528 4,065 24,074 6,278 17,276 4,816 1,283 1,112 2,241 681 4,999 10,943 2,971 24,970 $ 127,577 $ 42,526 $ 10,121 $ 81,210 $ 18,587 $ 280,021 $ 260,300 (1) Includes $2 million (2015: $9 million) of fair value net of CVA with financial guarantors hedging our derivative contracts. As part of our risk mitigation strategy, we may use credit protection purchases as a hedge against customer or industry sector concentration. As at October 31, 2016, we had credit protection purchased totalling $161 million (2015: $386 million) related to our business and government loans. Oil and gas exposure The following table provides a breakdown of our exposure to the oil and gas industry under the AIRB approach. Of these exposures, 70% are investment grade based on our internal risk rating, which incorporates security pledged (equivalent to S&P/Moody’s rating of BBB-/Baa3 and higher). Undrawn commitments Other off- balance sheet OTC derivatives $ $ $ 3,844 1,938 377 1,149 201 316 7,825 9,473 $ $ $ 322 99 33 447 36 26 963 784 $ 803 284 13 864 4 26 $ Total 8,628 4,282 578 2,612 598 957 $ $ 1,994 951 $ $ 17,655 17,276 $ millions, as at October 31, 2016 Exploration and production Midstream Downstream Integrated Oil and gas services Petroleum distribution October 31, 2015 Drawn 3,659 1,961 155 152 357 589 6,873 6,068 $ $ $ 54 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Credit quality of portfolios Credit quality of the risk-rated portfolios The following table provides the credit quality of the risk-rated portfolios. Amounts provided are before allowance for credit losses, and after credit risk mitigation, CVA, and collateral on repurchase agreement activities. The obligor grade is our assessment of the creditworthiness of the obligor, without respect to the collateral held in support of the exposure. The LGD estimate would reflect our assessment of the value of the collateral at the time of default of the obligor. For slotted exposures, the slotting category reflects our assessment of both the creditworthiness of the obligor, as well as the value of the collateral. $ millions, as at October 31 Obligor grade Investment grade Non-investment grade Watch list Default Total risk-rated exposure LGD estimate Less than 10% 10% – 25% 26% – 45% 46% – 65% 66% – 100% Strong Good Satisfactory Weak Default Total slotted exposure Total business and government portfolios Corporate 89,034 49,330 1,969 803 141,136 Corporate 14,180 33,499 65,821 26,931 705 141,136 $ $ $ $ EAD Sovereign 53,016 $ 778 4 – 53,798 $ Sovereign 45,178 $ 2,318 4,317 1,906 79 53,798 $ Banks 81,693 1,698 1 – 83,392 Banks 57,605 14,239 10,078 966 504 83,392 $ $ $ $ 2016 2015 Total 223,743 51,806 1,974 803 278,326 Total 116,963 50,056 80,216 29,803 1,288 278,326 1,467 127 86 8 7 1,695 280,021 $ $ $ $ $ $ Total 202,981 47,895 829 525 252,230 Total 109,323 53,774 67,913 20,140 1,080 252,230 7,198 556 264 47 5 8,070 260,300 $ $ $ $ $ $ The total exposures increased by $19.7 billion from October 31, 2015, largely attributable to growth in our Canadian lending portfolios. The investment grade category increased by $20.8 billion from October 31, 2015, while the non-investment grade category was up $3.9 billion. The increase in watch list and default exposures was largely attributable to downgrades in the corporate lending portfolios, related to oil and gas and the exited European leveraged finance portfolio. Credit quality of the retail portfolios The following table presents the credit quality of the retail portfolios. Amounts provided are before allowance for credit losses and after credit risk mitigation. $ millions, as at October 31 Risk level Exceptionally low Very low Low Medium High Default $ Real estate secured personal lending 180,501 19,186 16,833 2,889 354 192 219,955 $ EAD $ Qualifying revolving retail 40,998 6,562 12,409 7,696 1,347 44 69,056 $ 2016 2015 Total 223,014 27,093 34,980 12,991 2,373 289 300,740 $ $ Total 208,690 19,924 39,026 11,110 2,099 240 281,089 $ $ Other retail 1,515 1,345 5,738 2,406 672 53 11,729 $ $ Securitization exposures The following table provides details on our securitization exposures by credit ratings under the IRB approach. $ millions, as at October 31 S&P rating equivalent AAA to BBB- BB+ to BB- Below BB- Unrated 2016 2015 EAD (1) $ $ 11,227 – 13 7,367 18,607 $ $ 9,547 – 13 6,036 15,596 (1) EAD under IRB approach is net of financial collateral of $256 million (2015: $280 million). Real estate secured personal lending Real estate secured personal lending comprises residential mortgages and personal loans and lines secured by residential property (HELOC). This portfolio is low risk, as we have a first charge on the majority of the properties and a second lien on only a small portion of the portfolio. We use the same lending criteria in the adjudication of both first lien and second lien loans. Under the Bank Act (Canada), banks are limited to providing residential real estate loans of no more than 80% of the collateral value. An exception is made for mortgage loans with a higher LTV ratio if they are insured by either CMHC or a private mortgage insurer. Mortgage insurance protects banks from the risk of default by the borrower, over the term of the coverage. Mortgage insurers are subject to regulatory capital requirements, which aim to ensure that they are well capitalized. If a private mortgage insurer becomes insolvent, the Government of Canada has, provided certain conditions are met, obligations in respect of policies underwritten by certain insolvent private mortgage insurers as more fully described in the Protection of Residential Mortgage or Hypothecary Insurance Act (PRMHIA). There is a possibility that losses could be incurred in respect of insured mortgages if, among other CIBC 2016 ANNUAL REPORT 55 Management’s discussion and analysis things, CMHC or the applicable private mortgage insurer denies a claim, or further, if a private mortgage insurer becomes insolvent and either the conditions under the PRMHIA are not met or the Government of Canada denies the claim. In July 2016, as a follow-up to its B-20 guidelines, OSFI released a letter to all federally regulated financial institutions reinforcing its expectation that these institutions engage in prudent underwriting of residential mortgage loans. In October 2016, the Minister of Finance announced changes to strengthen the housing market that will impose the use of the government-posted mortgage qualifying rates on a wider range of insured mortgages, and close loopholes related to the principal residence exemption for capital gains taxes. There will also be a consultation with market participants on an approach to implement risk sharing for insured mortgages (i.e., sharing losses between banks and insurers). Reflective of the regulatory changes relating to mortgage insurance introduced over the past few years, including the most recent changes noted above, and a change in consumer behaviour in response to the series of government tightening measures on high ratio mortgages, we expect our insured mortgage mix as a proportion of total mortgages to decrease at an accelerated rate. The following tables provide details on our residential mortgage and HELOC portfolios: $ billions, as at October 31, 2016 Ontario British Columbia and territories Alberta Quebec Central prairie provinces Atlantic provinces Canadian portfolio (2)(3) International portfolio (2) Total portfolio October 31, 2015 Residential mortgages HELOC (1) Insured Uninsured Uninsured Total Insured (2) Uninsured $ $ $ 46.1 16.6 16.5 7.6 5.0 5.6 97.4 – 97.4 53 % $ 42 66 58 67 67 54 – 41.5 22.7 8.6 5.5 2.4 2.7 83.4 2.5 47 % $ 58 34 42 33 33 46 100 10.3 4.1 2.7 1.5 0.9 0.8 20.3 – 100 % $ 100 100 100 100 100 100 – 53 % $ 85.9 47 % $ 20.3 100 % $ 46.1 16.6 16.5 7.6 5.0 5.6 97.4 – 97.4 47 % $ 38 59 52 60 61 48 – 51.8 26.8 11.3 7.0 3.3 3.5 103.7 2.5 48 % $ 106.2 103.9 63 % $ 61.2 37 % $ 19.5 100 % $ 103.9 56 % $ 80.7 53 % 62 41 48 40 39 52 100 52 % 44 % (1) We did not have any insured HELOCs as at October 31, 2016 and 2015. (2) Geographical location is based on the address of the property managed. (3) 77% (2015: 82%) of insurance on Canadian residential mortgages is provided by CMHC and the remaining by two private Canadian insurers, both rated at least AA (low) by DBRS. The average LTV ratios(1) for our uninsured Canadian and international residential mortgages and HELOCs originated during the year are provided in the following table. We did not acquire uninsured residential mortgages or HELOCs from a third-party for the years presented in the table below. For the year ended October 31 Ontario British Columbia and territories Alberta Quebec Central prairie provinces Atlantic provinces Canadian portfolio (2) International portfolio Residential mortgages 64 % 60 68 67 69 72 64 % 71 % 2016 HELOC 69 % 64 72 72 73 73 68 % n/m Residential mortgages 65 % 61 68 67 69 72 65 % 68 % 2015 HELOC 70 % 65 72 72 73 73 69 % n/m LTV ratios for newly originated residential mortgages and HELOCs are calculated based on weighted average. (1) (2) Geographical location is based on the address of the property managed. n/m Not meaningful. The following table provides the average LTV ratios on our total Canadian residential mortgage portfolio: October 31, 2016 (1) October 31, 2015 (1) Insured Uninsured 57 % 60 % 56 % 59 % (1) LTV ratios for residential mortgages are calculated based on weighted average. The house price estimates for October 31, 2016 and 2015 are based on the Forward Sortation Area (FSA) level indices from the Teranet – National Bank National Composite House Price Index (Teranet) as of September 30, 2016 and 2015, respectively. Teranet is an independent estimate of the rate of change in Canadian home prices. The tables below summarize the remaining amortization profile of our total Canadian and international residential mortgages. The first table provides the remaining amortization periods based on the minimum contractual payment amounts. The second table provides the remaining amortization periods based upon current customer payment amounts, which incorporate payments larger than the minimum contractual amount and/or higher frequency of payments. Contractual payment basis Canadian portfolio October 31, 2016 October 31, 2015 International portfolio October 31, 2016 October 31, 2015 56 CIBC 2016 ANNUAL REPORT Less than 5 years 5 – 10 years 10 – 15 years 15 – 20 years 20 – 25 years 25 – 30 years 30 – 35 years 35 years and above – % – % 8 % 7 % – % 1 % 16 % 16 % 3 % 3 % 27 % 26 % 6 % 7 % 24 % 25 % 30 % 26 % 16 % 16 % 58 % 56 % 8 % 8 % 3 % 7 % 1 % 2 % – % – % – % – % Management’s discussion and analysis Current customer payment basis Canadian portfolio October 31, 2016 October 31, 2015 International portfolio October 31, 2016 October 31, 2015 Less than 5 years 5 – 10 years 10 – 15 years 15 – 20 years 20 – 25 years 25 – 30 years 30 – 35 years 35 years and above 2 % 2 % 8 % 7 % 5 % 6 % 16 % 16 % 8 % 9 % 26 % 26 % 12 % 13 % 23 % 24 % 34 % 33 % 16 % 17 % 37 % 34 % 8 % 7 % 2 % 3 % 2 % 2 % – % – % 1 % 1 % We have two types of condominium exposures in Canada: mortgages and developer loans. Both are primarily concentrated in the Toronto and Vancouver areas. As at October 31, 2016, our Canadian condominium mortgages were $20.6 billion (2015: $18.5 billion) of which 54% (2015: 64%) were insured. Our drawn developer loans were $0.7 billion (2015: $1.0 billion), or 0.8% (2015: 1.4%) of our business and government portfolio, and our related undrawn exposure was $2.2 billion (2015: $1.9 billion). The condominium developer exposure is diversified across 84 projects. We stress test our mortgage and HELOC portfolio to determine the potential impact of different economic events. Our stress tests can use variables such as unemployment rates, debt service ratios and housing price changes, to model potential outcomes for a given set of circumstances. The stress testing involves variables that could behave differently in certain situations. Our main tests use economic variables in a similar range to historical events when Canada experienced economic downturns. Our results show that in an economic downturn, our strong capital position should be sufficient to absorb mortgage and HELOC losses. Credit quality performance As at October 31, 2016, total loans and acceptances after allowance for credit losses were $319.8 billion (2015: $291.0 billion). Consumer loans (comprising residential mortgages, credit cards and personal loans, including student loans) constitute 74% (2015: 74%) of the portfolio, and business and government loans (including acceptances) constitute the remainder of the portfolio. Consumer loans were up by $20.0 billion or 9% from the prior year, primarily due to an increase in residential mortgages of $18.1 billion. Business and government loans (including acceptances) were up $8.8 billion or 12% from the prior year, mainly attributable to the real estate and construction, and financial institutions sectors. The following table provides details of our impaired loans and allowances for credit losses: $ millions, as at or for the year ended October 31 Gross impaired loans Balance at beginning of year Classified as impaired during the year Transferred to not impaired during the year Net repayments Amounts written off Disposals of loans Foreign exchange and other Balance at end of year Allowance for impairment (1) Balance at beginning of year Amounts written off Recoveries of amounts written off in previous years Charge to income statement Interest accrued on impaired loans Foreign exchange and other Balance at end of year Net impaired loans Balance at beginning of year Net change in gross impaired Net change in allowance Balance at end of year Net impaired loans as a percentage of net loans and acceptances Business and government loans Consumer loans $ $ $ $ $ $ 659 1,100 (16) (405) (259) (156) 28 951 313 (259) 14 208 (20) 3 259 346 292 54 692 $ $ $ $ $ $ 760 1,222 (125) (266) (894) – 10 707 333 (894) 169 724 (9) (10) 313 427 (53) 20 394 2016 Total 1,419 2,322 (141) (671) (1,153) (156) 38 1,658 646 (1,153) 183 932 (29) (7) 572 773 239 74 $ $ $ $ $ $ 1,086 0.34% Business and government loans Consumer loans $ $ $ $ $ $ 700 207 (17) (141) (174) – 84 659 337 (174) 10 100 (8) 48 313 363 (41) 24 346 $ $ $ $ $ $ $ $ $ $ $ 734 1,154 (105) (254) (830) – 61 760 307 (830) 176 662 (15) 33 333 427 26 (26) 427 $ 2015 Total 1,434 1,361 (122) (395) (1,004) – 145 1,419 644 (1,004) 186 762 (23) 81 646 790 (15) (2) 773 0.27% (1) Includes collective allowance relating to personal, scored small business and mortgage impaired loans that are greater than 90 days delinquent, and individual allowance. Gross impaired loans As at October 31, 2016, gross impaired loans were $1,658 million, up $239 million from the prior year. The increase was primarily due to an increase in the U.S. oil and gas sector, and an impairment in our exited European leveraged finance portfolio, partially offset by write-offs and lower new classifications in CIBC FirstCaribbean. Approximately 35% of gross impaired loans related to Canada, of which residential mortgages accounted for about half. The remaining gross impaired loans in Canada primarily related to personal lending and the oil and gas sector. Approximately 34% of gross impaired loans related to CIBC FirstCaribbean, of which the residential mortgages and the real estate and construction sectors accounted for the majority. Approximately 19% of gross impaired loans related to the U.S., of which the oil and gas sector accounted for the majority. The increase was driven by higher new classifications, partially offset by a sale of a large exposure, and write-offs in the oil and gas sector. The majority of the remaining gross impaired loans related to the impairment in our exited European leveraged finance portfolio noted above. CIBC 2016 ANNUAL REPORT 57 Management’s discussion and analysis Additional details on the geographic distribution and industry classification of impaired loans are provided in the “Supplementary annual financial information” section. Allowance for impairment Allowance for impairment was $572 million, down $74 million from the prior year. The decrease was due to higher write-offs and lower new classifications in CIBC FirstCaribbean, and higher write-offs in the oil and gas sector in Canada and the U.S., partially offset by the impact of U.S. dollar appreciation on the existing portfolio. Despite an increase in the gross impaired loans from the prior year, the allowance for impairment decreased, due to a higher value of collateral pledged against the newly impaired loans. Exposure to certain countries and regions Over the past several years, a number of countries in Europe experienced credit concerns. The following tables provide our exposure to European countries, both within and outside the Eurozone. Direct exposures to certain countries and regions Our direct exposures presented in the tables below comprise (A) funded – on-balance sheet loans (stated at amortized cost net of allowances, if any), deposits with banks (stated at amortized cost net of allowances, if any) and securities (stated at fair value); (B) unfunded – unutilized credit commitments, letters of credit, and guarantees (stated at notional amount net of allowances, if any) and sold credit default swap (CDS) contracts where we do not benefit from subordination (stated at notional amount less fair value); and (C) derivative MTM receivables (stated at fair value) and repo-style transactions (stated at fair value). Of our total direct exposures to Europe, approximately 34% (2015: 91%) is to entities in countries with Aaa/AAA ratings from at least one of Moody’s or S&P, with the change in ratio this year largely due to a downgrade of the United Kingdom, following the outcome of their referendum to exit the European Union. The following table provides a summary of our positions in this business: $ millions, as at October 31, 2016 Corporate Sovereign Bank Total funded (A) Corporate Bank Total unfunded (B) Funded Unfunded Direct exposures Austria Belgium Finland France Germany Ireland Italy Luxembourg Malta Netherlands Spain Total Eurozone Czech Republic Denmark Norway Poland Sweden Switzerland Turkey United Kingdom Total non-Eurozone Total Europe (2) October 31, 2015 $ $ $ – – 11 37 78 1 – – – 191 – 318 – – – – 295 290 – 781 $ $ $ 1,366 1,684 2,017 $ $ $ $ $ $ 220 – 1 – 525 – – – – 1 – 747 – – – – 310 – – 344 654 1,401 764 $ $ $ $ $ $ – 8 – 56 383 – – – – 157 1 605 – 15 1 2 37 40 256 532 883 1,488 1,609 $ $ $ $ $ $ 220 8 12 93 986 1 – – – 349 1 1,670 – 15 1 2 642 330 256 1,657 2,903 4,573 4,390 $ $ $ – – 77 70 3 – – 6 – 123 – 279 – – 319 – 91 17 – 2,641 (1) $ $ $ 3,068 3,347 4,264 $ $ $ $ $ $ 3 – – 6 24 – – – – 10 – 43 – 6 – – – – 43 204 253 296 603 $ $ $ $ $ $ 3 – 77 76 27 – – 6 – 133 – 322 – 6 319 – 91 17 43 2,845 3,321 3,643 4,867 (1) (2) Includes $180 million of exposure (notional value of $202 million and fair value of $22 million) on a CDS sold on a bond issue of a U.K. corporate entity, which is guaranteed by a financial guarantor. We currently hold the CDS sold as part of our structured credit run-off business. A payout on the CDS sold would be triggered by the bankruptcy of the reference entity, or a failure of the entity to make a principal or interest payment as it is due, as well as a failure of the financial guarantor to meet its obligation under the guarantee. Includes $162 million (2015: $220 million) of loans, net of allowance, related to the discontinued European leveraged finance business. 58 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Derivative MTM receivables and repo-style transactions Direct exposures (continued) $ millions, as at October 31, 2016 Corporate Sovereign Austria Belgium Finland France Germany Ireland Italy Luxembourg Malta Netherlands Spain Total Eurozone Czech Republic Denmark Norway Poland Sweden Switzerland Turkey United Kingdom Total non-Eurozone Total Europe October 31, 2015 $ $ $ $ $ $ – 6 5 31 – – – 1 – 109 – 152 – – – – 13 – – 581 594 746 841 $ $ $ – – – 30 – – – – – – – 30 953 – 73 – – – – – $ $ $ 1,026 1,056 245 Bank 25 25 32 1,595 1,249 8 6 71 1 64 51 3,127 – – – – 140 2,355 – 4,487 6,982 10,109 8,132 $ $ $ $ $ $ Gross exposure (1) Collateral held (2) Net exposure (C) $ $ $ $ $ $ 25 31 37 1,656 1,249 8 6 72 1 173 51 3,309 953 – 73 – 153 2,355 – 5,068 8,602 11,911 9,218 $ $ $ $ $ $ 25 24 31 1,623 1,215 2 – – – 62 51 3,033 904 – 73 – 140 2,306 – 4,349 7,772 10,805 8,142 $ $ $ $ $ $ – 7 6 33 34 6 6 72 1 111 – 276 49 – – – 13 49 – 719 830 1,106 1,076 Total direct exposure (A)+(B)+(C) $ $ $ $ $ $ 223 15 95 202 1,047 7 6 78 1 593 1 2,268 49 21 320 2 746 396 299 5,221 7,054 9,322 10,333 (1) The amounts shown are net of CVA. (2) Collateral on derivative MTM receivables was $1.2 billion (2015: $1.1 billion), collateral on repo-style transactions was $9.6 billion (2015: $7.0 billion), and both are composed of cash and investment grade debt securities. Indirect exposures to certain countries and regions Our indirect exposures comprise securities (primarily CLOs classified as loans on our consolidated balance sheet), and written credit protection on securities in our structured credit run-off business where we benefit from subordination to our position. Our gross exposure before subordination is stated at carrying value for securities and notional, less fair value for derivatives where we have written protection. $ millions, as at October 31, 2016 Finland France Germany Greece Ireland Italy Luxembourg Netherlands Spain Total Eurozone Denmark Sweden United Kingdom Total non-Eurozone Total exposure October 31, 2015 Total indirect exposure $ $ $ $ $ $ 5 22 8 5 5 5 20 31 11 112 2 2 16 20 132 404 In addition to the indirect exposures above, we have indirect exposure to European counterparties when we have taken debt or equity securities issued by European entities as collateral for our securities lending and borrowing activity, from entities that are not in Europe. Our indirect exposure was $399 million (2015: $533 million). CIBC 2016 ANNUAL REPORT 59 Management’s discussion and analysis Selected exposures in certain selected activities In response to the recommendations of the Financial Stability Board, this section provides information on our other selected activities within our continuing and exited businesses that may be of particular interest to investors based on their risk characteristics and the current market environment. U.S. real estate finance In our U.S. real estate finance business, we operate a full-service platform which originates commercial mortgages to mid-market clients, under four programs. The construction program offers floating-rate financing to properties under construction. The two interim programs offer fixed- and floating-rate financing, typically with an average term of one to three years for properties that are fully leased or with some leasing or renovation yet to be done. In addition, the interim programs provide operating lines to select borrowers. These programs provide feeder product for the group’s permanent fixed-rate loan program. Once the construction and interim phases are complete and the properties are income producing, borrowers are offered fixed-rate financing within the permanent program (typically with average terms of 10 years). The following table provides a summary of our positions in this business: $ millions, as at October 31, 2016 Construction program Interim program Permanent program Exposure, net of allowance Of the above: Net impaired On credit watch list Exposure, net of allowance, as at October 31, 2015 Drawn 118 8,604 105 8,827 43 138 7,600 $ $ $ $ Undrawn $ $ $ $ 418 529 – 947 – 10 453 As at October 31, 2016, the allowance for credit losses for this portfolio was $24 million (2015: $27 million). During the year, the provision for credit losses was $1 million (2015: $14 million). The business also maintains commercial mortgage-backed securities (CMBS) trading and distribution capabilities. As at October 31, 2016, there was no CMBS inventory (2015: nil). Settlement risk Settlement risk is the risk that during an agreed concurrent exchange of currency or principal payments, the counterparty will fail to make its payment to CIBC. This risk can arise in general trading activities and from payment and settlement system participation. Many global settlement systems offer significant risk reduction benefits through complex risk mitigation frameworks. Bilateral payment netting agreements may be put in place to mitigate risk by reducing the aggregate settlement amount between counterparties. Further, we participate in several North American payment and settlement systems, including a global foreign exchange multilateral netting system. We also use financial intermediaries to access some payment and settlement systems, and for certain trades, we may utilize an established clearing house to minimize settlement risk. Transactions settled outside of payment and settlement systems or clearing houses require approval of credit facilities for counterparties, either as pre-approved settlement risk limits or payment-versus-payment arrangements. 60 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Market risk Market risk is the risk of economic financial loss in our trading and non-trading portfolios from adverse changes in underlying market factors, including interest rates, foreign exchange rates, equity market prices, commodity prices, credit spreads, and customer behaviour for retail products. Market risk arises in CIBC’s trading and treasury activities, and encompasses all market related positioning and market making activity. The trading book consists of positions in financial instruments and commodities held to meet the near-term needs of our clients. The non-trading book consists of positions in various currencies that are related to asset/liability management (ALM) and investment activities. Governance and management Market risk is managed through the three lines of defence model. Front line businesses are responsible for managing their risk – this is the first line of defence. The second line of defence is Risk Management, which has a dedicated market risk manager for each trading business, supplemented by regional risk managers located in all of our major trading centres, facilitating comprehensive risk coverage, including the measurement, monitoring and control of market risk. Compliance and other oversight functions also provide independent oversight for market and pension risks. Internal Audit provides the third line of defence, with independent assessment of the design and operating effectiveness of risk management controls, processes and systems. Senior management reports material risk matters to the GRC and RMC at least quarterly, including material transactions, limit compliance, and portfolio trends. Policies We have comprehensive policies for the management of market risk. These policies are related to the identification and measurement of various types of market risk, their inclusion in the trading book, and to the establishment of limits within which we monitor, manage, and report our overall exposures. Our policies also outline the requirements for the construction of valuation models, independent checking of the valuation of positions, the establishment of valuation adjustments, and alignment with accounting policies including MTM and mark-to-model methodologies. Market risk limits We have risk tolerance levels, expressed in terms of statistically based VaR measures, potential stress losses, and notional or other limits as appropriate. We use a multi-tiered approach to set limits on the amounts of risk that we can assume in our trading and non-trading activities, as follows: (cid:129) (cid:129) Board limits approved by the RMC control consolidated market risk; Management limits control market risk for CIBC overall and are lower than the Board limits to allow for a buffer in the event of extreme market moves and/or extraordinary client needs; Tier 2 limits control market risk at the business unit level; and Tier 3 limits control market risk at the sub-business unit or desk level. Tier 3 limits are set on VaR and a variety of metrics including stress. (cid:129) (cid:129) Management limits are established by the CRO, consistent with the risk appetite statement approved by the RMC. Tier 2 and Tier 3 limits are approved at levels of management commensurate with risk assumed. Process and control Market risk exposures are monitored daily against approved risk limits, and control processes are in place to monitor that only authorized activities are undertaken. We generate daily risk and limit-monitoring reports, based on the previous day’s positions. Summary market risk and limit compliance reports are produced and reviewed periodically with the GRC and RMC. Risk measurement We use the following measures for market risk: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) VaR enables the meaningful comparison of the risks in different businesses and asset classes. VaR is determined by the combined modelling of VaR for each of interest rate, credit spread, equity, foreign exchange, commodity, and debt specific risks, along with the portfolio effect arising from the interrelationship of the different risks (diversification effect): (cid:129) (cid:129) Interest rate risk measures the impact of changes in interest rates and volatilities on cash instruments and derivatives; Credit spread risk measures the impact of changes in credit spreads of provincial, municipal and agency bonds, sovereign bonds, corporate bonds, securitized products, and credit derivatives such as credit default swaps; Equity risk measures the impact of changes in equity prices, volatilities, and dividend yields; Foreign exchange risk measures the impact of changes in foreign exchange rates and volatilities; Commodity risk measures the impact of changes in commodity prices and volatilities, including the basis between related commodities; Debt specific risk measures the impact of changes in the volatility of the yield of a debt instrument as compared with the volatility of the yield of a representative bond index; and Diversification effect reflects the risk reduction achieved across various financial instrument types, counterparties, currencies and regions. The extent of diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. Price sensitivity measures the change in value of a portfolio to a small change in a given underlying parameter, so that component risks may be examined in isolation, and the portfolio rebalanced accordingly to achieve a desired exposure; Stressed VaR enables the meaningful comparison of the risks in different businesses and asset classes under stressful conditions. Changes to rates, prices, volatilities, and spreads over a ten day horizon from a stressful historical period are applied to current positions and determine stressed VaR; IRC measures the required capital due to credit migration and default risk for debt securities held in the trading portfolios; Back-testing validates the effectiveness of risk measurement through analysis of observed and theoretical profit and loss outcomes; and Stress testing and scenario analyses provide insight into portfolio behaviour under extreme circumstances. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) CIBC 2016 ANNUAL REPORT 61 Management’s discussion and analysis The following table provides balances on the consolidated balance sheet which are subject to market risk. Certain differences between accounting and risk classifications are detailed in the footnotes below: $ millions, as at October 31 2016 2015 Consolidated balance sheet Cash and non-interest-bearing deposits with banks $ Interest-bearing deposits with banks Securities Cash collateral on securities borrowed Securities purchased under resale agreements Loans Residential mortgages Personal Credit card Business and government Allowance for credit losses Derivative instruments 3,500 10,665 87,423 5,433 28,377 187,298 38,041 12,332 71,437 (1,691) 27,762 Subject to market risk Subject to market risk Non- trading Not subject to market risk Consolidated balance sheet 1,645 10,318 39,357 5,433 28,377 187,298 38,041 12,332 64,901 (1,691) 3,632 $ 1,855 – – – – – – – – – – $ 3,053 $ 15,584 74,982 3,245 30,089 169,258 36,517 11,804 65,276 (1,670) 26,342 Trading $ – 501 45,299 (1) – – – – – 5,658 (2) – 22,457 (3) Non- trading 1,770 15,083 29,683 3,245 30,089 169,258 36,517 11,804 59,618 (1,670) 3,885 Trading $ $ – 347 48,066 (1) – – – – – 6,536 (2) – 24,130 (3) Customers’ liability under acceptances Other assets 12,364 18,416 – 1,466 12,364 9,190 – 7,760 9,796 19,033 – 1,381 9,796 10,260 Not subject to market risk Non-traded risk primary risk sensitivity $ 1,283 – – – Foreign exchange Interest rate Equity, interest rate Interest rate – Interest rate – – – – – – Interest rate Interest rate Interest rate Interest rate Interest rate Interest rate, foreign exchange Interest rate 7,392 Interest rate, equity, foreign exchange – Deposits Obligations related to securities sold short Cash collateral on securities lent Obligations related to securities sold under repurchase agreements Derivative instruments Acceptances Other liabilities Subordinated indebtedness $ 501,357 $ 80,545 $ 411,197 $ 9,615 $ 463,309 $ 75,296 $ 379,338 $ 8,675 $ 395,647 $ 331 (4) $ 352,522 $ 42,794 $ 366,657 $ 363 (4) $ 327,557 $ 38,737 Interest rate 10,338 2,518 11,694 28,807 12,395 12,919 3,366 10,256 – – 24,433 (3) – 927 – 82 2,518 11,694 4,374 12,395 5,445 3,366 – – – – – 6,547 – 9,806 1,429 8,914 29,057 9,796 12,223 3,874 9,468 – – 24,655 (3) – 1,038 – 338 1,429 8,914 4,402 9,796 5,138 3,874 – – – – – 6,047 – Interest rate Interest rate Interest rate Interest rate, foreign exchange Interest rate Interest rate Interest rate $ 477,684 $ 35,947 $ 392,396 $ 49,341 $ 441,756 $ 35,524 $ 361,448 $ 44,784 (1) Excludes securities in the structured credit run-off business of $496 million (2015: $565 million), and certain other securities that are considered non-trading for market risk purposes. (2) Excludes $103 million (2015: $333 million) of loans that are warehoused for future securitization purposes. These are considered non-trading for market risk purposes. (3) Excludes derivatives relating to the structured credit and other run-off businesses which are considered non-trading for market risk purposes. (4) Comprises FVO deposits which are considered trading for market risk purposes. Trading activities We hold positions in traded financial contracts to meet client investment and risk management needs. Trading revenue (net interest income or non- interest income) is generated from these transactions. Trading instruments are recorded at fair value and include debt and equity securities, as well as interest rate, foreign exchange, equity, commodity, and credit derivative products. Value-at-Risk Our VaR methodology is a statistical technique that measures the potential overnight loss at a 99% confidence level. We use a full revaluation historical simulation methodology to compute VaR, stressed VaR and other risk measures. Although a valuable guide to risk, VaR should always be viewed in the context of its limitations. For example: (cid:129) (cid:129) The use of historical data for estimating future events will not encompass all potential events, particularly those that are extreme in nature; The use of a one-day holding period assumes that all positions can be liquidated or the risks offset in one day. This may not fully reflect the market risk arising at times of severe illiquidity, when a one-day period may be insufficient to liquidate or hedge all positions fully; The use of a 99% confidence level does not take into account losses that might occur beyond this level of confidence; and VaR is calculated on the basis of exposures outstanding at the close of business and assumes no management action to mitigate losses. (cid:129) (cid:129) The VaR table below presents market risks by type of risk and in aggregate. The risks are interrelated and the diversification effect reflects the reduction of risk due to portfolio effects among the trading positions. Our trading risk exposures to interest rates and credit spreads arise from activities in the global debt and derivative markets, particularly from transactions in the Canadian, U.S., and European markets. The primary instruments are government and corporate debt, and interest rate derivatives. The majority of the trading exposure to foreign exchange risk arises from transactions involving the Canadian dollar, U.S. dollar, Euro, pound sterling, Australian dollar, Chinese yuan, and Japanese yen, whereas the primary risks of losses in equities are in the U.S., Canadian, and European markets. Trading exposure to commodities arises primarily from transactions involving North American natural gas, crude oil products, and precious metals. 62 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis VaR by risk type – trading portfolio $ millions, as at or for the year ended October 31 Interest rate risk Credit spread risk Equity risk Foreign exchange risk Commodity risk Debt specific risk Diversification effect (1) $ High 4.4 7.0 6.0 5.0 5.6 2.1 n/m $ Low 1.2 1.7 1.4 0.7 1.0 0.8 n/m 2016 As at Average $ 2.1 2.5 4.2 1.8 2.9 1.1 (9.0) $ 2.2 3.4 2.9 1.8 1.9 1.3 (7.7) $ High 3.3 4.6 6.3 2.5 3.0 3.0 n/m $ Low 0.9 1.7 1.3 0.4 0.6 1.1 n/m 2015 As at Average $ 1.6 2.3 2.0 1.3 1.5 1.7 (7.0) $ 1.5 2.8 2.3 0.9 1.6 2.0 (7.1) Total VaR (one-day measure) $ 9.9 $ 3.1 $ 5.6 $ 5.8 $ 7.3 $ 2.7 $ 3.4 $ 4.0 (1) Total VaR is less than the sum of the VaR of the different market risk types due to risk offsets resulting from a portfolio diversification effect. n/m Not meaningful. It is not meaningful to compute a diversification effect because the high and low may occur on different days for different risk types. Average total VaR for the year ended October 31, 2016 was up $1.8 million from the prior year. The increase was driven by an increase in foreign exchange, interest rate, credit spread, equity and commodity risks, partially offset by a decrease in debt specific risk. Stressed VaR The stressed VaR measure is intended to replicate the VaR calculation that would be generated for our current portfolio if the values of the relevant market risk factors were sourced from a period of stressed market conditions. The model inputs are calibrated to historical data from a continuous 12-month period of significant financial stress relevant to our current portfolio since December 2006. Our current stressed VaR period is from July 8, 2008 to July 6, 2009. Stressed VaR by risk type – trading portfolio $ millions, as at or for the year ended October 31 Interest rate risk Credit spread risk Equity risk Foreign exchange risk Commodity risk Debt specific risk Diversification effect (1) $ High 21.5 14.9 5.0 13.1 8.9 4.5 n/m $ Low 5.2 8.0 0.9 0.5 1.5 1.9 n/m $ As at 11.7 11.4 2.7 1.1 3.1 2.6 (25.8) 2016 Average $ 9.4 11.2 2.0 2.8 3.2 2.9 (22.0) $ High 15.9 19.0 16.8 11.0 10.1 5.3 n/m $ Low 2.5 9.3 1.1 0.6 1.1 2.0 n/m $ As at 9.3 10.9 4.2 3.4 2.1 2.5 (20.8) 2015 Average $ 6.7 13.5 2.4 3.8 4.0 3.7 (20.8) Stressed total VaR (one-day measure) $ 16.1 $ 4.9 $ 6.8 $ 9.5 $ 27.4 $ 8.7 $ 11.6 $ 13.3 (1) Stressed total VaR is less than the sum of the VaR of the different market risk types due to risk offsets resulting from a portfolio diversification effect. n/m Not meaningful. It is not meaningful to compute a diversification effect because the high and low may occur on different days for different risk types. Average stressed total VaR for the year ended October 31, 2016 was down $3.8 million from the prior year. The decrease was driven by a reduction in our credit spread, foreign exchange, commodity, debt specific and equity risks, partially offset by an increase in interest rate risk. Incremental risk charge IRC is a measure of default and migration risk for debt securities held in the trading portfolios. Our IRC methodology is a statistical technique that measures the risk of issuer migration and default over a period of one year by simulating changes in issuer credit rating. Validation of the model included testing of the liquidity horizon, recovery rate, correlation, and PD and migration. IRC – trading portfolio $ millions, as at or for the year ended October 31 Default risk Migration risk High 102.5 80.3 $ Low 42.2 21.1 $ 2016 As at Average $ 72.0 57.9 $ 64.6 32.8 $ High 156.6 50.9 Low 63.4 26.4 $ 2015 As at Average $ 64.2 27.3 $ 94.6 40.3 IRC (one-year measure) $ 137.1 $ 73.0 $ 129.9 $ 97.4 $ 202.4 $ 91.5 $ 91.5 $ 134.9 Average IRC for the year ended October 31, 2016 was down $37.5 million from the prior year due to the changes in the composition of fixed income instruments in the trading portfolio. Back-testing To determine the reliability of the trading VaR model, outcomes are monitored regularly through a back-testing process to test the validity of the assumptions and the parameters used in the trading VaR calculation. The back-testing process includes calculating a hypothetical or static profit and loss and comparing that result with calculated VaR. Static profit and loss represents the change in value of the prior day’s closing portfolio due to each day’s price movements, on the assumption that the contents of the portfolio remained unchanged. The back-testing process is conducted on a daily basis at the consolidated CIBC level. Back-testing is also performed for business lines and individual portfolios. Static profit and loss and trading losses in excess of the one-day VaR are investigated. The back-testing process, including the investigation of results, is performed by risk professionals who are independent of those responsible for development of the model. Internal Audit also reviews our models, validation processes, and results of our back-testing. Based on our back-testing results, we are able to ensure that our VaR model continues to appropriately measure risk. During the year, there were two negative back-testing breaches of the total VaR measure, in line with statistical expectations. CIBC 2016 ANNUAL REPORT 63 Management’s discussion and analysis Trading revenue Trading revenue (TEB) comprises both trading net interest income and non-interest income and excludes underwriting fees and commissions. Trading revenue (TEB) in the charts below excludes positions described in the “Structured credit run-off business” section of the MD&A and certain other exited portfolios. During the year, trading revenue (TEB) was positive for 99.6% of the days. The largest gain of $22.4 million occurred on August 4, 2016. It was attributable to a large client transaction within the commodities business. The largest loss of $0.3 million occurred on October 26, 2016, driven by movement in commodity prices. Average daily trading revenue (TEB) was $5.4 million during the year, and the average daily TEB was $1.9 million. Frequency distribution of daily 2016 trading revenue (TEB) The histogram below presents the frequency distribution of daily trading revenue (TEB) for 2016. s y a D e u n e v e R i g n d a r T 60 50 40 30 20 10 0 (1) 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 $ millions 20 21 or more Trading revenue (TEB) versus VaR The trading revenue (TEB) versus VaR graph below shows the current year’s daily trading revenue (TEB) against the close of business day VaR measures. Trading revenue distribution on which VaR is calculated is not on a TEB basis. Trading Revenue (TEB) VaR s n o i l l i m $ 25 20 15 10 5 0 (5) (10) (15) Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Stress testing and scenario analysis Stress testing and scenario analyses are designed to add insight to possible outcomes of abnormal market conditions, and to highlight possible risk concentrations. Our stress testing and scenario analyses measure the effect on portfolio values of a wide range of extreme moves in market risk factors. The methodology is a one-month stress test scenario and assumes that no actions are taken during the stress event to mitigate risk, reflecting the decreased liquidity that frequently accompanies market shocks. Our scenario analysis approach simulates the impact on earnings of extreme market events up to a period of one month. Scenarios are developed using historical market data during periods of market disruption, or are based on the hypothetical occurrence of economic events, political events and natural disasters suggested and designed by economists, business leaders, and risk managers. Among the historical scenarios are the 1994 period of U.S. Federal Reserve tightening, the 1998 Russian-led crisis, and the market events following the 2008 market crisis. The hypothetical scenarios include potential market crises originating in North America and Asia. During 2016, we introduced a Canadian market crisis scenario, which considers the implications of a Canadian real estate market crash or general Canadian crisis. We also introduced new scenarios aiming to quantify market impact surrounding the U.K. referendum on E.U. membership (Brexit “Leave” and “Remain”), and a U.S. protectionism scenario, which looks at the market impact of U.S. policy following the recent election. Below are our core stress test scenarios which we run daily to add insight into potential exposure levels under stress. Stress testing scenarios are periodically reviewed and amended as necessary to ensure they remain relevant. Under stress test scenarios limit monitoring, limits are placed on the maximum acceptable loss for the aggregate portfolio, at the detailed portfolio level, and at specific asset class types. 64 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Stress scenario list 1. Subprime crisis and Lehman collapse – 2008 2. U.S. Fed tightening – 1994 3. Russian debt crisis – 1998 4. Tech bubble burst – 2000 5. U.S. sovereign debt default and downgrade 6. Chinese hard landing 7. Canada market crisis 8. Brexit “Leave” 9. Brexit “Remain” 10. U.S. protectionism Average stress testing results for 2016 and 2015 for each of the 10 scenarios noted above from our trading positions are provided in the chart below: FY 2016 FY 2015 s n o i l l i m $ 20 10 0 -10 -20 -30 -40 -50 -60 -70 1 2 3 4 5 6 7 8 9 10 Stress Scenarios Non-exchange traded commodity derivatives In the normal course of business, we trade non-exchange traded commodity derivative contracts. We control and manage our non-exchange traded commodity derivatives risk through the VaR and stress testing methodologies described above. We use modelling techniques or other valuation methodologies to determine the fair value of these contracts. The following table provides the fair value, based upon maturity of non-exchange traded commodity contracts: $ millions, as at October 31, 2016 Maturity less than 1 year Maturity 1 – 3 years Maturity 4 – 5 years Maturity in excess of 5 years Positive Negative $ 336 605 70 386 $ 1,397 $ $ 365 326 114 30 835 $ Net (29) 279 (44) 356 $ 562 Non-trading activities Interest rate risk Non-trading interest rate risk, which includes structural interest rate risk, consists primarily of risk inherent in ALM activities and the activities of domestic and foreign subsidiaries. Interest rate risk results from differences in the maturities or repricing dates of assets and liabilities, both on- and off- balance sheet, as well as from embedded optionality in retail products. This optionality arises predominantly from the prepayment exposures of mortgage products, mortgage commitments and some guaranteed investment certificates products with early redemption features. A variety of cash instruments and derivatives, primarily interest rate swaps, futures and options, are used to manage these risks. The Board has oversight of the management of non-trading market risk, sets the market risk appetite and annually approves the market risk limits. GALCO and the Asset and Liability Management Committee regularly review structural market risk positions and provide senior management oversight. In addition to Board-approved limits on earnings and economic value exposure, more granular management limits are in place to guide day-to- day management of this risk. The ALM group within Treasury is responsible for the ongoing management of structural market risk across the enterprise, with independent oversight and compliance with non-trading market risk policy provided by Capital Markets Risk Management. ALM activities are designed to manage the effects of potential interest rate movements while balancing the cost of any hedging activities on the current net revenue. The net income sensitivity is a measure of the impact of potential changes in interest rates on the projected 12-month after-tax net income of a portfolio of assets, liabilities and off-balance sheet positions in response to prescribed parallel interest rate movements with interest rates floored at zero. Our total non-trading interest rate risk exposure, as at October 31, 2016, is included in Note 17 to the consolidated financial statements. On- and off-balance sheet assets and liabilities are generally reported based on the earlier of their contractual repricing or maturity date; however, our disclosure includes the assumed interest rate sensitivity of certain assets and liabilities (including core deposits and credit card balances), reflecting how we manage interest rate risk. The interest rate position reported in Note 17 presents our risk exposure only at a point in time. The exposure can change depending on client preference for products and terms, including mortgage prepayment or other options exercised, and the nature of our management of the various and diverse portfolios that comprise the consolidated interest rate risk position. The following table shows the potential impact over the next 12 months, adjusted for structural assumptions (excluding shareholders’ equity in the calculation of the present value of shareholders’ equity), estimated prepayments and early withdrawals, of an immediate and sustained 100 and 200 basis point increase or decrease in interest rates. CIBC 2016 ANNUAL REPORT 65 Management’s discussion and analysis Interest rate sensitivity - non-trading (after-tax) $ millions, as at October 31 100 basis point increase in interest rates Increase (decrease) in net income attributable to equity shareholders Increase (decrease) in present value of shareholders’ equity 100 basis point decrease in interest rates Increase (decrease) in net income attributable to equity shareholders Increase (decrease) in present value of shareholders’ equity 200 basis point increase in interest rates Increase (decrease) in net income attributable to equity shareholders Increase (decrease) in present value of shareholders’ equity 200 basis point decrease in interest rates Increase (decrease) in net income attributable to equity shareholders Increase (decrease) in present value of shareholders’ equity CAD USD $ $ $ $ 88 (176) (153) 75 145 (392) (327) (78) $ $ $ $ 11 (79) (14) 69 25 (137) (8) 90 2016 Other $ $ $ $ 10 (6) (12) 3 24 (6) (22) 8 CAD 83 (87) (154) (39) 154 (188) (244) (279) $ $ $ $ USD (5) (128) (8) 92 (9) (256) (13) 103 $ $ $ $ 2015 Other $ $ $ $ – (27) – 26 1 (54) – 45 Foreign exchange risk Non-trading foreign exchange risk, also referred to as structural foreign exchange risk, arises primarily from our net investment in foreign operations. This risk, predominantly in U.S. dollars, is managed using derivative hedges and by funding the investments in matching currencies. We actively manage this position to ensure that the potential impact on our capital ratios is in accordance with the policy approved by the RMC, while giving consideration to the impact on earnings and shareholders’ equity. Structural foreign exchange risk is managed by Treasury under the guidance of GALCO. Compliance with trading and non-trading market risk policy, as well as market risk limits, is monitored daily by Capital Markets Risk Management. A 1% appreciation of the Canadian dollar would reduce our shareholders’ equity as at October 31, 2016 by approximately $84 million (2015: $47 million) on an after-tax basis. Our non-functional currency denominated earnings are converted into the functional currencies through spot or forward foreign exchange transactions. Thus, there is no significant impact of exchange rate fluctuations on our consolidated statement of income. We hedge certain foreign currency contractual expenses using derivatives which are accounted for as cash flow hedges. The net change in fair value of these hedging derivatives included in AOCI amounted to a gain of $23 million (2015: $21 million) on an after-tax basis. This amount will be released from AOCI to offset the hedged currency fluctuations as the expenses are incurred. Derivatives held for ALM purposes Where derivatives are held for ALM purposes, and when transactions meet the criteria specified under IFRS, we apply hedge accounting for the risks being hedged, as discussed in Notes 12 and 13 to the consolidated financial statements. Derivative hedges that do not qualify for hedge accounting treatment are referred to as economic hedges and are recorded at fair value on the consolidated balance sheet with changes in fair value recognized in the consolidated statement of income. Economic hedges for other than FVO financial instruments may lead to income volatility because the hedged items are recorded either on a cost or amortized cost basis or recorded at fair value on the consolidated balance sheet with changes in fair value recognized in the consolidated statement of other comprehensive income. This income volatility may not be representative of the overall risk. Equity risk Non-trading equity risk arises primarily in our strategy and corporate development activities and our merchant banking activities. The investments comprise public and private equities, investments in limited partnerships, and equity-accounted investments. The following table provides the amortized cost and fair values of our non-trading equities: $ millions, as at October 31 2016 AFS securities Equity-accounted investments in associates (1) 2015 AFS securities Equity-accounted investments in associates (1) $ Amortized cost 221 386 607 $ $ $ 273 1,504 1,777 Fair value 374 $ 421 795 $ $ $ 446 1,815 2,261 (1) Excludes our equity-accounted joint ventures. See Note 26 to the consolidated financial statements for further details. Pension risk A number of defined benefit pension plans are operated globally. As at October 31, 2016, our consolidated defined benefit pension plans were in a net funded status surplus position of $22 million, compared with $445 million as at October 31, 2015. The change in the net funded status position of our pension plans is disclosed in Note 19 to the consolidated financial statements. The MRCC has been delegated fiduciary responsibility from the Board for pension plans. Pension market risk arises primarily from movements in interest rates, credit spreads, and equity prices. Our Canadian pension plans represent approximately 90% of our pension plans, the most significant of which is our principal Canadian pension plan (the CIBC Pension Plan). The estimated impact on our Canadian defined benefit obligations of a 100 bps change in the discount rate is disclosed in Note 19 to the consolidated financial statements. The MRCC is responsible for sound governance and oversight, and delegates management authority to the Pension Benefits Management Committee (PBMC). An appropriate investment strategy for the CIBC Pension Plan is set through a Statement of Investment Objectives, Policies and Procedures. Treasury’s Pension Investment Management department ensures that the governance, management and operational frameworks of our pension plans align with desired risk profiles. The use of derivatives is permitted within the CIBC Pension Plan, in accordance with the derivatives policy that was approved by the PBMC, and the MRCC of the Board, to manage risk at the discretion of the Pension Investment Committee, a sub-committee of the PBMC. Risk reduction and mitigation strategies may include hedging of interest rate, currency, credit spread and/or equity risks. The derivatives policy also permits the use of derivatives to enhance plan returns. The CIBC Pension Plan manages its foreign currency exposure through an overlay strategy. The fair value of derivatives used for the purposes of currency overlay is disclosed in Note 19 to the consolidated financial statements. 66 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Liquidity risk Liquidity risk is the risk of having insufficient cash or its equivalent in a timely and cost-effective manner to meet financial obligations as they come due. Common sources of liquidity risk inherent in banking services include unanticipated withdrawals of deposits, the inability to replace maturing debt, credit and liquidity commitments, and additional pledging or other collateral requirements. CIBC possesses a comprehensive liquidity management framework that supports our business strategy, aligns with our risk appetite and limits established within the liquidity risk management policy, and adheres to regulatory expectations. The liquidity risk management policy requires we maintain sufficient liquid assets and diversified funding sources to consistently fund our balance sheet, commitments and contingent obligations, in order to maintain the strength of our enterprise under both normal and stressed conditions. Our management strategies, objectives and practices are regularly reviewed to align with changes to the liquidity environment, including regulatory, business and/or market developments. Liquidity risk remains within CIBC’s risk appetite. Governance and management We manage liquidity risk in a manner that enables us to withstand a liquidity stress event without an adverse impact on the viability of our operations. Actual and anticipated cash flows generated from on- and off-balance sheet exposures are routinely measured and monitored to ensure compliance with established limits. CIBC incorporates stress testing into its management and measurement of liquidity risk. Stress test results assist with the development of our liquidity assumptions, identification of potential constraints to funding planning, and contribute to the design of CIBC’s contingency funding plan (CFP). Liquidity risk is managed using the three lines of defence model, with the ongoing management of liquidity risk the responsibility of the Treasurer, supported by guidance from GALCO. The Treasurer is responsible for managing the activities and processes required for measurement, reporting and monitoring of CIBC’s liquidity risk position – this is the first line of defence. The Liquidity and Non-Trading Market Risk group within the Capital Markets Risk Management group provides independent oversight, including the measurement, monitoring and control of liquidity risk, as the second line of defence. Internal Audit provides the third line of defence, with independent assessment of the design and operating effectiveness of liquidity risk management controls, processes and systems. The GALCO governs CIBC’s liquidity risk management, ensuring the liquidity risk management methodologies, assumptions, and key metrics such as the Liquidity Horizon, are regularly reviewed and aligned with our operating regulatory requirements. The Liquidity Risk Management Committee is responsible for supporting GALCO to ensure that CIBC’s liquidity risk profile is comprehensively measured and managed in alignment with CIBC’s strategic direction, risk appetite and regulatory requirements. The RMC approves CIBC’s liquidity risk management policy, CFP, and recommends liquidity risk tolerance to the Board through the risk appetite statement. Policies Our liquidity risk management policy requires a sufficient amount of available unencumbered liquid assets to meet anticipated liquidity needs in both normal and stressed conditions for a minimum time period as measured by CIBC’s Liquidity Horizon. CIBC subsidiaries possessing unique liquidity characteristics, due to distinct business or jurisdictional requirements, maintain local liquidity policies in alignment with CIBC’s liquidity risk management policy. CIBC’s pledging policy sets out consolidated aggregate pledge limits for both financial and non-financial assets. Pledged assets are considered encumbered and therefore unavailable for liquidity purposes. We maintain a detailed global CFP that clearly sets out the strategies for addressing liquidity shortfalls in emergency and unexpected situations, and delineates the requirements necessary to manage a range of stress conditions, establishes clear lines of responsibility and invocation, articulates implementation and escalation procedures, and is aligned to CIBC’s risk appetite. In order to reflect CIBC’s organizational complexity, regional and subsidiary CFPs are maintained to respond to liquidity stresses unique to the jurisdictions within which CIBC operates, and support CIBC as an enterprise. Process and control Measurement and management of liquidity risk is performed regionally and centralized in Treasury. Contractual and behavioural on- and off-balance sheet cash flows under normal and stressed conditions are modeled and used to determine liquidity levels to be maintained throughout the policy- prescribed time horizon. The role of the Liquidity and Non-Trading Market Risk group includes global accountability for the liquidity risk management of all CIBC legal entities and consolidated global exposure. They are responsible for ensuring that all liquidity risks incurred by CIBC are properly identified, analyzed, quantified and in alignment with CIBC’s risk appetite. The RMC is regularly informed of current and prospective liquidity conditions and ongoing enhancement of monitoring and measurement tools. Risk measurement Our liquidity risk tolerance is defined by our risk appetite statement, which is approved annually by the Board, and forms the basis for the delegation of liquidity risk authority to senior management. We use both external regulatory-driven and internal liquidity risk metrics to measure our liquidity risk exposure. Internally, our liquidity position is measured using the Liquidity Horizon. The Liquidity Horizon measures the future point in time when projected cumulative cash outflows exceed cash inflows under a predefined liquidity stress scenario. Expected and potential anticipated inflows and outflows of funds generated from on- and off-balance sheet exposures are measured and monitored on a daily basis to ensure compliance with established limits. Contractual and behavioural on- and off-balance sheet cash flows under normal and stressed conditions are modeled and used to determine liquidity levels against the prescribed management target. Our liquidity measurement system provides liquidity risk exposure reports that include the calculation of the Liquidity Horizon and regulatory reporting such as the LCR and Net Cumulative Cash Flow (NCCF). Our liquidity management framework also incorporates the monitoring of our unsecured wholesale funding position and funding capacity. CIBC 2016 ANNUAL REPORT 67 Management’s discussion and analysis Risk appetite CIBC’s risk appetite statement ensures prudent management of liquidity risk by outlining qualitative considerations and quantitative metrics. These include the LCR, and a minimum Liquidity Horizon that contemplates a severe combined CIBC-specific and market-wide stress scenario. Quantitative metrics are measured and managed to a set of GALCO-approved management limits, which are more stringent than the limits established by the RMC. Stress testing A key component of our liquidity risk management, and complementing our assessments of liquidity risk exposure, is liquidity risk stress testing. Liquidity stress testing involves the application of name-specific and market-wide stress scenarios at multiple levels of severity to assess the amount of available liquidity required to satisfy anticipated obligations as they come due. The scenarios model potential liquidity and funding requirements in the event of unsecured wholesale funding and deposit run-off, and expected contingent liquidity utilization, as well as liquid asset marketability. Results from stress testing are also incorporated as input into the CFP review process. Stress scenario assumptions are subject to periodic review, at least annually, by the RMC. Liquid and encumbered assets Available liquid assets include cash, high quality marketable securities and other assets that can be used to access funding in a timely fashion. Encumbered assets, composed of assets pledged as collateral and those assets that are deemed restricted due to legal, operational, or other purposes, are not considered as sources of available liquidity when measuring liquidity risk. Unencumbered assets from on- and off-balance sheet sources are summarized as follows: $ millions, as at October 31 2016 2015 Cash and due from banks Securities National Housing Act mortgage-backed securities Mortgages Credit cards Other assets Gross liquid assets Encumbered liquid assets (1) Unencumbered liquid assets CIBC owned assets Third-party assets CIBC owned assets Third-party assets $ 14,165 (2) 86,479 (3) $ – 73,724 (4) $ 500 23,690 $ – 45,135 $ 13,665 $ 91,378 18,177 82,872 47,219 (5) 14,227 (6) 4,245 (7) 6,608 (8) – – – – 20,996 14,227 4,245 6,022 – – – – 26,223 – – 586 32,440 – – 427 $ 172,943 $ 73,724 $ 69,680 $ 45,135 $ 131,852 $ 133,916 (1) Excludes intraday pledges to the Bank of Canada related to the Large Value Transfer System as these are normally released at the end of the settlement cycle each day. (2) (3) Includes cash, non-interest-bearing deposits and interest-bearing deposits with contractual maturities of less than 30 days. Includes trading, AFS and FVO securities. Excludes securities in our structured credit run-off business, private debt and private equity securities of $944 million (2015: $1,116 million). Includes $5,433 million (2015: $3,245 million) of cash collateral received on securities borrowed, $28,377 million (2015: $30,089 million) of securities purchased under resale agreements, $38,657 million (2015: $32,169 million) of securities borrowed against securities lent, and $1,257 (2015: $1,058 million) of securities received for derivative collateral. Includes securitized and transferred residential mortgages under the Canada Mortgage Bond Programme, and securitized mortgages that were not transferred to external parties. These are reported in Loans on our consolidated balance sheet. Includes mortgages in the Covered Bond Programme. Includes assets held in consolidated trusts supporting funding liabilities. Includes $6,022 million (2015: $5,460 million) of cash pledged for derivative collateral and $586 million (2015: $427 million) of gold and silver certificates. (4) (5) (6) (7) (8) The following table summarizes unencumbered liquid assets held by CIBC (parent) and significant subsidiaries: $ millions, as at October 31 CIBC (parent) CIBC World Markets Inc. (1) Other subsidiaries (1) Includes CIBC World Markets Inc. and CIBC World Markets Corp. $ 2016 96,027 18,387 17,438 $ 2015 100,698 16,005 17,213 $ 131,852 $ 133,916 Asset haircuts and monetization depth assumptions under a liquidity stress scenario are applied to determine asset liquidity value. Haircuts take into consideration those margins applicable at central banks – such as the Bank of Canada and the Federal Reserve Bank – historical observations, and securities characteristics including asset type, issuer, credit ratings, currency and remaining term to maturity, as well as available regulatory guidance. Our unencumbered liquid assets decreased by $2.1 billion or 2% from October 31, 2015, as a result of multiple drivers that are a part of our ongoing business operations and strategies. Furthermore, CIBC maintains access eligibility to the Bank of Canada Emergency Lending Assistance (ELA) program and the Federal Reserve Bank’s Discount Window. 68 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Asset encumbrance In the course of CIBC’s day-to-day operations, securities and other assets are pledged to secure obligations, participate in clearing and settlement systems and other collateral management purposes. For additional details, see Note 22 to the consolidated financial statements. The following table provides a summary of our total encumbered and unencumbered assets: $ millions, as at October 31 2016 Cash and deposits with banks Securities Securities borrowed or purchased under resale agreements Loans, net of allowance Other Derivative instruments Customers’ liability under acceptances Land, building and equipment Goodwill Software and other intangible assets Investments in equity-accounted associates and joint ventures Other assets 2015 Cash and deposits with banks Securities Securities borrowed or purchased under resale agreements Loans, net of allowance Other Derivative instruments Customers’ liability under acceptances Land, building and equipment Goodwill Software and other intangible assets Investments in equity-accounted associates and joint ventures Other assets $ $ $ Encumbered Unencumbered CIBC owned assets 14,165 87,423 Third-party assets Total assets Pledged as collateral $ $ – – 14,165 87,423 $ 11 23,690 Other $ 489 – Available as collateral $ 13,665 62,789 $ Other – 944 – 307,417 33,810 – 33,810 307,417 22,514 39,468 27,762 12,364 1,898 1,539 1,410 766 12,803 467,547 18,637 74,982 – 281,185 26,342 9,796 1,897 1,526 1,197 1,847 12,566 – – – – – – – $ $ $ $ 33,810 – – 33,334 – – – – – – – – 27,762 12,364 1,898 1,539 1,410 766 12,803 501,357 18,637 74,982 33,334 281,185 26,342 9,796 1,897 1,526 1,197 1,847 12,566 $ $ – – – – – – 6,022 91,705 16 24,603 16,748 39,858 – – – – – – 5,460 $ $ – 26 – – – – – – – 515 444 – – 76 – – – – – – – 11,296 26,223 – 241,700 – – – – – – 586 $ $ 114,559 18,177 49,263 $ $ 16,586 32,440 – – – – – – 427 27,762 12,364 1,898 1,539 1,410 766 6,195 294,578 – 1,116 – 208,811 26,342 9,796 1,897 1,526 1,197 1,847 6,679 $ 429,975 $ 33,334 $ 463,309 $ 86,685 $ 520 $ 116,893 $ 259,211 Restrictions on the flow of funds Our subsidiaries are not subject to significant restrictions that would prevent transfers of funds, dividends or capital distributions. However, certain subsidiaries have separate regulatory capital and liquidity requirements, as established by applicable banking and securities regulators. We monitor and manage our capital and liquidity requirements across these entities to ensure that resources are used efficiently and entities are in compliance with local regulatory and policy requirements. Liquidity coverage ratio The objective of the LCR is to promote short-term resilience of a bank’s liquidity risk profile, ensuring that it has adequate unencumbered high quality liquid resources to meet its liquidity needs in a 30-day acute stress scenario. Canadian banks are required to achieve a minimum LCR value of 100%. CIBC is in compliance with this requirement. In accordance with the calibration methodology contained in OSFI’s liquidity adequacy requirements (LAR) guidelines, CIBC reports the LCR to OSFI on a monthly basis. The ratio is calculated as follows: Total High Quality Liquid Assets (HQLA) Total net cash outflows over the next 30 calendar days ≥ 100% The LCR’s numerator consists of unencumbered HQLA, which follow an OSFI-defined set of eligibility criteria that considers fundamental and market- related characteristics, and relative ability to operationally monetize assets on a timely basis during a period of stress. CIBC’s centrally-managed liquid asset portfolio includes those liquid assets reported in the HQLA, such as central government treasury bills and bonds, central bank deposits and high-rated sovereign, agency, provincial, and corporate securities. Asset eligibility limitations inherent in the LCR metric do not necessarily reflect CIBC’s internal assessment of its ability to monetize its marketable assets under stress. The ratio’s denominator reflects net cash outflows expected in the LCR’s stress scenario over the 30-calendar-day period. Expected cash outflows represent LCR-defined withdrawal or draw-down rates applied against outstanding liabilities and off-balance sheet commitments, respectively. Significant contributors to CIBC’s LCR outflows include business and financial institution deposit run-off, draws on undrawn lines of credit and unsecured debt maturities. Cash outflows are partially offset by cash inflows, which are calculated at LCR-prescribed inflow rates, and include performing loan repayments and non-HQLA marketable assets. CIBC 2016 ANNUAL REPORT 69 Management’s discussion and analysis The LCR is disclosed using a standard OSFI-prescribed disclosure template and is calculated based on a simple average of the three month end positions within the quarter. Beginning in the first quarter of 2017, the LCR will be calculated based on the average of daily positions. $ millions, average of the three months ended October 31, 2016 Total unweighted value (1) Total weighted value (2) HQLA 1 HQLA Cash outflows 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Retail deposits and deposits from small business customers, of which: $ Stable deposits Less stable deposits Unsecured wholesale funding, of which: Operational deposits (all counterparties) and deposits in networks of cooperative banks Non-operational deposits (all counterparties) Unsecured debt Secured wholesale funding Additional requirements, of which: Outflows related to derivative exposures and other collateral requirements Outflows related to loss of funding on debt products Credit and liquidity facilities Other contractual funding obligations Other contingent funding obligations Total cash outflows n/a 130,956 64,723 66,233 117,460 35,013 56,992 25,455 n/a 65,413 10,158 1,870 53,385 3,798 239,161 n/a 50,965 13,767 2,560 $ 106,348 8,565 1,942 6,623 68,146 8,632 34,059 25,455 3,907 17,881 6,499 1,870 9,512 3,798 4,203 106,500 10,840 7,295 2,560 $ 67,292 $ 20,695 n/a n/a n/a n/a n/a n/a Total adjusted value 106,348 $ 85,805 $ 124 % Total adjusted value $ $ 96,992 80,872 120 % Cash inflows 17 18 19 20 21 22 23 Secured lending (e.g. reverse repos) Inflows from fully performing exposures Other cash inflows Total cash inflows Total HQLA Total net cash outflows LCR $ millions, average of the three months ended July 31, 2016 21 22 23 Total HQLA Total net cash outflows LCR (1) Unweighted inflow and outflow values are calculated as outstanding balances maturing or callable within 30 days of various categories or types of liabilities, off-balance sheet items or contractual receivables. (2) Weighted values are calculated after the application of haircuts (for HQLA) and inflow and outflow rates prescribed by OSFI. n/a Not applicable as per the LCR common disclosure template. Our average LCR as at October 31, 2016 increased to 124% from 120% as at July 31, 2016, primarily due to increases in deposits and eligible liquid assets, partially offset by growth in lending. Multiple other factors that are part of normal business operations also impact the LCR. CIBC considers the impact of its business decisions on the LCR and other liquidity risk metrics that it regularly monitors as part of a robust liquidity risk management function. Variables that can impact the ratio month-over-month include, but are not limited to, items such as wholesale funding activities and maturities, strategic balance sheet initiatives, and transactions and environmental considerations affecting collateral. Furthermore, CIBC reports the LCR to OSFI in multiple currencies, and thus measures the extent of potential currency mismatch under the ratio. CIBC predominantly operates in major currencies with deep and fungible foreign exchange markets. Reporting of the LCR is calibrated centrally by CIBC’s Treasury function, in conjunction with CIBC’s SBUs and other functional and support groups. Funding CIBC funds its operations with client-sourced deposits, supplemented with a wide range of wholesale funding. CIBC’s principal approach aims to fund the balance sheet with deposits primarily raised from Retail and Business Banking channels. Personal deposits accounted for $148.1 billion as at October 31, 2016 (2015: $137.4 billion). CIBC maintains a foundation of relationship-based core deposits, whose stability is regularly evaluated through internally developed statistical assessments. We routinely access a range of short-term and long-term secured and unsecured funding sources diversified by geography, depositor type, instrument, currency and maturity. We raise long-term funding from existing programs including covered bonds, asset securitizations and unsecured debt. CIBC continuously evaluates opportunities to diversify into new funding products and investor segments in an effort to maximize funding flexibility and minimize concentration and financing costs. We regularly monitor wholesale funding levels and concentrations to internal limits consistent with our desired liquidity risk profile. GALCO and RMC review and approve CIBC’s funding plan, which incorporates projected asset and liability growth, funding maturities, and output from our liquidity position forecasting. 70 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis The following table provides the contractual maturities at carrying values of CIBC’s wholesale funding sources: $ millions, as at October 31, 2016 Deposits from banks Certificates of deposit and commercial paper Bearer deposit notes and bankers’ acceptances Asset-backed commercial paper Senior unsecured medium-term notes Senior unsecured structured notes Covered bonds/asset-backed securities $ Mortgage securitization Covered bonds Cards securitization Subordinated liabilities Other Of which: Secured Unsecured October 31, 2015 Less than 1 month 2,517 5,964 1,970 – 2,250 – – – – – – $ $ $ $ 12,701 – 12,701 12,701 15,361 1 – 3 months 103 12,790 1,378 – 677 – 685 510 1,837 – – 17,980 3,032 14,948 17,980 23,429 $ $ $ $ $ 3 – 6 months 339 16,597 3,099 – 6,403 – 512 – – – – 26,950 512 26,438 26,950 17,787 $ $ $ $ $ 6 – 12 months Less than 1 year total $ $ $ $ $ 146 8,058 1,231 – 8,860 – 1,450 687 603 – – 21,035 2,740 18,295 21,035 20,601 $ $ $ $ $ 3,105 43,409 7,678 – 18,190 – 2,647 1,197 2,440 – – 78,666 6,284 72,382 78,666 77,178 $ $ $ $ $ 1 – 2 years – 751 – – 9,559 478 3,438 2,325 1,006 39 – 17,596 6,769 10,827 17,596 18,977 Over 2 years – – – – 9,969 – 14,927 10,705 799 3,327 – 39,727 26,431 13,296 39,727 37,237 $ $ $ $ $ Total 3,105 44,160 7,678 – 37,718 478 21,012 14,227 4,245 3,366 – 135,989 39,484 96,505 135,989 133,392 $ $ $ $ $ CIBC’s wholesale funding is diversified by currency as demonstrated in the table that follows: $ billions, as at October 31 CAD USD Other $ 60.4 56.6 19.0 $ 136.0 2016 44 % 42 14 100 % $ 61.5 60.1 11.8 $ 133.4 2015 46 % 45 9 100 % Our funding volumes increased relative to 2015 in response to CIBC’s business and liquidity strategies. We do not anticipate any events, commitments or demands that will materially impact our ability to raise funds through deposits or wholesale funding. Funding plan Our three-year funding plan is updated at least quarterly, or in response to material changes in underlying assumptions. The plan incorporates projected asset and liability growth from our ongoing operations, and the output from our liquidity position forecasting. Credit ratings CIBC’s access to and cost of wholesale funding are dependent on multiple factors, among them credit ratings provided by rating agencies. Rating agencies’ opinions are based upon internal methodologies, and are subject to change based on factors including, but not limited to, financial strength, competitive position and liquidity positioning. Our credit ratings are summarized in the following table: Short-term debt Senior debt Subordinated indebtedness Subordinated Preferred indebtedness – NVCC (1) Shares – NVCC (1) As at October 31 DBRS Fitch Moody’s S&P 2016 R-1(H) F1+ P-1 A-1 2015 R-1(H) F1+ P-1 A-1 2016 2015 AA AA- Aa3 A+ AA AA- Aa3 A+ 2016 AA(L) A+ A3 BBB+ 2015 AA(L) A+ A3 BBB+ 2016 A(L) A+ Baa1 BBB 2015 A(L) A+ Baa1 BBB 2016 Pfd-2 n/a Baa2 P-3(H) 2015 Pfd-2 n/a Baa2 P-3(H) Outlook Negative (2) Stable Negative (3) Stable (1) Comprises instruments which are treated as NVCC in accordance with OSFI’s capital adequacy guidelines. (2) Negative outlook applies to short-term debt, senior debt, and subordinated indebtedness ratings. (3) Negative outlook only applies to senior debt rating. n/a Not available. Additional collateral requirements for rating downgrades We are required to deliver collateral to certain derivative counterparties in the event of a downgrade to our current credit risk rating. The collateral requirement is based on MTM exposure, collateral valuations, and collateral arrangement thresholds as applicable. The following table presents the additional cumulative collateral requirements for rating downgrades: $ billions, as at October 31 One-notch downgrade Two-notch downgrade Three-notch downgrade $ 2016 – 0.2 0.4 $ 2015 0.1 0.2 0.5 CIBC 2016 ANNUAL REPORT 71 Management’s discussion and analysis Other regulatory liquidity standards In May 2014, OSFI published the final LAR guideline, which was driven by the BCBS’ global liquidity requirements, and includes the LCR, net stable funding ratio (NSFR) and other additional liquidity monitoring tools. It is further supplemented by the OSFI-designed supervisory tool known as the NCCF metric. OSFI will use the LAR and associated metrics to assess individual banks’ liquidity adequacy. On October 31, 2014, the BCBS published its final NSFR guideline, which will become effective January 1, 2018. In August 2016, OSFI provided its draft NSFR guideline and is engaging in directed and public consultations prior to issuance of its final NSFR reporting application and related disclosure requirements. Consistent with the requirements above, we submit LCR and NCCF reports to OSFI on a monthly basis and the NSFR report on a quarterly basis. We provide the LCR and NSFR reports to the BCBS twice annually. Contractual obligations Contractual obligations give rise to commitments of future payments affecting our short- and long-term liquidity and capital resource needs. These obligations include financial liabilities, credit and liquidity commitments, and other contractual obligations. Assets and liabilities The following table provides the contractual maturity profile of our on-balance sheet assets, liabilities and equity at their carrying values. Contractual analysis is not representative of CIBC’s liquidity risk exposure, however this information serves to inform CIBC’s management of liquidity risk, and provide input when modeling a behavioural balance sheet. $ millions, as at October 31, 2016 Assets Cash and non-interest-bearing deposits with banks Interest-bearing deposits with banks Securities Cash collateral on securities borrowed Securities purchased under resale agreements Loans Residential mortgages Personal Credit card Business and government Allowance for credit losses Derivative instruments Customers’ liability under acceptances Other assets Less than 1 month 1 – 3 months 3 – 6 months 6 – 9 months 9 – 12 months 1 – 2 years 2 – 5 years Over 5 years No specified maturity Total $ 3,500 $ 10,665 2,206 5,433 – $ – 1,820 – – $ – 1,511 – – $ – 2,415 – – $ – 2,876 – – $ – 7,244 – – $ – 18,559 – – $ – 14,801 – – $ – 35,991 – 3,500 10,665 87,423 5,433 13,262 8,158 3,787 151 – 3,019 – – – 28,377 1,403 651 259 5,296 – 2,306 10,973 – 3,020 523 518 3,485 – 2,699 1,344 – 7,517 962 777 2,346 – 1,009 41 – 8,680 1,091 777 2,676 – 988 5 – 8,105 838 777 3,269 – 684 1 – 39,213 141 3,108 10,962 – 3,084 – – 111,625 450 6,116 21,960 – 6,068 – – 7,338 2,308 – 13,134 – 10,924 – – 397 31,077 – 8,309 (1,691) – – 18,416 187,298 38,041 12,332 71,437 (1,691) 27,762 12,364 18,416 $ 55,954 $ 21,567 $ 17,950 $ 16,783 $ 16,550 $ 66,771 $ 164,778 $ 48,505 $ 92,499 $ 501,357 October 31, 2015 $ 54,058 $ 22,927 $ 21,064 $ 22,485 $ 16,347 $ 49,380 $ 141,529 $ 47,362 $ 88,157 $ 463,309 Liabilities Deposits (1) Obligations related to securities sold short Cash collateral on securities lent Obligations related to securities sold under repurchase agreements Derivative instruments Acceptances Other liabilities Subordinated indebtedness Equity $ 23,437 $ 28,771 $ 40,090 $ 20,053 $ 21,004 $ 27,807 $ 41,316 $ 10,338 2,518 10,935 1,676 11,004 – – – – – 759 2,415 1,344 – – – – – – 830 41 – – – – – – 1,042 5 – – – – – – 2,030 1 – – – – – – 4,001 – – 39 – – – – 6,607 – – – – 7,500 $ 185,669 $ 395,647 10,338 2,518 – – – – – 10,206 – – 3,327 – – – – 12,919 – 23,673 11,694 28,807 12,395 12,919 3,366 23,673 $ 59,908 $ 33,289 $ 40,961 $ 21,100 $ 23,035 $ 31,847 $ 47,923 $ 21,033 $ 222,261 $ 501,357 October 31, 2015 $ 60,305 $ 34,090 $ 27,455 $ 26,453 $ 15,499 $ 30,998 $ 47,403 $ 18,902 $ 202,204 $ 463,309 (1) Comprises $148.1 billion (2015: $137.4 billion) of personal deposits of which $143.3 billion (2015: $132.7 billion) are in Canada and $4.8 billion (2015: $4.7 billion) are in other countries; $229.7 billion (2015: $218.5 billion) of business and government deposits and secured borrowings of which $171.9 billion (2015: $158.9 billion) are in Canada and $57.8 billion (2015: $59.6 billion) are in other countries; and $17.8 billion (2015: $10.8 billion) of bank deposits of which $6.8 billion (2015: $4.0 billion) are in Canada and $11.0 billion (2015: $6.8 billion) are in other countries. The changes in the contractual maturity profile were primarily due to the natural migration of maturities and also reflect the impact of our regular business activities. 72 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Credit-related commitments The following table provides the contractual maturity of notional amounts of credit-related commitments. Since a significant portion of commitments are expected to expire without being drawn upon, the total of the contractual amounts is not representative of future liquidity requirements. $ millions, as at October 31, 2016 Less than 1 month 1 – 3 months 3 – 6 months 6 – 9 months 9 – 12 months 1 – 2 years 2 – 5 years Over 5 years Securities lending (2) Unutilized credit commitments Backstop liquidity facilities Standby and performance letters of credit Documentary and commercial letters of credit Other $ 26,229 $ 468 15 1,872 36 282 6,102 $ 6,326 $ 6,315 7,577 2,961 84 – 715 316 2,132 26 – – $ – $ – $ – $ – $ 1,430 678 2,368 8 – 1,937 10 1,483 53 – 6,459 233 351 6 – 34,434 – 964 4 – 1,134 13 246 – – No specified maturity (1) – 133,514 – – – – $ Total 38,657 186,406 8,842 12,377 217 282 October 31, 2015 $ 25,115 $ 19,910 $ 5,597 $ 4,322 $ 3,748 $ 8,912 $ 32,321 $ 1,560 $ 124,034 $ 225,519 $ 28,902 $ 23,039 $ 9,515 $ 4,484 $ 3,483 $ 7,049 $ 35,402 $ 1,393 $ 133,514 $ 246,781 Includes $105.0 billion (2015: $97.1 billion) of personal, home equity and credit card lines, which are unconditionally cancellable at our discretion. (1) (2) Excludes securities lending of $2.5 billion (2015: $1.4 billion) for cash because it is reported on the consolidated balance sheet. Other contractual obligations The following table provides the contractual maturities of other contractual obligations affecting our funding needs: $ millions, as at October 31, 2016 Operating leases Purchase obligations (1) Pension contributions (2) Underwriting commitments Investment commitments October 31, 2015 Less than 1 month 1 – 3 months 3 – 6 months 6 – 9 months 9 – 12 months $ 36 84 15 196 – $ 331 $ 797 $ 73 223 29 – – $ 325 $ 284 $ 108 213 44 – – $ 365 $ 306 $ 107 241 44 – 4 $ 396 $ 336 $ 1 – 2 years 398 681 – – 1 $ 2 – 5 years 861 874 – – 12 Over 5 years $ 1,026 378 – – 128 Total $ 2,715 2,900 176 196 145 $ 1,080 $ 1,747 $ 1,532 $ 6,132 $ 106 206 44 – – $ 356 $ 340 $ 1,093 $ 1,869 $ 1,669 $ 6,694 (1) Obligations that are legally binding agreements whereby we agree to purchase products or services with specific minimum or baseline quantities defined at fixed, minimum or variable prices over a specified period of time are defined as purchase obligations. Purchase obligations are included through to the termination date specified in the respective agreements, even if the contract is renewable. Many of the purchase agreements for goods and services include clauses that would allow us to cancel the agreement prior to expiration of the contract within a specific notice period. However, the amount above includes our obligations without regard to such termination clauses (unless actual notice of our intention to terminate the agreement has been communicated to the counterparty). The table excludes purchases of debt and equity instruments that settle within standard market timeframes. Includes estimated minimum funding contributions for our funded defined benefit pension plans in Canada, the U.S., the U.K., and the Caribbean. Estimated minimum funding contributions are included only for the next annual period as the minimum contributions are affected by various factors, such as market performance and regulatory requirements, and therefore are subject to significant variability. (2) Other risks Strategic risk Strategic risk is the risk of ineffective or improper implementation of business strategies, including mergers and acquisitions. It includes the potential financial loss due to the failure of organic growth initiatives or failure to respond appropriately to changes in the business environment. For additional details on acquisition risk, see the “Top and emerging risks” section. Oversight of strategic risk is the responsibility of the ExCo and the Board. At least annually, the CEO outlines the process and presents the strategic business plan to the Board for review and approval. The Board reviews the plan in light of management’s assessment of emerging market trends, the competitive environment, potential risks and other key issues. One of the tools for measuring, monitoring and controlling strategic risk is attribution of economic capital against this risk. Our economic capital models include a strategic risk component for those businesses utilizing capital to fund an acquisition or a significant organic growth strategy. Insurance risk Insurance risk is the risk of a potential loss due to actual experience being different from that assumed in the design and pricing of an insurance product. Unfavourable actual experience could emerge due to adverse fluctuations in timing, size and frequency of actual claims (e.g. mortality, morbidity), policyholder behaviour (e.g. cancellation of coverage), or associated expenses. Insurance contracts provide financial compensation to the beneficiary in the event of insured risk in exchange for premiums. We are exposed to insurance risk in our life insurance business and in our life reinsurance business within the respective subsidiaries. Senior management of the insurance and reinsurance subsidiaries have primary responsibility for managing insurance risk with oversight by Risk Management. The insurance and reinsurance subsidiaries also have their own boards of directors, as well as independent Appointed Actuaries who provide additional input to risk management oversight. Processes and oversight are in place to manage the risk to our insurance business. Underwriting risk on business assumed is managed through risk policies that limit exposure to an individual life, to certain types of business and to countries. Our risk governance practices ensure strong independent oversight and control of risk within the insurance businesses. The subsidiaries’ boards outline the internal risk and control structure to manage insurance risk, which includes risk, capital and control policies, processes as well as limits and governance. Senior management of the insurance and reinsurance subsidiaries and Risk Management attend the subsidiaries’ board meetings. CIBC 2016 ANNUAL REPORT 73 Management’s discussion and analysis Operational risk Operational risk is the risk of loss resulting from people, inadequate or failed internal processes and systems, or from external events. As part of the normal course of business, CIBC is exposed to operational risks in its business activities and external environment. Our comprehensive Operational Risk Management Framework, supported by policies, tools, systems and governance structure, is used to mitigate operational risks. We continuously monitor our operational risk profile to ensure we are operating within CIBC’s approved risk appetite. Governance and management Operational risk is managed through the three lines of defence model. Front line businesses form our first line of defence. Their primary responsibility is the day-to-day management of operational risk inherent in their products and activities. The second line of defence includes Risk Management and other oversight functions, which are responsible for monitoring and providing independent oversight of operational risk matters in their respective risk types and for providing effective challenges to business lines’ operational risk assessments and mitigation activities. Internal Audit, our third line of defence, assesses and provides an independent opinion on the design and operating effectiveness of CIBC’s management of operational risk and the strength of the internal control environment. Global Operational Risk Management (GORM) oversees CIBC’s operational risk exposures. The Head of GORM chairs the Operational Risk and Control Committee (ORCC), a sub-committee of the Global Risk Committee (GRC), with representation from SBUs and functional groups. The ORCC is a management forum providing oversight of CIBC’s operational risk and internal control environment. Its Chair reports significant operational risk matters to the GRC and RMC of the Board. Operational risk management approach Information transparency, timely escalation, clear accountability and a robust internal control environment are the principles forming the basis of the Operational Risk Management Framework which supports and governs the processes of identifying, measuring, mitigating, monitoring, and reporting operational risks. We mitigate operational losses by consistently applying control-based approaches and employing risk-specific assessment tools. Regular review of our risk governance structure ensures clarity of, and ownership in, key risk areas. Risk measurement CIBC’s business lines regularly conduct reviews of operational risks inherent in their products, services or processes and assess ways to mitigate and manage them in alignment with CIBC’s risk appetite. These reviews include using business process maps, risk and control self-assessments, audit findings, operational risk scenarios, past internal and external loss events, key risk indicators trends and change initiative risk assessments to form a holistic operational risk profile for the business lines. Under the three lines of defence model, GORM and relevant oversight functions and experts independently challenge business lines’ risk assessments and mitigation actions. Operational loss is one of the key operational risk metrics informing us of areas of heightened risk. We collect and analyze internal operational loss event data for themes and trends. The occurrence of a material or potential material loss triggers an investigation to determine the root causes of the incident and the effectiveness of existing mitigating controls, as well as the identification of any additional mitigating actions. Additionally, we monitor the external environment for emerging or potential risks to CIBC. The analysis of material operational risk events is performed by the first line of defence and the outputs of the analysis are subject to formal independent challenge by our second line of defence. The analysis of material operational risk events forms one component of our ongoing operational risk reporting to senior management and the Board. The current year included legal provisions related to certain matters, including those shown as an item of note. The legal provisions included a no-contest settlement agreement with the Ontario Securities Commission (OSC) in relation to a matter resulting in reimbursements to certain clients. See Note 23 to our consolidated financial statements for further details, and a description of our significant legal proceedings. Business lines conduct change initiative risk assessment on risks inherent to the initiatives (for example, new product launches or major system changes). Identified risks and related mitigation actions are independently challenged by GORM and other oversight functions as the second lines of defence to ensure residual risks remain within the approved risk appetite. We use both the AMA, a risk-sensitive method prescribed by the BCBS, and the Standardized Method to quantify our operational risk exposure in the form of operational risk regulatory capital. Our AMA model determines operational risk capital using historical loss data, projected loss data from our loss scenario analysis and the assessment of internal control risks impacting our business environment. Our AMA model was originally approved in 2008 and our second generation AMA model was developed in fiscal 2015. Our current AMA model, along with the standardized method, was approved for capital reporting commencing in fiscal 2016. The basic indicator or standardized approaches are also used as agreed with local regulators. Under AMA, operational risk capital represents the “worst-case loss” within a 99.9% confidence level. The aggregate risk to CIBC is less than the sum of the individual parts, as the likelihood that all business groups across all regions experience a worst-case loss in every loss category in the same year is extremely low. To adjust for the fact that all risks are not 100% correlated, we incorporate a portfolio effect to ensure that the aggregated risk is representative of the total bank-wide risk. The process for determining correlations considers both internal and external historical correlations and takes into account the uncertainty surrounding correlation estimates. Under AMA, the recognition of insurance as a risk mitigant may be considered in the measure of operational risk used for regulatory minimum capital requirements. Although our current insurance policies are tailored to provide earnings protection from potential high-severity losses, we do not reflect mitigation through insurance or any other risk transfer mechanism in our AMA model. Back-testing To ensure the AMA model is performing effectively and maintaining predictability, we back-test capital calculation results each quarter. The back- testing exercise assesses the model’s performance against internal loss data. The overall AMA methodology is also independently validated by the Model Validation group in Enterprise Risk Management to ensure that the applied assumptions are reasonable. The validation exercise includes modelling the relevant internal loss data using alternative methods and comparing the results to the model. Identified gaps are incorporated into the model. 74 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Risk mitigation Our primary tool for mitigating operational risk exposure is a robust internal control environment. The internal Control Framework outlines key principles, structure and processes underpinning CIBC’s approach to managing risks through internal controls. Under the Framework, all key controls are subject to ongoing testing and review to ensure they effectively mitigate our operational risk exposures. In addition, our corporate insurance program affords extra protection from loss while our global business continuity management program ensures that under conditions of interruption or crisis, CIBC’s critical business functions could continue to operate and normal operations are restored in a highly effective and efficient manner. Risk monitoring and reporting Both forward-looking key risk indicators (KRIs) as well as backward-looking key performance indicators provide insight into CIBC’s risk exposure and are used to monitor the main drivers of exposure associated with key operational risks and their adherence to the operational risk appetite. KRIs assist in early detection of potential operational risk events by identifying unfavourable trends and highlighting controls that may not be functioning effectively. Business lines are required to identify and implement KRIs for material risk exposures on an ongoing basis. Escalation triggers are used to highlight risk exposures requiring additional attention from senior management and/or the Board. The second line of defence challenges the selection of KRIs and the appropriateness of thresholds. Our risk monitoring processes support a transparent risk-reporting program, informing both senior management and the Board on our control environment, operational risks exposures, and mitigation strategies. Technology, information and cyber security risk We are also exposed to cyber threats and the associated financial, reputation and business interruption risks. For additional information on these risks and our mitigation strategies, see the “Top and emerging risks” section. Reputation and legal risk Our reputation and financial soundness are of fundamental importance to us and to our clients, shareholders and employees. Reputation risk is the risk of negative publicity regarding our business conduct or practices which, whether true or not, could significantly harm our reputation as a leading financial institution, or could materially and adversely affect our business, operations or financial condition. Legal risk is risk of financial loss arising from one or more of the following factors: (a) civil, criminal or regulatory enforcement proceedings against us; (b) our failure to correctly document, enforce or comply with contractual obligations; (c) failure to comply with our legal obligations to customers, investors, employees, counterparties or other stakeholders; (d) failure to take appropriate legal measures to protect our assets or security interests; or (e) vicarious misconduct by our employees or agents. The RMC, together with the Reputation and Legal Risks Committee and GRC, provides oversight of the management of reputation and legal risks. The identification, consideration and prudent, proactive management of potential reputation and legal risks is a key responsibility of CIBC and all of our employees. Our Global Reputation and Legal Risks Policy sets standards for safeguarding our reputation through pro-active identification, measurement and management of potential reputation and legal risks. The policy is supplemented by business procedures for identifying and escalating transactions to the Reputation and Legal Risks Committee that could pose material reputation risk and/or legal risk. Regulatory compliance risk Regulatory compliance risk refers to the risk of regulatory sanctions arising from CIBC’s failure to comply with regulatory requirements that govern its activities. Our regulatory compliance philosophy is to manage and mitigate regulatory compliance risk through the promotion of a strong risk and compliance culture within the parameters established by CIBC’s Risk Appetite Statement. The foundation of this approach is a comprehensive Regulatory Compliance Management (RCM) framework. The RCM framework, owned by the Chief Compliance Officer and approved by the RMC of the Board, maps regulatory requirements to internal policies, procedures and controls that govern regulatory compliance. Our Compliance department is responsible for the development and maintenance of a comprehensive regulatory compliance program, including oversight of the RCM framework. This department is independent of business management and reports regularly to the RMC of the Board. Primary responsibility for compliance with all applicable regulatory requirements rests with senior management of the business and infrastructure groups, and extends to all employees. The Compliance department’s activities support those groups, with particular emphasis on regulatory requirements that govern the relationship between CIBC and its clients, that help protect the integrity of the capital markets, or that relate to money laundering and terrorist financing. See the “Regulatory developments” section for further details. Environmental risk Environmental risk is the risk of financial loss or damage to reputation associated with environmental issues, whether arising from our credit and investment activities or related to our own operations. Our corporate environmental policy, originally approved by the Board in 1993 and most recently updated and approved by the RMC in 2015, commits CIBC to responsible conduct in all activities to protect and conserve the environment; safeguard the interests of all stakeholders from unacceptable levels of environmental risk; and support the principles of sustainable development. The policy is addressed by an integrated Corporate Environmental Management Program that is under the overall management of the Environmental Risk Management (ERM) group in Risk Management. Environmental evaluations are integrated into our credit and investment risk assessment processes, with environmental risk management standards and procedures in place for all sectors. In addition, environmental and social risk assessments in project finance, project-related corporate loans and related bridge loans are required in accordance with our commitment to the Equator Principles, a voluntary set of guidelines for financial institutions based on the screening criteria of the International Finance Corporation, which we adopted in 2003. We also conduct ongoing research and benchmarking on environmental issues such as climate change as they may pertain to responsible lending practices. We are also a signatory to and participant in the Carbon Disclosure Project’s climate change program, which promotes corporate disclosure to the investment community on greenhouse gas emissions and climate change management. The ERM group works closely with our main business units and functional and support groups to ensure that high standards of environmental responsibility are applied to the banking services that we provide to our clients, the relationships we have with our stakeholders, and to the way we manage our facilities. An executive-level Environmental Management Committee is in place to provide input on environmental strategy and oversight of CIBC’s environmental initiatives. CIBC 2016 ANNUAL REPORT 75 Management’s discussion and analysis Accounting and control matters Critical accounting policies and estimates A summary of significant accounting policies is presented in Note 1 to the consolidated financial statements. Certain accounting policies require us to make judgments and estimates, some of which may relate to matters that are uncertain. Changes in the judgments and estimates required in the critical accounting policies discussed below could have a material impact on our financial results. We have established control procedures to ensure accounting policies are applied consistently and processes for changing methodologies are well controlled. Valuation of financial instruments Debt and equity trading securities, trading business and government loans, obligations related to securities sold short, derivative contracts, AFS securities and FVO financial instruments are carried at fair value. FVO financial instruments include certain debt securities, certain secured borrowings, structured deposits and business and government deposits. Retail mortgage interest rate commitments are also designated as FVO financial instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability at the measurement date in an orderly arm’s- length transaction between market participants in the principal market under current market conditions (i.e., the exit price). Fair value measurements are categorized into levels within a fair value hierarchy based on the nature of the valuation inputs (Level 1, 2 or 3). We have an established and documented process for determining fair value. Fair value is based on unadjusted quoted prices in an active market for the same instrument, where available (Level 1). If active market prices or quotes are not available for an instrument, fair value is then based on valuation models in which the significant inputs are observable (Level 2) or in which one or more of the significant inputs are non-observable (Level 3). Estimating fair value requires the application of judgment. The type and level of judgment required is largely dependent on the amount of observable market information available. For instruments valued using internally developed models that use significant non-observable market inputs and are therefore classified within Level 3 of the hierarchy, the judgment used to estimate fair value is more significant than when estimating the fair value of instruments classified within Levels 1 and 2. To ensure that valuations are appropriate, a number of policies and controls are in place. Independent validation of fair value is performed at least on a monthly basis. Valuation inputs are verified to external sources such as exchange quotes, broker quotes or other management-approved independent pricing sources. The following table presents amounts, in each category of financial instruments, which are valued using valuation techniques based on Level 3 inputs, for the structured credit run-off business and total consolidated CIBC. For further details of the valuation of and sensitivity associated with Level 3 financial assets and liabilities, see Note 2 to the consolidated financial statements. $ millions, as at October 31 Assets Trading securities and loans AFS securities FVO securities Derivative instruments Liabilities Deposits and other liabilities (2) Derivative instruments Structured credit run-off business $ $ $ $ 496 3 94 140 733 257 197 454 Total CIBC 536 2,296 94 195 3,121 506 274 780 $ $ $ $ 2016 Total CIBC (1) 0.9 % 6.2 36.9 0.7 2.6 % 13.9 % 1.0 1.8 % Structured credit run-off business $ $ $ $ 565 32 111 165 873 280 244 524 Total CIBC 611 2,041 111 192 2,955 474 297 771 $ $ $ $ 2015 Total CIBC (1) 1.2 % 7.2 41.6 0.7 2.7 % 17.8 % 1.0 1.9 % (1) Represents the percentage of Level 3 assets and liabilities over total assets and liabilities for each reported category that are carried on the consolidated balance sheet at fair value. (2) Includes FVO deposits and bifurcated embedded derivatives. Note 2 to the consolidated financial statements presents the valuation methods used to determine fair value showing separately those financial instruments that are carried at fair value on the consolidated balance sheet and those that are not. In order to reflect the observed market practice of pricing collateralized and uncollateralized derivatives, our valuation approach uses OIS curves as the discount rate in the valuation of collateralized derivatives and market cost of funding in the valuation of uncollateralized derivatives. The use of a market cost of funds curve reduces the fair value of uncollateralized derivative assets incremental to the reduction in fair value for credit risk already reflected through the CVA. In contrast, the use of a market cost of funds curve reduces the fair value of uncollateralized derivative liabilities in a manner that generally includes adjustments for our own credit. As market practices continue to evolve in regard to derivative valuation, further adjustments may be required in the future. Fair value adjustments We apply judgment in establishing valuation adjustments that take into account various factors that may have an impact on the valuation of financial instruments that are carried at fair value on the consolidated balance sheet. Such factors include, but are not limited to, the bid-offer spread, illiquidity due to lack of market depth and other market risks, parameter uncertainty, model risk, credit risk, and future administration costs. The establishment of fair value adjustments and the determination of the amount of write-downs involve estimates that are based on accounting processes and judgments by management. We evaluate the adequacy of the fair value adjustments and the amount of write-downs on an ongoing basis. The levels of fair value adjustments and the amount of the write-downs could change as events warrant and may not reflect ultimate realizable amounts. 76 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis The following table summarizes our valuation adjustments: $ millions, as at October 31 Securities Market risk Derivatives Market risk Credit risk Administration costs Total valuation adjustments Impairment of AFS securities AFS securities include debt and equity securities. 2016 2015 $ 2 $ 1 68 99 6 $ 174 85 112 5 204 $ AFS securities are measured at fair value, with the difference between the fair value and the amortized cost included in AOCI. Only equities that do not have a reliably measurable fair value are carried at cost. We have determined that all of our equity securities have reliable fair values. AFS securities are subject to quarterly reviews to assess whether or not there is an impairment. The assessment of impairment depends on whether the instrument is debt or equity in nature. AFS debt securities are identified as impaired when there is objective observable evidence concerning the inability to collect the contractual principal or interest. Factors that are reviewed for impairment assessment include, but are not limited to, operating performance and future expectations, liquidity and capital adequacy, external credit ratings, deterioration in underlying asset quality, industry valuation levels for comparable entities, and any changes in market and economic outlook. For AFS equity instruments, objective evidence of impairment exists if there has been a significant or prolonged decline in the fair value of the investment below its cost. In making the impairment assessment, we also consider whether there have been significant adverse changes in the technological, market, economic, or legal environments in which the issuer operates or if the issuer is experiencing significant financial difficulty. Realized gains and losses on disposal and write-downs to reflect impairment in the value of AFS securities are recorded in the consolidated statement of income. Previously recognized impairment losses for debt securities (but not equity securities) are reversed if a subsequent increase in fair value can be objectively identified and is related to an event occurring after the impairment loss was recognized. Once an AFS equity security is impaired, all subsequent declines in fair value are charged directly to income. Allowance for credit losses We establish and maintain an allowance for credit losses that is considered the best estimate of probable credit-related losses existing in our portfolio of on- and off-balance sheet financial instruments, giving due regard to current conditions. The allowance for credit losses consists of individual and collective components. Individual allowances The majority of our business and government loan portfolios are assessed on an individual loan basis. Individual allowances are established when impaired loans are identified within the individually assessed portfolios. A loan is classified as impaired when we are of the opinion that there is no longer reasonable assurance of the full and timely collection of principal and interest. The individual allowance is the amount required to reduce the carrying value of an impaired loan to its estimated realizable amount. This is determined by discounting the expected future cash flows at the effective interest rate inherent in the loan. Individual allowances are not established for portfolios that are collectively assessed, including most retail portfolios. Collective allowances Consumer and certain small business allowances Residential mortgages, credit card loans, personal loans, and certain small business loan portfolios consist of large numbers of homogeneous balances of relatively small amounts, for which we take a portfolio approach to establish the collective allowance. As it is not practical to review each individual loan, we utilize a formula basis, by reference to historical ratios of write-offs to current accounts and balances in arrears. For residential mortgages, personal loans and certain small business loans, this historical loss experience enables CIBC to determine appropriate PD and LGD parameters, which are used in the calculation of the portion of the collective allowance for current accounts. The PDs determined by this process that correspond to the risk levels in our retail portfolios are disclosed in “Exposures subject to AIRB approach” in the “Credit risk” section. For credit card loans, non-current residential mortgages, personal loans and certain small business loans, the historical loss experience enables CIBC to calculate flows to write off in our models that determine the collective allowance that pertain to these loans. We also consider estimates of the time periods over which losses that are present would be identified and a provision taken, our view of current economic and portfolio trends, and evidence of credit quality improvements or deterioration. On a regular basis, the parameters that affect the allowance calculation are updated, based on our experience and the economic environment. Business and government allowances For groups of individually assessed loans for which no objective evidence of impairment has been identified on an individual basis, a collective allowance is provided for losses which we estimate are inherent in the portfolio at the reporting date, but not yet specifically identified from an individual assessment of the loan. The methodology for determining the appropriate level of the collective allowance incorporates a number of factors, including the size of the portfolios, expected loss rates, and relative risk profiles. We also consider estimates of the time periods over which losses that are present would be identified and a provision taken, our view of current economic and portfolio trends, and evidence of credit quality improvements or deterioration. On a regular basis, the parameters that affect the collective allowance calculation are updated, based on our experience and the economic environment. Expected loss rates for business loan portfolios are based on the risk rating of each credit facility and on the PD factors associated with each risk rating, as well as estimates of LGD. The PD factors reflect our historical loss experience and are supplemented by data derived from defaults in the public debt markets. Our risk-rating method and categories are disclosed in “Exposures subject to AIRB approach” in the “Credit risk” section. Historical loss experience is adjusted based on observable data to reflect the effects of current conditions. LGD estimates are based on our experience over past years. CIBC 2016 ANNUAL REPORT 77 Management’s discussion and analysis The collective allowance(1) of $1,201 million (2015: $1,084 million), which represents our best estimate of losses inherent but not specifically provided for in our loan portfolios, was selected from within the range based on a qualitative analysis of the economic environment and credit trends, as well as the risk profile of the loan portfolios. A uniform 10% increase in the PDs or loss severity across all portfolios would cause the collective allowance(1) to increase by approximately $120 million. (1) Relates to collective allowance, except for: (i) residential mortgages greater than 90 days delinquent; and (ii) personal loans and scored small business loans greater than 30 days delinquent. Securitizations and structured entities Securitization of our own assets Under IFRS 10 “Consolidated Financial Statements”, judgment is exercised in determining whether an investor controls an investee including assessing whether the investor has: (i) power over the investee; (ii) exposure, or rights, to variable returns from its involvement with the investee; and (iii) the ability to affect those returns through its power over the investee. We sponsor several SEs that have purchased and securitized our own assets including Cards II Trust, Broadway Trust and Crisp Trust, which we consolidate under IFRS 10. We also securitize our own mortgage assets through a government-sponsored securitization program. We sell these securitized assets to a government-sponsored securitization vehicle that we do not consolidate, as well as to other third parties. IAS 39 “Financial Instruments: Recognition and Measurement” provides guidance on when to derecognize financial assets. A financial asset is derecognized when the contractual rights to receive cash flows from the asset have expired, or when we have transferred the rights to receive cash flows from the asset such that: (cid:129) (cid:129) We have transferred substantially all the risks and rewards of the asset; or We have neither transferred nor retained substantially all the risks and rewards of the asset, but have transferred control of the asset. We have determined that our securitization activities related to residential mortgages and cards receivables are accounted for as secured borrowing transactions because we have not met the aforementioned criteria. In addition, we sell and derecognize commercial mortgages through a pass-through arrangement with a trust that securitizes these mortgages into ownership certificates held by various external investors. We continue to perform special servicing of the mortgages in exchange for a market-based fee and do not consolidate the trust. We also sell certain U.S. commercial mortgages to third parties that qualify for derecognition because we have transferred substantially all the risks and rewards of the mortgages and have no continuous involvement after the transfer. Securitization of third-party assets We also sponsor several SEs that purchase pools of third-party assets. We consider a number of factors in determining whether CIBC controls these SEs. We monitor the extent to which we support these SEs, through direct investment in the debt issued by the SEs and through the provision of liquidity protection to the other debtholders, to assess whether we should consolidate these entities. IFRS 10 also requires that we reconsider our consolidation assessment if facts and circumstances relevant to the entities indicate that there are changes to one or more of the three elements of control described above. Factors that trigger reassessment include, but are not limited to, significant changes in ownership structure of the entities, changes in contractual or governance arrangements, provision of a liquidity facility beyond the original terms, transactions with the entities that were not contemplated originally and changes in the financing structure of the entities. Specifically, in relation to our multi-seller conduits, we would reconsider our consolidation assessment if our level of interest in the ABCP issued by the conduits changes significantly, or in the rare event that the liquidity facility that we provide to the conduits is drawn or amended. A significant increase in our holdings of the outstanding commercial paper issued by the conduits would become more likely in a scenario in which the market for bank-sponsored ABCP suffered a significant deterioration such that the conduits were unable to roll their ABCP. For additional information on the securitizations of our own assets and third-party assets, see the “Off-balance sheet arrangements” section and Note 6 to the consolidated financial statements. Asset impairment Goodwill As at October 31, 2016, we had goodwill of $1,539 million (2015: $1,526 million). Goodwill is not amortized, but is tested, at least annually, for impairment by comparing the recoverable amount of the cash-generating unit (CGU) to which goodwill has been allocated, with the carrying amount of the CGU including goodwill. Any deficiency is recognized as impairment of goodwill. The recoverable amount of a CGU is defined as the higher of its estimated fair value less cost to sell and its value in use. Goodwill is also required to be tested for impairment whenever there are indicators that it may be impaired. Estimation of the recoverable amount is an area of significant judgment. Recoverable amounts are estimated using internally developed models which require the use of significant assumptions including forecasted earnings, discount rates, growth rates, forecasted regulatory capital requirements, and price-earnings multiples. Reductions in the estimated recoverable amount could arise from various factors, such as reductions in forecasted cash flows, an increase in the assumed level of required capital, and any adverse changes to the discount rate or terminal growth rates either in isolation or in any combination thereof. Where our estimated recoverable amount is not significantly in excess of the carrying amount of the CGU, additional judgment is required, and reductions in the recoverable amount are more likely to give rise to a deficiency which would result in an impairment charge. The recoverable amount of CIBC FirstCaribbean is based on a value in use calculation that is estimated using a five-year cash flow projection approved by management of CIBC FirstCaribbean and an estimate of the capital required to be maintained in the region to support ongoing operations. We performed our annual impairment test as of August 1, 2016 based on a five-year forecast prepared by management of CIBC FirstCaribbean during the fourth quarter of 2016. The forecast for CIBC FirstCaribbean used in our 2016 annual impairment test reflected the currently challenging, but improving, economic conditions which continue to persist in the Caribbean region, as well as an expected further recovery in those conditions during the forecast period. As economic conditions in the Caribbean region remain challenging, we continue to closely monitor our investment. Reductions in the estimated recoverable amount of our CIBC FirstCaribbean CGU could result in additional goodwill impairment charges in future periods. As at October 31, 2016, the carrying amount of goodwill relating to CIBC FirstCaribbean was $421 million (US$314 million). Other intangible assets and long-lived assets As at October 31, 2016, we had other intangible assets with an indefinite life of $142 million (2015: $142 million). Acquired intangible assets are separately recognized if the benefits of the intangible assets are obtained through contractual or other legal rights, or if the intangible assets can be sold, transferred, licensed, rented, or exchanged. Determining the useful lives of intangible assets requires judgment and fact-based analysis. Intangible assets with an indefinite life are not amortized but are assessed for impairment by comparing the recoverable amount to the carrying amount. An impairment test is required at least annually, or whenever there are indicators that these assets may be impaired. 78 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Long-lived assets and other identifiable intangible assets with a definite life are amortized over their estimated useful lives. These assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount is higher than the recoverable amount. The recoverable amount is defined as the higher of the estimated fair value less cost to sell and value in use. Determining the recoverable amount of intangible assets and long-lived assets is an area of judgment as we estimate the future cash flows expected to result from the use of the asset and, where appropriate, cash flows arising from the asset’s eventual disposition. For additional details, see Note 8 to the consolidated financial statements. Income taxes We are subject to income tax laws in the various jurisdictions where we operate, and the tax laws in those jurisdictions are potentially subject to different interpretations by us and the relevant taxation authority. We use judgment in the estimation of income taxes and deferred tax assets and liabilities. As a result, management judgment is applied in the interpretation of the relevant tax laws and in estimating the provision for current and deferred income taxes. Deferred tax assets or liabilities are determined for each temporary difference based on the tax rates that are expected to be in effect in the period that the assets are realized or the liabilities are settled. Deferred tax liabilities are generally recognized for all taxable temporary differences unless the temporary differences relate to our net investments in foreign operations and will not reverse in the foreseeable future. We are required to assess whether it is probable that our deferred tax assets will be realized prior to their expiration and, based on all the available evidence, determine if any portion of our deferred income tax assets should not be recognized. The factors used to assess the probability of realization are our past experience of income and capital gains, forecasts of future net income before income taxes, available tax planning strategies that could be implemented to realize the deferred tax assets, and the remaining expiration period of tax loss carryforwards. In addition, for deductible temporary differences arising from our investments in foreign operations, we must consider whether the temporary difference will reverse in the foreseeable future. Although realization is not assured, we believe, based on all of the available evidence, it is probable that the recognized deferred tax assets will be realized. Income tax accounting impacts all of our reporting segments. For further details on our income taxes, see Note 20 to the consolidated financial statements. Contingent liabilities and provision Legal proceedings and other contingencies In the ordinary course of its business, CIBC is a party to a number of legal proceedings, including regulatory investigations, in which claims for substantial monetary damages are asserted against CIBC and its subsidiaries. Legal provisions are established if, in the opinion of management, it is both probable that an outflow of economic benefits will be required to resolve the matter, and a reliable estimate can be made of the amount of the obligation. If the reliable estimate of probable loss involves a range of potential outcomes within which a specific amount within the range appears to be a better estimate, that amount is accrued. If no specific amount within the range of potential outcomes appears to be a better estimate than any other amount, the mid-point in the range is accrued. In some instances, however, it is not possible either to determine whether an obligation is probable or to reliably estimate the amount of loss, in which case no accrual can be made. While there is inherent difficulty in predicting the outcome of legal proceedings, based on current knowledge and in consultation with legal counsel, we do not expect the outcome of these matters, individually or in aggregate, to have a material adverse effect on our consolidated financial statements. However, the outcome of these matters, individually or in aggregate, may be material to our operating results for a particular reporting period. We regularly assess the adequacy of CIBC’s litigation accruals and make the necessary adjustments to incorporate new information as it becomes available. The provisions disclosed in Note 23 to the consolidated financial statements include all of CIBC’s accruals for legal matters as at October 31, 2016, including amounts related to the significant legal proceedings described in that note and to other legal matters. CIBC considers losses to be reasonably possible when they are neither probable nor remote. It is reasonably possible that CIBC may incur losses in addition to the amounts recorded when the loss accrued is the mid-point of a range of reasonably possible losses, or the potential loss pertains to a matter in which an unfavourable outcome is reasonably possible but not probable. CIBC believes the estimate of the aggregate range of reasonably possible losses, in excess of the amounts accrued, for its significant legal proceedings, where it is possible to make such an estimate, is from nil to approximately $1.4 billion as at October 31, 2016. This estimated aggregate range of reasonably possible losses is based upon currently available information for those significant proceedings in which CIBC is involved, taking into account CIBC’s best estimate of such losses for those cases for which an estimate can be made. CIBC’s estimate involves significant judgment, given the varying stages of the proceedings and the existence of multiple defendants in many of such proceedings whose share of the liability has yet to be determined. The range does not include potential punitive damages and interest. The matters underlying the estimated range as at October 31, 2016, consist of the significant legal matters disclosed in Note 23 to the consolidated financial statements. The matters underlying the estimated range will change from time to time, and actual losses may vary significantly from the current estimate. For certain matters, CIBC does not believe that an estimate can currently be made as many of them are in preliminary stages and certain matters have no specific amount claimed. Consequently, these matters are not included in the range. A description of significant ongoing matters to which CIBC is a party can be found in Note 23 to the consolidated financial statements. Restructuring During 2015, we recorded cumulative restructuring charges of $296 million in Corporate and Other. The charges primarily related to employee severance and included Program Clarity, a bank-wide priority focused on simplifying our bank. The charges also included restructuring costs related to CIBC FirstCaribbean, which included charges related to the sale by CIBC FirstCaribbean of its Belize banking operations. In the fourth quarter of 2016 we recorded additional restructuring charges of $134 million as we continue to implement initiatives in support of Program Clarity. As at October 31, 2016, the remaining provision relating to these restructuring charges was $256 million. While this amount represents our best estimate as at October 31, 2016 of the amount required to settle the obligation, uncertainty exists with respect to when the obligation will be settled and the amounts that will ultimately be paid, as this will largely depend upon individual facts and circumstances. For further details on our restructuring provision, see Note 23 to the consolidated financial statements. Post-employment and other long-term benefit plan assumptions We sponsor a number of benefit plans to eligible employees, including registered and supplemental pension plans, and post-retirement medical and dental plans (other post-employment benefit plans). We also continue to sponsor a long-term disability income replacement plan and associated medical and dental benefits (collectively, other long-term benefit plans). The long-term disability plan was closed to new claims effective June 1, 2004. The calculation of net defined benefit plan expense and obligations depends on various actuarial assumptions such as discount rates, health-care cost trend rates, turnover of employees, projected salary increases, retirement age, and mortality rates. The actuarial assumptions used for determining the net CIBC 2016 ANNUAL REPORT 79 Management’s discussion and analysis defined benefit expense for a fiscal year are set at the beginning of the annual reporting period, are reviewed in accordance with accepted actuarial practice and are approved by management. The discount rate assumption used in measuring the net defined benefit plan expense and obligations reflects market yields, as of the measurement date, on high quality debt instruments with a currency and term to maturity that match the currency and expected timing of benefit payments. Our discount rate is estimated by developing a yield curve based on high quality corporate bonds. While there is a deep market of high quality corporate bonds denominated in Canadian dollars with short and medium terms to maturity, there is not a deep market in bonds with terms to maturity that match the timing of all the expected benefit payments for all of our Canadian plans. As a result, for our Canadian pension, other post-employment and other long- term benefit plans, we estimate the yields of high quality corporate bonds with longer term maturities by extrapolating current yields on bonds with short- and medium-term durations along the yield curve. Judgment is required in constructing the yield curve, and as a result, different methodologies applied in constructing the yield curve can give rise to different discount rates. For further details of our annual pension and other post-employment expense and obligations, see Note 19 and Note 1 to the consolidated financial statements. Financial instruments As a financial institution, our assets and liabilities primarily comprise financial instruments, which include deposits, securities, loans, derivatives, acceptances, repurchase agreements, subordinated indebtedness, and preferred shares. We use these financial instruments for both trading and non-trading activities. Trading activities primarily include the purchase and sale of securities, transacting in foreign exchange and derivative instruments in the course of facilitating client trades and taking proprietary trading positions with the objective of income generation. Non-trading activities generally include the business of lending, investing, funding, and ALM. The use of financial instruments may either introduce or mitigate exposures to market, credit and/or liquidity risks. See the “Management of risk” section for details on how these risks are managed. Financial instruments are accounted for according to their classification. For details on the accounting for these instruments, see Note 2 to the consolidated financial statements. For significant assumptions made in determining the valuation of financial and other instruments, see the “Valuation of financial instruments” section above. Accounting developments Transition to IFRS 9 IFRS 9 “Financial Instruments” (IFRS 9) replaces IAS 39 “Financial Instruments: Recognition and Measurement” and is effective for annual periods beginning on or after January 1, 2018, which for us would have been on November 1, 2018. Early application is permitted if an entity applies all the requirements of the standard. During 2015, OSFI issued a final advisory that requires D-SIBs to adopt IFRS 9 for their annual period beginning on November 1, 2017, one year earlier than required by the International Accounting Standards Board (IASB). As a D-SIB, we will publish our first interim consolidated financial statements under IFRS 9 for the quarter ended January 31, 2018, except for the “own credit” provisions of IFRS 9, which we voluntarily early adopted as of November 1, 2014. IFRS 9 is required to be applied on a retrospective basis, with certain exceptions. As permitted, we will not re-state our prior period comparative consolidated financial statements when we adopt the requirements of the new standard. We will recognize an adjustment to our opening November 1, 2017 retained earnings and AOCI, to reflect the application of the new requirements at the adoption date. The transition to IFRS 9 represents a significant initiative for CIBC, for which we have established a transition program that is supported by a formal governance structure with an enterprise view and a dedicated project team. The project’s Steering Committee is co-chaired by senior stakeholders from our Risk Management and Finance groups, and comprises individuals from the impacted SBUs as well as functional groups, such as Information Technology and Internal Audit. The Steering Committee is responsible for: (cid:129) (cid:129) (cid:129) (cid:129) Ensuring the strategic alignment of IFRS 9 with CIBC’s overall strategies; Ensuring key milestones are met; Providing direction and guidance on a holistic basis; and Reviewing and resolving key issues and risks. To assist the Steering Committee in meeting its responsibilities, our transition program structure has three work streams that correspond to the three sections of the new financial instruments standard: (1) Classification and measurement of financial instruments; (2) Impairment; and (3) Hedge accounting. Each work stream comprises stakeholders from the impacted SBUs and functional groups, who are subject matter experts in the relevant policies, processes or technologies that are expected to be impacted by the transition. Classification and measurement The IFRS 9 classification and measurement model requires that all debt instrument financial assets that do not meet a “solely payment of principal and interest” (SPPI) test, including those that contain embedded derivatives, be classified at initial recognition as fair value through profit or loss (FVTPL). The intent of the SPPI test is to ensure that debt instruments that contain non-basic lending features, such as conversion options and equity linked pay-outs, are measured at FVTPL. Subsequent measurement of instruments classified as FVTPL under IFRS 9 operates in a similar manner to trading under IAS 39. For debt instrument financial assets that meet the SPPI test, classification at initial recognition will be determined based on the business model under which these instruments are managed. Debt instruments that are managed on a “held for trading” or “fair value” basis will be classified as FVTPL. Debt instruments that are managed on a “hold to collect and for sale” basis will be classified as fair value through OCI (FV-OCI) for debt. Debt instruments that are managed on a “hold to collect” basis will be classified as amortized cost. Subsequent measurement of instruments classified at FV-OCI and amortized cost classifications under IFRS 9 operate in a similar manner to AFS for debt securities and loans and receivables, respectively, under existing IAS 39, except for the impairment provisions which are discussed below. For those debt instrument financial assets that would otherwise be classified as FV-OCI or amortized cost, an irrevocable designation can be made at initial recognition to instead measure the debt instrument at FVTPL under the fair value option (FVO) if doing so eliminates or significantly reduces an accounting mismatch and if certain OSFI requirements are met. All equity instrument financial assets are required to be classified at initial recognition as FVTPL unless an irrevocable designation is made to classify the instrument as FV-OCI for equities. Unlike AFS for equity securities under IAS 39, the FV-OCI for equities category results in all realized and unrealized gains and losses being recognized in OCI with no recycling to profit and loss. Only dividends continue to be recognized in profit and loss. The classification and measurement of financial liabilities remain essentially unchanged from the current IAS 39 requirements, except that changes in fair value of FVO liabilities attributable to changes in own credit risk are to be presented in OCI, rather than profit and loss, which we early adopted as of November 1, 2014. 80 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Derivatives will continue to be measured at FVTPL under IFRS 9. Impairment The new impairment guidance sets out an expected credit loss (ECL) model applicable to all debt instrument financial assets classified as amortized cost or FV-OCI. In addition, the ECL model applies to loan commitments and financial guarantees that are not measured at FVTPL. The application of the ECL methodology to non-impaired financial instruments requires entities to recognize 12 months of expected credit losses from the date the financial instrument is first recognized (stage 1 loans), and to recognize lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition (stage 2 loans). In assessing whether credit risk has increased significantly, entities are required to compare the risk of a default occurring on the financial instrument as at the reporting date, with the risk of a default occurring on the financial instrument as at the date of initial recognition. In subsequent reporting periods, if the credit risk of the financial instrument improves such that there is no longer a significant increase in credit risk since initial recognition, then entities shall revert to recognizing 12 months of expected credit losses. In contrast, under the incurred loss methodology inherent in IAS 39, allowances are provided for non-impaired loans for losses that are incurred but not yet identified, while impairment losses are generally only recognized for AFS debt securities when objective evidence of impairment has been identified. The ECL model under IFRS 9 also requires that lifetime expected credit losses be recognized for financial assets that are assessed as credit-impaired (stage 3 loans), which for loans is similar to the requirements of IAS 39 to recognize impaired loans at their estimated realizable value. This occurs when one or more events have occurred after the initial recognition of the loan and the loss event or events have a detrimental impact on the estimated future cash flows of that loan. For our business and government portfolios, the individually assessed allowances for impaired loans recognized under IAS 39 will generally be replaced by stage 3 allowances under IFRS 9, while the collective allowances for non-impaired loans will generally be replaced by either stage 1 or stage 2 allowances under IFRS 9. For our retail portfolios, the portion of our collective allowances that relate to impaired loans under IAS 39 will generally be replaced by stage 3 allowances, while the non-impaired portion of our collective allowances will generally be replaced by either stage 1 or stage 2 allowances under IFRS 9. We are currently building the application of the ECL methodology for our impacted portfolios, which includes building the processes and systems to determine when a significant increase in credit risk of a financial asset has occurred, and to measure both 12-month and lifetime credit losses in a manner that incorporates forward-looking information. Our design takes into account that interpretations concerning the application of ECL continue to evolve. For the majority of our retail portfolios, we will determine significant increase in credit risk based on the loan’s lifetime probability of default. For the majority of our business and government portfolios and FV-OCI debt securities, we will determine significant increase in credit risk based on our internal risk ratings. Both metrics will incorporate our assessment of the appropriate forward-looking macroeconomic factors. We are currently building and testing the process to determine the forward-looking macroeconomic factors that will be used in our models. Our process will leverage our existing forecasting processes and will determine the forward-looking macroeconomic factors for multiple scenarios so that we can appropriately probability weight the expected losses we recognize on our balance sheet. The process will be overseen by a governance committee consisting of key internal stakeholders from Economics, Risk Management, and Finance. Our design also leverages our data, systems and processes that are used to calculate Basel expected losses regulatory adjustments for the portion of our portfolios under the AIRB approach. Appropriate adjustments will be made to the Basel parameters to meet IFRS 9 requirements, including the conversion of through-the-cycle and downturn parameters used in the Basel regulatory calculations to point-in-time parameters used under IFRS 9 that considers forward-looking information. In addition, expected losses under IFRS 9 are for 12 months for stage 1 loans and lifetime for stage 2 and stage 3 loans, as compared with 12 months for AIRB portfolios under Basel. The negative impact from potential increases in our balance sheet allowances under IFRS 9 on CET1 capital could be partially mitigated by reductions in negative regulatory capital adjustments related to any shortfall of allowances to regulatory expected losses in the CET1 calculation. The main adjustments necessary to Basel risk parameters are explained in the table below: Regulatory Capital IFRS 9 Through-the-cycle PD represents long-run average PD throughout a full economic cycle Point-in-time 12-month or lifetime PD based on current conditions and relevant forward-looking assumptions Downturn LGD based on losses that would be expected in an economic downturn and subject to certain regulatory floors Expected LGD based on estimated LGD including impact of relevant forward- looking assumptions such as changes in collateral value Discounted using the cost of capital Discounted using the original effective interest rate Based on the drawn balance plus expected utilization of any undrawn portion prior to default, and cannot be lower than the drawn balance Amortization and repayment of principal and interest from the balance sheet date to the default is captured Expected credit losses are discounted from the default date to the reporting date PD LGD EAD Other In December 2015, the BCBS finalized “Guidance on credit risk and accounting for expected credit losses”, which sets out supervisory guidance for banks relating to sound credit risk practices associated with implementing and applying an expected credit loss accounting framework, which includes the methodology in IFRS 9. In June 2016, OSFI issued guidance on “IFRS 9 Financial Instruments and Disclosures”, which effectively requires the application of the BCBS guidance for Federally Regulated Entities. We are currently building and testing the application of the IFRS 9 ECL methodology to our impacted portfolios, which takes into account OSFI’s and the BCBS’ supervisory guidance. In October 2016, the BCBS issued “Discussion Paper, Regulatory treatment of accounting provisions” for comment as it considers policy options for the longer-term regulatory treatment of accounting provisions given the change from an incurred loss to an expected credit loss accounting framework. The BCBS also issued “Consultative Document, Regulatory treatment of accounting provisions – interim approach and transitional arrangements”, which proposes to retain, for an interim period, the current regulatory treatment of accounting provisions under both the standardized and IRB approaches for credit risk. The consultative document also issues for commentary three potential approaches for transitional capital relief, if any relief is ultimately to be provided. Hedge accounting The IFRS 9 hedge accounting guidance is intended to better align the accounting with risk management activities. However, IFRS 9 allows the existing hedge accounting requirements under IAS 39 to continue in place of the hedge accounting requirements under IFRS 9, pending the completion of the IASB’s project on macro hedge accounting. As permitted, we have elected to not adopt the IFRS 9 hedge accounting requirements and instead will retain the IAS 39 hedge accounting requirements. Future accounting policy changes For details on other future accounting policy changes, see Note 32 to the consolidated financial statements. CIBC 2016 ANNUAL REPORT 81 Management’s discussion and analysis Regulatory developments Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted in the U.S. in July 2010. The Dodd-Frank Act contains many broad reforms impacting the financial services industry. These reforms impact every financial institution in the U.S. and many financial institutions that operate outside the U.S. Most aspects of the Dodd-Frank Act have become effective, while some portions are still subject to final rulemakings by U.S. government agencies, or the expiration of transition periods. CIBC is subject to a number of specific requirements, including, among other things: (i) mandatory clearing, trade reporting and registration of OTC derivative trading activities; (ii) heightened capital, liquidity and prudential standards, such as the enhanced prudential standards and early remediation requirements under Sections 165 and 166 of the Dodd-Frank Act; (iii) mandatory risk retention rules, which will become effective in December 2016, applicable to sponsors of asset-backed securities and securitizations; and (iv) restrictions on proprietary trading, private equity and hedge fund activities, commonly known as the Volcker Rule. CIBC continues to devote the resources necessary to ensure that we implement the requirements in compliance with all applicable regulations under the Dodd-Frank Act. We continually monitor developments to prepare for rulemakings that have the potential to impact our operations in the U.S. and elsewhere. Although these reforms have increased our cost of regulatory compliance and have restricted our ability to engage in certain activities in the U.S. and elsewhere, we do not expect costs and restrictions associated with the new regulations to have a material impact on our financial results. Automatic Exchange of Information – Organisation for Economic Co-operation and Development (OECD) Under the initiative of the OECD, many countries have committed to automatic exchange of information relating to accounts held by tax residents of signatory countries, using a Common Reporting Standard (CRS). CRS was implemented in “early adopter” countries in January 2016, with other countries, including Canada agreeing to implementation in subsequent years, through the adoption of local legislation. Proposed legislation to implement the CRS in Canada was released by the Department of Finance on April 15, 2016. CIBC will meet all obligations imposed under the CRS, in accordance with local law, in all applicable jurisdictions in which it operates. Principles for Effective Risk Data Aggregation and Risk Reporting In January 2013, the BCBS published “Principles for Effective Risk Data Aggregation and Risk Reporting”. The Principles outline the BCBS’ expectations to enhance risk data governance oversight and to improve risk data aggregation and reporting practices, thereby facilitating timely, consistent, and accurate decision making. It is expected that we will be subject to greater reporting scrutiny and may incur increased operating costs as a result of the Principles. We have an enterprise-wide Risk Data Aggregation initiative underway to be compliant with the Principles, which we expect to complete by the December 31, 2016 timeline, as required by OSFI. For a discussion of other regulatory developments, see the “Taxes”, “Capital resources”, and “Management of risk” sections. Related-party transactions We have various processes in place to ensure that the relevant related-party information is identified and reported to the Corporate Governance Committee (CGC) of the Board on a quarterly basis, as required by the Bank Act (Canada). The CGC has the responsibility for reviewing our policies and practices in identifying transactions with our related parties that may materially affect us, and reviewing the associated procedures for promoting compliance with the Bank Act (Canada). In the ordinary course of business, we provide banking services and enter into transactions with related parties on terms similar to those offered to unrelated parties. Related parties include key management personnel(1), their close family members, and entities that they or their close family members control or jointly control. Related parties also include associates and joint ventures accounted for under the equity method, and post-employment benefit plans for CIBC employees. Loans to these related parties are made in the ordinary course of business and on substantially the same terms as for comparable transactions with unrelated parties. We offer a subsidy on annual fees and preferential interest rates on credit card balances to senior officers which is the same offer extended to all employees of CIBC. In addition, CIBC offers deferred share and other plans to non-employee directors, executives, and certain other key employees. Details of our compensation of key management personnel(1) and our investments in equity-accounted associates and joint ventures are disclosed in Notes 25, 18, 19 and 26 to the consolidated financial statements. (1) Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of CIBC directly or indirectly and comprise the members of the Board (referred to as directors); and ExCo and certain named officers per the Bank Act (Canada) (collectively referred to as senior officers). Board members who are also ExCo members are included as senior officers. Policy on the Scope of Services of the Shareholders’ Auditors The “Policy on the Scope of Services of the Shareholders’ Auditors” sets out the parameters for the engagement of the shareholders’ auditors by CIBC that are consistent with applicable law, including the U.S. Sarbanes-Oxley Act of 2002 and SEC rules. The policy requires the Audit Committee’s pre-approval of all work performed by the shareholders’ auditors and prohibits CIBC from engaging the shareholders’ auditors for “prohibited” services. The Audit Committee is also accountable for the oversight of the work of the shareholders’ auditors and for an annual assessment of the engagement team’s qualifications, independence and performance. The Audit Committee is also responsible for conducting a periodic comprehensive review of the external auditor at least every five years. The Audit Committee’s oversight activities over the shareholders’ auditors are disclosed in our Management Proxy Circular. 82 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Controls and procedures Disclosure controls and procedures CIBC’s management, with the participation of the President and Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of CIBC’s disclosure controls and procedures as at October 31, 2016 (as defined in the rules of the SEC and the Canadian Securities Administrators). Based on that evaluation, the President and Chief Executive Officer and the Chief Financial Officer have concluded that such disclosure controls and procedures were effective. Management’s annual report on internal control over financial reporting CIBC’s management is responsible for establishing and maintaining adequate internal control over financial reporting for CIBC. Internal control over financial reporting is a process designed by, or under the supervision of, the President and Chief Executive Officer and the Chief Financial Officer and effected by the Board, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS as issued by the IASB. CIBC’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of CIBC; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS as issued by the IASB, and that receipts and expenditures of CIBC are being made only in accordance with authorizations of CIBC’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of CIBC’s assets that could have a material effect on the financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. CIBC’s management has used the Internal Control – Integrated Framework that was published in 2013 by the COSO as the basis to evaluate the effectiveness of CIBC’s internal control over financial reporting. As at October 31, 2016, management assessed the effectiveness of CIBC’s internal control over financial reporting and concluded that such internal control was effective and that there were no material weaknesses in CIBC’s internal control over financial reporting that have been identified by management. Ernst & Young LLP, the external auditors, have audited the consolidated financial statements of CIBC for the year ended October 31, 2016, and have also issued a report on internal control over financial reporting under standards of the Public Company Accounting Oversight Board (United States). This report is located on page 95 of this Annual Report. Changes in internal control over financial reporting There have been no changes in CIBC’s internal control over financial reporting during the year ended October 31, 2016 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. CIBC 2016 ANNUAL REPORT 83 Management’s discussion and analysis Supplementary annual financial information Average balance sheet, net interest income and margin $ millions, for the year ended October 31 Domestic assets (1) Cash and deposits with banks Securities Trading AFS FVO Securities borrowed or purchased under resale agreements Loans Residential mortgages Personal and credit card Business and government Total loans Other interest-bearing assets Derivative instruments Customers’ liability under acceptances Other non-interest-bearing assets Total domestic assets Foreign assets (1) Cash and deposits with banks Securities Trading AFS FVO Securities borrowed or purchased under resale agreements Loans Residential mortgages Personal and credit card Business and government Total loans Other interest-bearing assets Derivative instruments Other non-interest-bearing assets Total foreign assets Total assets Domestic liabilities (1) Deposits Personal Business and government Bank Secured borrowings Total deposits Derivative instruments Acceptances Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Other liabilities Subordinated indebtedness Total domestic liabilities Foreign liabilities (1) Personal Deposits Business and government Bank Secured borrowings Total deposits Derivative instruments Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Other liabilities Subordinated indebtedness Total foreign liabilities Total liabilities Shareholders’ equity Non-controlling interests Total liabilities and equity Net interest income and margin Additional disclosures: Non-interest- bearing deposit liabilities Domestic Foreign Average balance Interest Average rate 2016 2015 2014 2016 2015 2014 2016 2015 2014 $ 2,186 42,563 13,510 60 20,231 174,105 47,537 40,812 262,454 1,067 14,326 12,720 14,753 383,870 30,745 5,993 20,883 206 19,386 2,426 761 26,911 30,098 114 14,669 3,176 125,270 $ 509,140 $ 134,225 120,602 2,246 38,720 295,793 15,297 12,719 10,875 8,575 10,494 2,912 356,665 7,953 81,554 13,771 – 103,278 15,662 351 $ 2,369 43,061 6,231 58 26,361 159,689 46,234 36,343 242,266 578 14,504 10,256 13,776 359,460 23,473 4,006 12,809 208 11,407 2,324 739 23,464 26,527 92 13,812 3,530 95,864 $ 455,324 $ 125,982 106,439 1,548 38,758 272,727 15,461 10,256 10,724 9,743 9,459 4,138 332,508 7,163 63,798 10,519 115 81,595 14,723 721 $ 2,210 45,051 9,232 48 19,905 150,893 45,289 30,839 227,021 443 9,189 10,013 11,555 334,667 13,274 1,681 13,921 232 10,469 2,146 727 19,919 22,792 71 10,874 3,500 76,814 $ 411,481 $ 120,339 99,318 847 43,525 264,029 8,788 10,013 13,134 8,191 8,670 3,974 316,799 6,707 44,317 6,995 458 58,477 10,401 585 8,554 1,916 235 129,996 486,661 22,275 204 $ 509,140 3,469 1,911 262 102,681 435,189 19,951 184 $ 455,324 4,522 1,640 250 75,875 392,674 18,636 171 $ 411,481 $ $ 40,843 5,605 $ $ 37,202 4,844 $ $ 34,888 4,070 $ 19 1,273 167 3 209 4,188 3,260 1,346 8,794 8 – – – 10,473 137 112 216 3 $ 16 1,248 98 4 241 4,159 3,224 1,244 8,627 10 – – – 10,244 60 39 129 6 $ 11 1,248 162 4 275 4,241 3,183 1,171 8,595 10 – – – 10,305 14 38 175 1 120 131 74 826 1,031 – – – 1,619 $ 12,092 69 132 70 733 935 1 – – 1,239 $ 11,483 45 124 64 687 875 24 – – 1,172 $ 11,477 $ $ $ 858 1,560 9 547 2,974 – – 197 96 3 133 3,403 51 121 69 – 241 – 2 31 45 4 323 3,726 – – 3,726 8,366 $ $ $ 1,032 1,080 7 581 2,700 – – 221 90 10 179 3,200 68 190 31 1 290 – 9 20 47 2 368 3,568 – – 3,568 7,915 $ $ $ 1,129 1,271 4 717 3,121 – – 314 109 10 176 3,730 71 112 31 2 216 – 13 18 39 2 288 4,018 – – 4,018 7,459 0.87 % 2.99 1.24 5.00 0.68 % 0.50 % 2.90 1.57 6.90 2.77 1.75 8.33 1.03 2.41 6.86 3.30 3.35 0.75 – – – 2.73 0.45 1.87 1.03 1.46 0.62 5.40 9.72 3.07 3.43 – – – 1.29 2.37 % 0.64 % 1.29 0.40 1.41 1.01 – – 1.81 1.12 0.03 4.57 0.95 0.64 0.15 0.50 – 0.23 – 0.57 0.36 2.35 1.70 0.25 0.77 – – 0.73 % 1.64 % 0.91 2.60 6.97 3.42 3.56 1.73 – – – 2.85 0.26 0.97 1.01 2.88 1.38 2.81 7.03 3.80 3.79 2.26 – – – 3.08 0.11 2.26 1.26 0.43 0.60 5.68 9.47 3.12 3.52 1.09 – – 1.29 2.52 % 2.79 % 0.43 5.78 8.80 3.45 3.84 33.80 – – 1.53 0.82 % 0.94 % 1.01 0.45 1.50 0.99 – – 2.06 1.28 0.47 1.65 1.18 – – 2.39 0.92 0.11 4.33 0.96 0.95 0.30 0.29 0.87 0.36 – 1.25 0.58 2.46 0.76 0.36 0.82 – – 1.33 0.12 4.43 1.18 1.06 0.25 0.44 0.44 0.37 – 2.22 0.40 2.38 0.80 0.38 1.02 – – 0.78 % 0.98 % 1.74 % 1.81 % (1) Classification as domestic or foreign is based on domicile of debtor or customer. 84 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Volume/rate analysis of changes in net interest income $ millions Domestic assets (1) Cash and deposits with banks Securities Trading AFS FVO Securities borrowed or purchased under resale agreements Loans Residential mortgages Personal and credit card Business and government Total loans Other interest-bearing assets Change in domestic interest income Foreign assets (1) Cash and deposits with banks Securities Trading AFS FVO Securities borrowed or purchased under resale agreements Loans Residential mortgages Personal and credit card Business and government Total loans Other interest-bearing assets Change in foreign interest income Total change in interest income Domestic liabilities (1) Personal Deposits Business and government Bank Secured borrowings Total deposits Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Other liabilities Subordinated indebtedness Change in domestic interest expense Foreign liabilities (1) Personal Deposits Business and government Bank Secured borrowings Total deposits Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Other liabilities Subordinated indebtedness Change in foreign interest expense Total change in interest expense Change in total net interest income 2016/2015 2015/2014 Increase (decrease) due to change in: Increase (decrease) due to change in: Average balance Average rate Total Average balance Average rate Total $ $ $ $ $ $ (1) (14) 114 – (56) 375 91 153 619 8 670 19 19 81 – 48 6 2 108 116 – 283 953 68 144 3 (1) 214 3 (11) 1 (53) 154 7 53 10 (1) 69 (5) 29 – – 93 $ $ 247 706 $ $ 4 39 (45) (1) 24 (346) (55) (51) (452) (10) (441) 58 54 6 (3) 3 (7) 2 (15) (20) (1) 97 (344) (242) 336 (1) (33) 60 (27) 17 (8) 7 49 (24) (122) 28 – (118) (2) (18) (2) 2 (138) (89) (255) $ $ $ 3 25 69 (1) (32) 29 36 102 167 (2) 229 77 73 87 (3) 51 (1) 4 93 96 (1) 380 609 (174) 480 2 (34) 274 (24) 6 (7) (46) 203 (17) (69) 38 (1) (49) (7) 11 (2) 2 (45) $ $ 158 451 $ $ $ 1 (55) (53) 1 89 247 66 209 522 3 508 11 53 (14) – 4 10 1 122 133 7 194 702 53 91 3 (79) 68 (58) 21 1 7 39 5 49 16 (1) 69 3 (4) 6 – 74 113 589 $ $ $ $ $ 4 55 (11) (1) (123) (329) (25) (136) (490) (3) (569) 35 (52) (32) 5 20 (2) 5 (76) (73) (30) (127) (696) (150) (282) – (57) (489) (35) (40) (1) (4) $ $ $ 5 – (64) – (34) (82) 41 73 32 – (61) 46 1 (46) 5 24 8 6 46 60 (23) 67 6 (97) (191) 3 (136) (421) (93) (19) – 3 (569) (530) (8) 29 (16) – 5 (7) 6 2 – 6 $ $ (563) (133) $ $ (3) 78 – (1) 74 (4) 2 8 – 80 (450) 456 (1) Classification as domestic or foreign is based on domicile of debtor or customer. CIBC 2016 ANNUAL REPORT 85 Management’s discussion and analysis Analysis of net loans and acceptances $ millions, as at October 31 2016 2015 2014 2013 2012 2016 2015 2014 2013 2012 Canada (1) U.S. (1) Residential mortgages Student Personal Credit card $ 184,610 73 36,896 11,755 $ 166,616 110 35,412 11,279 $ 155,198 151 34,342 11,078 $ 148,664 210 33,257 14,097 $ 147,841 287 33,891 14,418 $ Total net consumer loans 233,334 213,417 200,769 196,228 196,437 Non-residential mortgages Financial institutions Retail and wholesale Business services Manufacturing-capital goods Manufacturing-consumer goods Real estate and construction Agriculture Oil and gas Mining Forest products Hardware and software Telecommunications and cable Publishing, printing, and broadcasting Transportation Utilities Education, health and social services Governments Others Collective allowance allocated to business and government loans Total net business and government loans, including acceptances 6,734 4,831 4,044 5,312 1,663 2,663 11,684 5,364 4,532 722 465 267 444 333 1,630 1,663 2,826 728 – 7,120 4,137 3,667 5,011 1,505 2,626 8,644 4,828 4,138 761 566 280 510 244 1,449 1,621 2,128 541 – 6,947 2,640 3,515 4,728 1,308 2,329 7,201 4,263 3,633 602 470 339 514 208 1,033 1,282 2,017 578 – 6,979 2,356 3,086 4,191 1,081 1,914 5,794 3,933 2,969 383 434 468 413 290 870 1,170 1,956 613 – 7,095 2,384 2,827 3,694 1,072 1,736 4,956 3,689 2,856 319 426 464 238 356 736 1,082 1,933 727 – – – 56 36 92 103 2,100 290 1,215 128 28 8,554 44 1,951 242 4 165 30 – 288 1,237 – – 17 $ – – 51 37 88 333 667 310 814 181 22 7,206 50 1,469 305 11 167 44 – 183 845 – – 69 $ 1 – 94 40 135 240 659 257 418 221 14 6,394 6 1,276 266 41 118 26 5 221 804 – – 165 $ 1 – 93 32 126 236 403 158 284 189 36 5,611 1 988 223 35 98 26 – 247 816 – – 210 $ 1 – 109 33 143 – 435 113 226 188 62 4,156 1 781 65 44 – 14 – 332 492 25 – 730 (215) (218) (192) (192) (211) (58) (50) (43) (28) (38) 55,690 49,558 43,415 38,708 36,379 16,338 12,626 11,088 9,533 7,626 Total net loans and acceptances $ 289,024 $ 262,975 $ 244,184 $ 234,936 $ 232,816 $ 16,430 $ 12,714 $ 11,223 $ 9,659 $ 7,769 (1) Classification by country is based on domicile of debtor or customer. Analysis of net loans and acceptances (continued) Other (1) Total $ millions, as at October 31 Residential mortgages Student Personal Credit card Total net consumer loans $ Non-residential mortgages Financial institutions Retail and wholesale Business services Manufacturing-capital goods Manufacturing-consumer goods Real estate and construction Agriculture Oil and gas Mining Forest products Hardware and software Telecommunications and cable Publishing, printing, and broadcasting Transportation Utilities Education, health and social services Governments Others Collective allowance allocated to business and government loans Total net business and government loans, including acceptances $ 2016 2,467 – 519 155 3,141 232 1,723 561 1,266 234 114 1,391 24 268 928 – – 359 87 1,326 532 32 1,874 300 $ 2015 2,406 – 476 150 3,032 245 3,291 548 1,370 293 119 1,124 40 324 446 – 12 388 79 899 785 32 1,611 711 $ 2014 2,118 1 410 125 2,654 228 2,155 499 1,098 248 88 890 37 321 384 38 14 162 89 803 631 26 1,079 1,431 $ 2013 2,113 1 429 126 2,669 239 1,065 333 772 202 249 777 40 71 537 30 22 234 4 893 318 24 943 2,403 2012 2016 2015 2014 2013 2012 2,143 $ 187,077 $ 169,022 110 35,939 11,466 73 37,471 11,946 1 568 119 $ 157,317 $ 150,778 211 33,779 14,255 152 34,846 11,243 $ 149,985 288 34,568 14,570 2,831 273 1,099 326 932 243 225 791 65 16 280 29 22 148 37 430 467 23 922 3,011 236,567 216,537 203,558 199,023 199,411 7,069 8,654 4,895 7,793 2,025 2,805 21,629 5,432 6,751 1,892 469 432 833 420 3,244 3,432 2,858 2,602 317 7,698 8,095 4,525 7,195 1,979 2,767 16,974 4,918 5,931 1,512 577 459 942 323 2,531 3,251 2,160 2,152 780 7,415 5,454 4,271 6,244 1,777 2,431 14,485 4,306 5,230 1,252 549 471 702 302 2,057 2,717 2,043 1,657 1,596 7,454 3,824 3,577 5,247 1,472 2,199 12,182 3,974 4,028 1,143 499 588 673 294 2,010 2,304 1,980 1,556 2,613 7,368 3,918 3,266 4,852 1,503 2,023 9,903 3,755 3,653 664 499 486 400 393 1,498 2,041 1,981 1,649 3,741 (65) (57) (42) (40) (23) (338) (325) (277) (260) (272) 11,186 12,260 10,179 9,116 9,316 83,214 74,444 64,682 57,357 53,321 Total net loans and acceptances $ 14,327 $ 15,292 $ 12,833 $ 11,785 $ 12,147 $ 319,781 $ 290,981 $ 268,240 $ 256,380 $ 252,732 (1) Classification by country is based on domicile of debtor or customer. 86 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Summary of allowance for credit losses $ millions, as at or for the year ended October 31 Balance at beginning of year Provision for credit losses Write-offs Domestic (1) Residential mortgages Student Personal and credit card Other business and government Foreign (1) Residential mortgages Personal and credit card Other business and government Total write-offs Recoveries Domestic (1) Personal and credit card Other business and government Foreign (1) Personal and credit card Other business and government Total recoveries Net write-offs Interest income on impaired loans Foreign exchange and other Balance at end of year Comprises: Loans Undrawn credit facilities $ 2016 1,762 1,051 $ 2015 1,736 771 $ 2014 1,758 937 $ 2013 1,916 1,121 $ 2012 1,851 1,291 13 – 842 116 21 18 143 14 1 781 42 18 16 132 19 3 857 63 8 16 92 15 3 1,030 137 9 9 245 18 6 1,118 93 2 13 98 1,153 1,004 1,058 1,448 1,348 163 8 6 6 183 970 (29) (1) 171 8 5 2 186 818 (23) 96 177 11 2 2 192 866 (30) (63) $ $ 1,813 1,691 122 $ $ 1,762 1,670 92 $ $ 1,736 1,660 76 $ $ 172 6 3 3 184 1,264 (37) 22 1,758 1,698 60 158 8 3 1 170 1,178 (47) (1) 1,916 1,860 56 $ $ Ratio of net write-offs during the year to average loans outstanding during the year 0.33 % 0.30 % 0.35 % 0.52 % 0.49 % (1) Classification as domestic or foreign is based on domicile of debtor or customer. Allowance for credit losses on impaired loans as a percentage of gross impaired loans $ millions, as at October 31 Domestic (2) Residential mortgages Personal loans Business and government Total domestic Foreign (2) Residential mortgages Personal loans Business and government Total foreign Total allowance 2016 2015 2014 2013 2012 2016 2015 2014 2013 2012 Allowance for credit losses (1) Allowance as a % of gross impaired loans $ 20 105 63 188 148 40 196 384 $ 21 99 77 197 167 46 236 449 $ 22 96 38 156 146 43 299 488 $ 24 105 61 190 65 30 262 357 $ 18 159 97 274 27 25 395 447 8.0 % 9.3 % 10.2 % 11.4 % 8.0 % 85.4 30.9 32.5 56.3 57.1 26.2 35.6 91.7 42.8 38.4 48.0 58.2 49.3 49.6 80.0 60.3 39.1 45.9 53.8 46.9 47.1 77.8 63.5 43.1 23.8 34.9 35.1 32.3 84.6 47.3 44.3 11.0 31.6 42.8 35.8 $ 572 $ 646 $ 644 $ 547 $ 721 34.5 % 45.5 % 44.9 % 35.4 % 38.6 % (1) Comprises individual allowance, and collective allowance related to personal, scored small business, and mortgage impaired loans that are greater than 90 days delinquent. (2) Classification as domestic or foreign is based on domicile of debtor or customer. CIBC 2016 ANNUAL REPORT 87 Management’s discussion and analysis Allowance on non-impaired loans as a percentage of net loans and acceptances $ millions, as at October 31 2016 2015 2014 2013 2012 2016 2015 2014 2013 2012 Allowance for credit losses (1) Allowance as a % of net loans and acceptances Domestic (2) Residential mortgages Personal loans Credit cards Business and government $ Total domestic Foreign (2) Residential mortgages Personal loans Credit cards Business and government Total foreign Total allowance 30 345 383 205 963 23 7 3 123 156 $ 26 316 334 208 884 22 7 4 107 140 $ 21 315 384 183 903 20 6 2 85 113 $ 63 313 512 179 $ 19 278 582 186 1,067 1,065 8 3 5 68 84 7 5 1 61 74 – % – % – % – % – % 0.9 3.3 0.4 0.3 0.9 1.2 1.6 0.4 0.5 0.9 3.0 0.4 0.3 0.9 1.3 2.1 0.4 0.5 0.9 3.5 0.4 0.4 0.9 1.2 1.2 0.4 0.5 0.9 3.6 0.5 0.5 0.4 0.6 3.2 0.4 0.4 0.8 4.0 0.5 0.5 0.3 0.7 0.7 0.4 0.4 $ 1,119 $ 1,024 $ 1,016 $ 1,151 $ 1,139 0.3 % 0.4 % 0.4 % 0.4 % 0.5 % (1) Excludes allowance on undrawn credit facilities. (2) Classification as domestic or foreign is based on domicile of debtor or customer. Net loans and acceptances by geographic location(1) $ millions, as at October 31 Canada Atlantic provinces Quebec Ontario Prairie provinces Alberta, Northwest Territories and Nunavut British Columbia and Yukon Collective allowance allocated to Canada (2) Total Canada U.S. Other countries 2016 2015 2014 2013 2012 $ 14,006 25,471 139,254 13,341 43,308 54,567 (923) 289,024 16,430 14,327 $ 13,598 23,093 125,584 12,877 41,197 47,478 (852) 262,975 12,714 15,292 $ 13,307 21,802 114,940 12,136 38,859 44,012 (872) 244,184 11,223 12,833 $ 13,124 21,257 109,390 11,829 37,953 42,421 (1,038) 234,936 9,659 11,785 $ 13,228 20,591 108,861 11,440 38,300 41,435 (1,039) 232,816 7,769 12,147 Total net loans and acceptances $ 319,781 $ 290,981 $ 268,240 $ 256,380 $ 252,732 (1) Classification by country is based on domicile of debtor or customer. (2) Relates to collective allowance, except for: (i) residential mortgages greater than 90 days delinquent; and (ii) personal loans and scored small business loans greater than 30 days delinquent. 88 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Net impaired loans $ millions, as at October 31 Gross impaired loans Residential mortgages Student Personal Total gross impaired consumer loans Non-residential mortgages Financial institutions Retail, wholesale and business services Manufacturing – consumer and capital goods Real estate and construction Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other Total gross impaired – business and government loans Total gross impaired loans Other past due loans (2) Canada (1) U.S.(1) 2016 2015 2014 2013 2012 2016 2015 2014 2013 2012 $ 251 3 120 $ 225 5 103 374 4 1 23 19 23 4 121 4 1 – 4 204 578 362 333 4 – 26 8 9 1 126 2 1 – 3 180 513 337 $ 216 7 113 336 $ 210 $ 9 126 345 226 12 176 414 $ 4 1 31 4 10 2 4 4 1 – 2 63 1 – 54 6 9 4 13 6 1 – 2 96 399 342 441 378 – 1 38 11 23 7 55 62 6 – 2 205 619 401 – – – – – – 5 – 62 – 248 – – – – 315 315 – $ – – – – – – – – 94 – 1 – – 10 – 105 105 – $ – – 1 1 – – – – 135 – – – – 20 – 155 156 – $ – – 4 4 – – 34 – 159 – – – 38 – – 231 235 – $ – – – – – – 58 3 183 – – – 90 – – 334 334 11 Total gross impaired and other past due loans $ 940 $ 850 $ 741 $ 819 $ 1,020 $ 315 $ 105 $ 156 $ 235 $ 345 Allowance for credit losses (3) Residential mortgages Student Personal Total allowance – consumer loans Non-residential mortgages Financial institutions Retail, wholesale and business services Manufacturing – consumer and capital goods Real estate and construction Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other Total allowance – business and government loans Total allowance Net impaired loans Residential mortgages Student Personal Total net impaired consumer loans Non-residential mortgages Financial institutions Retail, wholesale and business services Manufacturing – consumer and capital goods Real estate and construction Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other Total net impaired – business and government loans $ 20 – 105 125 $ 21 – 99 120 $ 22 – 96 118 $ 24 $ – 105 129 18 – 159 177 2 – 16 7 10 1 21 3 1 – 2 63 1 – 19 6 7 – 39 2 1 – 2 77 1 – 20 3 7 – 2 3 1 – 1 38 – – 31 6 6 1 9 5 1 – 2 61 – – 26 8 10 4 25 16 6 – 2 97 $ 188 $ 197 $ 156 $ 190 $ 274 $ 204 5 4 213 $ 194 7 17 218 $ 186 $ 9 21 216 208 12 17 237 3 – 7 2 2 1 87 – – – 1 103 3 1 11 1 3 2 2 1 – – 1 25 1 – 23 – 3 3 4 1 – – – 35 – 1 12 3 13 3 30 46 – – – 108 345 $ 231 3 15 249 2 1 7 12 13 3 100 1 – – 2 141 $ $ $ $ $ $ – – – – – – 4 – 20 – 8 – – – – 32 32 – – – – – – 1 – 42 – 240 – – – – 283 $ 283 $ – – – – – – – – 27 – – – – 6 – 33 33 – – – – – – – – 67 – 1 – – 4 – 72 72 $ $ $ $ – – 1 1 – – – – 47 – – – – 13 – 60 61 – – – – – – – – 88 – – – – 7 – 95 95 $ $ $ – – 1 1 – – 20 – 36 – – – 2 – – 58 59 – – 3 3 – – 14 – 123 – – – 36 – – 173 $ – – – – – – 38 3 90 – – – 55 – – 186 $ 186 $ – – – – – – 20 – 93 – – – 35 – – 148 $ 176 $ 148 Total net impaired loans $ 390 $ 316 $ 243 $ 251 $ (1) Classification by country is based on domicile of debtor or customer. (2) Represents loans where repayment of principal or payment of interest is contractually in arrears between 90 and 180 days. (3) Comprises individual allowance, and collective allowance related to personal, scored small business, and mortgage impaired loans that are greater than 90 days delinquent. CIBC 2016 ANNUAL REPORT 89 Management’s discussion and analysis Net impaired loans (continued) $ millions, as at October 31 Gross impaired loans Residential mortgages Student Personal Total gross impaired consumer loans Non-residential mortgages Financial institutions Retail, wholesale and business services Manufacturing – consumer and capital goods Real estate and construction Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other Total gross impaired – business and government loans Total gross impaired loans Other past due loans (2) Other (1) Total 2016 2015 2014 2013 2012 2016 2015 2014 2013 2012 $ 263 – 70 $ 348 – 79 $ 318 – 79 $ 273 – 82 $ 246 – 79 $ 514 $ 3 190 573 $ 5 182 534 $ 7 193 483 $ 9 212 333 17 3 94 210 104 1 – – 2 – 1 432 765 3 427 34 5 141 47 139 3 2 – 2 1 – 374 801 3 397 60 5 168 44 184 6 1 5 8 1 – 482 879 8 355 85 – 174 52 179 11 1 5 7 1 1 516 871 7 325 101 1 191 54 210 12 1 9 8 1 1 589 914 7 707 21 4 122 229 189 5 369 4 3 – 5 951 760 38 5 167 55 242 4 129 2 3 11 3 659 734 64 6 199 48 329 8 5 9 9 21 2 700 704 86 – 262 58 347 15 14 11 46 1 3 843 1,658 365 1,419 340 1,434 350 1,547 385 472 12 255 739 101 2 287 68 416 19 56 71 104 1 3 1,128 1,867 419 Total gross impaired and other past due loans $ 768 $ 804 $ 887 $ 878 $ 921 $ 2,023 $ 1,759 $ 1,784 $ 1,932 $ 2,286 Allowance for credit losses (3) Residential mortgages Student Personal Total allowance – consumer loans Non-residential mortgages Financial institutions Retail, wholesale and business services Manufacturing – consumer and capital goods Real estate and construction Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other $ 148 – 40 188 $ 167 – 46 213 $ 146 – 42 188 $ 12 2 48 45 54 1 – – 2 – – 17 3 65 43 68 3 1 – 2 1 – 31 3 67 42 91 4 – – – 1 – 65 – 29 94 32 – 60 41 62 5 – 1 2 1 – $ 27 – 25 52 24 1 63 37 70 3 – 9 1 1 – $ 168 $ – 145 313 14 2 68 52 84 2 29 3 3 – 2 Total allowance – business and government loans 164 203 239 204 209 259 188 $ – 145 168 $ – 139 89 $ – 135 333 18 3 84 49 102 3 40 2 3 7 2 313 307 32 3 87 45 145 4 2 3 1 14 1 337 224 32 – 111 47 104 6 9 6 5 1 2 323 Total allowance Net impaired loans Residential mortgages Student Personal Total net impaired consumer loans Non-residential mortgages Financial institutions Retail, wholesale and business services Manufacturing – consumer and capital goods Real estate and construction Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other Total net impaired – business and government loans $ 352 $ 416 $ 427 $ 298 $ 261 $ 115 – 30 145 5 1 46 165 50 – – – – – 1 268 $ 181 – 33 214 17 2 76 4 71 – 1 – – – – 171 $ 172 – 37 $ 208 – 53 $ 219 – 54 209 29 2 101 2 93 2 1 5 8 – – 243 261 53 – 114 11 117 6 1 4 5 – 1 312 273 77 – 128 17 140 9 1 – 7 – 1 380 $ $ 572 $ 646 $ 644 $ 547 $ 346 $ 3 45 385 $ 5 37 366 $ 7 54 394 $ 9 77 394 7 2 54 177 105 3 340 1 – – 3 692 427 20 2 83 6 140 1 89 – – 4 1 346 427 32 3 112 3 184 4 3 6 8 7 1 363 480 54 – 151 11 243 9 5 5 41 – 1 520 45 – 184 229 24 1 127 48 170 7 25 25 62 1 2 492 721 427 12 71 510 77 1 160 20 246 12 31 46 42 – 1 636 Total net impaired loans $ 413 $ 385 $ 452 $ 573 $ 653 $ 1,086 $ 773 $ 790 $ 1,000 $ 1,146 (1) Classification by country is based on domicile of debtor or customer. (2) Represents loans where repayment of principal or payment of interest is contractually in arrears between 90 and 180 days. (3) Comprises individual allowance, and collective allowance related to personal, scored small business, and mortgage impaired loans that are greater than 90 days delinquent. 90 CIBC 2016 ANNUAL REPORT Management’s discussion and analysis Deposits $ millions, for the year ended October 31 2016 2015 2014 2016 2015 2014 2016 2015 2014 Average balance Interest Rate Deposits in domestic bank offices (1) Payable on demand Personal Business and government Bank Payable after notice Personal Business and government Bank Payable on a fixed date Personal Business and government Bank Secured borrowings Total domestic Deposits in foreign bank offices Payable on demand Personal Business and government Bank Payable after notice Personal Business and government Payable on a fixed date Personal Business and government Bank Secured borrowings Total foreign Total deposits $ 9,965 $ 9,252 $ 37,572 2,943 87,057 28,873 174 40,414 58,618 1,816 38,720 33,735 2,083 80,328 25,128 97 38,996 50,604 937 38,758 $ 8,490 30,043 1,780 72,928 21,606 19 41,028 50,060 427 43,525 $ $ 12 138 – 363 240 2 505 845 10 547 14 121 2 454 243 1 589 749 5 581 15 107 6 461 242 – 673 928 4 717 306,152 279,918 269,906 2,662 2,759 3,153 818 4,261 3 2,551 801 1,373 72,031 11,081 – 92,919 701 3,801 6 2,369 766 1,499 56,203 8,944 115 74,404 567 3,089 6 2,040 673 1,993 38,164 5,610 458 52,600 1 3 – 20 1 8 454 66 – 553 3 4 – 33 1 7 152 30 1 231 3 3 1 38 1 10 102 24 2 184 0.12 % 0.37 – 0.15 % 0.36 0.10 0.18 % 0.36 0.34 0.42 0.83 1.15 1.25 1.44 0.55 1.41 0.87 0.12 0.07 – 0.78 0.12 0.58 0.63 0.60 – 0.60 0.57 0.97 1.03 1.51 1.48 0.53 1.50 0.99 0.43 0.11 – 1.39 0.13 0.47 0.27 0.34 0.87 0.31 0.63 1.12 – 1.64 1.85 0.94 1.65 1.17 0.53 0.10 16.67 1.86 0.15 0.50 0.27 0.43 0.44 0.35 $ 399,071 $ 354,322 $ 322,506 $ 3,215 $ 2,990 $ 3,337 0.81 % 0.84 % 1.03 % (1) Deposits by foreign depositors in our domestic bank offices amounted to $10.6 billion (2015: $7.4 billion; 2014: $6.0 billion). Short-term borrowings $ millions, as at or for the year ended October 31 Amounts outstanding at end of year Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Total short-term borrowings Obligations related to securities sold short Average balance Maximum month-end balance Average interest rate Obligations related to securities lent or sold under repurchase agreements Average balance Maximum month-end balance Average interest rate Fees paid to the shareholders’ auditors $ millions, for the year ended October 31 Audit fees (1) Audit-related fees (2) Tax fees (3) All other fees (4) Total 2016 2015 2014 $ $ $ $ 10,338 14,212 24,550 11,226 13,029 1.77 % 17,129 24,513 $ $ $ $ 9,806 10,343 20,149 11,445 13,248 2.01 % 13,212 14,766 $ $ $ $ 12,999 10,765 23,764 13,719 14,833 2.38 % 12,713 14,652 0.74 % 0.83 % 1.00 % $ 2016 16.4 2.2 0.3 – $ 2015 15.9 3.2 0.4 0.3 $ 2014 14.2 2.0 0.1 0.1 $ 18.9 $ 19.8 $ 16.4 (1) (2) (3) (4) For the audit of CIBC’s annual financial statements and services normally provided by the principal auditor in connection with CIBC’s statutory and regulatory filings. Audit fees also include the audit of internal controls over financial reporting under standards of the Public Company Accounting Oversight Board (United States). For the assurance and related services that are reasonably related to the performance of the audit or review of CIBC’s financial statements, including various agreed upon procedures and translation of financial reports. For tax compliance services. Includes fees for non-audit services. CIBC 2016 ANNUAL REPORT 91 Consolidated financial statements Consolidated financial statements 93 94 96 97 98 99 100 101 Financial reporting responsibility Independent auditors’ report of registered public accounting firm to shareholders Consolidated balance sheet Consolidated statement of income Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Details of the notes to the consolidated financial statements 101 Note 1 – Basis of preparation and summary of significant 110 119 120 121 124 127 128 130 130 130 131 135 136 137 140 Note 2 Note 3 Note 4 Note 5 Note 6 accounting policies – Fair value measurement – Significant acquisitions and dispositions – Securities – Loans – Structured entities and derecognition of financial assets – Land, buildings and equipment – Goodwill, software and other intangible assets – Other assets Note 7 Note 8 Note 9 Note 10 – Deposits Note 11 – Other liabilities Note 12 – Derivative instruments Note 13 – Designated accounting hedges Note 14 – Subordinated indebtedness Note 15 – Common and preferred share capital Note 16 – Capital Trust securities 141 142 144 149 151 151 153 157 158 159 160 161 163 164 165 166 166 Note 17 – Interest rate sensitivity Note 18 – Share-based payments Note 19 – Post-employment benefits Note 20 – Income taxes Note 21 – Earnings per share Note 22 – Commitments, guarantees and pledged assets Note 23 – Contingent liabilities and provision Note 24 – Concentration of credit risk Note 25 – Related-party transactions Note 26 – Investments in equity-accounted associates and joint ventures Note 27 – Significant subsidiaries Note 28 – Segmented and geographic information Note 29 – Financial instruments – disclosures Note 30 – Offsetting financial assets and liabilities Note 31 – Interest income and expense Note 32 – Future accounting policy changes Note 33 – Subsequent event 92 CIBC 2016 ANNUAL REPORT Consolidated financial statements Financial reporting responsibility The management of Canadian Imperial Bank of Commerce (CIBC) is responsible for the preparation, presentation, accuracy and reliability of the Annual Report, which includes the consolidated financial statements and management’s discussion and analysis (MD&A). The consolidated financial statements have been prepared in accordance with Section 308(4) of the Bank Act (Canada), which requires that the financial statements be prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. The MD&A has been prepared in accordance with the requirements of applicable securities laws. The consolidated financial statements and MD&A, contain items that reflect the best estimates and judgments of the expected effects of current events and transactions with appropriate consideration to materiality. Financial information appearing throughout the Annual Report is consistent with the consolidated financial statements. Management has developed and maintains effective systems, controls and procedures to ensure that information used internally and disclosed externally is reliable and timely. During the past year, we have continued to improve, document and test the design and operating effectiveness of internal control over financial reporting. The results of our work have been subjected to audit by the shareholders’ auditors. Management has assessed the effectiveness of CIBC’s internal control over financial reporting as at year end using the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based upon this assessment, we have determined that internal control over financial reporting is effective in all material respects and CIBC is in compliance with the requirements set by the U.S. Securities and Exchange Commission (SEC) under the U.S. Sarbanes-Oxley Act (SOX). CIBC’s Chief Executive Officer and Chief Financial Officer have certified CIBC’s annual filings with the SEC under SOX and with the Canadian Securities Administrators under Canadian securities laws. The Internal Audit department reviews and reports on the effectiveness of CIBC’s internal control, risk management and governance systems and processes, including accounting and financial controls, in accordance with the audit plan approved by the Audit Committee. Our Chief Auditor has unrestricted access to the Audit Committee. The Board of Directors oversees management’s responsibilities for financial reporting through the Audit Committee, which is composed of independent directors. The Audit Committee reviews CIBC’s interim and annual consolidated financial statements and MD&A and recommends them for approval by the Board of Directors. Other key responsibilities of the Audit Committee include monitoring CIBC’s system of internal control, and reviewing the qualifications, independence and performance of the shareholders’ auditors and internal auditors. Ernst & Young LLP, the external auditors, obtain an understanding of CIBC’s internal controls and procedures for financial reporting to plan and conduct such tests and other audit procedures as they consider necessary in the circumstances to express their opinions in the reports that follow. Ernst & Young LLP has unrestricted access to the Audit Committee to discuss their audit and related matters. The Office of the Superintendent of Financial Institutions (OSFI) Canada is mandated to protect the rights and interest of depositors and creditors of CIBC. Accordingly, OSFI examines and enquires into the business and affairs of CIBC, as deemed necessary, to ensure that the provisions of the Bank Act (Canada) are being complied with and that CIBC is in sound financial condition. Victor G. Dodig President and Chief Executive Officer Kevin Glass Chief Financial Officer November 30, 2016 CIBC 2016 ANNUAL REPORT 93 Consolidated financial statements Independent auditors’ report of registered public accounting firm to shareholders Report on the consolidated financial statements We have audited the accompanying consolidated financial statements of Canadian Imperial Bank of Commerce (CIBC), which comprise the consolidated balance sheet as at October 31, 2016 and 2015 and the consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended October 31, 2016, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of CIBC as at October 31, 2016 and 2015, and its financial performance and its cash flows for each of the years in the three-year period ended October 31, 2016, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Other matter We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CIBC’s internal control over financial reporting as of October 31, 2016, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 30, 2016 expressed an unqualified opinion on CIBC’s internal control over financial reporting. Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada November 30, 2016 94 CIBC 2016 ANNUAL REPORT Consolidated financial statements Independent auditors’ report of registered public accounting firm to shareholders Report on Internal Controls under Standards of the Public Company Accounting Oversight Board (United States) We have audited Canadian Imperial Bank of Commerce’s (CIBC) internal control over financial reporting as of October 31, 2016, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). CIBC’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management’s annual report on internal control over financial reporting contained in the accompanying management’s discussion and analysis. Our responsibility is to express an opinion on CIBC’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS as issued by the IASB, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, CIBC maintained, in all material respects, effective internal control over financial reporting as of October 31, 2016, based on the COSO criteria. We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of CIBC as at October 31, 2016 and 2015, and the consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended October 31, 2016 of CIBC and our report dated November 30, 2016 expressed an unqualified opinion thereon. Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada November 30, 2016 CIBC 2016 ANNUAL REPORT 95 Consolidated financial statements Consolidated balance sheet $ millions, as at October 31 ASSETS Cash and non-interest-bearing deposits with banks Interest-bearing deposits with banks Securities (Note 4) Trading Available-for-sale (AFS) Designated at fair value (FVO) Cash collateral on securities borrowed Securities purchased under resale agreements Loans (Note 5) Residential mortgages Personal Credit card Business and government Allowance for credit losses Other Derivative instruments (Note 12) Customers’ liability under acceptances Land, buildings and equipment (Note 7) Goodwill (Note 8) Software and other intangible assets (Note 8) Investments in equity-accounted associates and joint ventures (Note 26) Deferred tax assets (Note 20) Other assets (Note 9) LIABILITIES AND EQUITY Deposits (Note 10) Personal Business and government Bank Secured borrowings Obligations related to securities sold short Cash collateral on securities lent Obligations related to securities sold under repurchase agreements Other Derivative instruments (Note 12) Acceptances Deferred tax liabilities (Note 20) Other liabilities (Note 11) Subordinated indebtedness (Note 14) Equity Preferred shares (Note 15) Common shares (Note 15) Contributed surplus Retained earnings Accumulated other comprehensive income (AOCI) Total shareholders’ equity Non-controlling interests Total equity 2016 2015 $ 3,500 $ 3,053 10,665 15,584 49,915 37,253 255 87,423 5,433 28,377 187,298 38,041 12,332 71,437 (1,691) 307,417 27,762 12,364 1,898 1,539 1,410 766 771 12,032 58,542 46,181 28,534 267 74,982 3,245 30,089 169,258 36,517 11,804 65,276 (1,670) 281,185 26,342 9,796 1,897 1,526 1,197 1,847 507 12,059 55,171 $ 501,357 $ 463,309 $ 148,081 190,240 17,842 39,484 395,647 10,338 2,518 11,694 28,807 12,395 21 12,898 54,121 3,366 1,000 8,026 72 13,584 790 23,472 201 23,673 $ 137,378 178,850 10,785 39,644 366,657 9,806 1,429 8,914 29,057 9,796 28 12,195 51,076 3,874 1,000 7,813 76 11,433 1,038 21,360 193 21,553 $ 501,357 $ 463,309 The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. Victor G. Dodig President and Chief Executive Officer Jane L. Peverett Director 96 CIBC 2016 ANNUAL REPORT Consolidated financial statements Consolidated statement of income $ millions, except as noted, for the year ended October 31 Interest income Loans Securities Securities borrowed or purchased under resale agreements Deposits with banks Interest expense Deposits Securities sold short Securities lent or sold under repurchase agreements Subordinated indebtedness Other Net interest income Non-interest income Underwriting and advisory fees Deposit and payment fees Credit fees Card fees Investment management and custodial fees Mutual fund fees Insurance fees, net of claims Commissions on securities transactions Trading income (loss) AFS securities gains, net (Note 4) FVO gains (losses), net Foreign exchange other than trading (FXOTT) Income from equity-accounted associates and joint ventures (Note 26) Other Total revenue Provision for credit losses (Note 5) Non-interest expenses Employee compensation and benefits Occupancy costs Computer, software and office equipment Communications Advertising and business development Professional fees Business and capital taxes Other Income before income taxes Income taxes (Note 20) Net income Net income (loss) attributable to non-controlling interests Preferred shareholders Common shareholders Net income attributable to equity shareholders Earnings per share (EPS) (in dollars) (Note 21) Basic Diluted Dividends per common share (in dollars) (Note 15) 2016 2015 $ 9,833 1,774 329 156 12,092 $ 9,573 1,524 310 76 11,483 $ 2014 9,504 1,628 320 25 11,477 3,215 199 127 137 48 3,726 8,366 446 832 638 470 882 1,462 396 342 (88) 73 17 367 96 736 6,669 2,990 230 110 181 57 3,568 7,915 427 830 533 449 814 1,457 361 385 (139) 138 (3) 92 177 420 5,941 3,337 327 127 178 49 4,018 7,459 444 848 478 414 677 1,236 356 408 (176) 201 (15) 43 226 764 5,904 15,035 1,051 13,856 771 13,363 937 4,982 804 1,398 319 269 201 68 930 8,971 5,013 718 4,295 20 38 4,237 4,275 10.72 10.70 4.75 $ $ $ $ $ 5,099 782 1,292 326 281 230 68 783 8,861 4,224 634 3,590 14 45 3,531 3,576 8.89 8.87 4.30 $ $ $ $ $ 4,636 736 1,200 312 285 201 59 1,083 8,512 3,914 699 3,215 (3) 87 3,131 3,218 7.87 7.86 3.94 $ $ $ $ $ The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. CIBC 2016 ANNUAL REPORT 97 Consolidated financial statements Consolidated statement of comprehensive income $ millions, for the year ended October 31 Net income 2016 2015 $ 4,295 $ 3,590 2014 $ 3,215 Other comprehensive income (OCI), net of income tax, that is subject to subsequent reclassification to net income Net foreign currency translation adjustments Net gains (losses) on investments in foreign operations Net (gains) losses on investments in foreign operations reclassified to net income Net gains (losses) on hedges of investments in foreign operations Net (gains) losses on hedges of investments in foreign operations reclassified to net income Net change in AFS securities Net gains (losses) on AFS securities Net (gains) losses on AFS securities reclassified to net income Net change in cash flow hedges Net gains (losses) on derivatives designated as cash flow hedges Net (gains) losses on derivatives designated as cash flow hedges reclassified to net income OCI, net of income tax, that is not subject to subsequent reclassification to net income Net gains (losses) on post-employment defined benefit plans Net fair value change of FVO liabilities attributable to changes in credit risk Total OCI (1) Comprehensive income Comprehensive income (loss) attributable to non-controlling interests Preferred shareholders Common shareholders Comprehensive income attributable to equity shareholders 487 (272) (257) 121 79 125 (58) 67 13 (12) 1 (390) (5) (248) 4,047 20 38 3,989 4,027 $ $ $ $ 1,445 (21) (720) 18 722 (67) (97) (164) (7) 3 (4) 374 5 933 4,523 14 45 4,464 4,509 $ $ $ $ 694 – (425) – 269 152 (146) 6 94 (81) 13 (143) – 145 3,360 (3) 87 3,276 3,363 $ $ $ $ (1) Includes $6 million of gains for 2016 (2015: $5 million of losses; 2014: $16 million of gains) relating to our investments in equity-accounted associates and joint ventures. $ millions, for the year ended October 31 2016 2015 2014 Income tax (expense) benefit Subject to subsequent reclassification to net income Net foreign currency translation adjustments Net gains (losses) on investments in foreign operations Net (gains) losses on investments in foreign operations reclassified to net income Net gains (losses) on hedges of investments in foreign operations Net (gains) losses on hedges of investments in foreign operations reclassified to net income Net change in AFS securities Net gains (losses) on AFS securities Net (gains) losses on AFS securities reclassified to net income Net change in cash flow hedges Net gains (losses) on derivatives designated as cash flow hedges Net (gains) losses on derivatives designated as cash flow hedges reclassified to net income Not subject to subsequent reclassification to net income Net gains (losses) on post-employment defined benefit plans Net fair value change of FVO liabilities attributable to changes in credit risk $ $ (17) 37 128 (26) 122 (24) 15 (9) (5) 5 – 149 1 263 $ (118) 3 91 (6) (30) 42 48 90 2 (2) – (129) (1) (70) $ $ $ (52) – 67 – 15 (71) 59 (12) (34) 29 (5) 54 – 52 The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. 98 CIBC 2016 ANNUAL REPORT Consolidated financial statements Consolidated statement of changes in equity $ millions, for the year ended October 31 Preferred shares (Note 15) Balance at beginning of year Issue of preferred shares Redemption of preferred shares Balance at end of year Common shares (Note 15) Balance at beginning of year Issue of common shares Purchase of common shares for cancellation Treasury shares Balance at end of year Contributed surplus Balance at beginning of year Stock option expense Stock options exercised Other Balance at end of year Retained earnings Balance at beginning of year Net income attributable to equity shareholders Dividends (Note 15) Preferred Common Premium on purchase of common shares for cancellation Other Balance at end of year AOCI, net of income tax AOCI, net of income tax, that is subject to subsequent reclassification to net income Net foreign currency translation adjustments Balance at beginning of year Net change in foreign currency translation adjustments Balance at end of year Net gains (losses) on AFS securities Balance at beginning of year Net change in AFS securities Balance at end of year (1) Net gains (losses) on cash flow hedges Balance at beginning of year Net change in cash flow hedges Balance at end of year AOCI, net of income tax, that is not subject to subsequent reclassification to net income Net gains (losses) on post-employment defined benefit plans Balance at beginning of year Net change in post-employment defined benefit plans Balance at end of year Net fair value change of FVO liabilities attributable to changes in credit risk Balance at beginning of year Net change attributable to changes in credit risk Balance at end of year Total AOCI, net of income tax Non-controlling interests Balance at beginning of year Net income (loss) attributable to non-controlling interests Dividends Other Balance at end of year Equity at end of year $ $ $ $ $ $ $ 2016 1,000 – – 1,000 7,813 273 (61) 1 8,026 76 5 (9) – 72 11,433 4,275 (38) (1,879) (209) 2 $ $ $ $ $ $ $ 2015 1,031 600 (631) 1,000 7,782 30 (2) 3 7,813 75 5 (4) – 76 9,626 3,576 (45) (1,708) (9) (7) $ $ $ $ $ $ $ 2014 1,706 400 (1,075) 1,031 7,753 96 (65) (2) 7,782 82 7 (14) – 75 8,318 3,218 (87) (1,567) (250) (6) $ 13,584 $ 11,433 $ 9,626 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1,035 79 1,114 94 67 161 22 1 23 (118) (390) (508) 5 (5) – 790 193 20 (19) 7 201 23,673 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 313 722 1,035 258 (164) 94 26 (4) 22 (492) 374 (118) – 5 5 1,038 164 14 (5) 20 193 21,553 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 44 269 313 252 6 258 13 13 26 (349) (143) (492) – – – 105 175 (3) (4) (4) 164 18,783 (1) Includes $43 million (2015: $71 million; 2014: $20 million) of cumulative loss related to AFS securities measured at fair value. The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. CIBC 2016 ANNUAL REPORT 99 Consolidated financial statements Consolidated statement of cash flows $ millions, for the year ended October 31 2016 2015 2014 Cash flows provided by (used in) operating activities Net income Adjustments to reconcile net income to cash flows provided by (used in) operating activities: $ 4,295 $ 3,590 $ 3,215 Provision for credit losses Amortization and impairment (1) Stock option expense Deferred income taxes AFS securities gains, net Net losses (gains) on disposal of land, buildings and equipment Other non-cash items, net Net changes in operating assets and liabilities Interest-bearing deposits with banks Loans, net of repayments Deposits, net of withdrawals Obligations related to securities sold short Accrued interest receivable Accrued interest payable Derivative assets Derivative liabilities Trading securities FVO securities Other FVO assets and liabilities Current income taxes Cash collateral on securities lent Obligations related to securities sold under repurchase agreements Cash collateral on securities borrowed Securities purchased under resale agreements Other, net Cash flows provided by (used in) financing activities Issue of subordinated indebtedness Redemption/repurchase/maturity of subordinated indebtedness Issue of preferred shares Redemption of preferred shares Issue of common shares for cash Purchase of common shares for cancellation Net proceeds from treasury shares Dividends paid Share issuance costs Cash flows provided by (used in) investing activities Purchase of AFS securities Proceeds from sale of AFS securities Proceeds from maturity of AFS securities Net cash used in acquisitions Net cash provided by dispositions Net purchase of land, buildings and equipment Effect of exchange rate changes on cash and non-interest-bearing deposits with banks Net increase (decrease) in cash and non-interest-bearing deposits with banks during year Cash and non-interest-bearing deposits with banks at beginning of year Cash and non-interest-bearing deposits with banks at end of year (2) Cash interest paid Cash income taxes paid Cash interest and dividends received 1,051 462 5 (20) (73) (72) (692) 4,919 (27,464) 28,440 532 (98) (72) (1,425) (232) (3,734) 12 807 8 1,089 2,780 (2,188) 1,712 169 10,211 1,000 (1,514) – – 264 (270) 1 (1,917) – (2,436) (31,625) 10,750 12,299 – 1,363 (170) (7,383) 55 447 3,053 3,500 3,798 730 11,994 $ $ 771 435 5 (61) (138) (2) (257) (4,731) (22,610) 40,510 (3,193) (112) (77) (5,655) 7,204 880 (14) 327 140 526 (948) 144 3,318 (569) 19,483 – (1,130) 600 (631) 26 (11) 3 (1,753) (7) (2,903) (41,145) 9,264 15,451 – 185 (256) (16,501) 280 359 2,694 3,053 3,646 555 11,371 $ $ 937 813 7 57 (201) 1 (637) (6,685) (16,529) 10,213 (328) 79 (32) (688) 2,032 (2,991) 34 (14) (27) (1,196) 4,975 28 (8,096) (1,538) (16,571) 1,000 (264) 400 (1,075) 82 (315) (2) (1,654) (5) (1,833) (27,974) 29,014 14,578 (190) 3,611 (251) 18,788 99 483 2,211 2,694 4,050 669 11,556 $ $ (1) Comprises amortization and impairment of buildings, furniture, equipment, leasehold improvements, and software and other intangible assets. In addition, 2014 includes the goodwill impairment charge. Includes restricted balance of $422 million (2015: $406 million; 2014: $324 million). (2) The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. 100 CIBC 2016 ANNUAL REPORT Consolidated financial statements Notes to the consolidated financial statements Canadian Imperial Bank of Commerce (CIBC) is a diversified financial institution governed by the Bank Act (Canada). CIBC was formed through the amalgamation of the Canadian Bank of Commerce and Imperial Bank of Canada in 1961. Through our three main business units – Retail and Business Banking, Wealth Management and Capital Markets – CIBC provides a full range of financial services and products to 11 million individual, small business, commercial, corporate and institutional clients in Canada and around the world. Refer to Note 28 for further details on our business units. CIBC is incorporated and domiciled in Canada with our registered and principal business offices located at Commerce Court, Toronto, Ontario. Note 1 Basis of preparation and summary of significant accounting policies Basis of preparation The consolidated financial statements of CIBC have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These consolidated financial statements also comply with Section 308(4) of the Bank Act (Canada) and the requirements of the Office of the Superintendent of Financial Institutions (OSFI). CIBC has consistently applied the same accounting policies throughout all periods presented, unless otherwise indicated. These consolidated financial statements are presented in millions of Canadian dollars, unless otherwise indicated. These consolidated financial statements were authorized for issue by the Board of Directors (the Board) on November 30, 2016. Summary of significant accounting policies The following paragraphs describe our significant accounting policies. Use of estimates and assumptions The preparation of the consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the recognized and measured amounts of assets, liabilities, net income, comprehensive income and related disclosures. Significant estimates and assumptions are made in the areas of the valuation of financial instruments, impairment of AFS securities, allowance for credit losses, the evaluation of whether to consolidate structured entities (SEs), asset impairment, income taxes, provisions and contingent liabilities and post-employment and other long-term benefit plan assumptions. Actual results could differ from these estimates and assumptions. Basis of consolidation We consolidate entities over which we have control. We have control over another entity when we have: (i) power to direct relevant activities of the entity, (ii) exposure, or rights, to variable returns from our involvement with the entity, and (iii) the ability to affect those returns through our power over the entity. Subsidiaries Subsidiaries are entities over which CIBC has control. Generally, CIBC has power over its subsidiaries through a shareholding of more than 50% of the voting rights in its subsidiaries, and has significant exposure to the subsidiaries based on its ownership interests of more than 50%. The effects of potential voting rights that CIBC has the practical ability to exercise are considered when assessing whether control exists. Subsidiaries are fully consolidated from the date control is obtained by CIBC, and are deconsolidated from the date control is lost. Consistent accounting policies are applied throughout CIBC for the purposes of consolidation. Details of our significant subsidiaries are provided in Note 27. Structured entities A SE is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the significant relevant activities are directed by contractual arrangements. SEs often have some or all of the following features or attributes: (i) restricted activities; (ii) a narrow and well-defined objective, such as to securitize our own financial assets or third- party financial assets to provide sources of funding or to provide investment opportunities for investors by passing on risks and rewards associated with the assets of the SE to investors; (iii) insufficient equity to permit the SE to finance its activities without subordinated financial support; or (iv) financing in the form of multiple contractually linked instruments to investors that create concentrations of credit or other risks. Examples of SEs include securitization vehicles, asset-backed financings, and investment funds. When voting rights are not relevant in deciding whether CIBC has power over an entity, particularly for complex SEs, the assessment of control considers all facts and circumstances, including the purpose and design of the investee, its relationship with other parties and each party’s ability to make decisions over significant activities, and whether CIBC is acting as a principal or as an agent. Consolidation conclusions are reassessed whenever there is a change in the specific facts and circumstances relevant to one or more of the three elements of control. Factors that trigger the reassessment include, but are not limited to, significant changes in ownership structure of the entities, changes in contractual or governance arrangements, provision of a liquidity facility beyond the original terms, transactions with the entities that were not contemplated originally and changes in the financing structure of the entities. Transactions eliminated on consolidation All intercompany transactions, balances and unrealized gains and losses on transactions are eliminated on consolidation. Non-controlling interests Non-controlling interests are presented on the consolidated balance sheet as a separate component of equity that is distinct from CIBC’s shareholders’ equity. The net income attributable to non-controlling interests is presented separately in the consolidated statement of income. CIBC 2016 ANNUAL REPORT 101 Consolidated financial statements Associates and joint ventures We classify investments in entities over which we have significant influence, and that are neither subsidiaries nor joint ventures, as associates. Significant influence is presumed to exist where we hold, either directly or indirectly, between 20% and 50% of the voting rights of an entity, or, in the case of a limited partnership (LP), where CIBC is a co-general partner. Significant influence also may exist where we hold less than 20% of the voting rights of an entity, for example if we have influence over the policy-making processes through representation on the entity’s Board of Directors, or by other means. Where we are a party to a contractual arrangement whereby together with one or more parties, we undertake an economic activity that is subject to joint control, we classify our interest in the venture as a joint venture. Investments in associates and interests in joint ventures are accounted for using the equity method. Under the equity method, such investments are initially measured at cost, including attributable goodwill and intangible assets, and are adjusted thereafter for the post-acquisition change in our share of the net assets of the investment. For purposes of applying the equity method for an investment that has a different reporting period from that of CIBC, adjustments are made for the effects of any significant events or transactions that occur between the reporting date of the investment and CIBC’s reporting date. Foreign currency translation Monetary assets and liabilities and non-monetary assets and liabilities measured at fair value that are denominated in foreign currencies are translated into the functional currencies of operations at prevailing exchange rates at the date of the consolidated balance sheet. Revenue and expenses are translated using average monthly exchange rates. Realized and unrealized gains and losses arising from translation into functional currencies are included in the consolidated statement of income, with the exception of unrealized foreign exchange gains and losses on AFS equity securities, which are included in AOCI. Assets and liabilities of foreign operations with a functional currency other than the Canadian dollar, including goodwill and fair value adjustments arising on acquisition, are translated into Canadian dollars at the exchange rates prevailing as at the consolidated balance sheet date, while revenue and expenses of these foreign operations are translated into Canadian dollars at the average monthly exchange rates. Exchange gains and losses arising from the translation of these foreign operations and from the results of hedging the net investment in these foreign operations, net of applicable taxes, are included in Net foreign currency translation adjustments, which is included in AOCI. Any accumulated exchange gains and losses, including the impact of hedging, and any applicable taxes in AOCI are reclassified into the consolidated statement of income when there is a disposal of a foreign operation. On partial disposal of a foreign operation, the proportionate share of the accumulated exchange gains and losses, including the impact of hedging, and any applicable taxes previously recognized in AOCI are reclassified into the consolidated statement of income. Classification and measurement of financial assets and liabilities CIBC recognizes financial instruments on its consolidated balance sheet when it becomes a party to the contractual provisions of the instrument. All financial assets must be classified at initial recognition as trading, AFS, designated at fair value (fair value option — FVO), held-to-maturity (HTM), or loans and receivables, based on the purpose for which the instrument was acquired and its characteristics. All financial assets and derivatives are required to be measured at fair value with the exception of loans and receivables, debt securities classified as HTM, and AFS equity instruments whose fair value cannot be reliably measured. Reclassification of non-derivative financial assets out of trading to loans and receivables is allowed when they are no longer held for trading, and if they meet the definition of loans and receivables and we have the intention and ability to hold the financial assets for the foreseeable future or until maturity. Reclassification of non-derivative financial assets out of trading to AFS is also allowed under rare circumstances. Non- derivative financial assets may be reclassified out of AFS to loans and receivables if they meet the definition of loans and receivables and we have the intention and ability to hold the financial assets for the foreseeable future or until maturity or reclassified out of AFS to HTM if we have the intention to hold the financial assets until maturity. Financial liabilities, other than derivatives, obligations related to securities sold short and FVO liabilities, are measured at amortized cost. Derivatives, obligations related to securities sold short and FVO liabilities are measured at fair value. Interest expense is recognized on an accrual basis using the effective interest rate method. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that do not have a quoted market price in an active market and that we do not intend to sell immediately or in the near term at the time of inception. Loans and receivables are recognized initially at fair value, which represents the cash advanced to the borrower plus direct and incremental transaction costs. Subsequently, they are measured at amortized cost, using the effective interest rate method, net of an allowance for credit losses. Interest income is recognized on an accrual basis using the effective interest rate method. Certain loans and receivables may be designated at fair value (see below). Trading financial instruments Trading financial instruments are assets and liabilities held for trading activities or that are part of a managed portfolio with a pattern of short-term profit taking. These are measured initially at fair value. Loans and receivables that we intend to sell immediately or in the near term are classified as trading financial instruments. Trading financial instruments are remeasured at fair value as at the consolidated balance sheet date. Gains and losses realized on disposition and unrealized gains and losses from changes in fair value are included in Non-interest income as Trading income (loss), except to the extent they are economically hedging an FVO asset or liability, in which case the gains and losses are included in FVO gains (losses), net. Dividends and interest income earned on trading securities and dividends and interest expense incurred on securities sold short are included in Interest income and Interest expense, respectively. AFS financial assets AFS financial assets are those non-derivative financial assets that are not classified as trading, FVO or loans and receivables, and are measured initially at fair value, plus direct and incremental transaction costs. Only equity instruments whose fair value cannot be reliably measured are measured at cost. We have determined that all of our equity securities have reliable fair values. As a result, all AFS financial assets are remeasured at fair value through OCI (FV-OCI) subsequent to initial recognition, except that foreign exchange gains or losses on AFS debt instruments are recognized in the consolidated statement of income. Unrealized foreign exchange gains or losses on AFS equity securities, along with all other fair value changes, are recognized in OCI until the investment is sold or impaired, whereupon the cumulative gains and losses previously recognized in OCI are transferred from AOCI to the consolidated statement of income. Realized gains and losses on sale, determined on an average cost basis, and write-downs to reflect impairment, are included in AFS securities gains (losses), net. Dividends and interest income from AFS financial assets are included in Interest income. 102 CIBC 2016 ANNUAL REPORT Consolidated financial statements Designated at fair value financial instruments FVO financial instruments are those that we designate on initial recognition as instruments that we will measure at fair value through the consolidated statement of income. This designation, once made, is irrevocable. In addition to the requirement that reliable fair values are available, there are restrictions imposed by IFRS and by OSFI on the use of this designation. The criteria for applying the FVO at inception is met when: (i) the application of the FVO eliminates or significantly reduces the measurement inconsistency that otherwise would arise from measuring assets or liabilities on a different basis, or (ii) the financial instruments are part of a portfolio which is managed on a fair value basis, in accordance with our investment strategy, and are reported internally on that basis. FVO may also be applied to financial instruments that have one or more embedded derivatives that would otherwise require bifurcation as they significantly modify the cash flows of the contract. Gains and losses realized on dispositions and unrealized gains and losses from changes in fair value of FVO financial instruments, and gains and losses arising from changes in fair value of derivatives, trading securities and obligations related to securities sold short that are managed as economic hedges of the FVO financial instruments, are included in FVO gains (losses), net. Dividends and interest earned and interest expense incurred on FVO assets and liabilities are included in Interest income and Interest expense, respectively. Changes in the fair value of FVO liabilities that are attributable to changes in own credit risk are recognized in OCI. Determination of fair value Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability between market participants in an orderly transaction in the principal market at the measurement date under current market conditions (i.e., the exit price). Fair value measurements are categorized into three levels within a fair value hierarchy (Level 1, 2 or 3) based upon the market observability of the valuation inputs used in measuring the fair value. See Note 2 for more details about fair value measurement subsequent to initial recognition by type of financial instrument. Transaction costs Transaction costs relating to trading and FVO financial instruments are expensed as incurred. Transaction costs for all other financial instruments are generally capitalized. For debt instruments, transaction costs are amortized over the expected life of the instrument using the effective interest rate method. For equity instruments, transaction costs are included in the carrying value. Date of recognition of securities We account for all securities on the consolidated balance sheet using settlement date accounting. Effective interest rate Interest income and expense for all financial instruments measured at amortized cost and for AFS debt securities is recognized in Interest income and Interest expense using the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument to the net carrying value of the financial asset or liability upon initial recognition. When calculating the effective interest rate, we estimate future cash flows considering all contractual terms of the financial instrument, but not future credit losses. Fees relating to loan origination, including commitment, restructuring and renegotiation fees, are considered an integral part of the yield earned on the loan and are accounted for using the effective interest rate method. Fees received for commitments that are not expected to result in a loan are included in Non-interest income over the commitment period. Loan syndication fees are included in Non-interest income on completion of the syndication arrangement, provided that the yield on the portion of the loan we retain is at least equal to the average yield earned by the other lenders involved in the financing; otherwise, an appropriate portion of the fee is deferred as unearned income and amortized to interest income using the effective interest rate method. Securities purchased under resale agreements and obligations related to securities sold under repurchase agreements Securities purchased under resale agreements are treated as collateralized lending transactions and are measured at amortized cost as they represent the purchase of securities affected with a simultaneous agreement to sell them back at a future date at a fixed price, which is generally near term. Interest income is accrued using the effective interest rate method and is included in Interest income – Securities borrowed or purchased under resale agreements in the consolidated statement of income. Similarly, securities sold under agreements to repurchase are treated as collateralized borrowing transactions with interest expense accrued using the effective interest rate method and are included in Interest expense – Securities lent or sold under repurchase agreements in the consolidated statement of income. Cash collateral on securities borrowed and securities lent The right to receive back cash collateral paid and the obligation to return cash collateral received on borrowing and lending of securities, which is generally near term, is recognized as cash collateral on securities borrowed and securities lent, respectively. Interest income on cash collateral paid and interest expense on cash collateral received is included in Interest income – Securities borrowed or purchased under resale agreements and Interest expense – Securities lent or sold under repurchase agreements, respectively. For securities borrowing and lending transactions where securities are pledged or received as collateral, securities pledged by CIBC remain on the consolidated balance sheet and securities received by CIBC are not recognized on the consolidated balance sheet. Security borrowing fees and security lending income are included in Non-interest income in the consolidated statement of income. Impairment of financial assets Impaired loans and interest income on impaired loans We classify a loan as impaired when, in our opinion, there is objective evidence of impairment as a result of one or more loss events that have occurred after initial recognition of the loans with a negative impact on the estimated future cash flows of a loan or a portfolio of loans. Objective evidence of impairment includes indications that the borrower is experiencing significant financial difficulties, or a default or delinquency has occurred. Generally, loans on which repayment of principal or payment of interest is contractually 90 days in arrears are automatically considered impaired unless they are fully secured and in the process of collection. Notwithstanding management’s assessment of collectability, such loans are considered impaired if payments are 180 days in arrears. Exceptions are as follows: (cid:129) Credit card loans are not classified as impaired and are fully written off at the earlier of the notice of bankruptcy, settlement proposal, enlistment of credit counselling services, or when payments are contractually 180 days in arrears. Loans guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency are classified as impaired only when payments are contractually 365 days in arrears. (cid:129) CIBC 2016 ANNUAL REPORT 103 Consolidated financial statements In certain circumstances, we may modify a loan for economic or legal reasons related to a borrower’s financial difficulties. Once a loan is modified, if management still does not expect full collection of payments under the modified loan terms, the loan is classified as impaired. An impaired loan is measured at its estimated realizable value determined by discounting the expected future cash flows at the loan’s original effective interest rate. When a loan or a group of loans has been classified as impaired, interest income is recognized thereafter using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. For credit card loans, interest is accrued only to the extent that there is an expectation of receipt. A loan is no longer considered impaired when all past due amounts, including interest, have been recovered, and it is determined that the principal and interest are fully collectable in accordance with the original contractual terms or revised market terms of the loan with all criteria for the impaired classification having been remedied. Once a loan is modified and management expects full collection of payments under the modified loan terms, the loan is not considered impaired. No portion of cash received on an impaired loan is recognized in the consolidated statement of income until the loan is returned to unimpaired status. Loans are written off, either partially or in full, against the related allowance for credit losses when we judge that there is no realistic prospect of future recovery in respect of amounts written off. When loans are secured, this is generally after all collateral has been realized or transferred to CIBC, or in certain circumstances, when the net realizable value of any collateral and other available information suggests that there is no reasonable expectation of further recovery. In subsequent periods, any recoveries of amounts previously written off are credited to the provision for credit losses. Allowance for credit losses Allowance for credit losses consists of individual and collective components: Individual allowance We conduct ongoing credit assessments of the majority of the business and government loan portfolios on an account-by-account basis at each reporting date and we establish an allowance for credit losses when there is objective evidence that a loan is impaired. Collective allowance Loans are grouped in portfolios of similar credit risk characteristics and impairment is assessed on a collective basis in two circumstances: (i) (ii) (cid:129) (cid:129) Incurred but not yet identified credit losses — for groups of individually assessed loans for which no objective evidence of impairment has been identified on an individual basis: (cid:129) A collective allowance is provided for losses which we estimate are inherent in the business and government portfolio as at the reporting date, but which have not yet been specifically identified from an individual assessment of the loan. The collective allowance is established with reference to expected loss rates associated with different credit portfolios at different risk levels and the estimated time period for losses that are present but yet to be specifically identified. We also consider estimates of the time periods over which losses that are present would be identified and a provision taken, our view of current and ongoing economic and portfolio trends, and evidence of credit quality improvements or deterioration. The period between a loss occurring and its identification is estimated by management for each identified portfolio. The parameters that affect the collective allowance calculation are updated regularly, based on our experience and that of the market in general. Expected loss rates are based on the risk rating of each credit facility and on the probability of default (PD) factors, as well as estimates of loss given default (LGD) associated with each risk rating. The PD factors reflect our historical loss experience and are supplemented by data derived from defaults in the public debt markets. Historical loss experience is adjusted based on current observable data to reflect the effects of current conditions. LGD estimates are based on our experience over past years. For groups of loans where each loan is not considered to be individually significant: (cid:129) Residential mortgages, credit card loans, personal loans, and certain small business loan portfolios consist of large numbers of homogeneous balances of relatively small amounts, for which collective allowances are established by reference to historical ratios of write-offs to current accounts and balances in arrears. For residential mortgages, personal loans and certain small business loans, this historical loss experience enables CIBC to determine appropriate PD and LGD parameters, which are used in the calculation of the collective allowance. For credit card loans, the historical loss experience enables CIBC to calculate roll-rate models in order to determine an allowance amount driven by flows to write-off. We also consider estimates of the time periods over which losses that are present would be identified and a provision taken, our view of current and ongoing economic and portfolio trends, and evidence of credit quality improvements or deterioration. The parameters that affect the collective allowance calculation are updated regularly, based on our experience and that of the market in general. (cid:129) (cid:129) Individual and collective allowances are provided for off-balance sheet credit exposures that are not measured at fair value. These allowances are included in Other liabilities. AFS debt instruments An AFS debt instrument is identified as impaired when there is objective observable evidence about our inability to collect the contractual principal or interest. When an AFS debt instrument is determined to be impaired, an impairment loss is recognized by reclassifying the cumulative unrealized losses in AOCI to the consolidated statement of income. Impairment losses previously recognized in the consolidated statement of income are reversed in the consolidated statement of income if the fair value subsequently increases and the increase can be objectively determined to relate to an event occurring after the impairment loss was recognized. AFS equity instruments Objective evidence of impairment for an investment in an AFS equity instrument exists if there has been a significant or prolonged decline in the fair value of the investment below its cost, or if there is information about significant adverse changes in the technological, market, economic, or legal environment in which the issuer operates, or if the issuer is experiencing significant financial difficulty. When an AFS equity instrument is determined to be impaired, an impairment loss is recognized by reclassifying the cumulative unrealized losses in AOCI to the consolidated statement of income. Impairment losses previously recognized in the consolidated statement of income cannot be subsequently reversed. Further decreases in fair value subsequent to the recognition of an impairment loss are recognized directly in the consolidated statement of income, and subsequent increases in fair value are recognized in OCI. 104 CIBC 2016 ANNUAL REPORT Consolidated financial statements Derivatives We use derivative instruments for both asset/liability management (ALM) and trading purposes. The derivatives used for ALM purposes allow us to manage financial risks, such as movements in interest and foreign exchange rates, while our derivative trading activities are primarily driven by client trading activities. We may also take proprietary trading positions with the objective of earning income. All derivative instruments are recognized initially, and are measured subsequently, at fair value and are reported as assets where they have a positive fair value and as liabilities where they have a negative fair value, in both cases as derivative instruments. Any realized and unrealized gains or losses on derivatives used for trading purposes are recognized immediately in Trading income (loss). The accounting for derivatives used for ALM purposes depends on whether they qualify for hedge accounting as discussed below. Fair values of exchange-traded derivatives are based on quoted market prices. Fair values of over-the-counter (OTC) derivatives, including OTC derivatives that are centrally cleared, are obtained using valuation techniques, including discounted cash flow models and option pricing models. See Note 12 for further information on the valuation of derivatives. Derivatives used for ALM purposes that qualify for hedge accounting We apply hedge accounting for derivatives held for ALM purposes that meet specified criteria. There are three types of hedges: fair value, cash flow and hedges of net investments in foreign operations (NIFOs). When hedge accounting is not applied, the change in the fair value of the derivative is recognized in the consolidated statement of income (see “Derivatives used for ALM purposes that are not designated for hedge accounting” below). In order for derivatives to qualify for hedge accounting, the hedge relationship must be designated and formally documented at its inception in accordance with IAS 39 “Financial Instruments: Recognition and Measurement”. The particular risk management objective and strategy, the specific asset, liability or cash flow being hedged, as well as how hedge effectiveness is assessed, are documented. Hedge effectiveness requires a high correlation of changes in fair values or cash flows between the hedged and hedging items. We assess the effectiveness of derivatives in hedging relationships, both at inception and on an ongoing basis. Ineffectiveness results to the extent that the change in the fair value of the hedging derivative differs from the change in the fair value of the hedged risk in the hedged item; or the cumulative change in the fair value of the hedging derivative exceeds the cumulative change in the fair value of expected future cash flows of the hedged item. The amount of ineffectiveness of hedging instruments is recognized immediately in the consolidated statement of income. Fair value hedges We designate fair value hedges primarily as part of interest rate risk management strategies that use derivatives to hedge changes in the fair value of financial instruments with fixed interest rates. Changes in fair value attributed to the hedged interest rate risk are accounted for as basis adjustments to the hedged financial instruments and are included in Net interest income. Changes in fair value from the hedging derivatives are also included in Net interest income. Any differences between the two represent hedge ineffectiveness that is included in Net interest income. Similarly, for hedges of foreign exchange risk, changes in the fair value from the hedging derivatives and non-derivatives are included in FXOTT. Changes in the fair value of the hedged item from the hedged foreign exchange risk are accounted for as basis adjustments and are also included in FXOTT. Any difference between the two represents hedge ineffectiveness. If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated and the basis adjustment applied to the hedged item is amortized over the remaining term of the hedged item. If the hedged item is derecognized, the unamortized basis adjustment is recognized immediately in the consolidated statement of income. Cash flow hedges We designate cash flow hedges as part of interest rate risk management strategies that use derivatives to mitigate our risk from variable cash flows by effectively converting certain variable-rate financial instruments to fixed-rate financial instruments, and as part of foreign exchange rate risk management strategies to hedge forecasted foreign currency denominated cash flows. We also designate cash flow hedges to hedge changes in CIBC’s share price in respect of certain cash-settled share-based payment awards. The effective portion of the change in fair value of the derivative instrument is recognized in OCI until the variability in cash flows being hedged is recognized in the consolidated statement of income in future accounting periods, at which time an appropriate portion of the amount that was in AOCI is reclassified into the consolidated statement of income. The ineffective portion of the change in fair value of the hedging derivative is included in Net interest income, FXOTT, or Non-interest expenses immediately as it arises. If the hedging instrument expires or is sold, terminated or exercised, or where the hedge no longer meets the criteria for hedge accounting, the hedge relationship is terminated. Upon termination of the hedge relationship, any remaining amount in AOCI remains therein until it is recognized in the consolidated statement of income when the variability in cash flows hedged or the hedged forecast transaction is ultimately recognized in the consolidated statement of income. When the forecasted transaction is no longer expected to occur, the related cumulative gain or loss in AOCI is recognized immediately in the consolidated statement of income. Hedges of NIFOs with a functional currency other than the Canadian dollar We may designate NIFO hedges to mitigate the foreign exchange risk on our net investments in foreign operations with a functional currency other than the Canadian dollar. These hedges are accounted for in a similar manner to cash flow hedges. The change in fair value of the hedging instrument relating to the effective portion is recognized in OCI. The change in fair value of the hedging instrument attributable to the forward points and relating to the ineffective portion are recognized immediately in FXOTT. Gains and losses in AOCI are reclassified to the consolidated statement of income upon the disposal or partial disposal of the investment in the foreign operation, as explained in the “Foreign currency translation” policy above. Derivatives used for ALM purposes that are not designated for hedge accounting The change in fair value of the derivatives not designated as accounting hedges but used to economically hedge FVO assets or liabilities is included in FVO gains (losses), net. The change in fair value of other derivatives not designated as accounting hedges but used for other economic hedging purposes is included in FXOTT, Non-interest income – Other, or in the case of economic hedges of cash-settled share-based payment obligations, in compensation expense, as appropriate. Embedded derivatives All derivatives embedded in other financial instruments are accounted for as separate derivatives when their economic characteristics and risks are not closely related to those of the host instrument and the terms of the embedded derivative represent those of a freestanding derivative in situations where the combined instrument is not classified as trading or designated as FVO. These embedded derivatives, which are classified together with the host CIBC 2016 ANNUAL REPORT 105 Consolidated financial statements instrument on the consolidated balance sheet, are measured at fair value, with changes therein included in Non-interest income – Other. The residual amount of the host instrument asset or liability is accreted to its maturity value through Interest income and Interest expense, respectively, using the effective interest rate method. Gains at inception on derivatives embedded in financial instruments bifurcated for accounting purposes are not recognized at inception; instead they are recognized over the life of the residual host instrument. Where an embedded derivative is separable from the host instrument but the fair value, as at the acquisition or reporting date, cannot be reliably measured separately or is otherwise not bifurcated, the entire combined contract is measured at fair value. Securitizations and derecognition of financial assets Securitization of our own assets provides us with an additional source of liquidity. As we generally retain substantially all of the risks and rewards of the transferred assets, assets remain on the consolidated balance sheet and funding from these transactions is accounted for as Deposits – secured borrowing transactions. Securitizations to non-consolidated SEs are accounted for as sales, with the related assets being derecognized, only where: (cid:129) (cid:129) our contractual right to receive cash flows from the assets has expired; we transfer our contractual rights to receive the cash flows of the financial asset, and have: (i) transferred substantially all the risks and rewards of ownership, or (ii) neither retained nor transferred substantially all the risks and rewards, but have not retained control; or the transfer meets the criteria of a qualifying pass-through arrangement. (cid:129) Derecognition of financial liabilities A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expires. If an existing financial liability is replaced by another liability from the same lender on substantially different terms, or the terms of the existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying values is recognized in the consolidated statement of income. The repurchase of a debt instrument is considered an extinguishment of that debt instrument even if we intend to resell the instrument in the near term. Treasury shares Where we repurchase our own equity instruments, these instruments are treated as treasury shares and are deducted from equity at their cost with any gain or loss recognized in Contributed surplus or Retained earnings as appropriate. No gain or loss is recognized in the consolidated statement of income on the purchase, sale, issue or cancellation of our own equity instruments. Any difference between the carrying value and the consideration, if reissued, is also included in Contributed surplus. Mortgage commitments Mortgage interest rate commitments are extended to our retail clients in contemplation of borrowing to finance the purchase of homes under mortgages to be funded by CIBC in the future. These commitments are usually for periods of up to 120 days and generally entitle the borrower to receive funding at the lower of the interest rate at the time of the commitment and the rate applicable at the funding date. We use financial instruments, such as interest rate derivatives, to economically hedge our exposure to an increase in interest rates. Based on our estimate of the commitments expected to be exercised, a financial liability would be recognized on our consolidated balance sheet, to which we apply the FVO. We also carry the associated economic hedges at fair value on the consolidated balance sheet. Changes in the fair value of the FVO commitment liability and the associated economic hedges are included in FVO gains (losses), net. In addition, since the fair value of the commitments is priced into the mortgage, the difference between the mortgage amount and its fair value at funding is recognized in the consolidated statement of income to offset the carrying value of the mortgage commitment that is released upon its expiry. Financial guarantees Financial guarantees are financial contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Financial guarantee contracts issued by CIBC that are not classified as insurance contracts are initially recognized as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantees, which is generally the premium received or receivable on the date the guarantee was given. Subsequently, financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortization, and the present value of any expected payment when a payment under the guarantee has become probable. A financial guarantee that qualifies as a derivative is remeasured at fair value as at each reporting date and reported as Derivative instruments in assets or liabilities, as appropriate. Accumulated other comprehensive income AOCI is included on the consolidated balance sheet as a separate component of total equity, net of income tax. It includes net unrealized gains and losses on AFS securities, the effective portion of gains and losses on derivative instruments designated within effective cash flow hedges, unrealized foreign currency translation gains and losses on foreign operations with a functional currency other than the Canadian dollar net of gains or losses on related hedges, net gains (losses) related to fair value changes of FVO liabilities attributable to changes in own credit risk, and net gains (losses) on post- employment defined benefit plans. Liabilities and equity We classify financial instruments as a liability or equity based on the substance of the contractual arrangement. An instrument is classified as a liability if it is a contractual obligation to deliver cash or another financial asset, or to exchange financial assets or financial liabilities at potentially unfavourable terms. A contract is also classified as a liability if it is a non-derivative and could obligate us to deliver a variable number of our own shares or it is a derivative other than one that can be settled by the delivery of a fixed amount of cash or another financial asset for a fixed number of our own equity instruments. An instrument is classified as equity if it evidences a residual interest in our assets after deducting all liabilities. The components of a compound financial instrument are classified and accounted for separately as assets, liabilities, or equity as appropriate. Incremental costs directly attributable to the issuance of equity instruments are shown in equity, net of income tax. 106 CIBC 2016 ANNUAL REPORT Consolidated financial statements Offsetting of financial assets and financial liabilities Financial assets and financial liabilities are offset, and the amount presented net, when we have a legally enforceable right to set off the recognized amounts and intend to settle on a net basis or to realize the asset and settle the liability simultaneously. Acceptances and customers’ liability under acceptances Acceptances constitute a liability of CIBC on negotiable instruments issued to third parties by our customers. We earn a fee for guaranteeing and then making the payment to the third parties. The amounts owed to us by our customers in respect of these guaranteed amounts are reflected in assets as Customers’ liability under acceptances. Land, buildings and equipment Land is recognized initially at cost and is subsequently measured at cost less any accumulated impairment losses. Buildings, furniture, equipment and leasehold improvements are recognized initially at cost and are subsequently measured at cost less accumulated depreciation and any accumulated impairment losses. Depreciation commences when the assets are available for use and is recognized on a straight-line basis to depreciate the cost of these assets to their estimated residual value over their estimated useful lives. The estimated useful lives are as follows: (cid:129) (cid:129) (cid:129) (cid:129) Buildings – 40 years Computer equipment – 3 to 7 years Office furniture and other equipment – 4 to 15 years Leasehold improvements – over the estimated useful life Depreciation methods, useful lives and residual values are reviewed at each annual reporting date and are adjusted if appropriate. Gains and losses on disposal are included in Non-interest income – Other. We consider a portion of land and a building underlying a finance lease arrangement as investment property since we sub-lease this portion to third parties. Our investment property is recognized initially at cost and is subsequently measured at cost less accumulated depreciation and any accumulated impairment losses. Our investment property is depreciated on a straight-line basis over its estimated useful life, being the term of the lease. Rental income is included in Non-interest income – Other. Goodwill, software and other intangible assets Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets, liabilities and contingent liabilities acquired in business combinations. Identifiable intangible assets are recognized separately from goodwill when they are separable or arise from contractual or other legal rights, and have fair values that can be reliably measured. Goodwill is not amortized, but is subject to impairment review at least annually or more frequently if there are indicators that the goodwill may be impaired. Refer to the “Impairment of non-financial assets” policy below. Intangible assets represent software and customer relationships, core deposit intangibles, investment management contracts, and brand names recognized as part of past acquisitions. Intangible assets with definite useful lives are measured at cost less accumulated amortization and accumulated impairment losses. Each intangible asset is assessed for legal, regulatory, contractual, competitive or other factors to determine if the useful life is definite. Intangible assets with definite useful lives are amortized over their estimated useful lives, which are as follows: (cid:129) (cid:129) (cid:129) Software – 5 to 10 years Contract-based intangibles – 8 to 15 years Core deposit and customer relationship intangibles – on a declining balance over the expected life of the relationship, ranging from 10% to 12% per annum Intangible assets with indefinite useful lives are measured at cost less any accumulated impairment losses. Indefinite life intangible assets are tested for impairment at least annually and whenever there is an indication that the asset may be impaired. Refer to the “Impairment of non-financial assets” policy below. Impairment of non-financial assets The carrying values of non-financial assets with definite useful lives, including buildings and equipment, investment property, and intangible assets with definite useful lives are reviewed to determine whether there is any indication of impairment. Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. If any such indication of impairment exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. For the purpose of reviewing non-financial assets with definite useful lives for impairment, asset groups are reviewed at their lowest level for which identifiable cash inflows are largely independent of cash inflows of other assets or groups of assets. This grouping is referred to as a cash-generating unit (CGU). Corporate assets do not generate separate cash inflows. Corporate assets are tested for impairment at the minimum collection of CGUs to which the corporate asset can be allocated reasonably and consistently. The recoverable amount is the greater of fair value less costs to sell and value in use. Value in use is the present value of the future cash flows expected to be derived from the asset or CGU. When the carrying value exceeds its recoverable amount, an impairment loss equal to the difference between the two amounts is recognized in the consolidated statement of income. If an impairment subsequently reverses, the carrying value of the asset is increased to the extent that the carrying value of the underlying assets does not exceed the carrying value that would have been determined, net of depreciation or amortization, if no impairment had been recognized. Any impairment reversal is recognized in the consolidated statement of income in the period in which it occurs. Goodwill is assessed for impairment based on the group of CGUs expected to benefit from the synergies of the business combination, and the lowest level at which management monitors the goodwill. Any potential goodwill impairment is identified by comparing the recoverable amount of the CGU grouping to which the goodwill is allocated to its carrying value including the allocated goodwill. If the recoverable amount is less than its carrying value, an impairment loss is recognized in the consolidated statement of income in the period in which it occurs. Impairment losses on goodwill are not subsequently reversed if conditions change. CIBC 2016 ANNUAL REPORT 107 Consolidated financial statements Income taxes Income tax comprises current tax and deferred tax. Income tax is recognized in the consolidated statement of income, except to the extent that it relates to items recognized in OCI or directly in equity, in which case it is recognized accordingly. Current tax is the tax expected to be payable on the taxable profit for the year, calculated using tax rates enacted or substantively enacted as at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax assets and liabilities are offset when CIBC intends to settle on a net basis and the legal right to offset exists. Deferred tax is recognized on temporary differences between the carrying value of assets and liabilities on the consolidated balance sheet and the corresponding amounts attributed to such assets and liabilities for tax purposes. Deferred tax liabilities are generally recognized for all taxable temporary differences unless the temporary differences relate to our NIFOs and will not reverse in the foreseeable future. Deferred tax assets, other than those arising from our NIFOs, are recognized to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilized. Deferred tax assets arising from our NIFOs are recognized for deductible temporary differences which are expected to reverse in the foreseeable future to the extent that it is probable that future taxable profits will be available against which these deductible temporary differences can be utilized. Deferred tax is not recognized for temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable income, or for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted as at the reporting date. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity or tax reporting group. Pension and other post-employment benefits We are the sponsor of a number of employee benefit plans. These plans include both defined benefit and defined contribution pension plans, and various other post-employment benefit plans including post-retirement medical and dental benefits. Defined benefit plans The cost of pensions and other post-employment benefits earned by employees is actuarially determined separately for each plan using the projected unit credit method and our best estimate of salary escalation, retirement ages of employees, mortality and expected health-care costs. This represents CIBC’s defined benefit obligation, which is measured as at the reporting date. The discount rate used to measure the defined benefit obligation is based on the yield of a portfolio of high-quality corporate bonds denominated in the same currency in which the benefits are expected to be paid and with terms to maturity that, on average, match the terms of the defined benefit obligation. Plan assets are measured at fair value as at the reporting date. The net defined benefit asset (liability) represents the present value of the defined benefit obligation less the fair value of plan assets. The net defined benefit asset (liability) is included in Other assets and Other liabilities, respectively. Current service cost reflects the cost of providing post-employment benefits earned by employees in the current period. Current service cost is calculated as the present value of the benefits attributed to the current year of service and is recognized in the consolidated statement of income. Commencing in 2016, the current service cost is calculated using a separate discount rate to reflect the longer duration of future benefit payments associated with the additional year of service to be earned by the plan’s active participants. Previously the current service cost was calculated using the same discount rate used to measure the defined benefit obligation for both active and retired participants. Past service costs arising from plan amendments or curtailments are recognized in net income in the period in which they arise. Net interest income or expense comprises interest income on plan assets and interest expense on the defined benefit obligation. Interest income is calculated by applying the discount rate to the plan assets, and interest expense is calculated by applying the discount rate to the defined benefit obligation. Net interest income or expense is recognized in the consolidated statement of income. Actuarial gains and losses represent changes in the present value of the defined benefit obligation which result from changes in actuarial assumptions and differences between previous actuarial assumptions and actual experience, and from differences between the actual return on plan assets and assumed interest income on plan assets. Net actuarial gains and losses are recognized in OCI in the period in which they arise and are not subject to subsequent reclassification to net income. Cumulative net actuarial gains and losses are included in AOCI. When the calculation results in a net defined benefit asset, the recognized asset is limited to the present value of economic benefits available in the form of future refunds from the plan or reductions in future contributions to the plan (the asset ceiling). For plans where we do not have an unconditional right to a refund of surplus, we determine the asset ceiling by reference to future economic benefits available in the form of reductions in future contributions to the plan, in which case the present value of economic benefits is calculated giving consideration to minimum funding requirements for future service that apply to the plan. Where a reduction in future contributions to the plan is not currently realizable at the reporting date, we estimate whether we will have the ability to reduce contributions for future service at some point during the life of the plan by taking into account, among other things, expected future returns on plan assets. If it is anticipated that we will not be able to recover the value of the net defined benefit asset, after considering minimum funding requirements for future service, the net defined benefit asset is reduced to the amount of the asset ceiling. When the payment in the future of minimum funding requirements related to past service would result in a net defined benefit surplus, or an increase in a net defined benefit surplus, the minimum funding requirements are recognized as a liability to the extent that the surplus would not be fully available as a refund or a reduction in future contributions. Any funded status surplus is limited to the present value of future economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. Defined contribution plans Costs for defined contribution plans are recognized during the year in which the service is provided. Other long-term employee benefits CIBC sponsors a closed long-term disability plan that is classified as a long-term defined benefit arrangement. As the amount of the long-term disability benefit does not depend on the length of service, the obligation is recognized when an event occurs that gives rise to an obligation to make payments. CIBC also offers other medical and dental benefits to employees while on long-term disability. The amount of other long-term employee benefits is actuarially calculated using the projected unit credit method. Under this method, the benefit is discounted to determine its present value. The methodology used to determine the discount rate used to value the long-term employee benefit obligation is consistent with that for pension and other post-employment benefit plans. Actuarial gains and losses and past service costs are recognized in the consolidated statement of income in the period in which they arise. 108 CIBC 2016 ANNUAL REPORT Consolidated financial statements Share-based payments We provide compensation to certain employees and directors in the form of share-based awards. Compensation expense for share-based awards is recognized from the service commencement date to the earlier of the contractual vesting date or the employee’s retirement eligible date. For grants regularly awarded in the annual incentive compensation cycle (annual incentive grant), the service commencement date is considered to be the start of the fiscal year that precedes the fiscal year in which the grant is made. The service commencement date in respect of special awards granted outside of the annual cycle is the grant date. The amount of compensation expense recognized is based on management’s best estimate of the number of share-based awards expected to vest, including estimates of expected forfeitures, which are revised periodically as appropriate. For the annual incentive grant, compensation expense is recognized from the service commencement date based on the estimated fair value of the forthcoming grant with the estimated fair value adjusted to the actual fair value at the grant date. Under our Restricted Share Award (RSA) plans, where grants are settled in the cash equivalent of common shares, changes in the obligation which arise from fluctuations in the market price of common shares, net of related hedges, are recognized in the consolidated statement of income as compensation expense in proportion to the award recognized. Under the Performance Share Unit (PSU) plan, where grants are settled in the cash equivalent of common shares, changes in the obligation which arise from fluctuations in the market price of common shares, and revised estimates of the performance factor, net of related hedges, are recognized in the consolidated statement of income as compensation expense in proportion to the award recognized. The performance factor ranges from 75% to 125% of the initial number of units awarded based on CIBC’s performance relative to the other major Canadian banks. The Book Value Unit (BVU) plan provides compensation related to the book value of CIBC on a per common share basis. The amount recognized is based on management’s best estimate of the number of BVUs expected to vest, adjusted for new issues of, repurchase of, or dividends paid on, common shares. Compensation expense in respect of the Employee Stock Option Plan (ESOP) is based on the grant date fair value. Where the service commencement date precedes the grant date, compensation expense is recognized from the service commencement date based on the estimated fair value of the award at the grant date, with the estimated fair value adjusted to the actual fair value at the grant date. Compensation expense results in a corresponding increase to contributed surplus. If the ESOP award is exercised, the proceeds we receive, together with the amount recognized in Contributed surplus, are credited to common share capital. If the ESOP award expires unexercised, the compensation expense remains in Contributed surplus. Compensation in the form of Deferred Share Units (DSUs) entitles the holder to receive the cash equivalent of a CIBC common share. We recognize compensation expense for each DSU granted equal to the market value of a CIBC common share at the grant date on which DSUs are awarded. Changes in the obligation which arise from fluctuations in the market price of common shares, net of related hedges, are recognized in the consolidated statement of income as Non-interest expense – Other. Our contributions under the Employee Share Purchase Plan (ESPP) are expensed as incurred. The impact due to changes in common share price in respect of cash-settled share-based compensation under the RSA and PSU plans is hedged through the use of derivatives. We designate these derivatives within cash flow hedge accounting relationships. The effective portion of the change in fair value of these derivatives is recognized in OCI and is reclassified into compensation expense, within the consolidated statement of income, over the period that the hedged awards impact the consolidated statement of income. The ineffective portion of the change in fair value of the hedging derivatives is recognized in the consolidated statement of income immediately as it arises. Provisions and contingent liabilities Provisions are liabilities of uncertain timing or amount. A provision is recognized when we have a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The provision is recognized as the best estimate of the amount required to settle the obligation at the reporting date, taking into account the risk and uncertainties related to the obligation. Where material, provisions are discounted to reflect the time value of money and the increase in the obligation due to the passage of time is presented as interest expense in the consolidated statement of income. Contingent liabilities are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non- occurrence, of one or more uncertain future events not wholly within the control of CIBC, or are present obligations that have arisen from past events but are not recognized because it is not probable that settlement will require the outflow of economic benefits. Provisions and contingent liabilities are disclosed in the consolidated financial statements. Fee and commission income The recognition of fee and commission income is determined by the purpose of the fee or commission and the basis of accounting for any associated financial instrument. Income earned on completion of a significant act is recognized when the act is completed. Income earned from the provision of services is recognized as revenue as the services are provided. Income which forms an integral part of the effective interest rate of a financial instrument is recognized as an adjustment to the effective interest rate. Underwriting and advisory fees and commissions on securities transactions are recognized as revenue when the related services are completed. Deposit and payment fees and insurance fees are recognized over the period that the related services are provided. Card fees primarily include interchange income, late fees, cash advance fees, and annual fees. Card fees are recognized as billed, except for annual fees, which are recognized over the 12-month period to which they relate. Investment management fees are primarily based on the respective value of the assets under management (AUM) or assets under administration (AUA) and are recognized over the period that the related services are provided. Investment management fees relating to our asset management and private wealth management business are generally calculated based on point in time AUM balances, whereas investment management fees relating to our retail brokerage business are generally calculated based on point in time AUA balances. Custodial fees are recognized as revenue over the applicable service period, which is generally the contract term. Mutual fund fees are recognized over the period that the mutual funds are managed and are based upon the daily net asset values of the respective mutual funds. Earnings per share We present basic and diluted EPS for our common shares. Basic EPS is computed by dividing net income for the period attributable to CIBC common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income for the period attributable to CIBC common shareholders by the weighted-average number of diluted common shares outstanding for the period. Diluted common shares reflect the potential dilutive effect of exercising the stock options based on the treasury stock method. The treasury stock method determines the number of incremental common shares by assuming that outstanding stock options, CIBC 2016 ANNUAL REPORT 109 Consolidated financial statements whose exercise price is less than the average market price of common shares during the period, are exercised and then reduced by the number of common shares assumed to be repurchased with the exercise proceeds from the assumed exercise of the options. When there is a loss attributable to CIBC common shareholders, diluted EPS equals basic EPS. Changes in accounting policies There are no new or amended accounting standards that are effective for CIBC this fiscal year. Note 2 Fair value measurement This note presents the fair values of financial instruments and explains how we determine those values. Note 1, “Basis of preparation and summary of significant accounting policies” sets out the accounting treatment for each measurement category of financial instruments. Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, between market participants in an orderly transaction in the principal market at the measurement date under current market conditions (i.e., the exit price). The determination of fair value requires judgment and is based on market information, where available and appropriate. Fair value measurements are categorized into three levels within a fair value hierarchy (Level 1, 2 or 3) based on the valuation inputs used in measuring the fair value, as outlined below. (cid:129) Level 1 – Unadjusted quoted market prices in active markets for identical assets or liabilities we can access at the measurement date. Bid prices, ask prices or prices within the bid and ask, which are the most representative of the fair value, are used as appropriate to measure fair value. Fair value is best evidenced by an independent quoted market price for the same instrument in an active market. An active market is one where transactions are occurring with sufficient frequency and volume to provide quoted prices on an ongoing basis. Level 2 – Quoted prices for identical assets or liabilities in markets that are inactive or observable market quotes for similar instruments, or use of valuation techniques where all significant inputs are observable. Inactive markets may be characterized by a significant decline in the volume and level of observed trading activity or through large or erratic bid/offer spreads. In instances where traded markets do not exist or are not considered sufficiently active, we measure fair value using valuation models. Level 3 – Non-observable or indicative prices or use of valuation techniques where one or more significant inputs are non-observable. (cid:129) (cid:129) For a significant portion of our financial instruments, quoted market prices are not available because of the lack of traded markets, and even where such markets do exist, they may not be considered sufficiently active to be used as a final determinant of fair value. When quoted market prices in active markets are not available, we would consider using valuation models. The valuation model and technique we select maximizes the use of observable market inputs to the extent possible and appropriate in order to estimate the price at which an orderly transaction would take place at the measurement date. In an inactive market, we consider all reasonably available information, including any available pricing for similar instruments, recent arm’s-length market transactions, any relevant observable market inputs, indicative dealer or broker quotations, and our own internal model-based estimates. Valuation adjustments are an integral component of our fair valuation process. We apply judgment in establishing valuation adjustments that take into account various factors that may have an impact on the valuation. Such factors include, but are not limited to, the bid-offer spread, illiquidity due to lack of market depth, parameter uncertainty and other market risk, model risk and credit risk. Generally, the unit of account for a financial instrument is the individual instrument, and valuation adjustments are applied at an individual instrument level, consistent with that unit of account. In cases where we manage a group of financial assets and liabilities that consist of substantially similar and offsetting risk exposures, the fair value of the group of financial assets and liabilities are measured on the basis of the net open risks. We apply judgment in determining the most appropriate inputs and the weighting we ascribe to each such input as well as in our selection of valuation methodologies. Regardless of the valuation technique we use, we incorporate assumptions that we believe market participants would make for credit, funding, and liquidity considerations. When the fair value of a financial instrument at inception is determined using a valuation technique that incorporates significant non-observable market inputs, no inception profit or loss (the difference between the determined fair value and the transaction price) is recognized at the time the asset or liability is first recorded. Any gains or losses at inception are deferred and recognized only in future periods over the term of the instruments or when market quotes or data become observable. We have an ongoing process for evaluating and enhancing our valuation techniques and models. Where enhancements are made, they are applied prospectively, so that fair values reported in prior periods are not recalculated on the new basis. Valuation models used, including analytics for the construction of yield curves and volatility surfaces, are vetted and approved, consistent with our model risk policy. To ensure that valuations are appropriate, we have established internal guidance on fair value measurement, which is reviewed periodically in recognition of the dynamic nature of markets and the constantly evolving pricing practices in the market. A number of policies and controls are put in place to ensure that the internal guidance on fair value measurement is being applied consistently and appropriately. Fair value of publicly issued securities and derivatives is independently validated at least once a month. Valuations are verified to external sources such as exchange quotes, broker quotes or other management-approved independent pricing sources. Key model inputs, such as yield curves and volatilities, are independently verified. The results from the independent price validation and any valuation adjustments are reviewed by the Independent Price Verification Committee on a monthly basis. This includes, but is not limited to, reviewing fair value adjustments and methodologies, independent price verification results, limits and valuation uncertainty. Fair value of privately issued securities is reviewed on a quarterly basis. Due to the judgment used in applying a wide variety of acceptable valuation techniques and models, as well as the use of estimates inherent in this process, estimates of fair value for the same or similar assets may differ among financial institutions. The calculation of fair value is based on market conditions as at each balance sheet date, and may not be reflective of ultimate realizable value. Methods and assumptions Financial instruments with fair value equal to carrying value For financial instruments that are not carried on the consolidated balance sheet at fair value and where we consider the carrying value to be a reasonable approximation of fair value due to their short-term nature and generally negligible credit risk, the fair values disclosed for these financial instruments are assumed to equal their carrying values. These financial instruments are: cash and non-interest-bearing deposits with banks; short-term interest-bearing deposits with banks; cash collateral on securities borrowed; securities purchased under resale agreements; customers’ liability under acceptances; cash collateral on securities lent; obligations related to securities sold under repurchase agreements; acceptances; deposits with demand features; and certain other financial assets and liabilities. 110 CIBC 2016 ANNUAL REPORT Consolidated financial statements Securities The fair value of debt or equity securities and obligations related to securities sold short are based on quoted bid or ask market prices where available in an active market. Securities for which quotes in an active market are not available are valued using all reasonably available market information as described below. Fair value of government issued or guaranteed securities that are not traded in an active market are calculated by applying valuation techniques such as discounted cash flow models using implied yields derived from the prices of actively traded government securities and most recently observable spread differentials. Fair value of corporate debt securities is determined using the most recently executed transaction prices, and where appropriate, adjusted to the price of these securities obtained from independent dealers, brokers, and third-party multi-contributor consensus pricing sources. When observable price quotations are not available, fair value is determined based on discounted cash flow models using observable discounting curves such as benchmark and government yield curves and spread differentials observed through independent dealers, brokers, and third-party multi-contributor consensus pricing sources. Asset-backed securities (ABS) and mortgage-backed securities (MBS) not issued or guaranteed by a government are valued using discounted cash flow models making maximum use of market observable inputs, such as broker quotes on identical or similar securities and other pricing information obtained from third-party pricing sources adjusted for the characteristics and the performance of the underlying collateral. Other key inputs used include prepayment and liquidation rates, credit spreads, and discount rates commensurate with the risks involved. These assumptions factor information that is derived from actual transactions, underlying reference asset performance, external market research, and market indices, where appropriate. Privately issued debt and equity securities are valued using recent market transactions, where available. Otherwise, fair values are derived from valuation models using a market or income approach. These models consider various factors, including projected cash flows, earnings, revenue or other third-party evidence as available. The fair value of LP investments is based upon net asset values published by third-party fund managers and is adjusted for more recent information, where available and appropriate. Loans The fair value of variable-rate mortgages, which are largely prime rate based, is assumed to equal the carrying value. The fair value of fixed-rate mortgages is estimated using a discounted cash flow calculation that uses current market interest rates with similar remaining terms. The valuation model used for mortgages takes into account prepayment optionality, including consumer behaviour. The fair value of variable-rate loans and loans for which interest rates are repriced or reset frequently are assumed to be equal to their carrying value. The fair value for fixed-rate loans is estimated using a discounted cash flow calculation that uses market interest rates. Changes in credit and liquidity spreads since the loan inception date are not observable and are not factored into our determination of fair value. The ultimate fair value of loans disclosed is net of the individual and collective allowances for impaired loans and loans not yet specifically identified as impaired, respectively. The fair value of loans is not adjusted for the value of any credit derivatives used to manage the credit risk associated with them. The fair value of these credit derivatives is disclosed separately. In determining the fair value of collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs) in our structured credit run-off business that are classified as loans and receivables, we apply valuation techniques using non-observable market inputs, including indicative broker quotes, proxy valuation from comparable financial instruments, and other internal models using our own assumptions of how market participants would price a market transaction on the measurement date. Other assets and other liabilities Other assets and other liabilities mainly comprise accrued interest receivable or payable, brokers’ client accounts receivable or payable, and accounts receivable or payable. The fair values of other assets and other liabilities are primarily assumed to be at cost or amortized cost as we consider the carrying value to be a reasonable approximation of fair value. Deposits The fair values of floating-rate deposits and demand deposits are assumed to be equal to their amortized cost. The fair value of fixed-rate deposits is determined by discounting the contractual cash flows using current market interest rates with similar remaining terms. The fair value of deposit notes issued to CIBC Capital Trust is determined by reference to the quoted market prices of CIBC Tier 1 Notes issued by CIBC Capital Trust. The fair value of deposit liabilities with embedded optionality includes the fair value of those options. The fair value of equity- and commodity-linked notes includes the fair value of embedded equity and commodity derivatives. Certain FVO deposits are structured notes that have coupons or repayment terms linked to the performance of commodities, debt or equity securities. Fair value of these structured notes is estimated using internally vetted valuation models for the debt and embedded derivative portions of the notes by incorporating market observable prices of the referenced securities or comparable securities, and other inputs such as interest rate yield curves, market volatility levels, foreign exchange rates and changes in our own credit risk, where appropriate. Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation techniques. Appropriate market risk valuation adjustments for such inputs are assessed in all such instances. The fair value of secured borrowings, which comprises liabilities issued by or as a result of activities associated with the securitization of residential mortgages, the Covered Bond Programme, and consolidated securitization vehicles, is based on identical or proxy market observable quoted bond prices or determined by discounting the contractual cash flows using maximum market observable inputs, such as market interest rates, or credit spreads implied by debt instruments of similar credit quality, as appropriate. Subordinated indebtedness The fair value of subordinated indebtedness is determined by reference to market prices for the same or similar debt instruments. CIBC 2016 ANNUAL REPORT 111 Consolidated financial statements Derivative instruments The fair value of exchange-traded derivatives such as options and futures is based on quoted market prices. OTC derivatives primarily consist of interest rate swaps, foreign exchange forwards, equity and commodity derivatives, interest rate and currency derivatives, and credit derivatives. For such instruments, where quoted market prices or third-party consensus pricing information are not available, valuation techniques are employed to estimate fair value on the basis of pricing models. Such vetted pricing models incorporate current market measures for interest rates, foreign exchange rates, equity and commodity prices and indices, credit spreads, corresponding market volatility levels, and other market-based pricing factors. In order to reflect the observed market practice of pricing collateralized and uncollateralized derivatives, our valuation approach uses OIS curves as the discount rate for valuing collateralized derivatives and uses an estimated market cost of funds curve as the discount rate for valuing uncollateralized derivatives. The impact of valuing uncollateralized derivatives based on an estimated market cost of funds curve reduces the fair value of uncollateralized derivative assets incremental to the reduction in fair value for credit risk already reflected through the credit valuation adjustment (CVA). In contrast, the use of a market cost of funds curve reduces the fair value of uncollateralized derivative liabilities in a manner that generally includes adjustments for our own credit. As market practices continue to evolve in regard to derivative valuation, further adjustments may be required in the future. In determining the fair value of complex and customized derivatives, such as equity, credit, and commodity derivatives written in reference to indices or baskets of reference, we consider all reasonably available information including any relevant observable market inputs, third-party consensus pricing inputs, indicative dealer and broker quotations, and our own internal model-based estimates, which are vetted and pre-approved in accordance with our model risk policy, and are regularly and periodically calibrated. The model calculates fair value based on inputs specific to the type of contract, which may include stock prices, correlation for multiple assets, interest rates, foreign exchange rates, yield curves, and volatility surfaces. Where observable prices or inputs are not available, management judgment is required to determine fair values by assessing other relevant sources of information such as historical data, proxy information from similar transactions, and through extrapolation and interpolation techniques. Appropriate parameter uncertainty and market risk valuation adjustments for such inputs and other model risk valuation adjustments are assessed in all such instances. In addition to reflecting estimated market funding costs in our valuation of uncollateralized derivative receivables, we also consider whether a CVA is required to recognize the risk that any given derivative counterparty may not ultimately be able to fulfill its obligations. The CVA is driven off market- observed credit spreads or proxy credit spreads and our assessment of the net counterparty credit risk exposure. In assessing this exposure, we also take into account credit mitigants such as collateral, master netting arrangements, and settlements through clearing houses. As noted above, the fair value of uncollateralized derivative liabilities based on market cost of funding generally includes adjustments for our own credit. For credit derivatives purchased from financial guarantors, our CVA is generally driven off market-observed credit spreads, where available. For financial guarantors that do not have observable credit spreads or where observable credit spreads are available but do not reflect an orderly market (i.e., not representative of fair value), a proxy market spread is used. The proxy market credit spread is based on our internal credit rating for the particular financial guarantor. Credit spreads contain information on market (or proxy market) expectations of PD as well as LGD. The credit spreads are applied in relation to the weighted-average life of our exposure to the counterparties. For financial guarantor counterparties where a proxy market spread is used, we also make an adjustment to reflect additional financial guarantor risk over an equivalently rated non-financial guarantor counterparty. The amount of the adjustment is dependent on all available internal and external market information for financial guarantors. The final CVA takes into account the expected correlation between the future performance of the underlying reference assets and that of the counterparties, except for high quality reference assets where we expect no future credit degradation. Where appropriate on certain financial guarantors, we determine the CVA based on estimated recoverable amounts. Mortgage commitments The fair value of FVO mortgage commitments is for fixed-rate residential mortgage commitments and is based on changes in market interest rates for the loans between the commitment and the balance sheet dates. The valuation model takes into account the expected probability that outstanding commitments will be exercised as well as the length of time the commitment is offered. 112 CIBC 2016 ANNUAL REPORT Consolidated financial statements Fair value of financial instruments $ millions, as at October 31 2016 Financial assets Cash and deposits with banks Securities Cash collateral on securities borrowed Securities purchased under resale agreements Loans Residential mortgages Personal Credit card Business and government Derivative instruments Customers’ liability under acceptances Other assets Financial liabilities Deposits Personal Business and government Bank Secured borrowings Derivative instruments Acceptances Obligations related to securities sold short Cash collateral on securities lent Obligations related to securities sold under repurchase agreements Other liabilities Subordinated indebtedness 2015 Financial assets Cash and deposits with banks Securities Cash collateral on securities borrowed Securities purchased under resale agreements Loans Residential mortgages Personal Credit card Business and government Derivative instruments Customers’ liability under acceptances Other assets Financial liabilities Deposits Personal Business and government Bank Secured borrowings Derivative instruments Acceptances Obligations related to securities sold short Cash collateral on securities lent Obligations related to securities sold under repurchase agreements Other liabilities Subordinated indebtedness Carrying value Amortized cost Fair value through net income Fair value through OCI $ – 37,253 – – $ – – – – – – – – – – – – – – – – – – $ – 28,534 – – – – – – – – – – – – – – – – – – – – $ $ $ $ Total 14,165 87,423 5,433 28,377 187,077 37,544 11,946 70,850 27,762 12,364 8,356 148,081 190,240 17,842 39,484 28,807 12,395 10,338 2,518 11,694 8,365 3,366 18,637 74,982 3,245 30,089 169,022 36,049 11,466 64,648 26,342 9,796 8,185 137,378 178,850 10,785 39,644 29,057 9,796 9,806 1,429 8,914 7,966 3,874 $ $ $ $ Fair value 14,165 87,423 5,433 28,377 187,583 37,556 11,946 70,911 27,762 12,364 8,356 148,088 190,812 17,842 39,881 28,807 12,395 10,338 2,518 11,694 8,365 3,633 18,637 74,982 3,245 30,089 169,937 36,064 11,466 64,736 26,342 9,796 8,185 137,394 179,293 10,785 39,882 29,057 9,796 9,806 1,429 8,914 7,966 4,131 Fair value over (under) carrying value $ $ $ $ – – – – 506 12 – 61 – – – 7 572 – 397 – – – – – – 267 – – – – 915 15 – 88 – – – 16 443 – 238 – – – – – – 257 $ $ $ 347 50,170 – – – – – 6,640 27,762 – – 203 3,190 – 91 28,807 – 10,338 – – 146 – 501 46,448 – – – – – 5,991 26,342 – – $ 91 2,375 (1) $ – – 29,057 – 9,806 – – 197 – $ $ $ $ 13,818 – 5,433 28,377 187,077 37,544 11,946 64,210 – 12,364 8,356 147,878 187,050 17,842 39,393 – 12,395 – 2,518 11,694 8,219 3,366 18,136 – 3,245 30,089 169,022 36,049 11,466 58,657 – 9,796 8,185 137,287 176,475 10,785 39,644 – 9,796 – 1,429 8,914 7,769 3,874 (1) Represents deposit liabilities to which we have elected the FVO. Changes in fair value of these liabilities that are attributable to changes in our own credit risk are presented in OCI. CIBC 2016 ANNUAL REPORT 113 Positive Negative $ 13 11,501 181 – 11,695 $ 44 10,941 – 189 11,174 $ – – – – – – – – 2016 Net (31) 560 181 (189) 521 – – – – Positive Negative $ $ 65 11,742 161 – 11,968 $ 26 11,445 – 199 11,670 – – – – – – – – 11,695 11,174 521 11,968 11,670 2015 Net 39 297 161 (199) 298 – – – – 298 (365) (513) 329 (326) (875) (875) (4) 140 (231) (95) (483) (12) (495) 6 (113) (107) 2,892 5,803 – 326 9,021 9,021 4 31 240 275 1,030 410 1,440 25 127 152 2,300 201 2,501 25,059 (1,198) 173 (1,025) (2,299) – 1,034 – – 1,034 – – – 1,034 11 2,944 – 2,955 – 2,955 – – – – 9 – 9 – – – – – – (106) 8 – (98) – – – (98) 42 (404) – (362) – (362) – 3 – 3 41 – 41 – – – – – 3,693 5,914 310 – 9,917 9,917 – 141 – 141 385 742 1,127 32 38 70 1,365 123 1,488 24,438 – 737 8 – 745 – – – 745 228 2,347 – 2,575 – 2,575 – 1 – 1 3 – 3 – – – – – 3,545 6,612 – 281 10,438 10,438 – 14 201 215 1,473 493 1,966 10 24 34 825 192 1,017 24,844 – 789 – – 789 – – – 789 33 3,128 – 3,161 – 3,161 – – – – 13 – 13 – – – – – 148 (698) 310 (281) (521) (521) – 127 (201) (74) (1,088) 249 (839) 22 14 36 540 (69) 471 (406) – (52) 8 – (44) – – – (44) 195 (781) – (586) – (586) – 1 – 1 (10) – (10) – – – – – 2,527 5,290 329 – 8,146 8,146 – 171 9 180 547 398 945 31 14 45 1,102 374 1,476 22,760 – 928 8 – 936 – – – 936 53 2,540 – 2,593 – 2,593 – 3 – 3 50 – 50 – – – – – Consolidated financial statements Fair value of derivative instruments $ millions, as at October 31 Held for trading Interest rate derivatives Over-the-counter Exchange-traded Total interest rate derivatives Foreign exchange derivatives Over-the-counter Total foreign exchange derivatives Credit derivatives Over-the-counter Total credit derivatives Equity derivatives Over-the-counter Exchange-traded Total equity derivatives Precious metal derivatives Over-the-counter Exchange-traded Total precious metal derivatives Other commodity derivatives Over-the-counter Exchange-traded Total other commodity derivatives Total held for trading Held for ALM Interest rate derivatives Over-the-counter Exchange-traded Total interest rate derivatives Foreign exchange derivatives Over-the-counter – Forward rate agreements – Swap contracts – Purchased options – Written options – Futures contracts – Purchased options – Written options – Forward contracts – Swap contracts – Purchased options – Written options – Total return swap contracts – protection sold – Credit default swap contracts – protection purchased – Credit default contracts – protection sold – Forward rate agreements – Swap contracts – Purchased options – Written options – Futures contracts – Purchased options – Written options – Forward contracts – Swap contracts – Written options Exchange-traded – Futures contracts – Total return swap contracts – protection sold – Credit default swap contracts – protection purchased – Credit default contracts – protection sold Total foreign exchange derivatives Credit derivatives Over-the-counter Total credit derivatives Equity derivatives Over-the-counter Exchange-traded Total equity derivatives Precious metal derivatives Over-the-counter Exchange-traded Total precious metal derivatives Other commodity derivatives Over-the-counter Exchange-traded Total other commodity derivatives Total held for ALM Total fair value Less: effect of netting Average fair value of derivatives held for trading (1) (1) Average fair value represents monthly averages. 114 CIBC 2016 ANNUAL REPORT – Interest rate derivatives – Foreign exchange derivatives – Credit derivatives – Equity derivatives – Precious metal derivatives – Other commodity derivatives $ $ – 3,324 27,762 (17,965) 9,797 12,412 10,223 159 1,050 103 1,496 $ $ – 3,963 28,807 (17,965) 10,842 11,949 11,089 240 1,690 116 2,005 – (639) (1,045) – $ (1,045) $ 463 (866) (81) (640) (13) (509) $ $ – 3,582 26,342 (17,060) 9,282 12,099 9,537 393 860 121 1,346 – 3,998 29,057 (17,060) – (416) (2,715) – $ $ 11,997 $ (2,715) 11,816 10,382 497 1,272 180 2,457 $ 283 (845) (104) (412) (59) (1,111) $ 25,443 $ 27,089 $ (1,646) $ 24,356 $ 26,604 $ (2,248) Consolidated financial statements Assets and liabilities not carried on the consolidated balance sheet at fair value The table below presents the fair values by level within the fair value hierarchy for those assets and liabilities in which fair value is not assumed to equal the carrying value: $ millions, as at October 31 Financial assets Loans Residential mortgages Personal Credit card Business and government Investment in equity-accounted associates (1) Financial liabilities Deposits Personal Business and government Bank Secured borrowings Subordinated indebtedness Level 1 Level 2 Level 3 Quoted market price Valuation technique – observable market inputs Valuation technique – non-observable market inputs 2016 2015 2016 2015 2016 2015 Total 2016 Total 2015 $ $ $ $ – – – – 223 – – – – – $ $ – – – – 166 – – – – – – – – – – 43,419 111,091 13,171 35,535 3,633 $ $ – – – – – $ 187,583 37,556 11,946 64,271 198 $ 169,937 36,064 11,466 58,745 1,649 $ 187,583 37,556 11,946 64,271 421 $ 169,937 36,064 11,466 58,745 1,815 41,197 107,053 8,328 35,089 4,131 $ $ – – – 4,255 – – – – 4,793 – $ 43,419 111,091 13,171 39,790 3,633 $ 41,197 107,053 8,328 39,882 4,131 (1) See Note 26 for details of our equity-accounted associates. Financial instruments carried on the consolidated balance sheet at fair value The table below presents the fair values of financial instruments by level within the fair value hierarchy: $ millions, as at October 31 Financial assets Deposits with banks Trading securities Government issued or guaranteed Corporate equity Corporate debt Mortgage- and asset-backed Trading loans Business and government AFS securities Government issued or guaranteed Corporate equity Corporate debt Mortgage- and asset-backed FVO securities Government issued or guaranteed Corporate debt Asset-backed Derivative instruments Interest rate Foreign exchange Credit Equity Precious metal Other commodity Level 1 Level 2 Level 3 Quoted market price Valuation technique – observable market inputs Valuation technique – non-observable market inputs 2016 2015 2016 2015 2016 2015 Total 2016 Total 2015 $ – $ – $ 347 $ 501 $ – $ – $ 347 $ 501 1,474 35,023 – – 36,497 – 1,429 30 – – 1,459 – – – – – – – 742 – 161 903 2,566 31,728 – – 34,294 – 841 15 – – 856 – – – – – – – 398 14 374 786 9,307 554 1,853 1,168 7,780 712 2,083 701 12,882 11,276 6,640 5,991 22,445 – 5,838 5,215 33,498 59 102 – 161 12,409 12,492 2 364 70 1,327 26,664 80,192 (3,124) (5,654) (8,778) (11,926) (13,599) (18) (1,446) (34) (801) (27,824) 15,824 – 4,070 5,743 25,637 57 99 – 156 12,878 10,739 18 596 31 1,102 25,364 68,925 (2,189) (6,011) (8,200) (12,678) (11,976) (31) (1,012) (25) (2,300) (28,022) $ $ $ $ – 40 – 496 536 – – 344 5 1,947 2,296 – – 94 94 31 – 140 24 – – 195 – 46 – 565 611 – – 431 6 1,604 2,041 – – 111 111 26 – 165 1 – – 192 10,781 35,617 1,853 1,664 49,915 10,346 32,486 2,083 1,266 46,181 6,640 5,991 23,874 374 5,843 7,162 37,253 59 102 94 255 12,440 12,492 142 1,130 70 1,488 27,762 16,665 446 4,076 7,347 28,534 57 99 111 267 12,904 10,739 183 995 45 1,476 26,342 $ 3,121 $ 2,955 $ 122,172 $ 107,816 $ $ (506) – (506) (35) – (197) (42) – – (274) (474) – (474) (26) – (244) (27) – – (297) (771) $ (3,630) $ (10,338) (13,968) (11,963) (13,599) (215) (1,979) (34) (1,017) (28,807) (2,663) (9,806) (12,469) (12,704) (11,976) (275) (1,449) (152) (2,501) (29,057) $ (42,775) $ (41,526) Total financial assets $ 38,859 $ 35,936 Financial liabilities Deposits and other liabilities (1) Obligations related to securities sold short Derivative instruments Interest rate Foreign exchange Credit Equity Precious metal Other commodity $ $ – (4,684) (4,684) – (3,795) (3,795) (2) – – (491) – (216) (709) – – – (410) (127) (201) (738) Total financial liabilities $ (5,393) $ (4,533) $ (36,602) $ (36,222) $ (780) $ (1) Comprises FVO deposits of $3,281 million (2015: $2,375 million), bifurcated embedded derivative liabilities of $203 million (2015: $91 million), FVO other liabilities of $11 million (2015: $11 million), and other financial liabilities measured at fair value of $135 million (2015: $186 million). CIBC 2016 ANNUAL REPORT 115 Consolidated financial statements Transfers between levels in the fair value hierarchy are deemed to have occurred at the beginning of the quarter in which the transfer occurred. Transfers between levels can occur as a result of additional or new information regarding valuation inputs and changes in their observability. During the year, we transferred $548 million of trading securities (2015: $11 million) and $599 million of securities sold short (2015: $481 million) from Level 1 to Level 2 due to reduced observability in the inputs used to value these securities. In addition, insignificant transfers between Level 2 and Level 3 were made during 2016 and 2015 as there were changes in the extent to which non-observable inputs have a significant impact on the fair value of these instruments or there were changes in the observability of one or more inputs that significantly impact their fair value. The net gain recognized in the consolidated statement of income on the financial instruments, for which fair value was estimated using valuation techniques requiring non-observable market inputs, for the year was $33 million (2015: $122 million; 2014: $88 million). The following table presents the changes in fair value of financial assets and liabilities in Level 3. These instruments are measured at fair value utilizing non-observable market inputs. We often hedge positions with offsetting positions that may be classified in a different level. As a result, the gains and losses for assets and liabilities in the Level 3 category presented in the table below do not reflect the effect of offsetting gains and losses on the related hedging instruments that are classified in Level 1 and Level 2. Net gains/(losses) included in income Opening balance Realized (1) Unrealized (1)(2) Net unrealized gains (losses) included in OCI Transfer in to Level 3 Transfer out of Level 3 Purchases Issuances Sales Settlements Closing balance $ 3 27 $ $ – – $ $ 4 – $ – – $ (13) (103) $ 40 496 $ millions, for the year ended October 31 2016 Trading securities Corporate equity Mortgage- and asset-backed AFS securities Corporate equity Corporate debt Mortgage- and asset-backed FVO securities Asset-backed Derivative assets Interest rate Credit Equity Total assets Deposits and other liabilities (3) Derivative instruments Interest rate Credit Equity Total liabilities 2015 Trading securities Corporate equity Mortgage- and asset-backed AFS securities Corporate equity Corporate debt Mortgage- and asset-backed FVO securities Asset-backed Derivative assets Interest rate Credit Equity Total assets Deposits and other liabilities (3) Derivative instruments Interest rate Credit Equity Total liabilities $ $ 46 565 431 6 1,604 111 26 165 1 $ $ 2,955 (474) $ $ (26) (244) (27) $ (771) $ $ $ $ $ $ $ – 759 600 8 622 107 21 204 1 2,322 (729) (21) (270) (14) – 7 67 – 4 5 (1) (38) – 44 (21) – 36 – 15 – 79 107 – – 2 – (31) – 157 (85) – 29 – (27) (1) – (1) – 13 7 21 $ $ (36) (2) (6) (3) $ (47) $ $ $ 1 56 (4) 1 – 17 7 (3) – 75 (25) (8) (15) (6) 35 – 1,156 – 6 – 16 1,217 $ (124) – (4) – – – – – (809) (21) – – – $ (128) $ (946) – – – – – – – – – – (38) – (4) – – – – (42) $ $ $ $ $ – – – – – – – (139) (1) 4 – – – – $ (136) $ $ – – – – – $ (7) $ $ $ $ – – (1) (8) 46 – – – – – – – – 46 (1) – – (10) $ $ $ $ $ $ $ – – – – – – – – – – 3 – – – 3 – – – – – – – – – – 23 – – – $ $ $ $ $ $ – – – – – – – – – – – – – – – – – – – – $ (51) $ (7) – (11) $ (69) $ $ $ – – – – – – – – – – – – 62 – 1,287 – – – – 1,349 $ $ $ $ $ $ $ $ 1 – – – 1 – – (195) (2) – – (1) – – 79 – 17 – 96 (1) (329) – – (309) (15) (1) (5) – $ $ (198) 74 $ $ (660) 313 $ $ 1 – – 2 12 5 $ (44) – – (2) 344 5 1,947 94 31 140 24 3,121 (506) (35) (197) (42) (780) 46 565 431 6 1,604 111 26 165 1 2,955 (474) (26) (244) (27) (771) $ (1,034) $ (56) $ (54) $ (11) $ 23 $ $ (46) $ 75 $ 332 $ Includes foreign currency gains and losses. (1) (2) Comprises unrealized gains and losses relating to these assets and liabilities held at the end of the reporting year. (3) Includes FVO deposits of $318 million (2015: $338 million) and net bifurcated embedded derivative liabilities of $188 million (2015: $136 million). 116 CIBC 2016 ANNUAL REPORT Consolidated financial statements Quantitative information about significant non-observable inputs Valuation techniques using one or more non-observable inputs are used for a number of financial instruments. The following table discloses the valuation techniques and quantitative information about the significant non-observable inputs used in Level 3 financial instruments: $ millions, as at October 31 Trading securities Corporate equity Mortgage- and asset-backed AFS securities Corporate equity Limited partnerships Private companies Corporate debt Mortgage- and asset-backed FVO securities Asset-backed Derivative instruments Interest rate Credit Equity Total assets Deposits and other liabilities Derivative instruments Interest rate Credit 2016 Valuation techniques Key non-observable inputs Range of inputs Low High $ 40 496 Net asset value Market proxy or direct broker quote Market proxy or direct broker quote Net asset value n/a – % n/a 99.5 % 239 105 5 1,947 Adjusted net asset value (1) Valuation multiple Discounted cash flow Discounted cash flow Discounted cash flow Net asset value Earnings multiple Revenue multiple Discount rate Discount rate Credit spread n/a 8.0 3.9 14.0 % 30.0 % 0.7 % n/a 11.0 3.9 14.0 % 30.0 % 1.2 % 94 Market proxy or direct broker quote Market proxy or direct broker quote 71.7 % 86.1 % 31 Proprietary model (2) Option model n/a Market volatility 140 (3) Market proxy or direct broker quote Market proxy or direct broker quote Default rate Recovery rate Prepayment rate Discounted cash flow 24 $ 3,121 Option model Credit spread (4) Market volatility Market correlation n/a 22.2 % 24.1 % 4.0 % 50.0 % 20.0 % – % 13.4 % (18.8)% n/a 48.9 % 99.0 % 4.0 % 70.0 % 20.0 % 1.1 % 13.4 % 88.6 % $ (506) Market proxy or direct broker quote Market proxy or direct broker quote Market volatility Market correlation Option model – % 8.8 % 97.0 % 43.5 % (53.8)% 100.0 % (35) Proprietary model (2) n/a (197) Market proxy or direct broker quote Market proxy or direct broker quote Default rate Recovery rate Prepayment rate Credit spread Market correlation Discounted cash flow Option model (42) (780) n/a – % 4.0 % 50.0 % 20.0 % – % (28.7)% n/a 99.5 % 4.0 % 70.0 % 20.0 % 1.1 % 92.5 % Equity Total liabilities $ (1) Adjusted net asset value is determined using reported net asset values obtained from the fund manager or general partner of the LP and may be adjusted for current market levels where appropriate. (2) Using valuation techniques which we consider to be non-observable. (3) Net of CVA reserves related to financial guarantors calculated based on reserve rates (as a percentage of fair value) ranging from 15% to 70%. (4) Excludes financial guarantors. n/a Not applicable. Sensitivity of Level 3 financial assets and liabilities The following section describes the significant non-observable inputs identified in the table above, the inter-relationships between those inputs and the sensitivity of fair value to changes in those inputs. We performed our Level 3 sensitivity analysis on an individual instrument basis, except for instruments managed within our structured credit run-off business for which we performed the sensitivity analysis on a portfolio basis to reflect the manner in which those financial instruments are managed. Within our structured credit run-off business, our primary sources of exposure, which are derived either through direct holdings or derivatives, are U.S. residential mortgage market contracts, CLOs, corporate debt and other securities and loans. Structured credit positions classified as loans and receivables are carried at amortized cost and are excluded from this sensitivity analysis. The structured credit positions carried on the consolidated balance sheet at fair value are within trading securities, FVO securities, FVO structured note liability within deposits and derivatives. These fair values are generally derived from and are sensitive to non-observable inputs, including indicative broker quotes and internal models that utilize default rates, recovery rates, prepayment rates and credit spreads. Indicative broker quotes are derived from proxy pricing in an inactive market or from the brokers’ internal valuation models. These quotes are used to value our trading and FVO securities, FVO structured note liability and derivatives. A significant increase in the indicative broker prices or quotes would result in an increase in the fair value of our Level 3 securities and note liability but a decrease in the fair value of our credit derivatives. The fair value of our credit derivatives referencing CLO assets are also impacted by other key non-observable inputs, including: (cid:129) Prepayment rates – which are a measure of the future expected repayment of a loan by a borrower in advance of the scheduled due date. Prepayment rates are driven by consumer behaviour, economic conditions and other factors. A significant increase in prepayment rates of the underlying loan collateral of the referenced CLO assets would result in an increase in the fair value of the referenced CLO assets and a decrease in our Level 3 credit derivatives. Recovery rates – which are an estimate of the amount that will be recovered following a default by a borrower. Recovery rates are expressed as one minus a LGD rate. Hence, a significant increase in the recovery rate of the underlying defaulted loan collateral of the referenced CLO assets would result in an increase in the fair value of the referenced CLO assets and a decrease in the fair value of our Level 3 credit derivatives. Credit spreads – which are the premium over a benchmark interest rate in the market to reflect a lower credit quality of a financial instrument and form part of the discount rates used in a discounted cash flow model. A significant increase in the credit spread, which raises the discount rate applied to future cash flows of the referenced CLO assets, would result in a decrease in the fair value of referenced CLO assets and an increase in the fair value of our Level 3 credit derivatives. (cid:129) (cid:129) CIBC 2016 ANNUAL REPORT 117 Consolidated financial statements (cid:129) Default rates or probabilities of default – which are the likelihood of a borrower’s inability to repay its obligations as they become contractually due. A significant increase in the default rate of the underlying loan collateral of the referenced CLO assets up to a certain reasonably possible level would result in an increase in the fair value of the referenced CLO assets and a decrease in the fair value of our Level 3 credit derivatives. This impact is due to accelerated principal repayments from the defaulted underlying loan collateral and the subordination structure of the referenced CLO assets. In general, higher default rates have a positive correlation with credit spreads, but a negative correlation with recovery rates and prepayment rates, with the respective impact on fair value as described above. The fair value of the credit derivatives is also sensitive to CVA for counterparty risk on the credit derivative counterparty. The impact of adjusting the indicative broker quotes, default rates, recovery rates, prepayment rates and credit spreads noted above to reasonably possible alternatives would increase the net fair value by up to $4 million or decrease the net fair value by up to $4 million (2015: increase the net fair value by up to $5 million or decrease the net fair value by up to $1 million) in respect of financial instruments carried at fair value in our structured credit run-off business. Changes in fair value of a Level 3 FVO structured note liability and the Level 3 positions that the note hedges are excluded from this sensitivity analysis because reasonably possible changes in fair value are expected to be largely offsetting. The fair value of our investments in private companies is derived from applying applicable valuation multiples to financial indicators such as revenue or earnings. Earnings multiples or revenue multiples represent the ratios of earnings or revenue to enterprise value and are often used as non-observable inputs in the fair value measurement of our investments in private companies. We apply professional judgment in our selection of the multiple from comparable listed companies, which is then further adjusted for company-specific factors. The fair value of private companies is sensitive to changes in the multiple we apply. A significant increase in earnings multiples or revenue multiples generally results in an increase in the fair value of our investments in private companies. By adjusting the multiple and implied volatility within a reasonably possible range, the aggregate fair value of our investments in private companies would increase by $16 million or decrease by $9 million (2015: increase by $22 million or decrease by $10 million). The fair value of our LPs is determined based on the net asset value provided by the fund managers, adjusted as appropriate. The fair value of LPs is sensitive to changes in the net asset value and by adjusting the net asset value within a reasonably possible range, the aggregate fair value of our LPs would increase or decrease by $24 million. The fair value of our ABS is determined based on non-observable credit spreads. A significant increase in credit spreads generally results in a decrease in the fair value of our Level 3 ABS. By adjusting the credit spreads within a reasonably possible range, the fair value of our ABS would increase or decrease by $2 million (2015: $3 million). While our standalone derivatives are recorded as derivative assets or derivative liabilities, our bifurcated Level 3 embedded derivatives are recorded within deposits and other liabilities. The determination of the fair value of certain bifurcated embedded derivatives and certain standalone derivatives requires significant assumptions and judgment to be applied to both the inputs and the valuation techniques employed. These derivatives are sensitive to long-dated market volatility and correlation inputs, which we consider to be non-observable. Market volatility is a measure of the anticipated future variability of a market price and is an important input for pricing options, which are inherent in many of our Level 3 derivatives. A higher market volatility generally results in a higher option price, with all else held constant, due to the higher probability of obtaining a greater return from the option, and results in an increase in the fair value of our Level 3 derivatives. Correlation inputs are used to value those derivatives where the payout is dependent upon more than one market price. For example, the payout of an equity basket option is based upon the performance of a basket of stocks, and the inter-relationships between the price movements of those stocks. A positive correlation implies that two inputs tend to change the fair value in the same direction, while a negative correlation implies that two inputs tend to change the fair value in the opposite direction. Changes in market correlation could result in an increase or a decrease in the fair value of our Level 3 derivatives and embedded derivatives. By adjusting the non-observable inputs by reasonably alternative amounts, the fair value of our Level 3 standalone derivatives and embedded derivatives would increase by $23 million or decrease by $24 million (2015: increase or decrease by $12 million). FVO assets FVO securities include certain debt securities that were designated as FVO on the basis of being managed together with derivatives to eliminate or significantly reduce financial risks. FVO liabilities FVO deposits and other liabilities include: (cid:129) Certain business and government deposit liabilities and certain secured borrowings that are economically hedged with derivatives and other financial instruments, and certain financial liabilities that have one or more embedded derivatives that significantly modify the cash flows of the host liability but are not bifurcated from the host instrument; and Our mortgage commitments to retail clients to provide mortgages at fixed rates that are economically hedged with derivatives and other financial instruments. (cid:129) The fair value of a FVO liability reflects the credit risk relating to that liability. For those FVO liabilities for which we believe changes in our credit risk would impact the fair value from the note holders’ perspective, the related fair value changes were recognized in OCI. Changes in fair value attributable to changes in our own credit are measured as the difference between i) the period over period change in the present value of the expected cash flows using a discount curve adjusted for our own credit; and ii) the period over period change in the present value of the same expected cash flows using a discount curve based on the benchmark curve adjusted for our own credit as implied at inception of the FVO liability. The pre-tax impact of changes in CIBC’s own credit risk on our FVO liabilities were losses of $6 million for the year, and nil cumulatively. The estimated contractual settlement amount of FVO deposits is $4 million lower (2015: $4 million lower) than its fair value. 118 CIBC 2016 ANNUAL REPORT Consolidated financial statements Note 3 Significant acquisitions and dispositions 2016 Acquisition of PrivateBancorp, Inc. On June 29, 2016, we announced that we had entered into a definitive agreement to acquire PrivateBancorp, Inc. (PrivateBancorp) and its subsidiary, The PrivateBank and Trust Company (PrivateBank). PrivateBank is a Chicago-based middle-market commercial bank with private banking and wealth management capabilities. CIBC will pay US$18.80 in cash and 0.3657 of a CIBC common share for each share of PrivateBancorp common stock. Based on the June 28, 2016 closing price of CIBC’s common shares on the New York Stock Exchange (US$77.11), the total transaction value is approximately US$3.8 billion (C$4.9 billion) or US$47.00 of value per share of PrivateBancorp common stock at announcement. Based on the number of PrivateBancorp shares outstanding at the date of announcement, CIBC would be required to issue approximately 29 million CIBC common shares and pay approximately US$1.5 billion in cash in order to satisfy the consideration payable. The final transaction value is subject to change as it is dependent upon: (i) the closing price of CIBC’s common shares on the New York Stock Exchange on the date of close, (ii) the number of PrivateBancorp common shares outstanding on the date of close, and (iii) foreign exchange rates on the date of close as the cash consideration is denominated in US dollars. The transaction is expected to close in the first calendar quarter of 2017 and is subject to customary closing conditions, including regulatory approvals and the approval of PrivateBancorp’s common shareholders. A special meeting of PrivateBancorp’s common stockholders to vote on the transaction is scheduled for December 8, 2016. The results of PrivateBancorp will only be consolidated with CIBC’s results following the close of the transaction. Sale of equity investment We completed the sale of American Century Investments (ACI) to Nomura Holding America Inc. (Nomura) on May 19, 2016 for proceeds of US$1,045 million. As a result, we recognized a gain on sale, net of related transaction costs, of $428 million ($383 million after-tax), in our Wealth Management strategic business unit (SBU) which included cumulative foreign exchange translation gains, net of designated hedges, of $155 million ($141 million after-tax) which were reclassified from AOCI. Our minority investment in ACI was classified as held for sale and measured at the lower of its carrying value and fair value less costs to sell upon the announcement on December 21, 2015 that we had entered into a definitive agreement with Nomura to sell our minority investment. Prior to May 19, 2016, the carrying amount of our held for sale investment in ACI was included within Investments in equity-accounted associates and joint ventures. We also ceased recognition of income from equity-accounted associates relating to ACI following its classification as held for sale on the date of the announcement. 2015 Sale of equity investment On April 30, 2015, CIBC sold its equity investment in The Bank of N.T. Butterfield & Son Limited, which was accounted for as an associate within Corporate and Other, for an amount, net of associated expenses, that approximated its carrying value. CIBC 2016 ANNUAL REPORT 119 Consolidated financial statements Note 4 Securities $ millions, as at October 31 Within 1 year 1 to 5 years 5 to 10 years Over 10 years No specific maturity 2016 Total 2015 Total Carrying Carrying Carrying Carrying value Yield (1) value Yield (1) value Yield (1) value Yield (1) Carrying value Carrying Yield (1) value Yield (1) Carrying value Yield (1) Residual term to contractual maturity $ AFS securities Securities issued or guaranteed by: Canadian federal government Other Canadian governments U.S. Treasury and agencies Other foreign governments Mortgage-backed securities (2) Asset-backed securities Corporate public debt Corporate private debt Total debt securities Corporate public equity Corporate private equity Total equity securities 162 49 3,169 1,524 814 3 1,702 – 7,423 – – – 0.6 % $ 3.1 0.4 1.6 0.2 1.3 1.1 – 6,476 2,525 4,650 1,326 1,862 859 4,014 5 21,717 1.1 % $ 1.4 1.0 2.2 1.0 1.9 1.0 10.0 – – – – – – – 417 3,094 – 229 11 1,198 108 – 5,057 – – – 1.3 % $ 1.5 – 5.1 1.2 1.8 6.7 – – – – – 8 245 1,940 475 14 – 2,682 – – – Total AFS securities $ 7,423 $ 21,717 $ 5,057 $ 2,682 $ Trading securities Securities issued or guaranteed by: Canadian federal government Other Canadian governments U.S. Treasury and agencies Other foreign governments Mortgage-backed securities (3) Asset-backed securities Corporate public debt Corporate public equity 1,287 932 34 3 276 35 736 – $ 1,588 731 121 42 716 84 804 – $ 671 1,674 12 71 39 – 240 – $ 344 3,215 27 29 14 500 73 – – % $ – 1.1 5.4 0.9 1.0 5.5 – – – $ $ – – – – – – – – – 34 340 374 374 – – – – – – – 35,617 – % $ – – – – – – – 7,055 5,668 7,827 3,324 4,627 2,535 5,838 5 1.1 % $ 1.5 0.8 2.4 0.8 1.7 1.2 10.0 2,544 3,910 7,359 2,852 5,163 2,184 4,070 6 36,879 28,088 1.2 % 1.7 0.4 2.6 0.7 1.6 1.1 10.0 n/m n/m n/m n/m 34 340 374 n/m n/m 17 429 446 $ 37,253 $ 28,534 $ 3,890 6,552 194 145 1,045 619 1,853 35,617 $ 4,293 5,652 197 204 471 795 2,083 32,486 Total trading securities $ 3,303 $ 4,086 $ 2,707 $ 4,202 $ 35,617 $ 49,915 $ 46,181 FVO securities Securities issued or guaranteed by: Other Canadian governments Asset-backed securities Corporate public debt Total FVO securities $ $ – – 102 102 $ $ – – – – $ $ – – – – Total securities (4) $ 10,828 $ 25,803 $ 7,764 $ 59 94 – $ 153 $ 7,037 $ $ – – – – $ $ 59 94 102 255 $ $ 57 111 99 267 $ 35,991 $ 87,423 $ 74,982 (1) Represents the weighted-average yield, which is determined by applying the weighted average of the yields of individual fixed income securities. (2) Includes securities backed by mortgages insured by the Canada Mortgage and Housing Corporation (CMHC), with amortized cost of $971 million (2015: $1,223 million) and fair value of $975 million (2015: $1,226 million); securities issued by Federal National Mortgage Association (Fannie Mae), with amortized cost of $1,521 million (2015: $1,914 million) and fair value of $1,521 million (2015: $1,913 million); securities issued by Federal Home Loan Mortgage Corporation (Freddie Mac), with amortized cost of $849 million (2015: $1,221 million) and fair value of $848 million (2015: $1,221 million); and securities issued by Government National Mortgage Association, a U.S. government corporation (Ginnie Mae), with amortized cost of $1,248 million (2015: $742 million) and fair value of $1,246 million (2015: $744 million). Includes securities backed by mortgages insured by the CMHC of $986 million (2015: $397 million). Includes securities denominated in U.S. dollars with carrying value of $27.4 billion (2015: $25.1 billion) and securities denominated in other foreign currencies with carrying value of $1,253 million (2015: $1,068 million). (3) (4) n/m Not meaningful. Fair value of AFS securities $ millions, as at October 31 Securities issued or guaranteed by: Canadian federal government Other Canadian governments U.S. Treasury and agencies Other foreign governments Mortgage-backed securities Asset-backed securities Corporate public debt Corporate private debt Corporate public equity (1) Corporate private equity (1) Includes restricted stock. Amortized cost Gross unrealized gains Gross unrealized losses Fair value Amortized cost Gross unrealized gains Gross unrealized losses 2016 $ $ 7,028 5,646 7,820 3,326 4,626 2,533 5,842 5 10 211 $ 37,047 $ 28 25 9 15 6 3 12 – 24 132 254 $ $ $ (1) $ (3) (2) (17) (5) (1) (16) – – (3) 7,055 5,668 7,827 3,324 4,627 2,535 5,838 5 34 340 2,552 3,921 7,366 2,860 5,158 2,179 4,084 5 10 263 $ (48) $ 37,253 $ 28,398 $ 1 2 2 10 10 12 4 1 7 167 216 $ $ (9) (13) (9) (18) (5) (7) (18) – – (1) $ (80) $ 28,534 2015 Fair value 2,544 3,910 7,359 2,852 5,163 2,184 4,070 6 17 429 For AFS securities where the fair value is less than the amortized cost, the following table presents fair value and associated unrealized losses for periods less than 12 months and 12 months or longer: 120 CIBC 2016 ANNUAL REPORT Consolidated financial statements 2016 Less than 12 months 12 months or longer Total Less than 12 months 12 months or longer Gross unrealized losses Fair value Gross unrealized losses Fair value Gross unrealized losses Fair value Gross unrealized losses Fair value Gross unrealized losses Fair value 2015 Total Gross unrealized losses Fair value 247 90 804 756 993 378 1,097 – – 10 $ – $ – (1) (3) (2) – (4) – – (1) 608 538 1,121 461 778 502 1,624 – – 15 $ (1) $ (3) (1) (14) (3) (1) (12) – – (2) 855 628 1,925 1,217 1,771 880 2,721 – – 25 $ (1) $ (3) (2) (17) (5) (1) (16) – – (3) 1,463 3,290 5,390 1,245 2,588 1,602 2,580 – – 39 $ (9) $ (12) (9) (5) (5) (7) (7) – – (1) – 50 – 118 28 – 482 – – 1 $ – $ (1) – (13) – – (11) – – – 1,463 3,340 5,390 1,363 2,616 1,602 3,062 – – 40 $ 4,375 $ (11) $ 5,647 $ (37) $ 10,022 $ (48) $ 18,197 $ (55) $ 679 $ (25) $ 18,876 $ (9) (13) (9) (18) (5) (7) (18) – – (1) $ (80) $ millions, as at October 31 Securities issued or guaranteed by: Canadian federal government Other Canadian governments U.S. Treasury and agencies Other foreign governments $ Mortgage-backed securities Asset-backed securities Corporate public debt Corporate private debt Corporate public equity Corporate private equity As at October 31, 2016, the amortized cost of 240 AFS securities that are in a gross unrealized loss position (2015: 250 securities) exceeded their fair value by $48 million (2015: $80 million). The securities that have been in a gross unrealized loss position for more than a year include 81 AFS securities (2015: 28 securities), with a gross unrealized loss of $37 million (2015: $25 million). We have determined that these AFS securities were not impaired. The table below presents realized gains, losses, and write-downs on AFS securities: $ millions, for the year ended October 31 Realized gains Realized losses Impairment write-downs Equity securities Note 5 Loans(1)(2) $ millions, as at October 31 $ 2016 108 (8) (27) 2015 163 (20) $ (5) $ 73 $ 138 Gross amount Individual allowance Collective allowance Total allowance 2016 Net total Gross amount Individual allowance Collective allowance Total allowance 2014 242 (36) $ (5) $ 201 2015 Net total Residential mortgages Personal (3) Credit card Business and government (4) $ $ 187,298 38,041 12,332 71,437 $ 309,108 $ 1 8 – 249 258 $ 220 $ 489 386 338 221 $ 497 386 587 187,077 $ 37,544 11,946 70,850 169,258 36,517 11,804 65,276 $ $ 1,433 $ 1,691 $ 307,417 $ 282,855 $ 1 7 – 303 311 $ 235 $ 461 338 325 236 $ 468 338 628 169,022 36,049 11,466 64,648 $ 1,359 $ 1,670 $ 281,185 (1) (2) (3) (4) Loans are net of unearned income of $346 million (2015: $320 million). Includes gross loans of $35.6 billion (2015: $31.5 billion) denominated in U.S. dollars and $4.2 billion (2015: $4.1 billion) denominated in other foreign currencies. Includes $51 million (2015: $61 million) related to loans to certain individuals while employed by CIBC to finance a portion of their participation in funds which make private equity investments on a side-by-side basis with CIBC and its affiliates. These loans are secured by the borrowers’ interest in the funds. Of the total amount outstanding, $50 million (2015: $60 million) relates to individuals who are no longer employed by CIBC. Includes trading loans of $6,640 million (2015: $5,991 million). Allowance for credit losses Individual allowance $ millions, for the year ended October 31 2016 2015 2014 2016 2015 2014 2016 2015 2014 2016 2015 Residential mortgages Personal Business and government Balance at beginning of year Provision for (reversal of) credit losses Write-offs Recoveries Interest income on impaired loans Foreign exchange and other Balance at end of year $ $ 1 – – – – – 1 $ $ 1 – – – – – 1 $ $ 1 – – – – – 1 $ $ 7 1 – – – – 8 $ $ 9 (1) (1) – – – 7 $ $ 9 – – – – – 9 Total 2014 320 136 (120) 6 (14) 10 $ $ $ $ 303 187 (231) 8 (20) 2 328 77 (142) 4 (8) 44 310 136 (120) 6 (14) 10 $ $ 311 188 (231) 8 (20) 2 338 76 (143) 4 (8) 44 $ 249 $ 303 $ 328 $ 258 $ 311 $ 338 CIBC 2016 ANNUAL REPORT 121 Consolidated financial statements Collective allowance $ millions, as at or for the year ended October 31 Balance at beginning of year Provision for credit losses Write-offs Recoveries Interest income on impaired loans Foreign exchange and other Residential mortgages Personal Credit card Business and government Total 2016 2015 2014 2016 2015 2014 2016 2015 2014 2016 2015 2014 2016 2015 2014 $ 235 $ 208 $ 159 $ 461 $ 451 $ 442 $ 338 $ 386 $ 517 $ 417 $ 353 $ 320 $ 1,451 $ 1,398 $ 1,438 801 (938) 186 863 (922) 175 452 (524) 120 319 (336) 49 284 (312) 43 378 (564) 136 322 (495) 125 695 (861) 182 263 (302) 51 58 (28) 6 34 (34) – 73 (32) 6 56 (35) 7 83 (27) – 37 (32) – (7) (8) (7) 29 (8) 1 (2) (2) (8) 6 (8) 2 – – – – – (81) – 7 – 17 – 5 (9) (3) (15) 52 (16) (73) Balance at end of year $ 220 $ 235 $ 208 $ 489 $ 461 $ 451 $ 386 $ 338 $ 386 $ 460 $ 417 $ 353 $ 1,555 $ 1,451 $ 1,398 Comprises: Loans Undrawn credit facilities (1) $ 220 $ 235 $ 208 $ 489 $ 461 $ 451 $ 386 $ 338 $ 386 $ 338 $ 325 $ 277 $ 1,433 $ 1,359 $ 1,322 76 – 122 122 76 92 92 – – – – – – – – (1) Included in Other liabilities on the consolidated balance sheet. Impaired loans $ millions, as at October 31 Gross impaired Individual allowance Collective allowance (1) Net impaired 2016 Residential mortgages Personal Business and government $ 514 193 951 Total impaired loans (2)(3) $ 1,658 $ $ 1 8 249 258 $ $ 167 137 10 314 $ 346 48 692 $ 1,086 $ 1,419 Gross impaired $ 573 187 659 Individual allowance Collective allowance (1) $ 1 7 303 $ 311 $ 187 138 10 $ 335 2015 Net impaired $ 385 42 346 $ 773 (1) Includes collective allowance relating to personal, scored small business and mortgage impaired loans that are greater than 90 days delinquent. In addition, we have a collective allowance of $1,241 million (2015: $1,116 million) on balances and commitments which are not impaired. (2) Average balance of gross impaired loans was $1,587 million (2015: $1,471 million). (3) Foreclosed assets of $18 million (2015: $16 million) were included in Other assets on the consolidated balance sheet. Contractually past due loans but not impaired This comprises loans where repayment of principal or payment of interest is contractually in arrears. The following table provides an aging analysis of the contractually past due loans. $ millions, as at October 31 Residential mortgages Personal Credit card Business and government Less than 31 days $ 2,244 621 607 208 $ 31 to 90 days 802 168 180 130 $ 3,680 $ 1,280 Over 90 days $ $ 216 21 103 25 365 $ 2016 Total 3,262 810 890 363 $ 5,325 2015 Total $ 2,855 692 762 344 $ 4,653 During the year, gross interest income that would have been recorded if impaired loans were treated as current was $101 million (2015: $96 million), of which $27 million (2015: $21 million) was in Canada and $74 million (2015: $75 million) was outside Canada. During the year, interest recognized on impaired loans was $29 million (2015: $23 million), and interest recognized on loans before being classified as impaired was $61 million (2015: $38 million), of which $38 million (2015: $35 million) was in Canada and $23 million (2015: $3 million) was outside Canada. 122 CIBC 2016 ANNUAL REPORT Consolidated financial statements Credit quality of the loans portfolio The following tables provide the credit quality of business and government loans and acceptances and retail loans by carrying value. For details on the CIBC rating categories and PD bands, see the “Credit risk” section of the MD&A. Net business and government loans and acceptances $ millions, for the year ended October 31 Grade Investment grade Non-investment grade Watch list Default Total advanced internal ratings-based (AIRB) exposure Strong Good Satisfactory Weak Default Total slotted exposure Standardized exposure CIBC rating PD bands Corporate Sovereign Banks 00 – 47 51 – 67 70 – 80 90 0.01% – 0.38% $ 0.39% – 12.11% 12.11% – 99.99% 100% $ $ $ $ $ 37,148 34,950 1,054 636 73,788 1,314 124 18 7 4 1,467 3,767 79,022 $ $ $ $ $ $ 1,814 453 2 – 2,269 – – – – – – 273 2,542 $ $ $ $ $ $ 914 586 – – 1,500 2 – – – – 2 476 1,978 Less: collective allowance on non-impaired loans Net business and government loans and acceptances (1) (1) Includes customers’ liability under acceptances of $12,364 million (2015: $9,796 million). Net retail loans $ millions, for the year ended October 31 2016 Total 39,876 35,989 1,056 636 77,557 1,316 124 18 7 4 1,469 4,516 83,542 328 83,214 $ $ $ $ $ $ $ $ 2015 Total 29,239 33,189 630 372 63,430 6,432 495 143 46 4 7,120 4,209 74,759 315 74,444 $ $ $ $ $ $ $ $ PD bands Residential mortgages Personal 0.01% – 0.20% $ 0.21% – 0.50% 0.51% – 2.00% 2.01% – 10.00% 10.01% – 99.99% 100% $ $ $ $ $ $ 148,665 17,242 15,479 2,651 275 133 184,445 142 1 51 1 1 196 2,489 53 187,077 $ $ $ $ $ $ $ 19,498 3,862 8,363 4,935 710 7 37,375 – – – – – – 521 352 37,544 2016 2015 Cards 3,206 765 3,889 3,533 781 – 12,174 – – – – – – 158 386 11,946 Total 171,369 21,869 27,731 11,119 1,766 140 233,994 142 1 51 1 1 196 3,168 791 236,567 $ $ $ $ $ $ $ $ $ $ $ $ $ $ Total 158,224 13,280 31,176 8,984 1,534 101 213,299 714 53 118 1 1 887 3,060 709 216,537 $ $ $ $ $ $ $ Risk level Exceptionally low Very low Low Medium High Default Total AIRB exposure Strong Good Satisfactory Weak Default Total slotted exposure Standardized exposure Less: collective allowance on non-impaired loans Net retail loans Net interest income after provision for credit losses $ millions, for the year ended October 31 Interest income Interest expense Net interest income Provision for credit losses Net interest income after provision for credit losses 2016 $ 12,092 3,726 8,366 1,051 $ 7,315 2015 11,483 3,568 7,915 771 7,144 $ $ 2014 11,477 4,018 7,459 937 6,522 $ $ CIBC 2016 ANNUAL REPORT 123 Consolidated financial statements Note 6 Structured entities and derecognition of financial assets Structured entities SEs are entities that have been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. SEs are entities that are created to accomplish a narrow and well-defined objective. CIBC is involved with various types of SEs for which the business activities include securitization of financial assets, asset-backed financings, and asset management. We consolidate an SE when the substance of the relationship indicates that we control the SE. Consolidated structured entities We consolidate the following SEs: Multi-seller conduit We sponsor a consolidated multi-seller conduit in Canada that purchases financial assets from clients and finances the purchases by issuing ABS. The sellers to the conduit continue to service the assets and are exposed to credit losses realized on these assets through the provision of over-collateralization. We hold all of the outstanding ABS. Residential mortgage securitization trusts Clear Trust (Clear) originated Canadian insured prime mortgages and uninsured Near-Prime/Alt-A mortgages. Clear sold these mortgages to Crisp Trust (Crisp). Crisp funded the purchase of these mortgages through the issuance of commercial paper to investors, which was secured by the mortgages. We hold all of the outstanding commercial paper and the mortgages are presented as Residential mortgages within Loans on the consolidated balance sheet. This program is in run-off. Credit card securitization trusts We sell an ownership interest in a revolving pool of credit card receivables generated under certain credit card accounts to Cards II Trust (Cards II). Cards II purchases a proportionate share of credit card receivables on certain credit card accounts within designated portfolios, with the proceeds received from the issuance of notes. Our credit card securitizations are revolving securitizations, with credit card receivable balances fluctuating from month to month as credit card clients repay their balances and new receivables are generated. The notes are presented as Secured borrowings within Deposits on the consolidated balance sheet. As at October 31, 2016, $4.2 billion of credit card receivable assets with a fair value of $4.2 billion (2015: $4.8 billion with a fair value of $4.8 billion) supported associated funding liabilities of $4.2 billion with a fair value of $4.2 billion (2015: $4.8 billion with a fair value of $4.8 billion). Covered bond guarantor We have two covered bond programs, structured and legislative. Covered bonds are full recourse on-balance sheet obligations that are also fully collateralized by assets over which bondholders enjoy a priority claim in the event of CIBC’s insolvency. Under the structured program, we transfer a pool of CMHC insured mortgages to the CIBC Covered Bond Guarantor Limited Partnership that warehouses these mortgages and serves as a guarantor to bondholders for payment of interest and principal. Under the legislative program, we transfer a pool of conventional uninsured mortgages to the CIBC Covered Bond (Legislative) Guarantor Limited Partnership that warehouses these mortgages and serves as a guarantor to bondholders for payment of interest and principal. For both covered bond programs, the assets are owned by the guarantor and not CIBC. As at October 31, 2016, our structured program had outstanding covered bond liabilities of $1.0 billion with a fair value of $1.0 billion (2015: $4.3 billion with a fair value of $4.3 billion) and our legislative program had outstanding covered bond liabilities of $13.2 billion with a fair value of $13.3 billion (2015: $7.7 billion with a fair value of $7.7 billion). The covered bond liabilities are supported by a contractually-determined portion of the assets transferred to the guarantor and certain contractual arrangements designed to protect the bondholders from adverse events, including foreign currency fluctuations. CIBC-managed investment funds We establish and manage investment funds such as mutual funds and pooled funds. We act as an investment manager and earn market-based management fees, and for certain pooled funds, performance fees which are generally based on the performance of the funds. Seed capital is provided from time to time to CIBC-managed investment funds for initial launch. We consolidate those investment funds in which we have power to direct the relevant activities of the funds and in which our seed capital, or our units held, are significant relative to the total variability of returns of the funds such that we are deemed to be a principal rather than an agent. As at October 31, 2016, the total assets and non-controlling interests in the consolidated CIBC- managed investment funds were $68 million and $6 million, respectively (2015: $25 million and nil, respectively). Non-controlling interests in consolidated CIBC-managed investment funds are included in Other liabilities as the investment fund units are mandatorily redeemable at the option of the investor. Non-consolidated structured entities The following SEs are not consolidated by CIBC: Single-seller and multi-seller conduits We manage and administer a single-seller conduit and several CIBC-sponsored multi-seller conduits in Canada. Our 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. Our 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. As at October 31, 2016, the total assets in our single-seller conduit and multi-seller conduits amounted to $6.0 billion (2015: $4.5 billion). 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 our 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 also may purchase ABCP issued by our multi-seller conduits for market making purposes. 124 CIBC 2016 ANNUAL REPORT Consolidated financial statements We are required to maintain certain short-term and/or long-term debt ratings with respect to the liquidity facilities that we provide to our own 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. All fees earned in respect of activities with the conduits are on a market basis. Third-party structured vehicles – continuing We have investments in and provide liquidity and credit facilities to third-party SEs through our treasury and trading activities. We also have investments in LPs in which we generally are a passive investor of the LPs as a limited partner, and in some cases, we are the co-general partner and have significant influence over the LPs. Similar to other limited partners, we are obligated to provide funding up to our commitment level to these LPs. Pass-through investment structures We have exposure to units of third-party or CIBC-managed investment funds. We enter into equity derivative transactions with third-party investment funds to pass-through the return of these referenced funds. These transactions provide the investors of the third-party managed investment funds with the desired exposure to the referenced funds in a tax efficient manner. Commercial mortgage securitization trust We sold commercial mortgages through a pass-through arrangement with a trust that securitized these mortgages into various classes of ownership certificates held by various external investors. We continue to perform special servicing of the mortgages in exchange for a market-based fee. As at October 31, 2016, the total outstanding ownership certificates in the Commercial mortgage securitization trust amounted to $177 million (2015: $254 million). CIBC Capital Trust We have issued senior deposit notes to CIBC Capital Trust, which funds the purchase of these notes through the issuance of CIBC Tier 1 Notes (Notes) that match the term of the senior deposit notes. The Notes are eligible for Tier 1 regulatory capital treatment and are subject to the phase-out rules for capital instruments that will be viewed as non-qualifying capital instruments. See Note 16 for additional details. CIBC-managed investment funds As indicated above, we establish investment funds, including mutual funds and pooled funds, to provide clients with investment opportunities and we may receive management fees and performance fees. We may hold insignificant amounts of fund units in these CIBC-managed funds. We do not consolidate these funds if we do not have significant variability of returns from our interests in these funds such that we are deemed to be an agent through our capacity as the investment manager, rather than as a principal. We do not guarantee the performance of CIBC-managed investment funds. As at October 31, 2016, the total AUM in the non-consolidated CIBC-managed investment funds amounted to $101.4 billion (2015: $94.4 billion). CIBC structured collateralized debt obligation vehicles We hold exposures to structured CDO vehicles through investments in, or written credit derivatives referencing, these structured vehicles. We may also provide liquidity facilities or other credit facilities. The structured vehicles are funded through the issuance of senior and subordinated tranches. We may hold a portion of those senior and/or subordinated tranches. We have curtailed our business activity in structuring CDO vehicles within our structured credit run-off portfolio. Our exposures to CDO vehicles mainly arose through our previous involvement in acting as structuring and placement agent for the CDO vehicles. As at October 31, 2016, the assets in the CIBC structured CDO vehicles have a total principal amount of $0.9 billion (2015: $1.0 billion). Third-party structured vehicles – structured credit run-off Similar to our structured activities, we also curtailed our business activities in third-party structured vehicles, within our structured credit run-off portfolio. These positions were initially traded as intermediation, correlation and flow trading, which earned us a spread on matching positions. Sponsored non-consolidated structured entities in which CIBC has no interest In assessing whether CIBC is considered a sponsor for disclosure purposes, CIBC considers the significance of its involvement with the entity and its role in establishing and setting up the SE. Factors for considering whether CIBC is a sponsor include the extent of CIBC’s involvement in the creation and design of the SE, whether CIBC continues to manage ongoing operations, and whether CIBC is the majority user of the entity. CIBC is a sponsor of certain SEs in our structured credit run-off business in which we have no interest. The amount of assets transferred by CIBC to these SEs was nil for the years ended October 31, 2016 and 2015. Income received from the SEs was insignificant for the years ended October 31, 2016 and 2015. CIBC 2016 ANNUAL REPORT 125 Consolidated financial statements Our on-balance sheet amounts and maximum exposure to loss related to SEs that are not consolidated are set out in the table below. The maximum exposure comprises the carrying value of unhedged investments, the notional amounts for liquidity and credit facilities, and the notional amounts less accumulated fair value losses for unhedged written credit derivatives on SE reference assets. The impact of CVA is not considered in the table below. $ millions, as at October 31, 2016 On-balance sheet assets at carrying value (1) Trading securities AFS securities FVO securities Loans Investments in equity-accounted associates and joint ventures Derivatives (2) October 31, 2015 On-balance sheet liabilities at carrying value (1) Deposits Derivatives (2) October 31, 2015 Maximum exposure to loss, net of hedges Investments and loans Notional of written derivatives, less fair value losses Liquidity, credit facilities and commitments Less: hedges of investments, loans and written derivatives exposure October 31, 2015 Single-seller and multi-seller conduits Third-party structured vehicles – continuing Pass-through investment structures Commercial mortgage securitization trust CIBC Capital Trust CIBC-managed investment funds CIBC structured CDO vehicles Third-party structured vehicles – run-off $ $ $ $ $ $ $ 10 – – 103 – – 113 153 – – – – 113 – 5,500 (3) – $ $ $ $ $ $ $ 166 2,707 – 1,770 4 – 4,647 3,490 – – – – 4,647 – 1,398 – $ $ 5,613 4,125 $ $ 6,045 4,475 $ $ $ $ $ $ $ $ $ 395 – – – – 7 402 610 – – – 120 395 – – (395) – – $ $ $ $ $ $ $ $ $ 7 – – – – – 7 13 – – – – 7 – – – 7 13 $ $ $ $ $ $ $ $ $ – – – – 6 – 6 7 1,664 – 1,664 1,680 6 – 75 – 81 82 $ – – – – 33 – $ 33 $ $ $ $ – – – – – $ 33 – – – $ 33 $ – $ $ $ $ $ $ $ $ $ 7 3 – – – – 10 9 – – – 1 10 – 28 – 38 58 $ $ $ $ $ $ $ $ $ 489 – 94 317 – – 900 1,449 – 174 174 213 900 145 – (674) 371 548 (1) Excludes SEs established by CMHC, Fannie Mae, Freddie Mac, Ginnie Mae, Federal Home Loan Banks, Federal Farm Credit Bank, and Student Loan Marketing Association (Sallie Mae). (2) Comprises written credit default swaps (CDS) and total return swaps (TRS) under which we assume exposures. Excludes foreign exchange derivatives, interest rate derivatives and other derivatives provided as part of normal course client facilitation. (3) Excludes an additional $1.8 billion (2015: $0.9 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 $10 million (2015: $59 million) relating to our direct investments in the multi-seller conduits which we consider investment exposure. We also hold investments in a variety of third-party investment funds, which include, but are not limited to, exchange-traded funds, mutual funds, and investment trusts. We buy and sell units of these investment funds as part of trading activities or client facilitation businesses that are managed as part of larger portfolios. We generally are a passive investor and are not the investment manager in any of these investment funds. We are not the sponsor of any third-party investment funds, nor do we have the power over key decision-making activities of the funds. Our maximum exposure to loss from our investments is limited to the carrying amounts of our investments and any unutilized commitment we have provided to these funds. In addition, we issue certain structured notes and enter into equity derivatives that are referenced to the return of certain investment funds. Accordingly, we do not include our interests in these third-party investment funds in the table above. Derecognition of financial assets We enter into transactions in the normal course of business in which we transfer recognized financial assets directly to third parties, but retain substantially all of the risks and rewards of those assets. The risks include credit, interest rate, foreign exchange, pre-payment and other price risks whereas the rewards include income streams associated with the assets. Due to the retention of risks, the transferred financial assets are not derecognized and such transfers are accounted for as secured borrowing transactions. The majority of our financial assets transferred to non-consolidated entities that do not qualify for derecognition are: (i) residential mortgage loans under securitization transactions; (ii) securities held by counterparties as collateral under repurchase agreements; and (iii) securities lent under securities lending agreements. Residential mortgage securitizations We securitize fully insured fixed- and variable-rate residential mortgage pools through the creation of National Housing Act (NHA) MBS under the NHA MBS Program, sponsored by the CMHC. Under the Canada Mortgage Bond Program, sponsored by the CMHC, we sell MBS to a government-sponsored securitization trust that issues securities to investors. We do not consolidate the securitization trust. We may act as a counterparty in interest rate swap agreements where we pay the trust the interest due to investors and receive the interest on the MBS. We have also sold MBS directly to the CMHC under the Government of Canada’s Insured Mortgage Purchase Program as well as other third-party investors. The sale of mortgage pools that comprise the NHA MBS do not qualify for derecognition as we retain the pre-payment, credit, and interest rate risks associated with the mortgages, which represent substantially all the risks and rewards. As a result, the mortgages remain on our consolidated balance sheet and are carried at amortized cost. We also recognize the cash proceeds from the securitization as Deposits – Secured borrowing liabilities. Securities held by counterparties as collateral under repurchase agreements We enter into arrangements whereby we sell securities but enter into simultaneous arrangements to repurchase the securities at a fixed price on a future date thereby retaining substantially all the risks and rewards. As a result, the securities remain on our consolidated balance sheet. Securities lent for cash collateral or for securities collateral We enter into arrangements whereby we lend securities but with arrangements to receive the securities at a future date, thereby retaining substantially all the risks and rewards. As a result, the securities remain on our consolidated balance sheet. 126 CIBC 2016 ANNUAL REPORT Consolidated financial statements The following table provides the carrying amount and fair value of transferred financial assets that did not qualify for derecognition and the associated financial liabilities: $ millions, as at October 31 Residential mortgage securitizations (1) Securities held by counterparties as collateral under repurchase agreements (2)(3) Securities lent for securities collateral (2)(3) Carrying amount of associated liabilities (4) Carrying amount $ $ $ 19,967 2,326 19,564 41,857 42,902 2016 Fair value 20,021 2,326 19,564 41,911 43,186 $ $ $ Carrying amount 21,793 3,353 16,864 42,010 43,117 $ $ $ 2015 Fair value 21,911 3,353 16,864 42,128 43,337 $ $ $ (1) Includes $2.4 billion (2015: $2.2 billion) of mortgages underlying MBS held by CMHC counterparties as collateral under repurchase agreements. Certain cash in transit balances related to the securitization process amounting to $825 million (2015: $770 million) have been applied to reduce these balances. (2) Does not include over-collateralization of assets pledged. (3) Excludes third-party pledged assets. (4) Includes the obligation to return off-balance sheet securities collateral on securities lent. Additionally, we securitized $26.3 billion with a fair value of $26.4 billion (2015: $32.7 billion with a fair value of $32.8 billion) of mortgages that were not transferred to external parties. Note 7 Land, buildings and equipment $ millions, as at or for the year ended October 31 2016 Cost Balance at beginning of year 2015 2016 Additions (3) Disposals (4) Adjustments (5) Balance at end of year Balance at end of year Accumulated amortization Balance at beginning of year Amortization and impairment (4)(6) Disposals (4) Adjustments (5) Balance at end of year 2015 Balance at end of year Net book value As at October 31, 2016 As at October 31, 2015 Land and buildings (1) Computer equipment Office furniture and other equipment (2) Leasehold improvements $ $ $ $ $ $ $ $ 1,502 38 (32) 23 1,531 1,502 630 42 (19) 8 661 630 870 872 $ $ $ $ $ $ $ $ 896 132 (48) 3 983 896 680 106 (18) 3 771 680 212 216 $ $ $ $ $ $ $ $ 825 41 (11) 4 859 825 372 43 (5) 1 411 372 448 453 $ 941 78 (15) 3 $ 1,007 $ $ $ $ $ $ 941 585 67 (9) (4) 639 585 368 356 Total 4,164 289 (106) 33 4,380 4,164 2,267 258 (51) 8 2,482 2,267 1,898 1,897 $ $ $ $ $ $ $ $ (1) (2) (3) (4) (5) (6) Includes land and building underlying a finance lease arrangement. See below for further details. Includes $134 million (2015: $129 million) of work-in-progress not subject to amortization. Includes acquisitions through business combinations of nil (2015: nil). Includes write-offs of fully amortized assets. Includes foreign currency translation adjustments. Includes nil (2015: $2 million) of impairment loss relating to leasehold improvements. Net additions and disposals during the year were: Retail and Business Banking net additions of $68 million (2015: net additions of $37 million); Wealth Management net additions of $20 million (2015: net disposals of $5 million); Capital Markets net additions of $5 million (2015: net disposals of $4 million); and Corporate and Other net additions of $90 million (2015: net disposals of $55 million). Finance lease property Included in land and buildings above is a finance lease property, a portion of which is rented out and considered an investment property. The carrying value of the finance lease property is as follows: $ millions, for the year ended October 31 Balance at beginning of year Amortization Foreign currency adjustments Balance at end of year 2016 2015 $ 432 (24) 10 $ 392 (22) 62 $ 418 $ 432 Rental income of $99 million (2015: $94 million; 2014: $81 million) was generated from the investment property. Interest expense of $30 million (2015: $30 million; 2014: $28 million) and non-interest expenses of $49 million (2015: $46 million; 2014: $42 million) were incurred in respect of the finance lease property. Our commitment related to the finance lease is disclosed in Note 22. CIBC 2016 ANNUAL REPORT 127 Consolidated financial statements Note 8 Goodwill, software and other intangible assets Goodwill The carrying amount of goodwill is reviewed for impairment annually as at August 1 and whenever there are events or changes in circumstances which indicate that the carrying amount may not be recoverable. Goodwill is allocated to CGUs for the purposes of impairment testing based on the lowest level for which identifiable cash inflows are largely independent of cash inflows from other assets or groups of assets. The goodwill impairment test is performed by comparing the recoverable amount of the CGU to which goodwill has been allocated, with the carrying amount of the CGU including goodwill, with any deficiency recognized as impairment to goodwill. The recoverable amount of a CGU is defined as the higher of its estimated fair value less cost to sell and value in use. We have three significant CGUs to which goodwill has been allocated. The changes in the carrying amount of goodwill are allocated to each CGU as follows: $ millions, for the year ended October 31 2016 Balance at beginning of year Acquisitions Impairment Foreign currency translation adjustments Balance at end of year 2015 Balance at beginning of year (1) Acquisitions Impairment Foreign currency translation adjustments Balance at end of year CGUs CIBC FirstCaribbean Canadian Wealth Management $ $ $ $ 410 – – 11 421 353 – – 57 410 $ $ $ $ 884 – – – 884 884 – – – 884 Atlantic Trust $ $ $ 105 – – 2 107 89 – – 16 $ 105 Other 127 – – – 127 124 – – 3 127 $ $ $ $ $ $ $ Total 1,526 – – 13 1,539 1,450 – – 76 $ 1,526 (1) Net of cumulative impairment charges for FirstCaribbean International Bank Limited (CIBC FirstCaribbean) goodwill of $623 million, nil for other CGUs. Impairment testing of goodwill and key assumptions CIBC FirstCaribbean CIBC became the majority shareholder of CIBC FirstCaribbean in December 2006 and now holds 91.7% of its shares. CIBC FirstCaribbean is a major Caribbean bank offering a full range of financial services in corporate banking, retail banking, wealth management, credit cards, treasury sales and trading, and investment banking. CIBC FirstCaribbean, which has assets of over US$10 billion, operates in the Caribbean and is traded on the stock exchanges of Barbados, Trinidad, Bahamas and Eastern Caribbean. The results of CIBC FirstCaribbean are included in Corporate and Other. The recoverable amount of CIBC FirstCaribbean is based on a value in use calculation that is estimated using a five-year cash flow projection approved by management of CIBC FirstCaribbean and an estimate of the capital required to be maintained in the region to support ongoing operations. We have determined that for the impairment testing performed as at August 1, 2016, the estimated recoverable amount of the CIBC FirstCaribbean CGU approximated its carrying amount. As a result, no impairment charge was recognized during 2016. The forecast for CIBC FirstCaribbean used in our impairment test reflected the currently challenging, but improving, economic conditions which continue to persist in the Caribbean region, as well as an expected further recovery in those conditions during the forecast period. A terminal growth rate of 2.5% as at August 1, 2016 (August 1, 2015: 2.5%) was applied to the years after the five-year forecast. All of the forecasted cash flows were discounted at an after-tax rate of 13% as at August 1, 2016 (14.4% pre-tax) which we believe to be a risk-adjusted interest rate appropriate to CIBC FirstCaribbean (we used an identical after-tax rate of 13% as at August 1, 2015). The determination of a discount rate and a terminal growth rate require the exercise of judgment. The discount rate was determined based on the following primary factors: (i) the risk-free rate, (ii) an equity risk premium, (iii) beta adjustment to the equity risk premium based on a review of betas of comparable publicly traded financial institutions in the region, and (iv) a country risk premium. The terminal growth rate was based on management’s expectations of real growth and forecast inflation rates. Estimation of the recoverable amount is an area of significant judgment. Reductions in the estimated recoverable amount could arise from various factors, such as, reductions in forecasted cash flows, an increase in the assumed level of required capital, and any adverse changes to the discount rate or the terminal growth rate either in isolation or in any combination thereof. We estimated that a 10% decrease in each of the terminal year’s and subsequent years’ forecasted cash flows would result in a reduction in the estimated recoverable amount of the CIBC FirstCaribbean CGU of approximately $140 million as at August 1, 2016. We also estimated that a 50 basis point increase in the after-tax discount rate would result in a reduction in the estimated recoverable amount of the CIBC FirstCaribbean CGU of approximately $90 million as at August 1, 2016. These sensitivities are indicative only and should be considered with caution, as the effect of the variation in each assumption on the estimated recoverable amount is calculated in isolation without changing any other assumptions. In practice, changes in one factor may result in changes in another, which may magnify, counteract or obfuscate the disclosed sensitivities. Canadian Wealth Management The recoverable amount of the Canadian Wealth Management CGU is based on a fair value less cost to sell calculation. The fair value is estimated using an earnings-based approach whereby the forecasted earnings are based on the Wealth Management internal plan which was approved by management and covers a three-year period. The calculation incorporates the forecasted earnings multiplied by an earnings multiple derived from observable price-to-earnings multiples of comparable wealth management institutions. The price-to-earnings multiples of those comparable wealth management institutions ranged from 9.4 to 22.0 as at August 1, 2016 (August 1, 2015: 11.2 to 17.0). We have determined that the estimated recoverable amount of the Wealth Management CGU was well in excess of its carrying amount as at August 1, 2016. As a result, no impairment charge was recognized during 2016. If alternative reasonably possible changes in key assumptions were applied, the result of the impairment test would not differ. 128 CIBC 2016 ANNUAL REPORT Consolidated financial statements Atlantic Trust The recoverable amount of the Atlantic Trust CGU is determined using a value in use calculation that is estimated using a five-year cash flow projection which is based on a three-year plan that was reviewed by senior management and included in the three-year consolidated CIBC plan that was reviewed by the Board. We have determined that for the impairment testing performed as at August 1, 2016, the estimated recoverable amount of the Atlantic Trust CGU was in excess of its carrying amount. As a result, no impairment charge was recognized during 2016. A terminal growth rate of 3% (August 1, 2015: 3%) was applied to the terminal forecast year. All of the forecasted cash flows were discounted at a rate of 13% (August 1, 2015: 13%) which we believe to be a risk-adjusted interest rate appropriate to Atlantic Trust. If alternative reasonably possible changes in key assumptions were applied, the result of the impairment test would not differ. Other The goodwill relating to the Other CGUs is comprised of amounts which individually are not considered to be significant. We have determined that for the impairment testing performed as at August 1, 2016, the estimated recoverable amount of these CGUs was in excess of their carrying amounts. Allocation to strategic business units Goodwill of $1,539 million (2015: $1,526 million) is allocated to the SBUs as follows: Wealth Management of $991 million (2015: $989 million), Corporate and Other of $470 million (2015: $459 million), Capital Markets of $63 million (2015: $63 million) and Retail and Business Banking of $15 million (2015: $15 million). Software and other intangible assets The carrying amount of indefinite-lived intangible assets is provided in the following table: $ millions, as at or for the year ended October 31 2016 2015 Balance at beginning of year Foreign currency translation adjustments Balance at end of year Balance at beginning of year Foreign currency translation adjustments Balance at end of year (1) Represents management contracts purchased as part of past acquisitions. (2) Acquired as part of the CIBC FirstCaribbean acquisition. The components of finite-lived software and other intangible assets are as follows: Contract based (1) Brand name (2) Total $ $ $ $ 116 – 116 116 – 116 $ $ $ $ 26 – 26 22 4 26 $ $ $ $ 142 – 142 138 4 142 $ millions, as at or for the year ended October 31 2016 Gross carrying amount Balance at beginning of year 2015 2016 Additions Disposals (5) Adjustments (6) Balance at end of year Balance at end of year Accumulated amortization Balance at beginning of year Amortization and impairment (5)(7) Disposals (5) Adjustments (6) Balance at end of year 2015 Balance at end of year Net book value As at October 31, 2016 As at October 31, 2015 Core deposit Software (1) intangibles (2) Contract based (3) Customer relationships (4) $ $ $ $ $ $ $ $ 1,837 423 (20) 3 2,243 1,837 999 175 (8) 2 1,168 999 1,075 838 $ $ $ $ $ $ $ $ 296 – – 8 304 296 211 10 – 5 226 211 78 85 $ $ $ $ $ $ $ $ 41 – – – 41 41 31 4 – – 35 31 6 10 $ $ $ $ $ $ $ $ 188 – – 2 190 188 66 15 – – 81 66 109 122 Total 2,362 423 (20) 13 2,778 2,362 1,307 204 (8) 7 1,510 1,307 1,268 1,055 $ $ $ $ $ $ $ $ Includes $438 million (2015: $405 million) of work-in-progress not subject to amortization. (1) (2) Acquired as part of the CIBC FirstCaribbean acquisition. (3) Represents a combination of management contracts purchased as part of past acquisitions. (4) Represents customer relationships associated with the acquisitions of Atlantic Trust, Griffis & Small, LLC, the private wealth management business of MFS McLean Budden, and the MasterCard portfolio. Includes write-offs of fully amortized assets. Includes foreign currency translation adjustments. Includes impairment losses relating to software of $1 million (2015: $2 million). (5) (6) (7) Net additions and disposals of gross carrying amount during the year were: Retail and Business Banking net disposals of $11 million (2015: net disposals of $17 million); Wealth Management net disposals of nil (2015: net disposals of $1 million); Capital Markets net disposals of nil (2015: net disposals of nil); and Corporate and Other net additions of $414 million (2015: net additions of $261 million). CIBC 2016 ANNUAL REPORT 129 Consolidated financial statements Note 9 Other assets $ millions, as at October 31 Accrued interest receivable Defined benefit asset (Note 19) Gold and silver certificates Brokers’ client accounts Current tax receivable Other prepayments Derivative collateral receivable Accounts receivable Other Note 10 Deposits(1)(2) $ millions, as at October 31 Personal Business and government (6) Bank Secured borrowings (7) Comprises: Held at amortized cost Designated at fair value Total deposits include: Non-interest-bearing deposits In domestic offices In foreign offices Interest-bearing deposits In domestic offices In foreign offices U.S. federal funds purchased Payable on Payable after Payable on a demand (3) notice (4) fixed date (5) $ 11,317 43,520 4,401 – $ 93,149 33,011 271 – $ 43,615 113,709 13,170 39,484 $ 59,238 $ 126,431 $ 209,978 $ 2016 833 187 586 1,016 1,738 698 6,022 485 467 $ 2015 735 518 427 734 1,724 748 5,460 601 1,112 $ 12,032 $ 12,059 $ $ $ $ $ 2016 Total 148,081 190,240 17,842 39,484 395,647 392,366 3,281 395,647 45,709 4,005 276,330 69,603 – $ $ $ $ $ 2015 Total 137,378 178,850 10,785 39,644 366,657 364,282 2,375 366,657 41,614 3,583 253,989 65,673 1,798 $ 395,647 $ 366,657 Includes deposits of $103.5 billion (2015: $101.4 billion) denominated in U.S. dollars and deposits of $22.8 billion (2015: $14.2 billion) denominated in other foreign currencies. (1) (2) Net of purchased notes of $2,406 million (2015: $2,428 million). (3) (4) (5) (6) (7) Comprises liabilities issued by or as a result of activities associated with the securitization of residential mortgages, Covered Bond Programme, and consolidated securitization Includes all deposits for which we do not have the right to require notice of withdrawal. These deposits are generally chequing accounts. Includes all deposits for which we can legally require notice of withdrawal. These deposits are generally savings accounts. Includes all deposits that mature on a specified date. These deposits are generally term deposits, guaranteed investment certificates, and similar instruments. Includes $1,664 million (2015: $1,680 million) of Notes issued to CIBC Capital Trust. vehicles. Note 11 Other liabilities $ millions, as at October 31 Accrued interest payable Defined benefit liability (Note 19) Gold and silver certificates Brokers’ client accounts Derivative collateral payable Other deferred items Negotiable instruments Accounts payable and accrued expenses Other 130 CIBC 2016 ANNUAL REPORT $ 2016 988 894 135 1,548 2,850 645 805 1,605 3,428 $ 2015 1,060 746 131 1,418 2,751 603 799 1,514 3,173 $ 12,898 $ 12,195 Consolidated financial statements Note 12 Derivative instruments As described in Note 1, in the normal course of business, we use various derivative instruments for both trading and ALM purposes. These derivatives limit, modify or give rise to varying degrees and types of risk. $ millions, as at October 31 Trading (Note 2) ALM (Note 2) Designated accounting hedges (Note 13) Economic hedges (1) Assets $ 24,438 2,494 830 2016 Liabilities $ 24,844 2,794 1,169 2015 Assets Liabilities $ 22,760 $ 25,059 2,562 1,020 2,663 1,335 $ 27,762 $ 28,807 $ 26,342 $ 29,057 (1) Comprises derivatives not designated in hedge accounting relationships under IAS 39. Derivatives used by CIBC The majority of our derivative contracts are OTC transactions. OTC transactions consist of: (i) contracts that are bilaterally negotiated and settled between CIBC and the counterparty to the contract, and (ii) contracts that are bilaterally negotiated and then cleared through a central counterparty (CCP). Bilaterally negotiated and settled contracts are usually traded under a standardized International Swaps and Derivatives Association (ISDA) agreement with collateral posting arrangements between CIBC and its counterparties. Terms are negotiated directly with counterparties and the contracts have industry- standard settlement mechanisms prescribed by ISDA. Centrally cleared contracts are generally bilaterally negotiated and then novated to, and cleared through, a CCP. The industry promotes the use of CCPs to clear OTC trades. The central clearing of derivative contracts generally facilitates the reduction of credit exposures due to the ability to net settle offsetting positions. Consequently, derivative contracts cleared through CCPs generally attract less capital relative to those settled with non-CCPs. The remainder of our derivative contracts are exchange-traded derivatives, which are standardized in terms of their amounts and settlement dates, and are bought and sold on organized and regulated exchanges. These exchange-traded derivative contracts consist primarily of options and futures. Interest rate derivatives Forward rate agreements are OTC contracts that effectively fix a future interest rate for a period of time. A typical forward rate agreement provides that at a pre-determined future date, a cash settlement will be made between the counterparties based upon the difference between a contracted rate and a market rate to be determined in the future, calculated on a specified notional principal amount. No exchange of principal amount takes place. Certain forward rate agreements are bilaterally transacted and then novated and settled through a clearing house which acts as a CCP. Interest rate swaps are OTC contracts in which two counterparties agree to exchange cash flows over a period of time based on rates applied to a specified notional principal amount. A typical interest rate swap would require one counterparty to pay a fixed market interest rate in exchange for a variable market interest rate determined from time to time, with both calculated on a specified notional principal amount. No exchange of principal amount takes place. Certain interest rate swaps are bilaterally transacted and then novated and settled through a clearing house which acts as a CCP. Interest rate options are contracts in which one party (the purchaser of an option) acquires from another party (the writer of an option), in exchange for a premium, the right, but not the obligation, to either buy or sell, on a specified future date or within a specified time, a specified financial instrument at a contracted price. The underlying financial instrument has a market price which varies in response to changes in interest rates. Options are transacted in both OTC and exchange markets. Interest rate futures are standardized contracts transacted on an exchange. They are based upon an agreement to buy or sell a specified quantity of a financial instrument on a specified future date, at a contracted price. These contracts differ from forward rate agreements in that they are in standard amounts with standard settlement dates and are transacted through an exchange. Foreign exchange derivatives Foreign exchange forwards are OTC contracts in which one counterparty contracts with another to exchange a specified amount of one currency for a specified amount of a second currency, at a future date or range of dates. Foreign exchange futures contracts are similar in mechanics to foreign exchange forward contracts except that they are in standard currency amounts with standard settlement dates and are transacted through an exchange. Swap contracts comprise foreign exchange swaps and cross-currency interest rate swaps. Foreign exchange swaps are transactions in which a currency is simultaneously purchased in the spot market and sold for a different currency in the forward market, or vice versa. Cross-currency interest rate swaps are transactions in which counterparties exchange principal and interest flows in different currencies over a period of time. These contracts are used to manage both currency and interest rate exposures. Credit derivatives Credit derivatives are OTC contracts designed to transfer the credit risk in an underlying financial instrument (usually termed as a reference asset) from one counterparty to another. The most common credit derivatives are CDS and certain TRS. CDS contracts provide protection against the decline in value of a reference asset as a result of specified credit events such as default or bankruptcy. These derivatives are similar in structure to an option whereby the purchaser pays a premium to the seller of the CDS contract in return for payment contingent on the occurrence of a credit event. The protection purchaser has recourse to the protection seller for the difference between the face value of the CDS contract and the fair value of the reference asset at the time of settlement. Neither the purchaser nor the seller under the CDS contract has recourse to the entity that issued the reference asset. Certain CDS contracts are cleared through a CCP. In credit derivative TRS contracts, one counterparty agrees to pay or receive cash amounts based on the returns of a reference asset, including interest earned on these assets in exchange for amounts that are based on prevailing market funding rates. These cash settlements are made regardless of whether there is a credit event. Upon the occurrence of a credit event, the parties may either exchange cash payments according to the value of the defaulted assets or exchange cash based on the notional amount for physical delivery of the defaulted assets. Within our structured credit run-off business, we have purchased and sold credit protection with CDS and TRS contracts on reference assets that include corporate debt, CDOs of residential mortgages, trust preferred securities, and CLOs. CIBC 2016 ANNUAL REPORT 131 Consolidated financial statements Equity derivatives Equity swaps are OTC contracts in which one counterparty agrees to pay, or receive from the other, cash amounts based on changes in the value of a stock index, a basket of stocks or a single stock in exchange for amounts that are based either on prevailing market funding rates or changes in the value of a different stock index, basket of stocks or a single stock. These contracts generally include payments in respect of dividends. Equity options give the purchaser of the option, for a premium, the right, but not the obligation, to buy from or sell to the writer of an option, an underlying stock index, basket of stocks, or a single stock at a contracted price. Options are transacted in both OTC and exchange markets. Equity index futures are standardized contracts transacted on an exchange. They are based on an agreement to pay or receive a cash amount based on the difference between the contracted price level of an underlying stock index and its corresponding market price level at a specified future date. There is generally no actual delivery of stocks that comprise the underlying index. These contracts are in standard amounts with standard settlement dates. Precious metal and other commodity derivatives We also transact in other derivative products, including commodity forwards, futures, swaps and options, such as precious metal and energy-related products in both OTC and exchange markets. Notional amounts The notional amounts are not recorded as assets or liabilities, as they represent the face amount of the contract to which a rate or price is applied to determine the amount of cash flows to be exchanged. In most cases, notional amounts do not represent the potential gain or loss associated with market or credit risk of such instruments. The following table presents the notional amounts of derivative instruments: $ millions, as at October 31 2016 2015 Interest rate derivatives Over-the-counter Forward rate agreements Centrally cleared forward rate agreements Swap contracts Centrally cleared swap contracts Purchased options Written options Exchange-traded Futures contracts Purchased options Written options Total interest rate derivatives Foreign exchange derivatives Over-the-counter Forward contracts Swap contracts Purchased options Written options Exchange-traded Futures contracts Residual term to contractual maturity Less than 1 year 1 to 5 years Over 5 years Total notional amounts Trading ALM Trading ALM $ 13,001 $ – $ 186,505 70,423 636,140 3,586 2,411 912,066 61,689 536 – 62,225 14,732 206,780 564,287 1,871 1,829 789,499 12,010 – – 12,010 – $ – 74,842 188,668 4,587 497 268,594 – – – – 13,001 $ 4,465 $ 201,237 352,045 1,389,095 10,044 4,737 1,970,159 73,699 536 – 74,235 201,237 257,417 1,185,842 4,231 4,637 1,657,829 71,144 536 – 71,680 8,536 $ – 94,628 203,253 5,813 100 5,392 $ 140,806 270,991 732,249 3,980 4,532 312,330 1,157,950 5,521 – 104,902 165,623 4,156 – 280,202 2,555 – – 2,555 76,782 1 8 76,791 1,108 – – 1,108 974,291 801,509 268,594 2,044,394 1,729,509 314,885 1,234,741 281,310 271,255 185,881 21,500 22,998 501,634 5,954 47,799 1,833 665 56,251 983 20,768 62 52 21,865 278,192 254,448 23,395 23,715 579,750 270,193 194,034 23,395 23,715 511,337 7,999 60,414 – – 68,413 254,096 157,206 19,550 22,594 453,446 9,054 43,091 – 127 52,272 – – – – – – – – Total foreign exchange derivatives 501,634 56,251 21,865 579,750 511,337 68,413 453,446 52,272 Credit derivatives Over-the-counter Total return swap contracts – protection sold Credit default swap contracts – protection purchased Centrally cleared credit default swap contracts – protection purchased Credit default swap contracts – protection sold Centrally cleared credit default swap contracts – protection sold Total credit derivatives Equity derivatives Over-the-counter Exchange-traded Total equity derivatives Precious metal derivatives Over-the-counter Exchange-traded Total precious metal derivatives Other commodity derivatives Over-the-counter Centrally cleared commodity derivatives Exchange-traded Total other commodity derivatives Total notional amount of which: Over-the-counter (1) Exchange-traded 91 5,123 67 4,484 13 9,778 61,930 27,110 89,040 1,029 755 1,784 9,493 13 12,026 21,532 – 526 253 182 – 961 10,354 6,882 17,236 59 3 62 10,938 34 6,388 17,360 – 4 1,140 206 – 1,350 335 24 359 – – – 3,132 – 142 3,274 91 5,653 1,460 4,872 13 12,089 72,619 34,016 106,635 1,088 758 1,846 23,563 47 18,556 42,166 91 5,653 1,286 4,872 – 11,902 71,742 34,016 105,758 1,088 758 1,846 23,563 47 18,556 42,166 – – 174 – 13 187 877 – 877 – – – – – – – 519 6,593 1,991 5,032 732 14,867 42,125 19,304 61,429 1,446 2,999 4,445 18,671 14 18,049 36,734 – – 386 – – 386 811 – 811 – – – – – – – $ 1,598,059 $ 1,495,943 102,116 893,379 $ 868,096 25,283 295,442 $ 295,276 166 2,786,880 $ 2,659,315 127,565 2,402,518 $ 2,277,508 125,010 384,362 $ 1,805,662 $ 334,779 333,671 1,688,519 381,807 1,108 117,143 2,555 (1) For OTC derivatives that are not centrally cleared, $872.3 billion (2015: $806.7 billion) are with counterparties that have two-way collateral posting arrangements, $12.9 billion (2015: $13.7 billion) are with counterparties that have one-way collateral posting arrangements, and $182.3 billion (2015: $160.0 billion) are with counterparties that have no collateral posting arrangements. All counterparties with whom we have one-way collateral posting arrangements are sovereign entities. 132 CIBC 2016 ANNUAL REPORT Consolidated financial statements Risk In the following sections, we discuss the risks related to the use of derivatives and how we manage these risks. Market risk Derivatives, in the absence of any compensating upfront cash payments, generally have no or small market values at inception. They obtain value as relevant interest rates, foreign exchange rates, equity, commodity, credit prices or indices change, such that the previously contracted terms of the derivative transactions have become more or less favourable than what can be negotiated under current market conditions for contracts with the same terms and the same remaining period to expiry. The potential for derivatives to increase or decrease in value as a result of the aforementioned factors is generally referred to as market risk. Market risk arising from derivative trading activities is managed in order to mitigate risk with a view to maximize trading income. To manage market risk, we may enter into contracts with other market makers or undertake cash market hedges. Credit risk Credit risk arises from the potential for a counterparty to default on its contractual obligations and the possibility that prevailing market conditions are such that we would incur a loss in replacing the defaulted transaction. We limit the credit risk of OTC derivatives through the use of ISDA master netting agreements, collateral, CCPs and other credit mitigation techniques. We clear all eligible derivatives through CCPs in accordance with various global initiatives. Where feasible, we will novate existing bilaterally negotiated and settled derivatives to a CCP in an effort to reduce CIBC’s credit risk exposure. We negotiate netting agreements to contain the build-up of credit exposure resulting from multiple transactions with more active counterparties. Such agreements provide for the simultaneous close-out and netting of all transactions with a counterparty, in the case of a counterparty default. A number of these agreements incorporate a Credit Support Annex, which is a bilateral security agreement that, among other things, provides for the exchange of collateral between parties in the event that one party’s exposure to the other exceeds agreed upon thresholds. Written OTC options, including CDS, generally have no credit risk for the writer if the counterparty has already performed in accordance with the terms of the contract through payment of the premium at inception. These written options will, however, have some credit risk to the extent of any unpaid premiums. Credit risk on exchange-traded futures and options is limited, as these transactions are standardized contracts executed on established exchanges, whose CCPs assume the obligations of both counterparties. Similarly, swaps that are centrally cleared represent limited credit risk because these transactions are novated to the CCP, which assumes the obligations of the original bilateral counterparty. All exchange-traded and centrally cleared contracts are subject to initial margin and daily settlement of variation margins, designed to protect participants from losses incurred from a counterparty default. The following table summarizes our credit exposure arising from derivatives, except for those that are traded on an exchange or are CCP settled, as they are subject to daily margining requirements. The calculation of the risk-weighted amount is prescribed by OSFI. The current replacement cost is the estimated cost to replace all contracts that have a positive market value, representing an unrealized gain to us. The replacement cost of an instrument is dependent upon its terms relative to prevailing market prices, and will fluctuate as market prices change and as the derivative approaches its scheduled maturity. The credit equivalent amount is the sum of the current replacement cost and the potential credit exposure. The potential credit exposure is an estimate of the amount by which the current replacement cost could increase over the remaining term of each transaction, based on a formula prescribed by OSFI. The credit equivalent amount is then multiplied by counterparty risk variables that are adjusted for the impact of collateral and guarantees to arrive at the risk-weighted amount. The risk-weighted amount is used in determining the regulatory capital requirements for derivatives. CIBC 2016 ANNUAL REPORT 133 Current replacement cost Credit equivalent Trading ALM Total amount (1) 2016 Risk- weighted amount Current replacement cost Credit equivalent Trading ALM Total amount (1) 2015 Risk- weighted amount $ 2 $ 65 $ – $ 65 $ Consolidated financial statements $ millions, as at October 31 Interest rate derivatives Over-the-counter Forward rate agreements Swap contracts Purchased options Exchange-traded Foreign exchange derivatives Over-the-counter Forward contracts Swap contracts Purchased options Credit derivatives Over-the-counter Credit default swap contracts – protection purchased – protection sold Equity derivatives Over-the-counter Exchange-traded Precious metal derivatives Over-the-counter Exchange-traded Other commodity derivatives Over-the-counter Exchange-traded $ 13 $ – $ 13 $ 11,501 181 11,695 – 11,695 3,693 5,914 310 9,917 141 – 141 385 742 1,127 32 38 70 1,365 123 1,488 737 8 745 – 745 228 2,347 – 2,575 1 – 1 3 – 3 – – – – – – 12,238 189 12,440 – 12,440 3,921 8,261 310 12,492 142 – 142 388 742 1,130 32 38 70 1,365 123 1,488 32 5,075 36 5,143 72 5,215 3,356 3,734 358 7,448 146 – 146 1,912 1,648 3,560 30 4 34 2,254 969 3,223 11,742 161 11,968 – 11,968 928 8 936 – 936 2,527 5,290 329 8,146 53 2,540 – 2,593 171 9 180 547 398 945 31 14 45 1,102 374 1,476 3 – 3 50 – 50 – – – – – – 12,670 169 12,904 – 12,904 2,580 7,830 329 10,739 174 9 183 597 398 995 31 14 45 1,102 374 1,476 915 13 930 2 932 900 673 123 1,696 7 – 7 379 49 428 17 – 17 1,025 39 1,064 286 2,977 7,407 $ 69 4,536 38 4,643 89 4,732 2,541 3,456 403 6,400 204 9 213 1,590 1,342 2,932 20 224 244 1,737 2,299 4,036 8 884 26 918 3 921 668 656 173 1,497 14 – 14 254 36 290 6 8 14 616 77 693 347 2,685 6,461 Non-trade exposure related to central counterparties (CCP) Common equity tier 1 (CET1) CVA charge Total derivatives before netting 24,438 3,324 Less: effect of netting Total derivatives 27,762 (17,965) 19,626 22,760 3,582 26,342 (17,060) 18,557 $ 9,797 $ 19,626 $ 7,407 $ 9,282 $ 18,557 $ 6,461 (1) Sum of current replacement cost and potential future exposure, adjusted for the master netting agreements and the impact of collateral amounting to $3,940 million (2015: $3,586 million). The collateral comprises cash of $2,683 million (2015: $2,528 million) and government securities of $1,257 million (2015: $1,058 million). Operating limits We establish counterparty credit limits and limits for CCP exposures based on a counterparty’s creditworthiness and the type of trading relationship with each counterparty (underlying agreements, business volumes, product types, tenors, etc.) CVA A CVA is determined using the fair value based exposure we have on derivative contracts. We believe that we have made appropriate fair value adjustments to date. The establishment of fair value adjustments involves estimates that are based on accounting processes and judgments by management. We evaluate the adequacy of the fair value adjustments on an ongoing basis. Market and economic conditions relating to derivative counterparties may change in the future, which could result in significant future losses. Financial guarantors Contracts we have with financial guarantors are primarily credit derivatives. Fair value based exposure for credit derivatives is determined using the market value of the underlying reference assets. Our counterparty credit charge is a function of the fair value based exposure and our assessment of the counterparty credit risk. Counterparty credit risk is calculated using market-observed credit spreads, where available and appropriate, or through the use of equivalent credit proxies, or through an assessment of net recoverable value. During the year, we recorded a gain of $2 million (2015: $6 million; 2014: $18 million) against our receivables from financial guarantors. We have not terminated any contracts with financial guarantors during the year (2015: nil; 2014: loss of $9 million). The fair value of derivative contracts with financial guarantors, net of CVA, was $2 million (2015: $9 million). Non-financial guarantors Our methodology in establishing CVA against other derivative counterparties is also calculated using a fair value based exposure measure. We use market-observed credit spreads or proxies, as appropriate. During the year, we recorded a loss of $14 million (2015: loss of $7 million; 2014: loss of $1 million, excluding the impact of the adoption of funding valuation adjustments) on our positions with non-financial guarantors derivative counterparties. 134 CIBC 2016 ANNUAL REPORT Consolidated financial statements Note 13 Designated accounting hedges The following table presents the hedge ineffectiveness gains (losses) recognized in the consolidated statement of income: $ millions, for the year ended October 31 Fair value hedges (1) Gains (losses) on hedging instruments Gains (losses) on hedged items attributable to hedged risks Cash flow hedges (2)(3) (1) Recognized in Net interest income. (2) Recognized in Non-interest income – Other and Non-interest expenses – Other. (3) Includes NIFO hedges. 2016 2015 2014 $ $ $ (520) 458 (62) – $ $ $ (213) 163 (50) 1 $ $ $ (174) 149 (25) 1 Portions of derivative gains (losses) that by designation were excluded from the assessment of hedge effectiveness for fair value, cash flow, and NIFO hedging activities are included in the consolidated statement of income, and are not significant for the years ended October 31, 2016, 2015 and 2014. The following table presents the notional amounts and carrying value of our hedging-related derivative instruments: $ millions, as at October 31 2016 2015 Fair value hedges Cash flow hedges NIFO hedges Derivatives notional amount $ 182,610 23,210 4,390 Carrying value Positive Negative $ 2,250 244 – $ 1,255 394 1,145 Derivatives notional amount $ 140,891 19,329 4,038 Carrying value Positive Negative $ 2,352 210 – $ 1,466 162 1,035 $ 210,210 $ 2,494 $ 2,794 $ 164,258 $ 2,562 $ 2,663 In addition, foreign currency denominated deposit liabilities of $45 million (2015: $43 million) and $12.6 billion (2015: $1.8 billion) have been designated as hedging instruments in fair value hedges of foreign exchange risk and NIFO hedges, respectively. The cash flows designated as hedged items are expected to occur as follows: $ millions, as at October 31 2016 Cash inflows Cash outflows Net cash flows 2015 Net cash flows Within 1 year $ $ $ – (340) (340) (336) 1 – 3 years – (632) (632) (566) $ $ $ 3 – 8 years $ $ $ – (35) (35) (41) Over 8 years $ $ $ – – – – Cash flows designated in cash flow hedges of $174 million, $156 million and $35 million are expected to affect net income in the next 12 months, 1 to 3 years and 3 to 8 years, respectively (2015: $145 million, $109 million and $41 million, respectively). CIBC 2016 ANNUAL REPORT 135 Consolidated financial statements Note 14 Subordinated indebtedness The debt issues included in the table below are outstanding unsecured obligations of CIBC and its subsidiaries and are subordinated to the claims of depositors and other creditors as set out in their terms. Foreign currency denominated indebtedness funds foreign currency denominated assets (including our NIFOs). All redemptions are subject to regulatory approval. Terms of subordinated indebtedness $ millions, as at October 31 Interest rate % Fixed (3) 3.15 6.00 (5) 3.00 (6)(7) 3.42 (7)(8) 8.70 11.60 10.80 8.70 8.70 8.70 Floating (10) Floating (12) Contractual maturity date September 23, 2018 November 2, 2020 June 6, 2023 October 28, 2024 January 26, 2026 May 25, 2029 (9) January 7, 2031 May 15, 2031 May 25, 2032 (9) May 25, 2033 (9) May 25, 2035 (9) July 31, 2084 August 31, 2085 Denominated in foreign currency TT$195 million $ Earliest date redeemable At greater of Canada Yield Price (1) and par At par November 2, 2015 (4) June 6, 2018 October 28, 2019 January 26, 2021 June 6, 2008 January 7, 1996 May 15, 2021 July 27, 1990 August 20, 1991 US$99 million (11) US$36 million Subordinated indebtedness sold short (held) for trading purposes 2016 2015 Par value 39 – 600 1,000 1,000 25 200 150 25 25 25 133 48 3,270 (3) Carrying value (2) $ 39 – 600 1,002 1,004 45 201 151 47 48 51 133 48 3,369 (3) $ Par value 40 1,500 600 1,000 – 25 200 150 25 25 25 151 47 3,788 3 Carrying value (2) $ 40 1,500 600 1,000 – 44 200 150 45 46 48 151 47 3,871 3 $ 3,267 $ 3,366 $ 3,791 $ 3,874 (1) Canada Yield Price: a price calculated at the time of redemption to provide a yield to maturity equal to the yield of a Government of Canada bond of appropriate maturity plus a pre-determined spread. (2) Carrying values of fixed-rate subordinated indebtedness notes reflect the impact of interest rate hedges in an effective hedge relationship. (3) Guaranteed Subordinated Term Notes in Trinidad and Tobago dollars issued on March 23, 2007 by FirstCaribbean International Bank (Trinidad & Tobago) Limited, a subsidiary of CIBC FirstCaribbean, and guaranteed on a subordinated basis by CIBC FirstCaribbean. Interest rate is fixed for the first two years at 7.90%; then fixed for the next three years at 8.15%; thereafter fixed at 8.75% for the remaining tenor. Effective September 23, 2012, the subordinated notes were amended, and the maturity date was extended to September 23, 2018 and the interest was reduced to 4.35% per annum for the remaining term. (4) On November 2, 2015, we redeemed all $1.5 billion of our 3.15% Debentures due November 2, 2020. In accordance with their terms, the Debentures were redeemed at 100% of (5) (6) their principal amount, plus accrued and unpaid interest thereon. Interest rate is fixed at the indicated rate until the earliest date redeemable at par by CIBC and, thereafter, at a rate of 2.50% above the three-month Canadian dollar bankers’ acceptance rate. Interest rate is fixed at the indicated rate until the earliest date redeemable at par by CIBC and, thereafter, at a rate of 1.19% above the three-month Canadian dollar bankers’ acceptance rate. (7) Debentures are also subject to a Non-Viability Contingent Capital (NVCC) provision, necessary for the Debentures to qualify as Tier 2 regulatory capital under Basel III. As such, the Debentures are automatically converted into common shares upon the occurrence of a Trigger Event as described in the capital adequacy guidelines. In such an 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 supplements) subject to a minimum price of $5.00 per share (subject to adjustment in certain events as defined in the relevant prospectus supplements). Interest rate is fixed at the indicated rate until the earliest date redeemable at par by CIBC and, thereafter, at a rate of 2.57% above the three-month Canadian dollar bankers’ acceptance rate. (8) (9) Not redeemable prior to maturity date. (10) Interest rate is based on the six-month US$ LIBOR plus 0.25%. (11) US$16 million (2015: US$33 million) of this issue was repurchased and cancelled during the year. (12) Interest rate is based on the six-month US$ LIBOR plus 0.125%. 136 CIBC 2016 ANNUAL REPORT Consolidated financial statements Note 15 Common and preferred share capital Common shares CIBC’s authorized capital consists of an unlimited number of common shares, without nominal or par value. Normal course issuer bid The following table shows common shares purchased and cancelled under previously expired NCIBs. $ millions, except number of shares, as at or for the year ended October 31 TSX approval date September 4, 2013 (1) September 16, 2014 September 16, 2015 (2) Number of shares – – 3,081,300 3,081,300 2016 Amount – $ – 270 270 $ Number of shares – – 115,900 115,900 2015 $ Amount – – 11 11 $ Number of shares 3,369,000 – – 3,369,000 2014 Amount 315 $ – – 315 $ Number of shares 3,369,000 – 3,197,200 6,566,200 Total Amount 315 $ – 281 596 $ (1) Common shares were repurchased at an average price of $91.31 under this NCIB. (2) Common shares were repurchased at an average price of $87.83 under this NCIB, including 1,400,000 common shares purchased and cancelled under a private agreement at an average price of $86.94 for a total amount of $122 million on January 8, 2016. Preferred shares CIBC is authorized to issue an unlimited number of Class A Preferred Shares and Class B Preferred Shares without nominal or par value, issuable in series, provided that, for each class of preferred shares, the maximum aggregate consideration for all outstanding shares, at any time does not exceed $10 billion. There are no Class B Preferred Shares currently outstanding. Outstanding shares and dividends paid $ millions, except number of shares and per share amounts, as at or for the year ended October 31 2016 2015 2014 Shares outstanding Dividends paid Shares outstanding Dividends paid Shares outstanding Dividends paid Number of shares Amount Amount $ per share Number of shares Amount Amount $ per share Number of shares Amount Amount $ per share Common shares (1) 397,070,280 $ 8,026 $ 1,879 $ 4.75 397,291,068 $ 7,813 $ 1,708 $ 4.30 397,021,477 $ 7,782 $ 1,567 $ 3.94 Class A Preferred Shares Series 26 (2) Series 27 (3) Series 29 (4) Series 33 (5) Series 35 (6) Series 37 (7) Series 39 (8) Series 41 (9) Series 43 (10) – $ – – – – – 16,000,000 12,000,000 12,000,000 – $ – – – – – 400 300 300 – $ – – – – – 16 11 11 – – – – – – 0.98 0.94 0.90 – $ – – – – – 16,000,000 12,000,000 12,000,000 – $ – – – – – 400 300 300 – $ 4 8 – – – 16 10 7 – 0.35 0.68 – – – 0.98 0.82 0.58 – $ – $ 12,000,000 13,232,342 – – – 16,000,000 – – 300 331 – – – 400 – – 14 $ 1.44 1.40 17 1.35 18 1.00 12 0.81 10 1.22 10 0.38 6 – – – – $ 1,000 $ 38 $ 1,000 $ 45 $ 1,031 $ 87 Included short position in treasury shares of 14,882 (2015: included short position in treasury shares of 6,491; 2014: net of treasury shares held of 22,239). (1) (2) We redeemed all of our 10 million Non-cumulative Class A Series 26 Preferred Shares with a par value of $25.00 each at a redemption price of $25.00 per share for cash on October 31, 2014. (3) We redeemed all of our 12 million Non-cumulative Class A Preferred Shares Series 27 with a par value of $25.00 each at a redemption price of $25.00 per share for cash on January 31, 2015. (4) We redeemed all of our 13,232,342 Non-cumulative Class A Preferred Shares Series 29 with a par value of $25.00 each at a redemption price of $25.00 per share for cash on April 30, 2015. (5) We redeemed all of our 12 million Non-cumulative Rate Reset Class A Series 33 Preferred Shares with a par value of $25.00 each at a redemption price of $25.00 per share for cash on July 31, 2014. (6) We redeemed all of our 13 million Non-cumulative Rate Reset Class A Series 35 Preferred Shares with a par value of $25.00 each at a redemption price of $25.00 per share for cash on April 30, 2014. (7) We redeemed all of our 8 million Non-cumulative Rate Reset Class A Series 37 Preferred Shares with a par value of $25.00 each at a redemption price of $25.00 per share for cash on July 31, 2014. (8) We issued 16 million Non-cumulative Rate Reset Class A Series 39 Preferred Shares with a par value of $25.00 per share, for the gross sales proceeds of $400 million on June 11, 2014. (9) We issued 12 million Non-cumulative Rate Reset Class A Series 41 Preferred Shares with a par value of $25.00 per share, for the gross sales proceeds of $300 million on December 16, 2014. (10) We issued 12 million Non-cumulative Rate Reset Class A Series 43 Preferred Shares with a par value of $25.00 per share, for the gross sales proceeds of $300 million on March 11, 2015. Preferred share rights and privileges Class A Preferred Shares Each series of Class A Preferred Shares bears quarterly non-cumulative dividends. Non-cumulative Rate Reset Class A Preferred Shares Series 39, 41 and 43 (NVCC) are redeemable, subject to regulatory approval if required, for cash by CIBC on or after the specified redemption dates at the cash redemption prices indicated in the following table. Non-cumulative Rate Reset Class A Preferred Shares Series 43 (NVCC) (Series 43 shares) On March 11, 2015, we issued 12 million Series 43 shares with a par value of $25.00 per share, for gross proceeds of $300 million. 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. CIBC 2016 ANNUAL REPORT 137 Consolidated financial statements Non-cumulative Rate Reset Class A Preferred Shares Series 41 (NVCC) (Series 41 shares) On December 16, 2014, we issued 12 million Series 41 shares with a par value of $25.00 per share, for gross proceeds of $300 million. 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. Non-cumulative Rate Reset Class A Preferred Shares Series 39 (NVCC) (Series 39 shares) On June 11, 2014, we issued 16 million Series 39 shares with a par value of $25.00 per share, for gross proceeds of $400 million. 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. Series 39, Series 40, Series 41, Series 42, Series 43 and Series 44 shares are subject to an NVCC provision, necessary for the shares to qualify as regulatory capital under Basel III. As such, the shares are automatically converted into common shares upon the occurrence of a “Trigger Event” as described in the capital adequacy guidelines. Each such 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 of $5.00 per share (subject to adjustment in certain events as defined in the relevant prospectus supplement). We have recorded the Series 39, Series 41 and Series 43 shares as equity. Terms of Class A Preferred Shares Outstanding as at October 31, 2016 Series 39 Series 41 Series 43 Common shares issued $ millions, except number of shares, as at or for the year ended October 31 Balance at beginning of year Issuance pursuant to: Stock option plans Shareholder investment plan (1) Employee share purchase plan (2) Purchase of common shares for cancellation Treasury shares Number of shares 397,291,068 815,767 1,662,972 373,382 400,143,189 (3,081,300) 8,391 Quarterly dividends per share $ $ $ 0.243750 0.234375 0.225000 Earliest specified redemption date July 31, 2019 January 31, 2020 July 31, 2020 Cash redemption price per share $ $ $ 25.00 25.00 25.00 Number of shares 2015 Amount Number of shares 2014 Amount 397,021,477 $ 7,782 399,249,736 $ 7,753 356,661 – – 30 – – $ 8,086 (61) 1 397,378,138 (115,900) 28,830 $ 7,812 (2) 3 1,156,530 – – 400,406,266 (3,369,000) (15,789) 96 – – $ 7,849 (65) (2) 2016 Amount $ 7,813 72 164 37 Balance at end of year 397,070,280 $ 8,026 397,291,068 $ 7,813 397,021,477 $ 7,782 (1) Commencing with the dividends paid on October 28, 2016, the participants in the Dividend Reinvestment Option and Stock Dividend Option of the Shareholder Investment Plan received a 2% discount from average market price on dividends reinvested in additional common shares issued from Treasury. Commencing November 1, 2016, the participants in the Share Purchase Option of the Plan will receive shares issued from Treasury with no discount. Previously shares distributed under the Plan were acquired in the open market. (2) Commencing June 29, 2016, employee contributions to our Canadian ESPP have been used to purchase common shares from Treasury. Previously these shares were acquired in the open market. Common shares reserved for issue As at October 31, 2016, 6,525,893 common shares (2015: 7,341,660) were reserved for future issue pursuant to stock option plans, 5,912,208 common shares (2015: 7,575,180) were reserved for future issue pursuant to the shareholder investment plan, 3,842,701 common shares (2015: 4,216,083) were reserved for future issue pursuant to the employee share purchase plan, and 851,232,500 common shares (2015: 546,102,500) were reserved for future issue pursuant to instruments which include an NVCC provision requiring conversion into common shares upon the occurrence of a Trigger Event as described in the capital adequacy guidelines. 138 CIBC 2016 ANNUAL REPORT Consolidated financial statements Restrictions on the payment of dividends Under Section 79 of the Bank Act (Canada), a bank, including CIBC, is prohibited from declaring or paying any dividends on its preferred or common shares if there are reasonable grounds for believing that the bank is, or the payment would cause it to be, in contravention of any capital adequacy or liquidity regulation or any direction to the bank made by OSFI. In addition, our ability to pay common share dividends is also restricted by the terms of the outstanding preferred shares. These terms provide that we may not pay dividends on our common shares at any time without the approval of holders of the outstanding preferred shares, unless all dividends to preferred shareholders that are then payable have been declared and paid or set apart for payment. We have agreed that if CIBC Capital Trust fails to pay any interest payments on its $1,300 million of CIBC Tier 1 Notes – Series A, due June 30, 2108 or its $300 million of CIBC Tier 1 Notes – Series B, due June 30, 2108, we will not declare dividends of any kind on any of our preferred or common shares for a specified period of time. For additional details see Note 16. Currently, these limitations do not restrict the payment of dividends on our preferred or common shares. Capital Objectives, policy, and procedures Our objective is to employ a strong and efficient capital base. We manage capital in accordance with a capital policy established by the Board. The policy includes specific guidelines that relate to capital strength, capital mix, dividends and return of capital, and the unconsolidated capital adequacy of regulated entities and capital is monitored continuously for compliance. Each year, a Capital Plan and three-year outlook are established, which encompass all of the associated elements of capital: forecasts of sources and uses, maturities, redemptions, new issuance, corporate initiatives, and business growth. The Capital Plan is stress-tested in various ways to ensure that it is sufficiently robust under all reasonable scenarios. All of the elements of capital are monitored throughout the year, and the Capital Plan is adjusted as appropriate. There were no significant changes made to the objectives, policy, guidelines and procedures during the year. Regulatory capital requirements under Basel III Our regulatory capital requirements are determined in accordance with guidelines issued by OSFI, which are based on the risk-based capital standards developed by the Basel Committee on Banking Supervision (BCBS). CIBC and the other domestic systemically important banks (D-SIBs) in Canada are subject to a 1% CET1 surcharge effective January 1, 2016. This results in all-in minimum targets for CET1, Tier 1 and Total capital ratios of 8%, 9.5%, and 11.5%, respectively. These targets may be higher for certain institutions at OSFI’s discretion. “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 are phased in at 20% per year from 2014. Amounts not yet deducted from capital under OSFI’s transitional rules are risk weighted, creating a difference between risk-weighted assets (RWAs) on a transitional and all-in basis. Regulatory capital and ratios Regulatory capital under Basel III consists of CET1, Tier 1 and Tier 2 capital. CET1 capital includes common shares, retained earnings, AOCI (excluding AOCI relating to cash flow hedges and changes to FVO liabilities attributable to changes in own credit risk), and qualifying instruments issued by a consolidated banking subsidiary to third parties, less regulatory adjustments for items such as goodwill and other intangible assets (net of related deferred tax liabilities), certain deferred tax assets, net assets related to defined benefit pension plans as reported on our consolidated balance sheet (net of related deferred tax liabilities), and certain investments. Additional Tier 1 (AT1) capital primarily includes NVCC preferred shares, qualifying instruments issued by a consolidated subsidiary to third parties, and non-qualifying innovative Tier 1 notes subject to phase-out rules for capital instruments. Tier 2 capital includes NVCC subordinated indebtedness, non-qualifying subordinated indebtedness subject to phase-out rules for capital instruments, eligible collective allowance under the standardized approach, and qualifying instruments issued by a consolidated subsidiary to third parties. Our capital ratios and leverage ratio are presented in the table below: $ millions, as at October 31 Transitional basis CET1 capital Tier 1 capital Total capital RWA CET1 ratio Tier 1 capital ratio Total capital ratio Leverage ratio exposure Leverage ratio All-in basis CET1 capital Tier 1 capital Total capital CET1 capital RWA (1) Tier 1 capital RWA (1) Total capital RWA (1) CET1 ratio (1) Tier 1 capital ratio (1) Total capital ratio (1) Leverage ratio exposure Leverage ratio A B A/B C 2016 2015 $ 20,751 22,596 25,949 173,902 $ 19,147 20,671 24,538 163,867 11.9 % 13.0 % 14.9 % 11.7 % 12.6 % 15.0 % $ 546,136 $ 503,504 4.1 % 4.1 % $ 19,148 21,666 25,083 168,996 169,322 169,601 $ 16,829 19,520 23,434 156,107 156,401 156,652 11.3 % 12.8 % 14.8 % 10.8 % 12.5 % 15.0 % D C/D $ 545,480 $ 502,552 4.0 % 3.9 % (1) 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 CVA capital charge. During the years ended October 31, 2016, and 2015, we have complied with OSFI’s regulatory capital requirements. CIBC 2016 ANNUAL REPORT 139 Consolidated financial statements Note 16 Capital Trust securities On March 13, 2009, CIBC Capital Trust, a trust wholly owned by CIBC and established under the laws of the Province of Ontario, issued $1,300 million of CIBC Tier 1 Notes – Series A, due June 30, 2108, and $300 million of CIBC Tier 1 Notes – Series B, due June 30, 2108 (collectively, the Notes). CIBC Capital Trust is not consolidated by CIBC and the senior deposit notes issued by CIBC to CIBC Capital Trust are reported as Deposits – Business and government on the consolidated balance sheet. The Notes are structured to achieve Tier 1 regulatory capital treatment and, as such, have features of equity capital, including the deferral of cash interest under certain circumstances (Deferral Events). In the case of a Deferral Event, holders of the Notes will be required to invest interest paid on the Notes in our perpetual preferred shares. Should CIBC Capital Trust fail to pay the semi-annual interest payments on the Notes in full, we will not declare dividends of any kind on any of our preferred or common shares for a specified period of time. In addition, the Notes will be automatically exchanged for our perpetual preferred shares upon the occurrence of any one of the following events: (i) proceedings are commenced for our winding-up; (ii) OSFI takes control of us or our assets; (iii) we or OSFI are of the opinion that our Tier 1 capital ratio is less than 5% or our Total capital ratio is less than 8%; or (iv) OSFI directs us pursuant to the Bank Act (Canada) to increase our capital or provide additional liquidity and we elect such automatic exchange or we fail to comply with such direction. Upon such automatic exchange, holders of the Notes will cease to have any claim or entitlement to interest or principal against CIBC Capital Trust. CIBC Tier 1 Notes – Series A pays interest, at a rate of 9.976%, semi-annually until June 30, 2019. On June 30, 2019, and on each five-year anniversary thereafter, the interest rate on the CIBC Tier 1 Notes – Series A will reset to the five-year Government of Canada bond yield at such time plus 10.425%. CIBC Tier 1 Notes – Series B pays interest, at a rate of 10.25%, semi-annually until June 30, 2039. On June 30, 2039, and on each five-year anniversary thereafter, the interest rate on the CIBC Tier 1 Notes – Series B will reset to the five-year Government of Canada bond yield at such time plus 9.878%. Subject to the approval of OSFI, CIBC Capital Trust may, in whole or in part, on the redemption dates specified in the table below, and on any date thereafter, redeem the CIBC Tier 1 Notes – Series A or Series B without the consent of the holders. Also, subject to the approval of OSFI, CIBC Capital Trust may redeem all, but not part of, the CIBC Tier 1 Notes – Series A or Series B prior to the earliest redemption date specified in the table below without the consent of the holders, upon the occurrence of certain specified tax or regulatory events. OSFI’s capital adequacy guidelines confirmed the adoption of Basel III in Canada and clarified the treatment of non-qualifying capital instruments. Non-qualifying capital instruments are subject to a 10% phase-out per annum commencing in 2013. Banks are expected to develop and maintain a redemption schedule for non-qualifying capital instruments that gives priority to redeeming instruments at their regular par redemption dates before exercising any regulatory event redemption rights. With the adoption of Basel III, innovative capital instruments such as the CIBC Tier 1 Notes are considered non-qualifying capital instruments. We expect to exercise our regulatory event redemption rights in fiscal 2022 in respect of the $300 million CIBC Tier 1 Notes – Series B. The table below presents the significant terms and conditions of the Notes. As at October 31, 2016, trading positions of the Notes that we held were nil (2015: $1 million in long positions). $ millions, as at October 31 Issue date Interest payment dates Yield At greater of Canada Yield Price and par (1) At par Earliest redemption dates Principal amount 2016 2015 Series A Series B March 13, 2009 March 13, 2009 June 30, December 31 June 30, December 31 9.976 % June 30, 2014 10.250 % June 30, 2014 June 30, 2019 June 30, 2039 $ $ 1,300 300 1,600 $ $ 1,300 300 1,600 (1) Canada Yield Price: a price calculated at the time of redemption (other than an interest rate reset date applicable to the series) to provide a yield to maturity equal to the yield on a Government of Canada bond of appropriate maturity plus: (i) for the CIBC Tier 1 Notes – Series A, (a) 1.735% if the redemption date is any time prior to June 30, 2019, or (b) 3.475% if the redemption date is any time on or after June 30, 2019, and (ii) for the CIBC Tier 1 Notes – Series B, (a) 1.645% if the redemption date is any time prior to June 30, 2039, or (b) 3.29% if the redemption date is any time on or after June 30, 2039. 140 CIBC 2016 ANNUAL REPORT Consolidated financial statements Note 17 Interest rate sensitivity The table below details our exposure to interest rate risk resulting from the mismatch, or gap, relating to trading and non-trading financial assets, liabilities, and derivative off-balance sheet instruments. On- and off-balance sheet financial instruments have been reported on the earlier of their contractual repricing date or maturity date. Certain contractual repricing dates have been adjusted according to management’s estimates for prepayments and early redemptions. We manage interest rate gap by imputing a duration to certain assets and liabilities based on historical and forecasted trends in core balances. The repricing profile of these assets and liabilities has been incorporated in the table below. Based on earlier of maturity or repricing date of interest rate sensitive instruments $ millions, as at October 31 2016 Assets Cash and deposits with banks Trading securities AFS securities FVO securities Securities borrowed or purchased under resale agreements Loans Other Structural assumptions Total assets Liabilities and equity 1 – 5 years Over 5 years Non-interest rate sensitive Immediately rate sensitive Within 3 months $ $ – – – – – 115,757 – (7,241) 10,410 1,180 16,039 101 29,707 48,348 33,783 2,221 $ 3 – 12 months 255 2,160 3,607 – 4,103 55,183 – 7,993 $ – 4,049 12,513 – – 83,582 – 10,685 $ – 6,909 4,720 154 – 1,711 – – $ 108,516 $ 141,789 $ 73,301 $ 110,829 $ 13,494 Deposits Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Subordinated indebtedness Other Equity Structural assumptions $ 135,682 – $ – – – – (28,999) 98,801 37 14,212 133 31,657 – 8,629 $ 53,751 223 $ 49,295 5,617 $ – 48 – – 29,167 – 1,639 – 1,000 39,696 8,125 2,636 – 1,546 – – – Total liabilities and equity $ 106,683 $ 153,469 $ 83,189 $ 97,247 $ 12,307 On-balance sheet gap Off-balance sheet gap Total gap Total cumulative gap Gap by currency On-balance sheet gap Canadian currency Foreign currencies Total on-balance sheet gap Off-balance sheet gap Canadian currency Foreign currencies Total off-balance sheet gap Total gap 2015 Gap by currency On-balance sheet gap Canadian currency Foreign currencies Total on-balance sheet gap Off-balance sheet gap Canadian currency Foreign currencies Total off-balance sheet gap Total gap $ $ $ $ $ $ $ $ $ $ $ $ $ 1,833 – 1,833 1,833 10,128 (8,295) 1,833 – – – 1,833 22,719 (11,109) 11,610 – – – 11,610 $ $ $ $ $ $ $ $ $ $ $ $ $ (11,680) (13,457) (25,137) (23,304) $ (9,888) 17,376 $ 13,582 (2,647) 7,488 $ $ (15,816) $ 10,935 (4,881) $ $ 1,187 (1,272) (85) $ $ (4,966) (43,547) 31,867 (11,680) 9,963 (23,420) $ $ $ 1,146 (11,034) $ 22,919 (9,337) (9,888) $ 13,582 $ $ 3,303 (2,116) 1,187 7,313 10,063 $ (13,538) 10,891 $ (3,738) 2,466 (13,457) $ 17,376 $ (2,647) $ (1,272) (25,137) $ 7,488 $ 10,935 $ (85) (42,577) 7,173 (35,404) 5,889 (3,172) 2,717 (32,687) $ $ $ $ $ (764) 4,869 4,105 2,354 (3,984) (1,630) 2,475 $ $ $ $ $ 8,803 (4,000) 4,803 (5,173) 7,796 2,623 7,426 $ $ $ $ $ 2,493 880 3,373 (3,070) (640) (3,710) (337) $ Total 14,165 49,915 37,253 255 33,810 307,417 58,542 – 3,500 35,617 374 – – 2,836 24,759 (13,658) 53,428 $ 501,357 49,993 1,825 $ 395,647 10,338 – – 22,464 22,673 (48,493) 14,212 3,366 54,121 23,673 – 48,462 $ 501,357 4,966 – 4,966 – 6,051 (1,085) 4,966 – – – 4,966 9,326 2,187 11,513 – – – 11,513 $ $ $ $ $ $ $ $ $ $ $ $ $ – – – – – – – – – – – – – – – – – – $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ CIBC 2016 ANNUAL REPORT 141 Consolidated financial statements Note 18 Share-based payments We provide the following share-based compensation to certain employees and directors in the form of cash-settled or equity-settled awards. Restricted share award plan Under the RSA plan, share unit equivalents (RSA units) are granted to certain key employees on an annual basis in December or during the year as special grants. RSA grants are made in the form of cash-settled awards which generally vest and settle in cash at the end of three years or one-third annually beginning one year after the date of the grant. Dividend equivalents on RSA units granted prior to December 2015 are paid in cash to the employees over the vesting period. For RSA units granted in December 2015 and later, employees receive dividend equivalents in the form of additional RSA units. Grant date fair value of each cash-settled RSA unit is calculated based on the average closing price per common share on the TSX for the 10 trading days prior to a date specified in the grant terms. Upon vesting, each RSA unit is settled in cash based on the average closing price per common share on the TSX for the 10 trading days prior to the vesting date. During the year, 2,320,497 RSAs were granted at a weighted-average price of $99.99 (2015: 1,976,578 granted at a weighted-average price of $104.55; 2014: 2,663,480 granted at a weighted-average price of $91.01) and the number of RSAs outstanding as at October 31, 2016 was 5,422,030 (2015: 5,210,234; 2014: 5,600,802). Compensation expense in respect of RSAs, before the impact of hedging, totalled $218 million in 2016 (2015: $231 million; 2014: $279 million). As at October 31, 2016, liabilities in respect of RSAs were $518 million (2015: $510 million). Performance share unit plan Under the PSU plan, awards are granted to certain key employees on an annual basis in December. PSU grants are made in the form of cash-settled awards which vest and settle in cash at the end of three years. Dividend equivalents on PSUs granted prior to December 2015 are paid in cash to the employees over the vesting period. For PSUs granted in December 2015 and later, employees receive dividend equivalents in the form of additional PSUs. Grant date fair value of each cash-settled PSU is calculated based on the average closing price per common share on the TSX for the 10 trading days prior to a date specified in the grant terms. The final number of PSUs that vest will range from 75% to 125% of the initial number awarded based on CIBC’s performance relative to the other major Canadian banks. Upon vesting, each PSU is settled in cash based on the average closing price per common share on the TSX for the 10 trading days prior to the vesting date. During the year, 905,028 PSUs were granted at a weighted-average price of $99.86 (2015: 745,080 granted at a weighted-average price of $105.24; 2014: 866,807 granted at a weighted-average price of $91.11). As at October 31, 2016, the number of PSUs outstanding, before the impact of CIBC’s relative performance, was 2,507,808 (2015: 2,365,896; 2014: 2,618,678). Compensation expense in respect of PSUs, before the impact of hedging, totalled $93 million in 2016 (2015: $112 million; 2014: $148 million). As at October 31, 2016, liabilities in respect of PSUs were $261 million (2015: $271 million). Book value unit plan Under the BVU plan, certain key executives were granted awards denominated in BVUs. BVU grants were made in the form of cash-settled awards which vest and settle in cash at the end of three years. Each unit represents the right to receive a cash payment equal to the vesting price per unit, the value of which is related to the book value of CIBC on a per common share basis. The final number of BVUs that vest are adjusted for new issues of, re-purchases of, or dividends paid on common shares. BVU plan awards were granted beginning in December 2009 with the last award granted in December 2012, which vested in December 2015. There are no outstanding BVUs as at October 31, 2016. Grant date fair value of each BVU was calculated based on the book value per common share on the last day of the previous fiscal quarter. Compensation expense in respect of BVUs totalled $1 million in 2016 (2015: $4 million; 2014: $5 million). As at October 31, 2016, liabilities in respect of BVUs were nil (2015: $12 million). Deferred share unit plan Under the DSU plan, certain key employees are granted DSUs during the year as special grants or in December if they elect to receive DSUs in exchange for cash incentive compensation that they would otherwise be entitled to. DSUs vest in accordance with the vesting schedule defined in the grant agreement and settle in cash when the employee leaves CIBC. Employees receive dividend equivalents in the form of additional DSUs. Grant date fair value of each cash-settled DSU is calculated based on the average closing price per common share on the TSX for the 10 trading days prior to a date specified in the grant terms. Upon payout, each DSU is settled in cash based on the average closing price per common share on the TSX for the 10 trading days prior to the employee’s termination of employment date. During the year, 14,326 DSUs were granted at a weighted-average price of $99.86 (2015: 196 granted at a weighted-average price of $96.74; 2014: 3,173 granted at a weighted-average price of $103.36) and the number of DSUs outstanding as at October 31, 2016 was 45,410 (2015: 29,463; 2014: 27,978). Compensation expense in respect of DSUs, before the impact of hedging, totalled $9 million in 2016 (2015: $4 million; 2014: $2 million). As at October 31, 2016, liabilities in respect of DSUs were $13 million (2015: $2 million). Directors’ plans Under the Director Deferred Share Unit/Common Share Election Plan, each director who is not an officer or employee of CIBC may elect to receive the annual equity retainer as either DSUs or common shares. Under the Non-Officer Director Share Plan, each non-officer director may elect to receive all or a portion of their remuneration in the form of cash, common shares or DSUs. The value of DSUs credited to a director is payable when he or she is no longer a director or employee of CIBC and, in addition, for directors subject to section 409A of the U.S. Internal Revenue Code of 1986, as amended, the director is not providing any services to CIBC or any member of its controlled group as an independent contractor. In addition, under the Director Deferred Share Unit/Common Share Election Plan, the value of DSUs is payable when the director is no longer related to, or affiliated with, CIBC as defined in the Income Tax Act (Canada). Other non-interest expense in respect of the DSU components of these plans, totalled $2 million in 2016 (2015: $2 million; 2014: $5 million). As at October 31, 2016, liabilities in respect of DSUs were $17 million (2015: $21 million). Stock option plans A maximum of 42,834,500 common shares may be issued under our ESOP and Non-Officer Director Stock Option Plan (DSOP). As at October 31, 2016, 6,525,893 (2015: 7,341,660) common shares were reserved for future issue under our stock option plans. Stock options in respect of 4,073,451 (2015: 142 CIBC 2016 ANNUAL REPORT Consolidated financial statements 4,100,310) common shares have been granted but not yet exercised under the ESOP. No stock options under the DSOP remain outstanding. 2,452,442 (2015: 3,241,350) common shares remain available for future stock option grants. Under the ESOP, stock options are periodically granted to certain key employees. Options provide the employee with the right to purchase common shares from CIBC at a fixed price not less than the closing price of the shares on the trading day immediately preceding the grant date. In general, the options vest by the end of the fourth year and expire 10 years from the grant date. Fair value of each option is measured at the grant date using the Black-Scholes option pricing model. Model assumptions are based on observable market data for the risk-free interest rate and dividend yield; contractual terms for the exercise price; and historical experience for expected life. Volatility assumptions are best estimates of market implied volatility matching the exercise price and expected life of the options. The weighted-average grant date fair value of options granted during 2016 was $5.12 (2015: $8.59; 2014: $9.57). The following weighted-average assumptions were used to determine the fair value of options on the date of grant: For the year ended October 31 Weighted-average assumptions Risk-free interest rate Expected dividend yield Expected share price volatility Expected life Share price/exercise price 2016 2015 2014 1.34 % 6.14 % 17.26 % 6 years 97.73 $ $ 1.98 % 4.96 % 17.97 % 6 years 101.87 2.53 % 5.06 % 20.61 % 6 years 90.56 $ Compensation expense in respect of stock options totalled $5 million in 2016 (2015: $5 million; 2014: $7 million). Stock option plans As at or for the year ended October 31 Outstanding at beginning of year Granted Exercised (1) Forfeited Cancelled/expired Outstanding at end of year Exercisable at end of year Available for grant 2016 Weighted- average exercise price $ $ $ 82.62 97.73 75.86 91.99 87.36 86.92 74.94 Number of stock options 4,100,310 804,923 (815,767) (13,380) (2,635) 4,073,451 1,485,607 2,452,442 2015 Weighted- average exercise price $ $ $ 78.70 101.87 74.30 81.33 70.60 82.62 74.71 2014 Weighted- average exercise price $ $ $ 74.35 90.56 70.68 – 80.20 78.70 74.87 Number of stock options 4,308,244 796,625 (1,156,530) – (3,307) 3,945,032 1,383,033 3,753,289 Number of stock options 3,945,032 610,247 (356,661) (40,205) (58,103) 4,100,310 1,542,681 3,241,350 (1) The weighted-average share price at the date of exercise was $99.66 (2015: $98.21; 2014: $96.63). Stock options outstanding and vested As at October 31, 2016 Stock options outstanding Stock options vested Range of exercise prices $49.01 – $65.00 $65.01 – $75.00 $75.01 – $85.00 $85.01 – $95.00 $95.01 – $105.00 Number outstanding 129,833 606,055 1,022,225 830,449 1,484,889 4,073,451 Weighted- average contractual life remaining 2.10 4.39 5.09 7.15 7.89 6.33 Weighted- average exercise price $ 49.75 71.25 79.70 90.72 99.42 Number outstanding 129,833 606,055 623,131 9,516 117,072 Weighted- average exercise price $ 49.75 71.25 79.45 94.90 96.41 $ 86.92 1,485,607 $ 74.94 Employee share purchase plan Under our Canadian ESPP, qualifying employees can choose each year to have any portion of their eligible earnings withheld to purchase common shares. We match 50% of the employee contribution amount, up to a maximum contribution of 3% of eligible earnings, subject to a ceiling of $2,250 annually. CIBC contributions vest after employees have two years of continuous participation in the plan, and all subsequent contributions vest immediately. Similar programs exist in other regions globally, where each year qualifying employees can choose to have a portion of their eligible earnings withheld to purchase common shares and receive a matching employer contribution subject to each plan’s provisions. Commencing June 29, 2016, employee contributions to our ESPP have been used to purchase common shares from Treasury. Previously these shares were acquired in the open market. CIBC FirstCaribbean operates an ESPP locally, in which contributions are used by the plan trustee to purchase CIBC FirstCaribbean common shares in the open market. Our contributions are expensed as incurred and totalled $40 million in 2016 (2015: $36 million; 2014: $34 million). Hedging We use derivatives in a designated cash flow hedge relationship to hedge changes in CIBC’s share price in respect of cash-settled share-based compensation under the RSA and PSU plans. During the year, we recorded gains of $22 million (2015: $30 million; 2014: $132 million) as a credit to compensation expense in the consolidated statement of income in respect of these derivatives. As at October 31, 2016, the ending AOCI balance in respect of the designated accounting hedges totalled a credit of $6 million (2015: $1 million). CIBC 2016 ANNUAL REPORT 143 Consolidated financial statements Note 19 Post-employment benefits We sponsor pension and other post-employment benefit plans for eligible employees in a number of jurisdictions including Canada, the U.S., the U.K., and the Caribbean. Our pension plans include registered funded defined benefit pension plans, supplemental arrangements that provide pension benefits in excess of statutory limits, and defined contribution plans. We also provide certain health-care, life insurance, and other benefits to eligible employees and retired members. Plan assets and defined benefit obligations related to our defined benefit plans are measured for accounting purposes as at October 31 each year. Plan characteristics, funding and risks Pension plans Pension plans include CIBC’s Canadian, U.S., U.K., and Caribbean pension plans. CIBC’s Canadian pension plans represent approximately 90% of our consolidated net defined benefit pension assets and liabilities and net defined benefit pension expense. All of our Canadian pension plans are defined benefit plans, the most significant of which is our principal Canadian pension plan (the CIBC Pension Plan), which encompasses approximately 60,000 active, deferred, and retired members. The CIBC Pension Plan provides members with monthly pension income at retirement based on a prescribed plan formula which is based on a combination of maximum yearly pensionable earnings, average earnings at retirement and length of service recognized in the plan. There is a two-year waiting period for members to join the CIBC Pension Plan. The CIBC Pension Plan is funded through a separate trust. Actuarial funding valuations are prepared by the Plan’s external actuary at least once every three years or more frequently as required by Canadian pension legislation to determine CIBC’s minimum funding requirements as well as maximum permitted contributions. Any deficits determined in the funding valuations must generally be funded over a period not exceeding fifteen years. CIBC’s pension funding policy is to make at least the minimum annual required contributions required by regulations; any contributions in excess of the minimum requirements are discretionary. The CIBC Pension Plan is registered with OSFI and the Canada Revenue Agency and is subject to the acts and regulations that govern federally regulated pension plans. Other post-employment plans Other post-employment plans include CIBC’s Canadian, U.S. and Caribbean post-retirement health-care benefit plans (referred to for disclosure purposes as other post-employment plans). CIBC’s Canadian other post-employment plan (the Canadian post-employment plan) represents more than 90% of our consolidated other post-employment defined benefit obligation and net other post-employment defined benefit expense. The Canadian post-employment plan provides medical, dental and life insurance benefits to retirees that meet specified eligibility requirements, including specified age and service period eligibility requirements. CIBC reimburses 100% of the cost of benefits for eligible employees that retired prior to January 1, 2009, whereas the contribution level for medical and dental benefits for eligible employees that retire subsequent to this date has been fixed at a specified level. The plan is funded on a pay as-you-go basis. Benefit changes There were no material changes to the terms of our defined benefit pension or other post-employment plans in 2016 or 2015. Risks CIBC’s defined benefit plans expose the group to actuarial risks (such as longevity risk), currency risk, interest rate risk, market (investment) risk and health- care cost inflation risks. The use of derivatives within the CIBC pension plan is governed by the derivatives policy that was approved by the Pension Benefits Management Committee (PBMC) and Management Resources and Compensation Committee (MRCC) of the Board, and which permits the use of derivatives to manage risk at the discretion of the Pension Investment Committee (PIC). Risk reduction and mitigation strategies may include hedging of interest rate, currency, credit spread and/or equity risks. The derivatives policy also permits the use of derivatives to enhance plan returns. The CIBC pension plan manages its foreign currency exposure currently by utilizing a passive overlay strategy to reduce the aggregate currency exposure. Plan governance All of CIBC’s pension arrangements are governed by local pension committees, senior management or a board of trustees; however, all significant plan changes require approval from the MRCC. For the Canadian pension plans, the MRCC is also responsible for the establishment of the investment policies (such as asset mix, permitted investments, and use of derivatives), reviewing performance including funded status, and approving material plan design or governance changes. While specific investment policies are determined at a plan level to reflect the unique characteristics of each plan, common investment policies for all plans include the optimization of the risk-return relationship using a portfolio of multiple asset classes diversified by market segment, economic sector, and issuer. The objectives are to secure the obligations of our funded plans, to maximize investment returns while not compromising the security of the respective plans, and to manage the level of funding contributions. Investments in quoted debt and equity (held either directly or indirectly through investment funds) represent the most significant asset allocations. The use of derivatives is limited to the purposes and instruments described in the derivatives policy of the CIBC Pension Plan. These include the synthetic return of debt or equity instruments, currency hedging, risk reduction and enhancement of returns. Investments in specific asset classes are further diversified across funds, managers, strategies, sectors and geographies, depending on the specific characteristics of each asset class. The exposure to any one of these asset classes will be determined by our assessment of the needs of the plan assets and economic and financial market conditions. Factors evaluated before adopting the asset mix include demographics, cash-flow payout requirements, liquidity requirements, actuarial assumptions, expected benefit increases, and corporate cash flows. Management of the assets of the various Canadian plans has been delegated primarily to the PIC, which is a committee that is composed of CIBC management. The PIC is responsible for the appointment and termination of individual investment managers (which includes CIBC Asset Management Inc., a wholly owned subsidiary of CIBC), who each have investment discretion within established target asset mix ranges as set by the MRCC. Should a fund’s actual asset mix fall outside specified ranges, the assets are re-balanced as required to be within the target asset mix ranges. On a periodic basis, an Asset- Liability Matching study is performed in which the consequences of the strategic investment policies are analyzed. 144 CIBC 2016 ANNUAL REPORT Consolidated financial statements Management of the actuarial valuations of the various Canadian plans is primarily the responsibility of the Pension Finance & Administration Committee (PFAC). The PFAC is responsible for approving the actuarial assumptions for the valuations of the plans, and for recommending the level of annual funding for the Canadian plans to CIBC senior management. Local committees with similar mandates manage our non-Canadian plans and annually report back to the MRCC on all material governance activities. Amounts recognized on the consolidated balance sheet The following tables present the financial position of our defined benefit pension and other post-employment plans for Canada, the U.S., the U.K., and our Caribbean subsidiaries. Other minor plans operated by some of our subsidiaries are not material and are not included in these disclosures. $ millions, as at or for the year ended October 31 Defined benefit obligation Balance at beginning of year Current service cost Past service cost Interest cost on defined benefit obligation Employee contributions Benefits paid Settlements Gain on settlements Special termination benefits Foreign exchange rate changes Net actuarial losses (gains) on defined benefit obligation Balance at end of year Plan assets Fair value at beginning of year Interest income on plan assets (1) Net actuarial gains (losses) on plan assets (1) Employer contributions Employee contributions Benefits paid Settlements Plan administration costs Net transfer out Foreign exchange rate changes Fair value at end of year Net defined benefit asset (liability) Valuation allowance (2) Net defined benefit asset (liability), net of valuation allowance $ $ $ 2016 6,534 185 (8) 292 6 (308) – – 3 (20) 734 7,418 6,997 319 237 241 6 (308) – (6) (1) (27) Pension plans Other post-employment plans 2015 2016 2015 $ $ $ $ $ $ 6,735 210 (12) 291 6 (285) (27) (4) 8 87 (475) 6,534 6,796 299 (62) 185 6 (285) (27) (5) (1) 91 $ $ $ 652 11 2 28 – (29) – – – 1 60 725 – – – 29 – (29) – – – – 722 13 – 30 – (27) – – – 9 (95) 652 – – – 27 – (27) – – – – – (652) – $ 7,458 $ 6,997 $ – $ 40 (18) 22 $ 463 (18) 445 $ (725) – $ (725) $ (652) (1) The actual return on plan assets for the year ended October 31, 2016 was $556 million (2015: $237 million). (2) The valuation allowance reflects the effect of asset ceiling on plans with a net defined benefit asset. The net defined benefit asset (liability), net of valuation allowance, included in other assets and other liabilities is as follows: $ millions, as at October 31 Other assets Other liabilities (1) Pension plans Other post-employment plans 2016 187 (165) 22 $ $ 2015 517 (72) 445 $ $ 2016 – (725) (725) $ $ 2015 – (652) (652) $ $ (1) Excludes nil of other assets (2015: $1 million) and $4 million (2015: $22 million) of other liabilities for other post-employment plans of immaterial subsidiaries. The defined benefit obligation and plan assets by region are as follows: $ millions, as at October 31 Defined benefit obligation Canada U.S., U.K., and the Caribbean Defined benefit obligation at the end of year Plan assets Canada U.S., U.K., and the Caribbean Plan assets at the end of year 2016 6,734 684 7,418 6,676 782 7,458 $ $ $ $ Pension plans Other post-employment plans 2015 2016 2015 $ $ $ $ 5,884 650 6,534 6,291 706 6,997 $ $ $ $ 672 53 725 – – – $ $ $ $ 592 60 652 – – – CIBC 2016 ANNUAL REPORT 145 Consolidated financial statements Amounts recognized in the consolidated statement of income The net defined benefit expense for our defined benefit plans in Canada, the U.S., the U.K., and the Caribbean is as follows: Pension plans Other post-employment plans $ millions, for the year ended October 31 Current service cost (1) Past service cost Interest cost on defined benefit obligation Interest income on plan assets Interest cost on effect of asset ceiling Plan administration costs Gain on settlements Special termination benefits $ 2016 185 (8) 292 (319) 1 6 – 3 $ 2015 210 (12) 291 (299) 1 5 (4) 8 $ 2014 194 – 286 (305) 1 6 – – $ Net defined benefit plan expense recognized in net income $ 160 $ 200 $ 182 $ 2016 2015 2014 11 2 28 – – – – – 41 $ $ 13 – 30 – – – – – 43 $ $ 11 – 30 – – – – – 41 (1) The 2016 current service cost is calculated using a separate discount rate (4.57%) to reflect the longer duration of future benefits payments associated with the additional year of service to be earned by the plan’s active participants. Previously the current service cost was calculated using the same discount rate used to measure the defined benefit obligation for both active and retired participants. The impact of the change was not significant. Amounts recognized in the consolidated statement of comprehensive income The net remeasurement (losses) gains recognized in OCI for our defined benefit plans in Canada, the U.S., the U.K., and the Caribbean is as follows: Pension plans Other post-employment plans $ millions, for the year ended October 31 2016 2015 2014 2016 2015 2014 Actuarial (losses) gains on defined benefit obligation arising from: Demographic assumptions Financial assumptions Experience assumptions Net actuarial gains on plan assets Changes in asset ceiling excluding interest income $ 2 (730) (6) 237 1 $ 251 201 23 (62) 1 $ (37) (470) 43 303 – Net remeasurement (losses) gains recognized in OCI (1) $ (496) $ 414 $ (161) $ $ – (70) 10 – – (60) $ $ 84 15 (4) – – 95 $ $ (4) (46) 4 – – (46) (1) Excludes net remeasurement gains recognized in OCI in respect of immaterial subsidiaries not included in the disclosures totalling $17 million (2015: $6 million of net losses; 2014: $10 million of net gains). Canadian defined benefit plans As the Canadian defined benefit pension and other post-employment benefit plans represent approximately 90% of our consolidated net defined benefit assets and liabilities and net defined benefit pension expense, they are the subject and focus of the disclosures in the balance of this note. Disaggregation and maturity profile of defined benefit obligation The breakdown of the defined benefit obligation for our Canadian plans between active, deferred, and retired members is as follows: $ millions, as at October 31 Active members Deferred members Retired members n/a Not applicable. Pension plans Other post-employment plans $ 2016 3,702 463 2,569 $ 2015 3,252 377 2,255 $ 6,734 $ 5,884 2016 192 n/a 480 672 $ $ 2015 154 n/a 438 592 $ $ The weighted-average duration of the defined benefit obligation for our Canadian plans is as follows: As at October 31 Weighted-average duration, in years Pension plans Other post-employment plans 2016 16.3 2015 15.5 2016 14.5 2015 13.0 146 CIBC 2016 ANNUAL REPORT Consolidated financial statements Plan assets The major categories of our defined benefit pension plan assets for our Canadian plans are as follows: $ millions, as at October 31 Asset category (1) Canadian equity securities (2) Debt securities (3) Government bonds Corporate bonds Inflation adjusted bonds Investment funds (4) Canadian equity funds U.S. equity funds International equity funds (5) Global equity funds (5) Emerging markets equity funds Fixed income funds Other (2) Hedge funds Infrastructure and private equity Cash and cash equivalents and other 2016 2015 $ 683 10 % $ 852 14 % 2,193 828 364 3,385 47 291 49 955 282 106 1,730 428 266 184 878 33 12 6 51 1 4 1 14 4 2 26 6 4 3 13 1,589 614 332 2,535 42 383 50 1,239 278 101 2,093 422 221 168 811 25 10 5 40 1 6 1 20 4 2 34 7 3 2 12 (1) Asset categories are based upon risk classification including synthetic exposure through derivatives. The fair value of derivatives as at October 31, 2016 was a net derivative liability of $42 million (2015: net derivative asset of $34 million). (2) Pension benefit plan assets include CIBC issued securities and deposits of $19 million (2015: $26 million), representing 0.3% of Canadian plan assets (2015: 0.4%). All of the equity securities held as at October 31, 2016 and 2015 have daily quoted prices in active markets except hedge funds, infrastructure, and private equity. (3) All debt securities held as at October 31, 2016 and 2015 are investment grade, of which $117 million (2015: $98 million) have daily quoted prices in active markets. (4) $35 million (2015: $35 million) of the investment funds and other assets held as at October 31, 2016 have daily quoted prices in active markets (excludes securities held indirectly that have daily quoted prices in active markets). (5) Global equity funds include North American and international investments, whereas International equity funds do not include North American investments. $ 6,676 100 % $ 6,291 100 % Principal actuarial assumptions The weighted-average principal assumptions used to determine the defined benefit obligation for our Canadian plans are as follows: As at October 31 Discount rate Rate of compensation increase for the next 5 years (1) Rate of compensation increase after the next 5 years Pension plans Other post-employment plans 2016 2015 2016 2015 3.6 % 2.3 % 2.3 % 4.4 % 2.5 % 3.0 % 3.5 % 2.3 % 2.3 % 4.3 % 2.5 % 3.0 % (1) Rate of compensation increase for 2016 has been updated to reflect the use of a salary growth rate assumption table that is based on the age and tenure of the employees. The table yields a weighted average salary growth rate of approximately 2.3% per annum. Assumptions regarding future mortality have been based on published statistics and mortality tables. The current longevities underlying the values of the defined benefit obligation of our Canadian plans are as follows (in years): As at October 31 Longevity at age 65 for current retired members Males Females Longevity at age 65 for current members aged 45 Males Females 2016 2015 23.2 24.7 24.2 25.6 23.0 24.6 24.1 25.5 The assumed health-care cost trend rates of the Canadian other post-employment plan providing medical, dental, and life insurance benefits are as follows: For the year ended October 31 Health-care cost trend rates assumed for next year Rate to which the cost trend rate is assumed to decline Year that the rate reaches the ultimate trend rate 2016 5.7 % 4.5 % 2029 2015 5.9 % 4.5 % 2029 CIBC 2016 ANNUAL REPORT 147 Consolidated financial statements Sensitivity analysis Reasonably possible changes to one of the principal actuarial assumptions, holding other assumptions constant, would have affected the defined benefit obligation of our Canadian plans as follows: Estimated increase (decrease) in defined benefit obligation Pension plans Other post-employment plans $ millions, as at October 31 Discount rate (100 basis point change) Decrease in assumption Increase in assumption Rate of compensation increase (100 basis point change) Decrease in assumption Increase in assumption Health-care cost trend rates (100 basis point change) Decrease in assumption Increase in assumption Future mortality 1 year shorter life expectancy 1 year longer life expectancy n/a Not applicable. 2016 $ 1,138 (927) (214) 243 n/a n/a (159) 156 2016 $ 104 (84) (1) 1 (33) 38 (18) 18 The sensitivity analyses presented above are indicative only, and should be considered with caution as they have been calculated in isolation without changing any other assumptions. In practice, changes in one assumption may result in changes in another, which may magnify or counteract the disclosed sensitivities. Future cash flows Cash contributions The most recently completed actuarial valuation of the CIBC Pension Plan for funding purposes was as at October 31, 2015. The next actuarial valuation of this plan for funding purposes will be effective as of October 31, 2016. The minimum contributions for 2017 are anticipated to be $170 million for the Canadian defined benefit pension plans and $29 million for the Canadian other post-employment benefit plans. These estimates are subject to change since contributions are affected by various factors, such as market performance, regulatory requirements, and management’s ability to change funding policy. Expected future benefit payments The expected future benefit payments for our Canadian plans for the next 10 years are as follows: $ millions, for the year ended October 31 Defined benefit pension plans Other post-employment plans 2017 285 29 314 $ $ 2018 287 31 318 $ $ 2019 297 32 329 $ $ 2020 306 34 340 $ $ 2021 2022 – 2026 $ $ 314 35 349 $ $ 1,711 193 1,904 Total 3,200 354 3,554 $ $ Defined contributions and other plans We also maintain defined contribution plans for certain employees and make contributions to government pension plans. The expense recognized in the consolidated statement of income for these benefit plans is as follows: $ millions, for the year ended October 31 Defined contribution pension plans Government pension plans (1) (1) Includes Canada Pension Plan, Quebec Pension Plan, and U.S. Federal Insurance Contributions Act. 2016 20 96 116 $ $ 2015 20 96 116 $ $ 2014 16 90 106 $ $ 148 CIBC 2016 ANNUAL REPORT Consolidated financial statements Note 20 Income taxes Total income taxes $ millions, for the year ended October 31 Consolidated statement of income Provision for current income taxes Adjustments for prior years Current income tax expense Provision for deferred income taxes Adjustments for prior years Effect of changes in tax rates and laws Origination and reversal of temporary differences OCI Total comprehensive income Components of income tax $ millions, for the year ended October 31 Current income taxes Federal Provincial Foreign Deferred income taxes Federal Provincial Foreign 2016 2015 2014 $ $ (44) 782 738 13 (11) (22) (20) 718 (263) $ 455 $ (18) 713 695 13 3 (77) (61) 634 70 704 $ (27) 669 642 15 2 40 57 699 (52) $ 647 2016 2015 2014 $ 394 259 45 698 (129) (89) (25) (243) $ 358 246 107 711 80 54 (141) (7) $ 340 236 42 618 (23) (16) 68 29 $ 455 $ 704 $ 647 The combined Canadian federal and provincial income tax rate varies each year according to changes in the statutory rates imposed by each of these jurisdictions, and according to changes in the proportion of our business carried out in each province. We are also subject to Canadian taxation on income of foreign branches. Earnings of foreign subsidiaries would generally only be subject to Canadian tax when distributed to Canada. Additional Canadian taxes that would be payable if all foreign subsidiaries’ retained earnings were distributed to the Canadian parent as dividends are estimated to be nil. The effective rates of income tax in the consolidated statement of income are different from the combined Canadian federal and provincial income tax rates as set out in the following table: Reconciliation of income taxes $ millions, for the year ended October 31 2016 2015 (1) 2014 (1) Combined Canadian federal and provincial income tax rate applied to $ 1,328 26.5 % $ 1,115 26.4 % $ 1,033 26.4 % income before income taxes Income taxes adjusted for the effect of: Earnings of foreign subsidiaries Tax-exempt income Disposition Changes in income tax rate on deferred tax balances Impact of equity-accounted income Other (152) (348) (76) (11) (24) 1 (3.0) (7.0) (1.5) (0.2) (0.5) – (2) Income taxes in the consolidated statement of income $ 718 14.3 % $ (1) Certain information has been reclassified to conform to the presentation adopted in the current year. (2) Due to rounding. (87) (358) – 3 (41) 2 634 (2.0) (8.5) – 0.1 (1.0) – (2) 15.0 % $ 15 (310) (7) 2 (36) 2 699 0.4 (7.9) (0.2) 0.1 (0.9) – (2) 17.9 % CIBC 2016 ANNUAL REPORT 149 Consolidated financial statements Deferred income tax assets Sources of and movement in deferred tax assets and liabilities Deferred tax assets $ millions, for the year ended October 31 2016 2015 2014 Balance at beginning of year Recognized in net income Recognized in OCI Other (2) Balance at end of year Balance at beginning of year Recognized in net income Recognized in OCI Other (2) Balance at end of year Balance at beginning of year Recognized in net income Recognized in OCI Other (2) Balance at end of year Deferred tax liabilities $ millions, for the year ended October 31 2016 2015 2014 Balance at beginning of year Recognized in net income Recognized in OCI Other (2) Balance at end of year Balance at beginning of year Recognized in net income Recognized in OCI Other (2) Balance at end of year Balance at beginning of year Recognized in net income Recognized in OCI Other (2) Allowance for credit losses Buildings and equipment Pension and employee benefits Provisions Securities revaluation Tax loss carry- forwards (1) Unearned income Other $ $ $ $ $ $ 208 18 – 1 227 200 4 – 4 208 203 (3) – – 200 $ $ $ $ $ $ 81 2 – 5 88 72 (2) – 11 81 72 – – – 72 $ $ $ $ $ $ 353 13 155 (1) 520 430 36 (122) 9 353 313 63 54 – 430 $ $ $ $ $ $ 25 7 – (1) 31 23 1 – 1 25 26 (3) – – 23 $ $ $ $ $ $ 2 7 16 – 25 10 (6) – (2) 2 21 (13) 2 – 10 $ $ $ $ $ $ $ $ $ $ 62 – – 8 70 73 (18) – 7 62 87 (14) – – $ 73 $ 101 16 – (2) 115 106 (8) – 3 101 104 2 – – 106 $ $ $ $ $ $ 1 1 – – 2 5 (5) – 1 1 1 2 – 2 5 $ Total assets 833 64 171 10 $ 1,078 $ $ $ $ 919 2 (122) 34 833 827 34 56 2 919 Intangible assets Buildings and equipment Pension and employee benefits Goodwill Securities revaluation Lease receivables Foreign currency Other Total liabilities $ $ $ $ $ (124) (33) – (1) (158) (104) (18) – (2) (124) (76) (28) – – $ $ $ $ $ $ (49) 5 – (1) (45) (44) (5) – – (49) (38) (6) – – (44) $ $ $ $ $ $ (13) 8 (5) 2 (8) (9) 5 (7) (2) (13) (8) (1) – – (9) $ $ $ $ $ $ (81) (6) – (1) (88) (72) (9) – – (81) (70) (2) – – (72) $ $ $ $ $ (29) (29) (8) 12 (54) (110) 7 76 (2) (29) (40) (44) (26) – $ (110) $ $ $ $ $ $ – – – – – (47) 55 – (8) – (60) 13 – – (47) $ $ $ $ $ (38) $ – 62 – (20) $ 11 4 6 (354) (44) 53 17 24 $ 1 $ (328) (27) $ – – (11) (29) $ 24 (1) (14) (442) 59 68 (39) (38) $ (20) $ (354) (26) $ – (1) – (16) $ (23) – 10 (334) (91) (27) 10 $ (27) $ (29) $ (442) $ $ $ 750 479 477 Balance at end of year $ (104) Net deferred tax assets as at October 31, 2016 Net deferred tax assets as at October 31, 2015 Net deferred tax assets as at October 31, 2014 (1) The tax loss carryforwards include $70 million (2015: $35 million; 2014: $40 million) that relate to operating losses (of which $63 million relate to the U.S., $1 million relate to Canada and $5 million relate to other jurisdictions) that expire in various years commencing in 2017, and nil (2015: $27 million; 2014: $33 million) that relate to Canadian capital losses that never expire. Includes foreign currency translation adjustments. (2) Deferred tax assets and liabilities are assessed by entity for presentation in our consolidated balance sheet. As a result, the net deferred tax assets of $750 million (2015: $479 million) are presented in the consolidated balance sheet as deferred tax assets of $771 million (2015: $507 million) and deferred tax liabilities of $21 million (2015: $28 million). Unrecognized tax losses The amount of unused tax losses for which deferred tax assets have not been recognized was $1,123 million as at October 31, 2016 (2015: $975 million) of which nil (2015: $92 million) has no expiry date, and of which $1,123 million (2015: $883 million) expires within 10 years. Enron In prior years, the Canada Revenue Agency issued reassessments disallowing the deduction of approximately $3 billion of the 2005 Enron settlement payments and related legal expenses. The matter is currently in litigation. The Tax Court of Canada trial on the deductibility of the Enron payments is expected to commence in late 2017. 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 $190 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. Dividend Received Deduction In June 2016, the Canada Revenue Agency reassessed CIBC for approximately $118 million of additional income tax by denying the tax deductibility of certain 2011 Canadian corporate dividends on the basis that they were part of a “dividend rental arrangement”. The circumstances of the dividends subject to the reassessment are similar to those prospectively addressed by the rules in the 2015 Canadian federal budget. CIBC is confident that its tax filing position was appropriate and intends to defend itself vigorously. Accordingly, no amounts have been accrued in the consolidated financial statements. 150 CIBC 2016 ANNUAL REPORT Consolidated financial statements Note 21 Earnings per share $ millions, except per share amounts, for the year ended October 31 Basic EPS Net income attributable to equity shareholders Less: Preferred share dividends and premiums Net income attributable to common shareholders Weighted-average common shares outstanding (thousands) Basic EPS Diluted EPS Net income attributable to common shareholders Weighted-average common shares outstanding (thousands) Add: Stock options potentially exercisable (1) (thousands) Weighted-average diluted common shares outstanding (thousands) Diluted EPS $ $ $ 2016 4,275 38 4,237 395,389 10.72 4,237 395,389 530 395,919 $ $ $ 2015 3,576 45 3,531 397,213 8.89 3,531 397,213 619 397,832 $ 10.70 $ 8.87 2014 3,218 87 3,131 397,620 7.87 3,131 397,620 800 398,420 7.86 $ $ $ $ (1) Excludes average options outstanding of 1,304,880 with a weighted-average exercise price of $99.80; average options outstanding of 754,144 with a weighted-average exercise price of $100.50; and average options outstanding of 288,542 with a weighted-average exercise price of $96.36 for the years ended October 31, 2016, 2015, and 2014, respectively, as the options’ exercise prices were greater than the average market price of common shares. Note 22 Commitments, guarantees and pledged assets Commitments 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. Our policy of requiring collateral or other security to support credit-related arrangements and the types of security held is generally the same as for loans. The contract amounts presented below for credit-related arrangements represent the maximum amount of additional credit that we could be obligated to extend. The contract amounts also represent the additional credit risk amounts should the contracts be fully drawn, the counterparties default and any collateral held proves to be of no value. As many of these arrangements will expire or terminate without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements or actual risk of loss. $ millions, as at October 31 Securities lending (1) Unutilized credit commitments (2) Backstop liquidity facilities Standby and performance letters of credit Documentary and commercial letters of credit Other Contract amounts $ 2016 38,657 186,406 8,842 12,377 217 282 $ 2015 32,169 175,649 5,941 11,155 327 278 $ 246,781 $ 225,519 (1) Excludes securities lending of $2.5 billion (2015: $1.4 billion) for cash because it is reported on the consolidated balance sheet. (2) Includes $105.0 billion (2015: $97.1 billion) of personal, home equity and credit card lines, which are unconditionally cancellable at our discretion. In addition, the client securities lending of the joint ventures which CIBC has with The Bank of New York Mellon totalled $81.5 billion (2015: $78.3 billion) of which $8.5 billion (2015: $7.7 billion) are transactions between CIBC and the joint ventures. CIBC has provided indemnities to customers of the joint ventures in respect of securities lending transactions with third parties amounting to $71.0 billion (2015: $69.1 billion). Securities lending Securities lending represents our credit exposure when we lend our own or our clients’ securities to a borrower and the borrower defaults on the redelivery obligation. The borrower must fully collateralize the security lent at all times. Unutilized credit commitments Unutilized credit commitments are the undrawn portion of lending facilities that we have approved to meet the requirements of clients. These lines may include various conditions that must be satisfied prior to drawdown and include facilities extended in connection with contingent acquisition financing. The credit risk associated with these lines arises from the possibility that a commitment will be drawn down as a loan at some point in the future, prior to the expiry of the commitment. The amount of collateral obtained, if deemed necessary, is based on our credit evaluation of the borrower and may include a charge over the present and future assets of the borrower. Backstop liquidity facilities We provide irrevocable backstop liquidity facilities primarily to ABCP conduits. We are the financial services agent for some of these conduits, while other conduits are administered by third parties. The liquidity facilities for our sponsored ABCP programs, Safe Trust, Sure Trust, and Sound Trust, require us to provide funding, subject to the satisfaction of certain limited conditions with respect to the conduits, to fund non-defaulted assets. Standby and performance letters of credit These represent an irrevocable obligation to make payments to third parties in the event that clients are unable to meet their contractual financial or performance obligations. The credit risk associated with these instruments is essentially the same as that involved in extending irrevocable loan CIBC 2016 ANNUAL REPORT 151 Consolidated financial statements commitments to clients. The amount of collateral obtained, if deemed necessary, is based on our credit evaluation of the borrower and may include a charge over present and future assets of the borrower. Documentary and commercial letters of credit Documentary and commercial letters of credit are short-term instruments issued on behalf of a client, authorizing a third party, such as an exporter, to draw drafts on CIBC up to a specified amount, subject to specific terms and conditions. We are at risk for any drafts drawn that are not ultimately settled by the client; however, the amounts drawn are collateralized by the related goods. Operating lease commitments(1) Future minimum lease payments and receipts for operating lease commitments for each of the five succeeding years and thereafter are as follows: $ millions, as at October 31, 2016 2017 2018 2019 2020 2021 2022 and thereafter Operating leases Payments Receipts (2) $ 430 398 347 287 227 1,026 $ 122 123 124 124 128 1,472 (1) Total rental expense (excluding servicing agreements) in respect of buildings and equipment was $445 million (2015: $432 million; 2014: $407 million). (2) Includes sub-lease income from a finance lease property, a portion of which is rented out and considered an investment property. Finance lease commitments(1) Future minimum lease payments for finance lease commitments for each of the five succeeding years and thereafter are as follows: $ millions, as at October 31, 2016 2017 2018 2019 2020 2021 2022 and thereafter Less: Future interest charges Present value of finance lease commitments $ $ 57 55 53 51 49 379 644 226 418 (1) Total interest expense related to finance lease arrangements was $30 million (2015: $30 million; 2014: $28 million). Other commitments As an investor in merchant banking activities, we enter into commitments to fund external private equity funds. In connection with these activities, we had commitments to invest up to $145 million (2015: $143 million). In addition, we act as underwriter for certain new issuances under which we alone or together with a syndicate of financial institutions purchase these new issuances for resale to investors. As at October 31, 2016, the related underwriting commitments were $196 million (2015: $687 million). Guarantees and other indemnification agreements 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 standby and performance letters of credit as discussed above, and credit derivatives protection sold, as discussed in Note 12. Other indemnification agreements In the ordinary course of operations, we enter into contractual arrangements under which we may agree to indemnify the counterparty to such arrangement from any losses relating to a breach of representations and warranties, a failure to perform certain covenants, or for claims or losses arising from certain external events as outlined within the particular contract. This may include, for example, losses arising from changes in tax legislation, litigation, or claims relating to past performance. In addition, we have entered into indemnification agreements with each of our directors and officers to indemnify those individuals, to the extent permitted by law, against any and all claims or losses (including any amounts paid in settlement of any such claims) incurred as a result of their service to CIBC. In most indemnities, maximum loss clauses are generally not provided for, and as a result, no defined limit of the maximum potential liability exists. Amounts are accrued when we have a present legal or constructive obligation as a result of a past event, when it is both probable that an outflow of economic benefits will be required to resolve the matter, and when a reliable estimate can be made of the amount of the obligation. We believe that the likelihood of the conditions arising to trigger obligations under these contract arrangements is remote. Historically, any payments made in respect of these contracts have not been significant. Amounts related to these indemnifications, representations, and warranties reflected within the consolidated financial statements as at October 31, 2016 and 2015 are not significant. 152 CIBC 2016 ANNUAL REPORT Consolidated financial statements Pledged assets In the ordinary course of business, we pledge our own assets, or may sell or re-pledge third-party assets against liabilities, or to facilitate certain activities, pursuant to agreements permitting such re-pledging of third-party assets where required. The following table presents the carrying value of the sources and uses of our own pledged assets and collateral: $ millions, as at October 31 Sources of pledged assets and collateral (1) Deposits with banks Securities NHA mortgage-backed securities (2) Mortgages Credit cards (3) Other assets Uses of pledged assets and collateral Securities lent Obligations related to securities lent or sold under repurchase agreements Secured borrowings Derivative transactions (4) Foreign governments and central banks (5) Clearing systems, payment systems, depositories, and other (5) 2016 2015 $ $ $ 11 23,690 20,996 14,227 4,245 6,022 69,191 19,564 2,326 39,484 6,074 691 1,052 $ $ $ 16 24,603 23,114 11,962 4,782 5,460 69,937 16,864 3,492 39,644 8,658 366 913 $ 69,191 $ 69,937 (1) Does not include over-collateralization of assets pledged. (2) (3) These assets are held in consolidated securitization trusts and support funding liabilities of $4.2 billion with a fair value of $4.2 billion (2015: $4.8 billion with a fair value of Includes certain cash in transit balances related to the securitization process. $4.8 billion). (4) Comprises margins for exchange-traded futures and options, clearing house settled swap contracts, and collateralized derivative transactions. (5) Includes assets pledged in order to participate in clearing and payment systems and depositories, or to have access to the facilities of central banks in foreign jurisdictions. Excludes intraday pledges to the Bank of Canada related to the Large Value Transfer System as they are normally released back to us at the end of the settlement cycle each day. The following table presents the uses of third-party pledged assets and collateral available for sale or re-pledging: $ millions, as at October 31 Collateral received and available for sale or re-pledging Less: not sold or re-pledged Uses of pledged assets and collateral Securities lent Obligations related to securities lent or sold under repurchase agreements Obligations related to securities sold short Derivative transactions (1) $ $ $ 2016 73,724 28,589 45,135 19,093 11,886 10,338 3,818 $ $ $ 2015 66,561 33,609 32,952 15,305 6,851 9,806 990 $ 45,135 $ 32,952 (1) Comprises margins for exchange-traded futures and options, clearing house settled swap contracts, and collateralized derivative transactions. In addition, see the “Commitments” section above for details on the client securities lending of the joint ventures which CIBC has with The Bank of New York Mellon. Securities collateral Client securities collateral that is available for sale or re-pledging is received in connection with securities lending, securities borrowed or purchased under resale agreements, margin loans, and to collateralize derivative contracts. Client securities collateral may be sold or re-pledged by CIBC in connection with securities borrowed, lent or sold under repurchase agreements, for margin loans, as collateral for derivative transactions, or delivered to cover securities sold short. Note 23 Contingent liabilities and provision In the ordinary course of its business, CIBC is a party to a number of legal proceedings, including regulatory investigations, in which claims for substantial monetary damages are asserted against CIBC and its subsidiaries. Legal provisions are established if, in the opinion of management, it is both probable that an outflow of economic benefits will be required to resolve the matter, and a reliable estimate can be made of the amount of the obligation. If the reliable estimate of probable loss involves a range of potential outcomes within which a specific amount within the range appears to be a better estimate, that amount is accrued. If no specific amount within the range of potential outcomes appears to be a better estimate than any other amount, the mid-point in the range is accrued. In some instances, however, it is not possible either to determine whether an obligation is probable or to reliably estimate the amount of loss, in which case no accrual can be made. While there is inherent difficulty in predicting the outcome of legal proceedings, based on current knowledge and in consultation with legal counsel, we do not expect the outcome of these matters, individually or in aggregate, to have a material adverse effect on our consolidated financial statements. However, the outcome of these matters, individually or in aggregate, may be material to our operating results for a particular reporting period. We regularly assess the adequacy of CIBC’s litigation accruals and make the necessary adjustments to incorporate new information as it becomes available. CIBC considers losses to be reasonably possible when they are neither probable nor remote. It is reasonably possible that CIBC may incur losses in addition to the amounts recorded when the loss accrued is the mid-point of a range of reasonably possible losses, or the potential loss pertains to a matter in which an unfavourable outcome is reasonably possible but not probable. CIBC believes the estimate of the aggregate range of reasonably possible losses, in excess of the amounts accrued, for its significant legal proceedings, where it is possible to make such an estimate, is from nil to approximately $1.4 billion as at October 31, 2016. This estimated aggregate range of reasonably possible losses is based upon currently available information for those significant proceedings in which CIBC is involved, taking into account CIBC’s best estimate of such losses for those cases for which an estimate can be made. CIBC’s estimate involves significant judgment, given the varying stages of the CIBC 2016 ANNUAL REPORT 153 Consolidated financial statements proceedings and the existence of multiple defendants in many of such proceedings whose share of the liability has yet to be determined. The range does not include potential punitive damages and interest. The matters underlying the estimated range as at October 31, 2016, consist of the significant legal matters disclosed below. The matters underlying the estimated range will change from time to time, and actual losses may vary significantly from the current estimate. For certain matters, CIBC does not believe that an estimate can currently be made as many of them are in preliminary stages and certain matters have no specific amount claimed. Consequently, these matters are not included in the range. The following is a description of CIBC’s significant legal proceedings, which we intend to vigorously defend. Green v. Canadian Imperial Bank of Commerce, et al. In July 2008, a shareholder plaintiff commenced this proposed class action in the Ontario Superior Court of Justice against CIBC and several former and current CIBC officers and directors. It alleges that CIBC and the individual officers and directors violated the Ontario Securities Act through material misrepresentations and non-disclosures relating to CIBC’s exposure to the U.S. sub-prime mortgage market. The plaintiffs instituted this action on behalf of all CIBC shareholders in Canada who purchased shares between May 31, 2007 and February 28, 2008. The action seeks damages of $10 billion. In July 2012, the plaintiffs’ motions for leave to file the statement of claim and for class certification were dismissed by the Ontario Superior Court of Justice. In February 2014, the Ontario Court of Appeal released its decision overturning the lower court and allowing the matter to proceed as a certified class action. In August 2014, CIBC and the individual defendants were granted leave to appeal to the Supreme Court of Canada. The defendants’ appeal to the Supreme Court of Canada was heard on February 9, 2015. In December 2015, the Supreme Court of Canada upheld the Ontario Court of Appeal’s decision allowing the matter to proceed as a certified class action. Fresco v. Canadian Imperial Bank of Commerce Gaudet v. Canadian Imperial Bank of Commerce In June 2007, two proposed class actions were filed against CIBC in the Ontario Superior Court of Justice (Fresco v. CIBC) and in the Quebec Superior Court (Gaudet v. CIBC). Each makes identical claims for unpaid overtime for full-time, part-time, and retail frontline non-management employees. The Ontario action seeks $500 million in damages plus $100 million in punitive damages for all employees in Canada, while the Quebec action is limited to employees in Quebec and has been stayed pending the outcome of the Ontario action. In June 2009, in the Ontario action, the motion judge denied certification of the matter as a class action. In September 2010, the Ontario Divisional Court upheld the motion judge’s denial of the plaintiff’s certification motion and the award of costs to CIBC by a two to one majority. In January 2011, the Ontario Court of Appeal granted the plaintiff leave to appeal the decision denying certification. In June 2012, the Ontario Court of Appeal overturned the lower court and granted certification of the matter as a class action. The Supreme Court of Canada released its decision in March 2013 denying CIBC leave to appeal certification of the matter as a class action, and denying the plaintiff’s cross appeal on aggregate damages. Credit card class actions – Quebec Consumer Protection Act: Marcotte v. Bank of Montreal, et al. Corriveau v. Amex Bank of Canada, et al. Lamoureux v. Bank of Montreal, et al. St. Pierre v. Bank of Montreal, et al. Marcotte v. Bank of Montreal, et al. (II) Giroux v. Royal Bank of Canada, et al. Since 2004, a number of proposed class actions have been filed in the Quebec Superior Court against CIBC and numerous other financial institutions. The actions, brought on behalf of cardholders, allege that the financial institutions are in breach of certain provisions of the Quebec Consumer Protection Act (CPA). The alleged violations include charging fees on foreign currency transactions, charging fees on cash advances, increasing credit limits without the cardholder’s express consent, and failing to allow a 21-day grace period before posting charges to balances upon which interest is calculated. CIBC and the other defendant banks are jointly raising a constitutional challenge to the CPA on the basis that banks are not required to comply with provincial legislation because banking and cost of borrowing disclosure is a matter of exclusive federal jurisdiction. The first of these class actions (Marcotte v. Bank of Montreal, et al.), which alleges that charging cardholders fees on foreign currency transactions violates the CPA, went to trial in 2008. In a decision released in June 2009, the trial judge found in favour of the plaintiffs concluding that the CPA is constitutionally applicable to federally regulated financial institutions and awarding damages against all the defendants. The court awarded compensatory damages against CIBC in the amount of $38 million plus an additional sum to be determined at a future date. The court awarded punitive damages against a number of the other defendants, but not against CIBC. CIBC and the other financial institutions appealed this decision. The appeal was heard by the Quebec Court of Appeal in September 2011. In August 2012, the Quebec Court of Appeal allowed the defendant banks’ appeals in part and overturned the trial judgment against CIBC. The plaintiffs and some of the defendant banks appealed to the Supreme Court of Canada, and that appeal was heard in February 2014. On September 19, 2014, the Supreme Court of Canada found that the relevant provisions of the Quebec CPA were constitutionally applicable to the banks, but that CIBC is not liable for damages because it fully complied with the Quebec CPA. The Giroux and Marcotte II proposed class actions were discontinued in January 2015. The Lamoureux, St. Pierre and Corriveau actions have been settled subject to a court approval hearing in December 2016. Pursuant to the proposed settlement CIBC will pay $4.25 million to settle these three actions. 154 CIBC 2016 ANNUAL REPORT Consolidated financial statements Credit card class actions – Interchange fees litigation: Bancroft-Snell v. Visa Canada Corporation, et al. 9085-4886 Quebec Inc. v. Visa Canada Corporation, et al. Watson v. Bank of America Corporation, et al. Fuze Salon v. BofA Canada Bank, et al. 1023926 Alberta Ltd. v. Bank of America Corporation, et al. The Crown & Hand Pub Ltd. v. Bank of America Corporation, et al. Hello Baby Equipment Inc. v. BofA Canada Bank, et al. Since 2011 seven proposed class actions have been commenced against VISA Canada Corporation (Visa), MasterCard International Incorporated (MasterCard), CIBC and numerous other financial institutions. The actions, brought on behalf of all merchants who accepted payment by Visa or MasterCard from March 23, 2001 to the present, allege two “separate, but interrelated” conspiracies; one in respect of Visa and one in respect of MasterCard. The claims allege that Visa and MasterCard conspired with their issuing banks to set default interchange rate and merchant discount fees and that certain rules (Honour All Cards and No Surcharge) have the effect of increasing the merchant discount fees. The claims allege civil conspiracy, violation of the Competition Act, interference with economic interests and unjust enrichment. The claims seek unspecified general and punitive damages. The motion for class certification in Watson was granted in March 2014. The appeal of the decision granting class certification was heard in December 2014. In August 2015, the British Columbia Court of Appeal allowed the appeals in part, resulting in certain causes of action being struck and others being reinstated. The matter remains certified as a class action. The trial in Watson is scheduled to commence in September 2018. Mortgage prepayment class actions: Jordan v. CIBC Mortgages Inc. Lamarre v. CIBC Mortgages Inc. Sherry v. CIBC Mortgages Inc. In 2011, three proposed class actions were filed in the Superior Courts of Ontario, Quebec and British Columbia against CIBC Mortgages Inc. The representative plaintiffs allege that since 2005 CIBC Mortgages Inc. wrongfully charged or overcharged mortgage prepayment penalties and that the calculation clauses in the mortgage contract that provide for discretion in applying the prepayment penalties are void and unenforceable at law. The motion for class certification in Sherry was granted in June 2014 conditional on the plaintiffs framing a workable class definition. In July 2014 CIBC filed a Notice of Appeal. CIBC’s appeal of the certification decision in Sherry was heard in April 2016. The court reserved its decision. In June 2016, the British Columbia Court of Appeal allowed the appeal in Sherry in part, resulting in certain causes of action being struck. Sherry remains certified as a class action. Neither party has sought leave to appeal to the Supreme Court of Canada. Oppenheimer Holdings Inc., Oppenheimer & Co. Inc. and OPY Credit Corp v. Canadian Imperial Bank of Commerce and CIBC World Markets Corp. In March 2013, a claim was filed in New York State Supreme Court against CIBC by Oppenheimer Holdings Inc., Oppenheimer & Co. Inc. (Oppenheimer) and OPY Credit Corp. seeking damages of US$176 million relating to an alleged breach of a credit facility that Canadian Imperial Bank of Commerce entered into with OPY Credit Corp. in January 2008 (Oppenheimer Holdings Inc. v. Canadian Imperial Bank of Commerce). In November 2013, the court dismissed all claims brought by Oppenheimer Holdings Inc. and Oppenheimer & Co. and reduced the claim to one cause of action, a claim by OPY Credit Corp. alleging that Canadian Imperial Bank of Commerce breached the credit facility. In January 2014, plaintiffs filed an amended complaint again asserting claims relating to alleged breaches of the credit facility, as well as claims relating to an asset purchase agreement between Oppenheimer Holdings Inc. and Oppenheimer & Co., and Canadian Imperial Bank of Commerce and CIBC World Markets Corp. In October 2014, the court granted CIBC’s motion to dismiss in part, narrowing the claims against CIBC. This case continues to proceed. Barbero v. Royal Bank of Canada, et al In April 2015, a proposed class action was filed in the Supreme Court of British Columbia against CIBC, Royal Bank of Canada, Toronto-Dominion Bank, Bank of Montreal and Bank of Nova Scotia. The action is brought on behalf of residents of British Columbia who allege they were charged by the defendants a monthly premium or fee for credit protection without their consent or authorization at any time. The plaintiff alleges that the defendants employ uniform, unfair, fraudulent and unlawful marketing practices to enroll customers who receive no meaningful benefit from the product. The claim seeks a refund of the premiums, charges or fees received from customers and unspecified general and punitive damages. The motion for class certification is scheduled for February 2017. Cerberus Capital Management L.P. v. CIBC In October 2015, Securitized Asset Funding 2011-2, LTD., a special purpose investment vehicle affiliated with Cerberus Capital Management L.P. (collectively “Cerberus”), commenced a Federal Court action in New York against CIBC seeking unspecified damages of “at least hundreds of millions of dollars”. The action relates to two transactions in 2008 and 2011 in which CIBC issued a limited recourse note and certificate to Cerberus which significantly reduced CIBC’s exposure to the U.S. residential real estate market. The complaint alleges that CIBC breached its contract with Cerberus by failing to appropriately calculate and pay with respect to two of the payment streams due under the 2008 note and 2011 certificate. In November 2015, Cerberus voluntarily dismissed the Federal Court action and filed a new action asserting the same claims in New York State Court. In January 2016, CIBC served its Answer and Counterclaims. In March 2016, Cerberus filed a motion for summary judgment and sought to stay discovery. In April 2016, the court directed the parties to start discovery. The court has not set a date for hearing the summary judgment motion. Valeant class actions: Catucci v. Valeant Pharmaceuticals International Inc., et al. Potter v. Valeant Pharmaceuticals International Inc., et al. In March 2016, a proposed class action was filed in the Quebec Superior Court on behalf of purchasers of shares in Valeant Pharmaceuticals International Inc. against the issuer, its directors and officers, its auditors and the underwriting syndicates for six public offerings from 2013 to 2015. CIBC World Markets Corp. was part of the underwriting syndicate for three of the offerings (underwriting 1.5% of a US$1.6 billion offering in June 2013, 1.5% of a US$900 million offering in December 2013 and 0.625% of an offering comprising US$5.25 billion and €1.5 billion in March 2015). The proposed class action alleges various misrepresentations on the part of Valeant and the other defendants, including representations made in the prospectus of the public offerings, relating to Valeant’s relationships with various “specialty pharmacies” who were allegedly acting improperly in the distribution of Valeant’s products resulting in Valeant’s operational results, revenues, and share price during the relevant period being artificially inflated. In July 2016, a similar CIBC 2016 ANNUAL REPORT 155 Consolidated financial statements proposed class action (Potter v. Valeant Pharmaceuticals International Inc., et al.) was commenced in New Jersey Federal Court. The motion for class certification in Catucci is scheduled for April 2017. In re PrivateBancorp Shareholder Litigation Following the announcement of the proposed acquisition of PrivateBancorp, Inc., three proposed class actions were filed on behalf of PrivateBancorp, Inc. shareholders in the Circuit Court of Cook County, Illinois: Solak v. Richman, et al., Parshall v. PrivateBancorp, Inc., et al., and Griffin v. PrivateBancorp, Inc., et al. All of the actions name as defendants PrivateBancorp, Inc. and the members of its board of directors, and assert that the directors breached their fiduciary duties in connection with the transaction. One such case (Griffin) further asserts that PrivateBancorp, Inc. aided and abetted its directors’ alleged breaches. Two of the actions (Parshall and Griffin) also name as defendants CIBC, and assert that it, too, aided and abetted the directors’ purported breaches. The actions broadly allege that the transaction was the result of a flawed process, that the price is unfair, and that certain provisions of the merger agreement might dissuade a potential suitor from making a competing offer, among other things. Plaintiffs seek injunctive and other relief, including damages. CIBC believes the demands and complaints are without merit and there are substantial legal and factual defenses to the claims asserted. In Q4 2016, the matters were amended and consolidated as In re Privatebancorp Shareholder Litigation. Legal provisions The following table presents changes in our legal provisions: $ millions, for the year ended October 31 Balance at beginning of year Additional new provisions recognized Less: Amounts incurred and charged against existing provisions Unused amounts reversed Balance at end of year 2016 27 106 $ (9) (6) $ 2015 39 12 (22) (2) $ 118 $ 27 The additional new provisions recognized in 2016 include $76 million in respect of a no-contest settlement agreement reached with the Ontario Securities Commission (OSC) in relation to a matter resulting in reimbursements to certain clients. CIBC discovered and self-reported this matter to the OSC. The no- contest settlement agreement was approved by the OSC pursuant to an order dated October 28, 2016 and represents a legal obligation at the end of the current year. Restructuring During 2015, we recorded cumulative restructuring charges of $296 million in Corporate and Other. The charges primarily related to employee severance and included Program Clarity, a bank-wide priority focused on simplifying our bank. The charges also included restructuring costs related to CIBC FirstCaribbean, which included charges related to the sale by CIBC FirstCaribbean of its Belize banking operations. In the fourth quarter of 2016 we recorded additional restructuring charges of $134 million as we continue to implement initiatives focused on simplifying our bank. The following table presents changes in the restructuring provision: $ millions, for the year ended October 31 Balance at beginning of year Additional new provisions recognized Less: Amounts incurred and charged against existing provisions Unused amounts reversed Balance at end of year $ 2016 244 158 (122) (24) 2015 – 296 $ (52) – $ 256 $ 244 While the amount of $256 million recognized represents our best estimate as at October 31, 2016 of the amount required to settle the obligation, uncertainty exists with respect to when the obligation will be settled and the amounts that will ultimately be paid, as this will largely depend upon individual facts and circumstances. 156 CIBC 2016 ANNUAL REPORT Consolidated financial statements Note 24 Concentration of credit risk Concentration of credit exposure may arise with a group of counterparties that have similar economic characteristics or are located in the same geographic region. The ability of such counterparties to meet contractual obligations would be similarly affected by changing economic, political, or other conditions. The amounts of credit exposure associated with our on- and off-balance sheet financial instruments are summarized in the following table: Credit exposure by country of ultimate risk $ millions, as at October 31 2016 Canada U.S. Other countries Total Canada U.S. Other countries 2015 Total On-balance sheet Major assets (1)(2)(3) Off-balance sheet Credit-related arrangements Financial institutions Governments Retail Corporate Derivative instruments (4)(5) By counterparty type Financial institutions (6) Governments Corporate Less: effect of netting $ 387,354 $ 59,457 $ 36,130 $ 482,941 $ 345,718 $ 62,760 $ 35,798 $ 444,276 $ 45,464 5,894 114,834 51,512 $ 6,187 66 – 13,326 $ 3,578 108 415 5,397 $ 55,229 6,068 115,249 70,235 $ 39,781 $ 4,912 105,967 48,749 3,496 $ – 3 11,886 3,781 $ 47 285 6,612 47,058 4,959 106,255 67,247 $ 217,704 $ 19,579 $ 9,498 $ 246,781 $ 199,409 $ 15,385 $ 10,725 $ 225,519 $ $ $ 6,384 5,275 1,612 13,271 (9,225) 4,029 – 859 4,888 (3,594) 7,766 5 929 8,700 (5,146) $ 18,179 5,280 3,400 26,859 (17,965) $ 6,037 $ 5,379 1,675 3,467 $ – 458 13,091 (8,466) 3,925 (3,104) 7,502 $ 39 999 8,540 (5,490) 17,006 5,418 3,132 25,556 (17,060) Total derivative instruments $ 4,046 $ 1,294 $ 3,554 $ 8,894 $ 4,625 $ 821 $ 3,050 $ 8,496 (1) Major assets consist of cash and deposits with banks, loans and acceptances net of allowance for credit losses, securities, securities borrowed or purchased under resale (2) (3) agreements, and derivative instruments. Includes Canadian currency of $378.5 billion (2015: $344.0 billion) and foreign currencies of $104.4 billion (2015: $100.3 billion). Includes loans and acceptances, net of allowance for credit losses, totalling $319.8 billion (2015: $291.0 billion). No industry or foreign jurisdiction accounts for more than 10% of this amount. (4) Also included in the on-balance sheet major assets in the table. (5) Does not include exchange-traded derivatives of $903 million (2015: $786 million). (6) Includes positive fair value (net of CVA) of $3 million (2015: $12 million) on notional amounts of $0.4 billion (2015: $1.2 billion) with financial guarantors. In addition, see Note 22 for details on the client securities lending of the joint ventures which CIBC has with The Bank of New York Mellon. Also see shaded sections in “MD&A – Management of risk” for a detailed discussion on our credit risk. CIBC 2016 ANNUAL REPORT 157 Consolidated financial statements Note 25 Related-party transactions In the ordinary course of business, we provide banking services and enter into transactions with related parties on terms similar to those offered to unrelated parties. Related parties include key management personnel(1), their close family members, and entities that they or their close family members control or jointly control. Related parties also include associates and joint ventures accounted for under the equity method, and post-employment benefit plans for CIBC employees. Loans to these related parties are made in the ordinary course of business and on substantially the same terms as for comparable transactions with unrelated parties. As CIBC’s subsidiaries are consolidated, transactions with these entities have been eliminated and are not reported as related-party transactions. We offer a subsidy on annual fees and preferential interest rates on credit card balances to senior officers which is the same offer extended to all employees of CIBC. Key management personnel and their affiliates As at October 31, 2016, loans to key management personnel(1) and their close family members and to entities that they or their close family members control or jointly control totalled $140 million (2015: $73 million), letters of credit and guarantees totalled $2 million (2015: $1 million), and undrawn credit commitments totalled $46 million (2015: $37 million). These outstanding balances are generally unsecured and we have no provision for credit losses relating to these amounts for the years ended October 31, 2016 and 2015. (1) Key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the activities of CIBC directly or indirectly and comprise the members of the Board (referred to as directors); and Executive Committee (ExCo) and certain named officers per the Bank Act (Canada) (collectively referred to as senior officers). Board members who are also ExCo members are included as senior officers. Compensation of key management personnel $ millions, for the year ended October 31 Short-term benefits (1) Post-employment benefits Share-based benefits (2) Termination benefits Total compensation Directors $ $ 2 – 2 – 4 2016 Senior officers $ $ 22 3 27 – 52 2015 Senior officers $ $ 23 2 21 7 53 Directors $ $ 2 – 2 – 4 (1) Comprises salaries, statutory and non-statutory benefits related to senior officers and fees related to directors recognized during the year. Also includes annual incentive plan payments related to senior officers on a cash basis. (2) Comprises grant-date fair values of awards granted in the year. Refer to the following Notes for additional details on related-party transactions: Share-based payment plans See Note 18 for details of these plans offered to directors and senior officers. Post-employment benefit plans See Note 19 for related-party transactions between CIBC and the post-employment benefit plans. Equity-accounted associates and joint ventures See Note 26 for details of our equity-accounted associates and joint ventures. 158 CIBC 2016 ANNUAL REPORT Consolidated financial statements Note 26 Investments in equity-accounted associates and joint ventures Joint ventures CIBC is a 50/50 joint venture partner with The Bank of New York Mellon in two joint ventures: CIBC Mellon Trust Company and CIBC Mellon Global Securities Services Company, which provide trust and asset servicing, both in Canada. As at October 31, 2016, the carrying value of our investments in the joint ventures was $380 million (2015: $343 million), which was included in Corporate and Other. As at October 31, 2016, loans to the joint ventures totalled $50 million (2015: nil) and undrawn credit commitments totalled $78 million (2015: $128 million). CIBC, The Bank of New York Mellon, and CIBC Mellon have, jointly and severally, provided indemnities to customers of the joint ventures in respect of securities lending transactions. See Note 22 for additional details. There was no unrecognized share of losses of any joint ventures, either for the year or cumulatively. In 2016 and 2015, none of our joint ventures experienced any significant restrictions to transfer funds in the form of cash dividends or distributions, or repayment of loans or advances. The following table provides the summarized aggregate financial information related to our proportionate interest in the equity-accounted joint ventures: $ millions, for the year ended October 31 Net income OCI Total comprehensive income 2016 $ $ 64 2 66 2015 $ $ 57 (2) 55 2014 $ $ 50 2 52 Associates As at October 31, 2016, the total carrying value of our investments in associates was $386 million (2015: $1,504 million). These investments comprise: listed associates with a carrying value of $201 million (2015: $193 million) and a fair value of $223 million (2015: $166 million); and unlisted associates with a carrying value of $185 million (2015: $1,311 million) and a fair value of $198 million (2015: $1,649 million). Of the total carrying value of our investments in associates, $2 million (2015: nil) was included in Retail and Business Banking, $33 million (2015: $1,169 million) in Wealth Management, $330 million (2015: $316 million) in Capital Markets, and $21 million (2015: $19 million) in Corporate and Other. As at October 31, 2016, loans to associates totalled nil (2015: $12 million) and undrawn credit commitments totalled $153 million (2015: $132 million). We also had commitments to invest up to nil (2015: $1 million) in our associates. There was no unrecognized share of losses of any associate, either for the year or cumulatively. In 2016 and 2015, none of our associates experienced any significant restrictions to transfer funds in the form of cash dividends or distributions, or repayment of loans or advances. The following table provides the summarized aggregate financial information related to our proportionate interest in equity-accounted associates: $ millions, for the year ended October 31 Net income OCI Total comprehensive income 2016 $ $ 32 4 36 2015 120 (3) 117 $ $ 2014 176 14 190 $ $ CIBC 2016 ANNUAL REPORT 159 Consolidated financial statements Note 27 Significant subsidiaries The following is a list of significant subsidiaries in which CIBC, either directly or indirectly, owns 100% of the voting shares, except where noted. $ millions, as at October 31, 2016 Subsidiary name (1) CIBC Asset Management Inc. CIBC BA Limited CIBC Investor Services Inc. CIBC Life Insurance Company Limited CIBC Mortgages Inc. CIBC Securities Inc. CIBC Trust Corporation CIBC World Markets Inc. CIBC WM Real Estate Ltd. CIBC WM Real Estate (Quebec) Ltd. CIBC Wood Gundy Financial Services Inc. CIBC Wood Gundy Financial Services (Quebec) Inc. CIBC USA Holdings Inc. CIBC World Markets Corp. Canadian Imperial Holdings Inc. CIBC Inc. CIBC Capital Corporation CIBC Delaware Funding Corp. Atlantic Trust Group, LLC AT Investment Advisers, Inc. Atlantic Trust Company, National Association INTRIA Items Inc. CIBC Holdings (Cayman) Limited CIBC Cayman Bank Limited CIBC Cayman Capital Limited CIBC Investments (Cayman) Limited FirstCaribbean International Bank Limited (91.7%) CIBC Bank and Trust Company (Cayman) Limited (91.7%) CIBC Trust Company (Bahamas) Limited (91.7%) FirstCaribbean International Bank (Bahamas) Limited (87.3%) FirstCaribbean International Bank (Barbados) Limited (91.7%) FirstCaribbean International Bank (Cayman) Limited (91.7%) FirstCaribbean International Bank (Jamaica) Limited (91.4%) FirstCaribbean International Bank (Trinidad and Tobago) Limited (91.7%) FirstCaribbean International Wealth Management Bank (Barbados) Limited (91.7%) CIBC Reinsurance Company Limited CIBC World Markets plc CIBC World Markets (Japan) Inc. CIBC Australia Ltd Address of head or principal office Book value of shares owned by CIBC (2) 444 – (3) 25 23 230 2 591 306 100 9,933 Toronto, Ontario, Canada $ Toronto, Ontario, Canada Toronto, Ontario, Canada Mississauga, Ontario, Canada Toronto, Ontario, Canada Toronto, Ontario, Canada Toronto, Ontario, Canada Toronto, Ontario, Canada Toronto, Ontario, Canada Montreal, Quebec, Canada Toronto, Ontario, Canada Montreal, Quebec, Canada New York, New York, U.S. New York, New York, U.S. New York, New York, U.S. New York, New York, U.S. New York, New York, U.S. New York, New York, U.S. Atlanta, Georgia, U.S. Chicago, Illinois, U.S. Atlanta, Georgia, U.S. Mississauga, Ontario, Canada George Town, Grand Cayman, Cayman Islands George Town, Grand Cayman, Cayman Islands George Town, Grand Cayman, Cayman Islands George Town, Grand Cayman, Cayman Islands Warrens, St. Michael, Barbados George Town, Grand Cayman, Cayman Islands Nassau, The Bahamas Nassau, The Bahamas Warrens, St. Michael, Barbados George Town, Grand Cayman, Cayman Islands Kingston, Jamaica Maraval, Port of Spain, Trinidad & Tobago Warrens, St. Michael, Barbados Warrens, St. Michael, Barbados London, United Kingdom Warrens, St. Michael, Barbados Sydney, New South Wales, Australia 490 48 19 (1) Each subsidiary is incorporated or organized under the laws of the state or country in which the principal office is situated, except for CIBC USA Holdings Inc., CIBC World Markets Corp., Canadian Imperial Holdings Inc., CIBC Inc., CIBC Capital Corporation, CIBC Delaware Funding Corp., Atlantic Trust Group, LLC and AT Investment Advisers, Inc., which were incorporated or organized under the laws of the State of Delaware, U.S.; and Atlantic Trust Company, National Association, which was organized under the Federal law of the U.S. (2) The book value of shares of subsidiaries is shown at cost and may include non-voting common and preferred shares. These amounts are eliminated upon consolidation. (3) The book value of shares owned by CIBC is less than $1 million. In addition to the above, we consolidate certain SEs where we have control over the SE. See Note 6 for additional details. 160 CIBC 2016 ANNUAL REPORT Consolidated financial statements Note 28 Segmented and geographic information CIBC has three SBUs: Retail and Business Banking, Wealth Management, and Capital Markets. These SBUs are supported by Corporate and Other. Retail and Business Banking provides personal and business clients across Canada with financial advice, products and services through a strong team of advisors and relationship managers, in our banking centres or through remote channels such as mobile advisors, telephone, online or mobile banking. Wealth Management provides integrated advice and investment solutions to meet the needs of institutional, retail, and high net worth clients. Our asset management, retail brokerage and private wealth management businesses combine to create an integrated offer, delivered through approximately 1,600 advisors across Canada and the U.S. Other includes the results of ACI. For further details regarding the sale of our minority investment in ACI, see Note 3. 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. Corporate and Other includes the following functional groups – Technology and Operations, Finance (including Treasury), Administration, Risk Management, and Internal Audit, as well as other support groups. The expenses of these functional and support groups are generally allocated to the business lines within the SBUs. Corporate and Other also includes our international banking operations comprising mainly CIBC FirstCaribbean, strategic investments in the CIBC Mellon joint ventures, and other income statement and balance sheet items not directly attributable to the business lines. CIBC’s investment in The Bank of N.T. Butterfield & Son Limited was included in Corporate and Other results until it was sold on April 30, 2015. Business unit allocations Treasury activities impact the reported 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. 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 Retail and Business Banking and Wealth Management SBUs, we use a Manufacturer/Customer Segment/Distributor Management Model. The model uses certain estimates and allocation methodologies in the preparation of segmented financial information. Under this model, internal payments for sales, renewals, trailer commissions and the recovery of distribution service costs are made among the lines of business and SBUs. Periodically, the sales, renewals and trailer commission rates paid to customer segments for certain products/services are revised and applied prospectively. Non-interest expenses are attributed to the SBUs to which they relate based on appropriate criteria. Revenue, expenses, and other balance sheet resources related to certain activities are fully allocated to the lines of business within the SBUs. The individual allowances and related provisions are reported in the respective SBUs. The collective allowances and related provisions are reported in Corporate and Other 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 card portfolio, which are all reported in the respective SBUs. All allowances and related provisions for CIBC FirstCaribbean are reported in Corporate and Other. Changes made to our business segments 2016 The following external reporting changes were made in the first quarter of 2016. Prior period amounts were reclassified accordingly. The changes impacted the results of our SBUs, but there was no impact on consolidated net income resulting from these reclassifications. (cid:129) (cid:129) In the corporate and investment banking and business banking lines of business within Capital Markets and Retail and Business Banking, respectively, our client segmentation was redefined in a manner that reinforced our client-focused strategy, and resulted in a greater degree of industry specialization and expertise, while providing enhanced client coverage. We transferred client accounts accordingly between these lines of business. The transfer pricing methodology used by Treasury to charge and credit the SBUs for the cost and benefit of funding assets and liabilities, respectively, was enhanced to better align to our liquidity risk models. In addition: Within Capital Markets: (cid:129) Equity and debt underwriting revenue, previously shared between the global markets and corporate and investment banking lines of business, was transferred to be reported entirely within the corporate and investment banking line of business. Within Wealth Management: (cid:129) The wealth advisory services business previously reported in the asset management line of business was transferred to the retail brokerage line of business. An “other” line of business was established to include the results of ACI, previously reported in the asset management line of business. (cid:129) 2015 Capital Markets In November 2015, the name of this SBU was changed to Capital Markets from Wholesale Banking. This SBU comprises global markets, corporate and investment banking, and other. 2014 Sale of Aeroplan portfolio On December 27, 2013, we sold approximately 50% of our Aerogold VISA portfolio, consisting primarily of credit card only clients, to TD. Accordingly, the revenue related to the sold credit card portfolio was moved from personal banking to the other line of business within Retail and Business Banking. Prior period amounts were restated accordingly. CIBC 2016 ANNUAL REPORT 161 Consolidated financial statements Allocation of Treasury activities Treasury-related transfer pricing continues to be charged or credited to each line of business within our SBUs. We changed our approach to allocating the residual financial impact of Treasury activities. Certain fees are charged directly to the lines of business, and the residual net revenue is retained in Corporate and Other. Prior period amounts were restated accordingly. Results by reporting segments and geographic areas $ millions, for the year ended October 31 2016 Net interest income (2) Non-interest income Intersegment revenue (3) Total revenue Provision for (reversal of) credit losses Amortization and impairment (4) Other non-interest expenses Income (loss) before income taxes Income taxes (2) Net income (loss) Net income (loss) attributable to: Non-controlling interests Equity shareholders $ $ $ 6,218 2,174 463 8,855 765 93 4,379 3,618 929 2,689 – 2,689 Retail and Business Banking Wealth Management Capital Markets Corporate and Other Canada (1) U.S. (1) Caribbean (1) Other countries (1) $ 203 $ 3,110 (474) 2,839 – 26 1,727 1,086 222 2,115 $ 789 11 (170) $ 596 – 2,915 153 5 1,393 1,364 288 426 133 338 1,010 (1,055) (721) CIBC Total 8,366 $ 6,669 – 15,035 1,051 462 8,509 5,013 718 7,639 $ 5,208 n/a 12,847 890 374 7,295 4,288 616 $ 64 576 n/a 640 93 46 556 (55) (13) $ $ 864 $ 1,076 $ (334) $ 4,295 $ 3,672 $ (42) $ – $ – $ 864 1,076 20 $ (354) 20 $ – $ 4,275 3,672 $ – (42) 577 620 n/a 1,197 22 35 473 667 87 580 20 560 $ $ $ 86 265 n/a 351 46 7 185 113 28 85 – 85 Average assets (5) $ 265,760 $ 4,482 $ 162,842 $ 76,056 $ 509,140 $ 420,432 $ 53,694 $ 27,599 $ 7,415 2015 (6) Net interest income (2) Non-interest income Intersegment revenue (3) Total revenue Provision for (reversal of) credit losses Amortization and impairment (4) Other non-interest expenses Income (loss) before income taxes Income taxes (2) Net income (loss) Net income (loss) attributable to: Non-controlling interests Equity shareholders $ $ $ 5,879 2,080 447 8,406 670 93 4,216 3,427 897 2,530 – 2,530 $ 203 $ 2,722 (457) 2,468 (1) 26 1,758 685 167 1,870 $ 740 10 (37) $ 399 – 7,915 $ 5,941 – 7,221 $ 4,491 n/a 2,620 54 5 1,327 1,234 277 362 48 311 1,125 (1,122) (707) 13,856 771 435 8,426 4,224 634 11,712 701 348 7,229 3,434 462 $ $ 518 $ 957 $ (415) $ 3,590 $ 2,972 $ – $ 518 – $ 957 14 $ (429) 14 $ – $ 3,576 2,972 145 650 n/a 795 22 42 546 185 48 137 – 137 $ $ $ 458 601 n/a 1,059 49 38 469 503 97 406 14 392 $ $ $ 91 199 n/a 290 (1) 7 182 102 27 75 – 75 Average assets (5) $ 242,890 $ 4,796 $ 142,771 $ 64,867 $ 455,324 $ 388,220 $ 40,170 $ 19,984 $ 6,950 2014 (6) Net interest income (2) Non-interest income Intersegment revenue (3) Total revenue Provision for (reversal of) credit losses Amortization and impairment (4) Other non-interest expenses Income (loss) before income taxes Income taxes (2) Net income (loss) Net income (loss) attributable to: Non-controlling interests Equity shareholders $ $ $ 5,587 2,239 397 8,223 731 87 4,132 3,273 814 2,459 – 2,459 $ 196 $ 2,408 (404) 2,200 – 22 1,560 618 148 1,540 $ 849 7 136 $ 408 – 7,459 $ 5,904 – 6,728 $ 4,459 n/a 2,396 43 5 1,220 1,128 259 544 163 699 787 (1,105) (522) 13,363 937 813 7,699 3,914 699 11,187 661 319 6,734 3,473 525 $ $ 470 $ 869 $ (583) $ 3,215 $ 2,948 $ 2 $ 468 – $ (5) $ (3) $ 2 $ 869 (578) 3,218 2,946 $ $ $ 164 578 n/a 742 59 36 424 223 72 151 – 151 $ 471 584 n/a 1,055 219 451 378 7 49 (42) $ 96 283 n/a 379 (2) 7 163 211 53 158 (5) $ (37) – 158 Average assets (5) $ 229,947 $ 4,354 $ 122,469 $ 54,711 $ 411,481 $ 357,142 $ 27,565 $ 20,355 $ 6,419 (1) Net income and average assets are allocated based on the geographical location where they are recorded. (2) Capital Markets net interest income and income tax expense includes a taxable equivalent basis (TEB) adjustment of $474 million (2015: $482 million; 2014: $421 million) with an equivalent offset in Corporate and Other. Intersegment revenue represents internal sales commissions and revenue allocations under the Manufacturer/Customer Segment/Distributor Management Model. (3) (4) Comprises amortization and impairment of buildings, furniture, equipment, leasehold improvements, and software and other intangible assets. In addition, 2014 includes impairment loss relating to CIBC FirstCaribbean goodwill. (5) Assets are disclosed on an average basis as this measure is most relevant to a financial institution and is the measure reviewed by management. (6) Certain information has been reclassified to conform to the presentation adopted in the current year. n/a Not applicable. 162 CIBC 2016 ANNUAL REPORT Consolidated financial statements The following table provides a breakdown of revenue from our reporting segments: $ millions, for the year ended October 31 Retail and Business Banking Personal banking Business banking Other Wealth Management Retail brokerage Asset management Private wealth management Other Capital Markets (2) Global markets Corporate and investment banking Other Corporate and Other (2) International banking Other 2016 7,066 1,726 63 8,855 1,269 746 381 443 2,839 1,640 1,259 16 2,915 722 (296) 426 $ $ $ $ $ $ $ $ 2015 (1) 2014 (1) $ $ $ $ $ $ $ $ 6,693 1,623 90 8,406 1,282 707 379 100 2,468 1,353 1,273 (6) 2,620 678 (316) 362 $ $ $ $ $ $ $ $ 6,305 1,531 387 8,223 1,232 601 275 92 2,200 991 1,294 111 2,396 600 (56) 544 (1) Certain information has been reclassified to conform to the presentation adopted in the current year. (2) Capital Markets revenue includes a TEB adjustment of $474 million (2015: $482 million; 2014: $421 million) with an equivalent offset in Corporate and Other. Note 29 Financial instruments – disclosures Certain disclosures required by IFRS 7 are provided in the shaded sections of the “MD&A – Management of risk”, as permitted by IFRS. The following table provides a cross referencing of those disclosures to the MD&A. Description For each type of risk arising from financial instruments, an entity shall disclose: the exposure to risks and how they arise; objectives, policies and processes used for managing the risks; methods used to measure the risk; and description of collateral. Credit risk: gross exposure to credit risk, credit quality and concentration of exposures. Market risk: trading portfolios – Value-at-Risk (VaR); stressed VaR, incremental risk charge, non-trading portfolios – interest rate risk, foreign exchange risk and equity risk. Liquidity risk: liquid assets, maturity of financial assets and liabilities, and credit commitments. Section Risk overview Credit risk Market risk Liquidity risk Operational risk Reputation and legal risk Regulatory compliance risk Credit risk Market risk Liquidity risk We have provided quantitative disclosures related to credit risk consistent with Basel guidelines in the “Credit risk” section of the MD&A, which require entities to disclose their exposures based on how they manage their business and risks. The table below sets out the categories of the on-balance sheet exposure to credit risk under different Basel approaches, displayed in both accounting categories and Basel portfolios. Accounting categories Basel portfolios AIRB and standardized approaches $ millions, as at October 31 Corporate Sovereign Bank Real estate secured personal lending Qualifying revolving retail Other retail Asset securitization Total subject to credit risk Not subject to credit risk 2016 Cash and deposits with banks Securities Cash collateral on securities borrowed Securities purchased under resale agreements Loans Allowance for credit losses Derivative instruments Customers’ liability under acceptances Other assets $ 163 $ 10,193 $ 2,086 $ 1,320 – 30,352 – 3,791 5,433 – $ – – – $ – – $ – – – – $ 12,442 $ 1,723 48,710 – 38,713 5,433 3,250 – 14,376 63,648 – 5,799 10,609 437 8,950 4,705 – 6,776 1,615 1,963 5,051 1,369 – 15,187 140 5,269 – 204,078 – – – 147 – 21,565 – – – 32 – 10,451 – – – 14 – 2,181 – – – 4 28,377 307,997 – 27,762 12,364 7,866 – 1,111 (1,691) – – 10,550 28,377 309,108 (1,691) 27,762 12,364 18,416 Total credit exposure $ 96,352 $ 64,554 $ 38,326 $ 204,225 $ 21,597 $ 10,465 $ 5,435 $ 440,954 $ 60,403 $ 501,357 2015 Total credit exposure $ 85,638 $ 54,032 $ 44,739 $ 185,381 $ 20,435 $ 10,030 $ 4,857 $ 405,112 $ 58,197 $ 463,309 CIBC 2016 ANNUAL REPORT 163 Total consolidated balance sheet $ 14,165 87,423 5,433 Consolidated financial statements Note 30 Offsetting financial assets and liabilities The following table identifies the amounts that have been offset on the consolidated balance sheet in accordance with the requirements of IAS 32, and also those amounts that are subject to enforceable netting agreements but do not qualify for offsetting on the consolidated balance sheet either because we do not have a currently enforceable legal right to set-off the recognized amounts, or because we do not intend to settle on a net basis or to realize the asset and settle the liability simultaneously. Financial assets $ millions, as at October 31 2016 Amounts subject to enforceable netting agreements Gross amounts of recognized financial assets Gross amounts offset on the consolidated balance sheet (1) Related amounts not set-off on the consolidated balance sheet Net amounts Financial instruments (2) Collateral received (3) Net amounts Amounts not subject to enforceable netting agreements (4) Net amounts presented on the consolidated balance sheet Derivatives Cash collateral on securities borrowed Securities purchased under resale $ 33,335 5,433 $ (7,239) $ 26,096 5,433 – agreements 30,731 (2,354) 28,377 $ (17,965) $ – – (3,877) $ 4,254 151 (5,282) $ 1,666 – (28,362) 15 – $ 69,499 $ (9,593) $ 59,906 $ (17,965) $ (37,521) $ 4,420 $ 1,666 2015 Derivatives Cash collateral on securities borrowed Securities purchased under resale agreements $ 32,938 3,245 $ (7,771) – $ 25,167 3,245 $ (17,060) – $ (3,556) (3,182) $ 4,551 63 $ 1,175 – 31,803 (1,714) 30,089 – (30,070) 19 – $ 67,986 $ (9,485) $ 58,501 $ (17,060) $ (36,808) $ 4,633 $ 1,175 $ 27,762 5,433 28,377 $ 61,572 $ 26,342 3,245 30,089 $ 59,676 Financial liabilities $ millions, as at October 31 2016 Amounts subject to enforceable netting agreements Gross amounts of recognized financial liabilities Gross amounts offset on the consolidated balance sheet (1) Related amounts not set-off on the consolidated balance sheet Net amounts Financial instruments (2) Collateral pledged (3) Net amounts Amounts not subject to enforceable netting agreements (4) Net amounts presented on the consolidated balance sheet Derivatives Cash collateral on securities lent Obligations related to securities sold $ 34,820 2,518 $ (7,239) $ 27,581 2,518 – under repurchase agreements 14,048 (2,354) 11,694 $ (17,965) $ – – (7,328) $ 2,288 45 (2,473) $ 1,226 – (11,680) 14 – $ 51,386 $ (9,593) $ 41,793 $ (17,965) $ (21,481) $ 2,347 $ 1,226 2015 Derivatives Cash collateral on securities lent Obligations related to securities sold under repurchase agreements $ 35,486 1,429 $ (7,771) – $ 27,715 1,429 $ (17,060) – $ (6,625) (1,389) $ 4,030 40 $ 1,342 – 10,628 (1,714) 8,914 – (8,889) 25 – 8,914 $ 47,543 $ (9,485) $ 38,058 $ (17,060) $ (16,903) $ 4,095 $ 1,342 $ 39,400 $ 28,807 2,518 11,694 $ 43,019 $ 29,057 1,429 (1) Comprises amounts related to the financial instruments which qualify for offsetting under IAS 32. (2) Comprises amounts subject to set-off under enforceable netting agreements, such as ISDA agreements, derivative exchange or clearing counterparty agreements, global master repurchase agreements, and global master securities lending agreements. Under such arrangements, all outstanding transactions governed by the relevant agreement can be offset if an event of default or other predetermined event occurs. (3) Collateral received and pledged amounts are reflected at fair value, but have been limited to the net balance sheet exposure so as not to include any over-collateralization. (4) Includes contractual rights of set-off that are subject to uncertainty under the laws of the relevant jurisdiction. The offsetting and collateral arrangements discussed above and other credit risk mitigation strategies used by CIBC are further explained in the “Credit risk” section of the MD&A. Certain amounts of securities received as collateral are restricted from being sold or re-pledged. 164 CIBC 2016 ANNUAL REPORT Consolidated financial statements Note 31 Interest income and expense The table below provides the consolidated interest income and expense for both product and accounting categories. The consolidated amounts presented are reported before any interest income and expense associated with funding these assets and liabilities. $ millions, for the year ended October 31 Amortized cost Trading 2016 Interest income Loans Securities Securities borrowed or purchased under resale agreements Deposits with banks Interest expense Deposits Securities sold short Securities lent or sold under repurchase agreements Subordinated indebtedness Other 2015 Interest income Loans Securities Securities borrowed or purchased under resale agreements Deposits with banks Interest expense Deposits Securities sold short Securities lent or sold under repurchase agreements Subordinated indebtedness Other 2014 Interest income Loans Securities Securities borrowed or purchased under resale agreements Deposits with banks Interest expense Deposits Securities sold short Securities lent or sold under repurchase agreements Subordinated indebtedness Other $ 9,824 – 329 156 $ 10,309 $ $ $ $ $ $ $ $ $ 3,197 – 127 137 48 3,509 9,557 – 310 76 9,943 2,965 – 110 181 57 3,313 9,491 – 320 25 9,836 3,311 – 127 178 49 $ 3,665 $ $ $ $ $ $ $ $ $ $ $ $ 9 1,386 – – 1,395 – 199 – – – 199 16 1,293 – – 1,309 – 230 – – – 230 13 1,287 – – 1,300 – 327 – – – 327 AFS – 383 – – 383 – – – – – – – 227 – – 227 – – – – – – – 337 – – 337 – – – – – – $ $ $ $ $ $ $ $ $ $ $ $ FVO Total $ $ $ $ $ $ $ $ $ $ $ $ – 5 – – 5 18 – – – – 18 – 4 – – 4 25 – – – – 25 – 4 – – 4 26 – – – – 26 $ $ $ $ $ $ $ $ $ $ $ $ 9,833 1,774 329 156 12,092 3,215 199 127 137 48 3,726 9,573 1,524 310 76 11,483 2,990 230 110 181 57 3,568 9,504 1,628 320 25 11,477 3,337 327 127 178 49 4,018 CIBC 2016 ANNUAL REPORT 165 Consolidated financial statements Note 32 Future accounting policy changes We are currently evaluating the impact of the following standards that are effective for us after fiscal 2016: Amendments to IAS 7 “Statement of Cash Flows” – issued in January 2016 is effective for annual periods beginning January 1, 2017, which for us will be on November 1, 2017. The amendments will require disclosure of changes in certain liabilities that arise from financing activities. IFRS 9 “Financial Instruments” – issued in July 2014, replaces IAS 39 “Financial Instruments: Recognition and Measurement”. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, which for us would have been on November 1, 2018. Early application is permitted if an entity applies all of the requirements of the standard. During 2015, OSFI issued a final advisory that requires D-SIBs to adopt IFRS 9 for their annual period beginning on November 1, 2017, one year earlier than required by the IASB. As a D-SIB, we will publish our first interim consolidated financial statements under IFRS 9 for the quarter ended January 31, 2018, except for the “own credit” provisions of IFRS 9, which we voluntarily early adopted as of November 1, 2014. As permitted, we will not re-state our prior period comparative consolidated financial statements when we adopt the requirements of the new standard. We will recognize an adjustment to our opening November 1, 2017 retained earnings and AOCI to reflect the application of the new requirements at the adoption date. IFRS 9 consists of three main sections: (1) Classification and measurement of financial instruments; (2) Impairment; and (3) Hedge accounting. The IFRS 9 classification and measurement model requires that all debt instrument financial assets that do not meet a “solely payment of principal and interest” (SPPI) test, including those that contain embedded derivatives, be classified at initial recognition as fair value through profit or loss (FVTPL). For debt instrument financial assets that meet the SPPI test, classification at initial recognition will be determined based on the business model under which these instruments are managed. Debt instruments that are managed on a “hold for trading” or “fair value” basis will be classified as FVTPL. Debt instruments that are managed on a “hold to collect and for sale” basis will be classified as FV-OCI for debt. Debt instruments that are managed on a “hold to collect” basis will be classified as amortized cost. For those debt instrument financial assets that would otherwise be classified as FV-OCI or amortized cost, an irrevocable designation can be made at initial recognition to instead measure the debt instrument at FVTPL under the FVO if doing so eliminates or significantly reduces an accounting mismatch and if certain OSFI requirements are met. All equity instrument financial assets are required to be classified at initial recognition as FVTPL unless an irrevocable designation is made to classify the instrument as FV-OCI for equities. For instruments where an irrevocable designation has been made, all realized and unrealized gains and losses are recognized in OCI with no recycling to profit and loss. Only dividends continue to be recognized in profit and loss. The classification and measurement of financial liabilities remain essentially unchanged from the current IAS 39 requirements, except that changes in fair value of FVO liabilities attributable to changes in own credit risk are to be presented in OCI, rather than profit and loss, which we early adopted as of November 1, 2014. Derivatives will continue to be measured at FVTPL under IFRS 9. The new impairment guidance sets out an expected credit loss (ECL) model applicable to all debt instrument financial assets classified as amortized cost or FV-OCI. In addition, the ECL model applies to loan commitments and financial guarantees that are not measured at FVTPL. The application of the ECL methodology to non-impaired financial instruments requires entities to recognize 12 months of expected credit losses from the date the financial instrument is first recognized, and to recognize lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial recognition. In assessing whether credit risk has increased significantly, entities are required to compare the risk of a default occurring on the financial instrument as at the reporting date, with the risk of a default occurring on the financial instrument as at the date of initial recognition. In subsequent reporting periods, if the credit risk of the financial instrument improves such that there is no longer a significant increase in credit risk since initial recognition, then entities shall revert to recognizing 12 months of expected credit losses. The ECL model under IFRS 9 also requires that lifetime expected credit losses be recognized for financial assets that are assessed as credit-impaired. Hedge accounting guidance has been changed to better align the accounting with risk management activities. As permitted, we have chosen to not adopt the IFRS 9 hedge accounting requirements and instead to retain the IAS 39 requirements, pending the completion of the IASB’s project on macro hedge accounting. IFRS 15 “Revenue from Contracts with Customers” – issued in May 2014, replaces prior guidance, including IAS 18 “Revenue” and IFRIC 13 “Customer Loyalty Programmes”. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, which for us will be on November 1, 2018. The new guidance includes a five-step recognition and measurement approach, requirements for accounting for contract costs, and enhanced quantitative and qualitative disclosure requirements. IFRS 16 “Leases” – issued in January 2016, replaces IAS 17 “Leases” and is effective for annual periods beginning on or after January 1, 2019, which for us will be on November 1, 2019. Early application is permitted if IFRS 15 has also been applied. For lessees, the new standard will result in on-balance sheet recognition for many leases that are considered operating leases under IAS 17, which will result in the gross-up of the balance sheet through the recognition of a right-of-use asset and a liability for the lease component of the future payments. Depreciation expense on the right-of-use asset and interest expense on the lease liability will replace the operating lease expense. The accounting for leases by lessors remains mostly unchanged from IAS 17. Note 33 Subsequent event Sale and lease back of certain retail properties On November 15, 2016, we entered into a definitive agreement to sell and lease back 89 retail properties located mainly in Ontario and British Columbia. The closing of the agreement is expected to occur in the first quarter of 2017, and will result in the recognition of an after-tax gain of approximately $247 million in our Retail and Business Banking SBU. 166 CIBC 2016 ANNUAL REPORT Quarterly review Condensed consolidated statement of income Unaudited, $ millions, for the three months ended Oct. 31 Jul. 31 Apr. 30 Net interest income Non-interest income Total revenue Provision for credit losses Non-interest expenses Income before income taxes Income taxes Net income $ 2,110 1,571 3,681 222 2,347 1,112 181 $ 2,113 2,023 4,136 243 2,218 1,675 234 $ 2,037 1,594 3,631 324 2,242 1,065 124 $ 2016 Jan. 31 2,106 1,481 3,587 262 2,164 1,161 179 Oct. 31 Jul. 31 Apr. 30 $ 2,043 1,440 3,483 198 2,383 $ 2,021 1,499 3,520 189 2,179 1,152 174 $ 1,895 1,499 3,394 197 2,104 1,093 182 $ 2015 Jan. 31 1,956 1,503 3,459 187 2,195 1,077 154 902 124 778 2 9 767 776 $ 931 $ 1,441 $ 941 $ 982 $ Net income (loss) attributable to non-controlling interests Preferred shareholders Common shareholders Net income attributable to equity shareholders $ 4 10 917 927 6 9 1,426 $ 1,435 $ 5 10 926 936 5 9 968 977 $ $ $ 978 $ 911 $ 923 5 11 962 973 $ 4 12 895 907 $ 3 13 907 920 $ Condensed consolidated balance sheet Unaudited, $ millions, as at Oct. 31 Jul. 31 Apr. 30 2016 Jan. 31 Oct. 31 Jul. 31 Apr. 30 2015 Jan. 31 Assets Cash and deposits with banks Securities Securities borrowed or purchased under resale agreements Loans Residential mortgages Personal and credit card Business and government Allowance for credit losses Derivative instruments Customers’ liability under acceptances Other assets Liabilities and equity Deposits Personal Business and government Bank Secured borrowings Derivative instruments Acceptances Obligations related to securities lent or sold short or under repurchase agreements Other liabilities Subordinated indebtedness Equity $ 14,165 $ 87,423 13,128 $ 84,965 11,455 $ 79,599 12,629 $ 78,503 18,637 $ 74,982 20,075 $ 72,922 17,719 $ 58,687 13,045 61,289 33,810 36,460 35,722 34,811 33,334 31,350 41,774 38,019 187,298 50,373 71,437 (1,691) 27,762 12,364 18,416 181,480 49,621 69,448 (1,780) 28,553 13,504 19,111 175,438 48,790 68,118 (1,800) 28,740 13,215 18,867 172,998 48,223 71,297 (1,790) 31,939 10,573 19,849 169,258 48,321 65,276 (1,670) 26,342 9,796 19,033 165,337 48,047 65,738 (1,711) 30,030 8,091 17,963 161,281 47,702 58,969 (1,689) 26,746 10,280 17,734 160,007 47,213 60,169 (1,727) 39,124 9,304 18,780 $ 501,357 $ 494,490 $ 478,144 $ 479,032 $ 463,309 $ 457,842 $ 439,203 $ 445,223 $ 148,081 $ 190,240 17,842 39,484 28,807 12,395 145,731 $ 187,736 16,541 39,565 30,225 13,504 142,853 $ 177,287 11,424 37,146 32,744 13,272 142,583 $ 183,423 12,638 38,590 35,702 10,579 137,378 $ 178,850 10,785 39,644 29,057 9,796 135,733 $ 174,987 10,892 38,913 31,883 8,091 134,319 $ 158,927 9,556 38,386 30,468 10,280 24,550 12,919 3,366 23,673 22,801 12,266 3,400 22,721 26,358 11,934 3,354 21,772 18,474 11,693 3,385 21,965 20,149 12,223 3,874 21,553 21,066 11,370 3,844 21,063 22,645 10,873 3,868 19,881 134,882 155,861 9,118 40,014 39,903 9,304 19,104 12,694 4,864 19,479 $ 501,357 $ 494,490 $ 478,144 $ 479,032 $ 463,309 $ 457,842 $ 439,203 $ 445,223 CIBC 2016 ANNUAL REPORT 167 Select financial measures Unaudited, as at or for the three months ended Oct. 31 Jul. 31 Apr. 30 2016 Jan. 31 Oct. 31 Jul. 31 Apr. 30 2015 Jan. 31 Return on common shareholders’ equity Return on average assets Average common shareholders’ equity ($ millions) Average assets ($ millions) Average assets to average common equity Capital and leverage CET1 ratio Tier 1 capital ratio Total capital ratio Leverage ratio Net interest margin Efficiency ratio Common share information Unaudited, as at or for the three months ended Average shares outstanding (thousands) Per share – basic earnings – diluted earnings – dividends – book value (1) Share price (2) – high – low – close 16.8 % 0.70 % 26.8 % 1.12 % 18.0 % 0.76 % 18.1 % 0.79 % 15.1 % 0.65 % 20.4 % 0.85 % 19.9 % 0.83 % 19.9 % 0.84 % $ 21,763 $ 527,702 24.2 $ 21,198 $ 511,925 24.1 $ 20,899 $ 502,408 24.0 $ 21,233 $ 494,379 23.3 $ 20,122 $ 476,700 23.7 $ 18,733 $ 457,774 24.4 $ 18,437 $ 448,912 24.3 $ 18,123 $ 437,701 24.2 11.3 % 12.8 % 14.8 % 4.0 % 1.59 % 63.8 % 10.9 % 12.4 % 14.4 % 3.9 % 1.64 % 53.6 % 10.4 % 11.9 % 13.9 % 3.8 % 1.65 % 61.7 % 10.6 % 12.1 % 14.2 % 3.8 % 1.69 % 60.3 % 10.8 % 12.5 % 15.0 % 3.9 % 1.70 % 68.4 % 10.8 % 12.5 % 15.0 % 3.9 % 1.75 % 61.9 % 10.8 % 12.6 % 15.3 % 3.9 % 1.73 % 62.0 % 10.3 % 12.1 % 15.0 % 3.8 % 1.77 % 63.5 % Oct. 31 395,181 Jul. 31 394,753 Apr. 30 394,679 2016 Jan. 31 Oct. 31 Jul. 31 396,927 397,253 397,270 $ $ 2.32 2.32 1.21 56.59 104.46 97.51 100.50 $ 3.61 3.61 1.21 54.54 104.19 96.84 99.19 $ 2.35 2.35 1.18 52.16 101.76 83.33 101.34 2.44 2.43 1.15 52.56 101.22 83.42 91.24 $ 1.93 1.93 1.12 51.25 102.74 86.00 100.28 $ $ 2.42 2.42 1.09 50.02 96.99 89.55 93.46 Apr. 30 397,212 2.25 2.25 1.06 47.08 97.62 89.26 96.88 $ 2015 Jan. 31 397,117 2.28 2.28 1.03 45.99 107.16 88.18 88.18 Dividend payout ratio 52.2 % 33.5 % 50.2 % 47.3 % 58.0 % 45.0 % 47.1 % 45.1 % (1) Common shareholders’ equity divided by the number of common shares issued and outstanding at end of period. (2) The high and low price during the period, and closing price on the last trading day of the period, on the TSX. 168 CIBC 2016 ANNUAL REPORT Ten-year statistical review Condensed consolidated statement of income IFRS Canadian GAAP Unaudited, $ millions, for the year ended October 31 Net interest income Non-interest income Total revenue Provision for credit losses Non-interest expenses Income (loss) before income taxes Income taxes Non-controlling interests Net income (loss) Net income (loss) attributable to non-controlling interests $ $ Preferred shareholders Common shareholders Net income (loss) attributable 2016 2015 2014 2013 2012 $ 8,366 $ 6,669 7,915 $ 5,941 7,459 $ 5,904 7,453 $ 5,252 7,326 $ 5,159 15,035 1,051 8,971 5,013 718 – 13,856 771 8,861 4,224 634 – 13,363 937 8,512 3,914 699 – 12,705 1,121 7,608 3,976 626 – 12,485 1,291 7,202 3,992 689 – 4,295 $ 3,590 $ 3,215 $ 3,350 $ 3,303 $ 20 $ 14 $ (3) $ (2) $ 9 $ 38 4,237 45 3,531 87 3,131 99 3,253 158 3,136 2011 7,062 5,373 12,435 1,144 7,486 3,805 927 – 2,878 11 177 2,690 2010 2009 2008 $ 6,204 $ 5,881 5,394 $ 4,534 5,207 $ (1,493) 12,085 1,046 7,027 4,012 1,533 27 9,928 1,649 6,660 1,619 424 21 3,714 773 7,201 (4,260) (2,218) 18 2,452 $ 1,174 $ (2,060) $ – $ – $ – $ 169 2,283 162 1,012 119 (2,179) $ $ 2007 4,558 7,508 12,066 603 7,612 3,851 524 31 3,296 – 171 3,125 to equity shareholders $ 4,275 $ 3,576 $ 3,218 $ 3,352 $ 3,294 $ 2,867 $ 2,452 $ 1,174 $ (2,060) $ 3,296 Condensed consolidated balance sheet Unaudited, $ millions, as at October 31 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 IFRS Canadian GAAP Assets Cash and deposits with banks Securities Securities borrowed or purchased $ 14,165 $ 87,423 18,637 $ 74,982 13,547 $ 59,542 6,379 $ 4,727 $ 71,984 65,334 5,142 60,295 $ 12,052 $ 77,608 7,007 $ 8,959 $ 77,576 79,171 13,747 86,500 under resale agreements 33,810 33,334 36,796 28,728 28,474 27,479 37,342 32,751 35,596 34,020 Loans Residential mortgages Personal and credit card Business and government Allowance for credit losses Derivative instruments Customers’ liability under acceptances Other assets Liabilities and equity Deposits Personal Business and government Bank Secured borrowings Derivative instruments Acceptances Obligations related to securities lent or sold short or under repurchase agreements Capital Trust securities (1) Other liabilities Subordinated indebtedness Preferred share liabilities Non-controlling interests Shareholders’ equity 187,298 50,373 71,437 (1,691) 27,762 169,258 48,321 65,276 (1,670) 26,342 157,526 47,087 56,075 (1,660) 20,680 150,938 49,213 48,207 (1,698) 19,947 150,056 50,476 43,624 (1,860) 27,039 150,509 50,586 39,663 (1,803) 28,270 12,364 18,416 9,796 19,033 9,212 16,098 9,720 14,588 10,436 14,813 9,454 14,163 93,568 46,462 38,582 (1,720) 24,682 7,684 15,780 86,152 45,677 37,343 (1,960) 24,696 8,397 18,305 90,695 42,953 39,273 (1,446) 28,644 8,848 21,237 91,664 38,334 34,099 (1,443) 24,075 8,024 13,158 $ 501,357 $ 463,309 $ 414,903 $ 398,006 $ 393,119 $ 383,758 $ 352,040 $ 335,944 $ 353,930 $ 342,178 $ 148,081 $ 137,378 $ 130,085 $ 125,034 $ 118,153 $ 116,592 117,143 4,177 51,308 28,792 9,489 190,240 17,842 39,484 28,807 12,395 125,055 4,723 52,413 27,091 10,481 134,736 5,592 49,802 19,724 9,721 148,793 7,732 38,783 21,841 9,212 178,850 10,785 39,644 29,057 9,796 $ 113,294 $ 108,324 $ 99,477 $ 127,759 5,618 – 26,489 7,684 107,209 7,584 – 27,162 8,397 117,772 15,703 – 32,742 8,848 24,550 n/a 12,919 3,366 – 201 23,472 20,149 n/a 12,223 3,874 – 193 21,360 23,764 n/a 10,932 4,978 – 164 18,619 20,313 n/a 10,862 4,228 – 175 17,819 21,259 1,678 11,076 4,823 – 170 16,197 21,730 1,594 11,704 5,138 – 164 15,927 37,893 – 12,572 4,773 – 168 15,790 43,369 – 13,693 5,157 600 174 14,275 44,947 – 13,167 6,658 600 185 13,831 91,772 125,878 14,022 – 26,688 8,249 42,081 – 13,728 5,526 600 145 13,489 (1) Commencing November 1, 2012, CIBC Capital Trust was deconsolidated. n/a Not applicable. $ 501,357 $ 463,309 $ 414,903 $ 398,006 $ 393,119 $ 383,758 $ 352,040 $ 335,944 $ 353,930 $ 342,178 CIBC 2016 ANNUAL REPORT 169 Select financial measures Unaudited, as at or for the year ended October 31 Return on equity Return on average assets Average common shareholders’ equity ($ millions) Average assets ($ millions) Average assets to average common equity Capital and leverage – Basel III CET1 ratio Tier 1 capital ratio Total capital ratio Leverage ratio Basel II Tier 1 capital ratio (1) Total capital ratio (1) Net interest margin Efficiency ratio 2016 19.9 % 0.84 % 2015 18.7 % 0.79 % IFRS 2014 18.3 % 0.78 % 2013 21.4 % 0.83 % 2012 22.2 % 0.83 % 2011 22.2 % 0.73 % 2010 19.4 % 0.71 % 2009 9.4 % 0.33 % 2008 (19.4)% (0.60)% 2007 28.7 % 1.00 % Canadian GAAP $ 21,275 $ 509,140 $ 18,857 $ 455,324 $ 17,067 $ 411,481 $ 15,167 $ 403,546 $ 14,116 $ 397,155 $ 12,145 $ 394,527 $ 11,772 $ 345,943 $ 10,731 $ 350,706 $ 11,261 $ 344,865 $ 10,905 $ 328,520 23.9 24.1 24.1 26.6 28.1 32.5 29.4 32.7 30.6 30.1 11.3 % 12.8 % 14.8 % 4.0 % n/a n/a 1.64 % 59.7 % 10.8 % 12.5 % 15.0 % 3.9 % n/a n/a 1.74 % 63.9 % 10.3 % 12.2 % 15.5 % n/a n/a n/a 1.81 % 63.7 % 9.4 % 11.6 % 14.6 % n/a n/a n/a 1.85 % 59.9 % n/a n/a n/a n/a 13.8 % 17.3 % 1.84 % 57.7 % n/a n/a n/a n/a 14.7 % 18.4 % 1.79 % 60.2 % n/a n/a n/a n/a 13.9 % 17.8 % 1.79 % 58.1 % n/a n/a n/a n/a 12.1 % 16.1 % 1.54 % 67.1 % n/a n/a n/a n/a 10.5 % 15.4 % 1.51 % n/m n/a n/a n/a n/a 9.7 % 13.9 % 1.39 % 63.1 % (1) Capital measures for fiscal year 2011 and prior fiscal years are under Canadian GAAP and have not been restated for IFRS. n/a Not applicable. n/m Not meaningful. Condensed consolidated statement of changes in equity IFRS Canadian GAAP Unaudited, $ millions, for the year ended October 31 Balance at beginning of year Adjustment for change in accounting policy Premium on purchase of common shares Premium on redemption of preferred shares Changes in share capital Preferred Common Changes in contributed surplus Changes in OCI Net income (loss) Dividends Preferred Common Non-controlling interests Other Balance at end of year 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 $ 21,553 $ 18,783 $ 17,994 $ 16,367 $ 16,091 $ 14,799 $ 14,275 $ 13,831 $ 13,489 $ 12,322 – (209) – – 213 (4) (248) 4,275 (38) (1,879) 8 2 – (9) – (31) 31 1 933 3,576 (45) (1,708) 29 (7) – (250) – (675) 29 (7) 145 3,218 (87) (1,567) (11) (6) 7 (1) (422) (180) (2) (118) – – – (30) (12) – (16) (3) 325 3,352 (99) (1,523) 5 1 (1,050) 393 (8) (435) 3,294 (128) (1,470) 8 – (400) 572 (5) (171) 2,867 (165) (1,391) (4) 1 – – – – 563 4 9 2,452 (169) (1,350) – 6 (6) (3) – – (66) (4) – – 525 178 (4) 72 1,174 (162) (1,328) – (5) 300 2,926 – 650 (2,060) (119) (1,285) – (4) (50) (5) (277) (32) (50) 92 26 (650) 3,296 (139) (1,044) – (5) $ 23,673 $ 21,553 $ 18,783 $ 17,994 $ 16,367 $ 16,091 $ 15,790 $ 14,275 $ 13,831 $ 13,489 (1) Represents the impact of adoption of IFRS 10 “Consolidated Financial Statements”. (2) Represents the impact of adoption of amendments to IAS 19 “Employee Benefits”. (3) Represents the impact of changing the measurement date for employee future benefits. (4) Represents the impact of adopting the amended Chartered Professional Accountants of Canada (CPA Canada) Emerging Issues Committee Abstract 46, “Leveraged Leases”. (5) Represents the effect of implementing the CPA Canada financial instruments standards, which provide guidance on recognition and measurement of financial instruments. 170 CIBC 2016 ANNUAL REPORT Common share information Unaudited, as at or for the year ended October 31 Average number IFRS Canadian GAAP 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 outstanding (thousands) 395,389 397,213 397,620 400,880 403,685 396,233 387,802 381,677 370,229 336,092 Per share – basic earnings (loss) – diluted earnings (loss) (1) – dividends – book value (2) $ 10.72 $ 10.70 4.75 56.59 8.89 $ 8.87 4.30 51.25 7.87 $ 7.86 3.94 44.30 8.11 $ 8.11 3.80 40.36 7.77 $ 7.76 3.64 35.83 Share price (3) – high – low – close 104.46 83.33 100.50 107.16 86.00 100.28 107.01 85.49 102.89 88.70 74.10 88.70 78.56 68.43 78.56 6.79 6.71 3.51 32.88 85.49 67.84 75.10 $ 5.89 $ 5.87 3.48 32.17 79.50 61.96 78.23 Dividend payout ratio 44.3 % 48.4 % 50.0 % 46.8 % 46.9 % 51.7 % 59.1 % 2.65 $ 2.65 3.48 28.96 69.30 37.10 62.00 >100 % (5.89) $ (5.89) 3.48 29.40 9.30 9.21 3.11 33.31 99.81 49.00 54.66 n/m 106.75 87.00 102.00 33.4 % (1) In case of a loss, the effect of stock options potentially exercisable on diluted earnings (loss) per share will be anti-dilutive; therefore, basic and diluted earnings (loss) per share will be the same. (2) Common shareholders’ equity divided by the number of common shares issued and outstanding at end of year. (3) The high and low price during the year, and closing price on the last trading day of the year, on the TSX. n/m Not meaningful. Dividends on preferred shares(1) Unaudited, for the year ended October 31 Class A Series 18 Series 19 Series 23 Series 24 Series 25 Series 26 Series 27 Series 28 Series 29 Series 30 Series 31 Series 32 Series 33 Series 35 Series 37 Series 39 Series 41 Series 43 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 $ – – – – – – – – – – – – – – – 0.9750 0.9375 0.9000 $ – – – – – – 0.3500 – 0.6750 – – – – – – 0.9750 0.8203 0.5764 $ – – – – – 1.4375 1.4000 – 1.3500 – – – 1.0031 0.8125 1.2188 0.3793 – – $ – – – – – 1.4375 1.4000 – 1.3500 – – – 1.3375 1.6250 1.6250 – – – $ 1.3694 – – – – 1.4375 1.4000 – 1.3500 – 0.2938 0.5625 1.3375 1.6250 1.6250 – – – $ 1.3750 – – – – 1.4375 1.4000 0.0400 1.3500 0.9000 1.1750 1.1250 1.3375 1.6250 1.6250 – – – $ 1.3750 1.2375 1.3250 – – 1.4375 1.4000 0.0800 1.3500 1.2000 1.1750 1.1250 1.3375 1.6250 1.6250 – – – $ 1.3750 1.2375 1.3250 – – 1.4375 1.4000 0.0800 1.3500 1.2000 1.1750 1.1250 1.5271 1.1909 1.0607 – – – $ 1.3750 1.2375 1.3250 – – 1.4375 1.4000 0.0800 1.3500 1.2000 1.1750 1.1250 – – – – – – $ 1.3750 1.2375 1.3250 0.3750 1.1250 1.4375 1.4000 0.0800 1.3500 1.2000 1.1298 0.7995 – – – – – – (1) The dividends are adjusted for the number of days during the year that the share is outstanding at the time of issuance and redemption. CIBC 2016 ANNUAL REPORT 171 Glossary Allowance for credit losses An allowance set up in the financial statements sufficient to absorb both specifically identified and inherent credit-related losses in CIBC’s portfolio of loans, acceptances, letters of credit and guarantees. This allowance can be “collective” – assessed by reviewing a portfolio of loans with similar characteristics, or “individual” – assessed by reviewing the characteristics of an individual exposure. Amortized cost The amount at which a financial asset or financial liability is measured at initial recognition minus repayments, plus or minus any unamortized origination date premiums or discounts, plus or minus any basis adjustments resulting from a fair value hedge, and minus any reduction (directly or through the use of an allowance account) for impairment or uncollectability. The amount of a financial asset or liability measured at initial recognition is the cost of the financial asset or liability including capitalized transaction costs and deferred fees. Assets under administration (AUA) Assets administered by CIBC that are beneficially owned by clients and are, therefore, not reported on the consolidated balance sheet. Services provided by CIBC are of an administrative nature, such as safekeeping of securities, collection of investment income, and the settlement of purchase and sale transactions. In addition, AUM amounts are included in the amounts reported under AUA. Assets under management (AUM) Assets managed by CIBC that are beneficially owned by clients and are, therefore, not reported on the consolidated balance sheet. The service provided in respect of these assets is discretionary portfolio management on behalf of the clients. Average interest-earning assets Average interest-earning assets include interest-bearing deposits with banks, securities, cash collateral on securities borrowed or securities purchased under resale agreements, and loans net of allowances. Basis point One-hundredth of a percentage point (0.01%). Collateral Assets pledged to secure loans or other obligations, which are forfeited if the obligations are not repaid. Collateralized debt obligation (CDO) Securitization of any combination of corporate debt, asset-backed securities (ABS), mortgage-backed securities or tranches of other CDOs to form a pool of diverse assets that are tranched into securities that offer varying degrees of risk and return to meet investor demand. Collateralized loan obligation Securitizations of diversified portfolios of corporate debt obligations and/or ABS that are tranched into securities that offer varying degrees of risk and return to meet investor demand. Credit derivatives A category of financial instruments that allow one party (the beneficiary) to separate and transfer the credit risk of nonpayment or partial payment to another party (the guarantor). Credit valuation adjustment (CVA) A valuation adjustment that is required to be considered in measuring fair value of over-the-counter (OTC) derivatives to recognize the risk that any given derivative counterparty may not ultimately be able to fulfill its obligations. In assessing the net counterparty credit risk exposure, we take into account credit mitigants such as collateral, master netting arrangements, and settlements through clearing houses. Current replacement cost The estimated cost of replacing an asset at the present time according to its current worth. Derivatives A financial contract that derives its value from the performance of an underlying object, such as an asset, index or interest rate. Dividend payout ratio Common dividends paid as a percentage of net income after preferred share dividends and premium on preferred share redemptions. Dividend yield Dividends per common share divided by the closing common share price. Effective interest rate method A method of calculating the amortized cost of a financial asset or financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. Efficiency ratio Non-interest expenses as a percentage of total revenue (net interest income and non-interest income). Efficiency ratio is used as a measure of productivity. 172 CIBC 2016 ANNUAL REPORT Exchange-traded derivative contracts Standardized derivative contracts (e.g., futures contracts and options) that are transacted on an organized exchange and cleared through a central clearing house, and are generally subject to standard margin requirements. Fair value The price that would be received to sell an asset, or paid to transfer a liability, between market participants in an orderly transaction in the principal market at the measurement date under current market conditions. Forward contracts A non-standardized contract to buy or sell a specified asset at a specified price and specified date in the future. Forward rate agreement An OTC forward contract that determines an interest rate to be paid or received commencing on a specified date in the future for a specified period. Full-time equivalent employees A measure that normalizes the number of full-time and part-time employees, base plus commissioned employees, and 100% commissioned employees into equivalent full-time units based on actual hours of paid work during a given period. Futures A standardized contract to buy or sell a specified commodity, currency or financial instrument of standardized quantity and quality at a specific price and date in the future. Futures contracts are traded on an exchange. Guarantees and standby letters of credit Primarily represent CIBC’s obligation, subject to certain conditions, to make payments to third parties on behalf of clients, if these clients cannot make those payments, or are unable to meet other specified contractual obligations. Hedge A transaction intended to offset potential losses/gains that may be incurred in a transaction or portfolio. Leverage exposure For the purposes of the leverage ratio, exposure is defined as on-balance sheet assets (un-weighted) less Tier 1 capital regulatory adjustments plus derivative exposures as specified under the rules, securities financing transaction exposures with a limited form of netting under certain conditions, and other off-balance sheet exposures (commitments, direct credit substitutes, forward asset purchases, standby/trade letters of credit, and securitization exposure). Leverage ratio Defined as Tier 1 capital divided by Leverage Exposure determined in accordance with guidelines issued by OSFI, which are based on Basel Committee on Banking Supervision (BCBS) standards. Loan loss ratio The ratio is calculated as the provision for credit losses on impaired loans to average loans and acceptances, net of allowance for credit losses. The provision for credit losses on impaired loans includes provision for: individual allowance, collective allowance on impaired personal loans, scored small business loans and mortgages, and net card write-offs. Mark-to-market The fair value (as defined above) at which an asset can be sold or a liability can be transferred. Net interest income The difference between interest earned on assets (such as loans and securities) and interest incurred on liabilities (such as deposits and subordinated indebtedness). Net interest margin Net interest income as a percentage of average assets. Normal course issuer bid Involves a listed company buying its own shares for cancellation through a stock exchange or other published market, from time to time, and is subject to the various rules of the exchanges and securities commissions. Notional amount Principal amount or face amount of a financial contract used for the calculation of payments made on that contract. Off-balance sheet financial instruments A financial contract that is based mainly on a notional amount and represents a contingent asset or liability of an institution. Such instruments include credit-related arrangements. Office of the Superintendent of Financial Institutions (OSFI) OSFI supervises and regulates all banks, all federally incorporated or registered trust and loan companies, insurance companies, cooperative credit associations, fraternal benefit societies, and federal pension plans in Canada. CIBC 2016 ANNUAL REPORT 173 Operating leverage Operating leverage is the difference between the year-over-year increase in revenue (on a taxable equivalent basis) and non-interest expenses. Options A financial contract under which the writer (seller) confers the right, but not the obligation, to the purchaser to either buy (call option) or sell (put option) a specified amount of an underlying asset or instrument at a specified price either at or by a specified date. Provision for credit losses An amount charged or credited to income so as to bring the allowance for credit losses to a level that is sufficient to cover individually and collectively assessed credit-related losses in CIBC’s portfolio of loans, acceptances, letters of credit and guarantees. Return on average assets or average interest-earning assets Net income expressed as a percentage of average assets or average interest-earning assets. Return on common shareholders’ equity Net income attributable to equity shareholders expressed as a percentage of average common shareholders’ equity. Securities borrowed Securities are typically borrowed to cover short positions. Borrowing requires the pledging of collateral by the borrower to the lender. The collateral may be cash or a highly rated security. Securities lent Securities are typically lent to a borrower to cover their short positions. Borrowing requires the pledging of collateral by the borrower to the lender. The collateral provided may be cash or a highly rated security. Securities purchased under resale agreements A transaction where a security is purchased by the buyer and, at the same time, the buyer commits to resell the security to the original seller at a specific price and date in the future. Securities sold short A transaction in which the seller sells securities that it does not own. Initially the seller typically borrows the securities in order to deliver them to the purchaser. At a later date, the seller buys identical securities in the market to replace the borrowed securities. Securities sold under repurchase agreements A transaction where a security is sold by the seller and, at the same time, the seller commits to repurchase the security from the original purchaser at a specific price and date in the future. Structured entity (SE) Entities that have been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. Swap contracts A financial contract in which counterparties exchange a series of cash flows based on a specified notional amount over a specified period. Taxable equivalent basis (TEB) The gross up tax-exempt revenue on certain securities to a TEB basis. There is an equivalent offsetting adjustment to the income tax expense. Total shareholder return The total return earned on an investment in CIBC’s common shares. The return measures the change in shareholder value, assuming dividends are reinvested in additional shares. Risk and capital glossary Advanced internal ratings-based (AIRB) approach for credit risk Internal models based on historical experience of key risk assumptions such as probability of default (PD), loss given default (LGD) and exposure at default (EAD) are used to compute the capital requirements subject to OSFI approval. A transitional capital floor based on Basel I standards is also calculated by banks under the AIRB approach for credit risk and an adjustment to risk-weighted assets (RWAs) may be required as prescribed by OSFI. Advanced measurement approach (AMA) for operational risk A risk-sensitive approach to calculating the capital charge for operational risk based on internal risk measurement models, using a combination of quantitative and qualitative risk measurement techniques. Asset/liability management (ALM) The practice of managing risks that arise from mismatches between the assets and liabilities, mainly in the non-trading areas of the bank. Techniques are used to manage the relative duration of CIBC’s assets (such as loans) and liabilities (such as deposits), in order to minimize the adverse impact of changes in interest rates. Bank exposures All direct credit risk exposures to deposit-taking institutions and regulated securities firms, and exposures guaranteed by those entities. 174 CIBC 2016 ANNUAL REPORT Business and government portfolio A category of exposures that includes lending to businesses and governments, where the primary basis of adjudication relies on the determination and assignment of an appropriate risk rating, that reflects the credit risk of the exposure. Central counterparties Central counterparties, also known as clearing houses, place themselves between the buyer and seller of an original trade through the process of novation and become the counterparty for the novated transaction. Common Equity Tier 1 (CET1), Tier 1 and Total capital ratios CET1, Tier 1 and total regulatory capital, divided by RWAs, as defined by OSFI’s Capital Adequacy Requirements Guideline, which is based on BCBS standards. During the period beginning in the third quarter of 2014 to the fourth quarter of 2018, the calculation of CIBC’s CET1, Tier 1 and Total capital ratios will be based on different levels of RWAs. This occurs because of the option CIBC chose for the phase-in of the CVA capital charge. Corporate exposures All direct credit risk exposures to corporations, partnerships and proprietorships, and exposures guaranteed by those entities. Credit risk The risk of financial loss due to a borrower or counterparty failing to meet its obligations in accordance with contractual terms. Drawn exposure The amount of credit risk exposure resulting from loans already advanced to the customer. Economic capital Economic capital provides a framework to evaluate the returns of each SBU, commensurate with risk assumed. Economic capital is a non-GAAP risk measure 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. Economic profit A non-GAAP risk-adjusted performance measure used for measuring economic value added. It is calculated as earnings of each business less a charge for the cost of capital. Exposure at default (EAD) An estimate of the amount of exposure to a customer at the event of, and at the time of, default. Incremental risk charge A capital charge applied in addition to market risk capital specifically to cover default and migration risk in unsecuritized credit assets of varying liquidity held in the trading book. Internal Capital Adequacy Assessment Process A framework and process designed to provide a comprehensive view on capital adequacy, as defined by Pillar II of the Basel 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. Internal models approach for market risk Models, which have been developed by CIBC and approved by OSFI, for the measurement of risk and regulatory capital in the trading portfolio for general market risk, debt specific risk, and equity specific risk. Internal ratings based approach for securitization exposures Capital calculation method for securitizations available to the banks approved to use IRB approach for underlying exposures securitized. IRB for securitization comprises several calculation approaches (Ratings-Based, Supervisory Formula, Internal Assessment Approach). Liquidity coverage ratio (LCR) Derived from the BCBS’ Basel III framework and incorporated into OSFI’s Liquidity Adequacy Requirements (LAR), the liquidity Coverage Ratio (LCR) is a liquidity standard that aims to ensure that an institution has an adequate stock of unencumbered High Quality Liquid Assets (HQLA) that consists of cash or assets that can be converted into cash at little or no loss of value in private markets, to meet its liquidity needs for a 30 calendar day liquidity stress scenario. Liquidity risk The risk of having insufficient cash or its equivalent in a timely and cost-effective manner to meet financial obligations as they come due. Loss given default (LGD) An estimate of the amount of exposure to a customer that will not be recovered following a default by that customer, expressed as a percentage of the exposure at default. Market risk The risk of economic financial loss in our trading and non-trading portfolios from adverse changes in underlying market factors, including interest rates, foreign exchange rates, equity market prices, commodity prices, credit spreads and customer behaviour for retail products. Master netting agreement An industry standard agreement designed to reduce the credit risk of multiple transactions with a counterparty through the creation of a legal right of offset of exposures in the event of a default by that counterparty and through the provision for net settlement of all contracts through a single payment. CIBC 2016 ANNUAL REPORT 175 Operational risk The risk of loss arising from people, inadequate or failed internal processes, and systems or from external events. Other off-balance sheet exposure The amount of credit risk exposure resulting from the issuance of guarantees and letters of credit. Other retail This exposure class includes all loans other than qualifying revolving retail and real estate secured personal lending, that are extended to individuals and small businesses under the regulatory capital reporting framework. Over-the-counter derivatives exposure The amount of credit risk exposure resulting from derivatives that trade directly between two counterparties, rather than through exchanges. Probability of default (PD) An estimate of the likelihood of default for any particular customer which occurs when that customer is not able to repay its obligations as they become contractually due. Qualifying revolving retail This exposure class includes credit cards, unsecured lines of credit and overdraft protection products extended to individuals. Under the standardized approach, these exposures would be included under “other retail”. Real estate secured personal lending This exposure class includes residential mortgages and home equity lines of credit extended to individuals. Regulatory capital Basel III regulatory capital, as defined by OSFI’s Capital Adequacy Requirements Guideline, is comprised of Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) and Tier 2 capital. CET1 capital includes common shares, retained earnings, AOCI (excluding AOCI relating to cash flow hedges and changes to FVO liabilities attributable to changes in own credit risk) and qualifying instruments issued by a consolidated banking subsidiary to third parties, less regulatory adjustments for items such as goodwill and other intangible assets, deferred tax assets, net assets related to defined benefit pension plans, and certain investments. AT1 capital primarily includes non-viability contingent capital (NVCC) preferred shares, qualifying instruments issued by a consolidated subsidiary to third parties, and non-qualifying innovative Tier 1 notes which are subject to phase-out rules for capital instruments. Tier 1 capital is comprised of CET1 plus AT1. Tier 2 capital includes NVCC subordinated indebtedness, non-qualifying subordinated indebtedness subject to phase-out rules for capital instruments, eligible collective allowance under the standardized approach, and qualifying instruments issued by a consolidated subsidiary to third parties. Total capital is comprised of Tier 1 capital plus Tier 2 capital. Under Basel III, qualifying regulatory capital instruments must be capable of absorbing loss at the point of non-viability of the financial institution; non-qualifying capital instruments are excluded from regulatory capital at a rate of 10% per annum commencing January 1, 2013 through to January 1, 2022. Repo-style transactions exposure The amount of credit risk exposure resulting from our securities bought or sold under resale agreements, as well as securities borrowing and lending activities. Reputation risk The risk of negative publicity regarding CIBC’s business conduct or practices which, whether true or not, could significantly harm CIBC’s reputation as a leading financial institution, or could materially and adversely affect CIBC’s business, operations, or financial condition. Retail portfolios A category of exposures that primarily includes consumer but also small business lending, where the primary basis of adjudication relies on credit scoring models. Risk-weighted assets (RWAs) RWAs consist of three components: (i) RWAs for credit risk are calculated using the AIRB and standardized approaches. The AIRB RWAs are calculated using PDs, LGDs, EADs, and in some cases maturity adjustment, while the standardized approach applies risk weighting factors specified in the OSFI guidelines to on- and off- balance sheet exposures; (ii) RWAs for market risk in the trading portfolio are based on the internal models approved by OSFI with the exception of the RWAs for traded securitization assets where we are using the methodology defined by OSFI; and (iii) RWAs for operational risk relating to the risk of losses from inadequate or failed internal processes, people and systems or from external events are calculated under the AMA and standardized approaches. During the period beginning in the third quarter 2014 to the fourth quarter of 2018, CET1 capital RWA, Tier 1 capital RWA, and Total capital RWA, will differ due to the phase-in of the CVA capital charge. 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. The capital floor is determined by comparing a capital requirement calculated by reference to Basel I against the Basel III calculation, as specified by OSFI. Any shortfall in the Basel III capital requirement compared with the Basel I floor is added to RWAs. Securitization The process of selling assets (normally financial assets such as loans, leases, trade receivables, credit card receivables or mortgages) to trusts or other SEs. A SE normally issues securities or other forms of interest to investors and/or the asset transferor, and the SE uses the proceeds of the issue of securities to purchase the transferred assets. The SE will generally use the cash flows generated by the assets to meet the obligations under the securities or other interests issued by the SE, which may carry a number of different risk profiles. Sovereign exposures All direct credit risk exposures to governments, central banks and certain public sector entities, and exposures guaranteed by those entities. 176 CIBC 2016 ANNUAL REPORT Standardized approach for credit risk Applied to exposures when there is not sufficient information to allow for the AIRB approach for credit risk. Credit risk capital requirements are calculated based on a standardized set of risk weights as prescribed in the Basel Accord. The standardized risk weights are based on external credit assessments, where available, and on other risk related factors, including export credit agencies, exposure asset class, collateral, etc. Standardized approach for operational risk Capital is based on prescribed percentages that vary by business activity and is applied to the three-year average gross income. Strategic risk The risk of ineffective or improper implementation of business strategies, including mergers and acquisitions. It includes the potential financial loss due to the failure of organic growth initiatives or failure to respond appropriately to changes in the business environment. Stressed Value-at-Risk (VaR) A VaR calculation using a one-year observation period related to significant losses for the given portfolio at a specified level of confidence and time horizon. Structural foreign exchange risk Structural foreign exchange risk is primarily the risk inherent in net investment in foreign operations due to changes in foreign exchange rates. Structural interest rate risk Structural interest rate risk (also known as interest rate risk in the banking book) is the risk primarily arising due to mismatches in assets and liabilities, inherent in origination businesses like lending and deposits and in activities of domestic and foreign subsidiaries. Undrawn exposures The amount of credit risk exposure resulting from loans that have not been advanced to a customer, but which a customer may be entitled to draw in the future. Value-at-Risk Generally accepted risk measure that uses statistical models to estimate the distribution of possible returns on a given portfolio at a specified level of confidence and time horizon. CIBC 2016 ANNUAL REPORT 177 Shareholder information Fiscal Year November 1st to October 31st Key Dates Reporting dates 2017 First quarter results – Thursday, February 23, 2017 Second quarter results – Thursday, May 25, 2017 Third quarter results – Thursday, August 24, 2017 Fourth quarter results – Thursday, November 30, 2017 Annual Meeting of Shareholders 2017 CIBC’s Annual Meeting of Shareholders will be held on Thursday, April 6, 2017, at 9:30 a.m. (Eastern Daylight Time) in Ottawa at the Shaw Centre, 4th floor Trillium Ballroom, 55 Colonel By Drive, Ottawa, Ontario, Canada, K1N 9J2. Common shares of CIBC (CM) are listed on the Toronto Stock Exchange and the New York Stock Exchange. Preferred shares are listed on the Toronto Stock Exchange. Dividends Quarterly dividends were paid on CIBC common and preferred shares in 2016: Common shares Ex-dividend date Sep 26/16 Jun 24/16 Mar 23/16 Dec 23/15 Preferred shares Stock Ticker symbol Quarterly dividend Record date Sep 28/16 Jun 28/16 Mar 28/16 Dec 29/15 Series 39 CM.PR.O $0.24375 2017 dividend payment dates (Subject to approval by the CIBC Board of Directors) Record dates December 28, 2016 March 28 June 28 September 28 Payment dates January 27 April 28 July 28 October 27 Payment date Dividends per share Oct 28/16 Jul 28/16 Apr 28/16 Jan 28/16 Series 41 CM.PR.P $0.234375 $1.21 $1.21 $1.18 $1.15 Series 43 CM.PR.Q $0.22500 Number of common shares on record date 395,307,612 394,820,273 394,636,759 397,479,406 Eligible dividends CIBC designates any and all dividends paid or deemed for Canadian federal, provincial or territorial income tax purposes to be paid on or after January 1, 2006 to be “eligible dividends”, unless otherwise indicated in respect of dividends paid subsequent to this notification, and hereby notifies all recipients of such dividends of this designation. Regulatory capital Information on CIBC’s regulatory capital instruments and regulatory capital position may be found at www.cibc.com; About CIBC; Investor Relations; Regulatory Capital Instruments. Credit ratings Credit rating information can be found on page 71 in this report. Shareholder investment plan All Canadian and U.S. resident registered holders of CIBC common shares and designated Class A preferred shares may participate in one or more of the following options and pay no brokerage commissions or service charges: Dividend reinvestment option – Canadian residents may have dividends reinvested in additional CIBC common shares. Share purchase option – Canadian residents may purchase up to $50,000 of additional CIBC common shares during the fiscal year. Stock dividend option – U.S. residents may elect to receive stock dividends on CIBC common shares. Further information is available through CST Trust Company and on the CIBC website at www.cibc.com. Transfer agent and registrar For information relating to shareholdings, shareholder investment plan, dividends, direct dividend deposit, dividend reinvestment accounts and lost certificates, or to eliminate duplicate mailings of shareholder material, please contact: CST Trust Company, P.O. Box 700, Postal Station B, Montreal, QC, H3B 3K3 416 682-3860 or 1 800 387-0825 (toll-free in Canada and the U.S.), Fax 1 888 249-6189, Email: inquiries@canstockta.com, Website: www.canstockta.com. Common and preferred shares are transferable in Canada at the offices of our agent, CST Trust Company, in Toronto, Montreal, Calgary and Vancouver. In the United States, common shares are transferable at: Computershare Inc., By Mail: P.O. Box 43078 Providence, RI 02940-3078; By Overnight Delivery: 250 Royall Street, Canton, MA 02021, 1 800 589-9836, Website: www.computershare.com/investor. 178 CIBC 2016 ANNUAL REPORT How to reach us: CIBC Head Office Commerce Court, Toronto, Ontario, Canada M5L 1A2 Telephone number: 416 980-2211 SWIFT code: CIBCCATT Website: www.cibc.com CIBC Telephone Banking Toll-free across Canada: 1 800 465-2422 Investor Relations Call: 416 861-5743 Email: investorrelations@cibc.com Corporate Secretary Call: 416 980-3096 Email: corporate.secretary@cibc.com Office of the CIBC Ombudsman Toll-free across Canada: 1 800 308-6859 Toronto: 416 861-3313 Email: ombudsman@cibc.com Communications and Public Affairs Call: 416 861-5482 Email: corpcommmailbox@cibc.com Client Care Toll-free across Canada: 1 800 465-2255 Email: client.care@cibc.com Where to find more information CIBC Annual Report 2016 Additional print copies of the Annual Report will be available in March 2017 and may be obtained by calling 416 861-5743 or emailing investorrelations@cibc.com. The Annual Report is also available online at www.cibc.com/ca/investor-relations/annual-reports.html. Des exemplaires supplémentaires du Rapport annuel seront disponibles en mars 2017 et peuvent eˆ tre commande´ s au 416 861-5743 ou par courriel à relationsinvestisseurs@cibc.com. Le Rapport annuel est aussi disponible à l’adresse www.cibc.com/ca/investor-relations/annual-reports-fr.html. CIBC Corporate Responsibility Report and Public Accountability Statement 2016 This report reviews our economic, environmental, social and governance activities over the past year and will be available in March 2017 at www.cibc.com/ca/cibc-and-you/public-account.html. Management Proxy Circular 2017 The Management Proxy Circular contains information for shareholders about CIBC’s annual meeting, including information relating to the election of CIBC’s directors, appointment of auditors and shareholder proposals, as well as other matters. The 2017 Proxy Circular will be available in March 2017 at www.cibc.com/ca/about.html. Corporate Governance CIBC’s Statement of Corporate Governance Practices describes the governance framework that guides the Board and management in fulfilling their obligations to CIBC and our shareholders. This statement and other information on Corporate Governance at CIBC, including our CIBC Code of Conduct for all employees and CIBC Code of Ethics for Directors, can be found on our corporate website at www.cibc.com/ca/inside-cibc/governance/governance-practices.html. Regulatory Filings In Canada with the Canadian Securities Administrators at www.sedar.com. In the United States with the Securities and Exchange Commission at www.sec.gov/edgar.shtml. Incorporation Canadian Imperial Bank of Commerce (CIBC) is a diversified financial institution governed by the Bank Act (Canada). CIBC was formed through the amalgamation of The Canadian Bank of Commerce and Imperial Bank of Canada in 1961. The Canadian Bank of Commerce was originally incorporated as Bank of Canada by special act of the legislature of the Province of Canada in 1858. Subsequently, the name was changed to The Canadian Bank of Commerce and it opened for business under that name in 1867. Imperial Bank of Canada was incorporated in 1875 by special act of the Parliament of Canada and commenced operations in that year. Trademarks Trademarks used in this annual report which are owned by Canadian Imperial Bank of Commerce, or a wholly owned subsidiary, in Canada and/or other countries include, the CIBC logo, CIBC Capital Markets, CIBC Capital Trust, CIBC Cube Design & “Banking that fits your life.”, CIBC eDeposit, CIBC FirstCaribbean International Bank, CIBC Foreign Cash Online, CIBC Global Money Transfer, CIBC Investor’s Edge, CIBC Miracle Day, CIBC Mobile Banking, CIBC Personal Portfolio Services, CIBC Private Wealth Management, CIBC Smart, CIBC Team Next, Atlantic Trust, FirstLine, and Wood Gundy. All other trademarks mentioned in this annual report, which are not owned by Canadian Imperial Bank of Commerce or its subsidiaries, are the property of their respective owners. CIBC 2016 ANNUAL REPORT 179 Board of Directors: Hon. John P. Manley, P.C., O.C. Chair of the Board CIBC President and Chief Executive Officer Business Council of Canada Ottawa, Ontario, Canada Joined in 2005 Brent S. Belzberg (CGC, RMC) Senior Managing Partner Torquest Partners Toronto, Ontario, Canada Joined in 2005 Patrick D. Daniel (CGC, MRCC) Past President and Chief Executive Officer Enbridge Inc. Calgary, Alberta, Canada Joined in 2009 Luc Desjardins (AC) President and Chief Executive Officer Superior Plus Corp. Toronto, Ontario, Canada Joined in 2009 Kevin J. Kelly (RMC) Corporate Director Toronto, Ontario, Canada Joined in 2013 Katharine B. Stevenson (CGC – Chair, MRCC) Corporate Director Toronto, Ontario, Canada Joined in 2011 Linda S. Hasenfratz (MRCC – Chair) Chief Executive Officer Linamar Corporation Guelph, Ontario, Canada Joined in 2004 Jane L. Peverett (AC – Chair) Corporate Director West Vancouver, British Columbia, Canada Joined in 2009 Barry L. Zubrow (RMC) President ITB LLC Far Hills, New Jersey, U.S.A. Joined in 2015 AC – Audit Committee CGC – Corporate Governance Committee MRCC – Management Resources and Compensation Committee RMC – Risk Management Committee Nanci E. Caldwell (RMC) Former Executive Vice-President and Chief Marketing Officer PeopleSoft, Inc. Woodside, California, U.S.A. Joined in 2015 Victor G. Dodig President and Chief Executive Officer CIBC Toronto, Ontario, Canada Joined in 2014 Christine E. Larsen (AC) Executive Vice President and Chief Operations Officer First Data Corporation Montclair, New Jersey, U.S.A. Joined in 2016 Martine Turcotte (CGC, RMC) Vice Chair, Québec BCE Inc. and Bell Canada Verdun, Québec, Canada Joined in 2014 Gary F. Colter (AC, CGC) President CRS Inc. Mississauga, Ontario, Canada Joined in 2003 Hon. Gordon D. Giffin (CGC, MRCC) Partner Dentons US LLP Atlanta, Georgia, U.S.A. Joined in 2001 Nicholas D. Le Pan (MRCC) Corporate Director Ottawa, Ontario, Canada Joined in 2008 Ronald W. Tysoe (RMC – Chair) Corporate Director Naples, Florida, U.S.A. Joined in 2004 180 CIBC 2016 ANNUAL REPORT Economic contribution CIBC is a major contributor to the Canadian economy and to the communities in which we live and work . We support economic growth and prosperity by creating employment opportunities, purchasing local goods and services, supporting small business, and helping our clients prosper and grow by investing in social issues that matter to Canadians. Environmental responsibility We believe that our environmental responsibilities and business objectives are connected, as a healthy and sustainable environment fosters sustainable economic growth. We recognize the impact of our activities and acknowledge the bank’s responsibility to manage environmental issues effectively. Social investment We are committed to creating an environment where all employees can reach their full potential, making a real difference in our communities where we live and work, and helping our clients prosper and grow. We are committed to causes that matter to our clients, employees and our communities. Our goal is to make a difference through corporate donations, sponsorships and the volunteer spirit of our employees. Corporate Responsibility Our commitment to corporate responsibility extends from our vision and values and is integrated into our operations and business practices. We recognize that the long-term success and viability of our business is closely linked to the conﬁ dence and trust our clients and stakeholders have in our bank. Our framework is based on our economic, environmental, social and governance (EESG) commitments and focuses on: • providing accessible and affordable banking to Canadians; • advancing the goals of small business; • creating an environment where all employees can reach their full potential; • making a real difference in our communities where we live and work; and • protecting our environment. m o c . s l l i m n a y r b . w w w s l l i m n a y r b y b d e n g i s e D Governance practices At CIBC, we believe good corporate governance is the basis for creating sustainable shareholder value. We conduct our business with honesty and integrity. We hold ourselves accountable for our actions and strive to fulﬁ ll the commitments we have made to each of our stakeholders. CIBC’s online 2016 Corporate Responsibility Report and Public Accountability Statement will be available in March 2017 at www.cibc.com CIBC is an Imagine Canada Caring Company Our Vision To be the leader in client relationships Our Values Our vision comes to life through our values of Trust, Teamwork and Accountability All paper used in the production of the CIBC 2016 Annual Report is Forest Stewardship Council® (FSC®) certiﬁ ed.

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