Canadian Imperial Bank of Commerce
Annual Report 2017

Plain-text annual report

Building the bank of the future 1 5 0 Y E A R S 2 0 1 7 A N N U A L R E P O R T CIBC – 150 Years Strong 1 8 6 7 The Canadian Bank of Commerce is founded 1 9 3 1 The new headquarters of Canadian Bank of Commerce opens in Toronto, Ontario 1 9 8 7 First Canadian bank to offer an in-house investment dealer 1 9 9 7 Became the title sponsor of what is now known as the Canadian Cancer Society CIBC Run for the Cure 2 0 1 7 Acquisition of PrivateBancorp, Inc. 1 9 9 6 Launched PC Banking 1 9 6 1 The Canadian Bank of Commerce merged with the Imperial Bank of Canada to create CIBC 1 8 9 8 Opened bank in Dawson City, Yukon to support the Klondike Gold Rush 2017 Performance at a Glance In 2017 we advanced our client-focused strategy, created value for our shareholders and delivered strong earnings growth. Financial highlights Business Mix % adjusted net income(1) For the year ended October 31 (Canadian $ in billions, except as noted) Capital Markets 23% Financial results Revenue Provision for credit losses Expenses Net income U.S. Commercial Banking and Wealth Management 5% Canadian Commercial Banking and Wealth Management 24% Financial measures (%) Reported/Adjusted efficiency ratio(1) Return on common shareholders’ equity (ROE) Net interest margin Total shareholder return Canadian Personal and Small Business Banking 48% Corporate and Other 0% Common share information Market capitalization Dividends (%) Dividend yield Reported/Adjusted dividend payout ratio(1) Canadian Personal and Small Business Banking Canadian Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management Capital Markets Corporate and Other Net income by Strategic Business Unit Canadian Personal and Small Business Banking Canadian Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management Capital Markets 2017 16.3 0.8 9.6 4.7 58.8/57.2 18.3 1.66 18.3 49.9 4.5 45.6/46.2 2.4 1.1 0.2 1.1 2016 15.0 1.1 9.0 4.3 59.7/58.0 19.9 1.64 5.2 39.9 4.7 44.3/46.4 2.2 1.0 0.1 1.0 Reported revenue ($ billions) Reported net income ($ billions) Adjusted earnings per share(1) ($) 16.3 15.0 13.9 4.7 4.3 3.6 3.6 11.11 10.22 9.45 Adjusted return on common shareholders’ equity(1) (%) 19.9 19.0 18.1 Dividend ($/share) 5.08 4.75 4.30 15 16 17 15 16 17 15 16 17 15 16 17 15 16 17 Client Experience Metric: Improvement in Gap to #1(2) 2013 to 2017 J.D. Power Canadian Retail Banking Satisfaction Study Ipsos CSI Net Promoter Score Business Mix % adjusted net income(1) 10.0 15.5 31.0 25.7 13 17 13 17 (1) For additional information, see the "Non-GAAP measures" section of the MD&A. (2) Gap to #1 is a measure of CIBC’s ranking relative to Canada’s Big 5 banks. Capital Markets 23% U.S. Commercial Banking and Wealth Management 5% Canadian Commercial Banking and Wealth Management 24% Canadian Personal and Small Business Banking 48% Corporate and Other 0% Canadian Personal and Small Business Banking Canadian Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management Capital Markets Corporate and Other Reported revenue ($ billions) Reported net income ($ billions) Adjusted earnings per share(1) ($) 16.3 15.0 13.9 4.7 4.3 3.6 3.6 11.11 10.22 9.45 Adjusted return on common shareholders’ equity(1) (%) 19.9 19.0 18.1 Dividend ($/share) 5.08 4.75 4.30 15 16 17 15 16 17 15 16 17 15 16 17 15 16 17 Balanced Scorecard Financial Target 2017 Reported Results 2017 Adjusted Results(1) Earnings per share (EPS) growth 5%+ on average, annually $11.24, up 5% from 2016 $11.11, up 9% from 2016 Return on equity (ROE) 15%+ 18.3% 18.1% Efficiency ratio 55% run rate by 2019 58.8%, an improvement of 90 basis points from 2016 57.2%, an improvement of 80 basis points from 2016 Basel III CET1 ratio Dividend payout ratio Total shareholder return Strong buffer to regulatory minimum 10.6% 40%–50% 45.6% 46.2% Outperform the S&P/TSX Composite Banks Index over a rolling five-year period CIBC – 81.6% Banks Index – 103.6% (1) For additional information, see the “Non-GAAP measures” section of the MD&A. Non-financial2017 PerformanceClient Experience • 2.5 point improvement in the gap to #1 in our peer group in the Ipsos Customer Satisfaction Index Net Promoter Score • 1 point improvement in the gap to #1 in our peer group in the J.D. Power Canadian Retail Banking Customer Satisfaction IndexResponsible Banking• CIBC conducts environmental risk assessments of our financial transactions and our Environmental Risk Management group reviewed and advised on 1,009 transactions as an integral part of our due diligence processCommunity Investment• CIBC invested more than $70 million in community organizations across Canada and the U.S. through more than 2,200 charitable donations, including over $45 million in corporate contributions and over $25 million in employee-led fundraising and givingEngaging Employees• CIBC’s Engagement score of 89 is 7 percentage points above the global financial services norm• Our Employee Net Promoter Score, which measures likelihood to recommend CIBC as a place to work, and do business, increased by 10 points over last year• Invested more than $61 million in the development of our people with a focus on our clientsGovernance & Integrity• 41% women on the CIBC Board of Directors• 100% of employees completed CIBC Mandatory Training and TestingT A B L E O F C O N T E N T S 2017 Performance at a Glance 94 Consolidated Financial Statements i 2017 Year in Review 103 Notes to the Financial Statements ii Message from the President and Chief Executive Officer Executive Team 173 Quarterly Review vii Message from the Chair of the Board 175 Ten-Year Statistical Review viii Enhanced Disclosure Task Force 178 Glossary 1 Management’s Discussion and Analysis 184 Shareholder Information 2017 Year in Review. As we executed on our client-focused strategy, we delivered sustainable earnings growth for our shareholders, including the following key milestones reached in 2017: Q 1 Q 2 Q 3 Q 4 • Began co-locating • Earned highest score for • Completed the Private Banking and CIBC Wood Gundy teams to deliver a more integrated offer for clients • CIBC hosted the 20th annual Whistler Institutional Investor Conference mobile and online banking functionality by Forrester among the Big 5 • Announced new global headquarters, CIBC Square, to be built in Toronto US$5 billion acquisition of PrivateBancorp, Inc. • Announced changes to CIBC’s senior executive leadership team • Announced new direct banking brand through Simplii Financial™ • Closed the acquisition of Geneva Advisors $50 BILLION Market Capitalization 18.3% RETURN on Equity 11 MILLION Clients Building the bank of the future CIBC 2017 ANNUAL REPORT i Message from the President and Chief Executive Officer “ We have a rich history of helping people, businesses and communities grow and prosper. We are extraordinarily proud to mark our 150th anniversary, a major milestone in our history. “ Victor G. Dodig, President and Chief Executive Officer We have made excellent progress in embedding a client-first culture at our bank, creating a strong cross-border platform and enhancing value for our shareholders. Building a relationship-focused bank For CIBC, 2017 was an important year as we proudly marked our bank’s 150th year of serving clients and strengthening our communities. Against that backdrop, we continued to keep our focus squarely on our clients. We also completed the significant acquisition of The PrivateBank and laid the groundwork for CIBC to continue to thrive and grow into the future. Our financial results reflect the successful execution of our business strategy in each of our strategic business units. CIBC reported record net income of $4.7 billion or $11.24 per share. Adjusted net income was $4.7 billion or $11.11 per share, compared with $4.1 billion or $10.22 per share a year ago. Our adjusted return on common shareholders’ equity was strong at 18.1%. Our adjusted efficiency ratio ended the year just above 57%, as a result of our efforts to drive simplification and greater efficiency, as well as to deliver revenue growth. Our reported and adjusted diluted EPS growth were 5% and 9%, respectively, reflecting solid earnings from our strategic business units. We ended the year with a strong Basel III Common Equity Tier 1 ratio of 10.6%. A client-first approach In banking, relationships matter more than ever. This lens shapes how we think about every interaction we have with our clients and how we manage and invest in our bank. In 2017 we continued to accelerate our transformation by executing on our integrated, bank-wide priorities – focusing on our clients, innovating for the future and simplifying our bank. These priorities have enabled us to invest in our business with the goal of further enhancing our relationships with our clients. ii CIBC 2017 ANNUAL REPORT President and CEO, Victor G. Dodig CIBC 2017 ANNUAL REPORT iii Message from the President and Chief Executive Officer (continued) We have stayed close to our clients to understand what’s important to them and how we can best serve them, regardless of whether that is saving for retirement, running their small business or advising a client on an acquisition. We have also been investing in our bank to ensure we are personally engaging with our clients and providing the advice they need. A good example of this is the transformation of a number of our banking centres. In 2017, we physically transformed more than 100 banking centres across Canada, creating a more modern, open concept that fosters advice-based conversations with our clients. We’ve continued to invest in our technology and digital platforms to meet and stay ahead of the evolving needs of our clients. This includes our investments in online and mobile banking to deliver industry-leading functionality, like our CIBC Global Money Transfer capability that allows clients to send money to more than 50 countries around the world, or being the first bank to offer the three leading mobile wallets. As a result of the innovations we are delivering, we have been recognized with a number of awards, like our recent ranking by Forrester as the leading mobile and online bank for the past three years. In addition, in August we also announced the launch of our new direct banking brand, Simplii Financial™. Simplii provides straightforward, no-fee daily banking and great rates for the growing number of Canadians who prefer to do their banking by telephone, online or through a mobile device. EXECUTIVE TEAM From left to right Larry Richman Senior Executive Vice-President, US Region, and President and CEO, CIBC Bank USA Kevin Patterson Senior Executive Vice-President and Group Head, Technology and Operations Sandy Sharman Senior Executive Vice-President and Chief Human Resources and Communications Officer Harry Culham Senior Executive Vice-President and Group Head, Capital Markets Victor G. Dodig President and Chief Executive Officer iv CIBC 2017 ANNUAL REPORT Our acquisition of The PrivateBank was also critical to our ability to deepen client relationships and build a strong cross-border platform that will diversify our business over time. Our acquisition of The PrivateBank was also critical to our ability to deepen client relationships and build a strong cross-border platform that will diversify our business over time. Increasingly, our clients are doing business on both sides of the border and reinforcing our U.S. platform is key in our ability to serve and grow with our clients. Our integration is well underway, with our U.S. Commercial Banking and Wealth Management business assuming the CIBC name and unifying our brand globally. We also acquired Geneva Advisors, complementing our existing private wealth management capabilities. Together with our commercial banking, wealth management and capital markets businesses, we will continue to grow our service offering and reinforce our presence in the U.S. as we go forward. Looking to the future In 2017, we made two additional announcements aimed at setting CIBC up for the future. First, we announced senior leadership changes to better enable the execution of our strategy and to develop our next generation of senior executives. Michael G. Capatides Senior Executive Vice-President, Chief Administrative Officer and General Counsel Kevin Glass Senior Executive Vice-President and Chief Financial Officer Christina Kramer Senior Executive Vice-President and Group Head, Personal and Small Business Banking Jon Hountalas Senior Executive Vice-President and Group Head, Commercial Banking and Wealth Management, Canada Laura Dottori-Attanasio Senior Executive Vice-President and Chief Risk Officer Deepak Khandelwal Senior Executive Vice-President and Group Head, Client Connectivity and Innovation CIBC 2017 ANNUAL REPORT v Message from the President and Chief Executive Officer (continued) “ I’m very proud of how we have evolved our culture, re-focused on our clients and enhanced shareholder value. “ More than 40 leaders across the bank changed responsibilities with the goal of cross-pollinating ideas and further strengthening our team. Second, we announced our new global headquarters at CIBC Square, which will be home to 15,000 members of our team. This new urban campus will provide a modern, flexible workplace that fosters collaboration, community and teamwork. At CIBC Square, our team will feel empowered and enabled to perform at their best, and deliver the full power of our bank to our clients. Stepping back to look at our journey since I took on the leadership of CIBC, I’m very proud of how we have evolved our culture, re-focused on our clients and enhanced shareholder value. We are well positioned to deliver growth for our shareholders by executing our strategy to build a relationship-focused bank. Finally, thank you to our clients for entrusting CIBC with your business. We will continue to work hard to earn your business every day as we go forward. And thank you to our shareholders for your continued support. We will work to continue to create shareholder value. To our CIBC team members, you are our greatest strength and your passion for helping our clients and communities grow and prosper inspires me every day. Thank you for your dedication. Victor G. Dodig President and Chief Executive Officer vi CIBC 2017 ANNUAL REPORT Message from the Chair of the Board Focused on the long term This year was a historic one for CIBC as we celebrated our 150th anniversary and completed one of the most significant acquisitions in our history. Throughout the year, your Board continued to provide oversight on management’s efforts to strike the right balance between strategic growth and prudent risk and expense management, while creating value for our clients and shareholders. In 2017, succession planning continued to be a priority for your Board as we focused on the long term. The broad-based leadership changes announced in June were a key step in developing CIBC’s next generation of senior leaders. By moving team members across our bank, we are enhancing the breadth of experience of our leadership team. I am pleased to report that 45% of the individuals promoted were some of CIBC’s talented women. We also reinforced the collective experience of your Board as we welcomed Michelle L. Collins as a Director. Ms. Collins brings 30 years of experience in corporate governance, investment banking and private equity. Today 41% of your directors are women, exceeding our target of having at least 30% women and at least 30% men on your Board. Having a breadth and depth of experience across Board members is critical. We continue to review the alignment of the skills and experience of your Board with CIBC’s strategic priorities and the long-term needs of the Board. This review helps us identify gaps in the Board’s collective skill set for Board renewal purposes and continuing education. In closing, I would like to warmly thank your CEO, Victor Dodig, as well as your senior management team, for their leadership in 2017. To the entire CIBC team, my sincere thanks for your passion and commitment this year, as together we build a relationship-focused bank. The Honourable John P. Manley Chair of the Board CIBC 2017 ANNUAL REPORT vii Enhanced Disclosure Task Force The Enhanced Disclosure Task Force (EDTF), established by the Financial Stability Board, released its report “Enhancing the Risk Disclosures of Banks” in 2012, which included thirty-two disclosure recommendations. The index below provides the listing of these disclosures, 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 47 Key future regulatory ratio requirements 32, 35, 71, 74 143 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 42, 43 41, 44, 45 45, 49 37, 47, 52, 58, 65, 70, 76 30 32 34 37 33 – 35, 49 31, 33 51 – 56 34 – 35 Back-testing of models 46, 52, 64, 76 143 143 29 2, 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 70 71 74 72 63 63 – 67 63 – 67 37, 65 53 – 61 51, 59, 79 51, 59 125 – 127, 168 9 – 12 105 125 51, 54 137 – 138 12, 31 (2) 51, 56 75 – 77 76 137 – 138 12, 25 158 (1) A detailed glossary of our risk and capital terminology is included on page 180. (2) Included in supplementary financial information package. viii CIBC 2017 ANNUAL REPORT 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, 2017, compared with prior years. The MD&A should be read in conjunction with the audited consolidated financial statements. Unless otherwise indicated, all financial information in this MD&A has been prepared in accordance with International Financial Reporting Standards (IFRS or GAAP) and all amounts are expressed in Canadian dollars. Certain disclosures in the MD&A have been shaded as they form an integral part of the consolidated financial statements. The MD&A is current as of November 29, 2017. 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 178 to 183 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 2017 Financial results 6 Net interest income and margin Non-interest income 7 Trading activities (TEB) 7 Provision for credit losses 8 Non-interest expenses 8 Taxes 9 9 Foreign exchange 10 Significant events 10 Fourth quarter review 11 Quarterly trend analysis 12 Review of 2016 financial performance 13 Outlook for calendar year 2018 14 Non-GAAP measures 17 Strategic business units 41 Management of risk overview 18 Canadian Personal and Small Business Banking 20 Canadian Commercial Banking and Wealth Management 23 U.S. Commercial Banking and Wealth Management 25 Capital Markets 28 Corporate and Other 29 Financial condition 29 Review of condensed consolidated balance sheet 30 Capital resources 39 Off-balance sheet arrangements 78 Accounting and control matters 78 Critical accounting policies and estimates 82 Financial instruments 82 Accounting developments 84 Regulatory developments 85 Related-party transactions 85 Policy on the Scope of Services of the Shareholders’ Auditors 85 Controls and procedures 86 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 2018”, “Strategic business units overview – Canadian Personal and Small Business Banking”, “Strategic business units overview – Canadian Commercial Banking and Wealth Management”, “Strategic business units overview – U.S. Commercial Banking and Wealth Management”, “Strategic business units overview – Capital Markets”, “Financial condition – Capital resources”, “Financial condition – Off-balance sheet arrangements”, “Management of risk – Risk overview”, “Management of risk – Top and emerging risks”, “Management of risk – Credit risk”, “Management of risk – Market risk”, “Management of risk – Liquidity risk”, “Accounting and control matters – Critical accounting policies and estimates”, “Accounting and control matters – Financial instruments”, “Accounting and control matters – Accounting developments”, “Accounting and control matters – 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 2018 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 2018” section of this report, and are subject to inherent risks and uncertainties that may be general or specific. A variety of factors, many of which are beyond our control, affect our operations, performance and results, and could cause actual results to differ materially from the expectations expressed in any of our forward-looking statements. These factors include: credit, market, liquidity, strategic, insurance, operational, reputation and legal, regulatory and environmental risk; the effectiveness and adequacy of our risk management and valuation models and processes; legislative or regulatory developments in the jurisdictions where we operate, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations issued and to be issued thereunder, the Organisation for Economic Co-operation and Development Common Reporting Standard, and regulatory reforms in the United Kingdom and Europe, the Basel Committee on Banking Supervision’s global standards for capital and liquidity reform, and those relating to bank recapitalization legislation and the payments system in Canada; amendments to, and interpretations of, risk-based capital guidelines and reporting instructions, and interest rate and liquidity regulatory guidance; the resolution of legal and regulatory proceedings and related matters; the effect of changes to accounting standards, rules and interpretations; changes in our estimates of reserves and allowances; changes in tax laws; changes to our credit ratings; political conditions and developments, including changes relating to economic or trade matters; the possible effect on our business of international conflicts and 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; 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 2017 ANNUAL REPORT 1 Management’s discussion and analysis External reporting changes The following external reporting changes were made in 2017. Prior period amounts were reclassified accordingly. The changes impacted the results of our strategic business units (SBUs), but there was no impact on prior period consolidated net income resulting from these reclassifications. Fourth Quarter Changes to our organizational structure On June 20, 2017, we announced changes to CIBC’s leadership team and organizational structure to further accelerate our transformation. As a result of these changes, our new reporting structure is as follows: Canadian Personal and Small Business Banking – provides personal and small business clients across Canada with financial advice, products and services through a team of advisors in our banking centres, as well as through our direct, mobile and remote channels. Included in Canadian Personal and Small Business Banking are the following lines of business: (cid:129) (cid:129) Personal and small business banking; and Other. Canadian Commercial Banking and Wealth Management – provides high-touch, relationship-oriented commercial and private banking, as well as wealth management services to meet the needs of middle-market companies, entrepreneurs, high-net-worth individuals and families, along with institutional clients across Canada. Included in Canadian Commercial Banking and Wealth Management are the following lines of business: (cid:129) (cid:129) Commercial banking; and Wealth management. U.S. Commercial Banking and Wealth Management – provides high-touch, relationship-oriented commercial, personal and small business banking, as well as wealth management services to meet the needs of middle-market companies, executives, entrepreneurs, high-net-worth individuals and families in the markets we serve in the U.S. Included in U.S. Commercial Banking and Wealth Management are the following lines of business: (cid:129) (cid:129) (cid:129) Commercial banking; Wealth management; and Other. 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. Included in Capital Markets are the following lines of business: (cid:129) (cid:129) (cid:129) Global markets; Corporate and investment banking; and Other. Corporate and Other – includes the following functional groups – Administration, Client Connectivity and Innovation, Finance, Human Resources and Communications, Internal Audit, Risk Management, and Technology and Operations, as well as other support groups. The expenses of these functional and support groups are generally allocated to the business lines within the SBUs. The functional and support costs of CIBC Bank USA are recognized directly in the expenses of U.S. Commercial Banking and Wealth Management. Corporate and Other also includes the results of FirstCaribbean International Bank Limited (CIBC FirstCaribbean) and other strategic investments, as well as other income statement and balance sheet items not directly attributable to the business lines. In addition to the above: (cid:129) The results of Geneva Advisors, LLC (Geneva Advisors) is included in the wealth management line of business within U.S. Commercial Banking and Wealth Management, after the close of the acquisition on August 31, 2017; The results of CIBC Investor’s Edge, previously reported in Canadian Wealth Management, are now included in Canadian Personal and Small Business Banking; and The historical results of our minority investment in American Century Investments (ACI) sold in 2016 were reclassified from Canadian Wealth Management to Corporate and Other. (cid:129) (cid:129) Changes to our transfer pricing methodology 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. Third Quarter U.S. Commercial Banking and Wealth Management On June 23, 2017, we completed the acquisition of PrivateBancorp, Inc. (PrivateBancorp) and its subsidiary, The PrivateBank and Trust Company (The PrivateBank, subsequently rebranded as CIBC Bank USA). As a result of the acquisition, a new U.S. Commercial Banking and Wealth Management SBU was created. In addition to the results of CIBC Bank USA, U.S. Commercial Banking and Wealth Management includes: (cid:129) The results of CIBC Atlantic Trust Private Wealth Management (CIBC Atlantic Trust) in the wealth management line of business, previously reported in the private wealth management line of business within the Wealth Management SBU; and The results of U.S. real estate finance in the commercial banking line of business, previously reported in the corporate and investment banking line of business within Capital Markets. (cid:129) SBU name changes Given the addition of the U.S. Commercial Banking and Wealth Management SBU, we changed the name of our Retail and Business Banking SBU to Canadian Retail and Business Banking, and the name of our Wealth Management SBU to Canadian Wealth Management. Further changes to our SBU structure were made in the fourth quarter, as noted above. 2 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Overview CIBC is a leading Canadian-based global financial institution with a market capitalization of $50 billion and a Basel III Common Equity Tier 1 (CET1) ratio of 10.6%. Through our four strategic business units – Canadian Personal and Small Business Banking, Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets – CIBC provides a full range of financial products and services to 11 million individual, small business, commercial, corporate and institutional clients in Canada, the U.S. and around the world. We have approximately 45,000 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 relationship-focused bank. We have been accelerating our transformation by concentrating on three strategic bank-wide priorities: (cid:129) (cid:129) (cid:129) Focusing on our clients – we continue to shift our culture and drive towards our vision of being the leader in client relationships. Innovating for the future – we are investing in technologies that meet our clients’ ever-evolving needs and improve their banking experience. Simplifying our bank – we are simplifying our bank to free up resources for reinvestment and make CIBC more efficient. 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. To gauge our progress towards our goal of becoming the leader in client relationships, we report our Net Promoter Score (NPS) progress against our peers. 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). Our target beginning in 2017 is average annual EPS growth of at least 5%. In 2017, we achieved our target, delivering reported and adjusted(1) diluted EPS growth of 5% and 9%, respectively. Reported diluted EPS ($) Adjusted diluted EPS(1) ($) 11.24 10.70 11.11 10.22 9.45 8.65 8.94 8.87 8.11 7.86 Going forward, we are maintaining our target to deliver average annual EPS growth of at least 5%. 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 2017, CIBC’s reported and adjusted(1) efficiency ratios improved to 58.8% and 57.2%, respectively, from 59.7% and 58.0% in 2016. Reported efficiency ratio (%) Adjusted efficiency ratio(1) (%) 63.7 63.9 59.9 59.7 58.8 56.5 59.6 59.0 58.0 57.2 13 14 15 16 17 13 14 15 16 17 CIBC has set a medium-term target of achieving a run rate efficiency ratio of 55% by 2019. Return on common shareholders’ equity(1) ROE is another key measure of shareholder value. In 2017, CIBC’s reported and adjusted(1) ROE were strong, at 18.3% and 18.1%, respectively, above our target of at least 15%. Going forward, we will continue to target a strong ROE of at least 15%. 13 14 15 16 17 13 14 15 16 17 Reported return on common shareholders’ equity (%) Adjusted return on common shareholders’ equity(1) (%) 21.4 18.3 18.7 19.9 18.3 22.9 20.9 19.9 19.0 18.1 (1) For additional information, see the “Non-GAAP measures” section. 13 14 15 16 17 13 14 15 16 17 CIBC 2017 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. Reported dividend payout ratio (%) Adjusted dividend payout ratio(1) (%) We have two shareholder return targets: 1. For many years, we have consistently delivered adjusted dividend payout ratios in the range of 40% to 50% of earnings to common shareholders. Our key criteria for considering dividend increases are our current level of payout relative to our target and our view on the sustainability of our current earnings level through the cycle. In 2017, our reported and adjusted(1) dividend payout ratios were 45.6% and 46.2%, respectively. 50.0 48.4 46.8 44.3 45.6 43.9 44.0 45.4 46.4 46.2 Going forward, we will continue to target a dividend payout ratio of 40% to 50%. 13 14 15 16 17 13 14 15 16 17 2. We also have an objective to deliver a TSR that exceeds the industry average, which we have defined as the Standard & Poor’s Ratings Services (S&P)/Toronto Stock Exchange (TSX) Composite Banks Index, over a rolling five-year period. For the five years ended October 31, 2017, CIBC delivered a TSR of 81.6%, which was below the Banks Index return over the same period of 103.6%. 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 2017, our Basel III CET1 ratio on an all-in basis was 10.6%, 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. Net promoter score The NPS is a measure of client experience and is calculated by subtracting the percentage of detractors from the percentage of promoters who respond to surveys conducted by a third party. It is a key measure of client loyalty. While there is still work to be done to achieve our goal of #1 in client experience, CIBC’s gap to the leader has narrowed from 26 points in 2013 to 16 points in 2017. For additional information, see the “Non-GAAP measures” section. (1) (2) Gap to #1 is a measure of CIBC’s ranking relative to Canada’s Big 5 banks. Rolling five-year TSR (%) 125 100 75 50 25 0 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 CIBC 81.6% S&P/TSX Composite Index 49.7% S&P/TSX Composite Banks Index 103.6% CET1 ratio (%) 11.3 10.8 10.6 10.3 9.4 13 14 15 16 17 Ipsos CSI NPS Gap to #1(2) 13 14 15 16 17 15.5 16.9 18.0 24.8 25.7 Economic and market environment CIBC operated in an environment of healthy economic growth in Canada and an improving backdrop abroad in 2017. Canada enjoyed low unemployment rates that supported an acceleration in spending and consumer credit. The housing sector and growth in mortgage credit showed some signs of cooling as the year progressed, capturing regulatory and interest rate policy decisions. Corporate credit quality improved on a rebound in oil prices and a generally healthy environment, while business loan demand grew at a somewhat slower pace. Bond market issuance activity by corporations and the federal government picked up, while equity issuance activity was lighter due to less merger and acquisition-driven activity. The U.S. economy showed steady growth and robust employment gains with somewhat slower national growth in bank lending and strong equity market gains. 4 CIBC 2017 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 (2) Loan loss ratio (3) Reported return on common shareholders’ equity Adjusted return on common shareholders’ equity (2) Net interest margin Net interest margin on average interest-earning assets Return on average assets Return on average interest-earning assets Total shareholder return Reported effective tax rate Adjusted effective tax rate (2) Common share information Per share ($) Share price ($) Shares outstanding (thousands) – basic earnings – reported diluted earnings – adjusted diluted earnings (2) – dividends – book value – high – low – closing – weighted-average basic (4)(5) – weighted-average diluted (4) – end of period (4)(5) Market capitalization ($ millions) Value measures Dividend yield (based on closing share price) Reported dividend payout ratio Adjusted dividend payout ratio (2) 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) (6)(7) Assets under management (AUM) (7) Balance sheet quality (All-in basis) and liquidity measures 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 III leverage ratio Leverage ratio exposure ($ millions) Leverage ratio Liquidity coverage ratio (LCR) (8) Other information Full-time equivalent employees 2017 (1) 2016 2015 2014 2013 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 8,977 7,303 16,280 829 9,571 5,880 1,162 4,718 19 52 4,647 4,699 58.8 % 57.2 % 0.25 % 18.3 % 18.1 % 1.66 % 1.85 % 0.87 % 0.97 % 18.30 % 19.8 % 20.3 % 11.26 11.24 11.11 5.08 66.55 119.86 97.76 113.56 412,636 413,563 439,313 49,888 4.5 % 45.6 % 46.2 % 1.71 107,571 365,558 565,264 439,706 29,238 542,365 485,837 25,393 2,192,947 221,571 203,321 203,321 203,321 $ $ $ $ $ $ $ 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 2,041,887 183,715 168,996 169,322 169,601 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 1,846,142 170,465 156,107 156,401 156,652 10.6 % 12.1 % 13.8 % 11.3 % 12.8 % 14.8 % 10.8 % 12.5 % 15.0 % $ 610,353 $ 545,480 $ 502,552 4.0 % 120 % 4.0 % 124 % 3.9 % 119 % $ $ $ $ $ $ $ $ $ $ $ $ $ 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 $ 141,250 141,446 141,739 136,747 136,747 136,747 10.3 % 12.2 % 15.5 % n/a n/a n/a 9.4 % 11.6 % 14.6 % n/a n/a n/a 44,928 43,213 44,201 44,424 43,039 Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. For additional information, see the “Non-GAAP measures” section. (1) (2) (3) The ratio is calculated as the provision for credit losses on impaired loans to average loans and acceptances, net of allowance for credit losses. (4) Excludes 2,010,890 common shares which are issued and outstanding but which have not been acquired by a third party as at October 31, 2017 (2016: nil). These shares were issued as a component of our acquisition of The PrivateBank. These shares are currently held on behalf of CIBC, and may be cancelled at CIBC’s discretion. (5) Excludes 190,285 unvested restricted shares as at October 31, 2017 (2016: nil). (6) Includes the full contract amount of AUA or custody under a 50/50 joint venture between CIBC and The Bank of New York Mellon of $1,723.9 billion as at October 31, 2017 (2016: $1,640.2 billion). (7) AUM amounts are included in the amounts reported under AUA. (8) Average for the three months ended October 31 for each respective year. n/a Not applicable. CIBC 2017 ANNUAL REPORT 5 (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) Management’s discussion and analysis 2017 Financial results Reported net income for the year was $4,718 million, compared with $4,295 million in 2016. The current year included the results of CIBC Bank USA after the close of the acquisition on June 23, 2017, which contributed $96 million to net income. Adjusted net income(1) for the year was $4,665 million, compared with $4,104 million in 2016. Reported diluted EPS for the year was $11.24, compared with $10.70 in 2016. Adjusted diluted EPS(1) for the year was $11.11, compared with $10.22 in 2016. Reported and adjusted diluted EPS for the year included the results of CIBC Bank USA after the close of the acquisition on June 23, 2017. EPS was also impacted by the issuance of CIBC common shares, as detailed in Note 3 to our consolidated financial statements. 2017 Net income was affected by the following items of note: (cid:129) (cid:129) $299 million ($245 million after-tax) gain on the sale and lease back of certain retail properties (Canadian Personal and Small Business Banking); $104 million ($73 million after-tax) in transaction and integration-related costs as well as purchase accounting adjustments(2) associated with the acquisition of The PrivateBank and Geneva Advisors ($70 million after-tax in Corporate and Other, and $3 million after-tax in U.S. Commercial Banking and Wealth Management); $45 million ($33 million after-tax) increase in legal provisions in the third quarter (Corporate and Other); $41 million ($28 million after-tax) amortization of intangible assets ($4 million after-tax in Canadian Personal and Small Business Banking, $1 million after-tax in Canadian Commercial Banking and Wealth Management, $16 million after-tax in U.S. Commercial Banking and Wealth Management, and $7 million after-tax in Corporate and Other); $98 million ($71 million after-tax) in fees and charges related to the launch of Simplii Financial and the related wind-down of President’s Choice Financial (Canadian Personal and Small Business Banking); and $18 million ($13 million after-tax) reduction in the portion of the collective allowance recognized in Corporate and Other(3) in the fourth quarter. The above items of note increased revenue by $305 million, provision for credit losses by $17 million and non-interest expenses by $259 million, and decreased income taxes by $24 million. In aggregate, these items of note increased net income by $53 million. 2016 Net income was affected by the following items of note: (cid:129) $428 million ($383 million after-tax) gain, net of related transaction costs, on the sale of our minority investment in American Century Investments (ACI) (Corporate and Other)(4); $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(3); $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 Canadian Personal and Small Business Banking, $2 million after-tax in Canadian Commercial Banking and Wealth Management, $6 million after-tax in U.S. Commercial Banking and Wealth Management, and $9 million after-tax in Corporate and Other)(4); $30 million income tax recovery due to the settlement of transfer pricing-related matters (Canadian Personal and Small Business Banking); $15 million income tax recovery arising from a change in our expected utilization of certain tax loss carryforwards, primarily due to the sale of our minority investment in ACI (Corporate and Other); and $3 million ($2 million after-tax) gain from the structured credit run-off business (Capital Markets). The above items of note increased revenue by $505 million, provision for credit losses by $149 million and non-interest expenses by $262 million, and decreased income taxes by $97 million. In aggregate, these items of note increased net income by $191 million. For additional information, see the “Non-GAAP measures” section. (1) (2) Transaction costs include legal and other advisory fees, as well as financing costs associated with: (i) pre-funding the cash component of the merger consideration; (ii) interest incurred on the obligation payable to dissenting shareholders; and (iii) changes in the fair value of contingent consideration on the Geneva Advisors acquisition. Integration costs are comprised of direct and incremental costs incurred as part of planning for integrating the businesses of The PrivateBank (subsequently rebranded as CIBC Bank USA) and Geneva Advisors with CIBC, including enabling cross-sell opportunities and expansion of services in the U.S. market, the upgrade and conversion of systems and processes, project management, integration-related travel, severance, consulting fees and marketing costs related to rebranding activities. Purchase accounting adjustments, included as items of note beginning in the fourth quarter of 2017, include the accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank, as well as the collective allowance established for new loan originations and renewals of acquired loans. (3) 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; (iii) net write-offs for the cards portfolio; and (iv) the collective allowance related to CIBC Bank USA, which are all reported in the respective SBUs. (4) Certain information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. 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 2017 (1) 2016 2015 $ 485,837 8,977 $ 445,134 8,366 $ 395,616 7,915 1.85 % 1.88 % 2.00 % (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. Net interest income was up $611 million or 7% from 2016, primarily due to volume growth across Canadian personal and commercial products, and the results of CIBC Bank USA, which included $45 million of accretion of the acquisition date fair value discount on the acquired loans, of which $31 million was included as an item of note in the fourth quarter of 2017. These factors were partially offset by lower trading income and narrower Canadian personal and commercial spreads. Net interest margin on average interest-earning assets was down three basis points due to higher average interest-earning assets, primarily driven by growth across CIBC’s businesses, partially offset by lower short-term placements in treasury. The impact of higher average interest-earning assets was partially offset by higher net interest income. Additional information on net interest income and margin is provided in the “Supplementary annual financial information” section. 6 CIBC 2017 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 $ 2017 452 843 744 463 1,034 1,573 427 349 226 143 1 252 101 695 $ 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 $ 7,303 $ 6,669 $ 5,941 (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 $634 million or 10% from 2016. Credit fees were up $106 million or 17%, primarily due to higher commercial lending volumes. Investment management and custodial fees were up $152 million or 17%, mainly due to AUM and AUA growth in our wealth management businesses. Mutual fund fees were up $111 million or 8%, primarily due to higher AUM in our Canadian wealth management business, driven by net sales of long- term mutual funds and market appreciation. Trading income was $226 million, compared with a trading loss of $88 million in 2016. See the “Trading activities (TEB)” section which follows for further details. AFS securities gains, net, were up $70 million or 96%, primarily due to higher investment portfolio gains in Capital Markets, partially offset by a gain in 2016 from the structured credit run-off business, shown as an item of note. Foreign exchange other than trading was down $115 million or 31%, as the prior year included a portion of the gain on the sale of our minority investment in ACI, shown as an item of note, partially offset by higher revenue from hedging activity. Other was down $41 million or 6%, as the prior 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. The current year included a gain on the sale and lease back of certain retail properties, shown as an item of note. Trading activities (TEB) $ millions, for the year ended October 31 Trading income (loss) consists of: Net interest income (2) Non-interest income Trading income by product line: Interest rates Foreign exchange Equities Commodities Other $ $ $ 2017 1,143 226 1,369 276 524 401 111 57 2016 (1) 2015 (1) $ $ $ 1,482 (88) 1,394 293 511 453 106 31 $ $ $ 1,314 (139) 1,175 164 471 414 78 48 $ 1,369 $ 1,394 $ 1,175 (1) Certain information has been reclassified to conform to the presentation adopted in the current year. (2) Includes taxable equivalent basis (TEB) adjustment of $298 million (2016: $474 million; 2015: $482 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 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 down $25 million or 2% from 2016, primarily due to lower equity trading income, which included lower tax-exempt income in the second half of 2017, as the new rules eliminating the tax deductibility of certain dividends became fully effective (see “Taxes” section for further details), and lower interest rate trading income. The decrease was partially offset by higher trading income from U.S. real estate finance, foreign exchange, and the structured credit run-off business. CIBC 2017 ANNUAL REPORT 7 Management’s discussion and analysis Provision for credit losses $ millions, for the year ended October 31 Canadian Personal and Small Business Banking Canadian Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management Capital Markets Corporate and Other 2017 (1) 2016 (2) 2015 (2) $ 766 16 84 (4) (33) $ 736 29 (2) 155 133 $ 829 $ 1,051 $ $ 664 5 11 44 47 771 Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (1) (2) 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 down $222 million or 21% from 2016. In Canadian Personal and Small Business Banking, the provision was up primarily due to higher write-offs in the card and personal lending portfolios, and higher losses in the mortgage portfolio, partially offset by lower losses in the small business lending portfolio. In Canadian Commercial Banking and Wealth Management, the provision was down primarily due to lower losses in the commercial banking portfolio. In U.S. Commercial Banking and Wealth Management, the current year included a provision for credit losses compared with a reversal of credit losses in 2016, primarily due to the establishment of a $48 million collective allowance for new loan originations and renewals of acquired loans relating to CIBC Bank USA, of which $35 million was shown as an item of note in the fourth quarter of 2017. In addition, the current year included losses in our pre- existing U.S. real estate finance portfolio. In Capital Markets, the current year included a reversal of credit losses compared with a provision for credit losses in 2016, primarily due to better performance in the oil and gas sector. The prior year also included losses in our exited European leveraged finance portfolio, shown as an item of note. In Corporate and Other, the current year included a reversal of credit losses compared with a provision for credit losses in 2016. The current year included a reduction in the collective allowance, shown as an item of note, which was net of a higher provision in the Caribbean region mainly due to the recent hurricanes. The prior year included increases in the collective allowance, shown as items of note. 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 $ 2017 (1) 2,738 1,745 715 5,198 822 1,630 317 282 229 96 997 $ 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 $ 9,571 $ 8,971 $ 8,861 (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. Non-interest expenses increased by $600 million or 7% from 2016. Employee compensation and benefits increased by $216 million or 4%, primarily due to the inclusion of the results of CIBC Bank USA and higher performance-based compensation. The increase was partially offset by restructuring charges in 2016, primarily relating to employee severance, shown as an item of note. Computer, software and office equipment increased by $232 million or 17%, primarily due to higher spending on strategic initiatives. Other increased by $67 million or 7%, primarily due to fees and charges related to the launch of Simplii Financial and the related wind-down of President’s Choice Financial, and transaction and integration-related costs associated with the acquisition of The PrivateBank, both shown as items of note. The increase was partially offset by lower legal provisions, shown as items of note in both years. 8 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Taxes $ millions, for the year ended October 31 Income taxes Indirect taxes (2) 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 2017 (1) $ 1,162 $ 390 242 61 72 765 2016 718 361 239 38 71 709 2015 634 $ 342 239 39 68 688 $ 1,927 $ 1,427 $ 1,322 19.8 % 29.0 % 14.3 % 24.9 % 15.0 % 26.9 % Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (1) (2) Certain amounts are based on a paid or payable basis and do not factor in capitalization and subsequent amortization. Income taxes include those imposed on CIBC as a Canadian legal entity, as well as on our domestic and foreign subsidiaries. Indirect taxes comprise GST, HST and sales, payroll, capital, property and business taxes. Indirect taxes are included in non-interest expenses. Total income and indirect taxes were up $500 million from 2016. Income tax expense was $1,162 million, compared with $718 million in 2016, largely due to substantially lower tax-exempt income and higher income in the current year. In addition, 2016 included income tax recoveries from the settlement of transfer pricing-related matters, and a change in our expected utilization of certain tax loss carryforwards, shown as items of note. Indirect taxes were up $56 million, mainly due to higher sales taxes, and higher capital taxes due to the acquisition of The PrivateBank. In prior years, the Canada Revenue Agency (CRA) issued reassessments disallowing the deduction of approximately $3 billion of the 2005 Enron settlement payments and related legal expenses. The matter is currently in litigation. The Tax Court of Canada trial on the deductibility of the Enron payments is expected to commence in 2018. 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 $198 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 eliminated the tax deductibility of Canadian inter-corporate dividends for Canadian corporations in certain circumstances. The rules became law effective as of November 1, 2015, with a set of transition rules that applied between November 1, 2015 and April 30, 2017. The new rules have resulted in a higher effective tax rate, as the tax deductibility of certain Canadian corporate dividends is diminished. In June 2016, the CRA reassessed CIBC 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”. In May 2017, the CRA reassessed CIBC additional income tax of approximately $180 million related to the tax deductibility of dividends during the 2012 taxation year. The circumstances of the dividends subject to the reassessments are similar to those prospectively addressed by the rules in the 2015 Canadian federal budget. It is possible that subsequent years may be reassessed for similar activities. CIBC is confident that its tax filing positions were appropriate and intends to defend itself vigorously. Accordingly, no amounts have been accrued in the consolidated financial statements. The statutory income tax rate applicable to CIBC as a legal entity was 26.5% in 2017. 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 2017 (1) vs. 2016 $ (36) (1) (20) (1) (14) $ 2016 vs. 2015 117 8 61 – 48 $ 2015 vs. 2014 281 7 145 5 124 $ (0.03) (0.03) $ 0.12 0.12 $ 0.31 0.31 (1.3) % 5.6 % 14.7 % (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details CIBC 2017 ANNUAL REPORT 9 Management’s discussion and analysis Significant events Acquisition of PrivateBancorp, Inc. On June 23, 2017, we completed the acquisition of PrivateBancorp, Inc. (PrivateBancorp) and its subsidiary, The PrivateBank and Trust Company (The PrivateBank, subsequently rebranded as CIBC Bank USA) for total consideration of US$5.0 billion (C$6.6 billion). This acquisition expands our U.S. presence which diversifies earnings and strengthens our platform for long-term growth. The acquisition also creates a platform for CIBC to deliver high-quality middle market commercial and private banking capabilities, which advances our client-focused strategy. The results of the acquired business have been consolidated from the date of close and are included in the U.S. Commercial Banking and Wealth Management SBU. For additional information, see Note 3 to our consolidated financial statements. Acquisition of Geneva Advisors On August 31, 2017, we completed the acquisition of Geneva Advisors, LLC (Geneva Advisors), an independent private wealth management firm with AUM of US$8.4 billion (C$10.4 billion), for total estimated consideration of US$179 million (C$224 million). This acquisition will expand CIBC’s private wealth management client base and investment management capabilities in the U.S. The results of the acquired business have been consolidated from the date of close and are included in the U.S. Commercial Banking and Wealth Management SBU. For additional information, see Note 3 to our consolidated financial statements. Launch of Simplii Financial and wind-down of President’s Choice Financial consumer banking offer On August 16, 2017, we announced both the launch of Simplii Financial and the wind-down of our President’s Choice Financial branded consumer banking offer with Loblaw Companies Limited (Loblaw). Under the terms of the wind-down agreement negotiated with Loblaw, CIBC is required to pay certain fees to Loblaw. In addition, as a result of the agreement, we incurred ancillary asset impairment and severance costs, as well as ongoing project- related costs. In aggregate, CIBC incurred fees and charges of $98 million ($71 million after-tax) in the fourth quarter of 2017. Aeroplan developments Air Canada announced on May 11, 2017, that it will not be renewing its exclusive Aeroplan partnership with Aimia Inc. (Aimia) upon the expiry of the contract in 2020. CIBC’s Aeroplan clients are not immediately impacted by this announcement, as Aeroplan members may continue to collect miles and redeem them for Air Canada travel until Aimia’s contract with Air Canada expires in 2020. Lease of new premises On April 12, 2017, we announced that we had entered into a lease agreement to become the anchor tenant at a new office complex in downtown Toronto. We have agreed to lease up to 1.75 million square feet of total office space in two buildings to be constructed at the site within the next six years. The aggregate future minimum lease commitments related to the lease, which begins in 2020, are $2.3 billion. Sale and lease back of certain retail properties During the first quarter, we sold and leased back 89 retail properties located mainly in Ontario and British Columbia, and recognized a gain of $299 million ($245 million after-tax) in our Canadian Personal and Small Business Banking SBU. Fourth quarter review $ millions, except per share amounts, for the three months ended 2017 2016 Revenue (1) Canadian Personal and Small Business Banking Canadian Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management (2) 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 Oct. 31 Jul. 31 Apr. 30 Jan. 31 Oct. 31 Jul. 31 Apr. 30 Jan. 31 $ 2,093 922 422 622 210 $ 4,269 $ 2,464 1,805 4,269 229 2,570 1,470 306 $ 1,164 $ $ $ 5 1,159 2.60 2.59 $ 2,039 903 239 679 244 $ 4,104 $ 2,276 1,828 4,104 209 2,452 1,443 346 $ 1,097 $ $ $ 4 1,093 2.61 2.60 $ 1,937 886 102 692 81 $ 3,698 $ 2,095 1,603 3,698 179 2,275 1,244 194 $ 1,050 $ 2,303 879 113 830 84 $ 4,209 $ 2,142 2,067 4,209 212 2,274 1,723 316 $ 1,407 $ $ $ 5 1,045 2.59 2.59 $ $ $ 5 1,402 3.50 3.50 $ 2,005 846 106 626 98 $ 3,681 $ 2,110 1,571 3,681 222 2,347 1,112 181 931 $ $ $ $ 4 927 2.32 2.32 $ 1,946 830 93 772 495 $ 4,136 $ 2,113 2,023 4,136 243 2,218 1,675 234 $ 1,441 $ $ $ 6 1,435 3.61 3.61 $ 1,879 800 83 719 150 $ 3,631 $ 2,037 1,594 3,631 324 2,242 1,065 124 941 $ $ $ $ 5 936 2.35 2.35 $ 1,918 796 103 639 131 $ 3,587 $ 2,106 1,481 3,587 262 2,164 1,161 179 982 $ $ $ $ 5 977 2.44 2.43 (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 and U.S. Commercial Banking and Wealth Management revenue and income taxes are reported on a TEB basis with an equivalent offset in the revenue and income taxes of Corporate and Other. Compared with Q4/16 Net income for the quarter was $1,164 million, up $233 million or 25% from the fourth quarter of 2016. Net interest income was up $354 million or 17%, primarily due to the inclusion of the results of CIBC Bank USA, which included $31 million of accretion of the acquisition date fair value discount on the acquired loans, included as an item of note, and volume growth across Canadian personal and commercial products, partially offset by lower trading income. Non-interest income was up $234 million or 15%, primarily due to trading income compared with trading losses in the same quarter last year, higher investment management and custodial fees driven by higher average AUM and AUA, and higher credit fees and investment portfolio gains. 10 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Provision for credit losses was up $7 million or 3% from the same quarter last year. In Canadian Personal and Small Business Banking, the provision was down due to lower bankruptcies and write-offs in the card portfolio, and lower losses in the small business banking portfolio. In Canadian Commercial Banking and Wealth Management, the provision was down primarily due to lower losses in the commercial banking portfolio. In U.S. Commercial Banking and Wealth Management, the provision was up primarily due to the inclusion of the results of CIBC Bank USA, including the establishment of a $35 million collective allowance for new loan originations and renewals of acquired loans, shown as an item of note. In Capital Markets, the provision was comparable with the same quarter last year. In Corporate and Other, the current quarter included a reversal of credit losses compared with a provision for credit losses in the same quarter last year, primarily due to a reduction in the collective allowance in the current quarter, shown as an item of note, which was net of a higher provision in the Caribbean region mainly due to the recent hurricanes. Non-interest expenses were up $223 million or 10%, primarily due to the inclusion of the results of CIBC Bank USA. In addition, the current quarter included higher spending on strategic initiatives including fees and charges related to the launch of Simplii Financial and the related wind-down of President’s Choice Financial, as well as transaction and integration-related costs associated with the acquisition of The PrivateBank, both shown as items of note. The increase was partially offset by restructuring charges in the same quarter last year, primarily relating to employee severance, shown as an item of note. Income tax expense was up $125 million or 69%, primarily due to substantially lower tax-exempt income and higher income. Compared with Q3/17 Net income for the quarter was up $67 million or 6% from the prior quarter. Net interest income was up $188 million or 8%, primarily due to a full quarter of net interest income from CIBC Bank USA, and volume growth and wider spreads in Canadian Personal and Small Business Banking. Non-interest income was down $23 million or 1%, primarily due to lower trading income, partially offset by higher investment management and custodial fees driven by higher average AUM and AUA. Provision for credit losses was up $20 million or 10% from the prior quarter. In Canadian Personal and Small Business Banking, the provision was down mainly due to lower bankruptcies and write-offs in the card and personal lending portfolios. In Canadian Commercial Banking and Wealth Management, the current quarter included a provision for credit losses compared with a reversal of credit losses in the prior quarter, mainly due to higher losses and lower reversals in the commercial banking portfolio. In U.S. Commercial Banking and Wealth Management, the provision was up primarily due to a higher collective allowance established for new loan originations and renewals of acquired loans, and new impairments in CIBC Bank USA, partially offset by lower losses in our pre-existing U.S. real estate finance portfolio. In Capital Markets, the provision was comparable with the prior quarter. In Corporate and Other, the provision was comparable with the prior quarter, as a higher reduction in the collective allowance was offset by higher losses in CIBC FirstCaribbean. Non-interest expenses were up $118 million or 5%, primarily due to higher spending on strategic initiatives, including the fees and charges related to the launch of Simplii Financial noted above, and a full quarter of non-interest expenses from CIBC Bank USA. The increase was partially offset by legal provisions in the prior quarter, shown as an item of note. Income tax expense was down $40 million or 12%, primarily due to higher tax-exempt income and the impact of changes in the proportion of income subject to varying rates of tax in different jurisdictions. Quarterly trend analysis Our quarterly results are modestly affected by seasonal factors. The second quarter has fewer days as compared with the other quarters, generally leading to lower earnings. The summer months (July – third quarter and August – fourth quarter) typically experience lower levels of market activity, which affects our brokerage, investment management, and Capital Markets activities. Revenue Canadian Personal and Small Business Banking revenue has benefited from volume growth, partially offset by the continued low interest rate environment, and attrition in our exited FirstLine mortgage broker business. The first quarter of 2017 included a gain on the sale and lease back of certain retail properties. Canadian Commercial Banking and Wealth Management has benefited from strong volume growth in deposits and loans, and continued growth in AUA and AUM as a result of market appreciation and positive net sales of long-term mutual funds. This was partially offset by a sustained low interest rate environment. U.S. Commercial Banking and Wealth Management includes the revenue of CIBC Bank USA after the close of the acquisition on June 23, 2017. Capital Markets revenue is influenced, to a large extent, by market conditions and activity in the equity derivatives business, which includes tax- exempt income. Tax-exempt income is substantially lower in the second half of 2017 versus prior quarters. The first quarter of 2017 included higher trading revenue, while the third quarter of 2016 included a gain from the structured credit run-off business. Corporate and Other includes the offset related to the TEB component of tax-exempt income reported in the revenue of Capital Markets and U.S. Commercial Banking and Wealth Management. We recognized a gain, net of related transaction costs, on the sale of our minority investment in ACI in the third quarter of 2016. The second quarter of 2016 included a gain on sale of a processing centre. We ceased recognition of income from equity-accounted associates relating to ACI following the announcement of the sale in the first quarter of 2016. 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 Canadian Personal and Small Business Banking, losses in the card and personal lending portfolios trended higher after the first quarter of 2016. In Canadian Commercial Banking and Wealth Management, the fourth quarters of 2017 and 2016 included higher losses in the commercial banking portfolio. In U.S. Commercial Banking and Wealth Management, the second half of 2017 included the results of CIBC Bank USA after the close of the acquisition on June 23, 2017. The third quarter of 2017 included losses in our pre-existing U.S. real estate finance portfolio. In Capital Markets, losses in the oil and gas sector were elevated in the first half of 2016; however performance in this sector has improved since the fourth quarter of 2016. The third quarter of 2016 had higher losses in our exited European leveraged finance portfolio. In Corporate and Other, the final three quarters of 2017 included reductions in the collective allowance. The first two quarters of 2016 included increases in the collective allowance. Non-interest expenses Non-interest expenses have fluctuated over the period largely due to changes in employee-related compensation and benefits, higher spending on strategic initiatives, and movement in foreign exchange rates. The fourth quarter of 2017 included fees and charges related to the launch of Simplii Financial and the related wind-down of President’s Choice Financial. Non-interest expenses increased in the second half of 2017, as the results of CIBC Bank USA were included after the close of the acquisition on June 23, 2017. The third quarter of 2017 and second quarter of 2016 included legal provisions in Corporate and Other, shown as items of note. The fourth quarter of 2016 included restructuring charges primarily relating to employee severance. CIBC 2017 ANNUAL REPORT 11 Management’s discussion and analysis 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. Income taxes increased in the second half 2017, primarily due to substantially lower tax-exempt income and the inclusion of the results of CIBC Bank USA following the close of the acquisition on June 23, 2017. 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. Review of 2016 financial performance $ millions, for the year ended October 31 2016 (2) Net interest income Non-interest income Intersegment revenue (3) 2015 (2) Total revenue Provision for (reversal of) credit losses Non-interest expenses Income (loss) before income taxes Income taxes Net income Net income 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 Canadian Personal and Small Business Banking Canadian Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management (1) Capital Markets (1) Corporate and Other (1) $ $ $ $ $ $ 5,473 1,896 379 7,748 736 4,114 2,898 738 2,160 – 2,160 5,160 1,867 353 7,380 664 3,975 2,741 715 2,026 – 2,026 $ $ $ $ $ $ 930 2,732 (390) 3,272 29 1,890 1,353 362 991 – 991 893 2,619 (363) 3,149 5 1,889 1,255 334 921 – 921 $ $ $ $ $ $ 169 216 – 385 (2) 288 99 12 87 – 87 178 261 – 439 11 294 134 30 104 – 104 $ $ $ $ $ $ 1,958 787 11 2,756 155 1,328 1,273 281 992 – 992 1,691 703 10 2,404 44 1,264 1,096 249 847 – 847 $ $ $ $ $ $ (164) 1,038 – 874 133 1,351 (610) (675) 65 20 45 (7) 491 – 484 47 1,439 (1,002) (694) (308) 14 (322) CIBC Total 8,366 6,669 – 15,035 1,051 8,971 5,013 718 4,295 20 4,275 7,915 5,941 – 13,856 771 8,861 4,224 634 3,590 14 3,576 $ $ $ $ $ $ (1) Capital Markets and U.S. Commercial Banking and Wealth Management revenue and income taxes are reported on a TEB basis with an equivalent offset in the revenue and income taxes of Corporate and Other. (2) 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, 2016 and 2015. Overview Net income for 2016 was $4,295 million, compared with $3,590 million in 2015. The increase in net income of $705 million was due to higher revenue, partially offset by a higher provision for credit losses and higher non-interest expenses. Revenue by segment Canadian Personal and Small Business Banking Revenue was up $368 million or 5% from 2015, primarily due to volume growth and higher fees, partially offset by lower revenue from our exited FirstLine mortgage broker business. 2015 included a gain arising from accounting adjustments on credit card-related balance sheet amounts, shown as an item of note. Canadian Commercial Banking and Wealth Management Revenue was up $123 million or 4% from 2015. Commercial banking was up due to volume growth and higher fees, partially offset by narrower spreads. Wealth management was up due to higher average AUM, driven by net sales of long-term mutual funds and market appreciation. U.S. Commercial Banking and Wealth Management Revenue was down $54 million or 12% from 2015. Commercial banking was down due to lower revenue from U.S. real estate finance. Wealth management was down due to lower annual performance fees earned by CIBC Atlantic Trust. Capital Markets Revenue was up $352 million or 15% from 2015, primarily due to higher interest rate and foreign exchange trading revenue, higher revenue from global markets financing activity, and a gain on the sale of an AFS equity investment in our structured credit run-off business. Corporate and Other Revenue was up $390 million or 81% from 2015, primarily due to the gain, net of transaction costs, on the sale of our minority investment in ACI, and a gain on sale of a processing centre, both shown as items of note, partially offset by lower treasury revenue. Consolidated CIBC Net interest income 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. 12 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Non-interest income Non-interest income was up $728 million or 12% from 2015, primarily due to the gain, net of transaction costs, on the sale of our minority investment in ACI, and a gain on the sale of a processing centre, both shown as items of note. 2016 also included higher credit fees, and AUM and AUA growth in our retail brokerage and CIBC Atlantic Trust businesses. Provision for credit losses Provision for credit losses was up $280 million or 36% from 2015. In Canadian Personal and Small Business Banking, the provision was up primarily due to higher write-offs and bankruptcies in the card and the personal lending portfolios. In Canadian Commercial Banking and Wealth Management, the provision was up due to higher losses in the commercial banking portfolio. In U.S. Commercial Banking and Wealth Management, a reversal of credit losses compared with a provision for credit losses in 2015 due to lower losses in our U.S. real estate finance 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. In Corporate and Other, the provision was up due to increases in the collective allowance, shown as items of note, partially offset by lower losses in CIBC FirstCaribbean. Non-interest expenses Non-interest expenses increased by $110 million or 1% from 2015, primarily due to legal provisions, shown as an item of note, and higher spending on strategic initiatives. Both years included restructuring charges primarily relating to employee severance, shown as items of note. Income taxes Income tax expense was $718 million, compared with $634 million in 2015, primarily due to higher income in 2016. 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. Outlook for calendar year 2018 Canada’s economy is likely to moderate with real gross domestic product expected to grow at a still healthy rate of roughly 2% in 2018, as it begins to feel the constraints on labour supply after reaching full employment in some provinces. The Bank of Canada could raise interest rates by a further 50 basis points over the course of the year as it seeks to contain subsequent inflation pressures. In response to higher rates and tightening mortgage regulations, housing could become a weaker source of growth. Capital spending by business could remain on a cautious path owing to uncertainties tied to NAFTA talks, while consumer spending should see a moderation in growth after a very strong run. The U.S. has room to grow at just over 2% without inflationary concerns, with ongoing job creation and a modest pick-up in wage gains supporting a consumer-led expansion. Although core inflation is expected to start the year below the central bank’s target, a very gradual increase over the course of the year should justify modest additional interest rate increases from the U.S. Federal Reserve. Should a deficit-financed tax cut bill gain approval, it would add to economic momentum, but could also lead to some additional monetary tightening. Canadian Personal and Small Business Banking should see a moderation in consumer and mortgage lending growth reflecting interest rate increases and regulatory measures. Growth in corporate profits should support equity-related business in Capital Markets and Canadian Commercial Banking and Wealth Management, while financing infrastructure spending should offset lower government deficits as a driver of fixed income activity. Growth in corporate bond issuance is likely to moderate after a sharp acceleration in 2017. Credit quality should remain healthy given low unemployment and stable energy prices. Business loan demand is expected to grow at a steady pace, having moderated in 2017 as companies extended term in the bond market. In U.S. Commercial Banking and Wealth Management, commercial banking activity should benefit from the impact of further rate increases on margins, and from the financing needs associated with steady economic growth and healthy business credit quality. Wealth management could benefit as potential U.S. tax reforms and economic growth provide a greater high-net-worth savings pool. Although interest rates are moving higher, they remain low by historical standards, and should support growth in U.S. real estate finance. CIBC 2017 ANNUAL REPORT 13 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 amortization of intangibles, and certain items of significance that arise from time to time which management believes are not reflective of underlying business performance. We believe that adjusted measures provide the reader with a better understanding of how management assesses underlying business performance and facilitate a more informed analysis of trends. While we believe that adjusted measures may facilitate comparisons between our results and those of some of our Canadian peer banks which make similar adjustments in their public disclosure, it should be noted that there is no standardized meaning for adjusted measures under GAAP. We also adjust our results to gross up tax-exempt revenue on certain securities to a TEB basis, being the amount of fully taxable revenue, which, were it to have incurred tax at the statutory income tax rate, would yield the same after-tax revenue. Adjusted diluted EPS We adjust our reported diluted EPS to remove the impact of items of note, net of income taxes, to calculate the adjusted EPS. Adjusted efficiency ratio We adjust our reported revenue and non-interest expenses to remove the impact of items of note and gross up tax-exempt revenue to bring it to a TEB basis, as applicable. Adjusted dividend payout ratio We adjust our reported net income attributable to common shareholders to remove the impact of items of note, net of income taxes, to calculate the adjusted dividend payout ratio. Adjusted return on common shareholders’ equity We adjust our reported net income attributable to common shareholders to remove the impact of items of note, net of income taxes, to calculate the adjusted ROE. Adjusted effective tax rate We adjust our reported income before income taxes and reported income taxes to remove the impact of items of note to calculate the adjusted effective tax rate. Economic capital Economic capital provides a framework to evaluate the returns of each SBU, commensurate with risk assumed. The economic capital measure is based upon an estimate of equity capital required by the businesses to absorb unexpected losses consistent with our targeted risk rating over a one-year horizon. Economic capital comprises primarily credit, market, operational and strategic risk capital. The difference between our total equity capital and economic capital is held in Corporate and Other. There is no comparable GAAP measure for economic capital. Economic profit Net income attributable to equity shareholders, adjusted for a charge on economic capital, determines economic profit. This measures the return generated by each SBU in excess of our cost of capital, thus enabling users of our financial information to identify relative contributions to shareholder value. Reconciliation of net income attributable to equity shareholders to economic profit is provided with segmented information. Segmented return on equity We use ROE on a segmented basis as one of the measures for performance evaluation and resource allocation decisions. While ROE for total CIBC provides a measure of return on common equity, ROE on a segmented basis provides a similar metric relating to the economic capital allocated to the segments. As a result, segmented ROE is a non-GAAP measure. 14 CIBC 2017 ANNUAL REPORT 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 2017 (1) 2016 Reported and adjusted diluted EPS Reported net income attributable to common shareholders After-tax impact of items of note (2) After-tax impact of items of note on non-controlling interests Adjusted net income attributable to common shareholders (3) Diluted weighted-average common shares outstanding (thousands) Reported diluted EPS ($) Adjusted diluted EPS ($) (3) Reported and adjusted efficiency ratio Reported total revenue Pre-tax impact of items of note (2) TEB Adjusted total revenue (3) Reported non-interest expenses Pre-tax impact of items of note (2) Adjusted non-interest expenses (3) Reported efficiency ratio Adjusted efficiency ratio (3) Reported and adjusted dividend payout ratio Dividends paid to common shareholders Reported dividend payout ratio Adjusted dividend payout ratio (3) Reported and adjusted return on common shareholders’ equity Average common shareholders’ equity Reported return on common shareholders’ equity Adjusted return on common shareholders’ equity (3) Reported and adjusted effective tax rate Reported income before income taxes Pre-tax impact of items of note (2) Adjusted income before income taxes (3) Reported income taxes Tax impact of items of note (2) Adjusted income taxes (3) Reported effective tax rate Adjusted effective tax rate (3) $ millions, for the year ended October 31 2017 Reported net income (loss) After-tax impact of items of note (2) Adjusted net income (loss) (3) 2016 (4) Reported net income (loss) After-tax impact of items of note (2) Adjusted net income (loss) (3) 2015 (4) Reported net income (loss) After-tax impact of items of note (2) Adjusted net income (loss) (3) 2014 Reported net income (loss) After-tax impact of items of note (2) Adjusted net income (loss) (3) 2013 Reported net income (loss) After-tax impact of items of note (2) Adjusted net income (loss) (3) $ $ $ $ $ $ $ 4,647 (53) – 4,594 413,563 11.24 11.11 16,280 (305) 300 16,275 9,571 (259) 9,312 $ $ $ $ $ $ $ 4,237 (191) – 4,046 395,919 10.70 10.22 15,035 (505) 474 15,004 8,971 (262) 8,709 2015 3,531 232 (2) 3,761 397,832 8.87 9.45 13,856 (40) 482 14,298 8,861 (338) 8,523 $ $ $ $ $ $ $ 2014 3,131 442 (10) 3,563 398,420 7.86 8.94 13,363 (276) 421 13,508 8,512 (539) 7,973 $ $ $ $ $ $ $ 2013 3,253 219 – 3,472 401,261 8.11 8.65 12,705 (30) 357 13,032 7,608 (249) 7,359 $ $ $ $ $ $ $ 58.8 % 57.2 % 59.7 % 58.0 % 63.9 % 59.6 % 63.7 % 59.0 % 59.9 % 56.5 % $ 2,121 $ 1,879 $ 1,708 $ 1,567 $ 1,523 45.6 % 46.2 % 44.3 % 46.4 % 48.4 % 45.4 % 50.0 % 44.0 % 46.8 % 43.9 % $ 25,393 $ 21,275 $ 18,857 $ 17,067 $ 15,167 18.3 % 18.1 % 19.9 % 19.0 % 18.7 % 19.9 % 18.3 % 20.9 % 21.4 % 22.9 % $ $ $ $ 5,880 (29) 5,851 1,162 24 1,186 $ $ $ $ 5,013 (94) 4,919 718 97 815 $ $ $ $ 4,224 298 4,522 634 66 700 $ $ $ $ 3,914 408 4,322 699 (34) 665 $ $ $ $ 3,976 298 4,274 626 79 705 19.8 % 20.3 % 14.3 % 16.6 % 15.0 % 15.5 % 17.9 % 15.4 % 15.8 % 16.5 % 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 Canadian Personal and Small Business Banking Canadian Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management (1) $ $ $ $ $ $ $ $ $ $ 2,420 (170) 2,250 2,160 (25) 2,135 2,026 (28) 1,998 2,459 (64) 2,395 2,377 38 2,415 $ $ $ $ $ $ $ $ $ $ 1,138 1 1,139 991 2 993 921 2 923 470 15 485 385 4 389 $ $ $ $ $ $ 203 19 222 87 6 93 104 7 111 n/a n/a n/a n/a n/a n/a Capital Markets 1,090 – 1,090 992 28 1,020 847 8 855 869 18 887 699 118 817 $ $ $ $ $ $ $ $ $ $ Corporate and Other $ (133) 97 $ $ $ $ $ $ $ $ $ (36) 65 (202) (137) (308) 243 (65) (583) 473 (110) (111) 59 (52) CIBC Total 4,718 (53) 4,665 4,295 (191) 4,104 3,590 232 3,822 3,215 442 3,657 3,350 219 3,569 $ $ $ $ $ $ $ $ $ $ (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. The results of CIBC Bank USA are included in the U.S. Commercial Banking and Wealth Management SBU. See “Significant events” for additional details. (2) Reflects impact of items of note under “2017 Financial results” section and below. (3) Non-GAAP measure. (4) Certain information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. n/a Not available. CIBC 2017 ANNUAL REPORT 15 Management’s discussion and analysis Impact of items of note in prior years 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 (Canadian Personal and Small Business Banking); $42 million ($33 million after-tax) amortization of intangible assets ($6 million after-tax in Canadian Personal and Small Business Banking, $2 million after-tax in Canadian Commercial Banking and Wealth Management, $7 million after-tax in U.S. Commercial Banking and Wealth Management, and $18 million after-tax in Corporate and Other)(1); $29 million ($21 million after-tax) loss from the structured credit run-off business (Capital Markets); and $23 million ($13 million after-tax) gain on sale of an investment in our merchant banking portfolio (Capital Markets). The above items of note increased revenue by $40 million and non-interest expenses by $338 million, and decreased income taxes by $66 million. In aggregate, these items of note decreased net income by $232 million. 2014 Net income was affected by the following items of note: (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 Canadian Personal and Small Business Banking, and $60 million after-tax in Corporate and Other); $112 million ($82 million after-tax) charge relating to the incorporation of 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 Canadian Personal and Small Business Banking, $15 million after-tax in Canadian Commercial Banking and Wealth Management, and $9 million after-tax in Corporate and Other); $26 million ($19 million after-tax) reduction in the portion of the collective allowance recognized in Corporate and Other(2), including lower estimated credit losses relating to the Alberta floods (Corporate and Other); $26 million ($19 million after-tax) charge resulting from operational changes in the processing of write-offs in Canadian Personal and Small Business Banking; $22 million ($12 million after-tax) loan losses in our exited U.S. leveraged finance portfolio (Capital Markets); and $15 million ($11 million after-tax) loss from the structured credit run-off business (Capital Markets). The above items of note increased revenue by $276 million, provision for credit losses by $145 million, non-interest expenses by $539 million, and income taxes by $34 million. In aggregate, these items of note decreased net income by $442 million. 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(2), 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 (Canadian Personal and Small Business Banking); $23 million ($19 million after-tax) amortization of intangible assets(3) ($5 million after-tax in Canadian Personal and Small Business Banking, $4 million after-tax in Canadian Commercial Banking and 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 (Canadian Personal and Small 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). (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) 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. (1) Certain information has been reclassified to conform to the presentation adopted in the current year. See “External reporting changes” for additional details. (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. (3) Beginning in the fourth quarter of 2013, also includes amortization of intangible assets for equity-accounted associates. 16 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Strategic business units overview CIBC has four SBUs – Canadian Personal and Small Business Banking, Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets. These SBUs are supported by the following functional groups – Administration, Client Connectivity and Innovation, Finance, Human Resources and Communications, Internal Audit, Risk Management, and Technology and Operations, as well as other support groups, which all form part of Corporate and Other. The expenses of these functional and support groups are generally allocated to the business lines within the SBUs. The functional and support costs of CIBC Bank USA are recognized directly in the expenses of U.S. Commercial Banking and Wealth Management. Corporate and Other also includes the results of CIBC FirstCaribbean and other strategic investments, as well as other income statement and balance sheet items not directly attributable to the business lines. External reporting changes were made in 2017, 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, with the exception of certain Treasury activities in U.S. Commercial Banking and Wealth Management, which are reported in that SBU. Capital is attributed to the SBUs in a manner that is intended to consistently measure and align economic costs with the underlying benefits and risks associated with SBU activities. Earnings on unattributed capital remain in Corporate and Other. We review our transfer pricing methodologies on an ongoing basis to ensure they reflect changing market environments and industry practices. Revenue, expenses, and other balance sheet resources related to certain activities are fully allocated to the lines of business within the SBUs. To measure and report the results of operations of the lines of business within our Canadian Personal and Small Business Banking and Canadian Commercial Banking and Wealth Management SBUs, we use a Manufacturer/Customer Segment/Distributor Management Model. The model uses certain estimates and allocation methodologies to process internal payments between lines of business for sales, renewals and trailer commissions to facilitate preparation of segmented financial information. Periodically, the sales, renewals and trailer commission rates paid to customer segments for certain products/services are revised and applied prospectively. Non-interest expenses are attributed to the SBUs to which they relate based on appropriate criteria. 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. All allowances and related provisions for CIBC Bank USA are reported in U.S. Commercial Banking and Wealth Management. Revenue, taxable equivalent basis The SBUs evaluate revenue on a TEB basis. In order to arrive at the TEB amount, the SBUs gross up tax-exempt revenue on certain securities to a TEB basis, being the amount of fully taxable revenue, which, were it to have incurred tax at the statutory income tax rate, would yield the same after-tax revenue. Simultaneously, an equivalent amount is booked as an income tax expense resulting in no impact on the net income of the SBUs. This measure enables comparability of revenue arising from both taxable and tax-exempt sources. The total TEB adjustments of the SBUs are offset in revenue and income tax expense in Corporate and Other. CIBC 2017 ANNUAL REPORT 17 Management’s discussion and analysis Canadian Personal and Small Business Banking Canadian Personal and Small Business Banking provides personal and small business clients across Canada with financial advice, products and services through a team of advisors in our banking centres, as well as through our direct, mobile and remote channels. Our business strategy In 2017 we focused on building a strong, innovative, relationship-oriented bank. To accelerate our transformation and deliver on our objective to be the best retail and small business bank in Canada, we maintained two strategic priorities: (cid:129) (cid:129) Enhancing 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 through deeper relationships and advice. 2017 progress In 2017, 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) Completed our 100th banking centre transformation in the third quarter. These transformed centres increase our focus on advice and client conversations, while adding iPads, Wi-Fi, and enhanced ATMs to help clients leverage digital channels for routine transactions. Earned the top score among the five largest Canadian banks for mobile banking for the fourth year in a row, and online banking functionality for the third consecutive year in Forrester Research’s Mobile Banking and Online Banking benchmark studies. Announced Simplii Financial, our new direct banking brand, to meet the needs of Canadians who value straightforward, no-fee daily banking. We were the first Canadian financial institution to offer all three leading mobile wallets to our clients. We were the first major Canadian bank to introduce free mobile credit scores for clients. 2017 financial review (cid:129) (cid:129) (cid:129) (cid:129) Continued to invest in advice roles within our banking centres, while leveraging digital channels to facilitate more day-to-day banking transactions from clients across our network. We expanded the Mobile Investment Consultant channel from 50 to nearly 300 team members, delivering personal advice to clients at a time and place of their choosing. Launched Digital Cart, allowing clients to sign up for multiple banking products entirely through their mobile devices or online – a first in the mobile space in Canada. Launched the Business Plus Credit Cards, offering CIBC branded business credit cards that are underwritten based on business credit rather than personal credit. Revenue(1) ($ billions) Net income(1) ($ billions) Efficiency ratio(1) (%) 8.4 7.4 7.7 2.4 2.2 2.0 53.9 53.1 51.9 Average loans and acceptances(1)(2) ($ billions) 243.5 219.8 204.0 Average deposits(1) ($ billions) 162.9 152.5 141.9 15 16 17 15 16 17 15 16 17 15 16 17 15 16 17 (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 2018 Entering a new fiscal year, we are refreshing our strategy to build on our momentum with clients and sharpen our focus on meeting client needs in key growth markets. Our priorities in 2018 are to: (cid:129) (cid:129) Make it easy to bank with us. Win the relationship, emphasizing financial planning and advice to earn primary banking relationships particularly among affluent clients and business owners. Deliver market leading solutions through a product lineup that meets our clients’ needs. (cid:129) 18 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Results(1) $ millions, for the year ended October 31 Revenue Personal and small 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 2017 8,033 339 8,372 766 4,348 3,258 838 2,420 2,420 51.9 % 64.3 % (367) 2,053 246.3 243.5 162.9 14,709 $ $ $ $ $ $ $ $ 2016 (2) 2015 (2) $ $ $ $ $ $ $ $ 7,675 73 7,748 736 4,114 2,898 738 2,160 2,160 53.1 % 58.7 % (359) 1,801 222.6 219.8 152.5 15,501 $ $ $ $ $ $ $ $ 7,286 94 7,380 664 3,975 2,741 715 2,026 2,026 53.9 % 63.2 % (385) 1,641 206.4 204.0 141.9 16,582 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 $260 million or 12% from 2016, primarily due to higher revenue, partially offset by higher non-interest expenses and a higher provision for credit losses. Revenue in the current year included a gain on the sale and lease back of certain retail properties, shown as an item of note. Revenue Revenue was up $624 million or 8% from 2016. Personal and small business banking revenue was up $358 million or 5%, primarily due to volume growth and higher fees, partially offset by narrower spreads. Other revenue was up $266 million, primarily due to the gain noted above, partially offset by lower revenue from our exited FirstLine mortgage broker business. Provision for credit losses Provision for credit losses was up $30 million or 4% from 2016, primarily due to higher write-offs in the card and personal lending portfolios, and higher losses in the mortgage portfolio, partially offset by lower losses in the small business lending portfolio. Non-interest expenses Non-interest expenses were up $234 million or 6% from 2016, primarily due to fees and charges related to the launch of Simplii Financial and the related wind-down of President’s Choice Financial, shown as an item of note, and higher spending on other strategic initiatives that have accelerated our transformation into a modern, convenient and relationship-focused bank. Income taxes Income taxes were up $100 million or 14% from 2016, primarily due to higher income, partially offset by the impact of a lower effective tax rate on the gain noted above. The prior year included an income tax recovery from the settlement of transfer pricing-related matters, shown as an item of note. Average assets Average assets were up $23.7 billion or 11% from 2016 due to growth across all products. CIBC 2017 ANNUAL REPORT 19 Management’s discussion and analysis Canadian Commercial Banking and Wealth Management Canadian Commercial Banking and Wealth Management provides high-touch, relationship-oriented commercial and private banking, as well as wealth management services to meet the needs of middle-market companies, entrepreneurs, high-net-worth individuals and families, along with institutional clients across Canada. Our business strategy Our goal is to be the leading relationship bank in Canada for our commercial and wealth clients by delivering best-in-class advisory capabilities, value, and long-term growth. 2017 progress The commercial banking and wealth management lines of business were brought together into a single SBU in the fourth quarter of 2017. During the year, each business made progress in driving growth through client focus. In commercial banking: In wealth management: (cid:129) (cid:129) (cid:129) Continued to focus on relationship-based growth by increasing the number of client-facing relationship managers across the team to meet client needs. Met more of our clients’ needs on both sides of the border with the ability to make and receive cross-border client referrals in partnership with our commercial banking colleagues in the U.S. Introduced the new CIBC Integrated Payments service that enables businesses to streamline their local or global treasury and accounting operations. (cid:129) (cid:129) (cid:129) (cid:129) Co-located private banking teams with CIBC Wood Gundy teams in select locations across the country to deliver a more integrated offer for high-net-worth clients. Introduced a suite of new, lower-cost CIBC Passive Portfolios to improve value and accessibility for Canadian investors. Enhanced our investment lineup including management fee reductions, lower investment minimums and a simplified product offering. Launched the CIBC Active Global Currency Pool for institutional investors, leveraging our 20-year track record of managing active currency strategies. 20 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis 2017 financial review Revenue(1) ($ billions) 3.6 3.3 3.1 Net income(1) ($ millions) Efficiency ratio(1) (%) Average loans(1) ($ billions) Average deposits(1) ($ billions) 1,138 60.0 991 921 57.8 56.3 52.8 48.3 42.6 48.8 43.4 39.3 15 16 17 15 16 17 15 16 17 15 16 17 15 16 17 Commercial banking (cid:129) (cid:129) 10% growth in lending 14% growth in deposits Average loans(1) ($ billions) 51.1 46.6 41.0 Average deposits(1) ($ billions) 42.7 37.4 33.7 Wealth management 12% growth in AUM (cid:129) 9% growth in AUA (cid:129) Achieved strong net flows in our mutual funds and Canadian private (cid:129) wealth management business Assets under administration and management(1)(2) ($ billions) 274.5 252.0 237.1 Canadian retail mutual funds ($ billions) 101.4 90.8 84.2 15 16 17 15 16 17 (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. 162.5 145.3 134.3 15 16 17 15 16 17 AUM Our focus for 2018 To build on our momentum across this newly created SBU, we will continue to focus on client relationships by: (cid:129) Developing and deepening client relationships through a full-service solutions-based approach that includes commercial and private banking, as well as wealth management services. Investing in financial planning to become the leader in client advice. Simplifying and optimizing our business to align with changing market dynamics, and to better meet the needs of our clients. (cid:129) (cid:129) CIBC 2017 ANNUAL REPORT 21 Management’s discussion and analysis Results(1) $ millions, for the year ended October 31 Revenue Commercial banking Wealth management 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 (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 2017 1,324 2,266 3,590 16 2,021 1,553 415 1,138 – 1,138 56.3 % 37.6 % (295) 843 50.8 52.8 48.8 274.5 162.5 5,081 $ $ $ $ $ $ $ $ $ $ 2016 (2) 2015 (2) $ $ $ $ $ $ $ $ $ $ 1,211 2,061 3,272 29 1,890 1,353 362 991 – 991 57.8 % 34.5 % (279) 712 46.6 48.3 43.4 252.0 145.3 4,986 $ $ $ $ $ $ $ $ $ $ 1,119 2,030 3,149 5 1,889 1,255 334 921 – 921 60.0 % 36.5 % (303) 618 40.6 42.6 39.3 237.1 134.3 5,024 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 $147 million or 15% from 2016, primarily due to higher revenue, partially offset by higher non-interest expenses. Revenue Revenue was up $318 million or 10% from 2016. Commercial banking revenue was up $113 million or 9%, primarily due to volume growth and higher fees, partially offset by narrower spreads. Wealth management revenue was up $205 million or 10%, mainly due to higher investment management and custodial fees, and mutual fund fees from higher average AUM and AUA. Provision for credit losses Provision for credit losses was down $13 million or 45% from 2016, primarily due to lower losses in the commercial banking portfolio. Non-interest expenses Non-interest expenses were up $131 million or 7% from 2016, primarily due to higher performance-based and employee-related compensation. Income taxes Income taxes were up $53 million or 15% from 2016, primarily due to higher income. Assets under administration AUA were up $22.5 billion or 9% from 2016, due to market appreciation and strong net sales. AUM amounts are included in the amounts reported under AUA. Average assets Average assets were up $4.2 billion or 9% from 2016, primarily due to growth in commercial loans. 22 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis U.S. Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management provides high-touch, relationship-oriented commercial, personal and small business banking, as well as wealth management services to meet the needs of middle-market companies, executives, entrepreneurs, high-net-worth individuals and families in the markets we serve in the U.S. On June 23, 2017, we completed the acquisition of PrivateBancorp and its subsidiary The PrivateBank, subsequently rebranded as CIBC Bank USA. The results of CIBC Bank USA are included in this SBU from the date of acquisition (131 days in 2017). See “Significant events” for additional details. Our business strategy Our goal is to build the go-to commercial and wealth management bank for our chosen client segments and markets with a focus on developing deep, profitable relationships leveraging the full complement of CIBC’s products and services across our North American platform. 2017 progress In 2017, we made good progress on our strategy. Add high-quality U.S. banking and private wealth capabilities Build client relationships and drive profitable growth Optimize our business platform (cid:129) (cid:129) Acquired The PrivateBank, a Chicago- based commercial bank with personal banking and wealth management capabilities that shares our client-first culture and strategy. The acquisition expanded our U.S. presence, provided enhanced growth opportunities, and is a pivotal milestone as we build a strong cross-border platform. Expanded our private wealth management client base and investment management capabilities through the acquisition of Geneva Advisors, an independent private wealth management firm headquartered in Chicago and focused on high-net-worth clients. 2017 financial review (cid:129) (cid:129) (cid:129) Achieved solid loan, deposit, and revenue growth, reflecting the acquisition of The PrivateBank and the continued focus on building full, profitable client relationships. Generated strong growth in AUM and AUA, reflecting acquisitions and continued client development efforts. Received first-time deposit ratings from Moody’s Investors Service, Inc. (Moody’s) and Fitch Ratings, Inc. (Fitch), expanding our capabilities to serve new and existing commercial clients. (cid:129) (cid:129) (cid:129) Extended the CIBC brand across North America, as The PrivateBank took the CIBC name and began operating as CIBC Bank USA. Expanded investment management offering to Geneva Advisors and CIBC Bank USA clients through CIBC Atlantic Trust’s platform and product strategies. Leveraged CIBC’s banking platform to provide CIBC Atlantic Trust and Geneva Advisors’ clients with access to a full complement of private banking solutions. Commercial banking (cid:129) (cid:129) Strong loan and deposit growth reflecting our continued focus on building client relationships Asset quality remained strong, with nonperforming assets representing 0.6% of total assets at year end Wealth management (cid:129) (cid:129) 29% growth in AUM and 27% growth in AUA during the fourth quarter, largely due to the acquisition of Geneva Advisors CIBC Atlantic Trust was recognized with two Private Asset Management awards for our industry-leading performance Our focus for 2018 We are building a relationship-focused bank. To build on our momentum across this newly created SBU, we will continue to align our focus in 2018 to CIBC’s overall strategy and priorities. We will do this by: (cid:129) (cid:129) Continuing to successfully execute our integration, working as one coordinated team. Remaining focused on maintaining and developing profitable client relationships, leveraging our combined strengths, resources, and expanded capabilities to accelerate organic growth in the U.S. Improving operating leverage in our U.S. businesses by leveraging the best innovative practices. (cid:129) CIBC 2017 ANNUAL REPORT 23 Management’s discussion and analysis Results(1) $ millions, for the year ended October 31 Revenue Commercial banking Wealth management Other Total revenue (3) Provision for (reversal of) 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) Average loans ($ billions) Average deposits ($ billions) AUA ($ billions) AUM ($ billions) Full-time equivalent employees 2017 2016 (2) 2015 (2) $ $ $ $ $ $ $ $ $ $ 523 318 35 876 84 534 258 55 203 203 61.0 % 7.5 % (256) (53) 19.9 15.9 7.6 74.0 58.7 1,753 $ $ $ 166 217 2 385 (2) 288 99 12 87 87 74.8 % 17.6 % (48) $ 39 $ 8.4 $ 8.0 $ $ 0.1 $ 44.1 $ 38.0 310 $ $ $ 212 226 1 439 11 294 134 30 104 104 67.0 % 20.7 % (60) $ 44 $ 7.6 $ 7.2 $ $ 0.1 $ 41.3 $ 35.6 308 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 $2 million (2016: nil; 2015: nil). 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) Financial overview Net income was up $116 million or 133% from 2016. CIBC Bank USA contributed $96 million to net income during the year. Revenue Revenue was up $491 million or 128% from 2016. CIBC Bank USA contributed $448 million to revenue during the year. Commercial banking revenue was up $357 million or 215%, primarily due to the inclusion of the results of CIBC Bank USA, and higher revenue in U.S. real estate finance. In addition, the current year included accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank(1). Wealth management revenue was up $101 million or 47%, primarily due to the inclusion of the results of CIBC Bank USA, and growth in average AUM mainly due to the acquisition of Geneva Advisors. In addition, the current year included accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank(1). Other revenue primarily includes the Treasury activities of CIBC Bank USA. Provision for credit losses Provision for credit losses was $84 million, compared with a reversal of credit losses of $2 million in 2016. The increase was primarily due to the establishment of a $48 million collective allowance for new loan originations and renewals of acquired loans relating to CIBC Bank USA, of which $35 million was shown as an item of note in the fourth quarter of 2017. In addition, the current year included losses in our pre-existing U.S. real estate finance portfolio. Non-interest expenses Non-interest expenses were up $246 million or 85% from 2016, primarily due to the inclusion of the results of CIBC Bank USA of $244 million, which included compensation expenses of $40 million related to the retention of key employees. Income taxes Income taxes were up $43 million or 358% from 2016, primarily due to higher income from the inclusion of the results of CIBC Bank USA. Average assets Average assets were up $11.5 billion or 137% from 2016 due to the inclusion of the balances of CIBC Bank USA. Assets under administration AUA were up $29.9 billion or 68% from 2016 due to the inclusion of the balances of CIBC Bank USA and Geneva Advisors. (1) 2017 included $45 million of accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank, of which $31 million was included as an item of note in the fourth quarter of 2017. 24 CIBC 2017 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 for our core clients in Canada and the lead relationship bank for our core clients globally by delivering best-in-class insight, advice and execution. To enable CIBC’s strategy and priorities, we collaborated with our partners across our bank to deepen and enhance client relationships. 2017 progress We made good progress in 2017 on our strategy. Continue to strengthen our platform in Canada for our clients (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. Supported our clients by investing in our talent, further developing our proprietary technology, expanding our structuring expertise and advice and leveraging our market expertise. Strengthened our platform by continuing to evolve our research coverage framework and provide specialized advice and solutions, aligned to the macro trends influencing the global economy and our clients. Build a North American client platform and expand coverage in key sectors globally (cid:129) (cid:129) (cid:129) Continued the organic expansion of our platform and capabilities in the U.S. by employing our client-led strategy. Continued to leverage our strengths and added talent to complement our investments and infrastructure in the U.S. Helped our clients navigate market movements and volatility through proactive advice and trading solutions. Deliver innovation to clients across CIBC (cid:129) (cid:129) (cid:129) Strengthened our no-fee CIBC Global Money Transfer service by increasing the number of countries to which clients can send money. Introduced International Student Pay, a first-of-its-kind partnership in Canada with academic institutions to enable students to make tuition payments in their local currency. Expanded our Technology & Innovation team to provide specialized insight and advice, and collaborated with our banking partners to further our bank’s strategic innovation agenda. 2017 financial review Revenue(1) ($ billions) 2.8 2.8 2.4 Net income(1) ($ millions) 1,090 992 847 Efficiency ratio (%) 52.6 48.2 48.6 Average value-at-risk (VaR) ($ millions) 6.5 5.8 4.0 15 16 17 15 16 17 15 16 17 15 16 17 (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. As a leading capital markets franchise in Canada and banking partner to our clients around the world, Capital Markets acted as: (cid:129) (cid:129) Exclusive financial advisor to Pembina Pipeline Corp. on its $9.7 billion acquisition of Veresen Inc.; Joint bookrunner on a $1.4 billion issue of convertible unsecured subordinated debentures represented by installment receipts for Hydro One Ltd. in support of the acquisition of Avista Corporation, joint global coordinator and joint bookrunner on a $2.8 billion bought secondary offering of Hydro One Ltd. common shares by the Province of Ontario and joint bookrunner for a $950 million dual-tranche offering of medium-term notes; Financial Advisor to Metro Inc. in its $4.5 billion acquisition of The Jean Coutu Group (PJC) Inc. and joint bookrunner and co-lead arranger on the establishment of $3.45 billion in new facilities to support the acquisition; in addition, co-Manager on Metro’s sale of $650 million subordinate voting shares of Couche-Tard by way of a block trade bought deal; Joint bookrunner on Kinder Morgan Canada Ltd.’s $1.75 billion initial public offering and joint bookrunner and co-lead arranger for the $5.5 billion in credit facilities to fund TMEP as well as joint bookrunner on a $300 million issue of preferred shares; Lead underwriter and joint bookrunner on a $1.4 billion 4-tranche issue of senior secured nominal amortizing bonds for Alberta PowerLine LP; Exclusive financial advisor to Teck Resources Limited on its $1.2 billion sale of the Waneta Dam; Financial advisor to Sentry Investments on its $780 million sale to CI Financial; Exclusive financial advisor to Barrick Gold on its US$960 million sale of a 50% interest in the Veladero Mine in Argentina to Shandong Gold Mining Co., Ltd.; Lead manager and joint bookrunner on a $414 million bought deal offering of subscription receipts and on a $300 million offering of preferred shares, and joint lead and joint bookrunner on a $425 million issue of unsecured medium term notes for Intact Financial Corporation in support of its acquisition of OneBeacon Insurance Group, Ltd for US$1.7 billion; and (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) CIBC 2017 ANNUAL REPORT 25 Management’s discussion and analysis (cid:129) Lead bookrunner on Canada Goose Holdings Inc.’s $391 million dual-listed initial public offering on the TSX and NYSE and its follow-on US$259 million secondary offering of subordinate voting shares, as well as joint lead on its US$163 million Term Loan B offering, and agent and joint lead arranger on its $250 million asset-backed loan facility. Capital Markets awards and recognition (cid:129) (cid:129) (cid:129) Canada Derivatives House Of The Year – 2017 GlobalCapital Americas Derivatives Awards 2017 Canadian Hedge Fund Award for Top Canadian Prime Broker – Alternative IQ Multi-deal winner at the 2017 IJGlobal Americas Deals of the Year Awards: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Ranked #1 for number of deals led in Canadian Loan Syndication Thomson Reuters and Bloomberg Lead Arranger League Tables, January-September 2017 Project Financing, Americas – Kingston Jamaica Port Terminal Refinancing, Americas – Sabine Pass & Creole Trail Refinancing Acquisition Financing, Americas – Chicago Skyway Acquisition Financing, Europe – London City Airport Acquisition Financing, Asia Pacific – Port of Melbourne Project Financing, Africa – Oyu Tolgoi Copper Project, Mongolia (cid:129) Revenue – Global markets(1) ($ millions) 1,645 1,601 1,356 Revenue – Corporate and investment banking(1) ($ millions) 1,216 1,050 1,093 15 16 17 15 16 17 (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. Our focus for 2018 To support our bank’s long-term objectives, Capital Markets remains focused on driving client-focused growth, and collaborating with our partners across our bank to deepen and enhance client relationships. We will continue to do this by: (cid:129) (cid:129) (cid:129) Strengthening our leadership positions in Canada. Building a North American client platform and aligning our global capabilities. Delivering innovative solutions to profitably grow and protect our businesses. Results(1) $ millions, for the year ended October 31 Revenue Global markets Corporate and investment banking Other Total revenue (3) Provision for (reversal of) 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 2017 1,601 1,216 6 2,823 (4) 1,373 1,454 364 1,090 1,090 48.6 % 35.5 % (299) 791 156.4 1,314 $ $ $ $ $ $ 2016 (2) 2015 (2) $ $ $ $ $ $ 1,645 1,093 18 2,756 155 1,328 1,273 281 992 992 48.2 % 30.6 % (314) 678 154.8 1,260 $ $ $ $ $ $ 1,356 1,050 (2) 2,404 44 1,264 1,096 249 847 847 52.6 % 35.7 % (284) 563 134.7 1,270 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 $298 million (2016: $474 million; 2015: $482 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) 26 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Financial overview Net income was up $98 million or 10% from 2016, primarily due to a reversal of credit losses compared with a provision for credit losses in 2016, and higher revenue, partially offset by higher non-interest expenses and income taxes. Revenue Revenue was up $67 million or 2% from 2016. Global markets revenue was down $44 million or 3%, primarily due to lower revenue from equity derivatives, interest rate, and foreign exchange trading, partially offset by higher revenue from global markets financing activities, equity trading, the movement in reserves related to derivative client exposure, and a gain on sale of an investment. Corporate and investment banking revenue was up $123 million or 11%, primarily due to higher investment portfolio gains, higher debt underwriting activity, and higher revenue from corporate banking, partially offset by lower revenue from equity underwriting. Other revenue was down $12 million or 67%, due to lower revenue from our run-off businesses, as 2016 included a gain from the structured credit run- off business, shown as an item of note. Provision for credit losses 2017 included a reversal of credit losses of $4 million, compared with a provision for credit losses of $155 million in 2016, primarily due to better performance in the oil and gas sector. The prior year also included losses in our exited European leveraged finance portfolio, shown as an item of note. Non-interest expenses Non-interest expenses were up $45 million or 3% from 2016, primarily due to higher spending on strategic initiatives and performance-based compensation. Income taxes Income taxes were up $83 million or 30% from 2016, primarily due to higher income and the impact of changes in the proportion of income subject to varying rates of tax in different jurisdictions. Average assets Average assets were up $1.6 billion or 1% from 2016, primarily due to an increase in trading securities, partially offset by a decrease in loan balances. CIBC 2017 ANNUAL REPORT 27 Management’s discussion and analysis Corporate and Other Corporate and Other includes the following functional groups – Administration, Client Connectivity and Innovation, Finance, Human Resources and Communications, Internal Audit, Risk Management, and Technology and Operations, as well as other support groups. The expenses of these functional and support groups are generally allocated to the business lines within the SBUs. The functional and support costs of CIBC Bank USA are recognized directly in the expenses of U.S. Commercial Banking and Wealth Management. Corporate and Other also includes the results of CIBC FirstCaribbean and other strategic investments, as well as other income statement and balance sheet items not directly attributable to the business lines. Results(1) $ millions, for the year ended October 31 Revenue International banking Other Total revenue (3) Provision for (reversal of) credit losses Non-interest expenses Loss before income taxes Income taxes (3) Net income (loss) Net income (loss) attributable to: Non-controlling interests Equity shareholders Full-time equivalent employees 2016 (2) 2015 (2) 2017 723 (104) 619 (33) 1,295 (643) (510) (133) 19 (152) $ $ $ $ $ $ 722 152 874 133 1,351 (610) (675) 65 20 45 22,071 21,156 $ $ $ 678 (194) 484 47 1,439 (1,002) (694) (308) 14 (322) 21,017 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 of Capital Markets and U.S. Commercial Banking and Wealth Management are reported on a TEB basis. The equivalent amounts are offset in the revenue and income taxes of Corporate and Other. Accordingly, revenue and income taxes include a TEB adjustment of $300 million (2016: $474 million; 2015: $482 million). Financial overview Net loss was $133 million compared with net income of $65 million in 2016, primarily due to lower revenue and a lower income tax benefit, partially offset by a reversal of credit losses compared with a provision for credit losses in 2016, and lower non-interest expenses. Revenue Revenue was down $255 million or 29% from 2016. International banking revenue was comparable with 2016, as better performance in CIBC FirstCaribbean was partially offset by the unfavourable impact of foreign exchange rates. Other revenue was down $256 million or 168% from 2016, as the prior year included a gain, net of transaction costs, on the sale of our minority investment in ACI, and a gain on sale of a processing centre, both shown as items of note. The decrease was partially offset by a lower TEB adjustment(3) and higher treasury revenue. Provision for credit losses 2017 included a reversal of credit losses of $33 million, compared with a provision for credit losses of $133 million in 2016. The current year included a reduction in the collective allowance, shown as an item of note, which was net of a higher provision in the Caribbean region mainly due to the recent hurricanes. The prior year included increases in the collective allowance, shown as items of note. Non-interest expenses Non-interest expenses were down $56 million or 4% from 2016, as the prior year included restructuring charges primarily relating to employee severance, and a legal provision, both shown as items of note. The decrease was partially offset by higher spending on strategic initiatives in the current year, including transaction and integration-related costs associated with the acquisition of The PrivateBank, and a legal provision, both shown as items of note. Income taxes Income tax benefit was down $165 million, primarily due to a lower TEB adjustment(3), and an income tax recovery arising from a change in our expected utilization of certain tax loss carryforwards, shown as an item of note in 2016. The decrease was partially offset by higher losses in the current year, as 2016 included the gain on sale of ACI noted above. 28 CIBC 2017 ANNUAL REPORT 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 and held-to-maturity (HTM) 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 2017 (1) 2016 $ 14,152 $ 14,165 50,679 42,592 148 93,419 45,418 207,271 40,937 12,378 106,590 (1,618) 365,558 24,342 22,375 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 $ 565,264 $ 501,357 $ 159,327 225,622 13,789 40,968 439,706 43,708 23,271 8,828 15,305 3,209 31,237 $ 148,081 190,240 17,842 39,484 395,647 24,550 28,807 12,395 12,919 3,366 23,673 $ 565,264 $ 501,357 (1) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. Assets Total assets as at October 31, 2017 were up $63.9 billion or 13% from 2016, net of a decrease of approximately $3 billion due to the depreciation of the U.S. dollar. The assets of CIBC Bank USA were approximately $33 billion as at October 31, 2017. Securities increased by $6.0 billion or 7%, primarily due to the inclusion of securities from CIBC Bank USA. 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 $11.6 billion or 34%, primarily due to client-driven activities. Net loans and acceptances increased by $45.8 billion or 14% due to an increase in domestic residential mortgages and an increase in U.S. business and government loans from CIBC Bank USA. Further details on the composition of loans and acceptances are provided in the “Supplementary annual financial information” section and Note 5 to the consolidated financial statements. Derivative instruments decreased by $3.4 billion or 12%, largely driven by a decrease in interest rate and foreign exchange derivatives valuation, partially offset by an increase in equity derivatives valuation. Other assets increased by $4.0 billion or 21%, primarily due to the increase in goodwill as a result of the acquisition of The PrivateBank. Liabilities Total liabilities as at October 31, 2017 were up $56.3 billion or 12% from 2016, net of a decrease of approximately $3 billion due to the depreciation of the U.S. dollar. The liabilities of CIBC Bank USA were approximately $26 billion as at October 31, 2017. Deposits increased by $44.1 billion or 11%, primarily due to the inclusion of the balances of CIBC Bank USA, domestic retail volume growth, and increased wholesale funding. Further details on the composition of deposits are provided in the “Supplementary annual financial information” section and Note 10 to the consolidated financial statements. Obligations related to securities lent or sold short or under repurchase agreements increased by $19.2 billion or 78%, primarily due to client-driven activities. Derivative instruments decreased by $5.5 billion or 19%, largely driven by a decrease in interest rate and foreign exchange derivatives valuation, partially offset by an increase in equity derivatives valuation. CIBC 2017 ANNUAL REPORT 29 Management’s discussion and analysis Acceptances decreased by $3.6 billion or 29%, driven by changes in client activities. Other liabilities increased by $2.4 billion or 18%, primarily due to an increase in broker payables, collateral received for derivatives, and accrued liabilities. Equity Equity as at October 31, 2017 was up $7.6 billion or 32% from 2016, primarily due to share issuance arising from the acquisitions of The PrivateBank and Geneva Advisors and from our shareholder and employee plans, as well as 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. 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 1.0% CET1 surcharge, which commenced January 1, 2016. This results in current minimum targets for CET1, Tier 1 and Total capital ratios of 8.0%, 9.5%, and 11.5%, respectively, for the D-SIBs. These targets may be higher for certain institutions at OSFI’s discretion. Additionally, effective beginning in the first quarter of 2017, banks need to hold an incremental countercyclical capital buffer equal to the weighted average of buffers deployed in Canada and across certain other jurisdictions, where private sector credit exposures exist(1). 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. Starting January 2018, CIBC Life Insurance Company Limited will be subject to OSFI’s Life Insurance Capital Adequacy Test. A comparison of the BCBS transitional capital ratio requirements and the OSFI all-in target capital ratio requirements is as follows: Transitional basis(1) (BCBS) All-in basis(1) (OSFI) 9.3% 2.0% 1.5% 1.3% 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%) 4.5% 4.5% 4.5% Total Capital (11.5%) Tier 1 Capital (9.5%) CET1 Capital (8.0%) 11.5% 2.0% 1.5% 1.0% 2.5% 4.5% 2017 2018 2019 2017 - 2019 CET 1 Capital Conservation Buffer D-SIB Buffer Additional Tier 1 Tier 2 (1) A countercyclical capital buffer is also applicable, but is insignificant for CIBC as at October 31, 2017. 30 CIBC 2017 ANNUAL REPORT 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 (retained earnings, common shares and stock surplus) (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 T i e r 1 c a p i t a l T o t a l c a p i t a l (1) Excluding accumulated other comprehensive income (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: 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, for which sufficient historical data is unavailable, 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 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. CIBC 2017 ANNUAL REPORT 31 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 2017 2016 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 capital 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 12,685 16,101 452 109 29,347 62 5,284 1,654 18 160 – 551 7,729 21,618 1,797 1,253 14 3,064 – – 3,064 24,682 1,961 1,204 19 263 3,447 – $ 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 – Tier 2 capital (T2) Total capital (TC = T1 + T2) CET1 capital RWA (4) Tier 1 capital RWA (4) Total capital RWA (4) Capital ratios CET1 ratio Tier 1 capital ratio Total capital ratio $ $ 3,447 28,129 203,321 203,321 203,321 $ $ 3,417 25,083 168,996 169,322 169,601 10.6 % 12.1 % 13.8 % 11.3 % 12.8 % 14.8 % (1) Comprises non-cumulative Class A Preferred Shares Series 39, 41, 43 and 45 which are treated as non-viability contingent capital (NVCC) in accordance with OSFI’s capital adequacy guidelines. (2) Comprises CIBC Tier 1 Notes – Series A and Series B due June 30, 2108 (together, the Tier 1 Notes). (3) Comprises Debentures due on October 28, 2024 and January 26, 2026 which are treated as NVCC in accordance with OSFI’s capital adequacy guidelines. (4) All-in RWAs as at October 31, 2017 include a capital floor adjustment. See “Risk-weighted assets” section on page 31 for additional details. 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 (1) CET1 ratio Tier 1 ratio Total capital ratio (1) Transitional RWAs as at October 31, 2017 and 2016 include capital floor adjustments. $ 2017 23,254 25,198 28,594 207,910 $ 2016 20,751 22,596 25,949 173,902 11.2 % 12.1 % 13.8 % 11.9 % 13.0 % 14.9 % 32 CIBC 2017 ANNUAL REPORT 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 (2) Standardized approach Corporate Sovereign Banks Real estate secured personal lending Other retail Trading book AIRB approach Corporate Sovereign (3) 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) (4) 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 (4) CET1 RWA Tier 1 RWA Total RWA Capital floor adjustment (4) CET1 RWA Tier 1 RWA Total RWA Total RWA after adjustment for CVA phase-in (4) CET1 capital RWA Tier 1 capital RWA Total capital RWA 2017 RWA (All-in basis) Minimum total capital required (1) $ $ $ $ $ 28,029 1,597 488 2,735 933 187 33,969 64,924 2,093 3,215 14,738 17,355 7,579 759 3,345 1,341 6,911 122,260 11,427 167,656 935 2,058 1,843 556 5,392 24,664 197,712 3,498 3,741 3,935 2,111 1,868 1,674 203,321 203,321 203,321 $ $ $ $ $ 2,242 128 39 219 75 15 2,718 5,194 167 257 1,179 1,388 606 61 268 107 553 9,780 914 13,412 75 165 147 44 431 1,973 15,816 280 299 315 169 150 134 16,265 16,265 16,265 RWA (All-in basis) 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 n/a n/a n/a 168,996 169,322 169,601 $ $ $ $ 2016 Minimum total capital required (1) $ $ $ $ 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 n/a n/a n/a 13,518 13,544 13,567 (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 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%. (2) Credit risk for CIBC Bank USA and CIBC FirstCaribbean are calculated under the standardized approach. (3) Includes residential mortgages insured by Canada Mortgage and Housing Corporation (CMHC), an agency of the Government of Canada, and government guaranteed student loans. (4) Before any capital floor requirement as applicable, there are three different levels of RWAs for the calculation of the CET1, Tier 1, and Total capital ratios arising from the option CIBC has chosen for the phase-in of the CVA capital charge. All-in RWAs as at October 31, 2017 include a capital floor adjustment. CET1 ratio (All-in basis) The CET1 ratio at October 31, 2017 decreased 0.7% from October 31, 2016, driven by an increase in CET1 capital RWAs, partially offset by an increase in CET1 capital. The increase in CET1 RWAs was primarily due to the inclusion of the balances of CIBC Bank USA, organic growth, portfolio migrations, a Basel I capital floor adjustment and capital methodology updates, partially offset by net foreign exchange movement and capital model updates. The increase in CET1 capital was the result of share issuance arising from the acquisitions of The PrivateBank and Geneva Advisors, our shareholder investment plan and employee share purchase plan, and internal capital generation (net income less dividends), partially offset by higher regulatory deductions for goodwill and intangible assets arising from the acquisitions and net foreign exchange movement. We hold regulatory capital against the underlying exposures associated with our credit card securitization trust, CARDS II Trust, as we have in the past provided non-contractual support to the trust. Applying this treatment resulted in a reduction of our 2017 Basel III CET1, Tier 1 and Total capital ratios by approximately 0.12%, 0.14% and 0.15%, respectively (2016: 0.08%, 0.08% and 0.08%, respectively). CIBC 2017 ANNUAL REPORT 33 Management’s discussion and analysis Movement in total regulatory capital 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 pursuant to the acquisition of The PrivateBank Issue of common shares pursuant to the acquisition of Geneva Advisors Other 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 Change in goodwill and other intangible assets Redemption of subordinated indebtedness Other, including change in regulatory adjustments Balance at end of year $ 2017 25,083 3,443 126 208 800 – – – 4,699 (2,173) – 749 (376) (101) 10 139 (191) (4,219) – (68) $ 2016 23,434 – – 109 – 1,000 (61) – 4,275 (1,917) (209) 164 79 67 1 (390) (162) 185 (1,500) 8 $ 28,129 $ 25,083 Movement in CET1 capital RWAs 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) 2017 Of which counterparty 2016 Of which counterparty Credit risk credit risk (1) Credit risk credit risk (1) $ 143,075 13,151 (4,628) (3,080) 1,155 26,517 (2,119) (2,917) $ 8,861 1,881 (1,116) (37) 361 90 (87) 172 $ 133,505 13,456 1,779 (1,600) – (1,712) 565 (2,918) $ 7,898 1,402 (408) – – – 44 (75) $ 171,154 $ 10,125 $ 143,075 $ 8,861 (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) Includes $3,498 million (2016: $2,977 million) of CET1 CVA RWAs relating to bilateral over-the-counter (OTC) derivatives. The increase in credit risk RWAs is primarily due to the inclusion of the balances of CIBC Bank USA, as well as organic growth across our businesses throughout the year. The decrease in the book quality category reflects the impact of portfolio upgrades during the year. Model updates include refinements and normal course updates to our underlying AIRB models and parameters. Market risk $ millions, for the year ended October 31 Balance at beginning of year Movement in risk levels (1) Model updates (2) Methodology and policy (3) Acquisitions and disposals Foreign exchange movements Other Balance at end of year $ 2017 4,175 1,149 (252) – 59 261 – $ 2016 4,408 (268) (46) 5 – 76 – $ 5,392 $ 4,175 (1) Relates to changes in open positions and market data. (2) Relates to internal model or parameter changes. (3) 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. The overall increase in market risk RWAs is primarily driven by movement in risk levels, which includes changes in open positions and the market rates affecting these positions, along with foreign exchange movement. These factors were partially offset by internal model updates. 34 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Operational risk $ millions, for the year ended October 31 Balance at beginning of year Movement in risk levels (1) Methodology and policy (2) Acquisitions and disposals Balance at end of year 2017 21,746 1,227 – 1,691 24,664 $ $ 2016 18,194 1,154 2,398 – 21,746 $ $ (1) Relates to changes in loss experience and business environment and internal control factors. (2) 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. The increase in operational risk RWAs is primarily driven by the inclusion of the balances of CIBC Bank USA and Geneva Advisors. The movement in risk levels under the advanced measurement 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 and OSFI have published a number of proposals for changes to the existing risk-based capital requirements to strengthen the regulation, supervision, and practices of banks with the overall objective of enhancing financial stability. Since the start of the fiscal year, the BCBS and OSFI publications have included the proposals discussed below. In October 2017, the BCBS issued the final guideline on the identification and management of step-in risk, with a proposed implementation timeline of no later than 2020. Step-in risk is the risk that a bank might provide financial support to an unconsolidated entity beyond, or in the absence of, any contractual obligations or equity ties, should the entity experience financial stress. The focus of the guideline is on unconsolidated entities such as securitization conduits, structured investment vehicles, and money market funds. The objective of the guideline is to mitigate this risk through banks’ self-assessment and reporting to supervisors, and not by the automatic application of a Pillar I liquidity or capital charge. In August 2017, OSFI issued for public consultation revisions to the capital adequacy requirements (CAR) Guideline for implementation in the first quarter of 2018. The draft CAR Guideline proposed capital treatment for the expected credit losses accounting framework under IFRS 9 and that domestic implementation of the standardized approach for measuring counterparty credit risk exposures will be required by the first quarter of 2019, subject to confirming the implementation readiness of key foreign market counterparties during 2018. It also indicated that the revised securitization framework is expected to be implemented in the first quarter of 2019. In July 2017, the BCBS issued the consultative document “Capital treatment for simple, transparent and comparable short-term securitisations”, setting out additional guidance and requirements for eligibility to apply preferential regulatory capital treatment for banks that act as investors in, or sponsors of simple, transparent and comparable short-term securitizations. The proposed treatment is consistent with the BCBS’ July 2016 revisions to the securitization framework. In July 2017, OSFI announced that it is extending the Canadian implementation timeline for adoption of the BCBS’ market risk framework from the end of 2019 to no earlier than the first quarter of 2021. The date was revised from the BCBS’ expected 2019 timeline due to the challenges and uncertainties associated with implementation of the requirements as well as likely delays in implementation by the majority of key foreign jurisdictions. Prior to this fiscal year, the BCBS and OSFI issued the following publications which have not yet been implemented: In July 2016, the BCBS published the final standard on capital treatment of securitization exposure titled “Revisions to the securitisation framework”. The framework aims to reduce mechanistic reliance on external ratings, increase risk sensitivity, and re-calibrate the risk-weights for certain exposures. It also includes the capital treatment for “simple, transparent and comparable” securitizations. 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 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 objectives of the proposed changes are 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. In 2014, the BCBS issued the final standard “The standardized approach for measuring counterparty credit risk exposures”. The standard includes a comprehensive, non-modelled approach for measuring counterparty credit risk associated with OTC derivatives, exchange-traded derivatives, and long settlement transactions. The new standardized approach replaces the existing Current Exposure Method and the Standardized Method. CIBC will continue to monitor and prepare for developments impacting risk-based capital requirements. 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). CIBC 2017 ANNUAL REPORT 35 Management’s discussion and analysis OSFI expects federally regulated deposit-taking institutions to have leverage ratios that meet or exceed 3.0%. This minimum may be higher for certain institutions at OSFI’s discretion. $ millions, as at October 31 Transitional basis Tier 1 capital Leverage ratio exposure Leverage ratio All-in basis Tier 1 capital Leverage ratio exposure Leverage ratio 2017 2016 $ $ 25,198 610,769 4.1 % 24,682 610,353 4.0 % $ $ 22,596 546,136 4.1 % 21,666 545,480 4.0 % A B A/B C D C/D Leverage ratio (All-in basis) The leverage ratio at October 31, 2017 remained unchanged from October 31, 2016 at 4.0%, as an increase in leverage ratio exposure was offset by an increase in Tier 1 capital. The increase in leverage ratio exposure was primarily driven by an increase in on-balance sheet assets primarily resulting from the inclusion of the balances of CIBC Bank USA and an increase in securities financing transaction exposures. The increase in Tier 1 capital was primarily driven by the factors noted in the CET1 capital discussion above, as well as the issuance of preferred shares, partially offset by an increase in the phase-out of non-qualifying Tier 1 capital instruments from Additional Tier 1 capital. 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 global systemically important banks (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 not known at this point. Revised Pillar 3 disclosure requirements In January 2015, the BCBS issued “Revised Pillar 3 disclosure requirements”, which set out the first phase of an initiative to replace existing Pillar 3 disclosure requirements for the various types of risk. Pillar 3 aims to promote market discipline through regulatory disclosure requirements, in order to improve comparability and consistency of risk disclosures and increase transparency and confidence about a bank’s exposure to risk and the overall adequacy of its regulatory capital. In April 2017, OSFI released its guidelines confirming expectations for domestic implementation of the BCBS Pillar 3 first phase requirements, with implementation required by the fourth quarter of 2018. In March 2017, the BCBS released “Pillar 3 disclosure requirements – consolidated and enhanced framework”, a standard establishing the second phase of the project. This standard includes enhancements to the January 2015 requirements, the introduction of several new disclosure requirements, and the consolidation of all existing BCBS disclosure requirements into the Pillar 3 framework. The BCBS has also commenced a third phase of its review of Pillar 3. OSFI has not yet released its requirements for the second and third phases. CIBC will continue to monitor and prepare for developments in this area. Global systemically important banks – public disclosure requirements In March 2017, the BCBS released “Global Systemically Important Banks – Revised Assessment Framework”, a consultative document proposing revisions to the G-SIB assessment framework, designed to capture new dimensions of systemic risk not included in the current framework. The proposal includes new G-SIB indicators as well as amendments to the definition and potential weighting of existing indicators. The revised assessment methodology is expected to be finalized in 2017 and to become effective for the 2019 G-SIB assessment. Bank recapitalization (Bail-in) conversion regulations The overarching policy objective is to strengthen financial stability while protecting taxpayers in the event of a D-SIB failure, and is consistent with the objectives of the Financial Stability Board’s rules for Total Loss-Absorbing Capacity (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. In June 2016, a legislative framework for a bail-in regime for Canada’s D-SIBs received royal assent. On June 16, 2017, the Department of Finance issued a pre-publication of bail-in regulations. These provide statutory powers to the Canada Deposit Insurance Corporation (CDIC) to enact the bail-in regime including the ability to convert specified eligible shares and liabilities of D-SIBs into common shares in the event such a bank becomes non-viable. OSFI is responsible for designating D-SIBs, setting minimum bail-in/TLAC requirements, and determining that a bank is non-viable. In line with previous consultations, liabilities subject to bail-in are unsecured and tradable liabilities with original term to maturity of more than 400 days. Consumer deposits, derivatives and structured notes would not be eligible for bail-in. The regulations become effective 180 days after the regulations are registered. In conjunction with the pre-publication of bail-in regulations, OSFI issued draft guidelines on TLAC for Canada’s D-SIBs and holdings of TLAC instruments for public consultation. OSFI’s TLAC guideline requires D-SIBs to maintain a minimum of 21.5% of TLAC-eligible instruments(1) relative to their RWAs and 6.75% relative to their leverage exposures. In addition, D-SIBs will be expected to hold buffers above the minimum TLAC ratios. TLAC-eligible liabilities must satisfy all of the requirements set out in the bail-in regulations and have a residual maturity greater than 365 days, among other requirements. The minimum TLAC requirements are proposed to be effective in fiscal 2022. OSFI’s TLAC holdings proposal is in line with the BCBS’ TLAC holdings standard finalized in October 2016. Under the draft guideline, our investment in other G-SIBs’ and Canadian D-SIBs’ TLAC instruments are to be deducted from our own Tier 2 capital if our aggregate holdings, together with investments in capital instruments of other financial institutions, exceeds certain thresholds in relation to our own CET1 capital. (1) The sum of a D-SIB’s TLAC, subject to certain adjustments, including Tier 1 capital, Tier 2 capital, and prescribed shares and liabilities that are subject to conversion into common shares and meet the eligibility criteria set out in OSFI’s TLAC draft guideline. 36 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Capital management and planning Basel establishes a framework for a bank’s Internal Capital Adequacy Assessment Process (ICAAP), which includes oversight by the CIBC Board of Directors (the Board). Our capital management policy is reviewed and approved by the Board in support of the ICAAP. The policy includes a set of guiding principles that relate to capital strength, capital mix, dividends and return of capital, and unconsolidated capital adequacy of regulated entities, based on regulatory requirements and our risk appetite. The key 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 is continually monitored relative to our regulatory minimums and internal targets and the amount of capital required may change in relation to CIBC’s business growth, risk appetite, and business and regulatory environment, including changes in accounting policies. Capital planning is a crucial element of our overall financial planning 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. Capital initiatives The following main capital initiatives were undertaken in 2017: Normal course issuer bid On March 10, 2017, we announced that the Toronto Stock Exchange had accepted the notice of CIBC’s intention to commence a normal course issuer bid. Purchases under this bid will terminate upon the earlier of: (i) CIBC purchasing up to a maximum of 8 million common shares; (ii) CIBC providing a notice of termination; or (iii) March 13, 2018. No common shares have been purchased under this bid. See Note 15 to the consolidated financial statements for additional information. Common share issuance pursuant to the acquisition of The PrivateBank On June 23, 2017, we completed the acquisition of The PrivateBank, and in connection therewith, we issued 32,137,402 CIBC common shares. For further details, see Note 3 and Note 15 to the consolidated financial statements. Common share issuance pursuant to the acquisition of Geneva Advisors On August 31, 2017, we completed the acquisition of Geneva Advisors, and in connection therewith, we issued 1,204,344 CIBC common shares. For further details, see Note 3 and Note 15 to the consolidated financial statements. Shareholder investment plan (the plan) Effective with the October 28, 2016 dividend, CIBC has elected to issue shares from Treasury to fulfill the requirements of the plan. Pursuant to the plan, we issued 6,870,584 common shares for consideration of $749 million for the year ended October 31, 2017. Dividends Our quarterly common share dividend was increased from $1.27 per share to $1.30 per share for the quarter ending October 31, 2017, $1.24 per share to $1.27 per share for the quarter ended April 30, 2017, and $1.21 per share to $1.24 per share for the quarter ended January 31, 2017. Common and preferred share dividends are declared quarterly at the discretion of the Board. The declaration and payment of dividends is governed by Section 79 of the Bank Act (Canada), the terms of the preferred shares, and the terms of the Tier 1 notes issued by CIBC Capital Trust, as explained in Notes 15 and 16 to the consolidated financial statements. Preferred shares On June 2, 2017, we issued 32 million Non-cumulative Rate Reset Class A Preferred Shares Series 45 (NVCC) with a par value of $25.00 per share, for gross proceeds of $800 million. See the “Outstanding share data” section below and Note 15 to the consolidated financial statements for further details. Subordinated indebtedness During the quarter ended July 31, 2017, we purchased and cancelled $42 million (US$34 million) of our Floating Rate Debenture Notes Due 2084. During the quarter ended April 30, 2017, we purchased and cancelled $25 million (US$19 million) of our Floating Rate Debenture Notes Due 2085. 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. CIBC 2017 ANNUAL REPORT 37 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 24, 2017 Common shares Preferred shares (1)(2) Series 39 (NVCC) Series 41 (NVCC) Series 43 (NVCC) Series 45 (NVCC) Treasury shares – preferred shares (1)(2) Treasury shares – common shares Subordinated indebtedness (2)(3) 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 Amount 439,432,245 $ 12,560 16,000,000 12,000,000 12,000,000 32,000,000 85,626 160,203 $ $ $ 400 300 300 800 2 19 Minimum conversion price per common share Maximum number of common shares issuable on conversion/exercise $ 5.00 5.00 5.00 5.00 80,000,000 60,000,000 60,000,000 160,000,000 n/a n/a 1,000 1,000 5.00 5.00 $ 3,800 300,000,000 300,000,000 4,975,774 960,000,000 (1) Upon the occurrence of a Trigger Event, each share is convertible into a number of common shares, determined by dividing the par value of $25.00 plus declared and unpaid dividends by the average common share price (as defined in the relevant prospectus supplement) subject to a minimum price per share (subject to adjustment in certain events as defined in the relevant prospectus supplement). Preferred shareholders do not have the right to convert their shares into common shares. (2) The maximum number of common shares issuable on conversion excludes the impact of declared but unpaid dividends and accrued interest. (3) Upon the occurrence of a Trigger Event, the Debentures are convertible into a number of common shares, determined by dividing 150% of the par value plus accrued and unpaid interest by the average common share price (as defined in the relevant prospectus supplement) subject to a minimum price per common share (subject to adjustment in certain events as defined in the relevant prospectus supplement). n/a Not applicable. 38 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis The occurrence of a “Trigger Event” would result in conversion of all of the outstanding NVCC instruments described above, which would represent a dilution impact of 69% based on the number of CIBC common shares outstanding as at October 31, 2017. As described in the Capital Adequacy Guidelines, a Trigger Event occurs when OSFI determines the bank is or is about to become non-viable and, if after conversion of all contingent instruments and consideration of any other relevant factors or circumstances, it is reasonably likely that its viability will be restored or maintained; or if the bank has accepted or agreed to accept a capital injection or equivalent support from a federal or provincial government, without which OSFI would have determined the bank to be non-viable. Non-cumulative Rate Reset Class A Preferred Shares Series 39 (NVCC) (Series 39 shares) For the initial five year period to the earliest redemption date of July 31, 2019, the Series 39 shares pay quarterly cash dividends, if declared, at a rate of 3.90%. On July 31, 2019, and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 2.32%. Holders of the Series 39 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 40 (NVCC) (Series 40 shares), subject to certain conditions, on July 31, 2019 and on July 31 every five years thereafter. Holders of the Series 40 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus 2.32%. Holders of the Series 40 shares may convert their shares on a one-for-one basis into Series 39 shares, subject to certain conditions, on July 31, 2024 and on July 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 39 shares at par on July 31, 2019, and on July 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 40 shares at par on July 31, 2024, and on July 31 every five years thereafter. Non-cumulative Rate Reset Class A Preferred Shares Series 41 (NVCC) (Series 41 shares) For the initial five year period to the earliest redemption date of January 31, 2020, the Series 41 shares pay quarterly cash dividends, if declared, at a rate of 3.75%. On January 31, 2020, and on January 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 2.24%. Holders of the Series 41 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 42 (NVCC) (Series 42 shares), subject to certain conditions, on January 31, 2020 and on January 31 every five years thereafter. Holders of the Series 42 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus 2.24%. Holders of the Series 42 shares may convert their shares on a one-for-one basis into Series 41 shares, subject to certain conditions, on January 31, 2025 and on January 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 41 shares at par on January 31, 2020 and on January 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 42 shares at par on January 31, 2025 and on January 31 every five years thereafter. Non-cumulative Rate Reset Class A Preferred Shares Series 43 (NVCC) (Series 43 shares) For the initial five year period to the earliest redemption date of July 31, 2020, the Series 43 shares pay quarterly cash dividends, if declared, at a rate of 3.60%. On July 31, 2020, and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 2.79%. Holders of the Series 43 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 44 (NVCC) (Series 44 shares), subject to certain conditions, on July 31, 2020 and on July 31 every five years thereafter. Holders of the Series 44 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus 2.79%. Holders of the Series 44 shares may convert their shares on a one-for-one basis into Series 43 shares, subject to certain conditions, on July 31, 2025 and on July 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 43 shares at par on July 31, 2020 and on July 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 44 shares at par on July 31, 2025 and on July 31 every five years thereafter. Non-cumulative Rate Reset Class A Preferred Shares Series 45 (NVCC) (Series 45 shares) For the initial five year period to the earliest redemption date of July 31, 2022, the Series 45 shares pay quarterly cash dividends, if declared, at a rate of 4.40%. On July 31, 2022, and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 3.38%. Holders of the Series 45 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 46 (NVCC) (Series 46 shares), subject to certain conditions, on July 31, 2022 and on July 31 every five years thereafter. Holders of the Series 46 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus 3.38%. Holders of the Series 46 shares may convert their shares on a one-for-one basis into Series 45 shares, subject to certain conditions, on July 31, 2027 and on July 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 45 shares at par on July 31, 2022 and on July 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 46 shares at par on July 31, 2027 and on July 31 every five years thereafter. 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 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. CIBC 2017 ANNUAL REPORT 39 Management’s discussion and analysis 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 $45 million in 2017 (2016: $36 million). All fees earned in respect of activities with the conduits are on a market basis. As at October 31, 2017, the amount funded for the various asset types in our multi-seller conduits amounted to $5.7 billion (2016: $5.4 billion). The estimated weighted-average life of these assets was 1.7 years (2016: 1.5 years). Our holdings of commercial paper issued by our non-consolidated sponsored multi-seller conduits that offer commercial paper to external investors were nil (2016: $10 million). Our committed backstop liquidity facilities to these conduits were $8.7 billion (2016: $7.2 billion). We also provided credit facilities of $40 million (2016: $40 million) to these conduits. 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 (2016: $130 million). As at October 31, 2017, we funded $94 million (2016: $103 million) through the issuance of bankers’ acceptances and prime loans. We engage one or more of the four major rating agencies, DBRS Limited (DBRS), Fitch, Moody’s, and S&P, to opine on the credit ratings of asset- backed securities (ABS) issued by our sponsored securitization vehicles. In the event that ratings differ between rating agencies, we use the lower rating. Our on- and off-balance sheet amounts related to the structured entities (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 2017 Investments and loans (1) Liquidity, credit facilities and commitments Written credit derivatives (2) Investments and loans (1) 2016 Liquidity, credit facilities and commitments Written credit derivatives (2) Single-seller and multi-seller conduits Third-party structured vehicles – continuing Structured vehicles run-off Other $ 94 3,025 109 528 $ 5,741 (3) 2,259 13 94 $ – – 179 – $ 113 4,647 910 441 $ 5,500 (3) 1,398 28 75 $ – – 319 – (1) Excludes securities issued by, retained interest in, and derivatives with entities established by CMHC, Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, Government National Mortgage Association, Federal Home Loan Banks, Federal Farm Credit Bank, and Student Loan Marketing Association. $3 million (2016: $536 million) of the exposures related to structured vehicles run-off were hedged. (2) Disclosed amounts reflect the outstanding notional of written credit derivatives. The negative fair value recorded on the consolidated balance sheet was $148 million (2016: $174 million). Notional of $161 million (2016: $277 million) was hedged with credit derivatives protection from third parties. The fair value of these hedges net of CVA was $130 million (2016: $139 million). An additional notional of $18 million (2016: $36 million) was hedged through a limited recourse note. (3) Excludes an additional $3.0 billion (2016: $1.8 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 nil (2016: $10 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. 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 credit derivatives protection sold and standby and performance letters of credit, as discussed in Notes 12 and 22 to the consolidated financial statements, respectively. 40 CIBC 2017 ANNUAL REPORT 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. 41 Risk overview 42 Risk governance structure 43 Risk management structure 44 Risk management process 44 Risk appetite statement 45 Risk policies and limits 45 Risk identification and measurement 47 Stress testing 47 Risk treatment/mitigation 47 Top and emerging risks 49 Risks arising from business activities 50 Credit risk 50 Governance and management 50 Policies 51 Process and control 51 Risk measurement 53 Exposure to credit risk 56 Credit quality of portfolios 59 Credit quality performance 59 Exposure to certain countries and regions 61 Selected exposures in certain activities 61 Settlement risk 62 Market risk 62 Governance and management 62 Policies 62 Process and control 62 Risk measurement 63 Trading activities 66 Non-trading activities 68 Pension risk 69 Liquidity risk 69 Governance and management 69 Policies 69 Risk measurement 70 Liquid and encumbered assets 72 Funding 74 Contractual obligations 75 Other risks 75 Strategic risk 75 Insurance risk 76 Operational risk 77 Technology, information and cyber security risk 77 Reputation and legal risk 77 Regulatory compliance risk 77 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 groups own the risk and are responsible for managing all risks associated with their activities, including identifying, assessing, mitigating and controlling them – this is the first line of defence; As the second line of defence, CIBC’s Risk Management, and other functional groups are responsible for providing guidance and effective independent oversight and challenge of the enterprise-wide risks inherent in CIBC’s business activities; and (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. CIBC 2017 ANNUAL REPORT 41 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 design and operating effectiveness of internal controls and the control environment, including controls over the risk management process. Risk Management Committee (RMC): This committee assists the Board in fulfilling its responsibilities for defining CIBC’s risk appetite and overseeing CIBC’s risk profile and performance against the defined risk appetite. This includes oversight of policies, procedures and limits related to the identification, measurement, monitoring and controlling of CIBC’s principal business risks. Management Resources and Compensation Committee (MRCC): This committee is responsible for assisting the Board in fulfilling its governance and supervisory responsibilities for strategic oversight of CIBC’s human capital. This encompasses talent strategy, succession planning and total rewards; and their alignment with CIBC’s strategy of building a strong, innovative and relationship-oriented bank, its risk appetite and control framework. Corporate Governance Committee (CGC): The primary function of the CGC 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, funding and liquidity management, and asset liability management. It also provides strategic direction regarding structural interest rate risk and structural foreign exchange risk postures, approval of funds transfer pricing policies/ parameters and approval of wholesale funding plans. 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 functional groups, provides a forum for discussion and oversight of risk appetite, risk profile and risk-mitigation strategies. Key activities include reviewing, and providing input regarding CIBC’s risk appetite statements; monitoring risk profile against risk appetite, reviewing, and evaluating business activities in the context of risk appetite; and identifying, reviewing, and advising on current and emerging risk issues and associated mitigation plans. (cid:129) 42 CIBC 2017 ANNUAL REPORT 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 Capital Markets Risk Management Global Credit Risk Management (including non- U.S. Risk Officers) Global Operational Risk Management Risk Analytics, Reporting and Credit Decisioning Compliance U.S. Risk Management Risk Appetite 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 following key groups within Risk Management, independent of the originating businesses, contribute to our management of risk: (cid:129) Capital Markets Risk Management – This group provides independent oversight of the measurement, monitoring and control of market risks (both trading and non-trading), and trading credit risk (also called counterparty credit risk) across CIBC’s portfolios, and effective challenge and sound risk management oversight to the treasury/liquidity management function within CIBC. Global Credit Risk Management – This group is responsible for the adjudication and oversight of credit risks associated with our commercial, wholesale and wealth management activities, management of the risks in our investment portfolios, as well as management of special loan portfolios. Global Operational Risk Management – This group develops the systems and tools to facilitate the identification of operational risks, and has global accountability for the measurement and monitoring of all operational risk types. Risk Analytics, Reporting and Credit Decisioning – This group is responsible for enterprise-wide analysis, including enterprise-wide stress testing and reporting, risk policy and governance, risk systems and models, recovery and resolution planning, as well as economic and regulatory capital methodologies. In addition, this group manages credit risk in personal and small business products offered through the various distribution channels (residential mortgages, credit cards, personal loans/lines of credit, small business loans) and performs analytics to optimize retail credit performance, along with collections, fraud, and anti-money laundering outcomes. Compliance – This group provides timely and proactive advice and independent oversight of CIBC’s compliance with applicable regulatory and anti- money laundering requirements. U.S. Risk Management – This group carries out the mandate of CIBC Risk Management at a regional level under the leadership of the U.S. CRO, with oversight from the U.S. Risk Management Committee and reporting to the Senior Executive Vice-President, U.S. Region. The group provides independent oversight for the identification, management, measurement, monitoring and control of risks in CIBC’s U.S. Commercial Banking and Wealth Management SBU. In addition, the CRO also oversees, through a joint oversight structure, the U.S. CRO, to ensure the relevant aspects of the U.S. Risk Management group are consistent with the above-noted practices. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) CIBC 2017 ANNUAL REPORT 43 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 to ensure that the risk exposure is within our risk appetite. Day-to-day activities and decisions are governed by our framework of risk tolerance limits, policies, standards and procedures that support our risk appetite statement. Risk culture Risk culture refers to desired attitudes and behaviours relative to risk taking. At CIBC, we strive to achieve a consistent and effective risk culture by: (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, operational risk, code of conduct, anti-money laundering and other key risk topics. By taking this mandatory training, all employees develop a basic knowledge of risk management in support of our risk culture. This training is supplemented by our risk appetite statement, risk management priorities, documents on our internal website and internal news releases. In addition, we have policies, procedures and limits in place that govern our day-to-day business activity, with escalation procedures for limit breaches outlined accordingly. Risk input into performance and compensation At each year end, Risk Management provides an assessment of adherence to risk appetite and material risk matters across CIBC. Risk Management also considers a number of risk inputs to identify matters which may directly impact individual compensation awards and/or performance ratings. The MRCC oversees the performance management and compensation process. The MRCC is responsible for assisting the Board in 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) (cid:129) (cid:129) Approving CIBC’s compensation philosophy and any material changes to CIBC’s compensation principles or practices; Approving new material compensation policies and changes to existing material compensation policies; Reviewing and recommending for Board approval new material compensation plans or changes to existing material plans; Assessing the appropriateness and alignment of compensation relative to actual business performance and risks; 44 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis (cid:129) (cid:129) (cid:129) Reviewing and recommending for Board approval incentive compensation funding and allocations, based on an assessment of business performance and risk; Reviewing and recommending for Board approval individual compensation for the ExCo and other key officers; and Approving individual compensation for employees with total direct compensation above a certain materiality threshold. Risk policies and limits Our risk policies and limits framework is intended to ensure that risks are appropriately identified, measured, monitored and controlled in accordance with our risk appetite. For most risks, we have developed an overarching framework document that sets out the key principles for managing the associated risks and our key risk policies and limits. This framework is supported by standards, guidelines, processes, procedures and controls that govern day-to-day activities in our businesses. Oversight is provided by management committees, as well as the Board/Board Committees. Key risk policies and limits are illustrated below: 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 Policy 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 following chart, to reflect changes in the nature of the risks we are facing. The Risk Register is used as an input for our ICAAP, either explicitly in the economic and regulatory capital calculations, or implicitly through the buffer of actual capital over economic capital and regulatory capital. CIBC 2017 ANNUAL REPORT 45 Management’s discussion and analysis Risk Identification Processes Strategic and Emerging Risk Themes External and Peer Benchmarking Regulatory Reviews Macro and External Risks Assessment of Risk Level (probability / severity considerations) Risk Register Internal Capital Adequacy Assessment Process (ICAAP) Risks Inherent in CIBC’s Businesses Strategic Business Reviews Change Initiative Risk Assessment Process Risk and Control Self Assessments 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 the output. The following procedures provide evidence of this review: (cid:129) (cid:129) (cid:129) (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 whether the model/parameter concepts and assumptions are appropriate and robust; Accuracy testing to assess the calibration and accuracy of the risk components including, for example, the discriminative power of rating systems and the reasonableness of capital parameters; Sensitivity testing 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) 46 CIBC 2017 ANNUAL REPORT 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 to have potential negative implications, as well as regulatory and accounting developments that are material for CIBC. Technology, information and cyber security risk Financial institutions like CIBC are evolving their business processes to leverage innovative technologies and the internet to improve client experience and streamline operations. At the same time, cyber threats and the associated financial, reputation and business interruption risks have also increased. 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 continually perform cyber security preparedness and testing exercises to validate our defences, 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 and the recent rise of protectionism, could have serious negative implications for general economic and banking activities. Currently, there are several areas of concern which have raised the level of uncertainty in global financial markets. These include tensions between the U.S. and North Korea, the volatile situation in the Middle East, and uncertainties surrounding the North American Free Trade Agreement (NAFTA) and Brexit negotiations. While it is impossible to predict where new geo-political disruption will occur, we do pay particular attention to markets and regions CIBC 2017 ANNUAL REPORT 47 Management’s discussion and analysis with existing or recent historical instability to assess the impact of these environments on the markets and businesses in which we operate. The administration in the U.S. continues to pose economic policy uncertainties that could either add or subtract to Canadian economic activity. The downside risks would be associated with an increase in protectionism that does not exempt duties on Canadian goods and services, as well as heightened competition for business investment if 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. While the governments of Canada, the U.S. and Mexico recently held discussions relating to NAFTA, with a view to renegotiating specific terms of the agreement, the outcome remains uncertain. We will monitor these developments as details emerge. 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. The Bank of Canada’s recent and potential increases in interest rates can be viewed in concert with measures that OSFI, the Department of Finance and provincial governments are delivering (e.g., tax on foreign ownership, revised mortgage underwriting guidelines) to slow down borrowing and calm the housing market. Currently, we qualify variable rate mortgage borrowers using the Bank of Canada five-year fixed benchmark rate, which is typically higher than the variable rate by approximately two percentage points. Therefore, our variable rate borrowers should be able to withstand some increase in interest rates. OSFI recently revised its B-20 rules on mortgage lending. See the “Credit risk” section for further details. While we believe that the probability of a severe housing crash that generates significant losses for mortgage portfolios remains low, increases in rates and new measures put in place elevate the risk associated with an inflated housing market, along with high levels of consumer debt that would be a concern should the economy falter and unemployment rates begin to increase. In addition, we run our enterprise-wide statistical stress tests at lower home prices to determine potential direct losses, and have also conducted stress tests to assess the impact of rising unemployment rates on borrowers’ ability to repay loan obligations. Acquisition risk CIBC seeks out acquisition opportunities which align with its strategies, risk appetite and financial goals. 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, retaining clients and key personnel, realizing synergies and efficiencies, controlling integration and acquisition costs, among others, and changes in general business and economic conditions. Although many of the factors are beyond CIBC’s control, their impact is partially mitigated by conducting due diligence before completing the transaction, developing and executing appropriate integration plans, and monitoring performance following the acquisition. However, acquisitions involve inherent uncertainty and we cannot determine all potential events, facts and circumstances and there could be an adverse impact on CIBC’s operations and financial performance. U.S. banking regulation In conjunction with our acquisition of The PrivateBank (subsequently rebranded as CIBC Bank USA), completed on June 23, 2017, our wholly-owned subsidiary, CIBC Bancorp USA Inc. (CIBC Bancorp; formerly CIBC Holdco Inc.), became a bank holding company registered under the U.S. Bank Holding Company Act of 1956, as amended, and is subject to regulation as a bank holding company by the U.S. Board of Governors of the Federal Reserve System (Federal Reserve). CIBC Bank USA, as a state-chartered bank with greater than $10 billion of total assets, is subject to regulation by the U.S. Federal Deposit Insurance Corporation (FDIC), the U.S. Consumer Financial Protection Board (CFPB), and the Illinois Department of Financial and Professional Regulation. The scope of these regulations could impact our business in a number of ways. For example, both CIBC Bancorp and CIBC Bank USA are required to maintain minimum capital ratios in accordance with Basel III rules adopted by the U.S. bank regulatory agencies, which differ in some respects from Canada’s Basel III rules. Under the U.S. bank regulatory framework, both CIBC and CIBC Bancorp are expected to provide a source of strength to the subsidiary bank and may be required to commit additional capital and other resources to CIBC Bank USA in the event that its financial condition were to deteriorate, whether due to overall challenging economic conditions in the U.S., or because of business-specific issues. The Federal Reserve and the FDIC also have the ability to restrict dividends paid by CIBC Bancorp or CIBC Bank USA, which could limit our ability to receive distributions on our capital investment in our U.S. banking operations. Furthermore, the Federal Reserve and the FDIC could also place limits on our ability to grow our U.S. banking operation, whether through acquisitions or organically, if, among other things, they have supervisory concerns about risk management or compliance practices at CIBC Bancorp or CIBC Bank USA. In addition, the CFPB has been active in recent years in pursuing enforcement actions and imposing fines against U.S. financial institutions for violations of federal consumer protection laws. Commodity prices The global growth upturn in 2017 has led to increased commodity prices, although they continue to experience a high degree of fluctuation. Growing geo-political tensions in the Middle East have also provided support to the rally in oil prices. So far, our overall commodity exposure continues to perform within our risk appetite, with losses in our oil and gas portfolio down significantly. 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 trends negatively. China economic policy risk While meeting the government-set quarterly targets, China’s economy continues to be on a relatively 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. Concerns have been raised regarding high rates of credit growth in the Chinese economy and the potential for disruption in economic growth if credit quality deteriorates or credit access is tightened sharply. The capital controls deployed by the People’s Bank of China late last year which were designed to slow capital outflows remain in place and are believed to be having an impact on Canadian cities such as Vancouver and Toronto, where foreign purchasers have contributed to the sharp rise in house prices over recent years. These capital controls could also slow the market in Canada for mergers and acquisitions. 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 could affect clients that export to China or sell into a market where prices have been pushed down by weakness in Chinese demand, and could raise the credit risk associated with our exposure to trading counterparties. 48 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Anti-money laundering Recognizing the threat of money laundering, terrorist financing activities and other related crimes to the stability and integrity of a country’s financial sector and its broader economy, the international community has made the fight against these illegal activities a priority. Several laws and regulations have been enacted by governments and regulatory bodies globally. As a potential conduit for illegal operations, financial institutions bear a significant responsibility in mitigating the risks associated with these activities. CIBC is committed to adhering to all regulatory requirements pertaining to Anti-Money Laundering (AML) and Anti-Terrorist Financing (ATF) and implementing best practices to minimize the impact of such activities. As such, CIBC has implemented procedures to ensure that relevant regulatory obligations with respect to the reporting of large cash transactions, electronic funds transfers, and cross-border movements of cash and monetary instruments, are met in each jurisdiction. In addition, all employees are required to complete CIBC’s AML/ATF training annually. 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 “Taxes”, “Capital resources”, “Credit risk”, “Liquidity risk” and “Accounting and control matters” sections for additional information on regulatory developments. Accounting developments See the “Accounting and control matters” section and Note 32 to the consolidated financial statements for additional information on accounting developments. 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, 2017: CIBC Corporate and Other SBUs Business activities Balance sheet CET1 RWA (All-in basis) Economic capital (5) Canadian Personal and Small Business Banking Canadian Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management Capital Markets (cid:129) Deposits (cid:129) Commercial banking (cid:129) Commercial banking (cid:129) Residential mortgages (cid:129) Personal loans (cid:129) Credit cards (cid:129) Small business lending (cid:129) Insurance (cid:129) Full service brokerage (cid:129) Asset management (cid:129) Asset management (cid:129) Private wealth management (cid:129) Private wealth management (cid:129) Personal and small business banking (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 28) Average assets Average deposits Credit risk Market risk Operational risk ($ millions) 246,316 162,904 ($ millions) 45,215 – 10,874 Average assets Average deposits Credit risk Market risk Operational risk ($ millions) 50,832 48,836 ($ millions) 38,273 – 5,432 Average assets Average deposits Credit risk (1) Market risk Operational risk ($ millions) 19,905 7,594 ($ millions) 30,950 52 2,386 Average assets Average deposits Credit risk (2) Market risk Operational risk ($ millions) 156,440 27,983 ($ millions) 39,527 4,928 5,714 Average assets Average deposits Credit risk (3) Market risk Operational risk Capital floor adjustment (4) ($ millions) 68,872 176,820 ($ millions) 17,189 412 258 2,111 Proportion of total CIBC Comprising: Credit risk (6) Market risk Operational/Strategic risks (%) 19 56 31 13 Proportion of total CIBC Comprising: Credit risk (6) Market risk Operational/Strategic risks (%) 16 61 3 36 Proportion of total CIBC Comprising: Credit risk (6) Market risk Operational/Strategic risks (%) 33 33 2 65 Proportion of total CIBC Comprising: Credit risk (6) Market risk Operational/Strategic risks (%) 15 71 9 20 Proportion of total CIBC Comprising: Credit risk (6) Market risk Operational/Strategic risks (%) 17 22 9 69 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. Includes counterparty credit risk of $105 million, which comprises derivatives and repo-style transactions. Includes counterparty credit risk of $9,448 million, which comprises derivatives and repo-style transactions. Includes counterparty credit risk of $572 million, which comprises derivatives and repo-style transactions. (1) (2) (3) (4) 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 under Basel I and Basel III, as specified by OSFI. Any shortfall in the Basel III capital requirement compared with the Basel I requirement is added to the RWAs. All-in RWAs as at October 31, 2017 include a capital floor adjustment. (5) For additional information, see the “Non-GAAP measures” section. (6) Includes investment risk. CIBC 2017 ANNUAL REPORT 49 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 out of the lending businesses in each of our SBUs. 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. Frontline businesses own the risks and are responsible for identifying and assessing risks inherent in line of business activities, establishing controls to mitigate those risks, and ensuring the ongoing design and operating effectiveness of controls – this is the first line of defence. The second line of defence is Risk Management and other functional groups, which provide guidance and effective independent challenge of the adjudication and oversight of credit risks associated with CIBC’s commercial, wholesale and wealth management activities, as well as risk assessments and decisions for the first line of defence. Internal Audit provides the third line of defence, by providing reasonable assurance on the effectiveness of governance practices, risk management processes and internal controls. Senior management reports to the GRC and RMC at least quarterly on material credit risk matters, including material credit transactions, compliance with limits, portfolio trends, impaired loans and credit loss provisioning levels. Provision for credit losses is reviewed by the RMC and the Audit Committee quarterly. Specific to the management of credit risk, Risk Management is mandated to provide enterprise-wide oversight of the management of credit risk in CIBC’s credit portfolios, including the measurement, monitoring and control of credit risk. Key groups in Risk Management with credit risk responsibility include: Capital Markets Risk Management: This group is responsible for independent oversight of trading credit risk, including adjudication of trading credit facilities for non-bank financial 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. Global Credit Risk Management: This group is responsible for the adjudication and oversight of credit risks associated with CIBC’s commercial, wholesale and wealth management activities, management of the risks in CIBC’s investment portfolios, as well as management of special loan portfolios. 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. Risk Analytics, Reporting and Credit Decisioning: This group manages credit risk in personal and small business products offered through the various distribution channels (residential mortgages, credit cards, personal loans/lines of credit, small business loans) and performs analytics to optimize retail credit performance, along with collections, fraud, and anti-money laundering outcomes. U.S. Risk Management: This group carries out the mandate of CIBC Risk Management at a regional level and provides independent oversight of the identification, management, measurement, monitoring and control of risks in the U.S. Commercial Banking and Wealth Management SBU. Adjudication and oversight above delegated levels is provided by the CRO, GRC and RMC. Policies To control credit risk, prudent credit risk management principles are used as a base to establish policies, standards and guidelines that govern credit activities as outlined by the credit risk management policy. The credit risk management policy supplements CIBC’s risk management framework and risk appetite framework, and together with CIBC’s portfolio concentration limits for credit exposures, CIBC’s common risk/concentration risk limits for credit exposures, and other supporting credit risk policies, standards and procedures, assists CIBC in achieving its desired risk profile by providing an effective foundation for the management of credit risk. Credit risk limits The RMC approves Board limits, and exposures above Board limits require reporting to, or approval of, the RMC. Management limits are approved by the CRO. Usage is monitored to ensure risks are within allocated management and Board limits. Exposures above management limits require the approval of the CRO. Business lines may also impose lower limits to reflect the nature of their exposures and target markets. This tiering of limits provides for an appropriate hierarchy of decision making and reporting between management and the RMC. Credit approval authority flows from the Board and is further cascaded to officers in writing. The Board’s Investment and Lending Authority Resolution sets thresholds above which credits require reporting to, or approval of, the RMC, ensuring an increasing level of oversight for credits of higher risk. CIBC maintains country limits to control exposures within countries outside of Canada and the United States. Credit concentration limits At a bank-wide level, credit exposures are managed to promote alignment to our risk appetite statement, to maintain the target business mix and to ensure that there is no undue concentration of risk. We set limits to control borrower concentrations by risk-rating band for large exposures (i.e., risk- rated credits). Direct loan sales, credit derivative hedges, or structured transactions may also be used to reduce concentrations. We also have a set of portfolio concentration limits in place to control exposures by country, industry, product and activity. Further, our policies require limits to be established as appropriate for new initiatives and implementation of strategies involving material levels of credit risk. Concentration limits represent the maximum exposure levels we wish to hold on our books. In the normal course, it is expected that exposures will be held at levels below the maximums. The credit concentration limits are reviewed and approved by the RMC at least annually. 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. 50 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Credit risk mitigation We may mitigate credit risk by obtaining a pledge of collateral, which improves recoveries in the event of a default. Our credit risk management policies include verification of the collateral and its value and ensuring that we have legal certainty with respect to the assets pledged. Valuations are updated periodically depending on the nature of the collateral, legal environment, and the creditworthiness of the counterparty. The main types of collateral include: (i) cash or marketable securities for securities lending and repurchase transactions; (ii) cash or marketable securities taken as collateral in support of our OTC derivatives activity; (iii) charges over operating assets such as inventory, receivables and real estate properties for lending to small business and commercial borrowers; and (iv) mortgages over residential properties for retail lending. In certain circumstances we may use third-party guarantees to mitigate risk. We also obtain insurance to reduce the risk in our real estate secured lending portfolios, the most material of which relates to the portion of our residential mortgage portfolio that is insured by CMHC, an agency of the Government of Canada. We mitigate the trading credit risk of OTC derivatives 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, $347 million (2016: $192 million) of loans have undergone TDR, of which $97 million related to CIBC Bank USA. Process and control The credit approval process is centrally controlled, with all significant credit requests submitted to a credit adjudication group within Risk Management that is independent of the originating businesses. Approval authorities are a function of the risk and amount of credit requested. In certain cases, credit requests must be referred to the Credit Committee, a subcommittee of the GRC, or to the RMC for approval. After initial approval, individual credit exposures continue to be monitored, with a formal risk assessment, including review of assigned ratings, documented at least annually. Higher risk-rated accounts are subject to closer monitoring and are reviewed at least quarterly. Collections and specialized loan workout groups handle the day-to-day management of high risk loans to maximize recoveries. Risk measurement Exposures subject to AIRB approach 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. CIBC 2017 ANNUAL REPORT 51 Management’s discussion and analysis 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 of: 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. 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. 52 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Exposure to credit risk 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 2017 AIRB approach Standardized approach (1) Total AIRB approach Standardized approach (1) Business and government portfolios Corporate Drawn Undrawn commitments Repo-style transactions Other off-balance sheet OTC derivatives $ 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 (2) Gross credit exposure Less: repo-style transaction collateral 78,312 39,078 76,899 13,484 8,990 216,763 41,439 5,642 14,374 533 2,660 64,648 10,422 840 21,469 64,176 7,527 104,434 385,845 101,315 284,530 223,291 18,922 242,213 21,982 49,140 293 71,415 10,755 2,396 37 13,188 326,816 14,174 726,835 101,315 $ 23,390 4,085 39 697 64 28,275 11,827 – – – – 11,827 2,021 8 – – 232 2,261 42,363 – 42,363 3,423 3 3,426 – – – – 1,158 28 – 1,186 4,612 – 46,975 – $ 101,702 43,163 76,938 14,181 9,054 245,038 53,266 5,642 14,374 533 2,660 76,475 12,443 848 21,469 64,176 7,759 106,695 428,208 101,315 326,893 226,714 18,925 245,639 21,982 49,140 293 71,415 11,913 2,424 37 14,374 331,428 14,174 773,810 101,315 $ 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 – $ 2016 Total 76,177 36,990 53,677 18,579 9,001 194,424 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 Net credit exposure $ 625,520 $ 46,975 $ 672,495 $ 599,624 $ 14,122 $ 613,746 (1) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. Credit risk for CIBC Bank USA and CIBC FirstCaribbean are calculated under the standardized approach. (2) Under IRB approach. Net credit exposure increased by $58.7 billion in 2017, primarily due to the acquisition of The PrivateBank, as well as business growth in our Canadian lending portfolios. CIBC 2017 ANNUAL REPORT 53 Management’s discussion and analysis Exposures subject to the standardized approach Exposures within CIBC Bank USA, 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 Corporate Sovereign Bank Real estate secured personal lending Other retail $ 0% – 6,820 – – – $ 20% 69 4,216 1,893 – – $ 6,820 $ 6,178 Risk-weight category 35% 50% 75% $ $ – – – – – – $ $ 17 110 114 – – 241 $ – $ – – 3,205 1,109 100% 28,068 644 254 – 24 150% $ 121 $ 37 – 221 53 $ 2017 Total 28,275 11,827 2,261 3,426 1,186 2016 Total 3,777 4,773 2,107 2,645 820 $ 4,314 $ 28,990 $ 432 $ 46,975 $ 14,122 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 2017 (1) Exposure (2) $ 7.19 1.33 0.02 0.01 – 84.1 % 15.6 0.2 0.1 – $ 7.36 1.43 0.03 0.05 0.02 2016 82.8 % 16.1 0.3 0.6 0.2 $ 8.55 100.0 % $ 8.89 100.0 % Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (1) (2) 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 geographic 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 $101.3 billion (2016: $76.3 billion) of collateral held for our repurchase agreement activities. $ millions, as at October 31, 2017 Drawn Undrawn commitments Repo-style transactions Other off-balance sheet OTC derivatives October 31, 2016 54 CIBC 2017 ANNUAL REPORT $ Canada 80,338 34,823 6,962 52,371 9,133 $ $ 183,627 178,507 U.S. 36,261 7,417 2,790 19,358 4,754 70,580 73,352 $ $ $ $ Europe 4,683 2,133 1,035 5,900 3,306 $ Other 8,891 1,187 640 564 1,984 $ $ 17,057 15,833 $ $ 13,266 12,329 Total 130,173 45,560 11,427 78,193 19,177 284,530 280,021 $ $ $ 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 $101.3 billion (2016: $76.3 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 1,032 31,591 4,478 6,780 2,108 3,033 28,470 5,338 7,499 1,507 465 938 1,169 370 3,783 4,181 2,673 24,758 Undrawn commitments Repo-style transactions Other off- balance sheet OTC derivatives $ 33 4,375 2,724 2,294 2,068 1,618 6,478 1,507 7,746 2,898 459 435 1,142 128 1,856 5,248 894 3,657 $ – 10,271 – 45 – – 26 – – – – – – – – – 21 1,064 $ – 70,519 258 551 426 230 964 27 1,088 702 146 31 415 – 444 2,016 107 269 $ – $ 12,350 (1) 72 99 92 28 129 64 1,771 146 13 16 124 6 646 617 226 2,778 2017 Total 1,065 129,106 7,532 9,769 4,694 4,909 36,067 6,936 18,104 5,253 1,083 1,420 2,850 504 6,729 12,062 3,921 32,526 $ 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 $ 130,173 $ 45,560 $ 11,427 $ 78,193 $ 19,177 $ 284,530 $ 280,021 (1) Includes nil (2016: $2 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, 2017, we had credit protection purchased totalling $155 million (2016: $161 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, 75% are investment grade based on our internal risk rating, which incorporates security pledged (equivalent to S&P/Moody’s rating of BBB-/Baa3 or higher). Undrawn commitments Other off- balance sheet OTC derivatives $ millions, as at October 31, 2017 Exploration and production Midstream Downstream Integrated Oil and gas services Petroleum distribution October 31, 2016 Drawn 3,931 1,276 267 146 333 1,546 7,499 6,873 $ $ $ $ $ $ 3,423 1,732 196 1,150 157 1,088 7,746 7,825 $ 412 24 71 409 32 140 $ 838 138 2 684 17 92 $ Total 8,604 3,170 536 2,389 539 2,866 $ $ 1,088 963 $ $ 1,771 1,994 $ $ 18,104 17,655 CIBC 2017 ANNUAL REPORT 55 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, under the AIRB approach. 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 89,537 54,498 1,171 344 145,550 Corporate 10,090 39,926 68,700 25,879 955 145,550 $ $ $ $ EAD Sovereign 50,798 $ 568 2 – 51,368 $ Sovereign 42,107 $ 2,598 4,563 1,931 169 51,368 $ Banks 85,387 1,160 – – 86,547 Banks 59,554 11,916 14,416 500 161 86,547 $ $ $ $ 2017 2016 Total 225,722 56,226 1,173 344 283,465 Total 111,751 54,440 87,679 28,310 1,285 283,465 899 131 30 – 5 1,065 284,530 $ $ $ $ $ $ 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 $ $ $ $ $ $ The total exposures increased by $4.5 billion from October 31, 2016, largely attributable to growth in our Canadian lending portfolios. The investment grade category increased by $2.0 billion from October 31, 2016, while the non-investment grade category was up $4.4 billion. The decrease in watch list and default exposures was largely attributable to an improvement in the corporate lending portfolios, related to oil and gas and our exited European leveraged finance portfolio. Credit quality of the retail portfolios The following table presents the credit quality of the retail portfolios, under the AIRB approach. 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 192,583 24,861 20,727 3,376 426 240 242,213 $ EAD $ Qualifying revolving retail 38,444 10,437 12,899 8,271 1,319 45 71,415 $ 2017 2016 Total 234,716 36,506 38,351 14,436 2,466 341 326,816 $ $ Total 223,014 27,093 34,980 12,991 2,373 289 300,740 $ $ Other retail 3,689 1,208 4,725 2,789 721 56 13,188 $ $ 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 2017 2016 EAD (1) $ $ 11,196 – 13 2,960 14,169 $ $ 11,227 – 13 7,367 18,607 (1) EAD under IRB approach is net of financial collateral of $5 million (2016: $256 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 56 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Mortgage or Hypothecary Insurance Act (PRMHIA). There is a possibility that losses could be incurred in respect of insured mortgages if, among other 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. The following tables provide details on our residential mortgage and HELOC portfolios: $ billions, as at October 31, 2017 Ontario (2) British Columbia and territories (3) Alberta Quebec Central prairie provinces Atlantic provinces Canadian portfolio (4)(5) U.S. portfolio (4)(6) International portfolio (4) Total portfolio October 31, 2016 Residential mortgages HELOC (1) Total Insured Uninsured Uninsured Insured Uninsured $ $ $ 41.4 14.8 15.8 7.3 4.7 5.2 89.2 – – 89.2 97.4 41 % $ 34 61 51 62 61 44 – – 60.3 28.5 10.2 7.1 2.9 3.3 112.3 0.9 2.5 59 % $ 66 39 49 38 39 56 100 100 11.3 4.4 2.8 1.5 0.9 0.8 21.7 0.1 – 100 % $ 100 100 100 100 100 100 100 – 41.4 14.8 15.8 7.3 4.7 5.2 89.2 – – 37 % $ 31 55 46 55 56 40 – – 71.6 32.9 13.0 8.6 3.8 4.1 134.0 1.0 2.5 44 % $ 115.7 56 % $ 21.8 100 % $ 89.2 39 % $ 137.5 53 % $ 85.9 47 % $ 20.3 100 % $ 97.4 48 % $ 106.2 63 % 69 45 54 45 44 60 100 100 61 % 52 % (1) We did not have any insured HELOCs as at October 31, 2017 and 2016. (2) Includes $20.4 billion (2016: $22.7 billion) of insured residential mortgages, $41.5 billion (2016: $28.3 billion) of uninsured residential mortgages, and $6.6 billion (2016: $5.8 billion) of HELOCs in the Greater Toronto Area (GTA). Includes $6.9 billion (2016: $7.8 billion) of insured residential mortgages, $21.1 billion (2016: $17.2 billion) of uninsured residential mortgages, and $2.7 billion (2016: $2.5 billion) of HELOCs in the Greater Vancouver Area (GVA). (3) (4) Geographic location is based on the address of the property. (5) 74% (2016: 77%) 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. Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (6) 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 (2) British Columbia and territories (3) Alberta Quebec Central prairie provinces Atlantic provinces Canadian portfolio (4) U.S. Portfolio (4)(5) International portfolio (4) Residential mortgages 64 % 60 68 68 69 72 64 % 71 73 % 2017 HELOC 67 % 64 72 72 73 73 67 % 69 n/m Residential mortgages 64 % 60 68 67 69 72 64 % n/a 71 % 2016 HELOC 69 % 64 72 72 73 73 68 % n/a n/m (1) LTV ratios for newly originated residential mortgages and HELOCs are calculated based on weighted average. (2) Average LTV ratios for our uninsured GTA residential mortgages originated during the year were 62% (2016: 62%). (3) Average LTV ratios for our uninsured GVA residential mortgages originated during the year were 58% (2016: 57%). (4) Geographic location is based on the address of the property. (5) n/a Not applicable. n/m Not meaningful. Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. The following table provides the average LTV ratios on our total Canadian residential mortgage portfolio: October 31, 2017 (1)(2) October 31, 2016 (1)(2) Insured Uninsured 54 % 57 % 53 % 56 % (1) LTV ratios for residential mortgages are calculated based on weighted average. The house price estimates for October 31, 2017 and 2016 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, 2017 and 2016, respectively. Teranet is an independent estimate of the rate of change in Canadian home prices. (2) Average LTV ratio on our uninsured GTA residential mortgage portfolio was 49% (2016: 53%). Average LTV ratio on our uninsured GVA residential mortgage portfolio was 43% (2016: 46%). The tables below summarize the remaining amortization profile of our total Canadian, U.S. and other 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. CIBC 2017 ANNUAL REPORT 57 Management’s discussion and analysis Contractual payment basis Canadian portfolio October 31, 2017 October 31, 2016 U.S. portfolio October 31, 2017 (1) October 31, 2016 International portfolio October 31, 2017 October 31, 2016 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 – % – % – % n/a 8 % 8 % 1 % – % 3 % n/a 15 % 16 % 2 % 3 % 13 % n/a 26 % 27 % 5 % 6 % 15 % n/a 23 % 24 % 37 % 30 % 13 % n/a 17 % 16 % 53 % 58 % 50 % n/a 10 % 8 % 2 % 3 % 3 % n/a 1 % 1 % – % – % 3 % n/a – % – % Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (1) n/a Not applicable. Current customer payment basis Canadian portfolio October 31, 2017 October 31, 2016 U.S. portfolio October 31, 2017 (1) October 31, 2016 International portfolio October 31, 2017 October 31, 2016 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 % – % n/a 8 % 8 % 4 % 5 % 4 % n/a 15 % 16 % 7 % 8 % 14 % n/a 26 % 26 % 11 % 12 % 15 % n/a 23 % 23 % 35 % 34 % 13 % n/a 17 % 16 % 36 % 37 % 46 % n/a 9 % 8 % 5 % 2 % 2 % n/a 1 % 2 % – % – % 6 % n/a 1 % 1 % Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (1) n/a Not applicable. In October 2016, the Minister of Finance announced changes to strengthen the housing market that imposed the use of the government-posted mortgage qualifying rates on a wider range of insured mortgages, and closed loopholes related to the principal residence exemption for capital gains taxes. There is ongoing consultation with market participants on an approach to implement risk sharing for insured mortgages (i.e., sharing losses between banks and insurers). In August 2016, the government of British Columbia introduced a 15% property transfer tax on the purchase of real estate in the GVA and surrounding regions by foreign buyers. In April 2017, the Ontario government introduced a number of housing-related regulations, including a 15% foreign buyers’ tax in the GTA and surrounding regions. Indications have shown that residential real estate activity, including sales and average resale prices, have slowed in the GTA since the new tax was introduced, while the GVA has seen renewed activity levels after an initial decline. CIBC will continue to closely monitor the housing markets and the performance of our credit portfolios in these two regions, and will take risk mitigation action as required. In October 2017, OSFI released final updates to its B-20 guidelines, which will come into effect on January 1, 2018. The guidelines introduce a number of key changes to qualifying interest rates for uninsured mortgages, dynamic and adjusted LTV ratios and more prescriptive guidance around the definitions of non-conforming loans. Reflective of the government and regulatory measures noted above, in addition to changes in consumer behaviour, we expect our insured mortgage mix as a proportion of total mortgages to continue to decrease. We also anticipate that the change in rules may make it more difficult for certain Canadians to qualify for mortgages, which could result in fewer and/or smaller originations going forward. 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, 2017, our Canadian condominium mortgages were $23.8 billion (2016: $20.6 billion), of which 44% (2016: 54%) were insured. Our drawn developer loans were $0.9 billion (2016: $0.7 billion), or 0.9% (2016: 0.8%) of our business and government portfolio, and our related undrawn exposure was $2.4 billion (2016: $2.2 billion). The condominium developer exposure is diversified across 87 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. 58 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Credit quality performance As at October 31, 2017, total loans and acceptances after allowance for credit losses were $365.6 billion (2016: $319.8 billion). Consumer loans (comprising residential mortgages, credit cards, and personal loans, including student loans) constitute 71% (2016: 74%) of the portfolio, and business and government loans (including acceptances) constitute the remainder of the portfolio. Consumer loans were up by $22.9 billion or 10% from the prior year, primarily due to an increase in residential mortgages of $20.0 billion. Business and government loans (including acceptances) were up $22.8 billion or 27% from the prior year, mainly attributable to the inclusion of the results of CIBC Bank USA. 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 Recoveries of loans and advances previously written off Disposals of loans Purchased credit-impaired loans (1) Foreign exchange and other Balance at end of year Allowance for impairment (2) 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 Disposals of 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 $ $ $ $ $ 951 346 (42) (406) (131) – (169) 93 (16) 626 259 (131) 20 78 (18) – (17) 191 692 (325) 68 $ 435 $ $ $ $ $ $ 707 1,368 (157) (310) (926) – – 12 (10) 684 313 (926) 173 751 (8) – (17) 286 394 (23) 27 398 2017 Total 1,658 1,714 (199) (716) (1,057) – (169) 105 (26) 1,310 572 (1,057) 193 829 (26) – (34) 477 1,086 (348) 95 833 0.23% $ $ $ $ $ $ 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% (1) (2) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. 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, 2017, gross impaired loans were $1,310 million, down $348 million from the prior year. The decrease was mainly due to reductions in the oil and gas sector and in our exited European leveraged finance portfolio, as well as the impact of U.S. dollar depreciation on our existing portfolio. These factors were partially offset by the inclusion of the results of CIBC Bank USA and a new impairment in our pre-existing U.S. real estate finance portfolio. Approximately 39% of gross impaired loans related to Canada, of which the residential mortgages and personal lending portfolios accounted for the majority. Approximately 33% of gross impaired loans related to CIBC FirstCaribbean, of which the residential mortgages, real estate and construction, and personal lending portfolios accounted for the majority. The remaining gross impaired loans related to the U.S., of which the real estate and construction, and the oil and gas sectors accounted for the majority. 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 $477 million, down $95 million from the prior year. The decrease was primarily due to decreases in our exited European leveraged finance portfolio, the residential mortgage portfolio of CIBC FirstCaribbean, and the oil and gas sector, as well as the impact of U.S. dollar depreciation on our existing portfolio. These factors were partially offset by a new impairment in our pre-existing U.S. real estate finance portfolio. 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. 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 39% (2016: 34%) is to entities in countries with Aaa/AAA ratings from at least one of Moody’s or S&P. CIBC 2017 ANNUAL REPORT 59 Management’s discussion and analysis The following table provides a summary of our positions in this business: $ millions, as at October 31, 2017 Corporate Sovereign Bank Total funded (A) Corporate Bank Total unfunded (B) Funded Unfunded Direct exposures Austria Belgium Finland France Germany Ireland Italy Luxembourg Netherlands Spain Total Eurozone Czech Republic Denmark Norway Sweden Switzerland Turkey United Kingdom Total non-Eurozone Total Europe (1) October 31, 2016 $ $ $ $ $ $ – 6 – 39 218 18 – 2 234 2 519 – – – 29 179 – 922 1,130 1,649 1,684 $ $ $ $ $ $ 310 – 1 – 849 – – – 79 – 1,239 – – 117 242 – – 427 786 2,025 1,401 $ $ $ $ $ $ – 3 13 51 614 2 1 – 51 2 737 – 17 4 24 27 61 478 611 1,348 1,488 $ $ $ $ $ $ 310 9 14 90 1,681 20 1 2 364 4 2,495 – 17 121 295 206 61 1,827 2,527 5,022 4,573 $ $ $ $ $ $ – – 62 70 283 – – 5 139 – 559 – – 307 75 120 – 2,824 3,326 3,885 3,347 $ $ $ $ $ $ 2 – – 9 24 13 – 36 56 – 140 – 22 – – – 4 201 227 367 296 (1) Includes nil (2016: $162 million) of loans, net of allowance, related to the discontinued European leveraged finance business. Derivative MTM receivables and repo-style transactions Direct exposures (continued) $ millions, as at October 31, 2017 Corporate Sovereign Austria Belgium Finland France Germany Ireland Italy Luxembourg Netherlands Spain Total Eurozone Czech Republic Denmark Norway Sweden Switzerland Turkey United Kingdom Total non-Eurozone Total Europe October 31, 2016 $ $ $ $ $ $ – – 3 27 26 – – – 21 – 77 – – – 9 – – 628 637 714 746 $ $ $ $ $ $ 2 – – 1 – – – – – – 3 1,656 – 295 – – – – 1,951 1,954 1,056 Bank 28 12 – 2,968 1,180 2,265 3 34 61 37 6,588 – 3 – 307 3,682 – 3,823 7,815 14,403 10,109 $ $ $ $ $ $ Gross exposure (1) Collateral held (2) Net exposure (C) $ $ $ $ $ $ 30 12 3 2,996 1,206 2,265 3 34 82 37 6,668 1,656 3 295 316 3,682 – 4,451 10,403 17,071 11,911 $ $ $ $ $ $ 25 12 – 2,965 1,150 2,212 – – 58 37 6,459 1,569 3 295 305 3,525 – 3,749 9,446 15,905 10,805 $ $ $ $ $ $ 5 – 3 31 56 53 3 34 24 – 209 87 – – 11 157 – 702 957 1,166 1,106 $ $ $ $ $ $ 2 – 62 79 307 13 – 41 195 – 699 – 22 307 75 120 4 3,025 3,553 4,252 3,643 Total direct exposure (A)+(B)+(C) $ $ $ 317 9 79 200 2,044 86 4 77 583 4 3,403 87 39 428 381 483 65 5,554 $ 7,037 $ 10,440 $ 9,322 (1) The amounts shown are net of CVA. (2) Collateral on derivative MTM receivables was $1.0 billion (2016: $1.2 billion), collateral on repo-style transactions was $14.9 billion (2016: $9.6 billion), and both are composed of cash and investment grade debt securities. In addition to the European exposure identified above, we have $1 million (2016: $132 million) of indirect exposure, which comprises securities (primarily collateralized loan obligations (CLOs) classified as loans on our consolidated balance sheet). Our gross exposure before subordination is stated at carrying value. We also have $181 million (2016: $399 million) of indirect exposure to European entities, as we hold debt or equity securities issued by European entities as collateral for our securities lending and borrowing activity, from counterparties that are not in Europe. 60 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Selected exposures in certain activities In response to the recommendations of the Financial Stability Board, this section provides information on our other selected activities within our continuing and exited businesses that may be of particular interest to investors based on their risk characteristics and the current market environment. Structured credit run-off business In 2008, management made a decision to wind down our exposure in the structured credit business. The following table provides a summary of our exposures: US$ millions, as at October 31 Investments and loans (1) Written credit derivatives, liquidity and credit facilities Financial guarantors Other counterparties Purchased credit protection Fair value of trading, AFS and FVO securities $ $ 73 252 Fair value of securities classified as loans $ $ 9 236 Carrying value of securities classified as loans $ $ 9 236 Notional $ $ 188 611 Notional Fair value Notional Fair value net of CVA $ $ 135 3,695 $ $ 100 120 $ $ – 282 $ $ – 2 Fair value net of CVA $ $ 100 103 Notional $ $ 125 3,821 2017 2016 (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$7 million (2016: US$5 million). As at October 31, 2017, our significant positions in investments and loans include: (cid:129) Notes that were originally received in exchange for our non-bank sponsored ABCP in January 2009, upon the ratification of the Montreal Accord restructuring, which include loans classified at amortized cost with a notional value of US$48 million and fair value and carrying value of nil; and US$83 million notional value of collateralized debt obligations (CDOs) consisting of trust preferred securities 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$73 million. (cid:129) As at October 31, 2017, our significant positions in written and purchased credit derivatives include: (cid:129) USRMM CDO positions consisting of a written and purchased credit derivative with the same notional value of US$125 million. Net income for the year was $17 million (US$13 million), compared with $2 million (US$2 million) in 2016. During the year, our exposure significantly decreased due to maturities and unwinds, including the maturity of a corporate debt exposure in the first quarter of 2017, where CIBC had purchased and sold credit protection with a notional value of US$3.3 billion. U.S. real estate lending In our U.S. Commercial Banking and Wealth Management SBU, we operate a full-service real estate platform which offers credit to mid-market clients. Once construction is complete, and the property is income producing, we may occasionally offer fixed-rate financing within a permanent financing program (typically with average terms of up to 10 years). This portfolio of permanent financing exposures, which is a small subset of our total U.S. real estate lending portfolio, serves as a warehouse for inclusion in future commercial mortgage-backed securities (CMBS) programs. We retain no exposure to those CMBS programs. As at October 31, 2017, the portfolio was $95 million (October 31, 2016: $105 million). 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. CIBC 2017 ANNUAL REPORT 61 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. Frontline businesses are responsible for managing the market risk associated with their activities – 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. 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 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 Board. 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 CDS; Equity risk measures the impact of changes in equity prices and volatilities, including implied market corrections; 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) 62 CIBC 2017 ANNUAL REPORT 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 2017 (1) 2016 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 3,440 10,712 93,419 5,035 40,383 207,271 40,937 12,378 97,766 (1,618) 24,342 Subject to market risk Subject to market risk Non- trading Not subject to market risk Consolidated balance sheet 1,940 10,286 44,519 5,035 40,383 207,271 40,937 12,378 83,957 (1,618) 3,222 $ 1,500 – – – – – – – – – – $ 3,500 $ 10,665 87,423 5,433 28,377 187,298 38,041 12,332 71,437 (1,691) 27,762 Trading $ – 347 48,066 (2) – – Non- trading 1,645 10,318 39,357 5,433 28,377 – – – 6,536 (3) – 24,130 (4) 187,298 38,041 12,332 64,901 (1,691) 3,632 Trading $ $ – 426 48,900 (2) – – – – – 13,809 (3) – 21,120 (4) Customers’ liability under acceptances Other assets 8,824 22,375 – 955 8,824 12,411 – 9,009 12,364 18,416 – 1,466 12,364 9,190 Not subject to market risk Non-traded risk primary risk sensitivity $ 1,855 – – – 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 7,760 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 $ 565,264 $ 85,210 $ 469,545 $ 10,509 $ 501,357 $ 80,545 $ 411,197 $ 9,615 $439,706 $ 510 (5) $ 391,831 $ 47,365 $ 395,647 $ 331 (5) $ 352,522 $ 42,794 Interest rate 13,713 2,024 27,971 23,271 8,828 15,305 3,209 13,682 – 31 2,024 – 21,029 (4) 27,971 2,242 – – – – – 1,323 – 8,828 7,022 3,209 – 6,960 – 10,338 2,518 11,694 28,807 12,395 12,919 3,366 10,256 – – 24,433 (4) – 927 – 82 2,518 11,694 4,374 12,395 5,445 3,366 – – – – – 6,547 – Interest rate Interest rate Interest rate Interest rate, foreign exchange Interest rate Interest rate Interest rate $ 534,027 $ 36,544 $ 443,158 $ 54,325 $ 477,684 $ 35,947 $ 392,396 $ 49,341 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (1) (2) Excludes securities in the structured credit run-off business of $3 million (2016: $496 million), and certain other securities that are considered non-trading for market risk purposes. (3) Excludes $95 million (2016: $103 million) of loans that are warehoused for future securitization purposes. These are considered non-trading for market risk purposes. (4) Excludes derivatives relating to the structured credit and other run-off businesses which are considered non-trading for market risk purposes. (5) 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. CIBC 2017 ANNUAL REPORT 63 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 6.9 3.8 18.5 10.3 5.1 2.0 n/m $ Low 1.8 0.7 1.8 0.8 1.3 0.7 n/m 2017 As at Average $ 3.9 0.9 3.1 1.2 3.2 1.6 (8.8) $ 4.1 2.1 3.3 3.2 2.6 1.3 (10.1) $ 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) Total VaR (one-day measure) $ 22.2 $ 3.7 $ 5.1 $ 6.5 $ 9.9 $ 3.1 $ 5.6 $ 5.8 (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, 2017 was up $0.7 million from the prior year. The increase was driven by an increase in interest rate, foreign exchange, commodity, and equity risks, partially offset by a decrease in credit spread 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 September 10, 2008 to September 8, 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 32.2 13.8 11.3 28.2 9.2 5.0 n/m $ Low 6.4 4.1 0.8 0.6 1.4 2.3 n/m $ As at 25.2 5.6 1.9 1.8 3.4 4.4 (35.6) 2017 Average $ 15.1 7.9 2.2 7.1 4.3 3.4 (27.9) $ 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) Stressed total VaR (one-day measure) $ 35.0 $ 5.4 $ 6.7 $ 12.1 $ 16.1 $ 4.9 $ 6.8 $ 9.5 (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, 2017 was up $2.6 million from the prior year. The increase was driven by an increase in interest rate, foreign exchange, commodity, debt specific, and equity risks, partially offset by a reduction in credit spread 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 329.1 145.1 $ Low 69.4 27.3 2017 As at Average $ 69.5 77.9 $ 110.5 64.0 $ High 102.5 80.3 $ Low 42.2 21.1 $ As at 72.0 57.9 2016 Average $ 64.6 32.8 IRC (one-year measure) (1) $ 387.8 $ 122.2 $ 147.4 $ 174.5 $ 137.1 $ 73.0 $ 129.9 $ 97.4 (1) High and low IRC are not equal to the sum of the constituent parts, because the highs and lows of the constituent parts may occur on different days. Average IRC for the year ended October 31, 2017 was up $77.1 million from the prior year due to increases in inventory size 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 no negative back-testing breaches of the total VaR measure. 64 CIBC 2017 ANNUAL REPORT 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 certain exited portfolios. During the year, trading revenue (TEB) was positive for 100% of the days(1). The largest gain of $20.8 million occurred on January 24, 2017. It was attributable to a large client transaction in our equity derivatives business. Average daily trading revenue (TEB) was $5.3 million during the year, and the average daily TEB was $1.2 million. Frequency distribution of daily 2017 trading revenue (TEB)(1) The histogram below presents the frequency distribution of daily trading revenue (TEB) for 2017. s y a D e u n e v e R g n d a r T i 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 C $ millions 20 21 or more Trading revenue (TEB)(1) 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. The large increase in VaR in May 2017 was the result of a large transaction in our equity underwriting business. Trading Revenue (TEB) VaR $ millions 25 20 15 10 5 0 (5) (10) (15) (20) (25) Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 (1) Excludes certain month-end transfer pricing and other miscellaneous adjustments. 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. In January 2017, we introduced a Eurozone bank crisis scenario, which considers a major European bank unexpectedly having capital problems with market expectations of a default, combined with political instability in Europe, while in September 2017, we introduced two scenarios based on escalating tensions in the Korean peninsula. 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. CIBC 2017 ANNUAL REPORT 65 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. U.S. sovereign debt default and downgrade 5. Chinese hard landing 6. Canada market crisis 7. U.S. protectionism 8. Eurozone bank crisis 9. Korean War – severe 10. Korean War – base Average stress testing results for 2017 and 2016 for each of the 10 scenarios noted above from our trading positions are provided in the chart below: FY 2017 FY 2016 ) s n o i l l i M $ ( 140 120 100 80 60 40 20 0 -20 -40 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, 2017 Maturity less than 1 year Maturity 1 – 3 years Maturity 4 – 5 years Maturity in excess of 5 years Positive Negative $ 345 356 134 343 $ 1,178 $ $ 471 236 131 11 849 Net $ (126) 120 3 332 $ 329 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 its subcommittee, 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, 2017, 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. 2017 included the exposures from the balances of CIBC Bank USA. 66 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Interest rate sensitivity – non-trading $ millions, as at October 31 100 basis point increase in interest rates Increase (decrease) in net income after-tax attributable to equity shareholders Increase (decrease) in present value of shareholders’ equity 100 basis point decrease in interest rates Increase (decrease) in net income after-tax attributable to equity shareholders Increase (decrease) in present value of shareholders’ equity 200 basis point increase in interest rates Increase (decrease) in net income after-tax attributable to equity shareholders Increase (decrease) in present value of shareholders’ equity 200 basis point decrease in interest rates Increase (decrease) in net income after-tax attributable to equity shareholders Increase (decrease) in present value of shareholders’ equity CAD USD $ 119 (277) $ (209) 184 $ 233 (512) $ (382) 251 $ $ $ $ 48 (99) (57) 15 74 (223) (87) (124) 2017 Other $ (11) (30) $ 11 30 $ (21) (59) $ 21 59 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 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, 2017 by approximately $120 million (2016: $84 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 $12 million (2016: $20 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 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 2017 AFS securities Equity-accounted investments in associates (1) 2016 AFS securities Equity-accounted investments in associates (1) (1) Excludes our equity-accounted joint ventures. See Note 26 to the consolidated financial statements for further details. Amortized cost Fair value $ $ $ $ 364 313 677 221 386 607 $ $ $ $ 469 356 825 374 421 795 CIBC 2017 ANNUAL REPORT 67 Management’s discussion and analysis Pension risk A number of defined benefit pension plans are operated globally. As at October 31, 2017, our consolidated defined benefit pension plans were in a net funded status surplus position of $134 million, compared with $22 million as at October 31, 2016. The change in the net funded status position of our pension plans is disclosed in Note 19 to the consolidated financial statements. Changes in net funded position of our pension plans are driven by a number of risk factors. These include changes in the fair value of plan assets and/or changes in the actuarial value of the pension benefits promised within our defined benefit plans. 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 basis point 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’ investment strategies align with desired risk profiles, with independent oversight and effective challenge provided by Risk Management. 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 subcommittee 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. 68 CIBC 2017 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’s approach to liquidity risk management supports our business strategy, aligns with our risk appetite and adheres to regulatory expectations. 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 Capital Markets Risk Management 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, a subcommittee of GALCO, 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, 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 and diversified funding sources 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 limits for the pledging of CIBC’s assets across a broad range of financial activities. Pledged asset limits ensure unencumbered liquid assets are available for liquidity purposes. We maintain a detailed global CFP that 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 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. 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 regulatory-driven and internally developed liquidity risk metrics to measure our liquidity risk exposure. Internally, our liquidity position is measured using the Liquidity Horizon, which measures the future point in time when projected cumulative cash outflows exceed cash inflows under a combined CIBC-specific and market-wide 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 modelled 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 also incorporates the monitoring of our unsecured wholesale funding position and funding capacity. CIBC 2017 ANNUAL REPORT 69 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 including the LCR and Liquidity Horizon. 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 varying 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. 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 2017 (1) 2016 Gross liquid assets Encumbered liquid assets (2) Unencumbered liquid assets CIBC owned assets Third-party assets CIBC owned assets Third-party assets Cash and due from banks Securities National Housing Act mortgage-backed securities Mortgages Credit cards Other assets $ 14,152 (3) 92,889 (4) 50,347 (6) 17,414 (7) 3,048 (8) 4,606 (9) $ – 93,201 (5) $ – – – – 521 32,809 20,247 17,414 3,048 4,420 $ $ – 64,961 – – – – $ 13,631 88,320 30,100 – – 186 13,665 91,378 26,223 – – 586 $ 182,456 $ 93,201 $ 78,459 $ 64,961 $ 132,237 $ 131,852 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (1) (2) 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. (3) (4) 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 $530 million (2016: $944 million). Includes $5,035 million (2016: $5,433 million) of cash collateral received on securities borrowed, $40,383 million (2016: $28,377 million) of securities purchased under resale agreements, $46,753 million (2016: $38,657 million) of securities borrowed against securities lent, and $1,030 million (2016: $1,257 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 $4,420 million (2016: $6,022 million) of cash pledged for derivative collateral and $186 million (2016: $586 million) of gold and silver certificates. (5) (6) (7) (8) (9) 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 (2) $ 2017 92,846 13,707 25,684 $ 2016 96,027 18,387 17,438 $ 132,237 $ 131,852 (1) (2) Includes CIBC World Markets Inc. and CIBC World Markets Corp. Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. 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 were comparable with the prior year, as an increase in National Housing Act mortgage-backed securities was offset by a decrease in securities. Furthermore, CIBC maintains access eligibility to the Bank of Canada Emergency Lending Assistance (ELA) program and the Federal Reserve Bank’s Discount Window. 70 CIBC 2017 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 2017 (1) Cash and deposits with banks Securities Securities borrowed or purchased under resale agreements Loans, net of allowance Other CIBC owned assets Third-party assets $ 14,152 $ 93,419 – $ – Total assets 14,152 93,419 – 356,734 45,418 – 45,418 356,734 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 24,342 8,824 1,783 5,367 1,978 715 12,532 – – – – – – – 24,342 8,824 1,783 5,367 1,978 715 12,532 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 $ $ 519,846 $ 45,418 $ 565,264 14,165 $ 87,423 – $ – 14,165 87,423 – 307,417 33,810 – 33,810 307,417 27,762 12,364 1,898 1,539 1,410 766 12,803 – – – – – – – 27,762 12,364 1,898 1,539 1,410 766 12,803 Encumbered Unencumbered $ $ $ Pledged as collateral 6 32,809 31,291 40,773 – – – – – – 4,420 109,299 11 23,690 22,514 39,468 – – – – – – 6,022 Other $ 515 – Available as collateral $ 13,631 60,080 $ Other – 530 – 2 – – – – – – – $ $ 517 489 – – 26 – – – – – – – 14,127 30,100 – 285,859 – – – – – – 186 $ $ 118,124 13,665 62,789 $ $ 24,342 8,824 1,783 5,367 1,978 715 7,926 337,324 – 944 11,296 26,223 – 241,700 – – – – – – 586 27,762 12,364 1,898 1,539 1,410 766 6,195 (1) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. $ 467,547 $ 33,810 $ 501,357 $ 91,705 $ 515 $ 114,559 $ 294,578 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 2017 ANNUAL REPORT 71 Management’s discussion and analysis The LCR is disclosed using a standard OSFI-prescribed disclosure template, calculated based on the average of daily positions. $ millions, average of the three months ended October 31, 2017 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 142,230 70,658 71,572 123,875 44,738 60,401 18,736 n/a 81,252 11,382 2,669 67,201 2,299 254,432 n/a 63,057 15,420 8,487 $ 98,603 9,277 2,120 7,157 63,069 10,783 33,550 18,736 4,574 22,154 8,153 2,669 11,332 2,299 4,450 105,823 7,798 7,201 8,487 $ 86,964 $ 23,486 n/a n/a n/a n/a n/a n/a Total adjusted value 98,603 $ 82,337 $ 120 % Total adjusted value $ $ 102,461 81,908 125 % 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, 2017 24 25 26 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, 2017 decreased to 120% from 125% as at July 31, 2017, due to modest decreases in HQLA, which were the result of funding requirements associated with the acquisition of The PrivateBank. Multiple other factors that are part of normal business operations also contribute to 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 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 personal and commercial banking channels. Personal deposits accounted for $159.3 billion as at October 31, 2017 (2016: $148.1 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. 72 CIBC 2017 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, 2017 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, 2016 Less than 1 month 1 – 3 months 3 – 6 months 6 – 12 months Less than 1 year total 1 – 2 years Over 2 years 2,491 $ 5,325 1,165 – – – – – – – – 448 $ 132 $ – $ 3,071 $ – $ 11,393 1,629 – 2,229 – 570 856 – – – 18,268 2,475 – 4,952 8 1,312 – – – – 12,947 58 – 6,119 312 1,546 1,516 967 38 – 47,933 5,327 – 13,300 320 3,428 2,372 967 38 – 7,239 – – 6,062 – 4,911 4,660 1,290 – 45 – $ – – – 14,983 – 12,167 10,382 791 3,171 19 Total 3,071 55,172 5,327 – 34,345 320 20,506 17,414 3,048 3,209 64 8,981 $ 17,125 $ 27,147 $ 23,503 $ 76,756 $ 24,207 $ 41,513 $ 142,476 – $ 1,426 $ 1,312 $ 4,029 $ 6,767 $ 8,981 15,699 25,835 19,474 69,989 10,861 $ 13,346 23,340 $ 18,173 40,968 101,508 8,981 $ 17,125 $ 27,147 $ 23,503 $ 76,756 $ 24,207 $ 41,513 $ 142,476 12,701 $ 17,980 $ 26,950 $ 21,035 $ 78,666 $ 17,596 $ 39,727 $ 135,989 $ $ $ $ $ CIBC’s wholesale funding is diversified by currency as demonstrated in the table that follows: $ billions, as at October 31 CAD USD Other $ 53.2 72.6 16.7 $ 142.5 2017 37 % 51 12 100 % $ 60.4 56.6 19.0 $ 136.0 2016 44 % 42 14 100 % Our funding volumes increased relative to 2016 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. On May 10, 2017, Moody’s downgraded the ratings of the big six Canadian banks by one notch, including CIBC. On October 27, 2017, Fitch affirmed CIBC’s ratings, while revising the outlook to negative from stable. The negative outlook reflects Fitch’s view that CIBC is the most exposed to a potential housing correction and the health of the Canadian consumer. We do not expect a material impact on our funding costs or ability to access funding as a result of these changes. 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 2017 R-1(H) F1+ P-1 A-1 2016 R-1(H) F1+ P-1 A-1 2017 2016 AA AA- A1 A+ AA AA- Aa3 A+ 2017 AA(L) A+ Baa1 BBB+ 2016 AA(L) A+ A3 BBB+ 2017 2016 A(L) A+ Baa2 BBB A(L) A+ Baa1 BBB 2017 Pfd-2 n/a Baa3 P-3(H) 2016 Pfd-2 n/a Baa2 P-3(H) Outlook Negative (2) Negative 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 $ 2017 – 0.1 0.3 $ 2016 – 0.2 0.4 CIBC 2017 ANNUAL REPORT 73 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. In October 2017, OSFI provided updated draft NSFR guidance and is engaging industry participants to review its NSFR implementation plans and to clarify details of the NSFR and its application to the Canadian market. 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 modelling a behavioural balance sheet. $ millions, as at October 31, 2017 (1) 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 $ $ 3,440 10,712 3,862 5,035 24,938 1,559 662 260 8,750 – 1,827 7,588 – – – 3,544 – 4,248 3,069 571 520 3,091 – 3,061 1,180 – $ – – 2,770 – 3,127 7,101 966 780 2,927 – 1,430 47 – $ $ – – 4,059 – 546 $ – – 1,608 – 83 12,727 937 780 4,348 – 1,255 8 – 11,144 752 780 3,620 – 1,199 1 – 1 – 2 years – – 7,197 – 7,441 43,675 201 3,119 13,375 – 2,759 – – 2 – 5 years Over 5 years No specified maturity $ $ – – 19,407 – – $ – – 19,480 – – 121,384 845 6,139 31,729 – 5,644 – – 6,214 2,143 – 15,469 – 7,167 – – – – 31,492 – – 398 33,860 – 14,457 (1,618) – – 22,375 $ Total 3,440 10,712 93,419 5,035 40,383 207,271 40,937 12,378 97,766 (1,618) 24,342 8,824 22,375 $ 68,633 $ 19,284 $ 19,148 $ 24,660 $ 19,187 $ 77,767 $ 185,148 $ 50,473 $ 100,964 $ 565,264 October 31, 2016 $ 55,954 $ 21,567 $ 17,950 $ 16,783 $ 16,550 $ 66,771 $ 164,778 $ 48,505 $ 92,499 $ 501,357 Liabilities Deposits (2) 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 $ 19,850 13,713 2,024 $ 29,462 – – $ 39,576 – – $ 21,922 – – $ 22,671 – – $ 33,912 – – $ 44,996 – – $ 6,881 – – $ 220,436 – – $ 439,706 13,713 2,024 26,415 1,851 7,592 – – – 1,504 2,764 1,180 – – – 52 1,237 47 – – – – 1,307 8 – – – – 1,230 1 – 38 – – 2,897 – – – – – 4,840 – – – – – 7,145 – – 3,171 – – – – 15,305 – 31,237 27,971 23,271 8,828 15,305 3,209 31,237 $ 71,445 $ 34,910 $ 40,912 $ 23,237 $ 23,940 $ 36,809 $ 49,836 $ 17,197 $ 266,978 $ 565,264 October 31, 2016 $ 59,908 $ 33,289 $ 40,961 $ 21,100 $ 23,035 $ 31,847 $ 47,923 $ 21,033 $ 222,261 $ 501,357 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (1) (2) Comprises $159.3 billion (2016: $148.1 billion) of personal deposits of which $149.5 billion (2016: $143.3 billion) are in Canada and $9.8 billion (2016: $4.8 billion) are in other countries; $266.6 billion (2016: $229.7 billion) of business and government deposits and secured borrowings of which $192.7 billion (2016: $171.9 billion) are in Canada and $73.9 billion (2016: $57.8 billion) are in other countries; and $13.8 billion (2016: $17.8 billion) of bank deposits of which $6.6 billion (2016: $6.8 billion) are in Canada and $7.2 billion (2016: $11.0 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. 74 CIBC 2017 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, 2017 (1) 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 (3) Unutilized credit commitments Backstop liquidity facilities Standby and performance letters of credit Documentary and commercial letters of credit Other $ 36,541 $ 770 – 1,682 25 269 4,635 $ 5,897 8,711 2,519 103 – 5,577 $ 1,710 1,239 2,131 67 – – $ – $ – $ – $ – $ 3,385 1,026 2,623 8 – 2,358 90 1,629 6 – 13,943 116 913 4 – 36,030 – 1,249 1 – 1,889 13 18 – – No specified maturity (2) – 143,182 – – – – $ Total 46,753 209,164 11,195 12,764 214 269 October 31, 2016 $ 28,902 $ 23,039 $ 9,515 $ 4,484 $ 3,483 $ 7,049 $ 35,402 $ 1,393 $ 133,514 $ 246,781 $ 39,287 $ 21,865 $ 10,724 $ 7,042 $ 4,083 $ 14,976 $ 37,280 $ 1,920 $ 143,182 $ 280,359 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. Includes $111.7 billion (2016: $105.0 billion) of personal, home equity and credit card lines, which are unconditionally cancellable at our discretion. (1) (2) (3) Excludes securities lending of $2.0 billion (2016: $2.5 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, 2017 (1) Operating leases Purchase obligations (2) Pension contributions (3) Underwriting commitments Investment commitments October 31, 2016 Less than 1 month 1 – 3 months 3 – 6 months 6 – 9 months 9 – 12 months $ 40 145 15 424 1 $ 625 $ 331 $ 80 290 31 – 4 $ 405 $ 325 $ 120 217 46 – 3 $ 386 $ 365 $ 119 159 46 – – $ 324 $ 396 1 – 2 years 448 521 – – 4 973 $ $ 2 – 5 years $ 1,107 693 – – 5 Over 5 years $ 3,229 122 – – 126 Total $ 5,261 2,313 184 424 143 $ 1,805 $ 3,477 $ 8,325 $ 118 166 46 – – $ 330 $ 356 $ 1,080 $ 1,747 $ 1,532 $ 6,132 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (1) (2) 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 time frames. 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. (3) 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 losses arising from the uncertainty of the timing and size of insurance claims. 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 an insured risk occurring in exchange for premiums. We are exposed to insurance risk in our life insurance business and in our 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 each having an independent Appointed Actuary 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 regions. 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 2017 ANNUAL REPORT 75 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 Policy, 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. Frontline 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 subcommittee of the 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 Policy which supports and governs the processes of identifying, measuring, mitigating, monitoring, and reporting operational risks. We mitigate operational losses by consistently applying risk-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. See Note 23 to our consolidated financial statements for 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. The standardized method is also used as agreed with local regulators. Our current AMA model, along with the standardized method, was approved for capital reporting commencing in fiscal 2016. 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 Basel 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 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. The model will be updated to address identified gaps, as appropriate. 76 CIBC 2017 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 risk 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 is the risk of CIBC’s potential non-conformance with applicable regulatory requirements. 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 functional 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 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 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 2017 ANNUAL REPORT 77 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 $ $ $ $ 3 – 94 130 227 6 148 154 $ $ $ $ 2017 Total CIBC (1) 0.2 % 4.9 63.5 0.8 1.8 % 5.5 % 1.1 1.4 % Total CIBC 138 1,967 94 196 2,395 369 245 614 Structured credit run-off business $ $ $ $ 496 3 94 140 733 257 197 454 $ $ $ $ 2016 Total CIBC (1) 0.9 % 6.2 36.9 0.7 2.6 % 13.9 % 1.0 1.8 % Total CIBC 536 2,296 94 195 3,121 506 274 780 (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 overnight indexed swap 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. 78 CIBC 2017 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 2017 2016 $ 2 $ 2 111 66 5 184 $ 85 112 5 $ 204 Impairment of AFS securities AFS securities include debt and equity securities. 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 2017 ANNUAL REPORT 79 Management’s discussion and analysis The collective allowance(1) of $1,213 million (2016: $1,201 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 $121 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” (IFRS 10), 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, 2017, we had goodwill of $5,367 million (2016: $1,539 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, 2017 based on a five-year forecast prepared by management of CIBC FirstCaribbean during the fourth quarter of 2017. The forecast for CIBC FirstCaribbean used in our 2017 annual impairment test reflects an expectation of continued productive loan growth 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, 2017, the carrying amount of goodwill relating to CIBC FirstCaribbean was $405 million (US$314 million). Other intangible assets and long-lived assets As at October 31, 2017, we had other intangible assets with an indefinite life of $141 million (2016: $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. 80 CIBC 2017 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 of 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 net 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, 2017, 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 $1.2 billion as at October 31, 2017. 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, 2017, 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 continued to implement initiatives in support of Program Clarity. As at October 31, 2017, the remaining provision relating to these restructuring charges was $149 million. While this amount represents our best estimate as at October 31, 2017 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 2017 ANNUAL REPORT 81 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 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 restate 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 application of IFRS 9 is expected to reduce our shareholders’ equity by approximately $100 million on an after-tax basis as at November 1, 2017. The impact to our regulatory capital is not expected to be material. 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 other functional groups, such as Technology and Operations 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 other comprehensive income (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 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 will continue to be recognized in profit and loss. 82 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis 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. See Note 32 to the consolidated financial statements for further details of the classification and measurement changes resulting from the adoption of 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. Incurred Loss versus Expected Loss Methodology The application of ECL will significantly change our credit loss methodology and models. ECL allowances represent credit losses that reflect an unbiased and probability-weighted amount which is determined by evaluating a range of possible outcomes, the time value of money and reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. This compares to the present incurred loss model under IAS 39 that incorporates a single best estimate, the time value of money and information about past events and current conditions. The objective of the new impairment standard is to record lifetime losses on all financial instruments which have experienced a significant increase in credit risk (SICR) since their initial recognition. As a result, ECL allowances will be measured at amounts equal to either (i) 12-month ECL or (ii) lifetime ECL for those financial instruments which have experienced a SICR since initial recognition. This compares to the present incurred loss model which recognizes lifetime credit losses when there is objective evidence of impairment and also allowances for incurred but not identified credit losses. Because of the inclusion of relative credit deterioration criteria and consideration of forward looking information, the ECL model eliminates the threshold or trigger event required under the incurred loss model, and lifetime ECL are recognized earlier under IFRS 9. Stage Migration and Significant Increase in Credit Risk For non-impaired financial instruments: (cid:129) (cid:129) Stage 1 is comprised of all non-impaired financial instruments which have not experienced a SICR since initial recognition. Entities are required to recognize 12 months of ECL for stage 1 financial instruments. 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. Stage 2 is comprised of all non-impaired financial instruments which have experienced a SICR since initial recognition. Entities are required to recognize lifetime ECL for stage 2 financial instruments. In subsequent reporting periods, if the credit risk of the financial instrument improves such that there is no longer a SICR since initial recognition, then entities shall revert to recognizing 12 months of ECL. In contrast to stage 1 and stage 2, inherent within the incurred loss methodology under IAS 39, allowances are provided for non-impaired financial instruments for credit losses that are incurred but not yet identified. For impaired financial instruments: (cid:129) Financial instruments are classified as stage 3 when there is objective evidence of impairment as a result of one or more loss events that have occurred after initial recognition with a negative impact on the estimated future cash flows of a loan or a portfolio of loans. The ECL model requires that lifetime ECL be recognized for impaired financial instruments, which is similar to the current requirements under IAS 39 for impaired financial instruments. For our business and government portfolios, the individually assessed allowances for impaired instruments recognized under IAS 39 will generally be replaced by stage 3 allowances under IFRS 9, while the collective allowances for non-impaired financial instruments 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 financial instruments 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. Key Drivers of Expected Credit Loss The following concepts are subject to a high level of judgment, will have a significant impact on the level of ECL allowances and will be the cause of increased volatility of allowances: (cid:129) (cid:129) (cid:129) Determining when a SICR of a financial asset has occurred, Measuring both 12-month and lifetime credit losses, and Incorporating forward-looking information through the use of multiple probability-weighted scenarios. For the majority of our retail portfolios, we will determine SICR based on relative changes in the financial instrument’s lifetime PD since its initial recognition. For the majority of our business and government portfolios and FV-OCI debt securities, we will determine SICR based on relative changes in internal risk ratings since initial recognition. In respect to the lifetime of a financial instrument, the maximum period to consider when measuring ECL shall be the maximum contractual period over which an entity is exposed to credit risk. For revolving facilities, such as credit cards, an entity shall measure ECL over the period that the entity is exposed to credit risk and the ECL would not be mitigated by credit risk management actions, even if that period extends beyond the maximum contractual period. The lifetime of a credit card account is the expected behavioural life. The measurement of both 12-month and lifetime credit losses involves forecasting forward-looking macroeconomic factors for multiple scenarios and determining the probability weighting for the scenarios so that we can appropriately probability weight the expected losses we will recognize on our consolidated balance sheet. While this process will leverage existing forecasting processes and will be overseen by a governance committee consisting of key internal stakeholders from Economics, Risk Management, and Finance, it involves a significant amount of judgment. The incorporation of the forward- looking information into PDs, LGDs, and EADs for multiple scenarios for the purpose of calculating the ECLs under the different scenarios also involves significant judgment. In many cases, this process leverages our existing regulatory framework. CIBC 2017 ANNUAL REPORT 83 Management’s discussion and analysis Use of the Regulatory Framework Our ECL model leverages the 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, credit losses under IFRS 9 are for 12 months for stage 1 financial instruments and lifetime for stage 2 and stage 3 financial instruments, as compared with 12 months for AIRB portfolios under Basel. 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 Unbiased probability-weighted LGD based on estimated LGD including impact of relevant forward-looking assumptions such as changes in collateral value Discounted using the cost of capital 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 ECL is discounted from the default date to the reporting date Discounted using the original effective interest rate PD LGD EAD Other Key Activities Throughout 2017, we have been testing the application of the ECL methodology for our impacted portfolios through the application of an internal parallel run. This included testing the processes to forecast and probability weight the forward-looking factors used to calculate our ECLs and assessing the appropriateness of our SICR triggers. During the year, we also focused on updating all relevant internal controls and policies and we continued to educate key stakeholders. Throughout the transition program, our Audit Committee received regular program updates, including the results of our parallel ECL allowances. Upon the adoption of IFRS 9, we plan to change from our current policy of attributing changes to our collective allowance for non-impaired financial instruments from Corporate and Other to a new IFRS 9 policy to attribute any changes in ECL, including stage 1 and stage 2 ECL changes, to our SBUs. Regulatory Developments Our implementation of IFRS 9 takes into account guidance issued by OSFI covering sound credit risk practices associated with the implementation and application of an expected credit loss accounting framework. We also continue to monitor regulatory developments related to the new ECL impairment requirements. In March 2017, the BCBS issued Standards, Regulatory treatment of accounting provisions – interim approach and transitional arrangements, which addresses the transitional arrangement requirements and interim approach for the regulatory treatment of accounting provisions. The BCBS has outlined a number of high-level requirements that local regulatory authorities must comply with should the regulatory authority choose to adopt a transitional arrangement. The BCBS has decided to retain the current treatment of provisions under both the standardized and IRB approaches for credit risk for an interim period. Regulatory authorities in individual jurisdictions will be able to extend their existing approaches to categorize provisions as general or specific to provisions calculated under the applicable ECL accounting model. Beyond the interim period, the BCBS recommends that regulatory authorities in individual jurisdictions provide guidance, as appropriate, on how they intend to categorize ECL provisions as general or specific to ensure consistency within their jurisdiction. In August 2017, OSFI issued for public consultation revisions to the Capital Adequacy Requirements Guideline for implementation in the first quarter of 2018, including guidance related to the treatment of IFRS 9 allowances in the regulatory capital framework. The proposed guideline retains the current regulatory treatment of accounting provisions, consistent with the BCBS guideline, and provides guidance on the classification of stage 1, 2 and 3 allowances under IFRS 9 in the regulatory framework. 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. However, we will adopt the new hedge accounting disclosure requirements under amendments to IFRS 7 for our annual period ending October 31, 2018. Other accounting policy changes For details on other future accounting policy changes, see Note 32 to the consolidated financial statements. Regulatory developments Automatic Exchange of Information – Organisation for Economic Co-operation and Development (OECD) Under the initiative of the OECD, many countries, including Canada, have committed to automatic exchange of information relating to accounts held by tax residents of signatory countries, using a Common Reporting Standard (CRS). CIBC will meet all obligations imposed in respect of CRS, in accordance with local law, in all applicable jurisdictions in which it operates. 84 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Review of sales practices During the year, the Financial Consumer Agency of Canada and OSFI announced that they are conducting an industry-wide review of the retail banking sales practices of Canadian financial institutions, which is ongoing. CIBC will continue to monitor developments in this area. 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 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. 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, 2017 (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, 2017, 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, 2017, 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 97 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, 2017 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. CIBC 2017 ANNUAL REPORT 85 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 and HTM 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)(2) Cash and deposits with banks Securities Trading AFS and HTM 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)(2) Deposits Personal 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 Average balance Interest Average rate 2017 2016 2015 2017 2016 2015 2017 2016 2015 $ 3,294 $ 2,186 $ 2,369 $ 31 $ 19 $ 44,620 13,246 57 27,406 194,350 49,901 48,060 292,311 1,024 11,687 9,435 14,185 417,265 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 43,061 6,231 58 26,361 159,689 46,234 36,343 242,266 578 14,504 10,256 13,776 359,460 1,205 182 3 276 4,698 3,378 1,429 9,505 5 – – – 11,207 1,273 167 3 209 4,188 3,260 1,346 8,794 8 – – – 10,473 16 1,248 98 4 241 4,159 3,224 1,244 8,627 10 – – – 10,244 18,451 10,518 23,653 94 19,228 2,711 916 32,719 36,346 137 12,646 4,027 125,100 60 39 129 6 69 132 70 733 935 1 – – 1,239 $ 542,365 $ 509,140 $ 455,324 $ 13,593 $ 12,092 $ 11,483 30,745 5,993 20,883 206 19,386 2,426 761 26,911 30,098 114 14,669 3,176 125,270 23,473 4,006 12,809 208 11,407 2,324 739 23,464 26,527 92 13,812 3,530 95,864 149 161 333 6 219 140 83 1,295 1,518 – – – 2,386 137 112 216 3 120 131 74 826 1,031 – – – 1,619 0.94 % 0.87 % 0.68 % 2.70 1.37 5.26 1.01 2.42 6.77 2.97 3.25 0.49 – – – 2.69 2.90 1.57 6.90 0.91 2.60 6.97 3.42 3.56 1.73 – – – 2.85 2.99 1.24 5.00 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 0.81 1.53 1.41 6.38 1.14 5.16 9.06 3.96 4.18 – – – 1.91 2.51 % 2.37 % 2.52 % 0.26 0.97 1.01 2.88 0.60 5.68 9.47 3.12 3.52 1.09 – – 1.29 $ 143,640 $ 134,225 $ 125,982 $ 120,602 2,246 38,720 295,793 15,297 12,719 10,875 129,851 2,256 38,642 314,389 11,960 9,436 13,400 106,439 1,548 38,758 272,727 15,461 10,256 10,724 9,178 11,782 3,088 373,233 10,182 83,461 16,105 – 109,748 12,942 389 17,125 1,810 194 142,208 515,441 26,726 198 8,575 10,494 2,912 356,665 7,953 81,554 13,771 – 103,278 15,662 351 8,554 1,916 235 129,996 486,661 22,275 204 9,743 9,459 4,138 332,508 7,163 63,798 10,519 115 81,595 14,723 721 3,469 1,911 262 102,681 435,189 19,951 184 $ 542,365 $ 509,140 $ 455,324 $ 851 $ 858 $ 1,008 13 613 2,485 – – 224 130 (3) 138 2,974 66 1,274 128 – 1,468 – 2 1,560 9 547 2,974 – – 197 96 3 133 3,403 51 121 69 – 241 – 2 124 44 4 1,642 4,616 – – 4,616 $ 31 45 4 323 3,726 – – 3,726 $ 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 0.59 % 0.64 % 0.82 % 0.78 0.58 1.59 0.79 – – 1.67 1.01 0.45 1.50 0.99 – – 2.06 1.29 0.40 1.41 1.01 – – 1.81 1.42 (0.03) 4.47 0.80 0.65 1.53 0.79 – 1.34 – 0.51 1.12 0.03 4.57 0.95 0.64 0.15 0.50 – 0.23 – 0.57 0.92 0.11 4.33 0.96 0.95 0.30 0.29 0.87 0.36 – 1.25 0.72 2.43 2.06 1.15 0.90 – – 0.36 2.35 1.70 0.25 0.77 – – 0.85 % 0.73 % 0.78 % 0.58 2.46 0.76 0.36 0.82 – – $ 8,977 $ 8,366 $ 7,915 1.66 % 1.64 % 1.74 % Additional disclosures: Non-interest-bearing deposit liabilities Domestic Foreign (2) $ 45,691 $ 9,159 40,843 $ 5,605 37,202 4,844 (1) Classification as domestic or foreign is based on domicile of debtor or customer. (2) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. 86 CIBC 2017 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 and HTM 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)(2) Cash and deposits with banks Securities Trading AFS and HTM 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)(2) 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 2017/2016 2016/2015 Increase (decrease) due to change in: Increase (decrease) due to change in: Average balance Average rate Total Average balance Average rate Total $ $ $ 10 62 (3) – 74 487 162 239 888 – 1,031 (55) 85 29 (2) (1) 15 15 178 208 – 264 1,295 60 120 – (1) 179 46 7 – 8 240 14 3 12 – 29 – 31 (2) (1) 57 $ $ 297 998 $ $ $ 2 (130) 18 – (7) 23 (44) (156) (177) (3) (297) 67 (36) 88 5 100 (6) (6) 291 279 – 503 206 (67) (672) 4 67 (668) (19) 27 (6) (3) (669) 1 1,150 47 – 1,198 – 62 1 1 $ $ $ 12 (68) 15 – 67 510 118 83 711 (3) 734 12 49 117 3 99 9 9 469 487 – 767 1,501 (7) (552) 4 66 (489) 27 34 (6) 5 (429) 15 1,153 59 – 1,227 – 93 (1) – 1,262 593 (387) $ $ 1,319 890 611 $ $ $ $ $ $ $ $ (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) Classification as domestic or foreign is based on domicile of debtor or customer. (2) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. CIBC 2017 ANNUAL REPORT 87 Management’s discussion and analysis Analysis of net loans and acceptances $ millions, as at October 31 2017 2016 2015 2014 2013 2017 2016 2015 2014 2013 Canada (1) U.S. (1)(2) Residential mortgages Student Personal Credit card $ 203,787 $ 184,610 $ 166,616 $ 155,198 $ 148,664 $ 50 39,483 11,805 73 36,896 11,755 110 35,412 11,279 151 34,342 11,078 210 33,257 14,097 $ 902 – 326 35 Total net consumer loans 255,125 233,334 213,417 200,769 196,228 1,263 – – 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 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 6,481 5,403 4,496 6,237 1,912 3,019 13,293 5,558 4,762 668 464 539 281 291 1,818 1,927 2,937 869 – 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 – 95 3,248 1,812 3,567 1,559 702 13,761 107 2,198 87 209 883 756 117 602 1,445 3,099 7 12 (195) (215) (218) (192) (192) (83) (58) (50) (43) (28) 60,760 55,690 49,558 43,415 38,708 34,183 16,338 12,626 11,088 9,533 Total net loans and acceptances $ 315,885 $ 289,024 $ 262,975 $ 244,184 $ 234,936 $ 35,446 $ 16,430 $ 12,714 $ 11,223 $ 9,659 (1) Classification by country is based on domicile of debtor or customer. (2) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. 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 $ 2017 2,379 – 583 152 3,114 218 841 435 1,736 432 111 1,325 22 555 784 – 20 301 89 1,847 779 29 1,662 – $ 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 2017 2016 2015 2014 2013 2,113 $ 207,068 $ 187,077 73 37,471 11,946 50 40,392 11,992 1 429 126 $ 169,022 $ 157,317 152 34,846 11,243 110 35,939 11,466 $ 150,778 211 33,779 14,255 2,669 239 1,065 333 772 202 249 777 40 71 537 30 22 234 4 893 318 24 943 2,403 259,502 236,567 216,537 203,558 199,023 6,794 9,492 6,743 11,540 3,903 3,832 28,379 5,687 7,515 1,539 673 1,442 1,338 497 4,267 4,151 6,065 2,538 12 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 (73) (65) (57) (42) (40) (351) (338) (325) (277) (260) 11,113 11,186 12,260 10,179 9,116 106,056 83,214 74,444 64,682 57,357 Total net loans and acceptances $ 14,227 $ 14,327 $ 15,292 $ 12,833 $ 11,785 $ 365,558 $ 319,781 $ 290,981 $ 268,240 $ 256,380 (1) Classification by country is based on domicile of debtor or customer. 88 CIBC 2017 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 (2) Residential mortgages Student Personal and credit card Other business and government Foreign (2) Residential mortgages Personal and credit card Other business and government Total write-offs Recoveries Domestic (2) Personal and credit card Other business and government Foreign (2) 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 2017 (1) $ 1,813 829 $ 2016 1,762 1,051 $ 2015 1,736 771 $ 2014 1,758 937 $ 2013 1,916 1,121 21 – 869 51 17 19 80 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 1,057 1,153 1,004 1,058 1,448 168 15 5 5 193 864 (26) (15) 163 8 6 6 183 970 (29) (1) 171 8 5 2 186 818 (23) 96 177 11 2 2 192 866 (30) (63) $ $ 1,737 1,618 119 $ $ 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 Ratio of net write-offs during the year to average loans outstanding during the year 0.26 % 0.33 % 0.30 % 0.35 % 0.52 % Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (1) (2) 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)(3) Residential mortgages Personal loans Business and government Total foreign Total allowance 2017 2016 2015 2014 2013 2017 2016 2015 2014 2013 Allowance for credit losses (1) Allowance as a % of gross impaired loans $ $ 22 110 43 175 123 31 148 302 477 $ $ 20 105 63 188 148 40 196 384 572 $ $ 21 99 77 197 167 46 236 449 646 $ $ 22 96 38 156 146 43 299 488 644 $ $ 24 105 61 190 65 30 262 357 547 7.5 % 8.0 % 9.3 % 10.2 % 11.4 % 94.8 41.7 34.2 55.7 56.4 28.3 37.8 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 36.4 % 34.5 % 45.5 % 44.9 % 35.4 % (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. (3) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. CIBC 2017 ANNUAL REPORT 89 Management’s discussion and analysis Allowance on non-impaired loans as a percentage of net loans and acceptances $ millions, as at October 31 Domestic (2) Residential mortgages Personal loans Credit cards Business and government Total domestic Foreign (2)(3) Residential mortgages Personal loans Credit cards Business and government Total foreign Total allowance 2017 2016 2015 2014 2013 2017 2016 2015 2014 2013 Allowance for credit losses (1) Allowance as a % of net loans and acceptances $ $ $ 34 345 383 187 949 24 9 3 156 192 $ 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 1,067 8 3 5 68 84 – % – % – % – % – % 0.9 3.2 0.3 0.3 0.7 1.0 1.6 0.3 0.4 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 $ 1,141 $ 1,119 $ 1,024 $ 1,016 $ 1,151 0.3 % 0.3 % 0.4 % 0.4 % 0.4 % (1) Excludes allowance on undrawn credit facilities. (2) Classification as domestic or foreign is based on domicile of debtor or customer. (3) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. 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. (3) Other countries 2017 2016 2015 2014 2013 $ 14,194 27,027 157,987 13,746 44,354 59,479 (902) 315,885 35,446 14,227 $ 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 Total net loans and acceptances $ 365,558 $ 319,781 $ 290,981 $ 268,240 $ 256,380 (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. Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (3) 90 CIBC 2017 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 (3) Canada (1) U.S. (1)(2) 2017 2016 2015 2014 2013 2017 2016 2015 2014 2013 $ 292 2 114 408 7 – 38 6 33 9 2 3 2 – 3 103 511 337 $ 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 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 9 – 2 11 – 8 52 1 137 – 114 2 – – 45 359 370 – $ – – – – – – 5 – 62 – 248 – – – – 315 315 – $ – – – – – – – – 94 – 1 – – 10 – 105 105 – $ – – 1 1 – – – – 135 – – – – 20 – 155 156 – $ – – 4 4 – – 34 – 159 – – – 38 – – 231 235 – Total gross impaired and other past due loans $ 848 $ 940 $ 850 $ 741 $ 819 $ 370 $ 315 $ 105 $ 156 $ 235 Allowance for credit losses (4) 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 $ 22 – 110 132 $ 20 – 105 125 $ 21 – 99 120 $ 22 – 96 118 $ 24 – 105 129 2 – 18 5 9 – 2 2 2 – 3 43 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 $ 175 $ 188 $ 197 $ 156 $ 190 $ 270 2 4 276 5 – 20 1 24 9 – 1 – – – 60 $ 231 3 15 249 2 1 7 12 13 3 100 1 – – 2 141 $ 204 5 4 213 $ 194 7 17 218 $ 186 9 21 216 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 $ $ $ $ $ $ – – – – – – 16 – 41 – 8 – – – – 65 65 9 – 2 11 – 8 36 1 96 – 106 2 – – 45 294 $ $ $ – – – – – – 4 – 20 – 8 – – – – 32 32 – – – – – – 1 – 42 – 240 – – – – 283 Total net impaired loans $ 336 $ 390 $ 316 $ 243 $ 251 $ 305 $ 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 $ 176 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. (1) Classification by country is based on domicile of debtor or customer. (2) (3) Represents loans where repayment of principal or payment of interest is contractually in arrears between 90 and 180 days. (4) Comprises individual allowance, and collective allowance related to personal, scored small business, and mortgage impaired loans that are greater than 90 days delinquent. CIBC 2017 ANNUAL REPORT 91 Total gross impaired and other past due loans $ 432 $ 768 $ 804 $ 887 $ 878 $ 1,650 $ 2,023 $ 1,759 $ 1,784 $ 1,932 $ 212 – 53 265 17 2 57 5 78 1 – – 4 – – 164 429 3 9 – 29 3 39 1 – – 2 – – 83 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) 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 Other (1) Total 2017 2016 2015 2014 2013 2017 2016 2015 2014 2013 $ 263 – 70 $ 348 – 79 $ 318 – 79 $ 273 – 82 $ 513 $ 2 169 514 $ 3 190 573 $ 5 182 534 $ 7 193 333 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 7 684 24 10 147 12 248 10 116 5 6 – 48 626 707 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 1,310 340 1,658 365 1,419 340 1,434 350 1,547 385 $ 123 – 31 154 $ 148 – 40 188 $ 167 – 46 213 $ 146 – 42 188 $ $ 145 $ – 141 168 $ – 145 188 $ – 145 168 $ – 139 65 – 29 94 32 – 60 41 62 5 – 1 2 1 – 12 2 48 45 54 1 – – 2 – – 17 3 65 43 68 3 1 – 2 1 – 31 3 67 42 91 4 – – – 1 – 286 313 11 – 63 8 89 1 10 2 4 – 3 14 2 68 52 84 2 29 3 3 – 2 333 18 3 84 49 102 3 40 2 3 7 2 313 307 32 3 87 45 145 4 2 3 1 14 1 337 164 203 239 204 191 259 $ 237 $ 352 $ 416 $ 427 $ 298 $ 89 – 22 111 8 2 28 2 39 – – – 2 – – 81 $ 115 – 30 145 5 1 46 165 50 – – – – – 1 268 $ 181 – 33 214 17 2 76 4 71 – 1 – – – – 171 $ 172 – 37 $ 208 – 53 209 29 2 101 2 93 2 1 5 8 – – 243 261 53 – 114 11 117 6 1 4 5 – 1 312 $ $ 477 $ 572 $ 646 $ 644 $ 368 $ 2 28 346 $ 3 45 385 $ 5 37 366 $ 7 54 398 13 10 84 4 159 9 106 3 2 – 45 435 394 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 1 363 483 9 212 704 86 – 262 58 347 15 14 11 46 1 3 843 89 – 135 224 32 – 111 47 104 6 9 6 5 1 2 323 547 394 9 77 480 54 – 151 11 243 9 5 5 41 – 1 520 Total net impaired loans $ 192 $ 413 $ 385 $ 452 $ 573 $ 833 $ 1,086 $ 773 $ 790 $ 1,000 (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. 92 CIBC 2017 ANNUAL REPORT Management’s discussion and analysis Deposits $ millions, for the year ended October 31 2017 2016 2015 2017 2016 2015 2017 2016 2015 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 (2) 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 $ 10,567 $ 41,607 4,419 9,965 $ 37,572 2,943 95,035 34,510 359 41,688 72,260 1,681 38,642 87,057 28,873 174 40,414 58,618 1,816 38,720 $ 9,252 33,735 2,083 80,328 25,128 97 38,996 50,604 937 38,758 340,768 306,152 279,918 1,120 7,697 5 3,487 2,857 1,925 54,381 11,897 – 83,369 818 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 13 228 1 429 332 4 434 1,040 12 613 3,106 1 8 – 22 18 18 656 124 – 847 $ $ 12 138 – 363 240 2 505 845 10 547 14 121 2 454 243 1 589 749 5 581 2,662 2,759 1 3 – 20 1 8 454 66 – 553 3 4 – 33 1 7 152 30 1 231 0.12 % 0.55 0.02 0.12 % 0.37 – 0.15 % 0.36 0.10 0.45 0.96 1.11 1.04 1.44 0.71 1.59 0.91 0.09 0.10 – 0.63 0.63 0.94 1.21 1.04 – 1.02 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 $ 424,137 $ 399,071 $ 354,322 $ 3,953 $ 3,215 $ 2,990 0.93 % 0.81 % 0.84 % (1) Deposits by foreign depositors in our domestic bank offices amounted to $26.8 billion (2016: $10.6 billion; 2015: $7.4 billion). (2) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See “Significant events” for additional details. 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 2017 2016 2015 $ $ $ $ 13,713 29,995 43,708 13,789 15,211 1.64 % 26,303 33,261 $ $ $ $ 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 0.97 % 0.74 % 0.83 % $ 2017 21.1 2.6 1.1 0.1 $ 2016 16.4 2.2 0.3 – $ 2015 15.9 3.2 0.4 0.3 $ 24.9 $ 18.9 $ 19.8 (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 2017 ANNUAL REPORT 93 Consolidated financial statements Consolidated financial statements 95 96 98 99 100 101 102 103 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 103 Note 1 – Basis of preparation and summary of significant 112 121 123 125 128 131 132 134 134 134 135 139 140 141 144 Note 2 Note 3 Note 4 Note 5 Note 6 accounting policies – Fair value measurement – Significant transactions – 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 145 146 148 153 155 155 158 161 162 163 164 165 168 169 170 171 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 94 CIBC 2017 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 29, 2017 CIBC 2017 ANNUAL REPORT 95 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, 2017 and 2016 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, 2017, 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, 2017 and 2016, and its financial performance and its cash flows for each of the years in the three-year period ended October 31, 2017, 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, 2017, 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 29, 2017 expressed an unqualified opinion on CIBC’s internal control over financial reporting. Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada November 29, 2017 96 CIBC 2017 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, 2017, 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, 2017, 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, 2017 and 2016, 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, 2017 of CIBC and our report dated November 29, 2017 expressed an unqualified opinion thereon. Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada November 29, 2017 CIBC 2017 ANNUAL REPORT 97 Consolidated financial statements Consolidated balance sheet Millions of Canadian dollars, 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) and held-to-maturity (HTM) 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 2017 (1) 2016 $ 3,440 $ 3,500 10,712 10,665 50,679 42,592 148 93,419 5,035 40,383 207,271 40,937 12,378 97,766 (1,618) 356,734 24,342 8,824 1,783 5,367 1,978 715 727 11,805 55,541 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 $ 565,264 $ 501,357 $ 159,327 225,622 13,789 40,968 439,706 13,713 2,024 27,971 23,271 8,828 30 15,275 47,404 3,209 1,797 12,548 137 16,101 452 31,035 202 31,237 $ 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 $ 565,264 $ 501,357 (1) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. 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 98 CIBC 2017 ANNUAL REPORT Consolidated financial statements Consolidated statement of income Millions of Canadian dollars, 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 (Note 3) 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 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) 2017 (1) 2016 $ 11,028 1,890 495 180 13,593 $ 9,833 1,774 329 156 12,092 $ 2015 9,573 1,524 310 76 11,483 3,953 226 254 142 41 4,616 8,977 452 843 744 463 1,034 1,573 427 349 226 143 1 252 101 695 7,303 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 16,280 829 15,035 1,051 13,856 771 5,198 822 1,630 317 282 229 96 997 9,571 5,880 1,162 4,718 19 52 4,647 4,699 11.26 11.24 5.08 $ $ $ $ $ 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 $ $ $ $ $ (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. CIBC 2017 ANNUAL REPORT 99 Consolidated financial statements Consolidated statement of comprehensive income Millions of Canadian dollars, for the year ended October 31 Net income 2017 (1) 2016 $ 4,718 $ 4,295 2015 $ 3,590 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 gains (losses) due to fair value change of FVO liabilities attributable to changes in credit risk Total OCI (2) Comprehensive income Comprehensive income attributable to non-controlling interests Preferred shareholders Common shareholders Comprehensive income attributable to equity shareholders (1,148) – 772 – (376) 6 (107) (101) 70 (60) 10 139 (10) (338) 4,380 19 52 4,309 4,361 $ $ $ $ 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 $ $ $ $ (1) (2) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. Includes $24 million of losses for 2017 (2016: $6 million of gains; 2015: $5 million of losses) relating to our investments in equity-accounted associates and joint ventures. Millions of Canadian dollars, for the year ended October 31 2017 (1) 2016 2015 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 gains (losses) due to fair value change of FVO liabilities attributable to changes in credit risk $ $ 42 – (170) – (128) (23) 36 13 (23) 22 (1) (54) 4 $ (166) $ (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) (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. 100 CIBC 2017 ANNUAL REPORT Consolidated financial statements Consolidated statement of changes in equity Millions of Canadian dollars, for the year ended October 31 2017 (1) 2016 2015 Preferred shares (Note 15) Balance at beginning of year Issue of preferred shares Redemption of preferred shares Treasury shares Balance at end of year Common shares (Note 15) Balance at beginning of year Issued pursuant to the acquisition of The PrivateBank Issued pursuant to the acquisition of Geneva Advisors Other issue of common shares Purchase of common shares for cancellation Treasury shares Balance at end of year Contributed surplus Balance at beginning of year Issue of replacement equity-settled awards pursuant to the acquisition of The PrivateBank Stock options and restricted shares 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 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 gains (losses) due to 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 attributable to non-controlling interests Dividends Other Balance at end of year Equity at end of year $ $ $ $ $ $ $ 1,000 800 – (3) 1,797 8,026 3,443 126 957 – (4) 12,548 72 72 7 (15) 1 137 13,584 4,699 (52) (2,121) – (9) $ $ $ $ $ $ $ 1,000 – – – 1,000 7,813 – – 273 (61) 1 8,026 76 – 5 (9) – 72 11,433 4,275 (38) (1,879) (209) 2 $ $ $ $ $ $ $ 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) $ 16,101 $ 13,584 $ 11,433 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1,114 (376) 738 161 (101) 60 23 10 33 (508) 139 (369) – (10) (10) 452 201 19 (8) (10) 202 31,237 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 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 (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. CIBC 2017 ANNUAL REPORT 101 Consolidated financial statements Consolidated statement of cash flows Millions of Canadian dollars, for the year ended October 31 2017 (1) 2016 (2) 2015 Cash flows provided by (used in) operating activities Net income Adjustments to reconcile net income to cash flows provided by (used in) operating activities: $ 4,718 $ 4,295 $ 3,590 Provision for credit losses Amortization and impairment (3) Stock options and restricted shares expense Deferred income taxes AFS securities losses (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, net of issuance cost Redemption of preferred shares Issue of common shares for cash Purchase of common shares for cancellation Net sale (purchase) of treasury shares Dividends paid Cash flows provided by (used in) investing activities Purchase of AFS securities Proceeds from sale of AFS securities Proceeds from maturity of AFS securities Cash used in acquisitions, net of cash acquired Net cash provided by dispositions of investments in equity-accounted associates and joint ventures Net sale (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 (4) Cash interest paid Cash interest received Cash dividend received Cash income taxes paid 829 542 7 21 (143) (305) (15) 394 (30,547) 18,407 3,375 (34) 90 3,588 (5,549) (764) 107 1,071 (1,063) (494) 16,277 398 (10,556) 2,103 2,457 – (55) 792 – 194 – (7) (1,425) (501) (37,864) 18,787 19,368 (2,517) 60 201 (1,965) (51) (60) 3,500 3,440 4,526 12,611 949 2,204 $ $ 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) – – 100 (270) 1 (1,753) (2,436) (31,625) 10,750 12,299 – 1,363 (170) (7,383) 55 447 3,053 3,500 3,798 10,961 1,033 730 $ $ 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) 593 (631) 26 (11) 3 (1,753) (2,903) (41,145) 9,264 15,451 – 185 (256) (16,501) 280 359 2,694 3,053 3,646 10,388 983 555 $ $ Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (1) (2) Certain information has been reclassified to conform to the presentation adopted in the current year. (3) Comprises amortization and impairment of buildings, furniture, equipment, leasehold improvements, and software and other intangible assets. (4) Includes restricted balance of $436 million (2016: $422 million; 2015: $406 million). The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. 102 CIBC 2017 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 four strategic business units – Canadian Personal and Small Business Banking, Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets – CIBC provides a full range of financial products and services to 11 million individual, small business, commercial, corporate and institutional clients in Canada, the U.S. 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 29, 2017. 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 consolidated from the date control is obtained by CIBC, and are deconsolidated from the date control is lost. Consistent accounting policies are applied for all consolidated subsidiaries. Details of our significant subsidiaries are provided in Note 27. Structured entities An 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 2017 ANNUAL REPORT 103 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, FVO, 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. 104 CIBC 2017 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 2017 ANNUAL REPORT 105 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. 106 CIBC 2017 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. CIBC 2017 ANNUAL REPORT 107 Consolidated financial statements 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 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 borrowings. 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. 108 CIBC 2017 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 amortization 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 amortization 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 – 3 to 16 years 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 2017 ANNUAL REPORT 109 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. 110 CIBC 2017 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 the 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 Restricted Stock plan, where restricted stock is granted and settled in common shares, compensation expense is based on the grant date fair value. Compensation expense results in a corresponding increase to contributed surplus. When the restricted stock vests and is released from restriction, the amount recognized in Contributed surplus is credited to common share capital. 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) issued pursuant to the Deferred Share Unit Plan, the Deferred Compensation Plan (DCP), and the Directors’ Plan, entitle the holder to receive the cash equivalent of a CIBC common share. At the time DSUs are granted, the related expense in respect of the cash compensation that an employee or director would otherwise receive would have been fully recognized. Changes in the obligations 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 for employee DSUs and as Non-interest expense – Other for Directors’ DSUs. 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 consist of monthly and annual fees that are recognized over the period that the related services are provided, and transactional fees that are recognized at the time the related services are provided. Card fees primarily include interchange income, overlimit 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, and the portion of interchange income related to loyalty points, which is recognized when the loyalty points are redeemed. 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. CIBC 2017 ANNUAL REPORT 111 Consolidated financial statements 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, 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 During the year, we adopted the following accounting policies as a result of the acquisition of PrivateBancorp, Inc. and its subsidiary, The PrivateBank and Trust Company on June 23, 2017. Purchased loans Both purchased performing and purchased credit-impaired loans are initially measured at their acquisition date fair values. As a result of recording the loans at fair value, no allowance for credit losses were recognized at the acquisition date. Fair value is determined by estimating principal and interest cash flows expected to be collected and discounting those cash flows at a market rate of interest. At the acquisition date, we classify a loan as performing where we expect timely collection of all amounts in accordance with the original contractual terms of the loan and as credit-impaired where it is probable that we will not be able to collect all contractually required payments. For purchased performing loans, the acquisition date fair value adjustment on each loan is amortized to interest income over the expected remaining life of the loan using the effective interest rate method. Actual individual allowances for credit losses are recorded as they arise subsequent to the acquisition date in a manner that is consistent with our impairment policy for loans that we originate. As loans are repaid, the remaining unamortized amounts relating to those loans are recorded in income in the period that the loan is repaid. Collective allowances are established after the acquisition date as the purchased loan portfolio turns over and to the extent the credit quality of the acquired portfolio deteriorates. For purchased credit-impaired loans, the acquisition date fair value adjustment on each loan consists of management’s estimate of the shortfall of principal and interest cash flows expected to be collected and the time value of money. The time value of money component of the fair value adjustment is amortized to interest income over the expected remaining life of the loan using the effective interest rate method. Subsequent to the acquisition date, we regularly re-estimate the expected cash flows and recognize any difference, either through our provision for credit loss or interest income. Decreases in expected cash flows will result in a charge to provision for credit losses and an increase in our allowance for credit losses. Increases in expected cash flows will result in a recovery of provision for credit losses and a reduction in our allowance for credit losses, or if no allowance exists, an increase in interest income. HTM securities HTM securities are non-derivative financial assets with fixed or determinable payments and fixed maturity, that do not meet the definition of loans and receivables, and where we have the intention and ability to hold to maturity. They are recognized initially at fair value plus transaction costs that are directly attributable to the acquisition of the securities. Subsequently, they are measured at amortized cost, using the effective interest rate method, net of impairment losses. Interest income is recognized on an accrual basis using the effective interest rate method. 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. 112 CIBC 2017 ANNUAL REPORT Consolidated financial statements 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 consolidated 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. 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, which include Community Reinvestment Act investments and Federal Home Loan Bank (FHLB) stock 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 limited partnership (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. The carrying value of FHLB stock approximates fair value. 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 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. 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. CIBC 2017 ANNUAL REPORT 113 Consolidated financial statements 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. Other assets also include investment in bank owned life insurance carried at the cash surrender value which is assumed 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 either current market interest rates with similar remaining terms or rates estimated using internal models and broker quotes. 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. 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 overnight indexed swap (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 consolidated 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. 114 CIBC 2017 ANNUAL REPORT Carrying value Amortized cost Fair value through net income Consolidated financial statements Fair value of financial instruments $ millions, as at October 31 2017 (1) 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 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 13,735 2,435 5,035 38,933 207,056 40,442 11,992 83,222 – 8,824 7,386 $ 158,690 220,050 13,789 $ $ 40,634 – 8,828 – 2,024 27,971 9,782 3,209 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 Fair value through OCI $ – 40,157 – – $ – – – – – – – – – – – – – – – – – – $ – 37,253 – – $ – – – – – – – – – – – – – – – – – – $ Total 14,152 93,419 5,035 40,383 207,068 40,442 11,992 97,232 24,342 8,824 7,386 $ Fair value 14,152 93,406 5,035 40,383 206,135 40,438 11,992 97,188 24,342 8,824 7,386 Fair value over (under) carrying value $ – (13) – – (933) (4) – (44) – – – $ 159,327 225,622 13,789 $ 159,302 225,955 13,789 $ (25) 333 – $ $ 40,968 23,271 8,828 13,713 2,024 27,971 9,917 3,209 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 $ $ 41,391 23,271 8,828 13,713 2,024 27,971 9,917 3,541 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 $ $ 423 – – – – – – 332 – – – – 506 12 – 61 – – – 7 572 – 397 – – – – – – 267 $ $ $ $ 417 50,827 – 1,450 12 – – 14,010 24,342 – – 637 5,572 – 334 23,271 – 13,713 – – 135 – 347 50,170 – – – – – 6,640 27,762 – – 203 3,190 – 91 28,807 – 10,338 – – 146 – (1) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. CIBC 2017 ANNUAL REPORT 115 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 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 – Forward contracts – Swap contracts – Purchased options – 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 Other commodity derivatives Over-the-counter Exchange-traded Total other commodity derivatives Total held for ALM Total fair value Less: effect of netting 116 CIBC 2017 ANNUAL REPORT $ Positive Negative $ $ 56 6,968 153 – 7,177 – – – – 44 7,220 – 168 7,432 – – 153 153 7,177 7,585 3,603 6,028 217 – 9,848 9,848 – 130 11 141 1,197 1,541 2,738 40 186 226 1,138 84 1,222 3,097 6,012 – 243 9,352 9,352 – 31 148 179 2,323 936 3,259 74 50 124 775 1 776 21,352 21,275 1 1,065 3 – 1,069 87 1,707 1 – 1,795 – 1,795 – – – – 126 – 126 – – – – 300 – 2 302 14 1,631 – 1 1,646 – 1,646 – 3 – 3 44 – 44 1 – 1 2017 Net 12 (252) 153 (168) (255) – – (153) (153) (408) 506 16 217 (243) 496 496 – 99 (137) (38) (1,126) 605 (521) (34) 136 102 363 83 446 77 1 765 3 (2) 767 73 76 1 (1) 149 – 149 – (3) – (3) 82 – 82 (1) – (1) Positive Negative $ $ 13 11,501 181 – 11,695 $ 44 10,941 – 189 11,174 – – – – – – – – 2016 Net (31) 560 181 (189) 521 – – – – 11,695 11,174 521 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 – 745 228 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 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) 195 (781) – – (586) – (586) – 1 – 1 (10) – (10) – – – 2,990 24,342 (13,977) 1,996 23,271 (13,977) 994 1,071 – 3,324 27,762 (17,965) 3,963 28,807 (17,965) (639) (1,045) – $ 10,365 $ 9,294 $ 1,071 $ 9,797 $ 10,842 $ (1,045) 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 HTM securities Loans Residential mortgages Personal Credit card Business and government Investment in equity-accounted associates (2) Financial liabilities Deposits Personal Business and government Bank Secured borrowings Subordinated indebtedness Level 1 Level 2 Level 3 Quoted market price 2017 (1) 2016 Valuation technique – observable market inputs Valuation technique – non-observable market inputs 2017 (1) 2016 2017 (1) 2016 Total 2017 (1) Total 2016 $ – $ – $ 2,422 $ – – – – 192 – – – – 223 – – – – – – – – – – – $ – $ – $ 2,422 $ – 206,123 40,438 11,992 83,178 164 187,583 37,556 11,946 64,271 198 206,123 40,438 11,992 83,178 356 187,583 37,556 11,946 64,271 421 $ $ – – – – – – – – – – $ 43,047 117,461 8,568 37,995 3,541 $ 43,419 111,091 13,171 35,535 3,633 $ $ 1,524 1,801 – 3,062 – – – – 4,255 – $ 44,571 119,262 8,568 41,057 3,541 $ 43,419 111,091 13,171 39,790 3,633 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (1) (2) 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 Residential mortgages AFS securities Government issued or guaranteed Corporate equity Corporate debt Mortgage- and asset-backed FVO securities Government issued or guaranteed Corporate debt Asset-backed FVO securities purchased under resale agreements 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 2017 2016 2017 2016 Valuation technique – non-observable market inputs 2016 2017 Total 2017 Total 2016 $ – $ – $ 417 $ 347 $ – $ – $ 417 $ 347 2,403 30,737 – – 33,140 – – – 4,299 28 – – 4,327 – – – – – – – – 1,541 – 270 1,811 1,474 35,023 – – 36,497 – – – 1,429 30 – – 1,459 – – – – – – – – 742 – 161 903 13,049 255 2,256 1,944 17,504 13,907 12 13,919 21,015 152 5,152 7,544 33,863 54 – – 54 1,450 8,218 11,643 11 1,285 226 952 22,335 9,307 554 1,853 1,168 12,882 6,640 – 6,640 22,445 – 5,838 5,215 33,498 59 102 – 161 – 12,409 12,492 2 364 70 1,327 26,664 – 32 – 3 35 103 – 103 – 289 4 1,674 1,967 – – 94 94 – 28 – 130 38 – – 196 – 40 – 496 536 – – – – 344 5 1,947 2,296 – – 94 94 – 31 – 140 24 – – 195 15,452 31,024 2,256 1,947 50,679 14,010 12 14,022 25,314 469 5,156 9,218 40,157 54 – 94 148 1,450 8,246 11,643 141 2,864 226 1,222 24,342 10,781 35,617 1,853 1,664 49,915 6,640 – 6,640 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 Total financial assets $ 39,278 $ 38,859 $ 89,542 $ 80,192 $ 2,395 $ 3,121 $ 131,215 $ 122,172 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 Total financial liabilities $ $ – (7,291) (7,291) – (4,684) (4,684) $ $ (6,309) (6,422) (12,731) (3,124) (5,654) (8,778) – – – (937) – (203) (2) – – (491) – (216) (7,867) (10,998) (34) (2,289) (124) (574) (11,926) (13,599) (18) (1,446) (34) (801) (1,140) (8,431) $ (709) (5,393) $ (21,886) $ (34,617) (27,824) $ (36,602) $ $ (369) – (369) (20) – (148) (77) – – (245) (614) $ $ (506) – (506) (35) – (197) (42) – – (274) (780) $ (6,678) $ (13,713) (20,391) (7,887) (10,998) (182) (3,303) (124) (777) (23,271) (43,662) $ $ (3,630) (10,338) (13,968) (11,963) (13,599) (215) (1,979) (34) (1,017) (28,807) (42,775) (1) Comprises FVO deposits of $5,947 million (2016: $3,281 million), bifurcated embedded derivative liabilities of $596 million (2016: $203 million), FVO other liabilities of $9 million (2016: $11 million), and other financial liabilities measured at fair value of $126 million (2016: $135 million). CIBC 2017 ANNUAL REPORT 117 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 nil of trading securities (2016: $548 million) and $405 million of securities sold short (2016: $599 million) from Level 1 to Level 2 due to reduced observability in the inputs used to value these securities. In addition, transfers between Level 2 and Level 3 were made during 2017 and 2016 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 loss 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 $5 million (2016: net gain of $33 million; 2015: net gain of $122 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. $ millions, for the year ended October 31 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 (3) Issuances Sales Settlements Closing balance Net gains/(losses) included in income 2017 Trading securities Corporate equity Mortgage- and asset-backed Trading loans Business and government 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 (4) Derivative instruments Interest rate Credit Equity Total liabilities 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 (4) Derivative instruments Interest rate Credit Equity Total liabilities $ $ $ $ $ $ $ $ 40 496 – 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) $ $ $ $ $ $ $ $ – 2 – 71 – 5 3 – (11) – 70 – – 20 – 20 – 7 67 – 4 5 (1) (38) – 44 (21) – 36 – 15 $ $ 4 (3) 1 (10) (1) – 8 (2) 1 19 17 $ (101) 14 – (25) $ (112) $ $ $ 3 27 (27) (1) – (1) – 13 7 21 (36) (2) (6) (3) $ (47) $ $ – – – (46) – (5) – – – – $ (51) $ – – – – – – – – – 6 6 $ $ – – – – – – – – – (19) – – 13 40 – 653 – 1 – 21 $ $ – – 101 27 – – – – – – – – (8) (137) – – – – – – $ (12) $ (492) 32 3 (4) 103 – – (926) (11) (2) – (13) 289 4 1,674 94 28 130 38 $ (19) $ 728 $ 128 $ (145) $ (1,460) $ 2,395 – – – – – – – (124) – (4) – – – – $ 379 $ (369) – 29 18 426 $ (20) (148) (77) (614) (13) $ (103) 40 496 $ $ – – (809) (21) – – – 344 5 1,947 94 31 140 24 $ (15) $ 65 $ – – (41) 1 – 35 $ (56) $ 101 $ $ (191) $ – – (22) $ (213) $ $ $ – – – – – – – (38) – (4) – – – – $ $ $ $ $ $ – – – – – – – – – – $ $ $ $ – – – – – – – – – – 3 – – – 3 $ $ $ $ (42) $ – – – – – $ (7) – – (1) (8) $ – – – – – 4 – 35 – 1,156 – 6 – 16 1,217 – – – – – – – – – – – – – – – $ $ $ $ (128) $ (946) $ 3,121 (51) $ (7) – (11) $ (69) $ 1 – – – 1 $ 79 $ (506) – 17 – 96 $ (35) (197) (42) (780) $ 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) (4) Includes securities of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. Includes FVO deposits of $40 million (2016: $318 million) and net bifurcated embedded derivative liabilities of $329 million (2016: $188 million). 118 CIBC 2017 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 2017 Valuation techniques Key non-observable inputs Range of inputs Low High Corporate equity Mortgage- and asset-backed $ 32 3 Net asset value Market proxy or direct broker quote Market proxy or direct broker quote Net asset value n/a – % n/a 6.5 % AFS securities Corporate equity Limited partnerships Private companies Corporate debt Asset-backed Trading loans Business and government FVO securities Asset-backed Derivative instruments Interest rate Credit Equity Total assets Deposits and other liabilities Derivative instruments Interest rate Credit 203 86 4 1,674 103 94 28 130 38 $ $ 2,395 (369) 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 11.0 3.8 n/a 11.0 3.8 15.3 % 38.1 % 30.0 % 30.0 % 2.4 % 0.8 % Discounted cash flow Discount rate 2.5 % 5.7 % Market proxy or direct broker quote Market proxy or direct broker quote 75.0 % 88.0 % Proprietary model (2) Option model n/a Market volatility Market proxy or direct broker quote Market proxy or direct broker quote Default rate Recovery rate Prepayment rate Discounted cash flow Credit spread (3) Market volatility Market correlation n/a n/a 4.0 % 17.9 % 39.3 % 24.1 % 24.1 % 4.0 % 50.0 % 70.0 % 20.0 % 20.0 % 1.1 % – % 13.4 % 13.4 % 39.0 % 81.3 % Option model Option model Market volatility Market correlation 4.3 % 32.6 % (100.0) % 100.0 % (20) Proprietary model (2) n/a (148) 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 (77) (614) n/a n/a 4.0 % – % 24.1 % 4.0 % 50.0 % 70.0 % 20.0 % 20.0 % 1.1 % 19.7 % 75.1 % – % 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) 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. 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 other liabilities, 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 for structured credit securities 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 those credit derivatives that referenced the securities. The impact of adjusting the Level 3 inputs noted above to reasonably possible alternatives would not have a significant impact on the net fair value in respect of financial instruments carried at fair value in our structured credit run-off business. 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 $10 million or decrease by $8 million (2016: increase by $16 million or decrease by $9 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 $22 million (2016: $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 (2016: $2 million). CIBC 2017 ANNUAL REPORT 119 Consolidated financial statements 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 $58 million or decrease by $56 million (2016: increase by $23 million or decrease by $24 million). FVO assets FVO securities include certain debt securities and reverse repos 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 carrying value of our FVO securities and FVO reverse repos represent our maximum exposure to credit risk related to these FVO assets. The change in fair value attributable to change in credit risk of these FVO assets during the year is insignificant (2016: insignificant). 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 $14 million for the year, and $14 million cumulatively. The estimated contractual amount payable at maturity of FVO deposits, which is based on the par value and the intrinsic value of the applicable embedded derivatives, is $253 million higher (2016: $152 million higher) than its fair value. 120 CIBC 2017 ANNUAL REPORT Consolidated financial statements Note 3 Significant transactions 2017 Acquisition of PrivateBancorp, Inc. On June 23, 2017, we completed the acquisition of PrivateBancorp, Inc. (PrivateBancorp) and its subsidiary, The PrivateBank and Trust Company (The PrivateBank, subsequently rebranded as CIBC Bank USA) for total consideration of US$5.0 billion (C$6.6 billion). This acquisition expands our U.S. presence which diversifies earnings and strengthens our platform for long-term growth. The acquisition also creates a platform for CIBC to deliver high-quality middle market commercial and private banking capabilities, which advances our client-focused strategy. We acquired 100% of the outstanding share capital of PrivateBancorp for a final transaction value of US$61.00 per PrivateBancorp share. The following summarizes the total purchase consideration of $6.6 billion as of the acquisition date: $ millions, as at June 23, 2017 Issuance of CIBC common shares (1) Cash (2) Estimated obligation payable to dissenting shareholders (3) Issuance of replacement equity-settled awards (4) Total purchase consideration $ 3,443 2,770 327 72 $ 6,612 (1) 32,137,402 CIBC common shares were issued at a price of US$80.95 per share to satisfy the equity component of the merger consideration of 0.4176 of a CIBC common share per PrivateBancorp share. (2) US$2.1 billion in cash was transferred to satisfy the cash component of the merger consideration of US$27.20 per PrivateBancorp share. (3) Former PrivateBancorp shareholders who validly exercised their dissent and appraisal rights under Delaware law did not receive the merger consideration and instead filed petitions against PrivateBancorp seeking a payment equal to the “fair value” of their PrivateBancorp shares as determined by a Delaware court following an appraisal proceeding. In such a proceeding, a Delaware court may require a purchaser to pay to the dissenting shareholders an amount more or less than, or the same as, the merger consideration. Dissenting shareholders are entitled to receive interest of 5% plus the Federal Reserve discount rate compounded quarterly from the effective date of the transaction until any appraisal proceeding is adjudicated. As at June 23, 2017, CIBC estimated the fair value of the obligation payable to dissenting shareholders using the final transaction value of US$61.00 per PrivateBancorp share. In November 2017, CIBC and the petitioners entered into an agreement to settle the dispute, subject to the court’s entry of an order dismissing the consolidated petition. See Note 23 for additional details. (4) Equity-settled share-based awards issued to employees of PrivateBancorp and The PrivateBank consisted of 190,789 replacement restricted shares and 988,544 replacement stock options with a fair value of US$54 million relating to the portion of these awards attributable to pre-acquisition service. The fair values of the restricted shares and the stock options were estimated based on the final transaction value of US$61.00 per PrivateBancorp share. The following summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date: $ millions, as at June 23, 2017 Fair values of assets acquired Cash and non-interest-bearing deposits with banks Interest-bearing deposits with banks AFS and HTM securities Loans (1) Other assets Intangible assets (2) Total fair value of identifiable assets acquired Fair values of liabilities assumed Deposits Other liabilities Total fair value of identifiable liabilities assumed Fair value of identifiable net assets acquired Goodwill Total purchase consideration $ $ 280 441 5,577 20,642 33 370 27,343 24,059 496 24,555 2,788 3,824 6,612 (1) The fair value for loans reflects estimates of incurred and expected future credit losses at the acquisition date and interest rate premiums or discounts relative to prevailing market (2) rates. The gross principal amount is $20.9 billion. Intangible assets include core deposits, customer relationships, and software. Core deposit and customer relationship intangibles arising from the acquisition are amortized on a straight-line basis over estimated useful lives which range from 3-10 years. The goodwill recognized of $3.8 billion primarily reflects the expected growth of our combined U.S. Commercial Banking and Wealth Management businesses, the ability to cross sell products between strategic business units (SBUs), and expected synergies from the integration of certain technology and operational platforms. Goodwill is not expected to be deductible for tax purposes. The estimates for the fair values of the assets acquired and liabilities assumed are subject to refinement and therefore may be retroactively adjusted to reflect new information obtained about facts and circumstances that existed as at the acquisition date during the measurement period. All results of operations are included in our U.S. Commercial Banking and Wealth Management SBU. Since the acquisition date, our acquisition of PrivateBancorp has increased our consolidated revenue and net income by $448 million and $96 million, respectively. If our acquisition of PrivateBancorp had occurred on November 1, 2016 it would have increased our consolidated revenue and net income by $1,228 million and $304 million, respectively. These amounts exclude transaction and integration costs, which are primarily recognized in non-interest expenses and included in Corporate and Other. CIBC 2017 ANNUAL REPORT 121 Consolidated financial statements Acquisition of Geneva Advisors On August 31, 2017, we completed the acquisition of Geneva Advisors, LLC (Geneva Advisors), an independent private wealth management firm, for total estimated consideration of US$179 million (C$224 million). This acquisition will expand CIBC’s private wealth management client base and investment management capabilities in the U.S. The purchase price consisted of $39 million of cash consideration and 1,204,344 CIBC common shares valued at $126 million, plus estimated contingent consideration of $59 million to be paid over the next three years subject to future performance conditions being met. Contingent consideration of up to US$65 million may ultimately be payable dependent upon the level of achievement of future performance conditions. The following summarizes the preliminary fair values of identifiable assets acquired and liabilities assumed at the acquisition date: $ millions, as at August 31, 2017 Cash Other assets Intangible assets (1) Other liabilities Fair value of identifiable net assets acquired Goodwill (2) Total purchase consideration $ $ 12 2 102 (12) 104 120 224 (1) Intangible assets include customer relationships and contract-based intangibles. The customer relationship intangible asset arising from the acquisition is amortized on a straight- line basis over an estimated useful life of 7 years. Contract-based intangibles arising from the acquisition are amortized on a straight-line basis over estimated useful lives which range from 5 to 9 years. (2) Goodwill is expected to be deductible for tax purposes. The estimates for the fair values of the assets acquired and liabilities assumed are subject to refinement and therefore may be retroactively adjusted to reflect new information obtained about facts and circumstances that existed as at the acquisition date during the measurement period. All results of operations are included in our U.S. Commercial Banking and Wealth Management SBU. Transaction and integration costs are included in Corporate and Other. Launch of Simplii Financial and wind-down of President’s Choice Financial consumer banking offer On August 16, 2017, we announced both the launch of Simplii Financial and the wind-down of our President’s Choice Financial branded consumer banking offer with Loblaw Companies Limited (Loblaw). Under the terms of the wind-down agreement negotiated with Loblaw, CIBC is required to pay certain fees to Loblaw. In addition, as a result of the agreement, we incurred ancillary asset impairment and severance costs, as well as ongoing project- related costs. In aggregate, CIBC incurred fees and charges of approximately $98 million ($71 million after-tax) in the fourth quarter of 2017. Lease of new premises On April 12, 2017, we announced that we had entered into a lease agreement to become the anchor tenant at a new office complex in downtown Toronto. We have agreed to lease up to 1.75 million square feet of total office space in two buildings to be constructed at the site within the next six years. The aggregate future minimum lease commitments related to the lease, which begins in 2020, are $2.3 billion. Sale and lease back of certain retail properties During the first quarter, we sold and leased back 89 retail properties located mainly in Ontario and British Columbia, and recognized a gain of $299 million ($245 million after-tax) on proceeds of $390 million in our Canadian Personal and Small Business Banking SBU. The gain is included in Non-interest income – Other. 2016 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 Corporate and Other(1) 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. (1) Certain information has been reclassified to conform to the presentation adopted in the current year. 122 CIBC 2017 ANNUAL REPORT 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 2017 Total (1) 2016 Total Carrying Carrying Carrying Carrying Carrying Carrying Carrying value Yield (2) value Yield (2) value Yield (2) value Yield (2) value Yield (2) value Yield (2) value Yield (2) 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 (3) Asset-backed securities Corporate public debt Corporate private debt Total debt securities Corporate public equity Corporate private equity Total equity securities Total AFS securities HTM Securities Securities issued or guaranteed by: U.S. Treasury and agencies Other foreign governments Mortgage-backed securities (4) Corporate public debt Total HTM securities Trading securities Securities issued or guaranteed by: Canadian federal government Other Canadian governments U.S. Treasury and agencies Other foreign governments Mortgage-backed securities (5) Asset-backed securities Corporate public debt Corporate public equity $ 167 1,173 3,822 2,297 1,668 59 1,871 4 0.9 % $ 1.2 0.9 1.6 1.0 3.1 1.4 10.0 4,850 2,433 5,879 1,446 2,448 804 3,164 – 1.7 % $ 2.0 1.4 2.3 1.5 1.8 1.7 – 11,061 21,024 – – – – – – – – – – 456 1,660 708 173 453 810 117 – 4,377 – – – 2.2 % $ 2.5 1.9 4.7 2.3 2.3 4.3 – – – – – 22 228 2,415 561 – – 3,226 – – – – % $ – 2.1 5.1 1.9 1.9 – – – – $ 11,061 $ 21,024 $ 4,377 $ 3,226 $ $ $ – 1 5 – 6 1,996 1,189 39 127 340 74 1,011 – $ $ $ – – 134 4 138 1,792 1,023 261 78 1,340 136 812 – $ – – 759 4 $ – – 1,528 – $ 763 $ 1,528 $ 1,105 3,884 33 29 4 3 121 – $ 1,612 883 1,372 29 48 2 312 – $ 4,258 $ $ 54 – – 54 – – – – – – – – – 32 437 469 469 – – – – – – – – – – – – 31,024 – % $ – – – – – – – n/m n/m 5,473 5,266 10,431 4,144 6,984 2,234 5,152 4 39,688 32 437 469 1.7 % $ 2.0 1.3 2.2 1.6 2.0 1.6 10.0 n/m n/m 7,055 5,668 7,827 3,324 4,627 2,535 5,838 5 36,879 34 340 374 1.1 % 1.5 0.8 2.4 0.8 1.7 1.2 10.0 n/m n/m $ 40,157 $ 37,253 $ – 1 2,426 8 $ 2,435 $ 6,505 6,979 1,705 263 1,732 215 2,256 31,024 $ $ $ – – – – – 3,890 6,552 194 145 1,045 619 1,853 35,617 $ $ $ $ Total trading securities $ 4,776 $ 5,442 FVO securities Securities issued or guaranteed by: Other Canadian governments Asset-backed securities Corporate public debt Total FVO securities $ $ – – – – $ $ – – – – $ 5,179 $ 31,024 $ 50,679 $ 49,915 $ $ – 94 – 94 $ $ – – – – $ $ 54 94 – 148 $ $ 59 94 102 255 Total securities (6) $ 15,843 $ 26,604 $ 9,452 $ 10,027 $ 31,493 $ 93,419 $ 87,423 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (1) (2) Represents the weighted-average yield, which is determined by applying the weighted average of the yields of individual fixed income securities. (3) Includes securities backed by mortgages insured by the Canada Mortgage and Housing Corporation (CMHC), with amortized cost of $1,343 million (2016: $971 million) and fair value of $1,343 million (2016: $975 million); securities issued by Federal National Mortgage Association (Fannie Mae), with amortized cost of $1,895 million (2016: $1,521 million) and fair value of $1,891 million (2016: $1,521 million); securities issued by Federal Home Loan Mortgage Corporation (Freddie Mac), with amortized cost of $2,703 million (2016: $849 million) and fair value of $2,700 million (2016: $848 million); and securities issued by Government National Mortgage Association, a U.S. government corporation (Ginnie Mae), with amortized cost of $1,051 million (2016: $1,248 million) and fair value of $1,050 million (2016: $1,246 million). Includes securities backed by securities issued by Fannie Mae, with amortized cost of $948 million (2016: nil) and fair value of $943 million (2016: nil); securities issued by Freddie Mac, with amortized cost of $1,337 million (2016: nil) and fair value of $1,329 million (2016: nil); and securities issued by Ginnie Mae, with amortized cost of $141 million (2016: nil) and fair value of $141 million (2016: nil). Includes securities backed by mortgages insured by the CMHC of $1,690 million (2016: $986 million). Includes securities denominated in U.S. dollars with carrying value of $40.3 billion (2016: $27.4 billion) and securities denominated in other foreign currencies with carrying value of $1,491 million (2016: $1,253 million). (4) (5) (6) n/m Not meaningful. CIBC 2017 ANNUAL REPORT 123 Consolidated financial statements 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 (2) Corporate private equity Amortized cost Gross unrealized gains Gross unrealized losses Fair value Amortized cost Gross unrealized gains Gross unrealized losses 2017 (1) $ 5,439 5,236 10,459 4,147 6,992 2,236 5,163 5 13 351 $ 35 30 6 12 5 1 8 – 19 86 $ $ $ (1) $ – (34) (15) (13) (3) (19) (1) – – 5,473 5,266 10,431 4,144 6,984 2,234 5,152 4 32 437 7,028 5,646 7,820 3,326 4,626 2,533 5,842 5 10 211 $ 40,041 $ 202 $ (86) $ 40,157 $ 37,047 $ 28 25 9 15 6 3 12 – 24 132 254 $ $ (1) (3) (2) (17) (5) (1) (16) – – (3) (48) $ 2016 Fair value 7,055 5,668 7,827 3,324 4,627 2,535 5,838 5 34 340 $ 37,253 (1) (2) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. Includes restricted stock. 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: $ 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 2017 (1) 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 2016 Total Gross unrealized losses Fair value 19 193 6,631 1,753 4,146 622 1,672 4 – 5 $ – $ – (27) (4) (11) (1) (8) (1) – – 33 5 787 367 764 623 765 – – – $ (1) $ – (7) (11) (2) (2) (11) – – – 52 198 7,418 2,120 4,910 1,245 2,437 4 – 5 $ (1) $ – (34) (15) (13) (3) (19) (1) – – 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) $ (48) (1) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. $ 15,045 $ (52) $ 3,344 $ (34) $ 18,389 $ (86) $ 4,375 $ (11) $ 5,647 $ (37) $ 10,022 As at October 31, 2017, the amortized cost of 988 AFS securities that are in a gross unrealized loss position (2016: 240 securities) exceeded their fair value by $86 million (2016: $48 million). The securities that have been in a gross unrealized loss position for more than a year include 91 AFS securities (2016: 81 securities), with a gross unrealized loss of $34 million (2016: $37 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 $ 2017 178 (25) (10) $ 143 2016 108 (8) (27) 73 $ $ 2015 163 (20) $ (5) $ 138 HTM securities(1) As at October 31, 2017, we had HTM securities carried at amortized cost with a carrying value of $2,435 million and a fair value of $2,422 million (2016: nil carrying value and nil fair value). HTM securities measured at amortized cost are required to be assessed for impairment on a periodic basis. Impairment exists when, in management’s opinion, there is no longer reasonable assurance that the full amount of principal and interest can be collected. As at October 31, 2017, we have determined that these HTM securities were not impaired. During the year, no HTM securities were sold. (1) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. 124 CIBC 2017 ANNUAL REPORT Consolidated financial statements Note 5 Loans(1)(2) $ millions, as at October 31 Gross amount Individual allowance Collective allowance Total allowance 2017 (3) Net total Gross amount Individual allowance Collective allowance Total allowance 2016 Net total Residential mortgages (4) Personal (5) Credit card Business and government (4) $ $ 207,271 40,937 12,378 97,766 $ 358,352 $ 2 7 – 183 192 $ $ 201 488 386 351 203 $ 495 386 534 207,068 $ 40,442 11,992 97,232 187,298 38,041 12,332 71,437 $ 1 $ 8 – 249 220 $ 489 386 338 221 $ 497 386 587 187,077 37,544 11,946 70,850 $ 1,426 $ 1,618 $ 356,734 $ 309,108 $ 258 $ 1,433 $ 1,691 $ 307,417 (1) (2) (3) (4) (5) Loans are net of unearned income of $376 million (2016: $346 million). Includes gross loans of $53.1 billion (2016: $35.6 billion) denominated in U.S. dollars and $4.8 billion (2016: $4.2 billion) denominated in other foreign currencies. Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. Includes trading loans of $12 million (2016: nil) and $14,010 million (2016: $6,640 million) in residential mortgages and business and government, respectively. Includes $47 million (2016: $51 million) related to loans provided 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, $47 million (2016: $50 million) relates to individuals who are no longer employed by CIBC. Allowance for credit losses(1) Individual allowance $ millions, as at or for the year ended October 31 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 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 2 $ $ 1 – – – – – 1 $ $ 1 – – – – – 1 $ $ 8 – – – – (1) $ 7 $ 7 1 – – – – 8 $ $ 9 (1) (1) – – – $ 249 61 (107) 15 (18) (17) $ 303 187 (231) 8 (20) 2 $ 328 77 (142) 4 (8) 44 $ 258 61 (107) 15 (18) (17) 311 188 (231) 8 (20) 2 $ $ 7 $ 183 $ 249 $ 303 $ 192 $ 258 $ 311 Total 2015 338 76 (143) 4 (8) 44 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 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 $ 220 $ 235 $ 208 $ 489 $ 461 $ 451 $ 386 $ 338 $ 386 $ 460 $ 417 $ 353 $ 1,555 $ 1,451 $ 1,398 695 (861) 182 768 (950) 178 410 (529) 119 308 (359) 54 452 (524) 120 263 (302) 51 863 (922) 175 322 (495) 125 319 (336) 49 11 (24) 5 39 (38) – 73 (32) 6 58 (28) 6 37 (32) – 34 (34) – (8) (12) (7) (8) (7) 29 – (4) (2) (2) (8) 6 – – – – – – – 18 – 7 – 17 (8) 2 (9) (3) (15) 52 Balance at end of year $ 201 $ 220 $ 235 $ 488 $ 489 $ 461 $ 386 $ 386 $ 338 $ 470 $ 460 $ 417 $ 1,545 $ 1,555 $ 1,451 Comprises: Loans Undrawn credit facilities (2) $ 201 $ 220 $ 235 $ 488 $ 489 $ 461 $ 386 $ 386 $ 338 $ 351 $ 338 $ 325 $ 1,426 $ 1,433 $ 1,359 92 – 119 119 122 122 92 – – – – – – – – (1) (2) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. 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 Gross impaired Individual allowance Collective allowance (1) 2017 Residential mortgages Personal Business and government $ 513 171 626 Total impaired loans (2)(3)(4) $ 1,310 $ $ 2 7 183 192 $ $ 143 134 8 285 $ $ 368 30 435 833 $ 514 193 951 $ 1,658 $ $ 1 8 249 258 $ $ 167 137 10 314 2016 Net impaired $ 346 48 692 $ 1,086 (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 $1,260 million (2016: $1,241 million) on balances and commitments which are not impaired. Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (2) (3) Average balance of gross impaired loans was $1,376 million (2016: $1,587 million). (4) Foreclosed assets of $21 million (2016: $18 million) were included in Other assets on the consolidated balance sheet. CIBC 2017 ANNUAL REPORT 125 Consolidated financial statements Purchased credit-impaired loans Purchased credit-impaired loans resulting from the acquisition of The PrivateBank include Business and government and Consumer loans with outstanding unpaid principal balances of $81 million and $134 million; and fair values of $61 million and $105 million, respectively, as at October 31, 2017 and June 23, 2017 (the acquisition date). The following table provides further details of our purchased credit-impaired loans: $ millions, as at October 31 Unpaid principal balance (1) Credit related fair value adjustments Time value of money Carrying value Individually assessed allowance Carrying value net of related allowance 2017 2016 $ 81 (15) (3) 63 (2) $ 61 n/a n/a n/a n/a n/a n/a (1) Represents principal amount owed net of write-offs since the acquisition of the loan. n/a Not applicable. 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 $ 2,493 701 574 619 $ 31 to 90 days 872 179 182 165 $ 4,387 $ 1,398 Over 90 days $ $ 181 35 97 27 340 $ 2017 Total (1) 3,546 915 853 811 $ 2016 Total 3,262 810 890 363 $ 6,125 $ 5,325 (1) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. During the year, gross interest income that would have been recorded if impaired loans were treated as current was $78 million (2016: $101 million), of which $23 million (2016: $27 million) was in Canada and $55 million (2016: $74 million) was outside Canada. During the year, interest recognized on impaired loans was $26 million (2016: $29 million), and interest recognized on loans before being classified as impaired was $45 million (2016: $61 million), of which $35 million (2016: $38 million) was in Canada and $10 million (2016: $23 million) was outside Canada. 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% 12.12% – 99.99% 100% $ $ $ $ $ 37,800 38,946 745 257 77,748 765 126 9 – 4 904 23,761 102,413 $ $ $ $ $ $ 1,943 472 – – 2,415 – – – – – – 213 2,628 $ $ $ $ $ $ 719 188 – – 907 – – – – – – 451 1,358 Less: collective allowance on non-impaired loans Net business and government loans and acceptances (2) (1) (2) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. Includes customers’ liability under acceptances of $8,824 million (2016: $12,364 million). 126 CIBC 2017 ANNUAL REPORT 2017 (1) Total 40,462 39,606 745 257 81,070 765 126 9 – 4 904 24,425 106,399 343 106,056 $ $ $ $ $ $ $ $ 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 $ $ $ $ $ $ $ $ Consolidated financial statements Net retail loans $ millions, for the year ended October 31 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 PD bands Residential mortgages 0.01% – 0.20% $ 0.21% – 0.50% 0.51% – 2.00% 2.01% – 10.00% 10.01% – 99.99% 100% $ $ $ $ $ $ $ 158,372 22,512 19,223 3,076 340 176 203,699 104 4 12 – 1 121 3,306 207,126 58 207,068 2017 2016 Cards 3,257 1,767 4,031 2,482 686 – 12,223 – – – – – – 155 12,378 386 11,992 Total 184,013 28,386 29,561 11,780 1,921 184 255,845 104 4 12 – 1 121 4,334 260,300 798 259,502 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Total 171,369 21,869 27,731 11,119 1,766 140 233,994 142 1 51 1 1 196 3,168 237,358 791 236,567 $ $ $ $ $ $ $ $ Personal 22,384 4,107 6,307 6,222 895 8 39,923 – – – – – – 873 40,796 354 40,442 $ $ $ $ $ $ $ $ 2017 (1) $ $ 13,593 4,616 8,977 829 8,148 2016 12,092 3,726 8,366 1,051 7,315 $ $ 2015 11,483 3,568 7,915 771 7,144 $ $ (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. CIBC 2017 ANNUAL REPORT 127 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, 2017, $3.0 billion of credit card receivable assets with a fair value of $3.0 billion (2016: $4.2 billion with a fair value of $4.2 billion) supported associated funding liabilities of $3.0 billion with a fair value of $3.0 billion (2016: $4.2 billion with a fair value of $4.2 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, 2017, our structured program had outstanding covered bond liabilities of $0.3 billion with a fair value of $0.3 billion (2016: $1.0 billion with a fair value of $1.0 billion) and our legislative program had outstanding covered bond liabilities of $17.1 billion with a fair value of $17.3 billion (2016: $13.2 billion with a fair value of $13.3 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, 2017, the total assets and non-controlling interests in consolidated CIBC-managed investment funds were $70 million and $12 million, respectively (2016: $68 million and $6 million, 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. Community-based tax-advantaged investments We sponsor certain SEs that invest in community development projects in the U.S. through the issuance of below-market loans that generate a return primarily through the realization of tax credits. As at October 31, 2017, the program had outstanding loans of $44 million (2016: nil). 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, 2017, the total assets in our single-seller conduit and multi-seller conduits amounted to $6.2 billion (2016: $6.0 billion). 128 CIBC 2017 ANNUAL REPORT Consolidated financial statements 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. 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, 2017, the total outstanding ownership certificates in the Commercial mortgage securitization trust amounted to $11 million (2016: $177 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 a principal. We do not guarantee the performance of CIBC-managed investment funds. As at October 31, 2017, the total AUM in the non-consolidated CIBC-managed investment funds amounted to $113.9 billion (2016: $101.4 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 previously 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, 2017, the assets in the CIBC structured CDO vehicles have a total principal amount of $0.4 billion (2016: $0.9 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, 2017 and 2016. Income received from the SEs was insignificant for the years ended October 31, 2017 and 2016. Community Reinvestment Act investments We hold debt and equity investments in limited liability entities to further our U.S. Community Reinvestment Act initiatives with a carrying value of $159 million (2016: nil). These entities invest in qualifying community development projects, including affordable housing projects, that generate a return primarily by the realization of tax credits. Similar to other limited investors in these entities, we are obligated to provide funding up to our commitment level to these limited liability entities. As at October 31, 2017, the total assets of these limited liability entities were $3.9 billion (2016: nil). CIBC 2017 ANNUAL REPORT 129 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, 2017 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, 2016 On-balance sheet liabilities at carrying value (1) Deposits Derivatives (2) October 31, 2016 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, 2016 Single-seller and multi-seller conduits Third-party structured vehicles – continuing Structured vehicles run-off $ $ $ $ $ $ $ $ $ – – – 94 – – 94 113 – – – – 94 – 5,741 (4) – 5,835 5,613 $ $ $ $ $ $ $ $ $ 253 2,344 – 427 1 – 3,025 4,647 – – – – 3,025 – 2,259 – 5,284 6,045 $ $ $ $ $ $ $ $ $ 3 – 94 12 – – 109 910 – 148 148 174 109 31 13 (34) 119 409 Other 364 159 – – 5 – 528 448 1,625 31 1,656 (3) 1,664 528 – 94 (364) 258 121 $ $ $ $ $ $ $ $ $ (1) Excludes SEs established by CMHC, Fannie Mae, Freddie Mac, Ginnie Mae, FHLB, 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 $2 million (2016: nil) held in short trading positions. (4) Excludes an additional $3.0 billion (2016: $1.8 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 nil (2016: $10 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 borrowings. 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. 130 CIBC 2017 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 cash collateral (2)(3) Securities lent for securities collateral (2)(3) Carrying amount of associated liabilities (4) Carrying amount $ $ $ 19,948 10,391 72 19,291 49,702 50,261 2017 Fair value 19,857 10,391 72 19,291 49,611 50,492 $ $ $ 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 $ $ $ (1) Includes $1.9 billion (2016: $2.4 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 $809 million (2016: $825 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 $30.2 billion with a fair value of $30.0 billion (2016: $26.3 billion with a fair value of $26.4 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 2017 Cost Balance at beginning of year 2016 2017 Additions (3) Disposals (4) Adjustments (5) Balance at end of year Balance at end of year Accumulated amortization Balance at beginning of year Amortization (4) Disposals (4) Adjustments (5) Balance at end of year 2016 Balance at end of year Net book value As at October 31, 2017 As at October 31, 2016 Land and buildings (1) Computer equipment Office furniture, equipment and other (2) Leasehold improvements $ $ $ $ $ $ $ $ 1,531 37 (177) (35) 1,356 1,531 661 37 (77) (15) 606 661 750 870 $ $ $ $ $ $ $ $ 983 104 (22) (5) 1,060 983 771 107 (5) (5) 868 771 192 212 $ $ $ $ $ $ $ $ 859 51 (20) (6) 884 859 411 43 (15) (3) 436 411 448 448 $ $ $ $ $ $ $ $ 1,007 98 (27) (5) 1,073 1,007 639 68 (24) (3) 680 639 393 368 Total 4,380 290 (246) (51) 4,373 4,380 2,482 255 (121) (26) 2,590 2,482 1,783 1,898 $ $ $ $ $ $ $ $ (1) (2) (3) (4) (5) Includes land and building underlying a finance lease arrangement. See below for further details. Includes $133 million (2016: $134 million) of work-in-progress not subject to amortization. Includes acquisitions through business combinations of $62 million (2016: nil). Includes write-offs of fully amortized assets. Includes foreign currency translation adjustments. Net additions and disposals during the year were: Canadian Personal and Small Business Banking net disposals of $97 million (2016: net additions of $64 million); Canadian Commercial Banking and Wealth Management net disposals of $9 million (2016: net additions of $15 million); U.S. Commercial Banking and Wealth Management net additions of $68 million (2016: net additions of $8 million); Capital Markets net additions of nil (2016: net additions of $5 million); and Corporate and Other net additions of $82 million (2016: net additions of $91 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 2017 2016 $ 418 (24) (15) $ 432 (24) 10 $ 379 $ 418 Rental income of $99 million (2016: $99 million; 2015: $94 million) was generated from the investment property. Interest expense of $28 million (2016: $30 million; 2015: $30 million) and non-interest expenses of $40 million (2016: $49 million; 2015: $46 million) were incurred in respect of the finance lease property. Our commitment related to the finance lease is disclosed in Note 22. CIBC 2017 ANNUAL REPORT 131 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. During 2017, we made certain external reporting changes which impacted the results of our SBUs, which in turn changed our allocation of goodwill to our CGUs. As a result of these changes, certain prior period amounts have been reclassified accordingly. See Note 28 for additional details. 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, as at or for the year ended October 31 2017 Balance at beginning of year Acquisitions Impairment Foreign currency translation adjustments Balance at end of year 2016 Balance at beginning of year (2) Acquisitions Impairment Foreign currency translation adjustments Balance at end of year CGUs CIBC FirstCaribbean Canadian Wealth Management U.S. Commercial Banking and Wealth Management (1) Other $ $ $ $ 421 – – (16) 405 410 – – 11 421 $ $ $ $ 884 – – – 884 884 – – – 884 $ $ $ $ 107 3,944 – (99) 3,952 105 – – 2 107 $ $ $ $ 127 – – (1) 126 127 – – – 127 $ $ $ Total 1,539 3,944 – (116) 5,367 1,526 – – 13 $ 1,539 (1) Includes goodwill arising from our acquisitions of The PrivateBank and Geneva Advisors. See Note 3 for additional details on our acquisitions. Also includes goodwill previously allocated to the CIBC Atlantic Trust Private Wealth Management (CIBC Atlantic Trust) CGU. (2) Net of cumulative impairment charges for FirstCaribbean International Bank Limited (CIBC FirstCaribbean) goodwill of $623 million, and 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 and investment banking, retail and business banking, and wealth management. CIBC FirstCaribbean, which has assets of over US$12 billion, operates in the Caribbean and is traded on the stock exchanges of Barbados, Trinidad, 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, 2017, the estimated recoverable amount of the CIBC FirstCaribbean CGU approximated its carrying amount. As a result, no impairment charge was recognized during 2017. The forecast for CIBC FirstCaribbean used in our impairment test reflects an expectation of continued productive loan growth during the forecast period. A terminal growth rate of 2.5% as at August 1, 2017 (August 1, 2016: 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 14% as at August 1, 2017 (15.3% pre-tax) which we believe to be a risk-adjusted interest rate appropriate to CIBC FirstCaribbean (we used an after-tax rate of 13% as at August 1, 2016). 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 $115 million as at August 1, 2017. 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 $70 million as at August 1, 2017. 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 10.8 to 22.3 as at August 1, 2017 (August 1, 2016: 9.4 to 22.0). 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, 2017. As a result, no impairment charge was recognized during 2017. If alternative reasonably possible changes in key assumptions were applied, the result of the impairment test would not differ. 132 CIBC 2017 ANNUAL REPORT Consolidated financial statements U.S. Commercial Banking and Wealth Management During 2017, we completed the acquisitions of The PrivateBank and Geneva Advisors. The goodwill arising from both acquisitions has been allocated to the U.S. Commercial Banking and Wealth Management CGU. As a result of the external reporting changes described above, CIBC Atlantic Trust is also included in the U.S. Commercial Banking and Wealth Management CGU. Given the proximity of the acquisition of The PrivateBank to our impairment testing date of August 1, 2017, the ongoing performance of CIBC Bank USA (formerly The PrivateBank), and the absence of adverse market conditions, we have determined that the estimated recoverable amount of the U.S. Commercial Banking and Wealth Management CGU approximates its carrying value, and therefore no impairment charge was recognized during 2017. See Note 3 for additional details on our acquisitions of The PrivateBank and Geneva Advisors. 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, 2017, the estimated recoverable amount of these CGUs was in excess of their carrying amounts. Allocation to strategic business units Goodwill of $5,367 million (2016: $1,539 million) is allocated to the SBUs as follows: Canadian Commercial Banking and Wealth Management of $892 million (2016: $892 million), Corporate and Other of $454 million (2016: $470 million), U.S. Commercial Banking and Wealth Management of $3,952 million (2016: $107 million), Capital Markets of $62 million (2016: $63 million), and Canadian Personal and Small Business Banking of $7 million (2016: $7 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 2017 2016 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) $ $ $ $ 116 – 116 116 – 116 $ $ $ $ 26 (1) 25 26 – 26 $ millions, as at or for the year ended October 31 2017 Gross carrying amount Balance at beginning of year 2016 2017 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 2016 Balance at end of year Net book value As at October 31, 2017 As at October 31, 2016 Core deposit Software (1) intangibles (2) Contract based (3) Customer relationships (4) $ $ $ $ $ $ $ $ 2,243 401 (5) (7) 2,632 2,243 1,168 246 (5) (6) 1,403 1,168 1,229 1,075 $ $ $ $ $ $ $ $ 304 315 – (20) 599 304 226 21 – (8) 239 226 360 78 $ $ $ $ $ $ $ $ 41 31 (28) – 44 41 35 3 (28) (1) 9 35 35 6 $ $ $ $ $ $ $ $ 190 123 – (3) 310 190 81 17 – (1) 97 81 213 109 Total 142 (1) 141 142 – 142 $ $ $ $ Total 2,778 870 (33) (30) 3,585 2,778 1,510 287 (33) (16) 1,748 1,510 1,837 1,268 $ $ $ $ $ $ $ $ Includes $456 million (2016: $438 million) of work-in-progress not subject to amortization. (1) (2) Acquired as part of the acquisitions of CIBC FirstCaribbean and The PrivateBank. (3) Represents a combination of management contracts purchased as part of past acquisitions, as well as management contracts purchased as part of our acquisitions of The PrivateBank and Geneva Advisors in 2017. (4) Represents customer relationships associated with past acquisitions, including CIBC Atlantic Trust, and the MasterCard portfolio, as well as customer relationships associated with our acquisitions of The PrivateBank and Geneva Advisors in 2017. Includes write-offs of fully amortized assets. Includes foreign currency translation adjustments. Includes impairment losses relating to software of $2 million (2016: $1 million). (5) (6) (7) Net additions and disposals of gross carrying amount during the year were: Canadian Personal and Small Business Banking net additions of $1 million (2016: net disposals of $11 million); Canadian Commercial Banking and Wealth Management net disposals of $28 million (2016: net disposals of nil); U.S. Commercial Banking and Wealth Management net additions of $471 million (2016: net disposals of nil); Capital Markets net additions of $1 million (2016: net disposals of nil); and Corporate and Other net additions of $392 million (2016: net additions of $414 million). CIBC 2017 ANNUAL REPORT 133 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)(3) $ millions, as at October 31 Personal Business and government (7) Bank Secured borrowings (8) 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 Payable on Payable after Payable on a demand (4) notice (5) fixed date (6) $ 12,297 57,716 4,650 – $ 101,797 43,405 571 – $ 45,233 124,501 8,568 40,968 $ 74,663 $ 145,773 $ 219,270 $ 2017 951 200 186 1,503 2,783 697 4,420 512 553 $ 2016 833 187 586 1,016 1,738 698 6,022 485 467 $ 11,805 $ 12,032 $ $ $ $ $ 2017 Total 159,327 225,622 13,789 40,968 439,706 433,759 5,947 439,706 50,810 12,289 297,997 78,610 $ $ $ $ $ 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 $ 439,706 $ 395,647 Includes deposits of $145.6 billion (2016: $103.5 billion) denominated in U.S. dollars and deposits of $19.9 billion (2016: $22.8 billion) denominated in other foreign currencies. (1) (2) Net of purchased notes of $2,465 million (2016: $2,406 million). (3) (4) (5) (6) (7) (8) Comprises liabilities issued by or as a result of activities associated with the securitization of residential mortgages, Covered Bond Programme, and consolidated securitization Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. 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 $1,625 million (2016: $1,664 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 134 CIBC 2017 ANNUAL REPORT $ 2017 1,095 766 126 2,366 3,660 683 886 1,486 4,207 $ 2016 988 894 135 1,548 2,850 645 805 1,605 3,428 $ 15,275 $ 12,898 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 $ 21,352 2,454 536 2017 Liabilities $ 21,275 1,222 774 2016 Assets Liabilities $ 24,438 $ 24,844 2,494 830 2,794 1,169 $ 24,342 $ 23,271 $ 27,762 $ 28,807 (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-traded 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. Foreign 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 2017 ANNUAL REPORT 135 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 2017 2016 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 $ 4,496 $ 224 $ 199,849 63,922 982,638 6,416 3,967 35,938 185,174 870,444 4,033 3,788 5,128 $ – 71,469 193,316 2,402 403 9,848 $ 5,352 $ 235,787 320,565 2,046,398 12,851 8,158 235,787 243,136 1,782,769 7,813 6,086 4,496 $ – 77,429 263,629 5,038 2,072 4,465 $ 201,237 257,417 1,185,842 4,231 4,637 1,261,288 1,099,601 272,718 2,633,607 2,280,943 352,664 1,657,829 55,368 3,850 2,500 61,718 17,963 – – 17,963 67 – – 67 73,398 3,850 2,500 79,748 72,362 3,850 2,500 78,712 1,036 – – 1,036 71,144 536 – 71,680 8,536 – 94,628 203,253 5,813 100 312,330 2,555 – – 2,555 1,323,006 1,117,564 272,785 2,713,355 2,359,655 353,700 1,729,509 314,885 289,256 232,495 20,659 21,600 564,010 9,364 66,009 2,155 1,390 78,918 912 21,549 63 44 22,568 299,532 320,053 22,877 23,034 665,496 293,292 258,668 22,861 23,009 597,830 6,240 61,385 16 25 67,666 270,193 194,034 23,395 23,715 511,337 7,999 60,414 – – 68,413 1 – – 1 1 – – – Total foreign exchange derivatives 564,011 78,918 22,568 665,497 597,831 67,666 511,337 68,413 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 – 16 13 178 – 207 58,214 43,658 101,872 3,092 2,926 6,018 12,105 20 13,356 25,481 – 435 440 109 258 1,242 15,797 11,239 27,036 62 3 65 13,386 7 6,648 20,041 – 36 718 167 – 921 196 – 196 – – – 2,140 – 359 2,499 – 487 1,171 454 258 2,370 – 376 1,016 343 258 1,993 – 111 155 111 – 377 91 5,653 1,286 4,872 – 11,902 74,207 54,897 73,064 54,897 129,104 127,961 1,143 – 1,143 71,742 34,016 105,758 3,154 2,929 6,083 27,631 27 20,363 48,021 3,154 2,929 6,083 27,628 27 20,363 48,018 – – – 3 – – 3 1,088 758 1,846 23,563 47 18,556 42,166 – – 174 – 13 187 877 – 877 – – – – – – – $ 2,020,595 $ 1,244,866 $ 298,969 $ 3,564,430 $ 3,141,541 $ 422,889 $ 2,402,518 $ 384,362 381,807 2,555 1,209,013 35,853 1,898,936 121,659 2,277,508 125,010 3,406,492 157,938 2,984,639 156,902 298,543 426 421,853 1,036 (1) For OTC derivatives that are not centrally cleared, $933.8 billion (2016: $872.3 billion) are with counterparties that have two-way collateral posting arrangements, $17.3 billion (2016: $12.9 billion) are with counterparties that have one-way collateral posting arrangements, and $171.8 billion (2016: $182.3 billion) are with counterparties that have no collateral posting arrangements. All counterparties with whom we have one-way collateral posting arrangements are sovereign entities. 136 CIBC 2017 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 a loss would occur 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 eligible derivatives through CCPs in accordance with various global initiatives. Where feasible, we 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. 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 2017 ANNUAL REPORT 137 Current replacement cost Credit equivalent Trading ALM Total amount (1) 2017 Risk- weighted amount Current replacement cost Credit equivalent Trading ALM Total amount (1) 2016 Risk- weighted amount $ 3 $ 13 $ – $ 13 $ 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 Non-trade exposure related to central counterparties (CCP) Common equity tier 1 (CET1) CVA charge $ 56 $ 1 $ 57 $ 6,968 153 7,177 – 1,065 3 1,069 – 8,033 156 8,246 – 7,177 1,069 8,246 3,603 6,028 217 9,848 130 11 141 1,197 1,541 2,738 40 186 226 1,138 84 1,222 87 1,707 1 1,795 3,690 7,735 218 11,643 – – – 126 – 126 – – – – – – 130 11 141 1,323 1,541 2,864 40 186 226 1,138 84 1,222 29 4,993 55 5,077 88 5,165 3,644 4,350 310 8,304 90 6 96 2,033 2,837 4,870 43 24 67 2,314 1,003 3,317 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 1,488 653 22 678 2 680 938 847 81 1,866 10 – 10 520 84 604 19 1 20 902 40 942 176 3,498 7,796 $ 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 2 915 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 Total derivatives before netting 21,352 2,990 Less: effect of netting Total derivatives 24,342 (13,977) 21,819 24,438 3,324 27,762 (17,965) 19,626 $ 10,365 $ 21,819 $ 7,796 $ 9,797 $ 19,626 $ 7,407 (1) Sum of current replacement cost and potential future exposure, adjusted for the master netting agreements and the impact of collateral amounting to $4,341 million (2016: $3,940 million). The collateral comprises cash of $3,516 million (2016: $2,683 million) and government securities of $825 million (2016: $1,257 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 nil (2016: $2 million; 2015: $6 million) against our receivables from financial guarantors. We have not terminated any contracts with financial guarantors during the year (2016: nil; 2015: nil). The fair value of derivative contracts with financial guarantors, net of CVA, was nil (2016: $2 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 gain of nil (2016: loss of $14 million; 2015: loss of $7 million, excluding the impact of the adoption of funding valuation adjustments) on our positions with non-financial guarantors derivative counterparties. 138 CIBC 2017 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. 2017 2016 2015 $ (24) 73 $ $ 49 – $ $ $ (520) 458 (62) – $ $ $ (213) 163 (50) 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, 2017, 2016 and 2015. The following table presents the notional amounts and carrying value of our hedging-related derivative instruments: $ millions, as at October 31 2017 2016 Fair value hedges Cash flow hedges NIFO hedges Derivatives notional amount $ 210,019 23,332 5,712 Carrying value Positive Negative $ 1,717 419 318 $ 907 315 – Derivatives notional amount $ 182,610 23,210 4,390 Carrying value Positive Negative $ 2,250 244 – $ 1,255 394 1,145 $ 239,063 $ 2,454 $ 1,222 $ 210,210 $ 2,494 $ 2,794 In addition, foreign currency denominated deposit liabilities of $45 million (2016: $45 million) and $17.9 billion (2016: $12.6 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 2017 Cash inflows Cash outflows Net cash flows 2016 Net cash flows Within 1 year $ 16 (481) $ (465) $ (340) 1 – 3 years 41 (962) $ $ (921) $ (632) 3 – 8 years $ $ $ 15 (23) (8) (35) Over 8 years $ $ $ – – – – Cash flows designated in cash flow hedges of $332 million, $189 million and $8 million are expected to affect net income in the next 12 months, 1 to 3 years and 3 to 8 years, respectively (2016: $174 million, $156 million and $35 million, respectively). CIBC 2017 ANNUAL REPORT 139 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) 6.00 (4) 3.00 (5)(6) 3.42 (6)(7) 8.70 11.60 10.80 8.70 8.70 8.70 Floating (9) Floating (11) Contractual maturity date September 23, 2018 June 6, 2023 October 28, 2024 January 26, 2026 May 25, 2029 (8) January 7, 2031 May 15, 2031 May 25, 2032 (8) May 25, 2033 (8) May 25, 2035 (8) July 31, 2084 August 31, 2085 Earliest date redeemable At greater of Canada Yield Price (1) and par At par June 6, 2008 June 6, 2018 October 28, 2019 January 26, 2021 January 7, 1996 May 15, 2021 Denominated in foreign currency TT$195 million $ July 27, 1990 August 20, 1991 US$66 million (10) US$17 million (12) Subordinated indebtedness sold short (held) for trading purposes 2017 2016 Par value 37 600 1,000 1,000 25 200 150 25 25 25 85 22 3,194 7 Carrying value (2) $ 37 598 986 975 41 188 139 43 43 45 85 22 3,202 7 $ 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) (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. $ 3,201 $ 3,209 $ 3,267 $ 3,366 (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. 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. (4) (5) (6) 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 $5.00 per share (subject to adjustment in certain events as defined in the relevant prospectus supplements). Interest rate is fixed at the indicated rate until the earliest date redeemable at par by CIBC and, thereafter, at a rate of 2.57% above the three-month Canadian dollar bankers’ acceptance rate. (7) Interest rate is based on the six-month US$ LIBOR plus 0.25%. (8) Not redeemable prior to maturity date. (9) (10) US$34 million (2016: US$16 million) of this issue was repurchased and cancelled during the year. (11) Interest rate is based on the six-month US$ LIBOR plus 0.125%. (12) US$19 million (2016: nil) of this issue was repurchased and cancelled during the year. 140 CIBC 2017 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 On March 10, 2017, we announced that the Toronto Stock Exchange (TSX) had accepted the notice of CIBC’s intention to commence a normal course issuer bid (NCIB). Purchases under this bid will terminate upon the earlier of: (i) CIBC purchasing up to a maximum of 8 million common shares; (ii) CIBC providing a notice of termination; or (iii) March 13, 2018. No common shares have been purchased under this bid. The following table shows common shares purchased and cancelled under the previously expired NCIB. $ millions, except number of shares, as at or for the year ended October 31 TSX approval date September 16, 2015 (1) Number of shares – 2017 Amount – $ Number of shares 3,081,300 2016 Amount 270 $ Number of shares 115,900 2015 Amount 11 $ Number of shares 3,197,200 Total Amount 281 $ (1) 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 2017 2016 2015 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 439,329,713 $ 12,550 $ 2,121 $ 5.08 397,055,398 $ 8,025 $ 1,879 $ 4.75 397,284,577 $ 7,812 $ 1,708 $ 4.30 Class A Preferred Shares Series 27 (1) Series 29 (2) Series 39 (3) Series 41 (4) Series 43 (5) Series 45 (6) – – 16,000,000 12,000,000 12,000,000 32,000,000 – – 400 300 300 800 $ 1,800 $ – – 16 11 11 14 52 Treasury shares – common shares Treasury shares – preferred shares (16,410) $ (116,671) (2) (3) – – 0.98 0.94 0.90 0.46 – – 16,000,000 12,000,000 12,000,000 – – – 400 300 300 – $ 1,000 $ 14,882 $ – 1 – – – 16 11 11 – 38 – – 0.98 0.94 0.90 – – – 16,000,000 12,000,000 12,000,000 – – – 400 300 300 – $ 1,000 $ 6,491 $ – 1 – 0.35 0.68 0.98 0.82 0.58 – 4 8 16 10 7 – 45 (1) 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. (2) 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. (3) 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. (4) 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. (5) 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. (6) We issued 32 million Non-cumulative Rate Reset Class A Series 45 Preferred Shares with a par value of $25.00 per share, for the gross sales proceeds of $800 million on June 2, 2017. 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, 43, and 45 (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 45 (NVCC) (Series 45 shares) On June 2, 2017, we issued 32 million Series 45 shares with a par value of $25.00 per share, for gross proceeds of $800 million. For the initial five year period to the earliest redemption date of July 31, 2022, the Series 45 shares pay quarterly cash dividends, if declared, at a rate of 4.40%. On July 31, 2022, and on July 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 3.38%. Holders of the Series 45 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 46 (NVCC) (Series 46 shares), subject to certain conditions, on July 31, 2022 and on July 31 every five years thereafter. Holders of the Series 46 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus 3.38%. Holders of the Series 46 shares may convert their shares on a one-for-one basis into Series 45 shares, subject to certain conditions, on July 31, 2027 and on July 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 45 shares at par on July 31, 2022 and on July 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 46 shares at par on July 31, 2027 and on July 31 every five years thereafter. CIBC 2017 ANNUAL REPORT 141 Consolidated financial statements 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. 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, Series 44, Series 45, and Series 46 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, a Trigger Event occurs when OSFI determines the bank is or is about to become non-viable and, if after conversion of all contingent instruments and consideration of any other relevant factors or circumstances, it is reasonably likely that its viability will be restored or maintained; or if the bank has accepted or agreed to accept a capital injection or equivalent support from a federal or provincial government, without which OSFI would have determined the bank to be non-viable. 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, Series 43, and Series 45 shares as equity. Terms of Class A Preferred Shares Outstanding as at October 31, 2017 Series 39 Series 41 Series 43 Series 45 (1) Quarterly dividends may be adjusted depending on the timing of issuance or redemption. Quarterly dividends per share (1) $ $ $ $ 0.243750 0.234375 0.225000 0.275000 Earliest specified redemption date July 31, 2019 January 31, 2020 July 31, 2020 July 31, 2022 Cash redemption price per share $ $ $ $ 25.00 25.00 25.00 25.00 142 CIBC 2017 ANNUAL REPORT Consolidated financial statements Common shares issued $ millions, except number of shares, as at or for the year ended October 31 Number of shares 2017 Amount Number of shares 2016 Amount Number of shares 2015 Amount Balance at beginning of year Issuance pursuant to: Acquisition of The PrivateBank Acquisition of Geneva Advisors Stock option plans Shareholder investment plan (1) Employee share purchase plan (2) Purchase of common shares for cancellation Treasury shares 397,070,280 $ 8,026 397,291,068 $ 7,813 397,021,477 $ 7,782 32,137,402 1,204,344 990,934 6,870,584 1,071,051 439,344,595 – (31,292) 3,443 126 91 749 117 – – 815,767 1,662,972 373,382 – – 72 164 37 – – 356,661 – – – – 30 – – $ 12,552 – (4) 400,143,189 (3,081,300) 8,391 $ 8,086 (61) 1 397,378,138 (115,900) 28,830 $ 7,812 (2) 3 Balance at end of year (3)(4) 439,313,303 $ 12,548 397,070,280 $ 8,026 397,291,068 $ 7,813 (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. (3) Excludes 2,010,890 common shares which are issued and outstanding but which have not yet been exchanged for consideration as at October 31, 2017 (2016: nil; 2015: nil). These shares were issued in anticipation of our acquisition of The PrivateBank. These shares are currently held in trust for CIBC, and may ultimately be exchanged or cancelled at CIBC’s discretion. (4) Excludes 190,285 unvested restricted common shares as at October 31, 2017 (2016: nil; 2015: nil). Common shares reserved for issue As at October 31, 2017, 6,654,170 common shares (2016: 6,525,893) were reserved for future issue pursuant to stock option plans, 19,041,624 common shares (2016: 5,912,208) were reserved for future issue pursuant to the shareholder investment plan, 2,771,650 common shares (2016: 3,842,701) were reserved for future issue pursuant to the employee share purchase plan, and 1,012,992,500 common shares (2016: 851,232,500) 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. 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 8.0%, 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. CIBC 2017 ANNUAL REPORT 143 Consolidated financial statements 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 (1) 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 Tier 1 capital ratio Total capital ratio Leverage ratio exposure Leverage ratio A B A/B C 2017 2016 $ 23,254 25,198 28,594 207,910 $ 20,751 22,596 25,949 173,902 11.2 % 12.1 % 13.8 % 11.9 % 13.0 % 14.9 % $ 610,769 $ 546,136 4.1 % 4.1 % $ 21,618 24,682 28,129 203,321 203,321 203,321 $ 19,148 21,666 25,083 168,996 169,322 169,601 10.6 % 12.1 % 13.8 % 11.3 % 12.8 % 14.8 % D C/D $ 610,353 $ 545,480 4.0 % 4.0 % (1) On an all-in basis, before any capital floor requirement as applicable, there are three different levels of RWAs for the calculation of the CET1, Tier 1, and Total capital ratios arising from the option CIBC has chosen for the phase-in of the 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 under Basel I and Basel III, as specified by OSFI. Any shortfall in the Basel III capital requirement compared with the Basel I requirement is added to the RWAs. All-in RWAs as at October 31, 2017 include a capital floor adjustment, while the transitional RWAs as at October 31, 2017 and 2016 include capital floor adjustments. During the years ended October 31, 2017 and 2016, we have complied with OSFI’s regulatory capital requirements. 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, 2017, we held $2 million in net short trading positions (2016: nil) of the Notes. 144 CIBC 2017 ANNUAL REPORT Consolidated financial statements $ millions, as at October 31 Earliest redemption dates Principal amount 2017 2016 Series A Series B Issue date March 13, 2009 March 13, 2009 Interest payment dates June 30, December 31 June 30, December 31 At greater of Canada Yield Price and par (1) Yield 9.976 % June 30, 2014 10.250 % June 30, 2014 At par 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. 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. $ millions, as at October 31 2017 (1) Assets Cash and deposits with banks Trading securities AFS and HTM securities FVO securities Securities borrowed or purchased under resale agreements Loans Other Structural assumptions Total assets Liabilities and equity Deposits Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Subordinated indebtedness Other Equity Structural assumptions Total liabilities and equity 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 2016 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 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Based on earlier of maturity or repricing date of interest rate sensitive instruments Immediately rate sensitive Within 3 months 3 – 12 months 1 – 5 years Over 5 years Non-interest rate sensitive $ $ $ – – – – – 123,695 – (7,926) 115,769 157,559 – – – – – (27,291) 10,668 1,690 19,144 – 42,853 71,625 28,761 1,986 176,727 105,634 140 29,943 85 26,930 – 8,347 130,268 $ 171,079 (14,499) $ – (14,499) $ (14,499) $ 5,648 16,106 21,754 7,255 $ $ $ $ $ $ $ 44 3,113 2,888 – 2,565 64,410 – 7,163 80,183 46,797 477 52 658 – – 30,076 78,060 2,123 (6,537) $ $ $ $ $ (4,414) $ $ 2,841 – 5,428 12,685 – – 91,720 – 9,721 119,554 59,635 5,588 – 993 – 1,797 40,438 108,451 11,103 (1,371) 9,732 12,573 $ $ $ $ $ $ $ $ $ – 9,424 7,406 148 – 2,507 – – 19,485 6,656 4,306 – 1,473 – – – $ $ $ $ $ $ 3,440 31,024 469 – – 2,777 26,780 (10,944) 53,546 63,425 3,202 – – 20,474 29,440 (51,570) 7,050 (8,198) (1,148) 11,425 $ (11,425) $ – $ (11,425) $ $ $ – 2,144 4,906 7,050 $ (8,769) $ (2,656) $ (11,425) $ 12,435 $ 64,971 $ 565,264 5,460 (19,959) $ (36,480) $ 42,128 11,352 (9,229) $ $ 26,293 (15,190) 11,103 2,123 (14,499) $ 5,648 – – – $ $ (14,499) $ 22,124 (6,018) 16,106 21,754 $ $ $ $ (4,077) $ (2,460) (14,877) $ 13,506 (3,170) (5,028) (6,537) $ (1,371) $ (8,198) $ $ – – – $ $ (4,414) $ 9,732 $ (1,148) $ (11,425) $ 10,128 (8,295) 1,833 – – – 1,833 $ $ $ $ $ (43,547) $ 31,867 1,146 (11,034) $ 22,919 (9,337) (11,680) $ (9,888) $ 13,582 $ $ 3,303 (2,116) 1,187 9,963 (23,420) $ 7,313 10,063 (13,457) $ 17,376 (25,137) $ 7,488 $ $ $ (13,538) $ 10,891 (3,738) 2,466 (2,647) $ (1,272) 10,935 $ (85) $ $ $ $ $ 6,051 (1,085) 4,966 – – – 4,966 $ $ $ $ $ Total 14,152 50,679 42,592 148 45,418 356,734 55,541 – 565,264 439,706 13,713 29,995 3,209 47,404 31,237 – – – – – – – – – – – – – – – – – – – (1) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. CIBC 2017 ANNUAL REPORT 145 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 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 are paid in cash or in the form of additional RSA units to the employees over or at the end of the vesting period or settlement date. Grant date fair value of each cash-settled RSA unit granted as part of the acquisition of The PrivateBank was based on a 10-day average volume- weighted share price prior to the acquisition date. Grant date fair value of each cash-settled RSA unit granted in the normal course 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, 4,331,700 RSAs were granted at a weighted-average price of $105.67 (2016: 2,320,497 granted at a weighted-average price of $99.99; 2015: 1,976,578 granted at a weighted-average price of $104.55) and the number of RSAs outstanding as at October 31, 2017 was 7,590,852 (2016: 5,422,030; 2015: 5,210,234). Compensation expense in respect of RSAs, before the impact of hedging, totalled $323 million in 2017 (2016: $218 million; 2015: $231 million). As at October 31, 2017, liabilities in respect of RSAs were $720 million (2016: $518 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, 952,434 PSUs were granted at a weighted-average price of $105.15 (2016: 905,028 granted at a weighted-average price of $99.86; 2015: 745,080 granted at a weighted-average price of $105.24). As at October 31, 2017, the number of PSUs outstanding, before the impact of CIBC’s relative performance, was 2,651,991 (2016: 2,507,808; 2015: 2,365,896). Compensation expense in respect of PSUs, before the impact of hedging, totalled $128 million in 2017 (2016: $93 million; 2015: $112 million). As at October 31, 2017, liabilities in respect of PSUs were $287 million (2016: $261 million). Restricted stock plan As part of the acquisition of The PrivateBank, CIBC restricted stock was issued to replace previously issued PrivateBancorp restricted stock held by employees of The PrivateBank with substantially the same terms and vesting schedule. Under the restricted stock plan, awards were granted to certain key employees in the form of equity-settled awards. Pursuant to the acquisition, each restricted stock represents a CIBC common share with transferability restriction. The common shares are not restricted to voting rights, but dividends are subject to forfeiture under the terms of the grant. Dividends are payable in cash and are distributed to the holders to the extent and at the same time the underlying shares vest and are released from restriction. The transfer restrictions generally vest over a three year period and vesting is contingent upon continued employment. At the acquisition date, restricted stock was granted at a 10-day average volume-weighted share price of US$80.09 and the number of restricted stock outstanding as at October 31, 2017 was 190,285. Compensation expense in respect of restricted stock totalled $2 million in 2017. 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, 2017. 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 nil in 2017 (2016: $1 million; 2015: $4 million). As at October 31, 2017, liabilities in respect of BVUs were nil (2016: nil). Deferred share unit plan / Deferred compensation plan Under the DSU plan, certain key employees are granted DSUs during the year as special grants. Under the DSU and the DCP plan assumed through the acquisition of The PrivateBank, certain employees can also elect to receive DSUs in exchange for cash compensation that they would otherwise be entitled to. DSUs vest in accordance with the vesting schedule defined in the grant agreement or plan document and settle in cash on a date elected by the employee that is not less than two years after the deferral commitment, or after the employee leaves CIBC in a lump sum payment or up to 10 annual installments. Employees receive dividend equivalents in the form of additional DSUs. Grant date fair value of each cash-settled DSU that is not granted under the DCP, 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, these DSUs are 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. For the DCP plan, the grant date fair value for units issued as part of the acquisition of The PrivateBank was based on a 10-day average volume-weighted share price prior to the acquisition date. The grant date fair value for subsequent DCP grants is based on the closing stock price on the New York Stock Exchange (NYSE) on the last day of the quarter. Upon distribution, each DSU is settled in cash based on the average closing price per common share on the NYSE for the 10 trading days prior to the date of the distribution. During the year, 198,301 DSUs were granted at a weighted-average price of $106.21 (2016: 14,326 granted at a weighted-average price of $99.86; 2015: 196 granted at a weighted-average price of $96.74) and the number of DSUs outstanding as at October 31, 2017 was 248,032 (2016: 45,410; 2015: 29,463). Compensation expense in respect of DSUs, before the impact of hedging, totalled $20 million in 2017 (2016: $9 million; 2015: $4 million). As at October 31, 2017, liabilities in respect of DSUs were $42 million (2016: $13 million). 146 CIBC 2017 ANNUAL REPORT Consolidated financial statements Directors’ plans Under the Director DSU/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 or of an affiliate of CIBC. 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 DSU/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 $5 million in 2017 (2016: $2 million; 2015: $2 million). As at October 31, 2017, liabilities in respect of DSUs were $22 million (2016: $17 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). During the year, an additional 1,119,211 common shares were reserved for issue pursuant to the acquisition of The PrivateBank. Upon acquisition of The PrivateBank, each PrivateBancorp outstanding and unexercised option was converted into an option to purchase CIBC shares pursuant to the terms specified in the merger agreement. As at October 31, 2017, 6,654,170 (2016: 6,525,893) common shares were reserved for future issue under our stock option plans. Stock options in respect of 4,876,673 (2016: 4,073,451) common shares have been granted but not yet exercised under the ESOP. No stock options under the DSOP remain outstanding. 1,777,497 (2016: 2,452,442) 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. The fair value of in-the-money options granted as part of the acquisition of The PrivateBank approximated their intrinsic value. The fair value of other options granted during the year were 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 following weighted-average assumptions were used as inputs into the Black-Scholes option pricing model to determine the fair value of options on the date of grant, excluding the options granted pursuant to the acquisition of The PrivateBank: 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 2017 2016 2015 1.58 % 5.75 % 14.53 % 6 years 110.83 $ 1.34 % 6.14 % 17.26 % 6 years 97.73 $ 1.98 % 4.96 % 17.97 % 6 years 101.87 $ For 2017, the weighted-average grant date fair value of options, excluding the options granted pursuant to the acquisition of The PrivateBank, was $5.31 (2016: $5.12; 2015: $8.59). The weighted-average grant date fair value of options granted pursuant to the acquisition of The PrivateBank was $63.75. Compensation expense in respect of stock options totalled $5 million in 2017 (2016: $5 million; 2015: $5 million). Stock option plans As at or for the year ended October 31 Outstanding at beginning of year Granted Exercised (2) Forfeited Cancelled/expired Outstanding at end of year Exercisable at end of year Available for grant 2017 Weighted- average exercise price (1) $ $ $ 86.92 75.83 76.78 99.77 58.99 84.28 64.28 2016 Weighted- average exercise price $ $ $ 82.62 97.73 75.86 91.99 87.36 86.92 74.94 2015 Weighted- average exercise price $ $ $ 78.70 101.87 74.30 81.33 70.60 82.62 74.71 Number of stock options 3,945,032 610,247 (356,661) (40,205) (58,103) 4,100,310 1,542,681 3,241,350 Number of stock options 4,100,310 804,923 (815,767) (13,380) (2,635) 4,073,451 1,485,607 2,452,442 Number of stock options 4,073,451 1,935,997 (990,934) (133,581) (8,260) 4,876,673 1,988,449 1,777,497 (1) For foreign currency-denominated options granted and exercised during the year, the weighted average exercise prices are translated using exchange rates as at the grant date and settlement date, respectively. The weighted-average exercise price of outstanding balances as at October 31, 2017 reflects the conversion of foreign currency-denominated options at the year-end exchange rate. (2) The weighted-average share price at the date of exercise was $110.44 (2016: $99.66; 2015: $98.21). CIBC 2017 ANNUAL REPORT 147 Consolidated financial statements Stock options outstanding and vested As at October 31, 2017 Stock options outstanding Stock options vested Range of exercise prices $11.00 – $55.00 $55.01 – $65.00 $65.01 – $75.00 $75.01 – $85.00 $85.01 – $95.00 $95.01 – $105.00 $105.01 – $115.00 Number outstanding 689,714 305,519 423,893 564,846 683,986 1,286,026 922,689 4,876,673 Weighted- average contractual life remaining 3.42 7.22 3.42 4.41 6.21 7.59 9.19 6.35 Weighted- average exercise price $ 36.50 59.18 71.22 79.73 90.76 99.68 110.80 Number outstanding 689,714 27,146 422,745 564,351 281,557 2,936 – Weighted- average exercise price $ 36.50 61.36 71.22 79.74 90.82 99.68 – $ 84.28 1,988,449 $ 64.28 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 $43 million in 2017 (2016: $40 million; 2015: $36 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 $128 million (2016: $22 million; 2015: $30 million) as a credit to compensation expense in the consolidated statement of income in respect of these derivatives. As at October 31, 2017, the ending AOCI balance in respect of the designated accounting hedges totalled a credit of $30 million (2016: $6 million). 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 62,000 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 2017 or 2016. 148 CIBC 2017 ANNUAL REPORT Consolidated financial statements 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 benefits promised by our funded plans, to maximize long-term investment returns while not compromising the benefit security of the respective plans, manage the level of funding contributions in conjunction with the stability of the funded status, and implement all policies in a cost effective manner. 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. 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 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 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 (1) The actual return on plan assets for the year was $500 million (2016: $556 million). (2) The valuation allowance reflects the effect of asset ceiling on plans with a net defined benefit asset. $ $ $ 2017 7,418 214 (5) 272 6 (350) 2 (15) 71 7,613 7,458 279 221 167 6 (350) (6) (1) (16) Pension plans Other post-employment plans 2016 2017 2016 $ $ $ $ $ $ 6,534 185 (8) 292 6 (308) 3 (20) 734 7,418 6,997 319 237 241 6 (308) (6) (1) (27) 725 14 – 25 – (30) – (2) (36) 696 – – – 30 – (30) – – – – (696) – $ $ $ $ 652 11 2 28 – (29) – 1 60 725 – – – 29 – (29) – – – – (725) – $ (696) $ (725) CIBC 2017 ANNUAL REPORT 149 $ 7,758 $ 7,458 $ 145 (11) 134 $ 40 (18) 22 $ Consolidated financial statements 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 2017 199 (65) 134 $ $ 2016 187 (165) 22 $ $ 2017 – (696) (696) $ $ 2016 – (725) (725) $ $ (1) Excludes $1 million of other assets (2016: nil) and $5 million (2016: $4 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 2017 6,932 681 7,613 6,971 787 7,758 $ $ $ $ Pension plans Other post-employment plans 2016 2017 2016 $ $ $ $ 6,734 684 7,418 6,676 782 7,458 $ $ $ $ 646 50 696 – – – $ $ $ $ 672 53 725 – – – 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: $ 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 $ 2017 214 (5) 272 (279) 1 6 – 2 Pension plans Other post-employment plans 2016 2015 2017 2016 2015 $ $ 185 (8) 292 (319) 1 6 – 3 $ 210 (12) 291 (299) 1 5 (4) 8 14 – 25 – – – – – 39 $ $ 11 2 28 – – – – – 41 $ $ 13 – 30 – – – – – 43 Net defined benefit plan expense recognized in net income $ 211 $ 160 $ 200 $ (1) The 2017 and 2016 current service costs were calculated using separate discount rates of 3.72% and 4.57%, respectively, 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 gains (losses) 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 2017 2016 2015 2017 2016 2015 Actuarial gains (losses) 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 $ $ 1 19 (91) 221 8 Net remeasurement gains (losses) recognized in OCI (1) $ 158 $ 2 (730) (6) 237 1 (496) $ 251 201 23 (62) 1 $ 414 $ $ 26 5 5 – – 36 $ $ – (70) 10 – – (60) $ $ 84 15 (4) – – 95 (1) Excludes net remeasurement losses recognized in OCI in respect of immaterial subsidiaries not included in the disclosures totalling $1 million (2016: $17 million of net gains; 2015: $6 million of net losses). 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 $ 2017 3,755 490 2,687 $ 6,932 2016 $ 3,702 463 2,569 $ 6,734 2017 2016 $ $ 188 – 458 646 $ $ 192 n/a 480 672 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 150 CIBC 2017 ANNUAL REPORT Pension plans Other post-employment plans 2017 15.6 2016 16.3 2017 13.8 2016 14.5 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 2017 2016 $ 750 11 % $ 683 10 % 2,249 865 346 3,460 27 293 26 1,033 257 146 1,782 435 356 188 979 32 12 5 49 1 4 1 15 4 2 27 6 5 2 13 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) Asset categories are based upon risk classification including synthetic exposure through derivatives. The fair value of derivatives as at October 31, 2017 was a net derivative liability of $63 million (2016: net derivative liability of $42 million). (2) Pension benefit plan assets include CIBC issued securities and deposits of $18 million (2016: $19 million), representing 0.3% of Canadian plan assets (2016: 0.3%). All of the equity securities held as at October 31, 2017 and 2016 have daily quoted prices in active markets except hedge funds, infrastructure, and private equity. (3) All debt securities held as at October 31, 2017 and 2016 are investment grade, of which $134 million (2016: $117 million) have daily quoted prices in active markets. (4) $26 million (2016: $35 million) of the investment funds and other assets held as at October 31, 2017 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. $ 6,971 100 % $ 6,676 100 % 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 (1) Pension plans Other post-employment plans 2017 3.6 % 2.3 % 2016 3.6 % 2.3 % 2017 3.6 % 2.3 % 2016 3.5 % 2.3 % (1) Rates of compensation increase for 2017 and 2016 have 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 2017 2016 23.2 24.7 24.2 25.7 23.2 24.7 24.2 25.6 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 2017 5.7 % 4.5 % 2029 2016 5.7 % 4.5 % 2029 CIBC 2017 ANNUAL REPORT 151 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. 2017 $ 1,123 (912) (199) 225 n/a n/a (150) 147 2017 $ 96 (77) (1) 2 (41) 49 (17) 17 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, 2016. The next actuarial valuation of this plan for funding purposes will be effective as of October 31, 2017. The minimum contributions for 2018 are anticipated to be $184 million for the Canadian defined benefit pension plans and $30 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 2018 2019 2020 2021 2022 2023 – 2027 $ $ 303 30 333 $ $ 306 31 337 $ $ 313 33 346 $ $ 321 34 355 $ $ 330 35 365 $ $ 1,786 193 1,979 $ $ Total 3,359 356 3,715 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 (2) 2017 (1) 2016 2015 $ $ 21 107 128 $ $ 20 96 116 $ $ 20 96 116 (1) (2) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. Includes Canada Pension Plan, Quebec Pension Plan, and U.S. Federal Insurance Contributions Act. 152 CIBC 2017 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 2017 (1) 2016 2015 $ $ (19) 1,160 1,141 $ 6 3 12 21 1,162 166 (44) 782 738 13 (11) (22) (20) 718 (263) $ 1,328 $ 455 $ (18) 713 695 13 3 (77) (61) 634 70 704 (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. Components of income tax $ millions, for the year ended October 31 Current income taxes Federal Provincial Foreign Deferred income taxes Federal Provincial Foreign 2017 (1) 2016 2015 $ 683 451 127 1,261 52 33 (18) 67 $ 394 259 45 698 (129) (89) (25) (243) $ 358 246 107 711 80 54 (141) (7) $ 1,328 $ 455 $ 704 (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. 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 2017 2016 2015 $ 1,558 26.5 % $ 1,328 26.5 % $ 1,115 26.4 % Combined Canadian federal and provincial income tax rate applied to 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 (137) (219) (26) 3 (25) 8 (2.3) (3.7) (0.4) – (0.4) 0.1 Income taxes in the consolidated statement of income $ 1,162 19.8 % $ (1) Due to rounding. (152) (348) (76) (11) (24) 1 718 (3.0) (7.0) (1.5) (0.2) (0.5) – (1) 14.3 % $ (87) (358) – 3 (41) 2 634 (2.0) (8.5) – 0.1 (1.0) – (1) 15.0 % CIBC 2017 ANNUAL REPORT 153 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 2017 (2) Balance at beginning of year Recognized in net income Recognized in OCI Acquisitions Other (3) 2016 2015 Balance at end of year Balance at beginning of year Recognized in net income Recognized in OCI Other (3) Balance at end of year Balance at beginning of year Recognized in net income Recognized in OCI Other (3) Balance at end of year Deferred tax liabilities $ millions, for the year ended October 31 2017 (2) Balance at beginning of year Recognized in net income Recognized in OCI Acquisitions Other (3) 2016 2015 Balance at end of year Balance at beginning of year Recognized in net income Recognized in OCI Other (3) Balance at end of year Balance at beginning of year Recognized in net income Recognized in OCI Other (3) Balance at end of year $ Allowance for credit losses 227 2 – 14 2 245 $ $ Buildings and equipment 88 (14) – – (5) 69 $ Pension and employee benefits 520 $ 19 (49) 86 (17) 559 $ $ Provisions 31 15 – – 1 47 $ $ Financial instrument revaluation 25 (26) 19 111 (5) 124 $ $ $ $ $ 208 18 – 1 227 200 4 – 4 208 $ $ $ $ 81 2 – 5 88 72 (2) – 11 81 $ $ $ $ 353 13 155 (1) 520 430 36 (122) 9 353 $ $ $ $ 25 7 – (1) 31 23 1 – 1 25 $ $ $ $ 2 7 16 – 25 10 (6) – (2) 2 Tax loss carry- forwards (1) $ $ $ $ $ $ 70 (49) – – (3) 18 62 – – 8 70 73 (18) – 7 62 $ $ $ Intangible assets (158) (19) – (143) (9) (329) (124) (33) – (1) (158) (104) (18) – (2) (124) $ $ $ $ $ $ Buildings and equipment (45) (3) – (7) 3 (52) (49) 5 – (1) (45) (44) (5) – – (49) $ $ $ $ $ Pension and employee benefits (8) $ 1 (5) – 2 (10) (13) 8 (5) 2 (8) (9) 5 (7) (2) (13) $ $ $ $ $ $ Financial instrument revaluation (54) 36 (13) – 14 (17) (29) (29) (8) 12 (54) (110) 7 76 (2) (29) $ $ $ $ $ $ Lease receivables – – – – – – – – – – – (47) 55 – (8) – $ $ $ $ $ $ Goodwill (88) (5) – – – (93) (81) (6) – (1) (88) (72) (9) – – (81) $ $ $ Unearned income 115 $ 3 – 7 (20) 105 $ $ $ $ $ 101 16 – (2) 115 106 (8) – 3 101 Foreign currency 24 $ – – – (25) $ $ $ $ $ $ $ $ $ $ $ $ (1) $ (38) $ – 62 – $ 24 (27) $ – – (11) (38) $ Other 2 – – 3 (3) 2 1 1 – – 2 5 (5) – 1 1 $ $ $ $ $ $ Total assets 1,078 (50) (30) 221 (50) 1,169 833 64 171 10 1,078 919 2 (122) 34 833 $ Other 1 19 2 – 8 30 $ (20) $ 11 4 6 1 $ (29) $ 24 (1) (14) (20) $ Total liabilities (328) 29 (16) (150) (7) (472) (354) (44) 53 17 (328) (442) 59 68 (39) (354) Net deferred tax assets as at October 31, 2017 Net deferred tax assets as at October 31, 2016 Net deferred tax assets as at October 31, 2015 $ $ $ 697 750 479 (1) The tax loss carryforwards include $18 million (2016: $70 million; 2015: $35 million) that relate to operating losses (of which $11 million relate to the U.S., $2 million relate to Canada and $5 million relate to other jurisdictions) that expire in various years commencing in 2017, and nil (2016: nil; 2015: $27 million) that relate to Canadian capital losses that never expire. Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. Includes foreign currency translation adjustments. (2) (3) 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 $697 million (2016: $750 million) are presented in the consolidated balance sheet as deferred tax assets of $727 million (2016: $771 million) and deferred tax liabilities of $30 million (2016: $21 million). Unrecognized tax losses The amount of unused tax losses for which deferred tax assets have not been recognized was $1,141 million as at October 31, 2017 (2016: $1,123 million) of which nil (2016: nil) has no expiry date, and of which $1,141 million (2016: $1,123 million) expires within 10 years. These unused tax losses substantially relate to the Caribbean region. Enron In prior years, the Canada Revenue Agency (CRA) issued reassessments disallowing the deduction of approximately $3 billion of the 2005 Enron settlement payments and related legal expenses. The matter is currently in litigation. The Tax Court of Canada trial on the deductibility of the Enron payments is expected to commence in 2018. 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 $198 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 CRA reassessed CIBC 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”. In May 2017, the CRA reassessed CIBC additional income tax of approximately $180 million related to the tax deductibility of dividends during the 2012 taxation year. The circumstances of the dividends subject to the reassessments are similar to those prospectively addressed by the rules in the 2015 Canadian federal budget. It is possible that subsequent years may be reassessed for similar activities. CIBC is confident that its tax filing positions were appropriate and intends to defend itself vigorously. Accordingly, no amounts have been accrued in the consolidated financial statements. 154 CIBC 2017 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 (2) (thousands) Add: restricted shares and equity-settled contingent consideration (thousands) Weighted-average diluted common shares outstanding (thousands) 2017 (1) $ $ $ 4,699 52 4,647 412,636 11.26 4,647 412,636 827 100 413,563 $ $ $ 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 Diluted EPS $ 11.24 $ 10.70 $ 8.87 Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (1) (2) Excludes average options outstanding of 729,807 with a weighted-average exercise price of $111.69; average options outstanding of 1,304,880 with a weighted-average exercise price of $99.80; and average options outstanding of 754,144 with a weighted-average exercise price of $100.50 for the years ended October 31, 2017, 2016, and 2015, 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 (2) Unutilized credit commitments (3) Backstop liquidity facilities Standby and performance letters of credit Documentary and commercial letters of credit Other Contract amounts $ 2017 (1) 46,753 209,164 11,195 12,764 214 269 $ 2016 38,657 186,406 8,842 12,377 217 282 $ 280,359 $ 246,781 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (1) (2) Excludes securities lending of $2.0 billion (2016: $2.5 billion) for cash because it is reported on the consolidated balance sheet. (3) Includes $111.7 billion (2016: $105.0 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 $82.4 billion (2016: $81.5 billion) of which $11.7 billion (2016: $8.5 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 $68.1 billion (2016: $71.0 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. CIBC 2017 ANNUAL REPORT 155 Consolidated financial statements 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 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, 2017 2018 2019 2020 2021 2022 2023 and thereafter Operating leases Payments Receipts (2) $ 477 448 391 380 336 3,229 $ 125 126 126 130 132 1,351 (1) Total rental expense (excluding servicing agreements) in respect of buildings and equipment was $476 million (2016: $445 million; 2015: $432 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, 2017 2018 2019 2020 2021 2022 2023 and thereafter Less: future interest charges Present value of finance lease commitments $ $ 53 51 49 47 44 320 564 190 374 (1) Total interest expense related to finance lease arrangements was $28 million (2016: $30 million; 2015: $30 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 $143 million (2016: $145 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, 2017, the related underwriting commitments were $424 million (2016: $196 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, 2017 and 2016 are not significant. 156 CIBC 2017 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 (2) Deposits with banks Securities NHA mortgage-backed securities (3) Mortgages Credit cards (4) Other assets Uses of pledged assets and collateral Securities lent Obligations related to securities lent or sold under repurchase agreements Secured borrowings Derivative transactions (5) Foreign governments and central banks (6) Clearing systems, payment systems, depositories, and other (6) 2017 (1) 2016 $ $ $ 6 32,809 20,247 17,478 3,048 4,420 78,008 19,291 10,463 40,968 4,456 236 2,594 $ $ $ 11 23,690 20,996 14,227 4,245 6,022 69,191 19,564 2,326 39,484 6,074 691 1,052 $ 78,008 $ 69,191 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (1) (2) Does not include over-collateralization of assets pledged. (3) (4) These assets are held in consolidated securitization trusts and support funding liabilities of $3.0 billion with a fair value of $3.0 billion (2016: $4.2 billion with a fair value of Includes certain cash in transit balances related to the securitization process. $4.2 billion). (5) Comprises margins for exchange-traded futures and options, clearing house settled swap contracts, and collateralized derivative transactions. (6) 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 (2) 2017 (1) $ $ $ 93,201 28,240 64,961 27,462 19,532 13,713 4,254 $ $ $ 2016 73,724 28,589 45,135 19,093 11,886 10,338 3,818 $ 64,961 $ 45,135 (1) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (2) 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. CIBC 2017 ANNUAL REPORT 157 Consolidated financial statements 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 $1.2 billion as at October 31, 2017. 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, 2017, 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. The plaintiffs’ motion for summary judgment is scheduled for October 2018. 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. The plaintiffs’ motion for summary judgment has been adjourned to a date to be scheduled. 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 158 CIBC 2017 ANNUAL REPORT Consolidated financial statements 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 were settled in 2016 subject to court approval. Pursuant to the proposed settlement CIBC will pay $4.25 million to settle these three actions. The court approval hearing was held in December 2016. In January 2017, the court did not approve CIBC’s proposed settlement as it found the fees for plaintiffs’ counsel were excessive and the end date for one of the actions was later than required. The plaintiffs’ appeal was heard in September 2017. The court reserved its decision. 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 which was scheduled to commence in September 2018 will be adjourned to October 2019. The motion for class certification in 9085-4886 Quebec Inc. (formerly Bakopanos) was heard in November 2017. The court reserved its decision. 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, and continuation of the certification motion on the amended pleading is scheduled for November 2017. 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 alleged that the defendants employ uniform, unfair, fraudulent and unlawful marketing practices to enroll customers who receive no meaningful benefit from the product. The claim sought a refund of the premiums, charges or fees received from customers and unspecified general and punitive damages. The motion for class certification was heard in February 2017. In March 2017, the court dismissed the motion for class certification. The plaintiffs did not appeal. This matter is closed. 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 summary judgment motion was heard in June 2017. The court reserved its decision. CIBC 2017 ANNUAL REPORT 159 Consolidated financial statements 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 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 and motion to dismiss in Potter were heard in April 2017. In September 2017, the court certified Catucci as a class action. The defendants have sought leave to appeal the certification decision. In Potter the court dismissed the action against the underwriters, without prejudice to the plaintiff to re-plead its allegations. In re PrivateBancorp Shareholder Litigation Following the announcement of the proposed acquisition of PrivateBancorp, three proposed class actions were filed on behalf of PrivateBancorp 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 named as defendants PrivateBancorp and the members of its board of directors, and asserted that the directors breached their fiduciary duties in connection with the transaction. One such case (Griffin) further asserted that PrivateBancorp aided and abetted its directors’ alleged breaches. Two of the actions (Parshall and Griffin) also named as defendants CIBC, and asserted that it, too, aided and abetted the directors’ purported breaches. The actions broadly alleged 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 sought injunctive and other relief, including damages. The matters were subsequently amended and consolidated as In re PrivateBancorp Shareholder Litigation. This matter was settled in June 2017. PrivateBancorp Appraisal Rights Matters In August 2017, two appraisal petitions were filed against PrivateBancorp by former PrivateBancorp shareholders who exercised their dissent and appraisal rights under Delaware law. In October 2017, PrivateBancorp was named in a third petition. These matters have been consolidated. The petitioners were seeking a judicial determination of the fair value of PrivateBancorp’s common stock at the time the acquisition by CIBC closed on June 23, 2017. In November 2017, CIBC and the petitioners entered into an agreement to settle the dispute, subject to the court’s entry of an order dismissing the consolidated petition. See Note 3 for additional details on our acquisition of PrivateBancorp. Legal provisions(1) 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 2017 118 67 $ (70) (18) 2016 27 106 $ (9) (6) $ 97 $ 118 (1) Excludes amounts recognized in respect of the PrivateBancorp Appraisal Rights Matters. See Note 3 for additional details. The additional new provisions recognized in 2016 included $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 represented a legal obligation at the end of the 2016. 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 continued 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 2017 256 21 $ (104) (24) $ 2016 244 158 (122) (24) $ 149 $ 256 While the amount of $149 million recognized represents our best estimate as at October 31, 2017 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. 160 CIBC 2017 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 2017 (1) Canada U.S. Other countries Total Canada U.S. Other countries 2016 Total On-balance sheet Major assets (2)(3)(4) Off-balance sheet Credit-related arrangements Financial institutions Governments Retail Corporate Derivative instruments (5)(6) By counterparty type Financial institutions (7) Governments Corporate Less: effect of netting Total derivative instruments $ 407,878 $ 96,542 $ 38,469 $ 542,889 $ 387,354 $ 59,457 $ 36,130 $ 482,941 $ 46,069 8,377 120,451 55,847 $ 13,155 11 341 21,502 $ 7,660 73 381 6,492 $ 66,884 8,461 121,173 83,841 $ 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 $ 230,744 $ 35,009 $ 14,606 $ 280,359 $ 217,704 $ 19,579 $ 9,498 $ 246,781 $ $ 5,846 3,670 1,305 10,821 (6,739) 4,696 – 731 5,427 (3,972) $ 5,359 2 922 6,283 (3,266) $ 15,901 3,672 2,958 22,531 (13,977) $ 6,384 $ 5,275 1,612 4,029 $ – 859 13,271 (9,225) 4,888 (3,594) 7,766 $ 5 929 8,700 (5,146) 18,179 5,280 3,400 26,859 (17,965) $ 4,082 $ 1,455 $ 3,017 $ 8,554 $ 4,046 $ 1,294 $ 3,554 $ 8,894 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (1) (2) 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 (3) (4) agreements, and derivative instruments. Includes Canadian currency of $397.8 billion (2016: $378.5 billion) and foreign currencies of $145.1 billion (2016: $104.4 billion). Includes loans and acceptances, net of allowance for credit losses, totalling $365.6 billion (2016: $319.8 billion). No industry or foreign jurisdiction accounts for more than 10% of this amount. (5) Derivative instruments are presented at fair value. (6) Does not include exchange-traded derivatives of $1,811 million (2016: $903 million). (7) Includes positive fair value (net of CVA) of nil (2016: $3 million) on notional amounts of nil (2016: $0.4 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 2017 ANNUAL REPORT 161 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, 2017, 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 $186 million (2016: $140 million), letters of credit and guarantees totalled $2 million (2016: $2 million), and undrawn credit commitments totalled $57 million (2016: $46 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, 2017 and 2016. (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 2017 Senior officers $ $ 23 3 54 14 94 2016 Senior officers $ $ 22 3 27 – 52 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, including awards granted with respect to the acquisition of The PrivateBank, and changes to CIBC’s leadership team. 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 investments in equity-accounted associates and joint ventures. 162 CIBC 2017 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, 2017, the carrying value of our investments in the joint ventures was $402 million (2016: $380 million), which was included in Corporate and Other. As at October 31, 2017, loans to the joint ventures totalled nil (2016: $50 million) and undrawn credit commitments totalled $128 million (2016: $78 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 2017 and 2016, 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 2017 $ $ 81 (30) 51 2016 $ $ 64 2 66 2015 $ $ 57 (2) 55 Associates As at October 31, 2017, the total carrying value of our investments in associates was $313 million (2016: $386 million). These investments comprise: listed associates with a carrying value of $157 million (2016: $201 million) and a fair value of $192 million (2016: $223 million); and unlisted associates with a carrying value of $156 million (2016: $185 million) and a fair value of $164 million (2016: $198 million). Of the total carrying value of our investments in associates, $2 million (2016: $2 million) was included in Canadian Personal and Small Business Banking, nil (2016: $33 million) in Canadian Commercial Banking and Wealth Management, nil (2016: nil) in U.S. Commercial Banking and Wealth Management, $291 million (2016: $330 million) in Capital Markets, and $20 million (2016: $21 million) in Corporate and Other. As at October 31, 2017, loans to associates totalled nil (2016: nil) and undrawn credit commitments totalled $153 million (2016: $153 million). We also had commitments to invest up to nil (2016: nil) in our associates. There was no unrecognized share of losses of any associate, either for the year or cumulatively. In 2017 and 2016, 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 2017 $ $ 20 6 26 2016 $ $ 32 4 36 2015 120 (3) 117 $ $ CIBC 2017 ANNUAL REPORT 163 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, 2017 Subsidiary name (1) Canada and U.S. CIBC Asset Management Inc. CIBC BA Limited CIBC Bancorp USA Inc. CIBC Bank USA 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. Atlantic Trust Group, LLC AT Investment Advisers, Inc. Atlantic Trust Company, National Association Atlantic Trust Company of Delaware Canadian Imperial Holdings Inc. CIBC Inc. CIBC Capital Corporation CIBC World Markets Corp. INTRIA Items Inc. International CIBC Australia Ltd 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 (91.7%) 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 (Japan) Inc. CIBC World Markets plc Address of head or principal office Book value of shares owned by CIBC (2) Toronto, Ontario, Canada $ 444 – (3) 7,408 25 23 230 2 591 306 Toronto, Ontario, Canada Chicago, Illinois, U.S. Chicago, Illinois, U.S. Toronto, Ontario, Canada Toronto, 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. Atlanta, Georgia, U.S. Chicago, Illinois, U.S. Atlanta, Georgia, U.S. Wilmington, Delaware, 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. Mississauga, Ontario, Canada 100 19 9,933 Sydney, New South Wales, Australia 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 Tokyo, Japan London, United Kingdom 48 490 (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., Canadian Imperial Holdings Inc., CIBC Inc., CIBC Capital Corporation, CIBC World Markets Corp., Atlantic Trust Group, LLC, AT Investment Advisers, Inc., and CIBC Bancorp USA Inc., which were incorporated or organized under the laws of the State of Delaware, U.S., and CIBC World Markets (Japan) Inc., which was incorporated in Barbados. (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. 164 CIBC 2017 ANNUAL REPORT Consolidated financial statements Note 28 Segmented and geographic information CIBC has four SBUs – Canadian Personal and Small Business Banking, Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets. These SBUs are supported by Corporate and Other. Canadian Personal and Small Business Banking provides personal and small business clients across Canada with financial advice, products and services through a team of advisors in our banking centres, as well as through our direct, mobile and remote channels. Canadian Commercial Banking and Wealth Management provides high-touch, relationship-oriented commercial and private banking, as well as wealth management services to meet the needs of middle-market companies, entrepreneurs, high-net-worth individuals and families, along with institutional clients across Canada. U.S. Commercial Banking and Wealth Management provides high-touch, relationship-oriented commercial, personal and small business banking, as well as wealth management services to meet the needs of middle-market companies, executives, entrepreneurs, high-net-worth individuals and families in the markets we serve in the U.S. 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 – Administration, Client Connectivity and Innovation, Finance, Human Resources and Communications, Internal Audit, Risk Management, and Technology and Operations, as well as other support groups. The expenses of these functional and support groups are generally allocated to the business lines within the SBUs. The functional and support costs of CIBC Bank USA are recognized directly in the expenses of U.S. Commercial Banking and Wealth Management. Corporate and Other also includes the results of CIBC FirstCaribbean and other strategic investments, as well as other income statement and balance sheet items not directly attributable to the business lines. 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, with the exception of certain Treasury activities in U.S. Commercial Banking and Wealth Management, which are reported in that SBU. Capital is attributed to the SBUs in a manner that is intended to consistently measure and align economic costs with the underlying benefits and risks associated with SBU activities. Earnings on unattributed capital remain in Corporate and Other. We review our transfer pricing methodologies on an ongoing basis to ensure they reflect changing market environments and industry practices. Revenue, expenses, and other balance sheet resources related to certain activities are fully allocated to the lines of business within the SBUs. To measure and report the results of operations of the lines of business within our Canadian Personal and Small Business Banking and Canadian Commercial Banking and Wealth Management SBUs, we use a Manufacturer/Customer Segment/Distributor Management Model. The model uses certain estimates and allocation methodologies to process internal payments between lines of business for sales, renewals and trailer commissions to facilitate preparation of segmented financial information. Periodically, the sales, renewals and trailer commission rates paid to customer segments for certain products/services are revised and applied prospectively. Non-interest expenses are attributed to the SBUs to which they relate based on appropriate criteria. 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. All allowances and related provisions for CIBC Bank USA are reported in U.S. Commercial Banking and Wealth Management. Changes made to our business segments 2017 The following external reporting changes were made in 2017. Prior period amounts were reclassified accordingly. The changes impacted the results of our SBUs, but there was no impact on prior period consolidated net income resulting from these reclassifications. Fourth Quarter Changes to our organizational structure On June 20, 2017, we announced changes to CIBC’s leadership team and organizational structure to further accelerate our transformation. As a result of these changes, our new reporting structure is as follows: Canadian Personal and Small Business Banking – provides personal and small business clients across Canada with financial advice, products and services through a team of advisors in our banking centres, as well as through our direct, mobile and remote channels. Included in Canadian Personal and Small Business Banking are the following lines of business: Personal and small business banking; and (cid:129) Other. (cid:129) Canadian Commercial Banking and Wealth Management – provides high-touch, relationship-oriented commercial and private banking, as well as wealth management services to meet the needs of middle-market companies, entrepreneurs, high-net-worth individuals and families, along with institutional clients across Canada. Included in Canadian Commercial Banking and Wealth Management are the following lines of business: (cid:129) (cid:129) Commercial banking; and Wealth management. CIBC 2017 ANNUAL REPORT 165 Consolidated financial statements U.S. Commercial Banking and Wealth Management – provides high-touch, relationship-oriented commercial, personal and small business banking, as well as wealth management services to meet the needs of middle-market companies, executives, entrepreneurs, high-net-worth individuals and families in the markets we serve in the U.S. Included in U.S. Commercial Banking and Wealth Management are the following lines of business: (cid:129) (cid:129) (cid:129) Commercial banking; Wealth management; and Other. 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. Included in Capital Markets are the following lines of business: (cid:129) (cid:129) (cid:129) Global markets; Corporate and investment banking; and Other. Corporate and Other – includes the following functional groups – Administration, Client Connectivity and Innovation, Finance, Human Resources and Communications, Internal Audit, Risk Management, and Technology and Operations, as well as other support groups. The expenses of these functional and support groups are generally allocated to the business lines within the SBUs. The functional and support costs of CIBC Bank USA are recognized directly in the expenses of U.S. Commercial Banking and Wealth Management. Corporate and Other also includes the results of CIBC FirstCaribbean and other strategic investments, as well as other income statement and balance sheet items not directly attributable to the business lines. In addition to the above: (cid:129) The results of Geneva Advisors, LLC (Geneva Advisors) is included in the wealth management line of business within U.S. Commercial Banking and Wealth Management, after the close of the acquisition on August 31, 2017; The results of CIBC Investor’s Edge, previously reported in Canadian Wealth Management, are now included in Canadian Personal and Small Business Banking; and The historical results of our minority investment in American Century Investments (ACI) sold in 2016 were reclassified from Canadian Wealth Management to Corporate and Other. (cid:129) (cid:129) Changes to our transfer pricing methodology 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. Third Quarter U.S. Commercial Banking and Wealth Management On June 23, 2017, we completed the acquisition of PrivateBancorp, Inc. (PrivateBancorp) and its subsidiary, The PrivateBank and Trust Company (The PrivateBank, subsequently rebranded as CIBC Bank USA). As a result of the acquisition, a new U.S. Commercial Banking and Wealth Management SBU was created. In addition to the results of CIBC Bank USA, U.S. Commercial Banking and Wealth Management includes: (cid:129) The results of CIBC Atlantic Trust Private Wealth Management (CIBC Atlantic Trust) in the wealth management line of business, previously reported in the private wealth management line of business within the Wealth Management SBU; and The results of U.S. real estate finance in the commercial banking line of business, previously reported in the corporate and investment banking line of business within Capital Markets. (cid:129) SBU name changes Given the addition of the U.S. Commercial Banking and Wealth Management SBU, we changed the name of our Retail and Business Banking SBU to Canadian Retail and Business Banking, and the name of our Wealth Management SBU to Canadian Wealth Management. Further changes to our SBU structure were made in the fourth quarter, as noted above. 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) In the corporate and investment banking and business banking lines of business within Capital Markets and Canadian 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. (cid:129) 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 Canadian 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) 166 CIBC 2017 ANNUAL REPORT Consolidated financial statements 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. Results by reporting segments and geographic areas Canadian Personal and Small Business Banking Canadian Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management Capital Markets Corporate and Other CIBC Total Canada (1) U.S. (1) Caribbean (1) Other countries (1) $ millions, for the year ended October 31 2017 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 $ $ $ 5,752 2,193 427 8,372 766 87 4,261 3,258 838 2,420 – 2,420 $ 984 3,045 (439) 3,590 16 9 2,012 1,553 415 $ 1,138 $ – 1,138 $ 545 $ 331 – 876 84 33 501 258 55 1,647 1,164 12 2,823 (4) 5 1,368 1,454 364 $ $ 203 $ 1,090 – $ 203 – 1,090 $ $ $ 49 570 – 619 (33) 408 887 (643) (510) $ 8,977 $ 7,303 – 7,829 5,720 n/a $ 449 675 n/a $ 639 646 n/a $ 16,280 13,549 1,124 1,285 829 542 9,029 5,880 1,162 730 431 7,534 4,854 928 (133) $ 4,718 $ 3,926 $ $ 19 (152) 19 $ 4,699 $ – 3,926 68 64 805 187 88 99 – 99 31 39 518 697 110 587 19 568 $ $ 60 262 n/a 322 – 8 172 142 36 $ 106 $ – 106 Average assets (5) $ 246,316 $ 50,832 $ 19,905 $ 156,440 $ 68,872 $ 542,365 $ 451,831 $ 52,023 $ 28,553 $ 9,958 2016 (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 $ $ 5,473 1,896 379 7,748 736 91 4,023 2,898 738 2,160 – 2,160 $ $ $ 930 2,732 (390) 3,272 29 13 1,877 1,353 362 991 – 991 $ $ $ 169 $ 216 – 385 (2) 14 274 99 12 1,958 787 11 2,756 155 5 1,323 1,273 281 $ (164) $ 1,038 – 874 133 339 1,012 (610) (675) 87 $ 992 – $ 87 – 992 $ $ $ $ 65 20 45 8,366 $ 6,669 – 7,639 5,208 n/a $ 15,035 12,847 1,051 462 8,509 5,013 718 890 374 7,295 4,288 616 4,295 $ 3,672 $ 20 $ 4,275 $ – 3,672 64 576 n/a 640 93 46 556 (55) (13) (42) – (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) $ 222,642 $ 46,555 $ 8,423 $ 154,805 $ 76,715 $ 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 $ $ 5,160 1,867 353 7,380 664 91 3,884 2,741 715 2,026 – 2,026 $ $ $ 893 2,619 (363) 3,149 5 13 1,876 1,255 334 921 – 921 $ $ $ 178 $ 261 – 439 11 14 280 134 30 1,691 703 10 2,404 44 4 1,260 1,096 249 $ (7) $ 491 – 484 47 313 1,126 (1,002) (694) 7,915 $ 5,941 – 7,221 4,491 n/a $ 13,856 11,712 771 435 8,426 4,224 634 701 348 7,229 3,434 462 104 $ 847 – $ 104 – 847 $ $ (308) $ 3,590 $ 2,972 $ 14 (322) $ 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) $ 206,416 $ 40,626 $ 7,559 $ 134,723 $ 66,000 $ 455,324 $ 388,220 $ 40,170 $ 19,984 $ 6,950 (1) Net income and average assets are allocated based on the geographic location where they are recorded. (2) Capital Markets and U.S. Commercial Banking and Wealth Management net interest income and income taxes include taxable equivalent basis (TEB) adjustments of $298 million and $2 million, respectively (2016: $474 million and nil, respectively; 2015: $482 million and nil, respectively) 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. (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. CIBC 2017 ANNUAL REPORT 167 Consolidated financial statements The following table provides a breakdown of revenue from our reporting segments: $ millions, for the year ended October 31 Canadian Personal and Small Business Banking Personal and small business banking Other Canadian Commercial Banking and Wealth Management Commercial banking Wealth management U.S. Commercial Banking and Wealth Management (2) Commercial banking Wealth management Other Capital Markets (2) Global markets Corporate and investment banking Other Corporate and Other (2) International banking Other 2017 8,033 339 8,372 1,324 2,266 3,590 523 318 35 876 1,601 1,216 6 2,823 723 (104) 619 $ $ $ $ $ $ $ $ $ $ 2016 (1) 2015 (1) $ $ $ $ $ $ $ $ $ $ 7,675 73 7,748 1,211 2,061 3,272 166 217 2 385 1,645 1,093 18 2,756 722 152 874 $ $ $ $ $ $ $ $ $ $ 7,286 94 7,380 1,119 2,030 3,149 212 226 1 439 1,356 1,050 (2) 2,404 678 (194) 484 (1) Certain information has been reclassified to conform to the presentation adopted in the current year. (2) U.S. Commercial Banking and Wealth Management and Capital Markets revenue includes a TEB adjustment of $2 million and $298 million, respectively (2016: nil and $474 million, respectively; 2015: nil and $482 million, respectively) 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 2017 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 $ 226 $ 7,588 $ 4,305 $ 1,272 2,441 36,171 22 4,113 2,572 – $ – – – $ – – $ – – – – $ 12,119 $ 2,033 49,629 – 43,790 5,035 2,234 – 14,014 92,401 – 7,039 6,772 1,031 20,880 4,175 – 4,139 1,780 3,552 5,489 642 – 13,164 272 3,111 – 226,537 – – – 177 – 21,947 – – – 35 – 11,885 – – – 28 – 710 – – – 3 40,383 358,297 – 24,342 8,824 7,937 – 55 (1,618) – – 14,438 40,383 358,352 (1,618) 24,342 8,824 22,375 Total credit exposure $ 125,196 $ 78,307 $ 33,668 $ 226,714 $ 21,982 $ 11,913 $ 2,947 $ 500,727 $ 64,537 $ 565,264 2016 Total credit exposure $ 96,352 $ 64,554 $ 38,326 $ 204,225 $ 21,597 $ 10,465 $ 5,435 $ 440,954 $ 60,403 $ 501,357 168 CIBC 2017 ANNUAL REPORT Total consolidated balance sheet $ 14,152 93,419 5,035 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 “Financial Instruments: Presentation”, 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 2017 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 $ 31,147 5,035 $ (9,458) $ 21,689 5,035 – $ (13,977) $ (3,939) $ 3,773 134 (4,901) – $ 2,653 – agreements 40,999 (616) 40,383 – (40,334) 49 – $ 77,181 $ (10,074) $ 67,107 $ (13,977) $ (49,174) $ 3,956 $ 2,653 2016 Derivatives Cash collateral on securities borrowed Securities purchased under resale agreements $ 33,335 5,433 $ (7,239) – $ 26,096 5,433 $ (17,965) – $ (3,877) (5,282) $ 4,254 151 $ 1,666 – 30,731 (2,354) 28,377 – (28,362) 15 – $ 69,499 $ (9,593) $ 59,906 $ (17,965) $ (37,521) $ 4,420 $ 1,666 $ 24,342 5,035 40,383 $ 69,760 $ 27,762 5,433 28,377 $ 61,572 Financial liabilities $ millions, as at October 31 2017 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 $ 31,058 2,024 $ (9,458) $ 21,600 2,024 – $ (13,977) $ (5,468) $ 2,155 41 (1,983) – $ 1,671 – under repurchase agreements 28,587 (616) 27,971 – (27,924) 47 – $ 61,669 $ (10,074) $ 51,595 $ (13,977) $ (35,375) $ 2,243 $ 1,671 2016 Derivatives Cash collateral on securities lent Obligations related to securities sold under repurchase agreements $ 34,820 2,518 $ (7,239) – $ 27,581 2,518 $ (17,965) – $ (7,328) (2,473) $ 2,288 45 $ 1,226 – 14,048 (2,354) 11,694 – (11,680) 14 – $ 51,386 $ (9,593) $ 41,793 $ (17,965) $ (21,481) $ 2,347 $ 1,226 $ 23,271 2,024 27,971 $ 53,266 $ 28,807 2,518 11,694 $ 43,019 (1) Comprises amounts related to financial instruments which qualify for offsetting. Effective beginning in 2017, derivatives cleared through the Chicago Mercantile Exchange (CME) are considered to be settled-to-market and not collateralized-to-market. Derivatives which are settled-to-market are settled on a daily basis, resulting in derecognition, rather than offsetting, of the related amounts. As a result, settled-to-market amounts are no longer considered to be subject to enforceable netting arrangements. In the absence of this change, an amount of $230 million as at October 31, 2017 relating to derivatives cleared through CME would otherwise have been considered to be offset on the consolidated balance sheet. (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, exchange-traded derivatives and derivatives which are settled-to- market. 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. CIBC 2017 ANNUAL REPORT 169 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 2017 (1) 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 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 $ $ $ $ $ $ $ $ $ $ $ $ 11,017 – 495 180 11,692 3,922 – 254 142 41 4,359 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 $ $ $ $ $ $ $ $ $ $ $ $ 8 1,371 – – 1,379 – 226 – – – 226 9 1,386 – – 1,395 – 199 – – – 199 16 1,293 – – 1,309 – 230 – – – 230 AFS – 496 – – 496 – – – – – – – 383 – – 383 – – – – – – – 227 – – 227 – – – – – – $ $ $ $ $ $ $ $ $ $ $ $ HTM FVO Total $ $ $ $ $ $ $ $ $ $ $ $ – 20 – – 20 – – – – – – – – – – – – – – – – – – – – – – – – – – – – $ $ $ $ $ $ $ $ $ $ $ $ 3 3 – – 6 31 – – – – 31 – 5 – – 5 18 – – – – 18 – 4 – – 4 25 – – – – 25 $ $ $ $ $ $ $ $ $ $ $ $ 11,028 1,890 495 180 13,593 3,953 226 254 142 41 4,616 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 (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. 170 CIBC 2017 ANNUAL REPORT Consolidated financial statements Note 32 Future accounting policy changes IFRS 9 “Financial Instruments” (IFRS 9) 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 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 restate our prior period comparative consolidated financial statements when we adopt the requirements of the new standard. Differences in the carrying amounts of financial instruments resulting from the adoption of IFRS 9 will be recognized in our opening November 1, 2017 retained earnings and AOCI as if we had always followed the new requirements. As permitted, we have elected to continue to apply the hedge accounting requirements of IAS 39. The key changes to our accounting policies and the expected impact resulting from the adoption of IFRS 9 are described below. The application of IFRS 9 is expected to reduce our shareholders’ equity by approximately $100 million on an after tax basis as at November 1, 2017. The impact to our regulatory capital is not expected to be material. 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 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 will 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. As a result of the application of the classification and measurement requirements of IFRS 9, we expect to make the following reclassifications: Debt securities in our treasury portfolios of approximately $5.0 billion will be reclassified from AFS under IAS 39 to amortized cost under IFRS 9 with the majority of the remaining treasury securities reclassified to FV-OCI; Debt securities in our U.S. Commercial Banking and Wealth Management SBU of approximately $2.4 billion will be reclassified from HTM under IAS 39 to amortized cost under IFRS 9; Securities in our Capital Markets SBU, including certain lease-backed securities, of approximately $1 billion will be reclassified from AFS under IAS 39 to FVTPL under IFRS 9. Additional securities of approximately $1 billion will be reclassified from AFS under IAS 39 to amortized cost under IFRS 9. In addition, loans in our Capital Markets SBU, including certain lease-backed instruments, of approximately $400 million will be reclassified as FVTPL under IFRS 9; and The majority of our equity securities classified as AFS under IAS 39 to FV-OCI for equities under IFRS 9. (cid:129) (cid:129) (cid:129) (cid:129) 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. Expected Credit Loss Methodology The application of ECL will significantly change our credit loss methodology and models. ECL allowances represent credit losses that reflect an unbiased and probability-weighted amount which is determined by evaluating a range of possible outcomes, the time value of money and reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. ECL allowances will be measured at amounts equal to either: (i) 12-month ECL; or (ii) lifetime ECL for those financial instruments which have experienced a significant increase in credit risk (SICR) since initial recognition or when there is objective evidence of impairment. This compares to the present incurred loss model that incorporates a single best estimate, the time value of money and information about past events and current conditions and which recognizes lifetime credit losses when there is objective evidence of impairment and also allowances for incurred but not identified credit losses. Stage Migration and Significant Increase in Credit Risk Financial instruments subject to the ECL methodology are categorized into three stages. For non-impaired financial instruments: Stage 1 is comprised of all non-impaired financial instruments which have not experienced a SICR since initial recognition. Entities are required to recognize 12 months of ECL for stage 1 financial instruments. 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. CIBC 2017 ANNUAL REPORT 171 Consolidated financial statements Stage 2 is comprised of all non-impaired financial instruments which have experienced a SICR since initial recognition. Entities are required to recognize lifetime ECL for stage 2 financial instruments. In subsequent reporting periods, if the credit risk of the financial instrument improves such that there is no longer a SICR since initial recognition, then entities shall revert to recognizing 12 months of ECL. In contrast to stage 1 and stage 2, inherent within the incurred loss methodology under IAS 39, allowances are provided for non-impaired financial instruments for credit losses that are incurred but not yet identified. For impaired financial instruments: Financial instruments are classified as stage 3 when there is objective evidence of impairment as a result of one or more loss events that have occurred after initial recognition with a negative impact on the estimated future cash flows of a loan or a portfolio of loans. The ECL model requires that lifetime ECL be recognized for impaired financial instruments, which is similar to the current requirements under IAS 39 for impaired financial instruments. For our business and government portfolios, the individually assessed allowances for impaired instruments recognized under IAS 39 will generally be replaced by stage 3 allowances under IFRS 9, while the collective allowances for non-impaired financial instruments 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 financial instruments 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. IFRS 15 “Revenue From Contracts with Customers” (IFRS 15) IFRS 15 – issued in May 2014, replaces prior guidance, including IAS 18 “Revenue” and IFRIC 13 “Customer Loyalty Programmes”. In April 2016, the IASB issued amendments to the standard that clarified specific guidance and provided additional transitional relief. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, which for us will be on November 1, 2018, and can be applied on a retrospective basis or using a modified retrospective approach. We plan to adopt IFRS 15 using the modified retrospective approach by recognizing the cumulative effect of initial application in opening retained earnings as of the effective date. Use of the modified retrospective approach will require us to provide additional disclosures in the year of adoption that would not be required if we apply the standard on a retrospective basis. The new guidance includes a five-step, principles-based recognition and measurement approach, as well as requirements for accounting for contract costs, and enhanced quantitative and qualitative disclosure requirements. IFRS 15 excludes from its scope revenue related to lease contracts, insurance contracts and financial instruments. As a result, the majority of our revenue will not be impacted by the adoption of this standard, including net interest income. We continue to evaluate the effect of this standard on our financial statements, including the presentation of revenue and expense items, and the timing and measurement of revenue for certain types of contracts. We do not currently expect a material impact to our consolidated financial statements as a result of adopting this standard. IFRS 16 “Leases” (IFRS 16) IFRS 16 – 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. We continue to evaluate the impact of IFRS 16 on our consolidated financial statements. IFRS 17 “Insurance Contracts” (IFRS 17) IFRS 17 – issued in May 2017, replaces IFRS 4 “Insurance Contracts”, and is effective for annual periods beginning on or after January 1, 2021, which for us will be on November 1, 2021. IFRS 17 provides comprehensive guidance on the recognition, measurement, presentation and disclosures of insurance contracts. We continue to evaluate the impact of IFRS 17 on our consolidated financial statements. 172 CIBC 2017 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 Net income attributable to non-controlling interests Preferred shareholders Common shareholders $ $ $ 2,464 1,805 4,269 229 2,570 1,470 306 1,164 5 24 1,135 $ $ $ 2,276 1,828 4,104 209 2,452 1,443 346 1,097 4 9 1,084 $ $ $ 2,095 1,603 3,698 179 2,275 1,244 194 1,050 5 10 1,035 2017 (1) Jan. 31 $ $ $ 2,142 2,067 4,209 212 2,274 1,723 316 1,407 5 9 1,393 Net income attributable to equity shareholders $ 1,159 $ 1,093 $ 1,045 $ 1,402 Oct. 31 Jul. 31 Apr. 30 $ $ $ $ 2,110 1,571 3,681 222 2,347 1,112 181 931 4 10 917 927 $ $ $ 2,113 2,023 4,136 243 2,218 1,675 234 1,441 6 9 1,426 $ 1,435 $ $ $ $ 2,037 1,594 3,631 324 2,242 1,065 124 941 5 10 926 936 2016 Jan. 31 2,106 1,481 3,587 262 2,164 1,161 179 982 5 9 968 977 $ $ $ $ (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. Condensed consolidated balance sheet Unaudited, $ millions, as at Oct. 31 Jul. 31 Apr. 30 2017 (1) Jan. 31 Oct. 31 Jul. 31 Apr. 30 2016 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 $ 14,152 $ 93,419 19,917 $ 88,380 14,403 $ 96,069 15,389 $ 89,524 14,165 $ 87,423 13,128 $ 84,965 11,455 79,599 $ 12,629 78,503 45,418 45,072 43,842 44,556 33,810 36,460 35,722 34,811 207,271 53,315 97,766 (1,618) 24,342 8,824 22,375 203,387 52,908 94,913 (1,598) 26,370 9,383 22,180 196,580 51,395 75,593 (1,639) 25,612 8,823 17,913 191,888 50,401 73,274 (1,640) 23,897 8,171 17,834 187,298 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 $ 565,264 $ 560,912 $ 528,591 $ 513,294 $ 501,357 $ 494,490 $ 478,144 $ 479,032 $ 159,327 $ 225,622 13,789 40,968 23,271 8,828 158,296 $ 225,342 15,741 39,978 28,151 9,384 154,762 $ 203,217 17,401 37,748 24,345 8,825 150,380 $ 205,602 17,117 36,654 25,923 8,173 148,081 $ 190,240 17,842 39,484 28,807 12,395 145,731 $ 187,736 16,541 39,565 30,225 13,504 43,708 15,305 3,209 31,237 37,196 13,607 3,195 30,022 38,955 14,157 3,305 25,876 28,995 12,422 3,302 24,726 24,550 12,919 3,366 23,673 22,801 12,266 3,400 22,721 142,853 177,287 11,424 37,146 32,744 13,272 26,358 11,934 3,354 21,772 $ 142,583 183,423 12,638 38,590 35,702 10,579 18,474 11,693 3,385 21,965 $ 565,264 $ 560,912 $ 528,591 $ 513,294 $ 501,357 $ 494,490 $ 478,144 $ 479,032 (1) Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. CIBC 2017 ANNUAL REPORT 173 Select financial measures Unaudited, as at or for the three months ended Oct. 31 Jul. 31 Apr. 30 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 15.8 % 0.81 % 16.3 % 0.80 % 17.7 % 0.82 % 2017 (1) Jan. 31 24.4 % 1.06 % Oct. 31 Jul. 31 Apr. 30 16.8 % 0.70 % 26.8 % 1.12 % 18.0 % 0.76 % 2016 Jan. 31 18.1 % 0.79 % $ 28,471 $ 568,905 20.0 $ 26,447 $ 543,138 20.5 $ 23,932 $ 528,099 22.1 $ 22,674 $ 528,852 23.3 $ 21,763 $ 527,702 24.2 $ 21,198 $ 511,925 24.1 $ 20,899 $ 502,408 24.0 $ 21,233 $ 494,379 23.3 10.6 % 12.1 % 13.8 % 4.0 % 1.72 % 60.2 % 10.4 % 11.9 % 13.7 % 3.9 % 1.66 % 59.7 % 12.2 % 13.5 % 15.4 % 4.1 % 1.63 % 61.5 % 11.9 % 13.2 % 15.2 % 4.0 % 1.61 % 54.0 % 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 % (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. Common share information Unaudited, as at or for the three months ended Oct. 31 Jul. 31 Apr. 30 2017 (1) Jan. 31 Oct. 31 Jul. 31 Apr. 30 2016 Jan. 31 Weighted-average basic shares outstanding (thousands) (2)(3) Per share – basic earnings – diluted earnings – dividends – book value (4) Share price (5) – high – low – close 437,109 415,561 399,807 397,647 395,181 394,753 394,679 396,927 $ $ 2.60 2.59 1.30 66.55 114.01 104.10 113.56 2.61 2.60 1.27 64.29 109.57 104.87 108.22 $ 2.59 2.59 1.27 61.42 119.86 109.71 110.25 $ 3.50 3.50 1.24 58.90 113.16 97.76 110.81 $ 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 Dividend payout ratio 50.1 % 50.9 % 49.0 % 35.4 % 52.2 % 33.5 % 50.2 % 47.3 % Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (1) (2) Excludes 2,010,890 common shares which are issued and outstanding but which have not been acquired by a third party as at October 31, 2017 (October 31, 2016: nil). These shares were issued as a component of our acquisition of The PrivateBank. These shares are currently held on behalf of CIBC, and may be cancelled at CIBC’s discretion. (3) Excludes 190,285 unvested restricted shares as at October 31, 2017 (October 31, 2016: nil). (4) Common shareholders’ equity divided by the number of common shares issued and outstanding at end of period. (5) The high and low price during the period, and closing price on the last trading day of the period, on the TSX. 174 CIBC 2017 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 $ $ 2017 (1) 2016 2015 2014 2013 2012 $ 8,977 $ 7,303 8,366 $ 6,669 7,915 $ 5,941 7,459 $ 5,904 7,453 $ 5,252 7,326 $ 5,159 16,280 829 9,571 5,880 1,162 – 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 – 4,718 $ 4,295 $ 3,590 $ 3,215 $ 3,350 $ 3,303 $ 19 $ 20 $ 14 $ (3) $ (2) $ 9 $ Preferred shareholders Common shareholders 52 4,647 38 4,237 45 3,531 87 3,131 99 3,253 158 3,136 Net income (loss) attributable to 2011 7,062 5,373 12,435 1,144 7,486 3,805 927 – 2,878 11 177 2,690 2010 2009 $ 6,204 $ 5,881 5,394 $ 4,534 12,085 1,046 7,027 4,012 1,533 27 9,928 1,649 6,660 1,619 424 21 2008 5,207 (1,493) 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) equity shareholders $ 4,699 $ 4,275 $ 3,576 $ 3,218 $ 3,352 $ 3,294 $ 2,867 $ 2,452 $ 1,174 $ (2,060) (1) Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. Condensed consolidated balance sheet Unaudited, $ millions, as at October 31 2017 (1) 2016 2015 2014 2013 2012 2011 2010 2009 2008 IFRS Canadian GAAP Assets Cash and deposits with banks Securities Securities borrowed or purchased $ 14,152 $ 93,419 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 $ 77,576 8,959 79,171 under resale agreements 45,418 33,810 33,334 36,796 28,728 28,474 27,479 37,342 32,751 35,596 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 (2) Other liabilities Subordinated indebtedness Preferred share liabilities Non-controlling interests Shareholders’ equity 207,271 53,315 97,766 (1,618) 24,342 187,298 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 8,824 22,375 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 $ 565,264 $ 501,357 $ 463,309 $ 414,903 $ 398,006 $ 393,119 $ 383,758 $ 352,040 $ 335,944 $ 353,930 $ 159,327 $ 148,081 $ 137,378 $ 130,085 $ 125,034 $ 118,153 $ 116,592 117,143 4,177 51,308 28,792 9,489 134,736 5,592 49,802 19,724 9,721 125,055 4,723 52,413 27,091 10,481 148,793 7,732 38,783 21,841 9,212 178,850 10,785 39,644 29,057 9,796 225,622 13,789 40,968 23,271 8,828 190,240 17,842 39,484 28,807 12,395 $ 113,294 $ 108,324 $ 127,759 5,618 – 26,489 7,684 107,209 7,584 – 27,162 8,397 43,708 n/a 15,305 3,209 – 202 31,035 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 99,477 117,772 15,703 – 32,742 8,848 44,947 – 13,167 6,658 600 185 13,831 $ 565,264 $ 501,357 $ 463,309 $ 414,903 $ 398,006 $ 393,119 $ 383,758 $ 352,040 $ 335,944 $ 353,930 Includes the balances of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (1) (2) Commencing November 1, 2012, CIBC Capital Trust was deconsolidated. n/a Not applicable. CIBC 2017 ANNUAL REPORT 175 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 (2) Total capital ratio (2) Net interest margin Efficiency ratio 2017 (1) 2016 18.3 % 0.87 % 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) % Canadian GAAP $ 25,393 $ 542,365 $ 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 21.4 23.9 24.1 24.1 10.6 % 12.1 % 13.8 % 4.0 % n/a n/a 1.66 % 58.8 % 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 % 26.6 9.4 11.6 14.6 n/a n/a n/a 1.85 % 59.9 % 28.1 32.5 29.4 32.7 30.6 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 Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (1) (2) 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 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 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 $ 23,673 $ 21,553 $ 18,783 $ 17,994 $ 16,367 $ 16,091 $ 14,799 $ 14,275 $ 13,831 $ 13,489 IFRS Canadian GAAP – – – 797 4,522 65 (338) 4,699 (52) (2,121) 1 (9) – (209) – – 213 (4) (248) 4,275 (38) (1,879) 8 2 – (9) – (31) 31 1 933 3,576 (45) (1,708) 29 (7) – (1) (250) 7 (2) (422) – – (675) 29 (7) 145 3,218 (87) (1,567) (11) (6) – (16) (3) 325 3,352 (99) (1,523) 5 1 (180) (118) (30) (1,050) 393 (8) (435) 3,294 (128) (1,470) 8 – – – (12) (400) 572 (5) (171) 2,867 (165) (1,391) (4) 1 – (3) – – (6) (4) – – (66) (5) – – – 563 4 9 2,452 (169) (1,350) – 6 525 178 (4) 72 1,174 (162) (1,328) – (5) 300 2,926 – 650 (2,060) (119) (1,285) – (4) $ 31,237 $ 23,673 $ 21,553 $ 18,783 $ 17,994 $ 16,367 $ 16,091 $ 15,790 $ 14,275 $ 13,831 (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. 176 CIBC 2017 ANNUAL REPORT Common share information Unaudited, as at or for the year ended October 31 Weighted-average number basic shares outstanding (thousands) (2)(3) Per share – basic earnings (loss) – diluted earnings (loss) (4) – dividends – book value (5) $ Share price (6) – high – low – close IFRS Canadian GAAP 2017 (1) 2016 2015 2014 2013 2012 2011 2010 2009 2008 412,636 395,389 397,213 397,620 400,880 403,685 396,233 387,802 381,677 370,229 $ 11.26 11.24 5.08 66.55 119.86 97.76 113.56 $ 10.72 10.70 4.75 56.59 104.46 83.33 100.50 $ 8.89 8.87 4.30 51.25 107.16 86.00 100.28 $ 7.87 7.86 3.94 44.30 107.01 85.49 102.89 $ 8.11 8.11 3.80 40.36 88.70 74.10 88.70 7.77 7.76 3.64 35.83 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 2.65 $ 2.65 3.48 28.96 69.30 37.10 62.00 >100 % (5.89) (5.89) 3.48 29.40 99.81 49.00 54.66 n/m Dividend payout ratio 45.6 % 44.3 % 48.4 % 50.0 % 46.8 % 46.9 % 51.7 % 59.1 % Includes the results of CIBC Bank USA following the completion of the acquisition on June 23, 2017. See Note 3 for additional details. (1) (2) Excludes 2,010,890 common shares which are issued and outstanding but which have not been acquired by a third party as at October 31, 2017 (2016: nil). These shares were issued as a component of our acquisition of The PrivateBank. These shares are currently held on behalf of CIBC, and may be cancelled at CIBC’s discretion. (3) Excludes 190,285 unvested restricted shares as at October 31, 2017 (2016: nil). (4) 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. (5) Common shareholders’ equity divided by the number of common shares issued and outstanding at end of year. (6) 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 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 Series 45 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 $ – – – – – – – – – – – – – 0.9750 0.9375 0.9000 0.4551 $ – – – – – – – – – – – – – 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) 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 2017 ANNUAL REPORT 177 Glossary Allowance for credit losses An allowance set up in the financial statements sufficient to absorb expected credit losses in CIBC’s portfolio of loans, acceptances, debt securities, letters of credit and guarantees. 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. 178 CIBC 2017 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. 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. Operating leverage Operating leverage is the difference between the year-over-year percent change in revenue (on a taxable equivalent basis) and year-over-year percent change in 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 expected credit losses in CIBC’s portfolio of loans, acceptances, debt securities, letters of credit and guarantees. CIBC 2017 ANNUAL REPORT 179 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 entities (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. 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. 180 CIBC 2017 ANNUAL REPORT 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 Basel Committee on Banking Supervision (BCBS) standards. During the period beginning in the third quarter of 2014 to the fourth quarter of 2018, on an all-in basis, before any capital floor requirement, there are three different levels of RWAs for the calculation of CIBC’s CET1, Tier 1 and Total capital ratios. This occurs because of the option CIBC has chosen 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). Leverage exposure For the purposes of the leverage ratio, exposure is defined under the rules as on-balance sheet assets (unweighted) less Tier 1 capital regulatory adjustments plus derivative exposures, securities financing transaction exposures with a limited form of netting under certain conditions, and other off- balance sheet exposures (such as commitments, direct credit substitutes, forward asset purchases, standby/trade letters of credit, securitization exposures). Leverage ratio Defined as Tier 1 capital divided by leverage exposure determined in accordance with guidelines issued by OSFI, which are based on BCBS standards. Liquidity coverage ratio (LCR) Derived from the BCBS’ Basel III framework and incorporated into OSFI’s Liquidity Adequacy Requirements (LAR), the 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. CIBC 2017 ANNUAL REPORT 181 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. 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 resulting from people, inadequate or failed internal processes, 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. An 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. 182 CIBC 2017 ANNUAL REPORT Sovereign exposures All direct credit risk exposures to governments, central banks and certain public sector entities, and exposures guaranteed by those entities. Standardized approach for credit risk Applied to exposures when there is not sufficient information to allow for the use of 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 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 the risk primarily 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 2017 ANNUAL REPORT 183 Shareholder information Fiscal Year November 1st to October 31st Key Dates Reporting dates 2018 First quarter results – Thursday, February 22, 2018 Second quarter results – Wednesday, May 23, 2018 Third quarter results – Thursday, August 23, 2018 Fourth quarter results – Thursday, November 29, 2018 Annual Meeting of Shareholders 2018 CIBC’s Annual Meeting of Shareholders will be held on Thursday, April 5, 2018, at 9:30 a.m. (Atlantic Daylight Time) in Halifax at the Halifax Convention Centre, 4th floor Ballroom, 1650 Argyle Street, Halifax, NS, Canada, B3J 2V9. 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 2017: Common shares Ex-dividend date Sep 27/17 Jun 26/17 Mar 24/17 Dec 22/16 Preferred shares Stock Ticker symbol Quarterly dividend Record date Sep 28/17 Jun 28/17 Mar 28/17 Dec 28/16 Series 39 CM.PR.O $0.24375 2018 dividend payment dates (Subject to approval by the CIBC Board of Directors) Record dates December 28, 2017 March 28, 2018 June 28, 2018 September 28, 2018 Payment dates January 29, 2018 April 27, 2018 July 27, 2018 October 29, 2018 Payment date Dividends per share Number of common shares on record date Oct 27/17 Jul 28/17 Apr 28/17 Jan 27/17 Series 41 CM.PR.P $0.234375 $1.30 $1.27 $1.27 $1.24 Series 43 CM.PR.Q $0.22500 439,634,011 436,213,524 399,805,117 397,831,296 Series 45 CM.PR.R $0.27500 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. Normal course issuer bid CIBC is conducting a normal course issuer bid to purchase common shares for cancellation in the open market at market price until the earlier of: (i) CIBC purchasing 8 million common shares, (ii) CIBC providing a notice of termination, or (iii) March 13, 2018. A copy of the Notice of Intention to Make a Normal Course Issuer Bid that CIBC filed with the Toronto Stock Exchange may be obtained without charge by contacting the Corporate Secretary. 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 73 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 AST Trust Company (Canada) (formerly 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: AST Trust Company (Canada), P.O. Box 700, Postal Station B, Montreal, QC, H3B 3K3 416 682-3860 or 1 800 258-0499 (Canada and the U.S. only), Fax 1 888 249-6189, Email: inquiries@astfinancial.com, Website: www.astfinancial.com. Common and preferred shares are transferable in Canada at the offices of our agent, AST Trust Company (Canada), 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. 184 CIBC 2017 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 Investor Relations Call: 416 956-6996 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 CIBC Telephone Banking Toll-free across Canada: 1 800 465-2422 Communications and Public Affairs 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 2017 Additional print copies of the Annual Report will be available in March 2018 and may be obtained by calling 416 956-6996 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 2018 et peuvent être commandés au 416 956-6996 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 2017 This report reviews our economic, environmental, social and governance activities over the past year and will be available in March 2018 at www.cibc.com/ca/cibc-and-you/public-account.html. Management Proxy Circular 2018 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 2018 Proxy Circular will be available in March 2018 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 its subsidiaries in Canada and/or other countries include, the CIBC logo, the 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”, “Simplii Financial” 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 2017 ANNUAL REPORT 185 Board of Directors: The 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 Kevin J. Kelly (AC) Corporate Director Toronto, Ontario, Canada Joined in 2013 Katharine B. Stevenson (CGC – Chair, MRCC) Corporate Director Toronto, Ontario, Canada Joined in 2011 Gary F. Colter (AC, CGC) President CRS Inc. Mississauga, Ontario, Canada Joined in 2003 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 Luc Desjardins (AC) President and Chief Executive Officer Superior Plus Corp. Toronto, Ontario, Canada Joined in 2009 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 Michelle L. Collins (RMC) President Cambium LLC Chicago, Illinois, U.S.A. Joined in 2017 Victor G. Dodig President and Chief Executive Officer CIBC Toronto, Ontario, Canada Joined in 2014 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 186 CIBC 2017 ANNUAL REPORT Our Vision and Values Our vision is to be the leader in client relationships. Our vision comes to life through our values of Trust, Teamwork and Accountability. We strive to demonstrate our values in our everyday decisions, actions and interactions with our clients, team members, communities, and shareholders. Profile CIBC is a leading Canadian-based global financial institution. $50 10.6% BILLION Market Capitalization Basel III Common Equity Tier 1 capital ratio Across Personal and Small Business Banking, Commercial Banking and Wealth Management, and Capital Markets businesses – our 45,000 employees provide a full range of financial products and services to 11 million personal banking, business, public sector and institutional clients in Canada, the United States and around the world. Creating Value for Our Shareholders At CIBC, we are committed to delivering sustainable earnings growth to our shareholders and creating a relationship- focused bank for our clients. We continue to identify initiatives to free up resources and allow us to reinvest in our business to accelerate revenue growth and reduce our structural cost base. We will do so with a keen focus on industry-leading fundamentals in capital, expenses and risk management. 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 confidence 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. CIBC’s online 2017 Corporate Responsibility Report and Public Accountability Statement will be available in March 2018 at www.cibc.com 6 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 We have a rich history of helping people, businesses and communities grow and prosper. We are extraordinarily proud to mark our 150th anniversary, a major milestone in our history. All paper used in the production of the CIBC 2017 Annual Report is Forest Stewardship Council® (FSC®) certified. 

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