Canadian Imperial Bank of Commerce
Annual Report 2019

Plain-text annual report

C I B C 2 0 1 9 A N N U A L R E P O R T 2 0 1 9 A N N U A L R E P O R T $50 BIllION Market Capitalization 11.6% Basel III CET1 Ratio 10 MIllION Clients Who We Are CIBC is a leading North American financial institution with a market capitalization of $50 billion and a Basel III Common Equity Tier 1 capital ratio of 11.6%. 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 10 million personal banking, business, public sector and institutional clients in Canada, the U.S. and around the world. Our Purpose CIBC’s purpose is to help make your ambition a reality. Our Strategy At CIBC, we’re building a relationship-oriented bank for a modern world that delivers superior client experience and shareholder returns by focusing on four key areas: 1. Delivering a modern relationship-banking value proposition to our clients 2. Diversifying our earnings growth 3. Optimizing our operational efficiency 4. Maintaining capital and balance sheet discipline Creating Value for Our Shareholders At CIBC, we are committed to delivering sustainable earnings growth to our shareholders and creating a relationship-oriented bank for our clients. We continue to identify initiatives to free up resources that 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. Table of Contents 2019 Performance at a Glance 94 Consolidated Financial Statements ii Message from the President and Chief Executive Officer iv Executive Team vii Message from the Chair of the Board viii Enhanced Disclosure Task Force 1 Management’s Discussion and Analysis 108 Notes to the Consolidated Financial Statements 191 Quarterly Review 193 Ten-Year Statistical Review 196 Glossary 202 Shareholder Information 2 0 1 9 A N N U A L R E P O R T FSC Logo All paper used in the production of the CIBC 2019 Annual Report is Forest Stewardship Council® (FSC®) certified. C I B C 2 0 1 9 A N N U A L R E P O R T 2 0 1 9 A N N U A L R E P O R T $50 BIllION Market Capitalization 11.6% Basel III CET1 Ratio 10 MIllION Clients Who We Are CIBC is a leading North American financial institution with a market capitalization of $50 billion and a Basel III Common Equity Tier 1 capital ratio of 11.6%. 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 10 million personal banking, business, public sector and institutional clients in Canada, the U.S. and around the world. Our Purpose CIBC’s purpose is to help make your ambition a reality. Our Strategy At CIBC, we’re building a relationship-oriented bank for a modern world that delivers superior client experience and shareholder returns by focusing on four key areas: 1. Delivering a modern relationship-banking value proposition to our clients 2. Diversifying our earnings growth 3. Optimizing our operational efficiency 4. Maintaining capital and balance sheet discipline Creating Value for Our Shareholders At CIBC, we are committed to delivering sustainable earnings growth to our shareholders and creating a relationship-oriented bank for our clients. We continue to identify initiatives to free up resources that 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. Table of Contents 2019 Performance at a Glance 94 Consolidated Financial Statements ii Message from the President and Chief Executive Officer iv Executive Team vii Message from the Chair of the Board viii Enhanced Disclosure Task Force 1 Management’s Discussion and Analysis 108 Notes to the Consolidated Financial Statements 191 Quarterly Review 193 Ten-Year Statistical Review 196 Glossary 202 Shareholder Information 2 0 1 9 A N N U A L R E P O R T FSC Logo All paper used in the production of the CIBC 2019 Annual Report is Forest Stewardship Council® (FSC®) certified. 2019 Performance at a Glance In 2019, as a purpose-driven bank, we advanced our client-focused strategy and delivered solid performance for our shareholders. Financial Scorecard Financial Highlights For the year ended October 31 (Canadian $ in billions, except as noted) Financial results Revenue Provision for credit losses Expenses Reported/Adjusted net income(1) Financial measures (%) Reported/Adjusted efficiency ratio(1) Reported/Adjusted return on common shareholders’ equity (ROE)(1) Net interest margin Total shareholder return Common share information Reported/Adjusted earnings per share(1) Market capitalization Dividends (%) Dividend yield Reported/Adjusted dividend payout ratio(1) 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 2018 17.8 0.9 10.3 5.3/5.5 57.5/55.6 16.6/17.4 1.68 4.7 11.65/12.21 50.3 4.7 45.5/43.4 2.5 1.3 0.6 1.1 2019 18.6 1.3 10.9 5.1/5.4 58.3/55.5 14.5/15.4 1.65 4.2 11.19/11.92 50.0 5.0 49.9/46.9 2.3 1.3 0.7 0.9 Target 2019 Reported Results 2019 Adjusted Results(1) Earnings per share (EPS) growth 5%–10% on average, annually $11.19, down 4% from 2018 $11.92, down 2% from 2018 Return on equity (ROE) 15%+ 14.5% 15.4% Efficiency ratio 52% run rate in 2022(2) 58.3%, increased 80 basis points from 2018 55.5%, an improvement of 10 basis points from 2018 Basel III CET1 ratio Strong buffer to regulatory minimum 11.6% Dividend payout ratio 40%–50% 49.9% 46.9% Total shareholder return Outperform the S&P/TSX Composite Banks Index over a rolling five-year period CIBC – 38.4% Banks Index – 51.3% (1) For additional information, see the “Non-GAAP measures” section of the MD&A. (2) Medium-term through the cycle. Environmental, Social and Governance (ESG) Scorecard Reported revenue ($ billions) 18.6 17.8 16.3 Reported earnings per share ($) 11.24 11.65 11.19 Adjusted earnings per share(1) ($) 12.21 11.92 11.11 Dividend ($/share) 5.32 5.60 5.08 EnvIROnMEnT 17 18 19 17 18 19 17 18 19 17 18 19 SOCIAL CIBC Client Experience Net Promoter Score Index(2) Business mix % adjusted net income(1) 13% 17% 1% 24% 60.9 2019 45% Canadian Personal and Small Business Banking 24% Canadian Commercial Banking and Wealth Management 45% 17% Capital Markets 13% U.S. Commercial Banking and Wealth Management 1% Corporate and Other GOvERnAnCE 2019 Progress Goal • Achieved 17% of our 10-year goal for • $150 billion in support for environmental and sustainable finance(3) sustainable financing over 10 years (2018–2027) • 7% reduction in greenhouse gas (GHG) emissions(4) • 10% reduction in GHG emissions from our operations over five years (2019–2023) • CIBC Client Experience Net Promoter Score Index • Continuous improvement year over year was 60.9 • CIBC’s Engagement score of 89% or 109.9% of the global financial services norm exceeded our target • 109% of the global financial services norm • 32% women in boarded executive roles • At a minimum, between 35% and 40% women • Invested $78 million in community organizations across Canada and the U.S., including $57 million in corporate contributions and $21 million in employee-led fundraising and giving in board-approved executive roles by the end of 2022 (global) • $350 million over five years (2019–2023) in total corporate and employee giving • 47% women on the CIBC Board of Directors • At least 30% women on the CIBC Board of • 100% of non-executive directors on the Board Directors are independent • A substantial majority of independent directors • 100% of employees completed ethical • 100% completion rate training on our Code of Conduct Responsible Finance Climate Change Client Experience Employee Engagement Inclusion and Diversity Community Investment Corporate Governance Business Ethics (1) For additional information, see the “Non-GAAP measures” section of the MD&A. (2) Index based on internal NPS scores from across all of our SBUs. (3) 17% is for the combined results of 2018 and 2019 and is an estimate as the final taxonomy is still under development. (4) Applies only to CIBC’s Canadian-based real estate operations (Scope 1 and 2 GHG emissions which have not been adjusted to exclude the impacts of weather or other factors) and is based on unassured data. Third-party assured data will be published in CIBC’s 2019 Sustainability Report in March 2020. Sustainable Banking for a Modern World sustainability is at the heart of CIBC’s purpose: to help make your ambitions a reality. Inspired by this purpose, we integrate sustainability into everything we do, focusing on environmental, social and governance (esG) matters of importance to our stakeholders. Building on responsible business practices that we have embedded across CIBC, we are taking action to further reduce environmental impacts across our value chain, support programs that foster an inclusive and healthy society, and integrate best-in-class governance practices to create a sustainable future. Client Focus Responsible Banking Our purpose – to help make our clients’ ambitions a reality – is more than just words. It ensures we treat our clients with genuine care, professionalism and deliver excellence every day. By understanding their unique needs, and making their goals our own, we have the power to change our clients’ lives for the better. As our business and clients face new and intensifying environmental, social and economic challenges, we are working on all fronts to address them. Through our lending and investment decisions, and the actions we’re taking on climate change, we’re embracing our responsibility as a major North American bank to drive sustainable growth and support the low-carbon economy. Culture Building Community We’re a collaborative global team of 45,000 members driven by a shared purpose. We are guided by our core values of trust, teamwork and accountability, within an inclusive CIBC culture where our team members can realize their goals, are empowered to excel, and are appreciated for their contributions. As a relationship-focused bank, we are eager to build strong connections with community organizations and leaders, so that we can boost their ability to tackle important challenges facing society. For more than 150 years, CIBC has been a strong community partner – making a positive impact through our corporate giving, sponsorships and the volunteer spirit of our team members. Governance Good governance is the foundation of our business sustainability and underpins CIBC’s purpose. From our high ethical standards for team members and constant vigilance in safeguarding client interests to our robust controls around accountability, disclosure and risk management, strong practices are embedded across our organization. CIBC’s 2019 Sustainability Report will be available in March 2020 at www.cibc.com m o c . s l l i m n a y r b . w w w . d t L s l l i M n a y r B y b d e n g i s e D 2019 Performance at a Glance In 2019, as a purpose-driven bank, we advanced our client-focused strategy and delivered solid performance for our shareholders. Financial Scorecard Financial Highlights For the year ended October 31 (Canadian $ in billions, except as noted) Financial results Revenue Provision for credit losses Expenses Reported/Adjusted net income(1) Financial measures (%) Reported/Adjusted efficiency ratio(1) Reported/Adjusted return on common shareholders’ equity (ROE)(1) Net interest margin Total shareholder return Common share information Reported/Adjusted earnings per share(1) Market capitalization Dividends (%) Dividend yield Reported/Adjusted dividend payout ratio(1) 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 2018 17.8 0.9 10.3 5.3/5.5 57.5/55.6 16.6/17.4 1.68 4.7 11.65/12.21 50.3 4.7 45.5/43.4 2.5 1.3 0.6 1.1 2019 18.6 1.3 10.9 5.1/5.4 58.3/55.5 14.5/15.4 1.65 4.2 11.19/11.92 50.0 5.0 49.9/46.9 2.3 1.3 0.7 0.9 Target 2019 Reported Results 2019 Adjusted Results(1) Earnings per share (EPS) growth 5%–10% on average, annually $11.19, down 4% from 2018 $11.92, down 2% from 2018 Return on equity (ROE) 15%+ 14.5% 15.4% Efficiency ratio 52% run rate in 2022(2) 58.3%, increased 80 basis points from 2018 55.5%, an improvement of 10 basis points from 2018 Basel III CET1 ratio Strong buffer to regulatory minimum 11.6% Dividend payout ratio 40%–50% 49.9% 46.9% Total shareholder return Outperform the S&P/TSX Composite Banks Index over a rolling five-year period CIBC – 38.4% Banks Index – 51.3% (1) For additional information, see the “Non-GAAP measures” section of the MD&A. (2) Medium-term through the cycle. Environmental, Social and Governance (ESG) Scorecard Reported revenue ($ billions) 18.6 17.8 16.3 Reported earnings per share ($) 11.24 11.65 11.19 Adjusted earnings per share(1) ($) 12.21 11.92 11.11 Dividend ($/share) 5.32 5.60 5.08 EnvIROnMEnT 17 18 19 17 18 19 17 18 19 17 18 19 SOCIAL CIBC Client Experience Net Promoter Score Index(2) Business mix % adjusted net income(1) 13% 17% 1% 24% 60.9 2019 45% Canadian Personal and Small Business Banking 24% Canadian Commercial Banking and Wealth Management 45% 17% Capital Markets 13% U.S. Commercial Banking and Wealth Management 1% Corporate and Other GOvERnAnCE 2019 Progress Goal • Achieved 17% of our 10-year goal for • $150 billion in support for environmental and sustainable finance(3) sustainable financing over 10 years (2018–2027) • 7% reduction in greenhouse gas (GHG) emissions(4) • 10% reduction in GHG emissions from our operations over five years (2019–2023) • CIBC Client Experience Net Promoter Score Index • Continuous improvement year over year was 60.9 • CIBC’s Engagement score of 89% or 109.9% of the global financial services norm exceeded our target • 109% of the global financial services norm • 32% women in boarded executive roles • At a minimum, between 35% and 40% women • Invested $78 million in community organizations across Canada and the U.S., including $57 million in corporate contributions and $21 million in employee-led fundraising and giving in board-approved executive roles by the end of 2022 (global) • $350 million over five years (2019–2023) in total corporate and employee giving • 47% women on the CIBC Board of Directors • At least 30% women on the CIBC Board of • 100% of non-executive directors on the Board Directors are independent • A substantial majority of independent directors • 100% of employees completed ethical • 100% completion rate training on our Code of Conduct Responsible Finance Climate Change Client Experience Employee Engagement Inclusion and Diversity Community Investment Corporate Governance Business Ethics (1) For additional information, see the “Non-GAAP measures” section of the MD&A. (2) Index based on internal NPS scores from across all of our SBUs. (3) 17% is for the combined results of 2018 and 2019 and is an estimate as the final taxonomy is still under development. (4) Applies only to CIBC’s Canadian-based real estate operations (Scope 1 and 2 GHG emissions which have not been adjusted to exclude the impacts of weather or other factors) and is based on unassured data. Third-party assured data will be published in CIBC’s 2019 Sustainability Report in March 2020. Sustainable Banking for a Modern World sustainability is at the heart of CIBC’s purpose: to help make your ambitions a reality. Inspired by this purpose, we integrate sustainability into everything we do, focusing on environmental, social and governance (esG) matters of importance to our stakeholders. Building on responsible business practices that we have embedded across CIBC, we are taking action to further reduce environmental impacts across our value chain, support programs that foster an inclusive and healthy society, and integrate best-in-class governance practices to create a sustainable future. Client Focus Responsible Banking Our purpose – to help make our clients’ ambitions a reality – is more than just words. It ensures we treat our clients with genuine care, professionalism and deliver excellence every day. By understanding their unique needs, and making their goals our own, we have the power to change our clients’ lives for the better. As our business and clients face new and intensifying environmental, social and economic challenges, we are working on all fronts to address them. Through our lending and investment decisions, and the actions we’re taking on climate change, we’re embracing our responsibility as a major North American bank to drive sustainable growth and support the low-carbon economy. Culture Building Community We’re a collaborative global team of 45,000 members driven by a shared purpose. We are guided by our core values of trust, teamwork and accountability, within an inclusive CIBC culture where our team members can realize their goals, are empowered to excel, and are appreciated for their contributions. As a relationship-focused bank, we are eager to build strong connections with community organizations and leaders, so that we can boost their ability to tackle important challenges facing society. For more than 150 years, CIBC has been a strong community partner – making a positive impact through our corporate giving, sponsorships and the volunteer spirit of our team members. Governance Good governance is the foundation of our business sustainability and underpins CIBC’s purpose. From our high ethical standards for team members and constant vigilance in safeguarding client interests to our robust controls around accountability, disclosure and risk management, strong practices are embedded across our organization. CIBC’s 2019 Sustainability Report will be available in March 2020 at www.cibc.com m o c . s l l i m n a y r b . w w w . d t L s l l i M n a y r B y b d e n g i s e D Q1 • Acquisition of The PrivateBank became accretive Q2 • Launched CIBC Global Money Transfer™ for business clients • CIBC confirmed participation in Air Canada’s new loyalty program • CIBC introduced all-encompassing banking offer for physicians Q3 • Announced acquisition of U.S. investment banking firm Cleary Gull • Launched CIBC SmartBanking™ for Business and CIBC SmartPlus Account Q4 • CIBC Private Wealth Management® acquired Lowenhaupt Global Advisors • Announced $150 billion sustainable finance target 2 0 1 9 A N N U A L R E P O R T CIBC 2019 ANNUAL REPORT i Message from the President and Chief Executive Officer In 2019, we made significant progress in building a strong, relationship- oriented bank for a modern world, as we further unlocked the potential of our highly connected team to better serve our clients. CIBC reported solid earnings last year of $5.4 billion on an adjusted basis, as we continued to focus on transforming our bank to further increase client engagement and strengthen our culture. Our adjusted efficiency ratio ended the year at 55.5% and we achieved a return on common shareholders’ equity of 15.4%, helping to enhance shareholder value in a challenging market. Our reported and adjusted diluted EPS declined 4% and 2% respectively. While our performance was solid in the year, our financial results did not reflect the full potential of our bank. We delivered these results against a backdrop of significant changes in the environment. A shifting economic outlook globally has amplified the value of sound, long-term advice for both businesses and individuals. In parallel, technology is reshaping every facet of our society and every industry, including banking. Banks must meaningfully address both of these trends to deliver growth for shareholders and meet the evolving needs of clients. In times where the pace of change is accelerating, a shared purpose is integral. At defining moments of change and transformation throughout our 152-year history, when our clients and communities have needed us most, CIBC has done extraordinary work because of a clear sense of purpose, helping make our clients’ ambitions a reality. As a bank, we exist to serve our clients. This is at the forefront of our thinking and our strategy, and is essential to becoming a leading bank in the modern era. That’s how we focused our investments in 2019, as measured against our strategic priorities of delivering a modern relationship-banking proposition to our clients, diversifying our earnings growth, optimizing our operational efficiency, and maintaining capital and balance sheet discipline. A connected team is a differentiator for us. CIBC is investing in our culture and capabilities to build on the advantage we have in this area. Client relationships can only be retained for the long-term by taking a full view of the business and personal financial needs of clients, and working across business units to deliver integrated solutions. That means having the right people with the right capability, culture, tools and technology to do right by our clients and to make it easy for them to bank with us – whether they are students or start-ups, farmers or families, small businesses or the world’s largest companies or governments. It also means further strengthening our commitment to a sustainable future through a continued focus on environmental, social and governance factors in our business. We’re committed to working with all stakeholders to play a role in furthering these important areas of focus. Investing in relationships for a modern world In 2019, we continued to invest in our people and our business to ensure we are well positioned to meet the needs of our clients as they increasingly engage with us on both sides of the border. Strong connectivity across Capital Markets, Commercial Banking, Wealth Management, and Personal and Small Business Banking is delivering a greater breadth of services and growth opportunities for our bank and our clients. In the U.S., we further strengthened our capabilities with the acquisition of Cleary Gull, a boutique investment banking firm in the U.S. Midwest. This business builds on our established investment banking advisory services by enhancing our capabilities for mid-market, privately-owned businesses, and supports our diversification and growth objectives. We also continued to build our Commercial ii CIBC 2019 ANNUAL REPORT “ In 2019, we continued to invest in our people and our business to ensure we are well positioned to meet the needs of our clients as they increasingly engage with us on both sides of the border.” Victor G. Dodig, President and Chief Executive Officer CIBC 2019 ANNUAL REPORT iii Message from the President and Chief Executive Officer (continued) ExECutIVE tEaM Victor G. Dodig President and Chief Executive Officer Shawn Beber Senior Executive Vice-President, General Counsel and Corporate Development Michael G. Capatides Senior Executive Vice-President and Group Head, U.S. Region; President and CEO, CIBC Bank USA Harry Culham Senior Executive Vice-President and Group Head, Capital Markets Laura Dottori-Attanasio Senior Executive Vice-President and Chief Risk Officer Jon Hountalas Senior Executive Vice-President and Group Head, Commercial Banking and Wealth Management, Canada Deepak Khandelwal Senior Executive Vice-President and Chief Client Experience Officer Christina Kramer Senior Executive Vice-President and Group Head, Personal and Small Business Banking, Canada Hratch Panossian Senior Executive Vice-President and Chief Financial Officer Prior to November 1, 2019 Kevin Glass held this role. 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 iv CIBC 2019 ANNUAL REPORT Banking presence in new markets; CIBC now has offices in 25 U.S. cities. We are taking a high-touch, relationship-oriented approach across borders – and across business lines – to offer banking services to the U.S. private economy. For our personal clients, we are investing to build on our position as a recognized leader in enabling clients to use digital channels for their everyday banking – and, increasingly, to do things that weren’t possible a few short years ago. For example, our clients can now use their mobile device to send money globally with no upfront fee. We continue to transform our banking centres so that we are focused on having essential advice-based conversations with our clients on topics such as buying a new home or sending a child to post-secondary education. Those are moments of truth for all of us, and we want to be there to help our clients realize their ambitions. With over 200 banking centres now operating under our transformed model, we are further empowering local leaders to work together to meet the needs of clients in the communities where they live and work. With relationships at the centre of our strategy, our highly connected and client-focused Capital Markets team is driving growth by staying close to our clients during market volatility. We recognize that our clients’ long-term goals don’t change with short- term market fluctuations, and our team continues to offer advice and innovative solutions to meet our clients’ needs. $8.8 B I L L I O N Revenue, Canadian Personal and Small Business Banking $4.0 B I L L I O N Revenue, Canadian Commercial Banking and Wealth Management Modernizing our bank for the future Part of building good client relationships is making it easy for people to bank with us. This comes from our people, but also the platforms and technology we employ to transform our bank around our clients. This year we made strategic investments to enhance the client experience, modernize and protect our bank and strengthen our industry. For example, in addition to our leadership in mobile and online banking, we became the first major Canadian bank to offer installment plans on credit card purchases over $250 with the CIBC Pace It™ program, helping clients better manage their cash flow. In addition, we launched CIBC SmartBanking™ for Business – a first-of-its-kind banking platform integrating key business functions, such as payroll and accounts payable alongside banking, to help small and medium-sized businesses operate and grow their companies. We also invested in industry- leading investment tools, like the all-in-one CIBC Smart Investment Solutions portfolios, to help our clients navigate changing markets. To protect our clients and prepare our industry for the future of banking, we also made foundational investments in initiatives that are modernizing Canada’s payments industry, combatting money laundering and further strengthening our cyber security. Our people are our greatest asset While technology will help enable our transformation, it is our people that are at the heart of helping our clients achieve their ambitions. We’ve made several significant investments over the past year to help our team be at their best, including enhancements to how we manage performance and lead our team. We’re modernizing the way we work to further our client-focused culture, including our continued migration to cloud-based technologies such as Workday, a unified human resources platform that further aligns our team by providing better tools, data and analytics to enhance business performance. $ $2.0 B I L L I O N Revenue, U.S. Commercial Banking and Wealth Management $2.9 B I L L I O N Revenue, Capital Markets CIBC 2019 ANNUAL REPORT v Message from the President and Chief Executive Officer (continued) Our purpose is the “north star” for our team as we focus on meeting the needs of our clients in a changing world. We’re investing in our leaders today to build the bank of tomorrow through ongoing leadership development that is anchored in our purpose and targeted to the realities of each level of CIBC’s leadership. Our CIBC Leadership Institute, featuring three distinct academies, focuses on building a clear connection between effective leadership and top-line business performance to accelerate the execution of our strategy. We’re also here to help our team members achieve their ambitions by making their goals a priority, empowering them to excel every day, recognizing their achievements and supporting their well-being. This year on our Employee Appreciation Day, we announced that each team member will receive a day each year to invest in realizing their own ambitions. Our Global Workplace Experience Strategy is putting our clients at the centre of all that we do and setting a new standard for how we work together to bring the best of our bank to our team members and clients. The strategy is prioritizing our team’s well-being and providing the tools and space they need to perform at their very best. The cornerstone of the strategy is our new global headquarters, CIBC Square, which will open next year, enabling our team to better connect and collaborate with each other in service of our clients. Each of these enhancements is aimed at ensuring that CIBC continues to attract not just the best and brightest talent to our bank, but also people who share our commitment to clients. We are proud of our consistent recognition as a top employer. For the eighth and seventh straight year respectively, we were recognized as one of Canada’s Top 100 Employers, as well as a Top Employer for Young People. Our inclusive and diverse workplace is a major asset in helping us tap into the potential and strength of our team. Last year we were ranked second among Canadian companies and 57th globally in Equileap’s 2019 Global Top 100 ranking and report for gender equality. We were also included in the Bloomberg Gender Equality Index for our strong commitment to fostering gender-balanced leadership. Our team also made a positive impact on the communities where we live and work again in 2019. Thousands of CIBC team members took part in the Canadian Cancer Society CIBC Run for the Cure, to help create a future without breast cancer. We also made a difference through CIBC Miracle Day, and through our One for Change initiative, which allows team members to contribute to causes that matter to them in their community. Growing our business in 2020 and beyond Our purpose is the “north star” for our team as we focus on meeting the needs of our clients in a changing world. As one highly interconnected team, we will continue to help make our clients’ ambitions a reality on both sides of the border, while making it easier to do business with us. We will further modernize our bank to reflect the way our clients feel about the CIBC of today – an energized, client-centric bank, focused on delivering enduring value for all of our stakeholders. I’m proud of what we have accomplished so far and I’m excited for our future. On behalf of our executive team, thank you to each and every member of our team for your client focus; to our clients – thank you for allowing us to help make your ambition a reality; and to our shareholders – thank you for putting your trust in us, as we build a relationship-oriented bank for a modern world. Victor G. Dodig President and Chief Executive Officer vi CIBC 2019 ANNUAL REPORT Message from the Chair of the Board Creating sustainable value for our stakeholders at CIBC, we recognize the important role we play in supporting and engaging our clients, shareholders, employees and communities in fostering long-term sustainability. In 2019, your Board provided strategic oversight and advice to management as CIBC delivered solid business results and value for our stakeholders. We continue to invest in long-term growth as we build a relationship-oriented bank for a modern world. At CIBC, we believe that having a strong and diverse base of talent at all levels is a key driver of our current and future progress. I am pleased to report that 47% of the directors on your Board are women, exceeding our target for gender diversity. In 2019, we announced several executive appointments that underscore our focus on talent and succession planning, drawing on the depth of the bank’s leadership team and further strengthening our focus on clients. We also continued to focus on increasing diversity. Your Board and senior management team are working closely together on succession planning to advance our purpose-led organization and accelerate our growth. Creating value also means helping address environmental challenges including climate change. Your Board is actively engaging with management on this critical task. This year, CIBC committed to support $150 billion in environmental and sustainable finance activities by 2027, underscoring our focus on enabling sustainable growth and helping make Canada and North America global leaders in environmental stewardship. CIBC’s commitment to strengthening our communities is also foundational to our focus. This year, we bolstered our impact through our successful global community investment initiative, One for Change, inspired by the CIBC team’s shared passion for giving back. One for Change has invested $78 million in communities this year, and our goal is to invest $350 million by 2024. In closing, I would like to thank your CEO, Victor Dodig, as well as your senior management team, for their leadership in 2019 in responsibly managing our business to deliver long-term value for our stakeholders. On behalf of your Board, I also thank every member of CIBC’s team for their shared commitment to our purpose of helping make our clients’ ambitions a reality. the Honourable John P. Manley Chair of the Board CIBC 2019 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 Pillar 3 Report and Supplementary regulatory capital disclosure Index of risk information – current page Risk terminology and measures (1) Top and emerging risks 46 Key future regulatory ratio requirements 30, 32, 70, 72 162 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 Risk management structure Risk culture and appetite Risks arising from business activities Bank-wide stress testing Minimum capital requirements Components of capital and reconciliation to the consolidated regulatory balance sheet Regulatory capital flow statement Capital management and planning Business activities and risk-weighted assets Risk-weighted assets and capital requirements Credit risk by major portfolios Risk-weighted assets flow statement 41, 42 40, 43, 44 45, 49 35, 46, 53, 59, 65, 68, 75 28 30 32 34 31, 49 29, 31 51–57 31 Back-testing of models 45, 53, 64, 75 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 69 69 73 71 63 63–67 63–67 35, 65 54–61 Impaired loan and forbearance policies 51, 59, 79 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 59 51, 55 51, 56 74–77 74 162 162 68–69 9, 16 8–11 12 4 4 26–35 4, 5 66, 67 136–142, 184 6–7, 62–65 111, 112 137 152–153 65, 36 (2) 152–153 19, 51, 65 177 (1) A detailed glossary of our risk and capital terminology is included on page 198. (2) Included in supplementary financial information package. viii CIBC 2019 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, 2019, compared with prior years. The MD&A should be read in conjunction with the audited consolidated financial statements. Unless otherwise indicated, all financial information in this MD&A has been prepared in accordance with International Financial Reporting Standards (IFRS or GAAP) and all amounts are expressed in Canadian dollars. Certain disclosures in the MD&A have been shaded as they form an integral part of the consolidated financial statements. The MD&A is current as of December 4, 2019. 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 196 to 201 of this Annual Report. 2 Overview 2 CIBC’s strategy 2 Performance against objectives 4 Financial highlights 5 Economic and market environment 5 Year in review – 2019 5 Outlook for calendar year 2020 5 Significant events 6 6 6 Financial performance overview 2019 Financial results review 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 Fourth quarter review 10 Quarterly trend analysis 11 Review of 2018 financial performance 13 Non-GAAP measures 16 Strategic business units 40 Management of risk overview 17 Canadian Personal and Small Business Banking 19 Canadian Commercial Banking and Wealth Management 21 U.S. Commercial Banking and Wealth Management 23 Capital Markets 26 Corporate and Other 27 Financial condition 27 Review of condensed consolidated balance sheet 28 Capital management 38 Off-balance sheet arrangements 78 Accounting and control matters 78 Critical accounting policies and estimates 83 Accounting developments 84 Other regulatory developments 85 Related-party transactions 85 Policy on the Scope of Services of the Shareholders’ Auditor 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”, “Economic and market environment – Outlook for calendar year 2020”, “Significant events”, “Financial performance overview – Taxes”, “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 management”, “Financial condition – Off-balance sheet arrangements”, “Management of risk – Risk overview”, “Management of risk – Top and emerging risks”, “Management of risk – Credit risk”, “Management of risk – Market risk”, “Management of risk – Liquidity risk”, “Accounting and control matters – Critical accounting policies and estimates”, “Accounting and control matters – Accounting developments”, “Accounting and control matters – Other regulatory developments” and “Accounting and control matters – Controls and procedures” sections of this report and other statements about our operations, business lines, financial condition, risk management, priorities, targets, ongoing objectives, strategies, the regulatory environment in which we operate and outlook for calendar year 2020 and subsequent periods. Forward-looking statements are typically identified by the words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “forecast”, “target”, “objective” and other similar expressions or future or conditional verbs such as “will”, “should”, “would” and “could”. By their nature, these statements require us to make assumptions, including the economic assumptions set out in the “Economic and market environment – Outlook for calendar year 2020” 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, conduct and legal, regulatory and environmental risk; the effectiveness and adequacy of our risk management and valuation models and processes; legislative or regulatory developments in the jurisdictions where we operate, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations issued and to be issued thereunder, the Organisation for Economic Co-operation and Development Common Reporting Standard, and regulatory reforms in the United Kingdom and Europe, the Basel Committee on Banking Supervision’s global standards for capital and liquidity reform, and those relating to bank recapitalization legislation and the payments system in Canada; amendments to, and interpretations of, risk-based capital guidelines and reporting instructions, and interest rate and liquidity regulatory guidance; the resolution of legal and regulatory proceedings and related matters; the effect of changes to accounting standards, rules and interpretations; changes in our estimates of reserves and allowances; changes in tax laws; changes to our credit ratings; political conditions and developments, including changes relating to economic or trade matters; the possible effect on our business of international conflicts and terrorism; natural disasters, public health emergencies, disruptions to public infrastructure and other catastrophic events; reliance on third parties to provide components of our business infrastructure; potential disruptions to our information technology systems and services; increasing cyber security risks which may include theft or disclosure of assets, unauthorized access to sensitive information, or operational disruption; social media risk; losses incurred as a result of internal or external fraud; anti- money laundering; the accuracy and completeness of information provided to us concerning clients and counterparties; the failure of third parties to comply with their obligations to us and our affiliates or associates; intensifying competition from established competitors and new entrants in the financial services industry including through internet and mobile banking; technological change; global capital market activity; changes in monetary and economic policy; 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 an acquisition 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 2019 ANNUAL REPORT 1 Management’s discussion and analysis Overview CIBC is a leading North American financial institution with a market capitalization of $50 billion and a Basel III Common Equity Tier 1 (CET1) ratio of 11.6% as at October 31, 2019. Through our four strategic business units (SBUs) – Canadian Personal and Small Business Banking, Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets – CIBC provides a full range of financial products and services to 10 million personal banking, business, public sector 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 for a modern world, delivering consistent and sustainable earnings growth for our shareholders, and giving back to our communities. CIBC’s strategy We are building a relationship-oriented bank for a modern world. To achieve our strategic objectives of delivering superior client experience and shareholder returns, we are focused on four key areas: (cid:129) (cid:129) (cid:129) (cid:129) Delivering a modern relationship-banking value proposition to our clients; Diversifying our earnings growth; Optimizing our operational efficiency; and Maintaining capital and balance sheet discipline. Performance against objectives For many years, CIBC has reported a scorecard of financial measures that we use to evaluate and report on our progress to external stakeholders. These measures can be categorized into five key areas – earnings growth, efficiency ratio, return on common shareholders’ equity (ROE), shareholder value and balance sheet strength. We have set targets for each of these measures over the medium term, which we define as three to five years. Earnings growth(1) To assess our earnings growth, we monitor our earnings per share (EPS). Our target is average annual EPS growth of 5% to 10%. In 2019, against a backdrop of a challenging market environment, reported and adjusted(1) diluted EPS declined by 4% and 2%, respectively. Going forward, we are maintaining our target to deliver average annual EPS growth of 5% to 10% through the cycle. Reported diluted EPS ($) 11.24 11.65 11.19 10.70 8.87 Adjusted diluted EPS(1) ($) 12.21 11.92 11.11 10.22 9.45 Efficiency ratio(1) To assess how well we use our resources to generate net income, we measure and monitor our efficiency ratio, defined as the ratio of non-interest expenses to total revenue. In 2019, CIBC’s reported and adjusted(1) efficiency ratios were 58.3% and 55.5%, respectively, compared with 57.5% and 55.6% in 2018. CIBC has set a medium-term target of achieving a run rate efficiency ratio of 52% by 2022. 15 16 17 18 19 15 16 17 18 19 Reported efficiency ratio (%) Adjusted efficiency ratio(1) (%) 63.9 59.6 59.7 58.8 58.3 57.5 58.0 57.2 55.6 55.5 15 16 17 18 19 15 16 17 18 19 Return on common shareholders’ equity(1) ROE is another key measure of shareholder value. In 2019, CIBC’s reported and adjusted(1) ROE were at 14.5% and 15.4%, respectively. Reported return on common shareholders’ equity (%) Adjusted return on common shareholders’ equity(1) (%) Going forward, we will continue to target a strong ROE of at least 15% through the cycle. 19.9 18.7 18.3 16.6 14.5 19.9 19.0 18.1 17.4 15.4 (1) For additional information, see the “Non-GAAP measures” section. 2 CIBC 2019 ANNUAL REPORT 15 16 17 18 19 15 16 17 18 19 Management’s discussion and analysis Shareholder value We have two shareholder value targets: 1. Dividend payout ratio 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 2019, our reported and adjusted(1) dividend payout ratios were 49.9% and 46.9%, respectively. Going forward, we will continue to target a dividend payout ratio of 40% to 50%. 2. Total shareholder return (TSR) TSR is the ultimate measure of shareholder value, and the output of delivering against the financial targets within our control. We have an objective to deliver a TSR that exceeds the industry average, which we have defined as the Standard & Poor’s (S&P)/Toronto Stock Exchange (TSX) Composite Banks Index, over a rolling five-year period. For the five years ended October 31, 2019, our TSR was 38.4%, which was below the Banks Index return over the same period of 51.3%. Reported dividend payout ratio (%) Adjusted dividend payout ratio(1) (%) 48.4 44.3 45.6 45.5 49.9 45.4 46.4 46.2 46.9 43.4 15 16 17 18 19 15 16 17 18 19 Rolling five-year TSR (%) 125 100 75 50 25 0 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 CIBC 38.4% S&P/TSX Composite Index 31.0% S&P/TSX Composite Banks Index 51.3% CET1 ratio (%) 11.3 10.8 10.6 11.4 11.6 15 16 17 18 19 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 2019, our Basel III CET1 ratio was 11.6%, well above the current 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. Client experience We continue to have a strong and ongoing focus on client experience. Aligned to our journey as a purpose-led bank, we have enhanced our internal client experience index in 2019 to improve the transparency and accuracy of our client experience measurement program. The index has been renamed the CIBC Client Experience Net Promoter Score Index (CIBC CXNPS) and reflects the balanced weighting of nine internal net promoter scores from across all of our SBUs. As at October 31, 2019, the CIBC CXNPS score was 60.9. Our goal is to achieve continuous improvement year over year. (1) For additional information, see the “Non-GAAP measures” section. CIBC 2019 ANNUAL REPORT 3 Management’s discussion and analysis 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 attributable to non-controlling interests Preferred shareholders Common shareholders Net income attributable to equity shareholders Financial measures Reported efficiency ratio Adjusted efficiency ratio (1) Loan loss ratio (2) Reported return on common shareholders’ equity Adjusted return on common shareholders’ equity (1) Net interest margin Net interest margin on average interest-earning assets Return on average assets Return on average interest-earning assets Total shareholder return Reported effective tax rate Adjusted effective tax rate (1) Common share information Per share ($) Share price ($) Shares outstanding (thousands) – basic earnings – reported diluted earnings – adjusted diluted earnings (1) – dividends – book value – high – low – closing – weighted-average basic (3) – weighted-average diluted – end of period (3) Market capitalization ($ millions) Value measures Dividend yield (based on closing share price) Reported dividend payout ratio Adjusted dividend payout ratio (1) Market value to book value ratio On- and off-balance sheet information ($ millions) Cash, deposits with banks and securities Loans and acceptances, net of allowance Total assets Deposits Common shareholders’ equity Average assets Average interest-earning assets Average common shareholders’ equity Assets under administration (AUA) (5)(6) Assets under management (AUM) (6) Balance sheet quality (All-in basis) and liquidity measures Risk-weighted assets (RWA) ($ millions) (7) Total RWA CET1 capital RWA Tier 1 capital RWA Total capital RWA Capital ratios CET1 ratio Tier 1 capital ratio Total capital ratio Leverage ratio Liquidity coverage ratio (LCR) (8) Other information Full-time equivalent employees $ $ $ $ $ $ 2019 10,551 8,060 18,611 1,286 10,856 6,469 1,348 5,121 25 111 4,985 5,096 58.3 % 55.5 % 0.29 % 14.5 % 15.4 % 1.65 % 1.84 % 0.80 % 0.89 % 4.19 % 20.8 % 20.6 % 11.22 11.19 11.92 5.60 79.87 116.19 98.20 112.31 444,324 445,457 445,342 50,016 5.0 % 49.9 % 46.9 % 1.41 138,669 398,108 651,604 485,712 35,569 639,716 572,677 34,467 2,425,651 252,007 $ 239,863 n/a n/a n/a 11.6 % 12.9 % 15.0 % 4.3 % 125 % $ $ $ $ $ $ $ 2018 10,065 7,769 17,834 870 10,258 6,706 1,422 5,284 17 89 5,178 5,267 57.5 % 55.6 % 0.26 % 16.6 % 17.4 % 1.68 % 1.88 % 0.88 % 0.99 % 4.70 % 21.2 % 20.0 % 11.69 11.65 12.21 5.32 73.83 124.59 110.11 113.68 443,082 444,627 442,826 50,341 4.7 % 45.5 % 43.4 % 1.54 119,355 381,661 597,099 461,015 32,693 598,441 536,059 31,184 2,303,962 225,379 n/a 216,144 216,303 216,462 $ $ $ $ $ $ $ 2017 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 (4) 413,563 (4) 439,313 (4) 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 n/a 203,321 203,321 203,321 $ $ $ $ $ $ $ 2016 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 n/a 168,996 169,322 169,601 $ $ $ $ $ $ $ 2015 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 n/a 156,107 156,401 156,652 11.4 % 12.9 % 14.9 % 4.3 % 128 % 10.6 % 12.1 % 13.8 % 4.0 % 120 % 11.3 % 12.8 % 14.8 % 4.0 % 124 % 10.8 % 12.5 % 15.0 % 3.9 % 119 % 45,157 44,220 44,928 43,213 44,201 For additional information, see the “Non-GAAP measures” section. (1) (2) The ratio is calculated as the provision for credit losses on impaired loans to average loans and acceptances, net of allowance for credit losses. In 2019, following our adoption of IFRS 9 on November 1, 2017, provision for credit losses on impaired loans (stage 3) is calculated in accordance with IFRS 9. 2017 and prior amounts were calculated in accordance with IAS 39. (3) Excludes nil restricted shares as at October 31, 2019 (2018: 60,764). (4) Excludes 2,010,890 common shares which were issued and outstanding, but which had not been acquired by a third party as at October 31, 2017. These shares were issued as a (5) component of our acquisition of The PrivateBank. 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 $1,923.2 billion as at October 31, 2019 (2018: $1,834.0 billion). (6) AUM amounts are included in the amounts reported under AUA. (7) Beginning in 2019, the capital ratios are calculated by reference to the same level of RWA. Prior to 2019, before any capital floor requirement, there were three different levels of RWA for the calculation of CIBC’s CET1, Tier 1 and Total capital ratios as CIBC elected in 2014 to phase in the credit valuation adjustment (CVA) capital charge as permitted under the OSFI guideline; different scalars were applied to the CVA included in the RWA calculation applicable to each of the three tiers of capital. RWA as at October 31, 2017 include a capital floor adjustment. (8) Average for the three months ended October 31 for each respective year. n/a Not applicable. 4 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Economic and market environment Year in review – 2019 CIBC operated in an environment of decelerating economic growth in both the U.S. and Canada in 2019. Canada experienced low unemployment rates that supported household credit quality, but credit performance has normalized from very strong levels in the prior year. Both consumer and mortgage credit growth grew at a much slower pace than earlier in this expansion but showed a modest acceleration in the latter half of the year as mortgage rates eased and housing activity rebounded. Corporate credit quality remained generally healthy despite a slowing in profit growth, but was impacted by softer conditions in some regions and sectors. A drop in business capital spending drove slower growth in financing activity that manifested in the form of softer growth in bonds and equity issuance while business loan growth remained healthy. The U.S. economy showed a moderation in growth, as earlier fiscal stimulus impacts faded and trade uncertainties grew. Conversely, labour markets remained very healthy, with the consumer side of the economy helped by income gains and interest rate cuts in the second half of the year. Loan growth remained steady, while equities recovered ground and interest rate relief offset sluggish earnings. Outlook for calendar year 2020 A slowing global backdrop is expected to result in a further slight moderation in Canadian real gross domestic product (GDP) growth to just under 1.5%. Risks on the trade front and soft capital spending could see the Bank of Canada ease interest rates by 25 basis points from what are already low levels, potentially prompting a softening in the Canadian dollar over the course of 2020. While the unemployment rate is likely to edge above 6% in 2020, it is still expected to remain at historically low levels. Housing construction should be fairly steady, supported by lower mortgage rates, while only modest growth is expected in business capital spending until global uncertainties dissipate. Global crude oil prices look to be rangebound and, while Canadian production should gradually recover from earlier constraints, a lift to capital spending in the energy sector is likely contingent on further progress on pipeline capacity. The U.S. economy is expected to decelerate to approximately 1.7% real GDP growth in 2020 as trade and global growth uncertainties are expected to hold back business capital spending and hiring. Despite this, labour markets are still anticipated to remain tight by historical standards. The U.S. Federal Reserve is expected to hold rates through 2020. Escalating trade tensions between China and both the U.S. and Canada, and the threat of recession in Europe, pose downside risks to our U.S. and Canadian outlooks, but ones that may be offset by greater interest rate reductions than those currently projected. Canadian Personal and Small Business Banking is expected to see a continuation of low growth in consumer and mortgage lending, with demand constrained by modest growth in housing prices and the regulatory tightening introduced in 2018. Low interest rates and moderate growth in corporate earnings should support activity in Capital Markets and Canadian Commercial Banking and Wealth Management. Government bond issuance will likely increase to finance larger federal deficits, an impact that could be offset by reduced deficits in some provinces. Credit quality should remain healthy with low unemployment and moderate profit growth. Wealth management should benefit from ongoing growth in the pool of savings, but modest economic growth could constrain the extent to which AUM benefit from equity price gains. In U.S. Commercial Banking and Wealth Management, commercial banking faces slower growth in the manufacturing-weighted Midwest, but would benefit from any improvement in trade uncertainties that are currently holding back capital spending plans, while lower interest rates should support growth in commercial lending activity. Wealth management has benefited from a greater pool of after-tax savings, although a soft path for further equity price gains is expected to contain growth in AUM. Significant events Sale of FirstCaribbean International Bank Limited On November 8, 2019, we announced that we had entered into a definitive agreement to sell our controlling interest in FirstCaribbean International Bank Limited (CIBC FirstCaribbean) to GNB Financial Group Limited (GNB). Under the terms of the agreement, GNB will acquire 66.73% of CIBC FirstCaribbean’s outstanding shares from CIBC for total consideration of approximately US$797 million, subject to closing adjustments to reflect certain changes in CIBC FirstCaribbean’s book value prior to closing. The total consideration is comprised of approximately US$200 million in cash and secured financing provided by CIBC for the remainder. CIBC will also provide secured financing to facilitate the purchase of any shares tendered by the minority shareholders of CIBC FirstCaribbean under the take-over bid required by local securities laws. We expect to retain a minority interest in CIBC FirstCaribbean of approximately 24.9% after closing. This transaction is subject to regulatory approvals and is expected to close in 2020. Due to the valuation implied from the expected sale of our controlling interest in CIBC FirstCaribbean, we recognized a goodwill impairment charge of $135 million in the fourth quarter of 2019, shown as an item of note. For additional information, see Note 3 and Note 8 to our consolidated financial statements. Acquisition of Cleary Gull On September 9, 2019, we completed the acquisition of substantially all of the assets and operations of Cleary Gull Inc. (Cleary Gull), a Milwaukee-based boutique investment banking firm specializing in middle-market mergers and acquisitions, private capital placement and debt advisory across the U.S. Goodwill and intangible assets of $16 million were recognized as a result of the acquisition. The results of the acquired business have been consolidated from the date of close and are included in our Capital Markets SBU. Acquisition of Lowenhaupt Global Advisors On September 1, 2019, we completed the acquisition of substantially all of the assets and operations of Lowenhaupt Global Advisors, LLC (LGA), a wealth advisory firm in St. Louis and New York that provides independent advice on family wealth transfer, taxation, investment portfolio allocation and business structuring. Goodwill and intangible assets of $14 million were recognized as a result of the acquisition. The results of the acquired business have been consolidated from the date of close and are included in our U.S. Commercial Banking and Wealth Management SBU. Finalization of arrangement with Air Canada Following the close of Air Canada’s acquisition of the Aeroplan loyalty business from Aimia Inc. on January 10, 2019, we will be offering credit cards under Air Canada’s new loyalty program, which is expected to launch in 2020. This program will allow CIBC’s Aeroplan cardholders to transfer their Aeroplan Miles to Air Canada’s new loyalty program. To secure our participation in Air Canada’s new loyalty program for a period of 10 years, we paid Air Canada $200 million plus applicable sales tax, which we recognized as an expense in the first quarter of 2019. We have shown this payment, together with related transaction costs, as an item of note related to the first quarter of 2019. In addition, we made a payment of $92 million plus applicable sales tax in the first quarter of 2019 as a prepayment to be applied towards future monthly payments in respect of Aeroplan Miles over a 10-year period. CIBC 2019 ANNUAL REPORT 5 Management’s discussion and analysis Financial performance overview This section provides a review of our consolidated financial results for 2019. A review of our SBU results follows on pages 16 to 25. Refer to page 11 for a review of our financial performance for 2018. 2019 Financial results review Reported net income for the year was $5,121 million, compared with $5,284 million in 2018. Adjusted net income(1) for the year was $5,444 million, compared with $5,541 million in 2018. Reported diluted EPS for the year was $11.19, compared with $11.65 in 2018. Adjusted diluted EPS(1) for the year was $11.92, compared with $12.21 in 2018. 2019 Net income was affected by the following items of note: (cid:129) $227 million ($167 million after-tax) charge for a payment made to Air Canada, including related sales tax and transaction costs, to secure our participation in the new loyalty program (Canadian Personal and Small Business Banking); $135 million ($135 million after-tax) goodwill impairment charge related to the expected sale of our controlling interest in CIBC FirstCaribbean (Corporate and Other); $109 million ($82 million after-tax) amortization of acquisition-related intangible assets ($7 million after-tax in Canadian Personal and Small Business Banking, $1 million after-tax in Canadian Commercial Banking and Wealth Management, $65 million after-tax in U.S. Commercial Banking and Wealth Management, and $9 million after-tax in Corporate and Other); $67 million ($49 million after-tax) of interest income related to the settlement of certain income tax matters (Corporate and Other); $45 million ($33 million after-tax net positive impact) in purchase accounting adjustments net of transaction and integration-related costs(2) associated with the acquisitions of The PrivateBank, Geneva Advisors and Wellington Financial (income of $25 million after-tax in U.S. Commercial Banking and Wealth Management, and $8 million after-tax in Corporate and Other); and $28 million ($21 million after-tax) increase in legal provisions (Corporate and Other). The above items of note increased revenue by $101 million and non-interest expenses by $488 million, and decreased income taxes by $64 million. In aggregate, these items of note decreased net income by $323 million. 2018 Net income was affected by the following items of note: (cid:129) $115 million ($85 million after-tax) amortization of acquisition-related intangible assets ($9 million after-tax in Canadian Personal and Small Business Banking, $1 million after-tax in Canadian Commercial Banking and Wealth Management, $65 million after-tax in U.S. Commercial Banking and Wealth Management, and $10 million after-tax in Corporate and Other); $89 million ($65 million after-tax and minority interest) of incremental losses on debt securities and loans in CIBC FirstCaribbean recognized in the fourth quarter resulting from the Barbados government debt restructuring (Corporate and Other); $88 million charge from net tax adjustments resulting from the U.S. tax reforms enacted in the first quarter of 2018 (Corporate and Other); and $16 million ($14 million after-tax) in transaction and integration-related costs net of purchase accounting adjustments(2) associated with the acquisitions of The PrivateBank and Geneva Advisors (income of $38 million after-tax in U.S. Commercial Banking and Wealth Management, and charge of $52 million after-tax in Corporate and Other). (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) The above items of note increased revenue by $2 million, provision for credit losses by $28 million, non-interest expenses by $194 million, and income taxes by $37 million. In aggregate, these items of note decreased net income by $257 million and net income attributable to common shareholders by $252 million. For additional information, see the “Non-GAAP measures” section. (1) (2) Transaction costs include interest adjustments relating to the obligation payable to dissenting shareholders. Integration costs are comprised of direct and incremental costs incurred as part of the integration of the businesses of The PrivateBank (subsequently rebranded as CIBC Bank USA) and Geneva Advisors with CIBC, including enabling cross-sell opportunities and expansion of services in the U.S. market, the upgrade and conversion of systems and processes, project management, integration-related travel, severance, consulting fees and marketing costs related to rebranding activities. Purchase accounting adjustments, included as items of note beginning in the fourth quarter of 2017, include the accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank and changes in the fair value of contingent consideration relating to the Geneva Advisors and Wellington Financial acquisitions. 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 2019 2018 2017 $ 572,677 10,551 $ 536,059 10,065 $ 485,837 8,977 1.84 % 1.88 % 1.85 % Net interest income was up $486 million or 5% from 2018, primarily due to volume growth across our businesses, wider spreads in Canadian Personal and Small Business Banking, and the impact of foreign exchange translation, partially offset by lower trading income and narrower spreads in U.S. Commercial Banking and Wealth Management. The current year also included interest income related to the settlement of certain income tax matters, shown as an item of note. Net interest margin on average interest-earning assets was down four basis points, primarily due to a shift in the mix of average interest-earning assets, partially offset by higher margins in Canadian Personal and Small Business Banking. Additional information on net interest income and margin is provided in the “Supplementary annual financial information” section. 6 CIBC 2019 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 Gains (losses) from financial instruments measured/designated at fair value through profit or loss (FVTPL), net (2017: Trading income (loss) and designated at fair value (FVO) gains (losses), net) (3) Gains (losses) from debt securities measured at fair value through other comprehensive income (FVOCI) and amortized cost, net (2017: Available-for-sale (AFS) securities gains, net) Foreign exchange other than trading Income from equity-accounted associates and joint ventures (1) Other $ 2019 475 908 958 458 1,305 1,595 430 313 761 34 304 92 427 $ 2018 420 877 851 510 1,247 1,624 431 357 603 (35) 310 121 453 $ 2017 452 843 744 463 1,034 1,573 427 349 227 143 252 101 695 $ 8,060 $ 7,769 $ 7,303 (1) Custodial fees directly recognized by CIBC are included in Investment management and custodial fees. Our proportionate share of CIBC Mellon’s custodial fees are included within Income from equity-accounted associates and joint ventures. 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). Includes $54 million of loss (2018: $46 million of income; 2017: $1 million of income) relating to non-trading financial instruments measured/designated at FVTPL. (2) (3) Non-interest income was up $291 million or 4% from 2018. Underwriting and advisory fees were up $55 million or 13%, primarily due to higher advisory activity, debt issuance and loan syndication revenue, partially offset by lower equity issuance revenue. Deposit and payment fees were up $31 million or 4%, primarily driven by lower acquisition costs and higher fees in Canadian Personal and Small Business Banking. Credit fees were up $107 million or 13%, primarily due to growth in commercial loans. Card fees were down $52 million or 10%, primarily due to presentation changes relating to our adoption of IFRS 15 “Revenue from Contracts with Customers” (IFRS 15) on November 1, 2018 (see Note 1 for additional details), offset in Non-interest expenses – Other (see “Non-interest expenses” section below). Investment management and custodial fees were up $58 million or 5%, primarily due to AUM growth in our wealth management businesses. Commissions on securities transactions were down $44 million or 12%, primarily due to lower trading volume in our retail brokerage business. Gains (losses) from financial instruments measured/designated at FVTPL, net were up $158 million or 26%, primarily due to higher trading income, partially offset by lower treasury revenue. See the “Trading activities (TEB)” section which follows for further details. Gains (losses) from debt securities measured at FVOCI and amortized cost, net were up $69 million, as the prior year included losses on debt securities measured at FVOCI as a result of the Barbados government debt restructuring, of which $61 million was shown as an item of note in the fourth quarter of 2018. Trading activities (TEB) $ millions, for the year ended October 31 Trading income consists of: Net interest income (1) Non-interest income Trading income by product line: Interest rates Foreign exchange Equities Commodities Other $ $ $ 2019 633 815 1,448 300 585 386 117 60 $ $ $ 2018 856 557 1,413 246 573 452 94 48 $ $ $ 2017 1,143 226 1,369 276 524 401 111 57 $ 1,448 $ 1,413 $ 1,369 (1) Includes taxable equivalent basis (TEB) adjustment of $177 million (2018: $278 million; 2017: $298 million) reported within Capital Markets. See “Strategic business units overview” section for further details. Net interest income comprises interest and dividends relating to financial assets and liabilities associated with trading activities, net of interest expense and interest income associated with funding these assets and liabilities. Non-interest income includes realized and unrealized gains and losses on securities mandatorily measured at FVTPL and income relating to changes in fair value of derivative financial instruments. Trading activities and related risk management strategies can periodically shift income between net interest income and non-interest income. Therefore, we view total trading revenue as the most appropriate measure of trading performance. Trading income was up $35 million or 2% from 2018, primarily due to higher interest rate, commodities and foreign exchange trading income, partially offset by lower equity trading income. CIBC 2019 ANNUAL REPORT 7 Management’s discussion and analysis Provision for credit losses(1) $ millions, for the year ended October 31 Provision for (reversal of) credit losses – impaired Canadian Personal and Small Business Banking Canadian Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management Capital Markets Corporate and Other Provision for (reversal of) credit losses – performing Canadian Personal and Small Business Banking Canadian Commercial Banking and Wealth Management U.S. Commercial Banking and Wealth Management Capital Markets Corporate and Other 2019 2018 2017 In accordance with IFRS 9 In accordance with IFRS 9 In accordance with IAS 39 $ 809 159 68 90 21 1,147 87 4 5 63 (20) 139 $ 760 15 67 8 102 952 (19) (10) 12 (38) (27) (82) $ 760 16 37 (4) 20 829 6 n/a 47 n/a (53) – $ 1,286 $ 870 $ 829 (1) As a result of our adoption of IFRS 9 effective November 1, 2017, we now recognize provision for credit losses on both impaired and performing loans in the SBUs. In prior periods, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses related to CIBC Bank USA, which was recognized in U.S. Commercial Banking and Wealth Management, and provision for credit losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking. Provision for credit losses related to CIBC FirstCaribbean continues to be recognized in Corporate and Other. n/a Not applicable. Provision for credit losses was up $416 million or 48% from 2018. Provision for credit losses on performing loans was up $221 million, as the prior year included a reduction in allowance driven by an economic outlook that had improved since our adoption of IFRS 9 “Financial Instruments” (IFRS 9) on November 1, 2017, while the current year included an increase in allowance, reflective of the impact of certain unfavourable changes to our economic outlook, as well as unfavourable credit migration in certain portfolios. Provision for credit losses on impaired loans was up $195 million, due to higher provisions including one fraud-related impairment in Canadian Commercial Banking and Wealth Management, higher provisions in the utility and the oil and gas sectors within Capital Markets, higher provisions and write-offs in personal lending within Canadian Personal and Small Business Banking, partially offset by lower provisions in CIBC FirstCaribbean, included in Corporate and Other, as the prior year included losses on sovereign loans resulting from the Barbados government debt restructuring, of which $28 million was shown as an item of note in the fourth quarter of 2018. For further details regarding provision for credit losses in our SBUs, refer to the “Strategic business units overview” section. Non-interest expenses $ millions, for the year ended October 31 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 $ 2019 3,081 1,873 772 5,726 892 1,874 303 359 226 110 1,366 $ 2018 2,934 1,966 765 5,665 875 1,742 315 327 226 103 1,005 $ 2017 2,738 1,745 715 5,198 822 1,630 317 282 229 96 997 $ 10,856 $ 10,258 $ 9,571 Non-interest expenses were up $598 million or 6% from 2018. Employee compensation and benefits were up $61 million or 1%, primarily due to higher salaries, driven in part by the impact of foreign exchange translation, partially offset by lower performance-based compensation. Computer, software and office equipment were up $132 million or 8%, primarily due to higher spending on strategic initiatives. Other expenses were up $361 million or 36%, as the current year included a charge for a payment made to Air Canada, including related sales tax and transaction costs, to secure our participation in the new loyalty program, a goodwill impairment charge related to the expected sale of our controlling interest in CIBC FirstCaribbean, and an increase in legal provisions, all shown as items of note, partially offset by lower expenses due to presentation changes relating to our adoption of IFRS 15 (see the “Non-interest income” section above). 8 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Taxes $ millions, for the year ended October 31 Income taxes Indirect taxes (1) Goods and Services Tax (GST), Harmonized Sales Tax (HST) and sales taxes Payroll taxes Capital taxes Property and business taxes Total indirect taxes Total taxes Reported effective tax rate Total taxes as a percentage of net income before deduction of total taxes (1) Certain amounts are based on a paid or payable basis and do not factor in capitalization and subsequent amortization. 2019 2018 $ 1,348 $ 1,422 2017 $ 1,162 418 271 76 72 837 354 271 68 77 770 390 242 61 72 765 $ 2,185 $ 2,192 $ 1,927 20.8 % 29.9 % 21.2 % 29.3 % 19.8 % 29.0 % Income taxes include those imposed on CIBC as a Canadian legal entity, as well as on our domestic and foreign subsidiaries. Indirect taxes comprise GST, HST and sales, payroll, capital, property and business taxes. Indirect taxes are included in non-interest expenses. Total income and indirect taxes were down $7 million from 2018. Income tax expense was $1,348 million, down $74 million from 2018. This was primarily due to net tax adjustments resulting from the U.S. tax reforms enacted in the first quarter of 2018, shown as an item of note, as well as lower income in the current year, partially offset by lower tax-exempt income and the goodwill impairment charge related to the expected sale of our controlling interest in CIBC FirstCaribbean, which is not deductible for tax purposes. The current year also included a net tax recovery of $38 million resulting from the Enron settlement discussed below, largely offset by a $28 million revaluation of certain deferred tax assets due to tax rate changes enacted by the Barbados government in the first quarter of 2019. Indirect taxes were up $67 million, primarily due to the sales taxes applicable to the payment that we made to Air Canada to secure our participation in its new loyalty program and higher spending on strategic initiatives. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (U.S. tax reforms), which reduced the U.S. federal corporate income tax rate to 21% effective January 1, 2018, resulting in a significant decrease in CIBC’s U.S. deferred tax assets in the first quarter of 2018. The U.S. tax reforms introduced other important changes to U.S. corporate income tax laws including the creation of a new Base Erosion Anti- abuse Tax (BEAT) that subjects certain payments from a U.S. corporation to foreign related parties to additional taxes. In December 2018 and 2019, the Internal Revenue Service released proposed and final regulations to implement certain aspects of the U.S. tax reforms, including BEAT. CIBC continues to evaluate the impact of these regulations on our U.S. operations. In prior years, the Canada Revenue Agency (CRA) issued reassessments disallowing the deduction of approximately $3 billion of the 2005 Enron settlement payments and related legal expenses (the “Enron expenses”). In January 2019, CIBC entered into a settlement agreement (the “Agreement”) with the CRA that provides certainty with respect to the portion of the Enron expenses that are deductible in Canada. The impact of this Agreement resulted in the recognition of a net $38 million tax recovery in the first quarter of 2019. This recovery was determined after taking into account the portion of the Enron expenses that we expect to deduct in the United States, but which has not yet been agreed to by the Internal Revenue Service, and the taxable refund interest that we expect to collect from the CRA upon the reassessment of certain prior year tax returns in accordance with the Agreement. It is possible that adjustments may be required to the amount of the tax benefits recognized in the United States. The 2015 Canadian federal budget which became law effective on November 1, 2015, contained new rules for “synthetic equity arrangements” which eliminated the tax deductibility of Canadian inter-corporate dividends for Canadian corporations in certain circumstances. A set of transition rules applied between November 1, 2015 and April 30, 2017. The new rules have resulted in a higher effective tax rate, as the tax deductibility of certain Canadian corporate dividends is diminished. On February 27, 2018, the 2018 Canadian federal budget was released which extended the denial of the deductibility of Canadian inter-corporate dividends for Canadian corporations to include dividends received on share buyback transactions. In prior years, the CRA reassessed CIBC approximately $527 million of additional income tax by denying the tax deductibility of certain 2011 to 2013 Canadian corporate dividends on the basis that they were part of a “dividend rental arrangement”. In March 2018, CIBC filed a Notice of Appeal with the Tax Court of Canada with respect to the 2011 taxation year. The matter is now in litigation. The circumstances of the dividends subject to the reassessments are similar to those prospectively addressed by the rules in the 2015 and 2018 Canadian federal budgets. In May 2019, the CRA reassessed CIBC in respect of the 2014 taxation year for approximately $273 million of additional income tax. It is possible that subsequent years may be reassessed for similar activities. CIBC is confident that its tax filing positions were appropriate and intends to defend itself vigorously. Accordingly, no amounts have been accrued in the consolidated financial statements. Foreign exchange The estimated impact of U.S. dollar translation on key lines of our consolidated statement of income, as a result of changes in average exchange rates, is as follows: $ millions, for the year ended October 31 Estimated increase (decrease) in: Total revenue Provision for credit losses Non-interest expenses Income taxes Net income Impact on EPS: Basic Diluted 2019 vs. 2018 124 7 66 5 46 0.10 0.10 $ $ $ 2018 vs. 2017 (55) (2) (30) (3) (20) $ 2017 vs. 2016 (36) (1) (20) (1) (14) $ (0.05) (0.05) $ (0.03) (0.03) Average USD appreciation (depreciation) relative to CAD 3.2 % (1.5) % (1.3) % CIBC 2019 ANNUAL REPORT 9 Management’s discussion and analysis Fourth quarter review $ millions, except per share amounts, for the three months ended Revenue 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) 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 $ $ $ $ $ $ 2,225 1,028 503 735 281 4,772 2,801 1,971 4,772 402 2,838 1,532 339 1,193 8 1,185 2.59 2.58 $ $ $ $ $ $ 2,239 1,023 509 746 215 4,732 2,694 2,038 4,732 291 2,670 1,771 373 1,398 6 1,392 3.07 3.06 $ $ $ $ $ $ 2,128 $ 1,003 475 751 185 4,542 $ 2,460 $ 2,082 4,542 255 2,588 1,699 351 1,348 $ 7 $ 1,341 2.96 $ 2.95 2019 Jan. 31 2,166 992 479 705 223 4,565 2,596 1,969 4,565 338 2,760 1,467 285 1,182 4 1,178 2.61 2.60 Oct. 31 Jul. 31 Apr. 30 $ $ $ $ $ $ 2,201 986 457 649 159 4,452 2,539 1,913 4,452 264 2,591 1,597 329 1,268 2 1,266 2.81 2.80 $ $ $ $ $ $ 2,176 988 448 752 183 4,547 2,577 1,970 4,547 241 2,572 1,734 365 1,369 4 1,365 3.02 3.01 $ $ $ $ $ $ 2,090 937 429 710 210 4,376 2,476 1,900 4,376 212 2,517 1,647 328 1,319 6 1,313 2.90 2.89 2018 Jan. 31 2,138 954 432 801 134 4,459 2,473 1,986 4,459 153 2,578 1,728 400 1,328 5 1,323 2.96 2.95 $ $ $ $ $ $ (1) Capital Markets and U.S. Commercial Banking and Wealth Management revenue and income taxes are reported on a TEB with an equivalent offset in the revenue and income taxes of Corporate and Other. Compared with Q4/18 Net income for the quarter was $1,193 million, down $75 million or 6% from the fourth quarter of 2018. Net interest income was up $262 million or 10%, primarily due to volume growth, interest income related to the settlement of certain income tax matters, shown as an item of note, and higher trading income, partially offset by narrower spreads in U.S. Commercial Banking and Wealth Management. Non-interest income was up $58 million or 3% as the fourth quarter of 2018 had losses on debt securities measured at FVOCI as a result of the Barbados government debt restructuring, of which $61 million was shown as an item of note. The current quarter also included higher credit fees, largely offset by lower treasury revenue and card fees. Provision for credit losses was up $138 million or 52% from the same quarter last year. Provision for credit losses on performing loans was up $67 million, due to an unfavourable change to our economic outlook and unfavourable credit migration in certain portfolios. Provision for credit losses on impaired loans was up $71 million, due to a provision for one fraud-related impairment in Canadian Commercial Banking and Wealth Management, higher provisions in the oil and gas sector within Capital Markets, higher provisions and write-offs in personal lending within Canadian Personal and Small Business Banking, partially offset by lower provisions in CIBC FirstCaribbean, as the prior year included losses on sovereign loans resulting from the Barbados government debt restructuring, shown as an item of note. Non-interest expenses were up $247 million or 10%, primarily due to the goodwill impairment charge related to the expected sale of our controlling interest in CIBC FirstCaribbean, shown as an item of note, higher spending on strategic initiatives, and an increase in legal provisions, shown as an item of note. Income tax expense was up $10 million or 3%, despite lower income, primarily due to the goodwill impairment charge related to the expected sale of our controlling interest in CIBC FirstCaribbean, which is not deductible for tax purposes. Compared with Q3/19 Net income for the quarter was down $205 million or 15% from the prior quarter. Net interest income was up $107 million or 4%, primarily due to interest income related to the settlement of certain income tax matters, shown as an item of note, and volume growth. Non-interest income was down $67 million or 3%, primarily due to lower treasury revenue, lower trading income, and lower underwriting and advisory and card fees. Provision for credit losses was up $111 million or 38% from the prior quarter. Provision for credit losses on performing loans was up $53 million, due to an unfavourable change to our economic outlook and unfavourable credit migration in certain portfolios. Provision for credit losses on impaired loans was up $58 million, due to a provision for one fraud-related impairment in Canadian Commercial Banking and Wealth Management, higher provisions and write-offs in personal lending within Canadian Personal and Small Business Banking, partially offset by lower provisions within U.S. Commercial Banking and Wealth Management. Non-interest expenses were up $168 million or 6%, primarily due to the goodwill impairment charge related to the expected sale of our controlling interest in CIBC FirstCaribbean and an increase in legal provisions, both shown as items of note. Income tax expense was down $34 million or 9%, primarily due to lower income. Quarterly trend analysis Our quarterly results are modestly affected by seasonal factors. The second quarter has fewer days as compared with the other quarters, generally leading to lower earnings. The summer months (July – third quarter and August – fourth quarter) typically experience lower levels of market activity, which affects our brokerage, investment management, and Capital Markets activities. Revenue Canadian Personal and Small Business Banking revenue has benefited from volume growth and widening spreads over the period. 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 over the period. Increases in interest rates throughout 2018 contributed to improved margins over the period. 10 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis U.S. Commercial Banking and Wealth Management has benefited from strong volume growth in both loans and deposits. Reductions in interest rates during the latter half of 2019 resulted in narrower margins as deposit re-pricing lagged the predominantly LIBOR-indexed loan portfolio. The third quarter of 2019 benefited from an elevated level of interest recoveries. Capital Markets revenue is influenced, to a large extent, by market conditions and activity in the equity derivatives business, which includes tax-exempt income. The first quarter of 2018 included higher equity derivatives trading revenue, with the TEB component of revenue offset in Corporate and Other. Corporate and Other includes interest income related to the settlement of certain income tax matters in the fourth quarter of 2019. Provision for credit losses Provision for credit losses is dependent upon the credit cycle in general, on the credit performance of the loan portfolios, and changes in economic outlook. In Canadian Personal and Small Business Banking, the first quarter of 2018 included a reduction in allowance on performing loans, reflective of an economic outlook that improved in that quarter. The second and the fourth quarters of 2019 included an increase in allowance on performing loans, reflective of the impact of certain changes to our economic outlook, and model parameter updates. In Canadian Commercial Banking and Wealth Management, all four quarters of 2019 included increased provisions for impaired loans in the Canadian commercial banking portfolio. The fourth quarter of 2019 also included one fraud-related impairment. In U.S. Commercial Banking and Wealth Management, the third and fourth quarters of 2018 and the third quarter of 2019 included higher provisions on impaired loans in the U.S. commercial banking portfolio. In Capital Markets, the first half of 2018 included reductions in allowance for performing loans, reflective of better portfolio credit quality and an improved outlook with respect to the oil and gas sector. The first quarter of 2019 included an increase in allowance on performing loans, reflective of the impact of increased uncertainty on our economic outlook, as well as higher provisions on impaired loans. The third quarter of 2019 included an increase in allowance on performing loans in the oil and gas sector to reflect expectations of potentially higher losses resulting from low natural gas prices, as well as higher provisions on impaired loans in the oil and gas sector. The fourth quarter of 2019 included an increase in allowance on performing loans to reflect an unfavourable change to our economic outlook, as well as unfavourable credit migration within the performing portfolio. In Corporate and Other, the third and fourth quarters of 2018 included higher provisions on impaired loans in CIBC FirstCaribbean resulting from the Barbados government debt restructuring. Non-interest expenses Non-interest expenses have fluctuated over the period largely due to changes in employee-related compensation and benefits, spending on strategic initiatives, and movement in foreign exchange rates. The first quarter of 2019 included a charge for a payment made to Air Canada, including related sales tax and transaction costs, to secure our participation in its new loyalty program. The fourth quarter of 2019 included a goodwill impairment charge related to the expected sale of our controlling interest in CIBC FirstCaribbean and an increase in legal provisions in Corporate and Other, shown as an item of note. Income taxes Income taxes vary with changes in income subject to tax, and the jurisdictions in which the income is earned. Taxes can also be affected by the impact of significant items and the level of tax-exempt income. The first quarter of 2018 included net tax adjustments resulting from U.S. tax reforms. The favourable impact of the U.S. tax reforms on the effective tax rate in the U.S. has benefited the U.S. Commercial Banking and Wealth Management SBU beginning in the first quarter of 2018. The first quarter of 2019 included a net tax recovery resulting from the Enron settlement, largely offset by the revaluation of certain deferred tax assets due to tax rate changes enacted by the Barbados government in that quarter. Review of 2018 financial performance $ millions, for the year ended October 31 2018 Net interest income Non-interest income Total revenue Provision for (reversal of) credit losses Non-interest expenses Income (loss) before income taxes Income taxes Net income (loss) 2017 Net income (loss) attributable to: Non-controlling interests Equity shareholders Net interest income Non-interest income Total revenue Provision for (reversal of) credit losses Non-interest expenses Income (loss) before income taxes Income taxes Net income (loss) Net income (loss) attributable to: Non-controlling interests Equity shareholders $ Canadian Personal and Small Business Banking 6,167 2,438 8,605 741 4,395 3,469 922 2,547 $ $ Canadian Commercial Banking and Wealth Management 1,120 2,745 3,865 5 2,068 1,792 485 1,307 $ $ $ $ $ – 2,547 5,752 2,620 8,372 766 4,348 3,258 838 2,420 – 2,420 $ $ $ $ – 1,307 984 2,606 3,590 16 2,021 1,553 415 1,138 – 1,138 U.S. Commercial Banking and Wealth Management (1) $ $ $ $ $ $ 1,236 530 1,766 79 1,023 664 99 565 – 565 545 331 876 84 534 258 55 203 – 203 Capital Markets (1) 1,413 1,499 2,912 (30) 1,492 1,450 381 1,069 – 1,069 1,647 1,176 2,823 (4) 1,373 1,454 364 1,090 – 1,090 $ $ $ $ $ $ Corporate and Other (1) $ 129 557 686 75 1,280 (669) (465) (204) 17 (221) 49 570 619 (33) 1,295 (643) (510) (133) 19 (152) $ $ $ $ $ CIBC Total 10,065 7,769 17,834 870 10,258 6,706 1,422 5,284 17 5,267 8,977 7,303 16,280 829 9,571 5,880 1,162 4,718 19 4,699 $ $ $ $ $ $ (1) Capital Markets and U.S. Commercial Banking and Wealth Management revenue and income taxes are reported on a TEB with an equivalent offset in the revenue and income taxes of Corporate and Other. CIBC 2019 ANNUAL REPORT 11 Management’s discussion and analysis The following discussion provides a comparison of our results of operations for the years ended October 31, 2018 and 2017. Overview Net income for 2018 was $5,284 million, compared with $4,718 million in 2017. The increase in net income of $566 million was due to higher revenue, partially offset by higher non-interest expenses. Consolidated CIBC Net interest income Net interest income was up $1,088 million or 12% from 2017, primarily due to the inclusion of the results of CIBC Bank USA for the full year, volume growth and wider spreads in Canadian personal and commercial products, and higher treasury revenue. These factors were partially offset by lower trading income. Non-interest income Non-interest income was up $466 million or 6% from 2017. The results of CIBC Bank USA were included following the acquisition on June 23, 2017. The increase in non-interest income was primarily due to higher investment management and custodial fees, credit fees, and mutual fund fees, as well as higher revenue from trading activities, partially offset by lower revenue from other activities, as 2017 included a gain on the sale and lease back of certain retail properties, shown as an item of note. Provision for credit losses Provision for credit losses was up $41 million or 5% from 2017. Provision for credit losses on impaired loans was up $123 million, primarily due to higher provisions on impaired loans in CIBC FirstCaribbean and the U.S. commercial banking portfolio. The higher provisions on impaired loans in CIBC FirstCaribbean included losses on sovereign loans resulting from the Barbados government debt restructuring, of which $28 million was shown as an item of note in the fourth quarter of 2018. Provision for credit losses on performing loans was down $82 million from 2017, driven by an economic outlook that improved since our adoption of IFRS 9 on November 1, 2017, and the transfer of certain loans to the impaired portfolio. Non-interest expenses Non-interest expenses were up $687 million or 7% from 2017, primarily due to the inclusion of the non-interest expenses of CIBC Bank USA for the full year and higher spending on strategic initiatives. Income taxes Income tax expense was up $260 million from 2017, primarily due to higher income and net tax adjustments resulting from the U.S. tax reforms enacted in the first quarter of 2018, shown as an item of note. Revenue by segment Canadian Personal and Small Business Banking Revenue was up $233 million or 3% from 2017, primarily due to volume growth, wider spreads and higher fees, partially offset by the gain on the sale and lease back of certain retail properties in 2017, shown as an item of note. Canadian Commercial Banking and Wealth Management Revenue was up $275 million or 8% from 2017. Commercial banking revenue was up primarily due to volume growth, wider spreads, and higher fees. Wealth management revenue was up primarily due to higher investment management and custodial fees and mutual fund fees from higher average AUM and AUA, partially offset by lower commission revenue driven by lower equity issuance activity and a decline in transaction volume. U.S. Commercial Banking and Wealth Management Revenue was up $890 million or 102% from 2017, primarily due to the inclusion of the results of CIBC Bank USA for the full year, which included accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank. Capital Markets Revenue was up $89 million or 3% from 2017. Global markets revenue was up primarily due to higher revenue from our foreign exchange and equity derivatives trading business and global markets financing activities, partially offset by lower revenue from our interest rate and commodities trading businesses. Corporate and investment banking revenue was up primarily due to higher corporate banking and advisory revenue, partially offset by lower investment portfolio gains and lower revenue from equity and debt underwriting. Corporate and Other Revenue was up $67 million or 11% from 2017, primarily due to higher treasury revenue, partially offset by losses recognized on debt securities in CIBC FirstCaribbean as a result of the Barbados government debt restructuring, of which $61 million was shown as an item of note in the fourth quarter of 2018. 12 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Non-GAAP measures We use a number of financial measures to assess the performance of our business lines as described below. Some measures are calculated in accordance with GAAP (IFRS), while other measures do not have a standardized meaning under GAAP, and accordingly, these measures may not be comparable to similar measures used by other companies. Investors may find these non-GAAP measures useful in understanding how management views underlying business performance. Adjusted measures Management assesses results on a reported and adjusted basis and considers both as useful measures of performance. Adjusted results remove items of note from reported results and are used to calculate our adjusted measures noted below. Items of note include the amortization of intangibles, and certain items of significance that arise from time to time which management believes are not reflective of underlying business performance. We believe that adjusted measures provide the reader with a better understanding of how management assesses underlying business performance and facilitate a more informed analysis of trends. While we believe that adjusted measures may facilitate comparisons between our results and those of some of our Canadian peer banks which make similar adjustments in their public disclosure, it should be noted that there is no standardized meaning for adjusted measures under GAAP. We also adjust our results to gross up tax-exempt revenue on certain securities to a TEB, 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, 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. CIBC 2019 ANNUAL REPORT 13 Management’s discussion and analysis The following table provides a reconciliation of non-GAAP to GAAP measures related to CIBC on a consolidated basis. $ millions, for the year ended October 31 Reported and adjusted diluted EPS Reported net income attributable to common shareholders After-tax impact of items of note (1) After-tax impact of items of note on non-controlling interests Adjusted net income attributable to common shareholders (2) Diluted weighted-average common shares outstanding (thousands) Reported diluted EPS ($) Adjusted diluted EPS ($) (2) Reported and adjusted efficiency ratio Reported total revenue Pre-tax impact of items of note (1) TEB Adjusted total revenue (TEB) (2) Reported non-interest expenses Pre-tax impact of items of note (1) Adjusted non-interest expenses (2) Reported efficiency ratio Adjusted efficiency ratio (2) Reported and adjusted dividend payout ratio Dividends paid to common shareholders Reported dividend payout ratio Adjusted dividend payout ratio (2) Reported and adjusted return on common shareholders’ equity Average common shareholders’ equity Reported return on common shareholders’ equity Adjusted return on common shareholders’ equity (2) Reported and adjusted effective tax rate Reported income before income taxes Pre-tax impact of items of note (1) Adjusted income before income taxes (2) Reported income taxes Tax impact of items of note (1) Adjusted income taxes (2) Reported effective tax rate Adjusted effective tax rate (2) $ millions, for the year ended October 31 2019 Reported net income (loss) After-tax impact of items of note (1) Adjusted net income (loss) (2) 2018 Reported net income (loss) After-tax impact of items of note (1) Adjusted net income (loss) (2) 2017 Reported net income (loss) After-tax impact of items of note (1) Adjusted net income (loss) (2) 2016 Reported net income (loss) After-tax impact of items of note (1) Adjusted net income (loss) (2) 2015 Reported net income (loss) After-tax impact of items of note (1) Adjusted net income (loss) (2) $ 2019 4,985 323 – $ 5,308 445,457 $ 11.19 11.92 $ 18,611 (101) 179 $ 18,689 $ 10,856 (488) $ 10,368 58.3 % 55.5 % $ 2,488 49.9 % 46.9 % 2018 2017 2016 2015 $ $ $ $ $ $ $ $ 5,178 257 (5) 5,430 444,627 11.65 12.21 17,834 (2) 280 18,112 10,258 (194) 10,064 57.5 % 55.6 % 2,356 45.5 % 43.4 % $ $ $ $ $ $ $ $ 4,647 (53) – 4,594 413,563 11.24 11.11 16,280 (305) 300 16,275 9,571 (259) 9,312 58.8 % 57.2 % 2,121 45.6 % 46.2 % $ $ $ $ $ $ $ $ 4,237 (191) – 4,046 395,919 10.70 10.22 15,035 (505) 474 15,004 8,971 (262) 8,709 59.7 % 58.0 % 1,879 44.3 % 46.4 % $ $ $ $ $ $ $ $ 3,531 232 (2) 3,761 397,832 8.87 9.45 13,856 (40) 482 14,298 8,861 (338) 8,523 63.9 % 59.6 % 1,708 48.4 % 45.4 % $ 34,467 $ 31,184 $ 25,393 $ 21,275 $ 18,857 14.5 % 15.4 % $ $ $ $ 6,469 387 6,856 1,348 64 1,412 20.8 % 20.6 % 16.6 % 17.4 % 6,706 220 6,926 1,422 (37) 1,385 21.2 % 20.0 % $ $ $ $ 18.3 % 18.1 % 5,880 (29) 5,851 1,162 24 1,186 19.8 % 20.3 % $ $ $ $ 19.9 % 19.0 % 5,013 (94) 4,919 718 97 815 14.3 % 16.6 % $ $ $ $ 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 Capital Markets Corporate and Other $ $ $ $ $ $ $ $ $ $ 2,291 174 2,465 2,547 9 2,556 2,420 (170) 2,250 2,160 (25) 2,135 2,026 (28) 1,998 $ 1,301 1 $ 1,302 $ 1,307 1 $ 1,308 $ 1,138 1 $ 1,139 $ $ $ $ 991 2 993 921 2 923 $ $ $ $ $ $ $ $ $ $ 683 40 723 565 27 592 203 19 222 87 6 93 104 7 111 $ $ $ $ $ $ $ $ $ $ 937 – 937 1,069 – 1,069 1,090 – 1,090 992 28 1,020 847 8 855 $ $ $ $ (91) 108 17 (204) 220 16 $ (133) 97 $ $ $ $ $ (36) 65 (202) (137) (308) 243 (65) 18.7 % 19.9 % 4,224 298 4,522 634 66 700 15.0 % 15.5 % CIBC Total 5,121 323 5,444 5,284 257 5,541 4,718 (53) 4,665 4,295 (191) 4,104 3,590 232 3,822 $ $ $ $ $ $ $ $ $ $ $ $ $ $ (1) Reflects impact of items of note described under “2019 Financial results review” section and below. (2) Non-GAAP measure. 14 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Impact of items of note in prior years 2017 Net income was affected by the following items of note: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) $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(1) associated with the acquisition of The PrivateBank and Geneva Advisors ($3 million after-tax in U.S. Commercial Banking and Wealth Management, and $70 million after-tax in Corporate and Other); $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); $45 million ($33 million after-tax) increase in legal provisions in the third quarter (Corporate and Other); $41 million ($28 million after-tax) amortization of acquisition-related intangible assets ($4 million after-tax in Canadian Personal and Small Business Banking, $1 million after-tax in Canadian Commercial Banking and Wealth Management, $16 million after-tax in U.S. Commercial Banking and Wealth Management, and $7 million after-tax in Corporate and Other); and $18 million ($13 million after-tax) reduction in the portion of the collective allowance recognized in Corporate and Other(2) 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); $134 million ($98 million after-tax) in restructuring charges primarily relating to employee severance (Corporate and Other); $109 million ($80 million after-tax) increase in the portion of the collective allowance recognized in Corporate and Other(2); $77 million ($56 million after-tax) increase in legal provisions (Corporate and Other); $53 million ($47 million after-tax) gain, net of related transaction and severance costs, on the sale of a processing centre (Corporate and Other); $40 million ($30 million after-tax) of loan losses in our exited European leveraged finance portfolio (Capital Markets); $30 million ($22 million after-tax) amortization of acquisition-related intangible assets ($5 million after-tax in Canadian Personal and Small Business Banking, $2 million after-tax in Canadian Commercial Banking and Wealth Management, $6 million after-tax in U.S. Commercial Banking and Wealth Management, and $9 million after-tax in Corporate and Other); $30 million income tax recovery due to the settlement of transfer pricing-related matters (Canadian Personal and Small Business Banking); $15 million income tax recovery arising from a change in our expected utilization of certain tax loss carryforwards, primarily due to the sale of our minority investment in ACI (Corporate and Other); and $3 million ($2 million after-tax) gain from the structured credit run-off business (Capital Markets). The above items of note increased revenue by $505 million, provision for credit losses by $149 million and non-interest expenses by $262 million, and decreased income taxes by $97 million. In aggregate, these items of note increased net income by $191 million. 2015 Net income was affected by the following items of note: (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 acquisition-related intangible assets ($6 million after-tax in Canadian Personal and Small Business Banking, $2 million after-tax in Canadian Commercial Banking and Wealth Management, $7 million after-tax in U.S. Commercial Banking and Wealth Management, and $18 million after-tax in Corporate and Other); $29 million ($21 million after-tax) loss from the structured credit run-off business (Capital Markets); and $23 million ($13 million after-tax) gain on sale of an investment in our merchant banking portfolio (Capital Markets). The above items of note increased revenue by $40 million and non-interest expenses by $338 million, and decreased income taxes by $66 million. In aggregate, these items of note decreased net income by $232 million. (1) Transaction costs include legal and other advisory fees, financing costs associated with pre-funding the cash component of the merger consideration, and interest incurred on the obligation payable to dissenting shareholders. Integration costs are comprised of direct and incremental costs incurred as part of planning for and executing the integration of the businesses of The PrivateBank (subsequently rebranded as CIBC Bank USA) and Geneva Advisors with CIBC, including enabling cross-sell opportunities and expansion of services in the U.S. market, the upgrade and conversion of systems and processes, project management, integration-related travel, severance, consulting fees and marketing costs related to rebranding activities. Purchase accounting adjustments, included as items of note beginning in the fourth quarter of 2017, include the accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank, the collective allowance established for new loan originations and renewals of acquired loans (prior to the adoption of IFRS 9 in the first quarter of 2018), and changes in the fair value of contingent consideration relating to the Geneva Advisors acquisition. (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 were all reported in the respective SBUs prior to our adoption of IFRS 9. CIBC 2019 ANNUAL REPORT 15 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 – Technology and Operations, Risk Management, Culture and Brand, and Finance, 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 majority of the functional and support costs of CIBC Bank USA are recognized directly in the U.S. Commercial Banking and Wealth Management SBU. Corporate and Other also includes the results of CIBC FirstCaribbean and other strategic investments, as well as other income statement and balance sheet items not directly attributable to the business lines. Business unit allocations Revenue, expenses, and other balance sheet resources related to certain activities are generally allocated to the lines of business within the SBUs. Treasury activities impact the financial results of the SBUs. Each line of business within our SBUs is charged or credited with a market-based cost of funds on assets and liabilities, respectively, which impacts the revenue performance of the SBUs. Once the interest and liquidity risks inherent in our client- driven assets and liabilities are transfer priced into Treasury, they are managed within CIBC’s risk framework and limits. The residual financial results associated with Treasury activities are reported in Corporate and Other, with the exception of certain Treasury activities in U.S. Commercial Banking and Wealth Management, which are reported in that SBU. Capital is attributed to the SBUs in a manner that is intended to consistently measure and align economic costs with the underlying benefits and risks associated with SBU activities. Earnings on unattributed capital remain in Corporate and Other. We review our transfer pricing methodologies on an ongoing basis to ensure they reflect changing market environments and industry practices. To measure and report the results of operations of the lines of business within our Canadian Personal and Small Business Banking and Canadian Commercial Banking and Wealth Management SBUs, we use a Manufacturer/Customer Segment/Distributor Management Model. The model uses certain estimates and allocation methodologies to process internal payments between lines of business for sales, renewals and trailer commissions to facilitate preparation of segmented financial information. Periodically, the sales, renewals and trailer commission rates paid to customer segments for certain products/services are revised and applied prospectively. Non-interest expenses incurred by our functional groups are attributed to the SBUs to which they relate based on appropriate criteria. We recognize provision for credit losses on both impaired (stage 3) and performing (stages 1 and 2) loans in the respective SBUs. Prior to November 1, 2017, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses related to CIBC Bank USA, which was recognized in U.S. Commercial Banking and Wealth Management, and provision for credit losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking. Revenue, taxable equivalent basis The SBUs evaluate revenue on a TEB. In order to arrive at the TEB amount, the SBUs gross up tax-exempt revenue on certain securities to a TEB, being the amount of fully taxable revenue, which, were it to have incurred tax at the statutory income tax rate, would yield the same after-tax revenue. Simultaneously, an equivalent amount is booked as an income tax expense resulting in no impact on the net income of the SBUs. This measure enables comparability of revenue arising from both taxable and tax-exempt sources. The total TEB adjustments of the SBUs are offset in revenue and income tax expense in Corporate and Other. 16 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Canadian Personal and Small Business Banking Canadian Personal and Small Business Banking provides personal and business clients across Canada with financial advice, products and services through a team in our banking centres, as well as through our direct, mobile and remote channels. Our business strategy Our goal is to build a modern consumer and small business relationship bank to help our clients achieve their ambitions by focusing on three key strategic priorities: (cid:129) (cid:129) (cid:129) Winning at relationships Delivering market-leading solutions Being easy to bank with 2019 progress In 2019, we made good progress on our strategy. Winning at relationships Delivering market-leading solutions Being easy to bank with (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) For the fifth consecutive year, CIBC was ranked #1 in Investment Executive magazine’s Report Card on Banks, as voted by our Imperial Service advisors. Amplified our focus on providing exceptional advice and solutions by increasing the number and quality of financial and retirement plans, increasing the accreditation of our advisors and engaging more than 25,000 clients through financial education seminars and national education events. Topics included women and wealth, retirement planning and cash flow planning, among others. Successfully piloted a new business advisor role in key markets to provide specialized support for our growing business client segment. Expanded the number in Ontario throughout the year, and expansion in Western Canada is planned for 2020. Restructured our banking centre network into a community model to be closer to our clients and communities where we operate, while investing in local leadership to help bring the depth and breadth of our expertise to our clients. Reached a total of more than 200 redesigned urban banking centres across Canada as part of a multi-year network transformation strategy, positioning CIBC for the future of banking through a clear focus on advice and client relationships, and supported by innovative digital banking capabilities. (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) Launched CIBC SmartBanking for Business, a first-of-its kind banking platform in Canada that is designed to help businesses manage their banking, accounting and payroll in one place. Introduced a Full-Service Physician Package and Medical/Dental Student Offer to bring the best of our bank to clients as they progress through various stages of their career. Expanded our CIBC Global Money Transfer service to business clients so they can now send money internationally with no transfer fee at a preferred exchange rate to more than 75 countries. Launched Pace It on our credit cards, allowing clients to convert larger purchases into installment plans, enabling clients to spread their payments out over a fixed time period at a lower interest rate – a first among the large Canadian banks. Introduced Shopping with Points, a new feature on our Aventura card enabling clients to redeem their points directly for purchases and giving them greater flexibility and choice in using their reward points beyond travel. Introduced the CIBC Smart Plus account, providing clients with an exceptional all-in-one, everyday banking solution that provides unlimited transactions, overdraft protection, no CIBC fees on ATM withdrawals worldwide, and an annual fee rebate on a premium CIBC credit card. Expanded Simplii Financial’s suite of banking products with the introduction of the no annual fee Simplii Financial Cash Back Visa card. Awarded the highest overall score by Forrester for mobile banking for the 6th year in a row. Received the highest ranking in Surviscor’s 2019 Canadian Mobile Banking scorCard for the best overall mobile banking experience in the Canadian digital banking landscape. Earned the top ranking in customer satisfaction for mobile credit card apps by J.D. Power. Named the Best Consumer Digital Bank in Canada by Global Finance magazine, recognizing our mobile banking, mobile app and website design as top in the country. Over 1,000 of our CIBC banking centres can now leverage eSignatures, saving our clients time and delivering a radically simple banking experience when they visit us. Clients now have access to enriched transaction information online and in their mobile app, including recognizable merchant names, transaction details and merchant locations on a map – a first among the large Canadian banks. Continued to significantly invest in technology and innovations to make it easier for our clients to bank with us – from document scanning that saves our clients’ time, to a simplified and faster mortgage application system, to a centralized power of attorney and estates process to ensure we are bringing the best of our bank to our clients. 2019 financial review Revenue ($ billions) 8.4 8.6 8.8 Net income ($ billions) Efficiency ratio (%) 2.4 2.5 2.3 54.2 51.9 51.1 Average loans and acceptances(1) ($ billions) 243.5 257.0 256.7 Average deposits ($ billions) 162.9 166.7 177.4 17 18 19 17 18 19 17 18 19 17 18 19 17 18 19 (1) Loan amounts are stated before any related allowances. CIBC 2019 ANNUAL REPORT 17 Management’s discussion and analysis Our focus for 2020 We are continuing to deliver on our client-focused strategy with a clear focus on relationship-building and advice, with the objective of helping to make our clients’ ambitions a reality. Our priorities in 2020 are: (cid:129) (cid:129) (cid:129) Winning at relationships through deeper needs-based conversations including more financial planning; Delivering market-leading solutions that offer clients great value and benefits, are easy to use and provide a more focused product line; and Being easy to bank with by implementing meaningful process enhancements and helping clients experience radically simple banking. Results(1) $ millions, for the year ended October 31 Revenue Provision for (reversal of) credit losses Impaired (2) Performing (2) 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 2019 2018 2017 $ 8,758 $ 8,605 $ 8,372 809 87 896 4,745 3,117 826 2,291 2,291 54.2 % 62.4 % (359) 1,932 259.1 256.7 177.4 13,431 $ $ $ $ $ $ $ 760 (19) 741 4,395 3,469 922 2,547 2,547 51.1 % 67.2 % (372) 2,175 259.1 257.0 166.7 14,086 $ $ $ $ $ $ $ 760 6 766 4,348 3,258 838 2,420 2,420 51.9 % 64.3 % (367) 2,053 246.3 243.5 162.9 14,709 $ $ $ $ $ $ $ For additional segmented information, see Note 30 to the consolidated financial statements. (1) (2) As a result of our adoption of IFRS 9 effective November 1, 2017, we now recognize provision for credit losses on both impaired and performing loans in the SBU. In prior years, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking. For additional information, see the “Non-GAAP measures” section. (3) Financial overview Net income was down $256 million or 10% from 2018, primarily due to higher non-interest expenses as the current year included a charge for a payment made to Air Canada to secure our participation in its new loyalty program, shown as an item of note, and a higher provision for credit losses, partially offset by higher revenue. Revenue Revenue was up $153 million or 2% from 2018, primarily due to wider spreads and volume growth, partially offset by lower fee income. Provision for credit losses Provision for credit losses was up $155 million or 21% from 2018. The current year included a provision for credit losses on performing loans due to the impact of certain unfavourable changes to our economic outlook and unfavourable credit migration in certain portfolios. The prior year included a reversal of credit losses on performing loans, driven by an economic outlook that had improved since our adoption of IFRS 9 on November 1, 2017, partially offset by an unfavourable impact from model parameter updates. Provision for credit losses on impaired loans was up due to higher write-offs and an increase in allowance driven by higher impaired balances in the personal lending portfolio. Non-interest expenses Non-interest expenses were up $350 million or 8% from 2018, primarily due to the charge noted above and higher spending on strategic initiatives. Income taxes Income taxes were down $96 million or 10% from 2018, primarily due to lower income. Average assets Average assets were comparable with 2018. 18 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Canadian Commercial Banking and Wealth Management Canadian Commercial Banking and Wealth Management provides high-touch, relationship-oriented banking and wealth management services to middle- market companies, entrepreneurs, high-net-worth individuals and families across Canada, as well as asset management services to institutional investors. Our business strategy We are focused on building and enhancing client relationships, being Canada’s leader in financial advice and generating long-term consistent growth. To deliver on this, our three strategic priorities are: (cid:129) (cid:129) (cid:129) Scaling commercial banking Increasing agility and efficiency in wealth management Deepening client relationships across our bank 2019 progress In 2019, we made good progress on our strategy. Scaling commercial banking Increasing agility and efficiency in wealth management Deepening client relationships across our bank (cid:129) (cid:129) (cid:129) Expanded our commercial banking team by adding talent to help meet the unique needs of our diverse clients. Continued to meet clients’ needs on both sides of the border through cross-border client referrals with CIBC Bank USA. (cid:129) (cid:129) Expanded CIBC Innovation Banking to other high-growth centres in North America in order to extend our service offering to technology and innovation clients across North America. Launched CIBC Smart Investment Solutions – all-in-one portfolios that blend active and passive investment strategies to deliver on value and expertise. Continued to focus on enhancing value for our clients by finding opportunities to simplify our product lineup and optimize costs. (cid:129) (cid:129) Increased partnership referrals to deepen client relationships across CIBC and better satisfy the needs of our clients. Upgraded the financial planning capabilities and capacity of our team. 2019 financial review Revenue ($ billions) 3.9 4.0 3.6 Net income ($ millions) Efficiency ratio (%) 1,307 1,301 56.3 1,138 53.5 52.0 Average loans(1) ($ billions) 64.7 57.8 52.8 Average deposits ($ billions) 60.2 53.2 48.8 17 18 19 17 18 19 17 18 19 17 18 19 17 18 19 Average commercial banking loans(1)(2) ($ billions) Average commercial banking deposits ($ billions) 62.6 55.8 51.1 54.9 47.6 42.7 Assets under administration and management(3) ($ billions) 274.5 269.0 289.1 Canadian retail mutual funds ($ billions) 101.4 101.1 108.9 17 18 19 17 18 19 17 18 19 17 18 19 Loan amounts are stated before any related allowances. (1) (2) Comprises loans and acceptances and notional amount of letters of credit. (3) AUM amounts are included in the amounts reported under AUA. AUM 182.4 164.6 162.5 CIBC 2019 ANNUAL REPORT 19 Management’s discussion and analysis Our focus for 2020 To build on our momentum across Canadian Commercial Banking and Wealth Management, we will continue to focus on helping our clients achieve their ambitions 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; Continuing to invest in financial planning to further our role as a leader in financial advice; Simplifying and optimizing our business to align with changing market dynamics to better meet the needs of our clients; and Expanding our workforce to seize strategic opportunities in commercial banking. (cid:129) (cid:129) (cid:129) Results(1) $ millions, for the year ended October 31 Revenue Commercial banking Wealth management Total revenue Provision for (reversal of) credit losses Impaired (2) Performing (2) 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 ($ billions) Average deposits ($ billions) AUA ($ billions) AUM ($ billions) Full-time equivalent employees 2019 1,651 2,395 4,046 159 4 163 2,106 1,777 476 1,301 1,301 52.0 % 36.8 % (345) 956 62.6 64.7 60.2 289.1 182.4 5,048 $ $ $ $ $ $ $ $ $ $ 2018 1,488 2,377 3,865 15 (10) 5 2,068 1,792 485 1,307 1,307 53.5 % 39.8 % (322) 985 55.7 57.8 53.2 269.0 164.6 4,999 $ $ $ $ $ $ $ $ $ $ 2017 1,324 2,266 3,590 16 n/a 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 $ $ $ $ $ $ $ $ $ $ For additional segmented information, see Note 30 to the consolidated financial statements. (1) (2) As a result of our adoption of IFRS 9 effective November 1, 2017, we now recognize provision for credit losses on both impaired and performing loans in the SBU. In prior years, provision for credit losses on performing loans was recognized in Corporate and Other. For additional information, see the “Non-GAAP measures” section. (3) n/a Not applicable. Financial overview Net income was down $6 million from 2018, primarily due to a higher provision for credit losses and higher non-interest expenses, partially offset by higher revenue. Revenue Revenue was up $181 million or 5% from 2018. Commercial banking revenue was up $163 million or 11%, primarily due to volume growth from loans and deposits, and higher fees. Wealth management revenue was up $18 million or 1%, primarily due to higher investment management and custodial fees driven by higher AUM and AUA, wider spreads, and volume growth, partially offset by lower commission revenue and mutual fund fees. Provision for credit losses Provision for credit losses was up $158 million from 2018, primarily due to higher provisions on impaired loans in the Canadian commercial banking portfolio, including one fraud-related impairment in the fourth quarter. Non-interest expenses Non-interest expenses were up $38 million or 2% from 2018, primarily due to higher spending on strategic initiatives and higher employee-related compensation, partially offset by lower performance-based compensation. Income taxes Income taxes were down $9 million or 2% from 2018, primarily due to lower income. Average assets Average assets were up $6.9 billion or 12% from 2018, primarily due to growth in commercial loans. Assets under administration AUA were up $20.1 billion or 7% from 2018, primarily due to market appreciation. AUM amounts are included in the amounts reported under AUA. 20 CIBC 2019 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. Our business strategy Our goal is to build the best-in-class commercial and wealth management bank for our chosen client segments and markets with a focus on developing deep, profitable relationships leveraging the full complement of CIBC’s products and services across our North American platform. To deliver on this, our three key strategic priorities are: (cid:129) (cid:129) (cid:129) Growing organically by adding and deepening our client relationships and selectively entering additional markets and specialty businesses Continuing to build a strong U.S. operating platform by investing appropriately in our growth Maintaining our risk discipline through selective evaluation of new opportunities, portfolio diversification, and quality of funding sources 2019 progress In 2019, we made strong progress on our strategy. Growing organically by adding and deepening our client relationships and selectively entering additional markets and specialty businesses (cid:129) (cid:129) (cid:129) Achieved solid revenue growth, reflecting strong business performance and our continued focus on building full, profitable client relationships. Generated robust loan and deposit growth, as we continue to capitalize on referral opportunities to do more for our combined North American client base. Generated strong growth in AUM and AUA, reflecting continued client development efforts and an acquisition. 2019 financial review Continuing to build a strong U.S. operating platform by investing appropriately in our growth Maintaining our risk discipline through selective evaluation of new opportunities, portfolio diversification, and quality of funding sources (cid:129) (cid:129) (cid:129) Managed expenses while appropriately investing in our growth, with an efficiency ratio of 56.9% for 2019. (cid:129) (cid:129) Expanded our private wealth management capabilities by acquiring LGA, a leading family office in St. Louis and New York. Refined client-facing processes, making it easier for clients to bank with us. Maintained focus on strong asset quality which remained stable during 2019. Continued growing deposits via CIBC Agility, an online savings and certificate of deposit account platform for U.S. clients that provides us with some diversification of our deposit base. Revenue(1) ($ billions) 2.0 1.8 0.9 Net income(1) ($ millions) 683 565 Efficiency ratio(1) (%) 61.0 57.9 56.9 Average loans(1)(2) ($ billions) Average deposits(1) ($ billions) 35.6 30.4 27.2 22.3 203 15.9 7.6 17 18 19 17 18 19 17 18 19 17 18 19 17 18 19 Average commercial banking loans(1)(2) ($ billions) 32.4 27.7 15.1 17 18 19 Assets under administration and management(1)(3) ($ billions) 89.7 74.0 80.0 68.8 60.0 58.7 17 18 19 AUM Included the results of CIBC Bank USA following the acquisition on June 23, 2017. Loan amounts are stated before any related allowances. Average commercial banking loans are stated before purchase accounting adjustments. (1) (2) (3) AUM amounts are included in the amounts reported under AUA. Our focus for 2020 To build on our momentum across U.S. Commercial Banking and Wealth Management, we will continue to focus on helping our clients achieve their ambitions by: (cid:129) Adding new client relationships in commercial banking and wealth management through our strategically located U.S. offices and national specialty groups, while maintaining our focus on asset quality, as well as loan and deposit portfolio diversification; Expanding relationships with existing clients by leveraging cross-border and cross-business capabilities; and Investing appropriately in the growth of our business while managing expenses. (cid:129) (cid:129) CIBC 2019 ANNUAL REPORT 21 Management’s discussion and analysis Results(1) $ millions, for the year ended October 31 Revenue Commercial banking Wealth management Other Total revenue (2)(3) Provision for (reversal of) credit losses Impaired (4) Performing (4) Provision for credit losses Non-interest expenses Income before income taxes Income taxes (2) Net income Net income attributable to: Equity shareholders (a) Efficiency ratio Return on equity (5) Charge for economic capital (5) (b) Economic profit (5) (a+b) Average assets ($ billions) Average loans ($ billions) Average deposits ($ billions) AUA ($ billions) AUM ($ billions) Full-time equivalent employees 2019 1,349 611 6 1,966 68 5 73 1,119 774 91 683 683 56.9 % 9.1 % (713) (30) 48.7 35.6 27.2 89.7 68.8 2,113 $ $ $ $ $ $ $ $ $ $ 2018 1,197 563 6 1,766 67 12 79 1,023 664 99 565 565 57.9 % 8.1 % (664) (99) 42.0 30.4 22.3 80.0 60.0 1,947 $ $ $ $ $ $ $ $ $ $ 2017 532 324 20 876 37 47 84 534 258 55 203 203 61.0 % 7.5 % (256) (53) 19.9 15.9 7.6 74.0 58.7 1,753 $ $ $ $ $ $ $ $ $ $ For additional segmented information, see Note 30 to the consolidated financial statements. (1) (2) Revenue and income taxes are reported on a TEB. Accordingly, revenue and income taxes include a TEB adjustment of $2 million (2018: $2 million; 2017: $2 million). The (3) equivalent amounts are offset in the revenue and income taxes of Corporate and Other. Included $35 million of accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank, shown as an item of note beginning in the fourth quarter of 2017 (2018: $55 million; 2017: $45 million, of which $31 million was included as an item note in the fourth quarter of 2017). (4) As a result of our adoption of IFRS 9 effective November 1, 2017, we now recognize provision for credit losses on both impaired and performing loans in the SBU. In prior years, provision for credit losses on performing loans other than that of CIBC Bank USA was recognized in Corporate and Other. For additional information, see the “Non-GAAP measures” section. (5) Financial overview Net income was up $118 million or 21% from 2018, primarily due to higher revenue, partially offset by higher non-interest expenses. Revenue Revenue was up $200 million or 11% from 2018. Commercial banking revenue was up $152 million or 13%, primarily due to volume growth and the impact of foreign exchange translation, partially offset by narrower spreads and lower revenue from the accretion of the acquisition date fair value discount on the acquired loans of The PrivateBank, shown as an item of note. Wealth management revenue was up $48 million or 9%, primarily due to volume growth, higher investment management and custodial fees driven by higher AUM, and the impact of foreign exchange translation, partially offset by narrower spreads. Other revenue was comparable with 2018. Other revenue primarily includes the treasury activities of CIBC Bank USA. Provision for credit losses Provision for credit losses was down $6 million or 8% from 2018. The current year included a provision for credit losses on performing loans that reflects the unfavourable impact of changes to our economic outlook and unfavourable credit migration within the performing portfolio. The prior year also included a provision for credit losses on performing loans driven by unfavourable credit migration within the performing portfolio, partially offset by improvements in our economic outlook since our adoption of IFRS 9 on November 1, 2017. The provision for credit losses on impaired loans was comparable with the prior year. Non-interest expenses Non-interest expenses were up $96 million or 9% from 2018, primarily due to higher spending on strategic initiatives, higher employee-related compensation, and the impact of foreign exchange translation, partially offset by lower performance-based compensation. Income taxes Income taxes were down $8 million or 8% from 2018, as higher income in the current year was more than offset by a lower effective tax rate due to the impact of the U.S. tax reforms. Average assets Average assets were up $6.7 billion or 16% from 2018, primarily due to growth in commercial loans. Assets under administration AUA were up $9.7 billion or 12% from 2018, primarily due to the impact of foreign exchange rates, net sales, and market appreciation. AUM amounts are included in the amounts reported under AUA. 22 CIBC 2019 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 solutions and top-ranked research to corporate, government and institutional clients around the world. Our business strategy Our goal is to be the leading capital markets franchise for our core clients in Canada and the lead relationship bank for our key clients globally by delivering best-in-class insight, advice and execution. To enable CIBC’s strategy and priorities, we collaborate with our partners across our bank to deepen and enhance client relationships. To deliver on our goal, our three key strategic priorities are: (cid:129) (cid:129) (cid:129) Being the leading capital markets platform in Canada for our core clients Building a North American client platform with global capabilities Increasing connectivity across CIBC to deliver better service for clients 2019 progress In 2019, we made good progress on our strategy. Being the leading capital markets platform in Canada for our core clients Building a North American client platform with global capabilities Increasing connectivity across CIBC to deliver better service for clients (cid:129) (cid:129) (cid:129) Supported our clients by investing in our talent, further developing our proprietary technology, expanding our structuring expertise and advice, and leveraging our market expertise. Continued to hold leadership positions in syndicated loans, debt and equity underwriting, advisory services, equity trading, commodities and foreign exchange. Strengthened our platform by continuing to evolve our research coverage framework and provide specialized advice and solutions, aligned to the macro trends influencing the global economy and our clients, including renewable energy, private capital, technology and innovation. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Acquired Cleary Gull, a Milwaukee-based boutique investment banking firm specializing in middle-market mergers and acquisitions, private capital placement and debt advisory across the U.S. Expanded our U.S. Prime Service business, focused on meeting the needs of U.S.- based alternative asset managers and other cross-border clients, and furthering our North American platform for growth. Announced our commitment to support $150 billion in environmental and sustainable finance activities by 2027, underscoring our focus on enabling growth, and helping to make Canada and North America global leaders in environmental stewardship and sustainability. Announced distribution of CIBC’s top-ranked Canadian equity research, analyst expertise and execution capabilities to European-based clients through partnership with Kepler Cheuvreux. Eliminated transfer fees for businesses sending money overseas with CIBC’s Global Money Transfer service, making it easier and faster to do business in more than 75 countries around the world. Launched our Multi-Currency Pricing business, a market-leading foreign exchange solution for Canadian businesses who transact with international cardholders online. Expanded our U.S. investment banking team in Chicago, further strengthening partnerships with commercial banking to bring our suite of commercial and capital markets solutions to mid-market businesses. Expanded our client teams and product capabilities to bring our suite of wealth and capital markets solutions to small businesses, family offices, ultra high-net-worth clients, foundations and endowments. As a leading capital markets franchise in Canada and banking partner to our clients around the world, Capital Markets acted as: (cid:129) Financial advisor to Barrick Gold Corporation on its creation of a joint venture in Nevada with Newmont Mining Corporation representing one of the largest mining joint ventures; CIBC also acted as financial advisor to Randgold Resources on its merger with Barrick Gold Corporation; Financial advisor, co-lead arranger and joint bookrunner on the sale of 10.01% of SNC-Lavalin’s interest in Highway 407 for up to $3.25 billion to a Canadian pension fund and the refinancing of associated credit facilities; Exclusive financial advisor to Kilmer Infrastructure and HMSHost on the sale of their respective interests in the ONRoute Service Centres business to a consortium of infrastructure investors led by Arjun Infrastructure Partners and Fengate Asset Management; CIBC also acted as sole underwriter and lead arranger to Arjun and Fengate in support of the acquisition; Exclusive financial advisor and sole lead to ENMAX Corporation on the acquisition of operations in Maine from Emera Inc. for approximately US$1.3 billion and associated credit facilities representing CIBC’s first advisory role for a Canadian utility acquiring assets in the U.S.; Financial advisor and sole bookrunner, administrative agent and lead arranger to Northland Power on its acquisition of a 99.2% interest in Empresa de Energía de Boyacá (EBSA) for approximately $1.05 billion, $347 million subscription receipts offering and $1.1 billion bridge facility. CIBC also acted as sole bookrunner on a $863 million secondary offering of Northland Power common shares for Northland Power Holdings Inc.; Exclusive financial advisor to TC Energy on the sale of its interests in three Ontario natural gas-fired power plants to Ontario Power Generation for approximately $2.87 billion representing the largest power asset sale in Canada. CIBC also acted as sole bookrunner on a $1 billion issue of medium- term note debentures for TransCanada Pipelines Limited; Financial advisor to WestJet on its sale to ONEX Corporation for approximately $5 billion; Financial advisor to Starlight Investments on the US$1.4 billion sale of Starlight U.S. Multi-Family (No. 5) Core Fund to Tricon Capital Group; and Joint lead agent, mandated lead arranger and swap provider on a A$2.5 billion corporate refinancing for Port of Melbourne. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) CIBC 2019 ANNUAL REPORT 23 Management’s discussion and analysis Capital Markets awards and recognition (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Canadian Structured Notes Issuer of the Year – mtn-i Americas Structured Note Awards (2019) CIBC Prime Services named Top Canadian Prime Broker by Alternative IQ (2019) Most helpful analyst in rates research, CIBC Capital Markets by Greenwich Associates Canadian Fixed Income Investors (2019) The leader in Canadian equity trading, #1 in volume, value and number of trades – TSX and ATS Market Share Report (2009 – present) CIBC Global Investment Banking ranked #2 in Canadian Corporate Bond Issuance by Bloomberg (2019) M&A Atlas Awards Americas (2019) (cid:129) (cid:129) U.S.A. Boutique Investment Banker of the Year: Ronald D. Miller, CIBC Cleary Gull U.S.A. Middle Markets M&A Industry TMT Deal of the Year – Allen Technologies, Inc., a portfolio company of Greyrock Capital Group, to Periscope Equity, LLC (2019) U.S.A. Middle Markets M&A Industry Industrials Deal of the Year – Roll-Rite Holdings Group LLC, a portfolio company of Capital Partners and Argosy Private Equity, to Safe Fleet Holdings, LLC, a portfolio company of Oak Hill Capital Partners (2019) (cid:129) 2019 financial review Revenue ($ billions) 2.8 2.9 2.9 Net income ($ millions) 1,090 1,069 937 Efficiency ratio (%) 48.6 51.2 51.6 17 18 19 17 18 19 17 18 19 Average value-at-risk (VaR) ($ millions) Revenue – Global markets ($ millions) 6.5 5.7 5.3 1,674 1,705 1,601 Revenue – Corporate and investment banking ($ millions) 1,222 1,238 1,232 17 18 19 17 18 19 17 18 19 Our focus for 2020 To support our bank’s long-term objectives, Capital Markets remains focused on delivering profitable growth by deepening client relationships and collaborating with our partners across our bank to help make our clients’ ambitions a reality. We will continue to do this by: (cid:129) (cid:129) (cid:129) Maintaining our focused approach to client coverage in Canada; Growing our North American platform by further expanding our U.S. reach and broadening the services offered to clients; and Strengthening our connectivity, technology and innovation efforts to bring more of our bank’s offerings to our clients. 24 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Results(1) $ millions, for the year ended October 31 Revenue Global markets Corporate and investment banking (2) Total revenue (3) Provision for (reversal of) credit losses Impaired (4) Performing (4) 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 (5) Charge for economic capital (5) (b) Economic profit (5) (a+b) Average assets ($ billions) Full-time equivalent employees 2019 1,705 1,232 2,937 90 63 153 1,516 1,268 331 937 937 51.6 % 31.7 % (288) 649 184.6 1,449 $ $ $ $ $ $ 2018 1,674 1,238 2,912 8 (38) (30) 1,492 1,450 381 1,069 1,069 51.2 % 39.4 % (266) 803 166.2 1,396 $ $ $ $ $ $ 2017 1,601 1,222 2,823 (4) n/a (4) 1,373 1,454 364 1,090 1,090 48.6 % 35.5 % (299) 791 156.4 1,314 $ $ $ $ $ $ For additional segmented information, see Note 30 to the consolidated financial statements. (1) (2) Certain information has been reclassified to conform to the presentation adopted in the first quarter of 2019. Corporate and investment banking includes the Other line of business. (3) Revenue and income taxes are reported on a TEB. Accordingly, revenue and income taxes include a TEB adjustment of $177 million (2018: $278 million; 2017: $298 million). The equivalent amounts are offset in the revenue and income taxes of Corporate and Other. (4) As a result of our adoption of IFRS 9 effective November 1, 2017, we now recognize provision for credit losses on both impaired and performing loans in the SBU. In prior years, provision for credit losses on performing loans was recognized in Corporate and Other. (5) For additional information, see the “Non-GAAP measures” section. n/a Not applicable. Financial overview Net income was down $132 million or 12% from 2018, primarily due to a higher provision for credit losses. Revenue Revenue was up $25 million or 1% from 2018. Global markets revenue was up $31 million or 2%, primarily due to higher revenue from our interest rate trading business, global markets financing activities, and our commodities and equity trading businesses, largely offset by lower revenue from our equity derivatives trading business. Corporate and investment banking revenue was down $6 million, primarily due to lower investment portfolio gains, lower equity underwriting activity, and lower revenue from our run-off businesses, partially offset by higher corporate banking and advisory revenue. Provision for (reversal of) credit losses Provision for credit losses was $153 million compared to a reversal of credit losses of $30 million in 2018. Provision for credit losses on performing loans was up due to an increase in the oil and gas sector reflective of both unfavourable credit migration and downward revisions to expected oil prices. Provision for credit losses on impaired loans was up primarily due to higher provisions in the utility and oil and gas sectors. Non-interest expenses Non-interest expenses were up $24 million or 2% from 2018, primarily due to higher spending on strategic initiatives and higher employee-related compensation, partially offset by lower performance-based compensation. Income taxes Income taxes were down $50 million or 13% from 2018, primarily due to lower income. Average assets Average assets were up $18.4 billion or 11% from 2018, primarily due to an increase in securities purchased under resale agreements and higher loan balances. CIBC 2019 ANNUAL REPORT 25 Management’s discussion and analysis Corporate and Other Corporate and Other includes the following functional groups – Technology and Operations, Risk Management, Culture and Brand, and Finance, as well as other support groups. The expenses of these functional and support groups are generally allocated to the business lines within the SBUs. The majority of the functional and support costs of CIBC Bank USA are recognized directly in the U.S. Commercial Banking and Wealth Management SBU. Corporate and Other also includes the results of CIBC FirstCaribbean and other strategic investments, as well as other income statement and balance sheet items not directly attributable to the business lines. Results(1) $ millions, for the year ended October 31 Revenue International banking Other Total revenue (2) Provision for (reversal of) credit losses Impaired (3) Performing (3) Provision for (reversal of) credit losses Non-interest expenses Loss before income taxes Income taxes (2) Net income (loss) Net income (loss) attributable to: Non-controlling interests Equity shareholders Full-time equivalent employees 2019 2018 $ $ $ 803 101 904 21 (20) 1 1,370 (467) (376) (91) 25 (116) $ $ $ 663 23 686 102 (27) 75 1,280 (669) (465) (204) 17 (221) 23,116 21,792 $ $ $ 2017 723 (104) 619 20 (53) (33) 1,295 (643) (510) (133) 19 (152) 22,071 For additional segmented information, see Note 30 to the consolidated financial statements. (1) (2) Revenue and income taxes of Capital Markets and U.S. Commercial Banking and Wealth Management are reported on a TEB. The equivalent amounts are offset in the revenue and income taxes of Corporate and Other. Accordingly, revenue and income taxes include a TEB adjustment of $179 million (2018: $280 million; 2017: $300 million). (3) As a result of our adoption of IFRS 9 effective November 1, 2017, we now recognize provision for credit losses on both impaired and performing loans in the SBUs. In prior years, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses related to CIBC Bank USA, which was recognized in U.S. Commercial Banking and Wealth Management, and provision for credit losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking. Provision for credit losses related to CIBC FirstCaribbean continues to be recognized in Corporate and Other. Financial overview Net loss was down $113 million or 55% from 2018, primarily due to higher revenue and a lower provision for credit losses, partially offset by higher non-interest expenses. Revenue Revenue was up $218 million or 32% from 2018. International banking revenue was up $140 million or 21% from 2018, as the prior year included incremental expected credit losses on debt securities in CIBC FirstCaribbean as a result of the Barbados government restructuring its public debt, of which $61 million was shown as an item of note in the fourth quarter of 2018. The current year also reflected a favourable impact from foreign exchange translation and better performance in CIBC FirstCaribbean. Other revenue was up $78 million or 339% from 2018, primarily due to a lower TEB adjustment and interest income related to the settlement of certain income tax matters, shown as an item of note, partially offset by lower treasury revenue and lower income from equity-accounted associates and joint ventures. Provision for (reversal of) credit losses Provision for credit losses was down $74 million from 2018, as the prior year included a higher provision for credit losses on impaired loans in CIBC FirstCaribbean, which included losses on sovereign loans resulting from the Barbados government debt restructuring noted above, of which $28 million was shown as an item of note in the fourth quarter of 2018. Non-interest expenses Non-interest expenses were up $90 million or 7% from 2018. The current year was impacted by a goodwill impairment charge related to the expected sale of our controlling interest in CIBC FirstCaribbean, an increase in legal provisions, and lower transaction and integration-related costs as well as purchase accounting adjustments associated with the acquisitions of The PrivateBank and Geneva Advisors, all shown as items of note. Excluding these items of note, non-interest expenses were up $17 million from 2018, primarily due to higher spending on strategic initiatives, higher operating expenses in CIBC FirstCaribbean and the impact of foreign exchange translation, partially offset by lower corporate support costs. Income taxes Income tax benefit was down $89 million, primarily due to a lower TEB adjustment and lower losses, partially offset by net tax adjustments resulting from the U.S. tax reforms enacted in the first quarter of 2018, shown as an item of note, that were included in 2018. The current year also included the net tax recovery resulting from the Enron settlement (see the “Financial performance overview – Taxes” section for additional details) and the revaluation of certain deferred tax assets due to tax rate changes enacted by the Barbados government. 26 CIBC 2019 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 Securities borrowed or purchased under resale agreements Loans and acceptances Derivative instruments Other assets Liabilities and equity Deposits Obligations related to securities lent or sold short or under repurchase agreements Derivative instruments Acceptances Other liabilities Subordinated indebtedness Equity Assets Total assets as at October 31, 2019 were up $54.5 billion or 9% from 2018. 2019 2018 $ $ $ 17,359 121,310 59,775 398,108 23,895 31,157 651,604 485,712 69,258 25,113 9,188 19,069 4,684 38,580 $ $ $ 17,691 101,664 48,938 381,661 21,431 25,714 597,099 461,015 47,353 20,973 10,296 18,266 4,080 35,116 $ 651,604 $ 597,099 Cash and deposits with banks decreased by $0.3 billion or 2%, mainly due to lower short-term placements in Treasury. Securities increased by $19.6 billion or 19%, primarily due to increases in U.S. Treasury and other agencies from client-driven activities, as well as debt securities in Canadian governments, and corporate debt. 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 $10.8 billion or 22%, primarily due to client-driven activities. Net loans and acceptances increased by $16.4 billion or 4%, primarily due to an increase in U.S. and Canadian business and government loans. Further details on the composition of loans and acceptances are provided in the “Supplementary annual financial information” section and Note 5 to the consolidated financial statements. Derivative instruments increased by $2.5 billion or 11%, largely driven by an increase in interest rate derivatives valuation, partially offset by a decrease in other commodity derivatives valuation. Other assets increased by $5.4 billion or 21%, primarily due to an increase in broker receivables, precious metals, and collateral pledged for derivatives. Liabilities Total liabilities as at October 31, 2019 were up $51.0 billion or 9% from 2018. Deposits increased by $24.7 billion or 5%, primarily due to domestic retail volume growth, and increases in Canadian and U.S. commercial deposits. 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 $21.9 billion or 46%, primarily due to client-driven activities. Derivative instruments increased by $4.1 billion or 20%, largely driven by an increase in interest rate and foreign exchange derivatives valuation. Acceptances decreased by $1.1 billion or 11%, driven by client activities. Other liabilities increased by $0.8 billion or 4%, primarily due to an increase in broker payables. Subordinated indebtedness increased by $0.6 billion or 15%, mainly due to an issuance in the third quarter of 2019, net of a redemption in the fourth quarter of 2019. For further details see the “Capital management” section. Equity Equity as at October 31, 2019 increased $3.5 billion or 10% from 2018, primarily due to a net increase in retained earnings and the issuance of preferred shares. CIBC 2019 ANNUAL REPORT 27 Management’s discussion and analysis Capital management Our capital strength protects our depositors and creditors from risks inherent in our businesses. Our overall capital management objective is to maintain a strong and efficient capital base that: (cid:129) (cid:129) (cid:129) (cid:129) Acts as a buffer to absorb unexpected losses while providing sustainable returns to our shareholders; Enables our frontline businesses to grow and execute on our strategy; Demonstrates balance sheet strength and our commitment to prudent balance sheet management; and Supports us in maintaining a favourable credit standing and raising additional capital or other funding on attractive terms. We closely monitor and manage our capital to help achieve the appropriate balance of strength and efficiency of our capital base. Capital management and planning framework CIBC maintains a capital management policy that helps us achieve our capital management objectives. Our capital management policy is reviewed and approved by the Board of Directors (the Board) in support of our Internal Capital Adequacy Assessment Process (ICAAP). The policy includes guidelines that relate to capital strength, capital mix, dividends and return of capital, and unconsolidated capital adequacy of regulated entities, based on regulatory requirements and our risk appetite. The key guideline relates to our capital strength, which is foundational to our financial strength and supports growth. The guideline on dividends and return of capital is intended to balance the need for retaining capital for strength and growth, while providing an adequate return to our shareholders. The level of capital and capital ratios is continually monitored relative to our regulatory minimums and internal targets and the amount of capital required may change in relation to CIBC’s business growth, risk appetite, and business and regulatory environment, including changes in accounting policies. Capital planning is a crucial element of our overall financial planning process and establishment of strategic objectives and is developed in accordance with the capital management policy. Each year, a capital plan and three-year outlook are established as part of the financial plan, which establishes targets for the coming year and business plans to achieve those targets. The capital plan is also stress-tested as a part of our enterprise-wide stress testing process to ensure CIBC is adequately capitalized through severe but plausible stress scenarios (see the “Enterprise-wide stress testing” section for further details). Our capital position is monitored throughout the year and assessed against the capital plan. The Board, with endorsement from the Risk Management Committee, provides overall oversight of CIBC’s capital management through the approval of our risk appetite, capital policy and plan. The Risk Management Committee is provided with regular updates on our capital position including performance to date, updated forecasts, as well as any material regulatory developments that may impact our future capital position. Treasury is responsible for the overall management of capital including planning, forecasting, and execution of the plan, with senior management oversight provided by the Global Asset Liability Committee. 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. 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 general 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. Qualifying regulatory capital instruments must be capable of absorbing loss at the point of non-viability of the financial institution. Non-qualifying Tier 1 and Tier 2 capital instruments are excluded from regulatory capital at a rate of 10% per annum until January 2022, at which point they will have no regulatory value. OSFI requires all institutions to achieve target capital ratios which include buffers. Targets may be higher for certain institutions at OSFI’s discretion. CIBC, along with Bank of Montreal, Bank of Nova Scotia, National Bank of Canada, Royal Bank of Canada, and the Toronto-Dominion Bank, have been designated by OSFI as domestic systemically important banks (D-SIBs) in Canada. D-SIBs are subject to a CET1 surcharge equal to 1.0% of RWA and a Domestic Stability Buffer requirement intended to address Pillar 2 risks that are not adequately captured in the Pillar 1 capital requirements. The Domestic Stability Buffer is currently set at 2.0%, but can range from 0% to 2.5% of RWA (see the “Continuous enhancement to regulatory capital requirements” section for details regarding recent increases to the Domestic Stability Buffer requirement). Additionally, banks need to hold an incremental countercyclical capital buffer equal to their weighted average buffer requirement in Canada and across certain other jurisdictions where they have private sector credit exposures. 28 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis OSFI’s current targets are summarized below: As at October 31, 2019 CET1 ratio Tier 1 capital ratio Total capital ratio Minimum 4.5 % 6.0 % 8.0 % Capital conservation buffer 2.5 % 2.5 % 2.5 % D-SIB buffer 1.0 % 1.0 % 1.0 % Pillar I targets (1) 8.0 % 9.5 % 11.5 % Domestic Stability Buffer (2) 2.0 % 2.0 % 2.0 % Target including all buffer requirements 10.00 % 11.50 % 13.50 % (1) The countercyclical capital buffer applicable to CIBC is insignificant as at October 31, 2019. (2) The Domestic Stability Buffer was increased to 2.0% effective October 31, 2019. See the “Continuous enhancement to regulatory capital requirements” section for additional details. Capital adequacy requirements are applied on a consolidated basis consistent with our financial statements, except for our insurance subsidiaries (CIBC Reinsurance Company Limited, CIBC Cayman Reinsurance Limited and CIBC Life Insurance Company Limited), which are excluded from the regulatory scope of consolidation. The basis of consolidation applied to our financial statements is described in Note 1 to the consolidated financial statements. CIBC Life Insurance Company Limited is subject to OSFI’s Life Insurance Capital Adequacy Test. Risk-weighted assets The following table provides a summary of permissible regulatory capital approaches and those adopted by CIBC: Risk category Permissible regulatory capital approaches Approach adopted by CIBC Credit risk(1) Market risk Operational risk Basel provides three approaches for calculating credit risk capital requirements: (cid:129) (cid:129) (cid:129) Standardized Foundation Advanced internal ratings-based (AIRB) OSFI expects financial institutions in Canada with Total capital in excess of $5 billion to use the AIRB approach for all material portfolios and credit businesses. OSFI provides three approaches for calculating counterparty credit risk (CCR) for derivatives and repo-style transactions: (cid:129) (cid:129) (cid:129) Standardized approach (SA-CCR) Internal model method (IMM) Comprehensive approach Permitted approaches for equity positions in the banking book (which includes equity investments in funds) include: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Standardized Market-based Look-through Mandate-based Fall-back Basel provides the following approaches for calculating capital requirements for securitization positions: (cid:129) (cid:129) (cid:129) (cid:129) Internal Ratings-Based Approach (SEC-IRBA) Internal Assessment Approach (SEC-IAA) External Ratings-Based Approach (SEC-ERBA) Standardized (SEC-SA) Market risk capital requirements can be determined under the following approaches: Standardized (cid:129) Internal models (cid:129) Internal models involve 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. Operational risk capital requirements can be determined under the following approaches: (cid:129) (cid:129) (cid:129) Basic indicator approach Standardized approach Advanced measurement approach (AMA) We have adopted the AIRB approach for the majority of our credit portfolios. Under this methodology, we utilize our own internal estimates to determine probability of default (PD), loss given default (LGD), maturity, and exposure at default (EAD) for lending products and securities. We utilize the standardized approach for credit portfolios within CIBC Bank USA and CIBC FirstCaribbean. We periodically review portfolios under the standardized approach for consideration of adoption of the AIRB approach. Counterparty credit risk for derivatives is calculated using SA-CCR in accordance with revisions to the Capital Adequacy Requirements (CAR) Guideline that were effective for CIBC on November 1, 2018. Prior to adopting SA-CCR, CIBC used the current exposure method (CEM) for CCR exposures. The comprehensive approach is used for credit risk mitigation for repo-style transactions. We use the standardized approach for equity positions in the banking book and both the look-through and mandate- based approaches for equity investments in funds. We use SEC-IRBA, SEC-ERBA, SEC-IAA, and SEC-SA for securitization exposures in the banking book. We use the internal models approach to calculate market risk capital. Our internal market risk models comprise VaR, stressed VaR, IRC and a capital charge for risk not captured in VaR. We also use SEC-ERBA for trading book securitization positions. We use AMA and standardized approaches based on OSFI rules to calculate operational risk capital. (1) Includes counterparty credit risk. Since the introduction of Basel II in 2008, OSFI has prescribed a capital floor requirement for institutions that use the AIRB approach for credit risk. During 2018, before any capital floor requirement, there were three different levels of RWA for the calculation of CIBC’s CET1, Tier 1 and Total capital ratios as CIBC elected in 2014 to phase in the CVA capital charge as permitted under OSFI’s guideline. Beginning in the first quarter of 2019, the ratios are calculated by reference to the same level of RWA as the phase-in of the CVA capital charge has been completed. CIBC 2019 ANNUAL REPORT 29 Management’s discussion and analysis Regulatory capital and ratios The components of our regulatory capital and ratios under Basel III are presented in the table below: $ millions, as at October 31 2019 2018 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) 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) AT1 instruments issued by subsidiaries and held by third parties (amount allowed in AT1) 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) General allowances Tier 2 capital (T2) Total capital (TC = T1 + T2) Total RWA (4) CET1 capital RWA (4) Tier 1 capital RWA (4) Total capital RWA (4) Capital ratios CET1 ratio Tier 1 capital ratio Total capital ratio $ $ 13,716 20,972 881 126 35,695 32 5,375 1,658 24 138 761 7,988 13,379 18,537 777 118 32,811 27 5,489 1,661 38 284 671 8,170 27,707 24,641 2,825 302 17 3,144 30,851 4,015 630 23 335 5,003 2,250 1,003 14 3,267 27,908 3,430 579 20 293 4,322 $ 35,854 $ 239,863 n/a n/a n/a $ $ 32,230 n/a 216,144 216,303 216,462 11.6 % 12.9 % 15.0 % 11.4 % 12.9 % 14.9 % (1) Comprises non-cumulative Class A Preferred Shares Series 39, 41, 43, 45, 47, 49, and 51 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). The CIBC Tier 1 Notes – Series A were redeemed on June 30, 2019. (3) Comprises Debentures due on October 28, 2024, January 26, 2026, April 4, 2028 and June 19, 2029 which are treated as NVCC in accordance with OSFI’s capital adequacy guidelines. The Debentures due on October 28, 2024 were redeemed on October 28, 2019. (4) Beginning in 2019, the capital ratios are calculated by reference to the same level of RWA. Prior to 2019, before any capital floor requirement, there were three different levels of RWA for the calculation of CIBC’s CET1, Tier 1 and Total capital ratios as CIBC elected in 2014 to phase in the CVA capital charge as permitted under the OSFI guideline; different scalars were applied to the CVA included in the RWA calculation applicable to each of the three tiers of capital. n/a Not applicable. The CET1 ratio at October 31, 2019 increased 0.2% from October 31, 2018, mainly driven by an increase in CET1 capital, partially offset by an increase in RWA. The increase in CET1 capital was primarily the result of internal capital generation (net income less dividends and share repurchases) and common share issuance. The increase in RWA was primarily due to organic growth, changes in regulatory requirements and movement in risk levels. In the first quarter of 2019, CIBC implemented OSFI’s revisions to the CAR Guideline including the revised standardized approach to counterparty credit risk and central counterparties, the revised securitization framework, and the removal of the CVA phase-in transitional arrangement. The Tier 1 capital ratio at October 31, 2019 was comparable with October 31, 2018 as the impact of the redemption of the CIBC Tier 1 Notes – Series A, net of the issuance of NVCC preferred shares during 2019, was offset by the factors affecting the CET1 ratio noted above. See the “Capital initiatives” section below for further details. The Total capital ratio at October 31, 2019 increased 0.1% from October 31, 2018 primarily due to the issuance, net of redemptions, of NVCC subordinated indebtedness during the year, in addition to the factors affecting the Tier 1 capital ratio noted above. See the “Capital initiatives” section below for further details. 30 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Components of risk-weighted assets The components of our RWA 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 Equity Securitization (3) AIRB approach (4) Corporate Sovereign (5) Banks Real estate secured personal lending Qualifying revolving retail Other retail Equity Trading book Securitization (3) Adjustment for scaling factor Other credit RWA (6) Total credit risk (before adjustment for CVA phase-in) (7) Market risk (Internal Models and IRB Approach) VaR Stressed VaR Incremental risk charge Securitization and other Total market risk Operational risk Total RWA before adjustments for CVA phase-in and capital floor CVA capital charge (7) Total RWA (7) CET1 RWA Tier 1 RWA Total RWA Total RWA after adjustments for CVA phase-in and capital floor (7) Total RWA CET1 capital RWA Tier 1 capital RWA Total capital RWA 2019 Minimum total capital 2018 Minimum total capital RWA required (1) RWA required (1) $ $ $ $ 39,131 2,411 454 2,597 911 468 606 707 47,285 76,182 2,227 3,082 18,557 15,605 8,890 395 6,684 815 7,898 140,335 10,134 197,754 1,073 2,478 2,574 407 6,532 28,587 232,873 6,990 n/a n/a n/a 239,863 n/a n/a n/a $ $ $ $ 3,130 193 36 208 73 37 48 57 3,782 6,095 178 247 1,485 1,248 711 32 535 65 632 11,228 811 15,821 86 198 206 33 523 2,287 18,631 559 n/a n/a n/a 19,190 n/a n/a n/a $ 32,443 2,319 470 2,764 903 247 436 n/a 39,582 68,402 2,144 3,547 16,072 18,071 7,773 299 3,982 1,050 7,280 128,620 10,697 178,899 868 2,084 2,865 566 6,383 26,626 $ 2,595 185 38 221 72 20 35 n/a 3,166 5,472 171 284 1,286 1,446 622 24 319 84 582 10,290 856 14,312 70 167 229 45 511 2,130 $ 211,908 $ 16,953 $ $ n/a 4,236 4,395 4,554 n/a 216,144 216,303 216,462 $ $ n/a 339 352 364 n/a 17,292 17,305 17,317 (1) Refers to the minimum standard established by the BCBS before the application of the capital conservation buffer and any other capital buffers that may be established by regulators from time to time. It is calculated by multiplying RWA by 8%. (2) Credit risk includes counterparty credit risk, which comprises derivative and repo-style transactions. Credit risk for CIBC Bank USA and CIBC FirstCaribbean are calculated under the (3) (4) (5) standardized approach. In the first quarter of 2019, we implemented OSFI’s revisions to the CAR Guideline, including the revised securitization framework. As a result, certain exposures that were previously subject to the IRB approach are now subject to the standardized approach. In addition, SEC-ERBA, which is inclusive of SEC-IAA, includes exposures that qualify for the IRB approach as well as exposures under the standardized approach. Includes RWA relating to equity investments in funds and certain commercial loans which are determined using the supervisory slotting approach. Includes residential mortgages insured by Canada Mortgage and Housing Corporation (CMHC), an agency of the Government of Canada, and government guaranteed student loans. (6) Comprises RWA relating to derivative and repo-style transactions cleared through qualified central counterparties (QCCPs), settlement risk, and other assets that are subject to the credit risk framework but are not included in the standardized or IRB frameworks, including other balance sheet assets that are risk-weighted at 100%, significant investments in the capital of non-financial institutions that are risk-weighted at 1250%, and amounts below the thresholds for deduction that are risk-weighted at 250%. (7) Beginning in 2019, the capital ratios are calculated by reference to the same level of RWA. Prior to 2019, before any capital floor requirement, there were three different levels of RWA for the calculation of CIBC’s CET1,Tier 1 and Total capital ratios as CIBC elected in 2014 to phase in the CVA capital charge as permitted under the OSFI guideline; different scalars were applied to the CVA included in the RWA calculation applicable to each of the three tiers of capital. n/a Not applicable. The increase in total RWA was primarily due to organic growth, changes in regulatory requirements and movement in risk levels. The increase in credit risk RWA was primarily due to organic growth across our businesses and changes in regulatory requirements. The change in market risk RWA was driven by movement in risk levels, which includes changes in open positions and the market rates affecting these positions, foreign exchange movements and capital model updates. The increase in operational risk RWA was primarily driven by movement in risk levels, which reflects changes in loss experience, changes in the business environment, internal control factors and gross income, as defined by OSFI. CIBC 2019 ANNUAL REPORT 31 Management’s discussion and analysis Movement in total regulatory capital Changes in regulatory capital under Basel III are presented in the table below: $ millions, for the year ended October 31 CET1 capital 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 Wellington Financial Shares issued in lieu of cash dividends Other issue of common shares Purchase of common shares for cancellation Premium on purchase of common shares for cancellation Net income attributable to equity shareholders Preferred and common share dividends Change in AOCI balances included in regulatory capital Net foreign currency translation adjustments Net change in securities measured at FVOCI 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 Other, including change in regulatory adjustments (1) CET 1 capital balance at end of year AT1 capital Balance at beginning of year AT1 eligible capital issues Phase-out of innovative Tier 1 notes Redeemed Other, including change in regulatory adjustments (1) AT 1 capital balance at end of year Tier 2 capital Balance at beginning of year New Tier 2 eligible capital issues Redeemed Other, including change in regulatory adjustments (1) Tier 2 capital balance at end of year Total capital balance at end of year 2019 2018 $ $ $ $ $ $ $ 24,641 – – 194 183 (30) (79) 5,096 (2,599) (31) 196 131 (220) 72 117 36 27,707 3,267 575 (251) (452) 5 3,144 4,322 1,500 (1,000) 181 5,003 35,854 $ $ $ $ $ $ $ 21,618 194 47 337 218 (104) (313) 5,267 (2,445) 286 (191) (51) 226 (173) (212) (63) 24,641 3,064 450 (251) – 4 3,267 3,447 1,500 (600) (25) 4,322 32,230 (1) Includes the net impact on retained earnings and AOCI as at November 1, 2017 from our adoption of IFRS 9 and as at November 1, 2018 from our adoption of IFRS 15. Leverage ratio The Basel III capital standards include a non-risk-based capital metric, the leverage ratio, to supplement risk-based capital requirements. The leverage ratio is defined as Tier 1 capital divided by the leverage ratio exposure. The leverage ratio exposure is defined under the rules as the sum of: On-balance sheet assets less Tier 1 capital regulatory adjustments; Derivative exposures; Securities financing transaction exposures; and (i) (ii) (iii) (iv) Off-balance sheet exposures (such as commitments, direct credit substitutes, letters of credit, and securitization exposures). OSFI expects federally regulated deposit-taking institutions to have 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 Tier 1 capital Leverage ratio exposure Leverage ratio A B A/B 2019 $ 30,851 714,343 2018 $ 27,908 653,946 4.3 % 4.3 % The leverage ratio at October 31, 2019 was comparable with October 31, 2018, as an increase in Tier 1 capital was offset by an increase in leverage ratio exposure. The increase in leverage ratio exposure was primarily driven by increases in on- and off-balance sheet assets and securities financing transaction exposures. 32 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Continuous enhancement to regulatory capital requirements The BCBS and OSFI have published a number of proposals for changes to the existing regulatory capital requirements to strengthen the regulation, supervision, and practices of banks with the overall objective of enhancing financial stability. The discussion below provides a summary of significant BCBS and OSFI publications that have been issued but not yet effective, other than those discussed in separate sections of the document. Basel III reforms In December 2017, the Group of Central Bank Governors and Heads of Supervision (GHOS; the oversight body of the BCBS) announced the finalization of Basel III reforms. Revisions have been included in the finalized framework with the objective of reducing excessive variability in RWA and improving comparability of capital ratios among banks. Notable changes include: (cid:129) (cid:129) (cid:129) Major revisions to the standardized approaches to credit and operational risk, market risk, and CVA frameworks, which will be effective January 1, 2022; Constraints on the use of internally modelled approaches for certain credit exposures; Changes to the Basel III capital output floor requirements that will ensure that banks’ RWA generated by internal models are not lower than 72.5% of RWA as calculated under the Basel III framework’s standardized approaches. The new approach to the capital output floor will be phased in beginning at 50% in 2022, increasing by 5% every year thereafter to a rate of 72.5% in 2027; and Finalized leverage ratio requirements, including a new buffer requirement for global systemically important banks (G-SIBs) starting in 2022. The finalized leverage ratio guideline includes changes to the measurement for derivative exposures, treatment of unsettled trades, and revisions to credit conversion factors related to off-balance sheet items. (cid:129) In July 2018, OSFI issued for public consultation a discussion paper on the proposed implementation of the final Basel III reforms in Canada in response to the BCBS publishing the final Basel III reforms in December 2017, as discussed above. Notable areas where the discussion paper differs from the BCBS guidance include: (cid:129) (cid:129) (cid:129) (cid:129) Potentially accelerating the implementation of the revised operational risk framework to 2021; Advancing the calibration of the capital output floor to 72.5% starting in 2022; Applying the higher leverage ratio requirement to Canadian D-SIBs starting in 2022; and Modifying model parameters and approaches for certain assets under the credit risk framework. In January 2019, the BCBS published the final standard “Revisions to the minimum capital requirements for market risk”, which aims to address issues related to the implementation of the market risk standard published in January 2016. The BCBS implementation date for the market risk standard is January 1, 2022. In June 2019, the BCBS issued two publications impacting the leverage ratio calculation and associated disclosures effective January 2022. “Leverage ratio treatment of client cleared derivatives” aligns the measurement of client cleared derivatives with the standardized approach to measuring counterparty credit risk exposures, allowing cash and non-cash forms of segregated initial and variation margin received to offset the replacement cost and potential future exposure for these derivatives only. “Revisions to leverage ratio disclosure requirements” requires banks to disclose their leverage ratios based on both quarter-end and daily average values for securities financing transactions, allowing for a better understanding of actual leverage employed throughout the period. In July 2019, OSFI issued revisions to its capital requirements for operational risk applicable to deposit-taking institutions, reflecting the final Basel III revisions published by the BCBS in December 2017. In advance of these new requirements, institutions that are currently approved to use the advanced measurement approach for operational risk capital are required to report using the current standardized approach for fiscal year 2020. Domestic Stability Buffer In December 2018, OSFI announced an increase in the Domestic Stability Buffer requirement from 1.5% to 1.75% effective April 30, 2019. This increased OSFI’s target capital ratios, including all buffers, for CET1, Tier 1 and Total capital to 9.75%, 11.25% and 13.25%, respectively. In June 2019, OSFI announced a second increase in the Domestic Stability Buffer requirement, from 1.75% to 2.0% effective October 31, 2019. This increased OSFI’s target capital ratios, including all buffers, for CET1, Tier 1 and Total capital to 10.0%, 11.5% and 13.5% respectively. Revised Pillar 3 disclosure requirements In January 2015, the BCBS issued “Revised Pillar 3 disclosure requirements”, which sets out the first phase of an initiative to replace existing Pillar 3 disclosure requirements for the various types of risk. Pillar 3 aims to promote market discipline through regulatory disclosure requirements, in order to improve comparability and consistency of risk disclosures and increase transparency and confidence about a bank’s exposure to risk and the overall adequacy of its regulatory capital. We implemented the first phase of the Pillar 3 disclosure requirements in the fourth quarter of 2018, with the exception of certain market risk related disclosures that have been deferred until the latter phases of the project as permitted by the OSFI guideline issued in April 2017. In March 2017, the BCBS released “Pillar 3 disclosure requirements – consolidated and enhanced framework”, a standard establishing the second phase of the project. This standard includes enhancements to the January 2015 requirements, the introduction of several new disclosure requirements, and the consolidation of all existing BCBS disclosure requirements into the Pillar 3 framework. In December 2018, the BCBS issued “Pillar 3 disclosure requirements – updated framework”, a standard establishing the third phase of an initiative to replace existing Pillar 3 requirements for the various types of risk. This standard includes enhancements to the first and second phases of the BCBS initiative, for which standards were issued in January 2015 and March 2017, respectively, the introduction of several new disclosure requirements, and the consolidation of all existing BCBS disclosure requirements into the Pillar 3 framework. OSFI has not yet released its requirements for the second and third phases of the Pillar 3 framework, though it has provided separate guidance regarding certain disclosure requirements, including the Total Loss Absorbing Capacity (TLAC) disclosure requirements contemplated in the second phase which we implemented in the first quarter of 2019. Global systemically important banks – public disclosure requirements On July 5, 2018, the BCBS issued “Global systemically important banks: revised assessment methodology and the higher loss absorbency requirement” as a result of the first review of the G-SIB framework. The core elements of the framework have been maintained. A trading volume indicator has been added to the substitutability category, increasing the existing 12 indicators to 13. The scope of consolidation for the G-SIB framework will now include insurance subsidiaries. The revised assessment methodology must be effective by the 2021 G-SIB assessment. The framework will continue to be reviewed every three years with the next review to be completed by 2021. CIBC 2019 ANNUAL REPORT 33 Management’s discussion and analysis Other regulatory developments In October 2017, the BCBS issued the final guideline on the identification and management of step-in risk. 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 April 2019, OSFI released the final guideline “Large Exposure Limits for Domestic Systemically Important Banks”. The guideline is intended to limit maximum losses a lender could incur as a result of the default of an individual obligor or set of connected obligors, and is not expected to have a significant impact on our operations. The guideline has an implementation date of November 1, 2019. In May 2019, OSFI issued revisions to “Guideline B-12: Interest Rate Risk Management”, which incorporates guidance contained in the “Interest rate risk in the banking book” standard issued by BCBS in April 2016 with the objective of ensuring institutions have governance processes and controls that remain current and comprehensive with respect to defining a risk control framework for managing interest rate risk in the banking book to prudent levels. The new guideline outlines OSFI’s expectations regarding risk measurement, development of stressed shock scenarios, as well as key behavioural and model assumptions. The implementation date for the OSFI guideline is January 1, 2020. CIBC will continue to monitor and prepare for developments impacting regulatory capital requirements and disclosures. Capital initiatives The following were the main capital initiatives undertaken in 2019: Normal course issuer bid On May 31, 2019, 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 9 million common shares; (ii) CIBC providing a notice of termination; or (iii) June 3, 2020. Our previous bid terminated on June 3, 2019. During the year, we purchased and cancelled 1,000,000 common shares under the current bid at an average price of $109.06 for a total amount of $109 million. Shareholder investment plan (the plan) Effective with the October 28, 2016 dividend, CIBC has elected to issue shares from Treasury to fulfill the requirements of the plan. Pursuant to the plan, we issued 1,777,738 common shares for consideration of $194 million for the year ended October 31, 2019. Dividends Our quarterly common share dividend was increased from $1.36 per share to $1.40 per share for the quarter ended April 30, 2019, and from $1.40 per share to $1.44 per share for the quarter ended October 31, 2019. Common and preferred share dividends are declared quarterly at the discretion of the Board. The declaration and payment of dividends is governed by Section 79 of the Bank Act (Canada), the terms of the preferred shares, and the terms of the Tier 1 notes issued by CIBC Capital Trust, as explained in Notes 15 and 16 to the consolidated financial statements. Preferred shares On January 22, 2019, we issued 13 million Non-cumulative Rate Reset Class A Preferred Shares Series 49 (NVCC) (Series 49 Shares) with a par value of $25.00 per share, for gross proceeds of $325 million. On June 4, 2019, we issued 10 million Non-cumulative Rate Reset Class A Preferred Shares Series 51 (NVCC) (Series 51 shares) with a par value of $25.00 per share, for gross proceeds of $250 million. Holders of the Non-cumulative Rate Reset Class A Preferred Shares Series 39 (NVCC) (Series 39 shares) had the option to convert their shares into Non-cumulative Floating Rate Class A Preferred Shares Series 40 (NVCC) (Series 40 shares) on a one-for-one basis on July 31, 2019. As the conditions for conversion were not met, no Series 40 shares were issued, and all of the Series 39 shares remain outstanding. The dividend on the Series 39 shares was reset to 3.713%, payable quarterly as and when declared by the Board, effective for the five-year period commencing July 31, 2019. See the “Outstanding share data” section below and Note 15 to the consolidated financial statements for further details. CIBC Tier 1 Notes On June 30, 2019, CIBC Capital Trust, a trust wholly owned by CIBC, redeemed all $1.3 billion of its 9.976% CIBC Tier 1 Notes – Series A (the notes) due June 30, 2108. In accordance with their terms, the notes were redeemed at 100% of their principal amount, together with accrued and unpaid interest thereon. As a result of the redemption of the notes by CIBC Capital Trust, CIBC redeemed the corresponding senior deposit notes issued by CIBC to CIBC Capital Trust on June 30, 2019. Subordinated indebtedness On June 19, 2019, we issued $1.5 billion principal amount of 2.95% Debentures (subordinated indebtedness). The Debentures bear interest at a fixed rate of 2.95% per annum (paid semi-annually) until June 19, 2024, and at the three-month Canadian dollar bankers’ acceptance rate plus 1.18% per annum thereafter (paid quarterly) until maturity on June 19, 2029. On October 28, 2019, we redeemed all $1.0 billion of our 3.00% Debentures due October 28, 2024. In accordance with their terms, the Debentures were redeemed at 100% of their principal amount, plus accrued and unpaid interest thereon. 34 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Enterprise-wide stress testing We perform enterprise-wide stress testing on at least an annual basis and the results are an integral part of our ICAAP, as defined by Pillar II of the Basel III Accord, wherein we identify and measure our risks on an ongoing basis in order to ensure that the capital available is sufficient to cover all risks across CIBC, including the impacts of stress testing. We maintain a process which determines plausible but stressed economic scenarios such as global recessions and housing price shocks, and then apply these stress scenarios to our bank-wide exposures to determine the impact on the consolidated statement of income, RWA requirements, and consequently, key capital ratios. This helps us analyze the potential risks within our portfolios and establish prudent capital levels in excess of the regulatory minimum requirements. All of the elements of capital are monitored throughout the year and the capital plan is adjusted as appropriate. Management determines the range of scenarios to be tested. Macroeconomic stress test scenarios are designed to be both severe and plausible and designed to be consistent with OSFI’s stress testing framework to ensure that they are comprehensive. The following diagram summarizes the enterprise-wide stress testing process including the development of scenarios, identification of risk drivers and linkages to our other bank-wide ICAAP processes. The process includes syndication with our economists and lines of business to ensure scenarios are relevant to our businesses and there is a consistent interpretation of the scenarios across CIBC. 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 bottoms-up analysis of each of our bank-wide portfolios, and results are analyzed on a product, location and sector basis. Our stress testing approach combines the use of statistical models and expert judgment to ensure the results are reasonable in estimating the impacts of the stress scenarios. Stress testing methodologies and results are subject to a detailed review and challenge from both our lines of business and Risk Management. Stress testing results are presented for review to the Risk Management Committee and are also shared with the Board and OSFI. The results of our enterprise- wide stress testing are used to highlight any vulnerabilities and ensure we remain well capitalized against regulatory and management expectations. A key objective of the enterprise-wide stress tests is to identify key areas of exposure and foster discussion of management actions that would be taken to mitigate the impact of stress scenarios. Reverse stress testing is also integrated into our recovery and resolution planning process to determine worst case scenarios that would result in CIBC reaching the point of non-viability from which remedial actions are then considered. Additional information on stress testing is provided in the “Management of risk” section. Recovery plan Federally regulated financial institutions must maintain robust and credible recovery plans that identify options to restore financial strength and viability when under severe stress. CIBC continues to maintain and update its recovery plan in line with OSFI requirements. Resolution plan In 2019, the Canada Deposit Insurance Corporation (CDIC) issued guidance for a comprehensive bank-authored resolution plan. Each Canadian D-SIB must have a credible and feasible resolution plan documented and in place, demonstrating how the bank can be resolved in an orderly manner while ensuring the continuity of critical financial services. CIBC continues to develop its resolution plan deliverables in line with regulatory requirements and timelines for final submission to CDIC by December 2020. CIBC 2019 ANNUAL REPORT 35 Management’s discussion and analysis 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 29, 2019 Common shares Treasury shares – common shares Preferred shares (1)(2) Series 39 (NVCC) Series 41 (NVCC) Series 43 (NVCC) Series 45 (NVCC) Series 47 (NVCC) Series 49 (NVCC) Series 51 (NVCC) Treasury shares – preferred shares (1)(2) Subordinated indebtedness (2)(3) 3.42% Debentures due January 26, 2026 (NVCC) 3.45% Debentures due April 4, 2028 (NVCC) 2.95% Debentures due June 19, 2029 (NVCC) Stock options outstanding Shares outstanding Number of shares 445,440,208 32,588 Amount $ 13,628 4 $ 16,000,000 12,000,000 12,000,000 32,000,000 18,000,000 13,000,000 10,000,000 – 400 300 300 800 450 325 250 – n/a n/a n/a 1,000 1,500 1,500 Minimum conversion price per common share Maximum number of common shares issuable on conversion/exercise $ 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 80,000,000 60,000,000 60,000,000 160,000,000 90,000,000 65,000,000 50,000,000 300,000,000 450,000,000 450,000,000 5,125,447 (1) Upon the occurrence of a Trigger Event, each share is convertible into a number of common shares, determined by dividing the par value of $25.00 plus declared and unpaid dividends by the average common share price (as defined in the relevant prospectus supplement) subject to a minimum price per share (subject to adjustment in certain events as defined in the relevant prospectus supplement). Preferred shareholders do not have the right to convert their shares into common shares. (2) The maximum number of common shares issuable on conversion excludes the impact of declared but unpaid dividends and accrued interest. (3) Upon the occurrence of a Trigger Event, the Debentures are convertible into a number of common shares, determined by dividing 150% of the par value plus accrued and unpaid interest by the average common share price (as defined in the relevant prospectus supplement) subject to a minimum price per common share (subject to adjustment in certain events as defined in the relevant prospectus supplement). n/a Not applicable. The occurrence of a “Trigger Event” would result in conversion of all of the outstanding NVCC instruments described above, which would represent a dilution impact of 80% based on the number of CIBC common shares outstanding as at October 31, 2019. 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. Bank recapitalization (Bail-in) conversion regulations The Department of Finance’s final bail-in regulations became effective September 23, 2018. These regulations provide certain statutory powers to CDIC to enact the bail-in regime, including the ability to convert specified eligible shares and liabilities of D-SIBs into common shares in the event such a bank becomes non-viable. The Superintendent of Financial Institutions (the Superintendent) is responsible for designating D-SIBs, setting minimum TLAC requirements, and determining whether a bank is non-viable. Senior debt issued by CIBC on or after September 23, 2018, with an original term to maturity of more than 400 days (including explicit or embedded options) that is unsecured or partially secured is subject to bail-in. Consumer deposits, certain derivatives, covered bonds, and certain structured notes would not be eligible for bail-in. Beginning in the first quarter of 2022, D-SIBs will be required to maintain a supervisory target TLAC ratio (which is comprised of a minimum risk-based TLAC ratio of 21.5% plus the then applicable Domestic Stability Buffer) and a minimum TLAC leverage ratio of 6.75%. Under the bail-in regime there is no fixed and pre-determined contractual conversion ratio for the conversion of the specified eligible shares and liabilities of CIBC that are subject to a bail-in conversion into common shares, nor are there specific requirements regarding whether liabilities subject to a bail-in conversion are converted into common shares. CDIC determines the timing of the bail-in conversion, the portion of the specified eligible shares and liabilities to be converted and the terms and conditions of the conversion, subject to parameters set out in the bail-in regime. As at October 31, 2019, $8,986 million (October 31, 2018: $190 million) of our outstanding liabilities were subject to conversion under the bail-in regime. Non-cumulative Rate Reset Class A Preferred Shares Series 39 (NVCC) (Series 39 shares) and Non-cumulative Floating Rate Class A Preferred Shares Series 40 (NVCC) (Series 40 shares) For the initial five-year period to the earliest redemption date of July 31, 2019, the Series 39 shares paid quarterly cash dividends, as declared, at a rate of 3.90%. The dividend was reset to 3.713%, payable quarterly as and when declared by the Board, effective for the five-year period commencing July 31, 2019. On July 31, 2024, 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 had the right to convert their shares on a one-for-one basis into Series 40 shares, subject to certain conditions, on July 31, 2019. As the conditions for conversion were not met, no Series 40 shares were issued, and all of the Series 39 shares remain outstanding. Holders of the Series 39 shares will have the right to convert their shares on a one-for-one basis into Series 40 shares, subject to certain conditions, on July 31, 2024 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 then outstanding Series 40 shares may convert their shares on a one-for-one basis into Series 39 shares, subject to certain conditions, on July 31, 2029 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, 2024, 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, 2029, and on July 31 every five years thereafter. 36 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis 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. Non-cumulative Rate Reset Class A Preferred Shares Series 47 (NVCC) (Series 47 shares) For the initial five-year period to the earliest redemption date of January 31, 2023, the Series 47 shares pay quarterly cash dividends, if declared, at a rate of 4.50%. On January 31, 2023, and on January 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 2.45%. Holders of the Series 47 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 48 (NVCC) (Series 48 shares), subject to certain conditions, on January 31, 2023 and on January 31 every five years thereafter. Holders of the Series 48 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus 2.45%. Holders of the Series 48 shares may convert their shares on a one-for-one basis into Series 47 shares, subject to certain conditions, on January 31, 2028 and on January 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 47 shares at par on January 31, 2023 and on January 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 48 shares at par on January 31, 2028 and on January 31 every five years thereafter. Non-cumulative Rate Reset Class A Preferred Shares Series 49 (NVCC) (Series 49 shares) For the initial five-year period to the earliest redemption date of April 30, 2024, the Series 49 shares pay quarterly cash dividends, if declared, at a rate of 5.20%. On April 30, 2024, and on April 30 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 3.31%. Holders of the Series 49 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 50 (NVCC) (Series 50 shares), subject to certain conditions, on April 30, 2024 and on April 30 every five years thereafter. Holders of the Series 50 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 3.31%. Holders of the Series 50 shares may convert their shares on a one-for one basis into Series 49 shares, subject to certain conditions, on April 30, 2029 and on April 30 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 49 shares at par on April 30, 2024 and on April 30 every five years thereafter; we may redeem all or any part of the then outstanding Series 50 shares at par on April 30, 2029 and on April 30 every five years thereafter. Non-cumulative Rate Reset Class A Preferred Shares Series 51 (NVCC) (Series 51 shares) For the initial five-year period to the earliest redemption date of July 31, 2024, the Series 51 shares pay quarterly cash dividends, if declared, at a rate of 5.15%. On July 31, 2024, 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 3.62%. CIBC 2019 ANNUAL REPORT 37 Management’s discussion and analysis Holders of the Series 51 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 52 (NVCC) (Series 52 shares), subject to certain conditions, on July 31, 2024 and on July 31 every five years thereafter. Holders of the Series 52 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 3.62%. Holders of the Series 52 shares may convert their shares on a one-for-one basis into Series 51 shares, subject to certain conditions, on July 31, 2029 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 51 shares at par on July 31, 2024 and on July 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 52 shares at par on July 31, 2029 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. Non-consolidated structured entities We manage and administer a single-seller conduit and several CIBC-sponsored multi-seller conduits in Canada. The multi-seller conduits acquire direct or indirect ownership or security interests in pools of financial assets from our clients and finance the acquisitions by issuing asset-backed commercial paper (ABCP) to investors. The single-seller conduit acquires financial assets and finances these acquisitions through a credit facility provided by a syndicate of financial institutions. The sellers to the conduits may continue to service the assets and may be exposed to credit losses realized on these assets, typically through the provision of over-collateralization or another form of retained interest. The conduits may obtain credit enhancement from third-party providers. We generally provide the multi-seller conduits with commercial paper backstop liquidity facilities, securities distribution, and provide both the single and multi-seller conduits with accounting, cash management, and operations services. The liquidity facilities for the managed and administered multi-seller conduits require us to provide funding, subject to the satisfaction of certain conditions with respect to the conduits, for ABCP not placed with external investors. We may also purchase ABCP issued by the multi-seller conduits for market making purposes. We are required to maintain certain short-term and/or long-term debt ratings with respect to the liquidity facilities that we provide to the sponsored multi-seller conduits. If we are downgraded below the level specified under the terms of those facilities, we must provide alternative satisfactory liquidity arrangements, such as procuring an alternative liquidity provider that meets the minimum rating requirements. We may also act as the counterparty to derivative contracts entered into by a multi-seller conduit in order to convert the yield of the underlying assets to match the needs of the multi-seller conduit’s investors or to mitigate the interest rate, basis, and currency risk within the conduit. We earn fees for providing services related to the non-consolidated single-seller and multi-seller conduits, such as backstop liquidity facilities, distribution, transaction structuring, and conduit administration. These fees totalled $54 million in 2019 (2018: $55 million). All fees earned in respect of activities with the conduits are on a market basis. As at October 31, 2019, the amount funded for the various asset types in the multi-seller conduits amounted to $7.1 billion (2018: $7.0 billion). The estimated weighted-average life of these assets was 1.6 years (2018: 1.7 years). Our holdings of commercial paper issued by the non-consolidated sponsored multi-seller conduits that offer commercial paper to external investors were $26 million (2018: $9 million). Our committed backstop liquidity facilities to these conduits were $8.8 billion (2018: $8.8 billion). We also provided credit facilities of $50 million (2018: $50 million) to these conduits. We participated in a syndicated facility for a three-year commitment of $700 million to the single-seller conduit that provides funding to franchisees of a major Canadian retailer. Our portion of the commitment was $130 million (2018: $130 million). As at October 31, 2019, we funded $87 million (2018: $93 million) through the issuance of bankers’ acceptances and prime loans. We engage one or more of the four major rating agencies, DBRS Limited (DBRS), Fitch Ratings Inc. (Fitch), Moody’s Investors Service, Inc. (Moody’s), and S&P, to opine on the credit ratings of asset-backed securities (ABS) issued by our sponsored securitization vehicles. In the event that ratings differ between rating agencies, we use the lower rating. We also have investments in and provide loans, liquidity and credit facilities to certain other third-party and CIBC-managed structured entities. The on-balance sheet exposure related to these structured entities is included in the consolidated financial statements. Our on- and off-balance sheet amounts related to the structured entities that are not consolidated are set out in the table below. For additional details on our structured entities, see Note 6 to the consolidated financial statements. $ millions, as at October 31 2019 Investments and loans (1) Liquidity, credit facilities and commitments Written credit derivatives (2) Investments and loans (1) 2018 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 $ 113 3,345 3 332 $ 7,137 (3) 2,358 13 127 $ – – 139 – $ 102 3,347 3 298 $ 7,136 (3) 1,656 13 114 $ – – 157 – (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 (2018: $3 million) of the exposures related to structured vehicles run-off were hedged. (2) Disclosed amounts reflect the outstanding notional of written credit derivatives. The negative fair value recorded on the consolidated balance sheet was $112 million (2018: $131 million). Notional of $130 million (2018: $141 million) was hedged with credit derivatives protection from third parties. The fair value of these hedges net of CVA was $104 million (2018: $115 million). An additional notional of $9 million (2018: $16 million) was hedged through a limited recourse note. (3) Excludes an additional $1.6 billion (2018: $1.7 billion) relating to our backstop liquidity facilities provided to the multi-seller conduits as part of their commitment to fund purchases of additional assets. Also excludes $26 million (2018: $9 million) of our direct investments in the multi-seller conduits which we consider investment exposure. 38 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis 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. We act as a trustee of a number of personal trusts and have a fiduciary responsibility to act in the best interests of the beneficiaries of the trusts. We earn a fee for acting as a trustee. We also participate in transactions to modify the cash flows of trusts managed by third- party asset managers to create investments with specific risk profiles, or to assist clients in the efficient management of other risks. Typically, these involve the use of derivative products, which transfer the risks and returns to or from a trust. Derivatives We participate in derivatives transactions, as a market maker facilitating the needs of our clients or as a principal to manage the risks associated with our funding, investing and trading strategies. All derivatives are recorded at fair value on our consolidated balance sheet. See Notes 12 and 23 to the consolidated financial statements for details on derivative contracts and the risks associated with them. Credit-related arrangements Credit-related arrangements are generally off-balance sheet instruments and are typically entered into to meet the financing needs of clients. In addition, there are certain exposures for which we could be obligated to extend credit that are not recorded on the consolidated balance sheet. For additional details of these arrangements, see the “Liquidity risk” section and Note 21 to the consolidated financial statements. Guarantees A guarantee is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor failed to make payment when due in accordance with the original or modified terms of a debt instrument. Guarantees include credit derivatives protection sold and standby and performance letters of credit, as discussed in Notes 12 and 21 to the consolidated financial statements, respectively. CIBC 2019 ANNUAL REPORT 39 Management’s discussion and analysis Management of risk We have provided certain disclosures required under IFRS 7 “Financial Instruments – Disclosures” (IFRS 7) related to the nature and extent of risks arising from financial instruments in the MD&A, as permitted by that IFRS standard. These disclosures are included in the “Risk overview”, “Credit risk”, “Market risk”, “Liquidity risk”, “Operational risk”, “Reputation, conduct and legal risk”, and “Regulatory compliance risk” sections. 40 41 42 43 43 44 45 46 46 46 46 49 Risk overview Risk governance structure Risk management structure Risk management process Risk appetite statement Risk policies and limits Risk identification and measurement Stress testing Risk treatment and mitigation Risk monitoring and reporting Top and emerging risks Risks arising from business activities Credit risk 50 50 Governance and management 50 51 Policies Process and control 51 54 56 59 60 60 61 61 Risk measurement Exposure to credit risk Credit quality of portfolios Credit quality performance Exposure to certain countries and regions Selected exposures in certain activities Settlement risk Securitization activities Policies 62 Market risk 62 Governance and management 62 62 Market risk limits 62 62 63 66 67 Process and control Risk measurement Trading activities Non-trading activities Pension risk Liquidity risk 68 68 Governance and management 68 68 69 71 73 Policies Risk measurement Liquid assets Funding Contractual obligations 74 Other risks Strategic risk 74 74 Insurance risk 74 Operational risk 76 Technology, information and cyber security risk Reputation, conduct and legal risk Regulatory compliance risk Environmental and related social risk 76 76 77 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) As the first line of defence, CIBC’s SBUs and functional groups own the risks and are accountable and responsible for identifying and assessing risks inherent in their activities in accordance with the CIBC risk appetite. In addition, they establish and maintain controls to mitigate such risks. The first line of defence may include control groups within the relevant area to facilitate the control framework and other risk-related processes. Control groups provide subject matter expertise to the business lines and/or implement and maintain enterprise-wide control programs and activities. While control groups collaborate with the lines of business in identifying and managing risk, they also challenge risk decisions and risk mitigation strategies. The second line of defence is independent from the first line of defence and provides an enterprise-wide view of specific risk types, guidance and effective challenge to risk and control activities. Risk Management, including anti-money laundering (AML) and Compliance, is the primary second line of defence. Risk Management may leverage or rely on subject matter expertise of other groups (e.g., third parties or control groups) to better inform their independent assessments, as appropriate. (ii) (iii) As the third line of defence, CIBC’s internal audit function provides reasonable assurance of the design and operating effectiveness of CIBC’s controls, processes and systems. Internal audit reports the results of its assessment to management and the Board. A strong risk culture and communication between the three lines of defence are important characteristics of effective risk management. We continuously monitor our risk profile against our defined risk appetite and related limits, taking action as needed to maintain an appropriate balance of risk and return. Monitoring our risk profile includes forward-looking analysis of sensitivity to local and global market factors, economic conditions, and political and regulatory environments that influence our overall risk profile. Regular and transparent risk reporting and discussion at senior management committees facilitates communication of risks and discussion of risk management strategies across the organization. 40 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Risk governance structure Our risk governance structure is illustrated below: Risk Governance Structure Board of Directors h t e rsi g v o n e s c a l a ti o Audit Committee Risk Management Committee Management Resources and Compensation Committee Corporate Governance Committee c ulture Executive Committee fra m e w ork Global Asset Liability Committee Global Risk Committee Board of Directors (the Board): The Board oversees the enterprise-wide risk management program through approval of our risk appetite and supporting risk management policies and limits. The Board accomplishes its mandate through its Audit, Risk Management, Management Resources and Compensation, and Corporate Governance committees, described below. Audit Committee (AC): The Audit Committee reviews the overall design and operating effectiveness of internal controls and the control environment, including controls over the risk management process. Risk Management Committee (RMC): This committee assists the Board in fulfilling its responsibilities for defining CIBC’s risk appetite and overseeing CIBC’s risk profile and performance against the defined risk appetite. This includes oversight of policies, procedures and limits related to the identification, measurement, monitoring and controlling of CIBC’s principal business risks. Management Resources and Compensation Committee (MRCC): This committee is responsible for assisting the Board in its global oversight of CIBC’s human capital strategy, including talent and total rewards, and the alignment with CIBC’s strategy, risk appetite and controls. Corporate Governance Committee (CGC): This committee is responsible for assisting the Board in fulfilling its corporate governance oversight responsibilities. Executive Committee (ExCo): The ExCo, led by the 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. Global Risk Committee (GRC): This committee, which comprises members of the ExCo and senior leaders from the lines of business, Risk Management and other functional groups, provides a forum for discussion and oversight of risk appetite, risk profile and risk-mitigation strategies. Key activities include reviewing, and providing input regarding CIBC’s risk appetite statements; monitoring risk profile against risk appetite, reviewing, and evaluating business activities in the context of risk appetite; and identifying, reviewing, and advising on current and emerging risk issues and associated mitigation plans. (cid:129) CIBC 2019 ANNUAL REPORT 41 Management’s discussion and analysis Risk management structure The Risk Management group, led by our Chief Risk Officer (CRO), is responsible for setting risk strategies and for providing independent oversight of the businesses. Risk Management works to identify, assess, mitigate, monitor and control the risks associated with business activities and strategies, and is responsible for providing an effective challenge to the lines of business. The current structure is illustrated below: Risk Management Structure Chief Risk Officer Capital Markets Risk Management Global Credit Risk Management (including non-U.S. Risk Officers) Global Operational Risk Management Risk Analytics, Reporting and Credit Decisioning Conduct Risk Management and Environmental Sustainability Compliance Enterprise Anti-Money Laundering 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 (including transaction-specific environmental and related social risk(1)) associated with our commercial, corporate 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 including fraud, model, third party, technology and information security risks. Risk Analytics, Reporting and Credit Decisioning – This group is responsible for enterprise-wide analysis, including enterprise-wide stress testing and reporting, loan loss reporting, risk policy and governance, risk systems and models, as well as economic and regulatory capital methodologies. In addition, this group manages credit risk in personal and small business products offered through the various distribution channels (residential mortgages, credit cards, personal loans/lines of credit, small business loans) and performs analytics to optimize retail credit performance, along with collections, fraud, and anti-money laundering outcomes. Conduct Risk Management and Environmental Sustainability – This group is responsible for enterprise-wide conduct risk, including sales practice risk, effective challenge of compensation plan changes and non-transactional reputation risk. In addition, this group identifies and manages environmental risk, including the physical and transition risks associated with climate change. Compliance – This group provides timely and proactive advice and independent oversight of CIBC’s compliance with applicable regulatory requirements. Enterprise Anti-Money Laundering – This group is responsible for all aspects of compliance with and oversight of requirements relating to anti-money laundering, anti-terrorist financing, and sanctions measures. U.S. Risk Management – This group carries out the mandate of CIBC Risk Management at a regional level under the leadership of the U.S. CRO, with oversight from the U.S. Risk Management Committee and reporting to the Senior Executive Vice-President, U.S. Region. The group provides independent oversight for the identification, management, measurement, monitoring and control of risks in the U.S. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (1) See the “Environmental and related social risk” section for further details, including oversight of non-transaction-specific environmental and related social risk, which reports directly into the CRO. 42 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Risk management process Our risk management process is illustrated below: g n i t r o p e R Risk Management Process Risk Appetite Statement Risk Policies and Limits Risk Identification and Measurement Stress Testing Risk Treatment / Mitigation i w e v e R d n a r o t i n o M Risk appetite statement CIBC’s risk appetite statement defines the amount of risk we are willing to assume in pursuit of our strategic and financial objectives. Our guiding principle is to practice sound risk management, supported by strong capital and funding positions, as we pursue our client-focused strategy. In defining our risk appetite, we take into consideration our vision, values, and strategy, along with our risk capacity (defined by regulatory constraints). It defines how we conduct business, which is to be consistent with the following objectives: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Doing the right thing for our clients/stakeholders; Safeguarding our reputation and brand; Engaging in client-oriented businesses that we understand; Maintaining a balance between risk and returns; Retaining a prudent attitude towards tail and event risk; Meeting regulatory expectations and/or identifying and having plans in place to address any issues in a timely manner; and Achieving/maintaining an AA rating. Our CIBC risk appetite statement contains metrics with limits that define our risk tolerance levels. In addition, we have SBU risk appetite statements that are integrated with the overall CIBC risk appetite statement that further articulate our business level risk tolerances. Our CIBC risk appetite statement is reviewed annually in conjunction with our strategic, financial and capital planning cycle to ensure alignment and is approved annually by the Board. To help ensure CIBC stays within its risk appetite, the Board, RMC, and senior management regularly receive and review reporting on our risk profile against the risk appetite limits. All strategic business decisions, as well as day-to-day business decisions, are governed by our risk appetite framework. Strategic decisions are evaluated to ensure that the risk exposure is within our risk appetite. Day-to-day activities and decisions are governed by our framework of risk tolerance limits, policies, standards and procedures that support our risk appetite statement. Risk culture Risk culture refers to desired attitudes and behaviours relative to risk taking. At CIBC, we strive to achieve a consistent and effective risk culture by: (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 Throughout the year, the Risk Management team manages various compensation risk reviews. These reviews are part of the second line of defence responsibilities to review and challenge new compensation plans, changes to existing compensation plans, and compensation plans that will be closed. All compensation plans are rated as either high-risk or low-risk with high-risk compensation plans requiring approval from the CRO. 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. Annually, Risk Management reviews the assessment with both the RMC and the MRCC. The MRCC oversees the performance management and compensation process. The MRCC is responsible for assisting the Board in its global oversight of CIBC’s human capital strategy, including talent and total rewards, and the alignment with CIBC’s strategy, risk appetite and controls. The MRCC’s key compensation-related responsibilities include: (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 material changes to existing material compensation policies; CIBC 2019 ANNUAL REPORT 43 Management’s discussion and analysis (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Reviewing and recommending for Board approval new material compensation plans or changes to existing material compensation plans; Assessing the appropriateness and alignment of compensation relative to actual business performance and risks; Reviewing and recommending for Board approval incentive compensation funding and allocations, based on an assessment of business performance and risk; Reviewing and recommending for Board approval individual compensation target and compensation for the ExCo, including the CEO and other key officers; and Approving individual compensation for employees with total direct compensation above a certain materiality threshold. Risk policies and limits Our risk policies and limits framework is intended to ensure that risks are appropriately identified, measured, monitored and controlled in accordance with our risk appetite. For most risks, we have developed an overarching framework document that sets out the key principles for managing the associated risks and our key risk policies and limits. This framework is supported by standards, guidelines, processes, procedures and controls that govern day-to-day activities in our businesses. Oversight is provided by management committees, as well as the Board/Board Committees. Key risk policies and limits are illustrated below: Risk Management Framework Risk Appetite Statement and Risk Appetite Framework Risk Overarching Framework / Policy Risk Limits Management Oversight Credit Risk Management Policy Credit Concentration Limits Delegated Credit Approval Authorities Credit Committee Personal and Small Business Credit Risk Committee Global Risk Committee Market Risk Limits Delegated Risk Authorities Global Risk Committee Global Asset Liability Committee Trading Credit Risk and Market Risk Management Policies Structural Risk Management Policies Operational Risk Management Policy Control Framework Key Risk Indicators Credit Market Operational Operational Risk and Control Committee Global Risk Committee Technology Risk Committee Model and Parameter Risk Committee Reputation and Legal Risk Committee Reputation Risk Committee Reputation and conduct Reputation Risk Management Framework and Policy Conduct Risk Framework Key Risk Indicators Liquidity Liquidity Risk Management Policy Pledging Policy Liquidity and Funding Limits Pledging Limits Global Asset Liability Committee Global Risk Committee Strategic Strategic Planning Policy Risk Appetite Statement Executive Committee Regulatory Regulatory Compliance Management Policy Key Risk Indicators Global Risk Committee Money Laundering/ Terrorist Financing Anti-Money Laundering (AML)/ Anti-Terrorist Financing (ATF) Framework Enterprise AML/ATF Policy Risk Appetite Statement Key AML Metrics AML Executive Steering Committee Global Risk Committee 44 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis 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 maintains 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 to support 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. Risk Identification Processes Risks Inherent in CIBC’s Businesses Strategic Business Reviews Change Initiative Risk Assessment Process Risk and Control Self Assessments 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) The decision to register a new risk is based on a risk assessment through our risk identification processes and includes criteria such as severity, measurability and probability. Furthermore, the decision to hold capital for a new risk is also based on whether the risk is being mitigated, and whether capital is deemed to be a suitable mitigant. We have enterprise-wide methodologies, models and techniques in place to measure both the quantitative and qualitative aspects of risks, appropriate for the various types of risks we face. These methodologies, models and techniques are subject to independent assessment and review to ensure that the underlying logic remains sound, that model risks have been identified and managed, that use of the models continues to be appropriate and outputs are valid. Risk is usually measured in terms of expected loss, unexpected loss, and economic capital. Expected loss Expected loss represents the loss that is statistically expected to occur in the normal course of business, with adjustments for conservatism, in a given period of time. In respect of credit risk, the parameters used to measure expected loss are PD, LGD and EAD. These parameters are updated regularly and are based on our historical experience through the cycle and benchmarking of credit exposures. The PD, LGD and EAD parameters used for regulatory capital purposes are not adjusted for forward-looking information. For trading market risks, VaR is a statistical technique used to measure risk. VaR is an estimate of the loss in market value for a given level of confidence that we would expect to incur in our trading portfolio due to an adverse one-day movement in market rates and prices. We also use stressed VaR to replicate our VaR over a period when relevant market factors are in distress. For trading credit risks associated with market value based products, we use models to estimate exposure relative to the value of the portfolio of trades with each counterparty, giving consideration to market rates and prices. Unexpected loss and economic capital Unexpected loss is the statistical estimate of the amount by which actual losses might exceed expected losses over a specified time horizon, computed at a given confidence level. We use economic capital to estimate the level of capital needed to protect us against unexpected losses. Economic capital allows us to assess performance on a risk-adjusted basis. We also use techniques such as sensitivity analysis and stress testing to help ensure that the risks remain within our risk appetite and that our capital is adequate to cover those risks. Our stress testing program includes evaluation of the potential effects of various economic and market scenarios on our risk profile, earnings and capital. Refer to the “Capital management” section for additional details. Model risk management Model risk management encompasses sound development, independent validation, and ongoing monitoring and review of the models as well as governance and controls that are proportionate to the risks. Our model inventory includes, but is not limited to, models that relate to risk measurement (including VaR, economic and regulatory capital), pricing, credit risk rating and scoring models, credit models for the calculation of loss severity and stress testing, and models for the calculation of expected credit losses under IFRS 9. CIBC’s approach to provide effective governance and oversight for model risk management is comprised of the following key elements: (cid:129) Governance and oversight by management committees, including the Model and Parameter Risk Committee (MPRC), senior management and the Board; CIBC 2019 ANNUAL REPORT 45 Management’s discussion and analysis (cid:129) (cid:129) Policies, procedures and standards to outline applicable roles and responsibilities of the various oversight groups and to provide guidance to identify, measure, control and monitor model risk throughout the model’s life cycle; and Controls for key operational aspects of model risk management including maintaining a model inventory, model risk ranking, model risk attestation and ongoing monitoring and reporting. The MPRC is a subcommittee of the GRC and is responsible for reviewing and approving proposals for new and/or modified regulatory, economic capital and financial reporting models and provides oversight of CIBC’s regulatory, economic capital and financial reporting models and parameters for credit, market and operational risks. The MPRC has accountability and responsibility for model and parameter approvals, parameter performance monitoring, validation oversight, and policy oversight. Model risk mitigation policies We have policies, procedures, standards and controls to ensure effective model risk management for CIBC. A model review and validation is the independent effective challenge that documents the model risk and ensures models are sound and CIBC can rely on their output. The model review and validation process includes: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Review of model documentation; Comprehensive, systematic testing of key model parameters on implementation to ensure results are as expected; Replication of the risk quantification process to determine whether the model implementation is faithful to the model specifications; Review of whether the model/parameter concepts and assumptions are appropriate and robust; Accuracy testing to assess the calibration and accuracy of the risk components including, for example, the discriminative power of rating systems and the reasonableness of capital parameters; Sensitivity testing to analyze the sensitivity of model/parameter outputs to model/parameter assumptions and key inputs; Scenario and stress testing of the model outputs to key inputs; Back-testing by comparing actual results with model-generated risk measures; Benchmarking to other models and comparable internal and external data; Review of the internal usage of the model/parameter applications to ensure consistency of application; Reporting of model status to the MPRC, supported through an up-to-date inventory of regulatory models and parameters; A quarterly attestation process for model owners in order to ensure compliance with the Model Risk and Validation Policy; and A comprehensive validation report is prepared that identifies the conditions for valid application of the model and summarizes these findings to the model owners, developers and users. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Once a model has been approved for use, ongoing monitoring becomes a joint responsibility of model users, owners and validators. Stress testing Stress testing supplements our other risk management tools by providing an estimate of tail risk (i.e., low probability, high severity events). Results of stress testing are interpreted in the context of our risk appetite, including metrics for capital adequacy. Enterprise-wide stress testing, capital planning and financial planning processes are integrated for a comprehensive information system. See the “Financial condition” section for detailed discussion on our enterprise-wide stress testing. Risk treatment and mitigation Risk treatment and mitigation is the implementation of options for modifying risk levels. CIBC pursues risk mitigation options in order to control its risk profile in the context of its risk appetite. CIBC’s objective is to proactively consider risk mitigation options in order to optimize results. Discussions regarding potential risk mitigation strategies are held between Risk Management and the lines of business, and at the GRC or GALCO and at the RMC for governance and oversight, as appropriate. In evaluating possible strategies, considerations include costs and benefits, residual risks (i.e., risks that are retained), secondary risks (i.e., those caused by the risk mitigation actions), and appropriate monitoring and review to track results. Risk controls Our risk management framework also includes a comprehensive set of risk controls, designed to ensure that risks are being appropriately identified and managed. Our risk controls are part of CIBC’s overall Control Framework, developed based on the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO) widely accepted “Internal Control – Integrated Framework”. The Control Framework also draws on elements of the OSFI Supervisory Framework and Corporate Governance Guidelines. The Board, primarily through the RMC, approves certain credit risk limits and delegates specific transactional approval authorities to the CEO or jointly to the CEO and CRO. The RMC must approve transactions that exceed delegated authorities. Delegation of authority to business units is controlled to ensure decision-making authorities are restricted to those individuals with the necessary experience levels. In addition, CIBC has rigorous processes to identify, evaluate and remediate risk control deficiencies in a timely manner. Regular reporting is provided to the RMC to evidence compliance with risk limits. Risk limits and the delegation of authority to the CEO or jointly to the CEO and CRO are reviewed annually by the RMC. Risk monitoring and reporting To monitor CIBC’s risk profile and facilitate evaluation against the risk appetite statement, a number of measurement metrics have been established, with regular reporting against these metrics provided to the GRC and the RMC. This reporting enables decisions on growth and risk mitigation strategies. Exposures are also regularly monitored against limits, with escalation protocols for limit excesses, should they occur. Escalation protocols ensure awareness at appropriate levels and facilitate management of excesses that is consistent with our risk appetite. Regular management reports on each risk type are also prepared to facilitate monitoring and control of risk at a more granular level. Top and emerging risks We monitor and review top and emerging risks that may affect our future results, and take action to mitigate potential risks if required. We perform in-depth analyses, which can include stress testing our exposures relative to the risks, and provide updates and related developments to the Board on a regular basis. Top and emerging risks are those that we consider to have potential negative implications that are material for CIBC. This section describes those top and emerging risks, as well as regulatory and accounting developments that are material for CIBC. 46 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Technology, information and cyber security risk Financial institutions like CIBC are evolving their business processes to leverage innovative technologies and the internet to improve client experience and streamline operations. At the same time, cyber threats and the associated financial, reputation and business interruption risks have also increased. These risks continue to be actively managed by us through strategic risk reviews, enterprise-wide technology and information security programs, with the goal of maintaining overall cyber-resilience that prevents, detects, and responds to threats such as data breaches, malware, unauthorized access, and denial-of-service attacks, which can result in damage to CIBC systems and information, theft or disclosure of confidential information, unauthorized or fraudulent activity, and service disruption. Given the importance of electronic financial systems, including secure online and mobile banking provided by CIBC to its clients, CIBC monitors the changing environment globally, including cyber threats, mitigation strategies and evolving regulatory requirements, in order to improve our controls and processes to protect our systems and client information. In addition, we perform cyber security preparedness, testing, and recovery exercises to validate our defences, benchmark against best practices and provide regular updates to the Board. CIBC has well-defined cyber incident response protocols and playbooks in the event that a security incident or breach occurs. CIBC also has cyber insurance coverage to help mitigate against certain potential losses associated with cyber incidents. CIBC’s insurance coverage is subject to various terms and provisions, including limits on the types and amounts of coverage relating to losses arising from cyber incidents. We periodically assess our insurance coverage based on our risk tolerance and limits. Despite our commitment to information and cyber security, and given the rapidly evolving threat and regulatory landscape, coupled with a changing business environment, it is not possible for CIBC to identify all cyber risks or implement measures to prevent or eliminate all potential incidents from occurring. However, CIBC monitors its risk profile for changes and continues to refine approaches to security protection and service resilience to minimize the impact of any incidents that may occur. Third party risk CIBC’s Board and senior management recognize the establishment of third-party relationships as important to CIBC’s business model and therefore leverage them to achieve CIBC’s business objectives. With the introduction of new technologies, new foreign jurisdictions and increasing reliance on sub-contractors, the third-party landscape continues to evolve. While such relationships may benefit CIBC through reduced costs, innovation, improved performance and increased business competitiveness, they also can introduce risks of failure or disruption to CIBC through breakdowns in people, processes or technology or through external events that impact these third parties. To mitigate third-party risks, prepare for future third-party risks and changing regulatory expectations, and to ensure existing processes and internal controls are operating effectively, CIBC relies on its strong risk culture and established Third Party Risk Management program, which includes policies, procedures, expertise and resources dedicated to third-party risk management. The program identifies and manages risks that arise from third-party relationships from the point of selection through the life cycle of the business arrangement and supports the maintenance of collaborative relationships that advance CIBC’s strategic direction and operational needs within our risk appetite. Disintermediation risk Canadian banking clients are increasingly shifting their service transactions from branches to digital platforms. As such, competitive pressure from digital disruptors, both global technology leaders and smaller financial technology entrants, is increasing and the risk of disintermediation is growing due to the level of sophistication of these non-traditional competitors. Cryptocurrencies, such as Bitcoin, are increasingly being recognized by financial institutions as risk factors facing their business operations. One of the major appeals of cryptocurrencies is the anonymity they offer, as participants can transfer assets across the internet without the need for centralized third-party intermediaries such as banks. In view of several shortcomings including their high volatility and propensity for attempted and successful cyber attacks, the widespread adoption of cryptocurrencies as a substitute for government-issued currencies does not appear to be a near-term prospect. However, the underlying blockchain technology is seen to have vast potential which could contribute to increased disintermediation. Blockchain is a decentralized ledger technology that keeps records that are linked and secured with cryptography. It enables the use of cryptocurrencies, such as Bitcoin. The percentage of global GDP stored on this technology is expected to continue to increase, creating the potential for blockchain to transform business models over time across multiple industries that focus on transaction and record verification. CIBC manages disintermediation risk through strategic risk reviews as well as investment in emerging channels, in data and analytics capabilities, and in technology and innovation in general, to meet our clients’ changing expectations, while working to reduce our cost structure and simplify operations. Climate risk The physical effects of climate change such as heat waves, water stress and flooding, along with regulations designed to mitigate climate change, will have a measurable impact on communities and the economy. As the world transitions to a low-carbon economy, we are committed to understanding and responsibly managing the relevant impacts of climate change on our business activities. While CIBC has relatively low direct carbon emissions given we are a service-based company, many of our clients operate in businesses that currently face or will face new carbon emission standards in the foreseeable future. There is an increasing demand for disclosure around climate-related risk identification and mitigation and we support the disclosure framework developed by the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD reporting framework provides stakeholders with consistent, material climate-related disclosures that are comparable across sectors, industries and countries. A key recommendation by the TCFD is the use of climate- related scenario analysis as a way to provide insight into how physical and transition risks of climate change might impact a business over time. Along with many other global banks, CIBC is participating in the United Nations Environmental Programme Finance Initiative Task Force on Climate-related Financial Disclosures (UNEP FI TCFD) in order to accelerate our progress and ensure consistency in approach to effective climate scenario analysis. See the “Environmental and related social risk” section for additional information. 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. Geo-political risk could reduce economic growth, and in combination with the potential impacts on commodity prices and the recent rise of protectionism, could have serious negative implications for general economic and banking activities. Current areas of concern include: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Ongoing trade tensions between the U.S. and China; Diplomatic tensions and the trade dispute between Canada and China; Relations between the U.S. and Iran; Anti-government protests in Hong Kong; Uncertainty regarding the outcome of Brexit negotiations following a third deadline delay and a general election to be held in the U.K. in December; and CIBC 2019 ANNUAL REPORT 47 Management’s discussion and analysis (cid:129) Uncertainty regarding the United States Congress’ ratification of the Canada-U.S.-Mexico Agreement, and the potential impact on North American trade policy. While it is impossible to predict where new geo-political disruption will occur, we do pay particular attention to markets and regions with existing or recent historical instability to assess the impact of these environments on the markets and businesses in which we operate. Canadian consumer debt and the housing market As a consequence of historically low interest rates, Canadians had increased debt levels at a pace that exceeded the growth in their income. Most of the increase in household debt levels was driven by higher levels of mortgage debt, which was tied to the Canadian housing market. The Bank of Canada’s interest rate increases in 2018, combined with regulatory measures introduced by OSFI, the Department of Finance, and provincial governments, including taxes on foreign ownership and revised mortgage underwriting guidelines (B-20 guidelines), are having their intended effect. Household credit is currently growing at the slowest pace experienced in any non-recessionary period during the post-war era. While we believe that the probability of a severe housing crash that generates significant losses for mortgage portfolios remains low, future increases in interest rates would elevate the risk associated with an inflated housing market. Further, the high levels of consumer debt would be a concern should the economy falter and unemployment rates begin to increase. Currently, we qualify variable rate mortgage borrowers using the Bank of Canada five-year fixed benchmark rate, which is typically higher than the variable rate by approximately two percentage points, which is required as part of the B-20 guidelines. Therefore, our variable rate borrowers should be able to withstand some increase in interest rates. In addition, we run our enterprise-wide statistical stress tests at lower home prices to determine potential direct losses, and have also conducted stress tests to assess the impact of rising unemployment rates on borrowers’ ability to repay loan obligations. Money laundering Money laundering, terrorist financing activities and other related crimes pose a great threat to the stability and integrity of a country’s financial sector and its broader economy. In recognition of this threat, the international community has made the fight against these illegal activities a priority. In Canada, amendments to the regulations under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act were published in June 2019 to improve the effectiveness of Canada’s AML and ATF regime. The new regulations will require substantial changes to the type of client information we need to collect, and as such, will impact our client-facing systems and transaction, payment processing and reporting systems. CIBC is committed to adhering to all regulatory requirements pertaining to AML and ATF and implementing best practices to minimize the impact of such activities. As such, CIBC has implemented procedures to ensure that relevant regulatory obligations with respect to the reporting of large cash transactions, electronic funds transfers, and cross-border movements of cash and monetary instruments, are met in each jurisdiction. In addition, all employees are required to complete CIBC’s AML/ATF training annually. Commodity prices While crude oil prices have rebounded from December 2018 lows, ongoing price stability remains a concern despite supply restrictions and unease arising from geo-political tensions. Factors including the extension of existing output cuts to the end of the first quarter of 2020 by the Organization of the Petroleum Exporting Countries (OPEC), significant volume reductions resulting from U.S. sanctions on Venezuela and Iran, and output disruption from attacks on Saudi Arabian oil facilities are being counteracted by expectations of reduced oil demand in line with the projected deceleration in the pace of global economic growth for 2020. While there has been improvement in the price of Canada’s heavy oil benchmark, WCS, and a narrowing of the spread between WCS and WTI, differentials remain volatile, affected by the impact of declines in production limitations mandated by the Alberta government and inadequate transportation capacity. Natural gas prices also continue to be an area of concern, as Alberta Energy Company (AECO) prices – the Canadian gas benchmark – have experienced extreme volatility since mid-2017, mainly due to severe pipeline constraints, with the largest impact felt by Canadian dry gas producers. CIBC’s overall commodity exposure continues to perform within our risk appetite, with losses in our oil and gas portfolio down from peak levels. Clients in our oil and gas portfolio are currently being assessed on the basis of our enhanced risk metrics, and our portfolio is being monitored in a prudent manner. U.S. banking regulation CIBC’s U.S. operations are subject to supervision by the Board of Governors of the Federal Reserve System (Federal Reserve), and are also subject to a comprehensive federal and state regulatory framework. Our wholly owned subsidiary, CIBC Bancorp USA Inc. (CIBC Bancorp), is a financial holding company subject to regulation and supervision by the Federal Reserve under the Bank Holding Act of 1956, as amended. CIBC Bank USA, our Illinois-chartered bank, is subject to regulation by the U.S. Federal Deposit Insurance Corporation (FDIC) and the Illinois Department of Financial and Professional Regulation. CIBC’s New York branch is subject to regulation and supervision by the New York Department of Financial Services and the Federal Reserve. Certain market activities of our U.S. operations are subject to regulation by the SEC and the U.S. Commodity Futures Trading Commission, as well as other oversight bodies. 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 (in the case of CIBC Bancorp) and the FDIC (in the case of CIBC Bank USA) also have the ability to restrict dividends paid by CIBC Bancorp or CIBC Bank USA, which could limit our ability to receive distributions on our capital investment in our U.S. banking operations. Furthermore, the Federal Reserve and the FDIC could also restrict our ability to grow our U.S. banking operations, whether through acquisitions or organically, if, among other things, they have supervisory concerns about risk management, AML or compliance programs and practices, governance and controls, and/or capital and liquidity adequacy at CIBC Bancorp, CIBC Bank USA or our New York branch, as applicable. The U.S. regulatory environment continues to evolve and future legislative and regulatory developments may impact CIBC. In October 2019, U.S. banking regulators finalized a revised risk-based framework for applying enhanced prudential standards to the U.S. operations of foreign banking organizations. Under that framework, certain additional capital and liquidity requirements that would demand significant compliance efforts will not apply until CIBC’s U.S. operations grow substantially. Acquisition risk CIBC seeks out acquisition opportunities that align with its strategy, risk appetite and financial goals. The ability to successfully execute on our strategy to integrate acquisitions, and the ability to anticipate and manage risks associated with acquisitions, are subject to certain factors. These include receiving regulatory and shareholder approval on a timely basis and on favourable terms, retaining clients and key personnel, realizing synergies and efficiencies, controlling integration and acquisition costs, among others, and changes in general business and economic conditions. 48 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis 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. Regulatory developments See the “Taxes”, “Capital management”, “Liquidity risk” and “Accounting and control matters” sections for additional information on regulatory developments. Accounting developments See the “Accounting and control matters” section and Note 31 to the consolidated financial statements for additional information on accounting developments. Risks arising from business activities The chart below shows our business activities and related risk measures based upon regulatory RWA and economic capital as at October 31, 2019: CIBC Corporate and Other SBUs Business activities Balance sheet CET1 RWA Economic capital (4) 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 26) Average assets Average deposits Credit risk Market risk Operational risk ($ millions) 259,089 177,423 ($ millions) 48,876 – 12,013 Average assets Average deposits Credit risk Market risk Operational risk ($ millions) 62,552 60,195 ($ millions) 44,980 – 6,232 Average assets Average deposits Credit risk (1) Market risk Operational risk ($ millions) 48,687 27,224 ($ millions) 42,630 39 3,261 Average assets Average deposits Credit risk (2) Market risk Operational risk ($ millions) 184,566 33,312 ($ millions) 49,452 6,186 6,295 Average assets Average deposits Credit risk (3) Market risk Operational risk ($ millions) 84,822 178,976 ($ millions) 18,806 307 786 Proportion of total CIBC Comprising: Credit risk (5) Market risk Operational/Strategic risks (%) 17 62 28 10 Proportion of total CIBC Comprising: Credit risk (5) Market risk Operational/Strategic risks (%) 17 65 2 33 Proportion of total CIBC Comprising: Credit risk (5) Market risk Operational/Strategic risks (%) 34 40 2 58 Proportion of total CIBC Comprising: Credit risk (5) Market risk Operational/Strategic risks (%) 13 75 13 12 Proportion of total CIBC Comprising: Credit risk (5) Market risk Operational/Strategic risks (%) 19 23 16 61 Risk profile We are exposed to credit, market, liquidity, operational, and other risks, which primarily include strategic, insurance, technology, information and cyber security, reputation, conduct and legal, regulatory compliance, and environmental and related social risks. (1) (2) (3) (4) (5) Includes counterparty credit risk of $242 million, which comprises derivatives and repo-style transactions. Includes counterparty credit risk of $16,849 million, which comprises derivatives and repo-style transactions. Includes counterparty credit risk of $149 million, which comprises derivatives and repo-style transactions. For additional information, see the “Non-GAAP measures” section. Includes investment risk. CIBC 2019 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 consist of our trading activities, which include our over-the-counter (OTC) derivatives, debt securities, and our repo-style transaction activity. In addition to losses on the default of a borrower or counterparty, unrealized gains or losses may occur due to changes in the credit spread of the counterparty, which could impact the carrying or fair value of our assets. Governance and management Credit risk is managed through the three lines of defence model. Frontline businesses and control groups must assess and manage the risks associated with their activities. They own the risks and the controls that mitigate the risks – this is the first line of defence. The second line of defence is Risk Management, including AML and Compliance, which takes a broader, independent view and is responsible for the adjudication and oversight of credit risks associated with CIBC’s commercial, corporate and wealth management activities, 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 of the design and operating effectiveness of CIBC’s controls, processes and systems. Internal audit reports the results of its assessment to management and the Board. Senior management reports to the GRC and RMC at least quarterly on material credit risk matters, including material credit transactions, compliance with limits, portfolio trends, impaired loans and credit loss provisioning levels. Provision for credit losses is reviewed by the RMC and the Audit Committee quarterly. Specific to the management of credit risk, Risk Management is mandated to provide enterprise-wide oversight of the management of credit risk in CIBC’s credit portfolios, including the measurement, monitoring and control of credit risk and the management of credit risk models. Key groups in Risk Management with credit risk responsibility include: Capital Markets Risk Management: This group is responsible for independent oversight of the measurement, monitoring and control of market risk and trading credit risk for all counterparties, including adjudication of trading credit facilities for non-bank financial entities, prime brokerage clients and central clearing counterparties where the client has no other credit relationship with CIBC. In addition, Capital Markets Risk Management is responsible for managing the country risk rating and the country exposure limits processes, and oversight of the Global Collateral Finance framework covering repos and securities lending. Global Credit Risk Management: This group is responsible for the adjudication and oversight of credit risks (including transaction-specific environmental and related social risk) associated with our commercial, corporate and wealth management credit portfolios, management of the risks in our investment portfolios, as well as management of special loan portfolios. Model Validation, Global Operational Risk Management: This group is responsible for the oversight of model validation practices. Model validation constitutes the independent set of processes, activities and ongoing documentary evidence that models and parameters are sound and CIBC can rely on their output. 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, 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 (e.g., residential mortgages, credit cards, personal loans/ lines of credit, small business loans) and performs analytics to optimize retail credit performance, along with collections, fraud, and AML outcomes. U.S. Risk Management: This group carries out the mandate of CIBC Risk Management at a regional level and provides independent oversight of the identification, management, measurement, monitoring and control of credit risks in the U.S. Commercial Banking and Wealth Management SBU. Adjudication and oversight above delegated levels is provided by the CRO, GRC and RMC. Policies To control credit risk, prudent credit risk management principles are used as a base to establish policies, standards and guidelines that govern credit activities as outlined by the credit risk management policy. The credit risk management policy supplements CIBC’s risk management framework and risk appetite framework, and together with CIBC’s portfolio concentration limits for credit exposures, CIBC’s common risk/concentration risk limits for credit exposures, and other supporting credit risk policies, standards and procedures, assists CIBC in achieving its desired risk profile by providing an effective foundation for the management of credit risk. Credit risk limits The RMC approves Board limits, and exposures above Board limits require reporting to, or approval of, the RMC. Management limits are approved by the CRO. Usage is monitored to ensure risks are within allocated management and Board limits. Exposures above management limits require the approval of the CRO. Business lines may also impose lower limits to reflect the nature of their exposures and target markets. This tiering of limits provides for an appropriate hierarchy of decision making and reporting between management and the RMC. Credit approval authority flows from the Board and is further cascaded to officers in writing. The Board’s Investment and Lending Authority Resolution sets thresholds above which credits require reporting to, or approval of, the RMC, ensuring an increasing level of oversight for credits of higher risk. CIBC maintains country limits to control exposures within countries outside of Canada and the U.S. Credit concentration limits At a bank-wide level, credit exposures are managed to promote alignment to our risk appetite statement, to maintain the target business mix and to ensure that there is no undue concentration of risk. We set limits to control borrower concentrations by risk-rating band for large exposures (i.e., risk- rated credits). Direct loan sales, credit derivative hedges, or structured transactions may also be used to reduce concentrations. We also have a set of portfolio concentration limits in place to control exposures by country, industry, product and activity. Further, our policies require limits to be established as appropriate for new initiatives and implementation of strategies involving material levels of credit risk. Concentration limits represent the maximum exposure levels we wish to hold on our books. In the normal course, it is expected that exposures will be held at levels below the maximums. The credit concentration limits are reviewed and approved by the RMC at least annually. Credit concentration limits are also applied to our retail lending portfolios to mitigate concentration risk. We not only have concentration limits to individual borrowers and geographic regions, but also to different types of credit facilities, such as unsecured credits, rental occupancy purpose credits, 50 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis condominium secured credits and mortgages with a second or third charge where we are behind another lender. In addition, we limit the maximum insured mortgage exposure to private insurers in order to reduce counterparty risk. Credit risk mitigation We may mitigate credit risk by obtaining a pledge of collateral, which improves recoveries in the event of a default. Our credit risk management policies include verification of the collateral and its value and ensuring that we have legal certainty with respect to the assets pledged. Valuations are updated periodically depending on the nature of the collateral, legal environment, and the creditworthiness of the counterparty. The main types of collateral include: (i) cash or marketable securities for securities lending and repurchase transactions; (ii) cash or marketable securities taken as collateral in support of our OTC derivatives activity; (iii) charges over operating assets such as inventory, receivables and real estate properties for lending to small business and commercial borrowers; and (iv) mortgages over residential properties for retail lending. In certain circumstances we may use third-party guarantees to mitigate risk. We also obtain insurance to reduce the risk in our real estate secured lending portfolios, the most material of which relates to the portion of our residential mortgage portfolio that is insured by CMHC, an agency of the Government of Canada. We mitigate the trading credit risk of OTC derivatives, securities lending and repurchase transactions with counterparties by employing the International Swaps and Derivatives Association (ISDA) Master Agreement, as well as Credit Support Annexes (CSAs) or similar master and collateral agreements. See Note 12 to the consolidated financial statements for additional details on the risks related to the use of derivatives and how we manage these risks. ISDA Master Agreements and similar master and collateral agreements, such as the global master repurchase agreement and global master securities lending agreement, facilitate cross transaction payments, prescribe close-out netting processes, and define the counterparties’ contractual trading relationship. In addition, the agreements formalize non-transaction-specific terms. Master agreements serve to mitigate our credit risk by outlining default and termination events, which enable parties to close out of all outstanding transactions in the case of a negative credit event on either party’s side. The mechanism for calculating termination costs in the event of a close-out are outlined in the master agreement; this allows for the efficient calculation of a single net obligation of one party to another. CSAs and other collateral agreements are often included in ISDA Master Agreements or similar master agreements governing securities lending and repurchase transactions. They mitigate counterparty credit risk by providing for the exchange of collateral between parties when a party’s exposure to the other exceeds agreed upon thresholds, subject to a minimum transfer amount. CSAs and other collateral agreements which operate with master agreements also designate acceptable collateral types, and set out rules for re-hypothecation and interest calculation on collateral. Collateral types permitted under CSAs and other master agreements are set through our trading credit risk management documentation procedures. These procedures include requirements around collateral type concentrations. Consistent with global initiatives to improve resilience in the financial system, we will clear derivatives through 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. Loan loss provisions are adjusted as appropriate. In retail lending, forbearance techniques include interest capitalization, amortization amendments and debt consolidations. We have a set of eligibility criteria which allow our Client Account Management team to determine suitable remediation strategies and propose products based on each borrower’s situation. While these solutions often provide more favourable conditions than those originally provided and are intended to increase the ability of borrowers to service their obligation to CIBC overall, we consider these solutions to be at market and comparable to terms and conditions we would have offered to new clients with comparable credit ratings. The solutions available to corporate and commercial clients vary based on the individual nature of the client’s situation and are undertaken selectively where it has been determined that the client has or is likely to have repayment difficulties servicing its obligations. Covenants often reveal changes in the client’s financial situation before there is a change in payment behaviour and typically allow for a right to reprice or accelerate payments. Solutions may be temporary in nature or may involve other special management options. Process and control The credit approval process is centrally controlled, with all significant credit requests submitted to a credit adjudication group within Risk Management that is independent of the originating businesses. Approval authorities are a function of the risk and amount of credit requested. In certain cases, credit requests must be escalated to senior management, the CRO, or to the RMC for approval. After initial approval, individual credit exposures continue to be monitored, with a formal risk assessment, including review of assigned ratings, documented at least annually. Higher risk-rated accounts are subject to closer monitoring and are reviewed at least quarterly. Collections and specialized loan workout groups handle the day-to-day management of high risk loans to maximize recoveries. Risk measurement Exposures subject to AIRB approach Under the AIRB approach we are required to categorize exposures to credit risk into broad classes of assets with different underlying risk characteristics. This asset categorization may differ from the presentation in our consolidated financial statements. Under the AIRB approach, credit risk is measured using the following three key risk parameters(1): (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 risk exposures are divided into business and government and retail portfolios. Regulatory models used to measure credit risk exposure under the AIRB approach are subject to CIBC’s model risk management process. (1) These parameters differ from those used in the calculation of expected credit losses under IFRS 9. See the “Accounting and control matters” section for further details. CIBC 2019 ANNUAL REPORT 51 Management’s discussion and analysis Business and government portfolios (excluding scored small business) – risk-rating method The portfolios comprise exposures to corporate, sovereign, and bank obligors. Our adjudication process and criteria includes assigning an obligor default rating that reflects our estimate of the financial strength of the borrower, and a facility rating or loss given default rating that reflects the collateral amount and quality applicable to secured exposures, the seniority position of the claim, and the capital structure of the borrower for unsecured exposures. The obligor rating takes into consideration our financial assessment of the obligor, the industry, and the economic environment of the region in which the obligor operates. Where a guarantee from a third party exists, both the obligor and the guarantor will be assessed. While our obligor rating is determined independently of external ratings for the obligor, our risk-rating methodology includes a review of those external ratings. CIBC employs a 20-point master internal obligor default rating scale that broadly maps to external agencies ratings as presented in the table below. Grade Investment grade Non-investment grade Watch list Default CIBC rating 00–47 51–67 70–80 90 S&P equivalent AAA to BBB- BB+ to B- CCC+ to C D Moody’s equivalent Aaa to Baa3 Ba1 to B3 Caa1 to Ca C We use quantitative modelling techniques to assist in the development of internal risk-rating systems. The risk-rating systems have been developed through analysis of internal and external credit risk data, supplemented with expert judgment. The risk ratings are used for portfolio management, risk limit setting, product pricing, and in the determination of regulatory and economic capital. Our credit process is designed to ensure that we approve applications and extend credit only where we believe that our client has the ability to repay according to the agreed terms and conditions. Our credit framework of policies and limits defines our appetite for exposure to any single name or group of related borrowers, which is a function of the internal risk rating. We generally extend new credit only to borrowers in the investment and non-investment grade categories noted above. Our credit policies are also defined to manage our exposure to concentration in borrowers in any particular industry or region. In accordance with our process, each obligor is assigned an obligor default rating and the assigned rating is mapped to a PD estimate that represents a long-run average one-year default likelihood. For corporate obligors, PD estimates are calculated using joint maximum likelihood techniques based on our internal default rate history by rating category and longer dated external default rates as a proxy for the credit cycle to arrive at long-run average PD estimates. Estimates drawn from third party statistical default prediction models are used to supplement the internal default data for some rating bands where internal data is sparse. For small and medium corporate enterprises, PD estimates are developed using only internal default history. For bank and sovereign obligors, PD estimates are derived from an analysis based on external default data sets and supplemented with internal data where possible. We examine several different estimation methodologies and compare results across the different techniques. In addition, we apply the same techniques and estimation methodologies to analogous corporate default data and compare the results for banks and sovereigns to the corporate estimates for each technique. A regulatory floor is applied to PD estimates for corporate and bank obligors. Each facility is assigned a loss given default rating and each assigned rating is mapped to an LGD estimate that considers economic downturn conditions. For corporate obligors, LGD estimates are primarily derived from internal historical recovery data. Time to resolution is typically 1 to 2 years for most corporate obligors, and 1 to 4 years in the real estate sector. LGD values are based on discounted post-default cash flows for resolved accounts and include material direct and indirect costs associated with collections. External data is used in some cases to supplement our analysis. Economic downturn periods are identified for each portfolio by examining the history of actual losses, default rates and LGD. For bank and sovereign exposures, LGD estimates are primarily driven by expert judgment supplemented with external data and benchmarks where available. Appropriate adjustments are made to LGD estimates to account for various uncertainties associated with estimation techniques and data limitations, including adjustments for unresolved accounts. EAD is estimated based on the current exposure to the obligor together with possible future changes in that exposure driven by factors such as the available undrawn credit commitment amount and the obligor default rating. EAD estimates are primarily based on internal historical loss data supplemented with comparable external data. Economic downturn periods are identified for each portfolio by examining the historical default rates and actual EAD factors. Appropriate adjustments are made to PD, LGD and EAD estimates to account for various uncertainties associated with estimation techniques and data limitations, including adjustments for unresolved accounts (for LGD). A simplified risk-rating process (slotting approach) is used for part of our uninsured Canadian commercial mortgage portfolio, which comprises non-residential mortgages and multi-family residential mortgages. These exposures are individually rated on our rating scale using a risk-rating methodology that considers the property’s key attributes, which include its loan-to-value (LTV) and debt service ratios, the quality of the property, and the financial strength of the owner/sponsor. All exposures are secured by a lien over the property. In addition, we have insured multi-family residential mortgages, which are not treated under the slotting approach, but are instead treated as sovereign exposures. Retail portfolios Retail portfolios are characterized by a large number of relatively small exposures. They comprise of: real estate secured personal lending (residential mortgages and personal loans and lines secured by residential property); qualifying revolving retail exposures (credit cards, overdrafts and unsecured lines of credit); and other retail exposures (loans secured by non-residential assets, unsecured loans including student loans, and scored small business loans). We use scoring models in the adjudication of new retail credit exposures, which are based on statistical methods of analyzing the unique characteristics of the borrower, to estimate future behaviour. In developing our models, we use internal historical information from previous borrowers, as well as information from external sources, such as credit bureaus. The use of credit scoring models allows for consistent assessment across borrowers. There are specific guidelines in place for each product, and our adjudication decision will take into account the characteristics of the borrower, any guarantors, and the quality and sufficiency of the collateral pledged (if any). The lending process will include documentation of, where appropriate, satisfactory identification, proof of income, independent appraisal of the collateral and registration of security. Retail portfolios are managed as pools of homogeneous risk exposures, using external credit bureau scores and/or other behavioural assessments to group exposures according to similar credit risk profiles. These pools are established through statistical techniques. Characteristics used to group individual exposures vary by asset category; as a result, the number of pools, their size, and the statistical techniques applied to their management differ accordingly. 52 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis 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% For the purposes of the AIRB approach for retail portfolios, additional PD, LGD and EAD segmentation into homogenous risk exposures is established through statistical techniques. The principal statistical estimation technique is decision trees benchmarked against alternative techniques such as regression and random forests. Within real estate secured lending, we have two key parameter estimation models: mortgages and real estate secured personal lines of credit. Within qualifying revolving retail, we have three key parameter estimation models: credit cards, overdraft, and unsecured personal lines. A small percentage of credit cards, overdraft, and unsecured line accounts that do not satisfy the requirements for qualifying revolving retail are grouped into other retail parameter models. Within other retail, we have three key parameter models: margin lending, personal loans, and scored small business loans. Each parameter model pools accounts according to characteristics such as: delinquency, current credit bureau score, internal behaviour score, estimated current LTV ratio, account type, account age, utilization, outstanding balance, or authorized limit. PD is estimated as the average default rate over an extended period based on internal historical data, generally for a 5-to-10-year period, which is adjusted using internal historical data on default rates over a longer period or comparable external data that includes a period of stress. A regulatory floor is applied to our PD estimate for all retail exposures with the exception of insured mortgages and government-guaranteed loans. LGD is estimated based on observed recovery rates over an extended period using internal historical data. In determining our LGD estimate, we exclude any accounts that have not had enough time since default for the substantial majority of expected recovery to occur. This recovery period is product-specific and is typically in the range of 1 to 3 years. Accounts that cure from default and return to good standing are considered to have zero loss. We simulate the loss rate in a significant downturn based on the relationship(s) between LGD and one or more of the following: PD; housing prices, cure rate, and recovery time; or observed LGD in periods with above-average loss rates. We apply appropriate adjustments to address various types of estimation uncertainty including sampling error and trending. A regulatory floor is applied to all real estate secured exposures with the exception of insured mortgages. EAD for revolving products is estimated as a percentage of the authorized credit limit based on the observed EAD rates over an extended period using historical data. We simulate the EAD rate in a significant downturn based on the relationship(s) between the EAD rate and PD and/or the observed EAD rate in periods with above-average EAD rates. For term loan products, EAD is set equal to the outstanding balance. We apply appropriate adjustments to PD, LGD and EAD to address various types of estimation uncertainty including sampling error and trending. Back-testing We monitor the three key risk parameters – PD, EAD and LGD – on a quarterly basis for our business and government portfolios and on a monthly basis for our retail portfolios. Every quarter, the back-testing results are reported to OSFI and are presented to the business and Risk Management senior management for review and challenge. For each parameter, we identify any portfolios whose realized values are significantly above or significantly below expectations and then test to see if this deviation is explainable by changes in the economy. If the results indicate that a parameter model may be losing its predictive power, we prioritize that model for review and update. Stress testing As part of our regular credit portfolio management process, we conduct stress testing and scenario analyses on our portfolio to quantitatively assess the impact of various historical, as well as hypothetical, stressed conditions, versus limits determined in accordance with our risk appetite. Scenarios are selected to test our exposures to specific industries (e.g., oil and gas and real estate), products (e.g., mortgages and cards), or geographic regions (e.g., Europe and Caribbean). Results from stress testing are a key input into management decision making, including the determination of limits and strategies for managing our credit exposure. See the “Real estate secured personal lending” section for further discussion on our residential mortgage portfolio stress testing. CIBC 2019 ANNUAL REPORT 53 Management’s discussion and analysis Exposure to credit risk The portfolios are categorized based upon how we manage the business and the associated risks. Gross credit exposure amounts presented in the table below represent our estimate of EAD, which is net of derivative master netting agreements and CVA but is before allowance for credit losses or credit risk mitigation. Gross credit exposure amounts relating to our business and government portfolios are reduced for collateral held for repo-style transactions, which reflects the EAD value of such collateral. Non-trading equity exposures are not included in the table below as they have been deemed immaterial under the OSFI guidelines, and hence are subject to 100% risk-weighting. $ millions, as at October 31 2019 2018 AIRB approach (1) Standardized approach Total approach (1) approach (2) Total AIRB Standardized 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: collateral held for repo-style transactions 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 Gross credit exposure Less: collateral held for repo-style transactions 96,444 44,732 122,776 14,540 14,125 292,617 73,036 6,421 21,404 1,624 3,094 105,579 12,689 1,771 25,472 61,532 9,355 110,819 509,015 157,415 351,600 222,933 20,777 243,710 19,784 49,709 275 69,768 13,478 2,584 36 16,098 329,576 10,688 849,279 157,415 $ 32,292 6,244 1 981 596 40,114 13,301 – – – 2 13,303 1,862 6 – – 18 1,886 55,303 – 55,303 4,177 1 4,178 – – – – 1,268 26 – 1,294 5,472 3,511 64,286 – $ 128,736 50,976 122,777 15,521 14,721 332,731 86,337 6,421 21,404 1,624 3,096 118,882 14,551 1,777 25,472 61,532 9,373 112,705 564,318 157,415 406,903 227,110 20,778 247,888 19,784 49,709 275 69,768 14,746 2,610 36 17,392 335,048 14,199 913,565 157,415 $ 85,899 43,180 91,970 14,496 9,440 244,985 51,703 6,576 16,929 753 3,454 79,415 13,697 1,041 28,860 65,253 8,727 117,578 441,978 125,368 316,610 224,501 19,572 244,073 22,469 51,836 277 74,582 12,158 2,546 9 14,713 333,368 13,661 789,007 125,368 $ 27,018 4,885 2 827 294 33,026 12,047 – – – – 12,047 1,868 5 – – 27 1,900 46,973 – 46,973 3,743 2 3,745 – – – – 1,239 26 – 1,265 5,010 – 51,983 – $ 112,917 48,065 91,972 15,323 9,734 278,011 63,750 6,576 16,929 753 3,454 91,462 15,565 1,046 28,860 65,253 8,754 119,478 488,951 125,368 363,583 228,244 19,574 247,818 22,469 51,836 277 74,582 13,397 2,572 9 15,978 338,378 13,661 840,990 125,368 Net credit exposure (3) $ 691,864 $ 64,286 $ 756,150 $ 663,639 $ 51,983 $ 715,622 Includes exposures subject to the supervisory slotting approach. (1) (2) Certain information has been reclassified. (3) Excludes exposures arising from derivative and repo-style transactions that are cleared through QCCPs as well as credit risk exposures arising from other assets that are subject to the credit risk framework but are not included in the standardized or IRB frameworks, including other balance sheet assets that are risk-weighted at 100%, significant investments in the capital of non-financial institutions that are risk-weighted at 1250%, settlement risk, and amounts below the thresholds for deduction that are risk- weighted at 250%. Net credit exposure increased by $40.5 billion in 2019, primarily due to business growth in our North American lending portfolios. 54 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Exposures subject to the standardized approach(1) 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 credit risk exposures by risk-weight category, before considering the effect of credit risk mitigation strategies and before allowance for credit losses, is provided below. $ millions, as at October 31 Corporate Sovereign Banks Real estate secured personal lending Other retail 0% – 7,953 – – – 7,953 $ $ 20% – 3,911 1,747 – – 5,658 $ $ $ $ $ Risk-weight category 50% 1 111 66 – – 178 35% – – – 1,238 – 1,238 $ $ $ 75% – $ – – 2,770 1,226 3,996 $ 100% 39,966 838 68 162 61 41,095 150% $ $ 147 $ 490 5 8 7 657 $ 2019 Total 40,114 13,303 1,886 4,178 1,294 60,775 2018 Total 32,767 12,047 2,159 3,745 1,265 51,983 $ $ (1) See “Securitization exposures” section for securitization exposures that are subject to the standardized approach. We use credit ratings from S&P and Moody’s to calculate credit risk RWA for certain exposures under the standardized approach, including securities issued by sovereigns and their central banks (sovereigns), banks and corporates, and deposits with sovereigns and banks. This includes S&P and Moody’s issuer-specific credit ratings for securities issued by sovereigns and corporates, the S&P country credit rating for the country of incorporation for securities issued by banks, and deposits with banks, and the S&P country credit rating for deposits with central banks. The RWA calculated using credit ratings from these agencies represents 1.66% of credit risk RWA under the standardized approach. 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 2019 Exposure (1) 82.4 % $ 17.1 0.3 0.2 100.0 % $ 2018 6.78 0.97 0.01 0.01 7.77 87.3 % 12.5 0.1 0.1 100.0 % $ $ 5.40 1.12 0.02 0.01 6.55 (1) MTM of the OTC derivative contracts is after the impact of master netting agreements, but before any collateral. Concentration of exposures Concentration of credit risk exists when a number of obligors are engaged in similar activities, or operate in the same 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(1) The following table provides a geographic distribution of our business and government exposures under the AIRB approach, net of collateral held for repo-style transactions. $ millions, as at October 31, 2019 Drawn Undrawn commitments Repo-style transactions Other off-balance sheet OTC derivatives October 31, 2018 Canada 123,265 39,452 6,152 56,158 12,207 237,234 213,842 $ $ $ U.S. 41,676 9,327 3,477 12,608 6,812 73,900 67,911 $ $ $ Europe 6,470 2,489 743 8,232 5,216 23,150 21,255 $ $ $ Other 10,758 1,656 1,865 698 2,339 17,316 13,602 $ $ $ Total 182,169 52,924 12,237 77,696 26,574 351,600 316,610 $ $ $ (1) Classification by country is primarily based on domicile of debtor or customer. CIBC 2019 ANNUAL REPORT 55 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, net of collateral held for repo-style transactions. $ 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 352 38,209 5,812 7,870 3,004 4,038 35,187 6,828 9,048 1,790 627 1,061 425 630 4,710 5,957 2,907 53,714 Undrawn commitments Repo-style transactions Other off- balance sheet OTC derivatives $ – 6,834 2,853 2,700 2,152 1,685 7,856 1,550 8,606 2,692 479 559 1,080 138 2,425 5,924 1,122 4,269 $ – 11,471 – 13 – – 117 – – – – – – – – 20 6 610 $ – 69,145 239 623 456 197 1,111 22 913 619 175 41 407 1 401 2,144 151 1,051 $ – 14,739 238 176 286 104 650 175 3,246 225 43 90 322 32 1,341 1,702 387 2,818 $ 2019 Total 352 140,398 9,142 11,382 5,898 6,024 44,921 8,575 21,813 5,326 1,324 1,751 2,234 801 8,877 15,747 4,573 62,462 $ 2018 Total 625 142,431 8,360 10,658 5,407 5,238 41,028 7,319 20,258 5,668 1,145 1,353 2,667 721 7,083 12,095 3,883 40,671 $ 182,169 $ 52,924 $ 12,237 $ 77,696 $26,574 $ 351,600 $ 316,610 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, 2019, we had credit protection purchased totalling $183 million (2018: $158 million) related to our business and government loans. Credit quality of portfolios Credit quality of risk-rated portfolios The following table provides the credit quality of our risk-rated portfolios under the AIRB approach, net of collateral held for repo-style transactions. The obligor grade is our assessment of the creditworthiness of the obligor, without respect to the collateral held in support of the exposure. The LGD estimate would reflect our assessment of the value of the collateral at the time of default of the obligor. For slotted exposures, the slotting category reflects our assessment of both the creditworthiness of the obligor, as well as the value of the collateral. $ millions, as at October 31 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 104,405 70,730 1,239 579 176,953 Corporate 9,977 53,740 84,497 27,381 1,358 176,953 $ $ $ $ EAD Sovereign 84,721 $ 837 – – 85,558 $ Sovereign 75,078 $ 6,825 3,582 9 64 85,558 $ Banks 87,691 1,046 – – 88,737 Banks 57,611 8,225 22,517 343 41 88,737 $ $ $ $ 2019 2018 Total 276,817 72,613 1,239 579 351,248 Total 142,666 68,790 110,596 27,733 1,463 351,248 246 85 21 – – 352 351,600 $ $ $ $ $ $ $ Total 249,031 65,973 724 257 315,985 Total 128,989 63,363 97,494 24,769 1,370 315,985 499 99 25 1 1 625 316,610 $ $ $ $ $ $ $ The total exposures increased by $35.0 billion from October 31, 2018, largely attributable to growth in our North American lending portfolios. The investment grade category increased by $27.8 billion from October 31, 2018, while the non-investment grade category was up $6.6 billion. The increase in watch list and default exposures was largely attributable to credit migration of a number of exposures in the corporate lending portfolio, including exposures within the oil and gas portfolio. 56 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Credit quality of the retail portfolios The following table presents the credit quality of our retail portfolios under the AIRB approach. $ millions, as at October 31 Risk level Exceptionally low Very low Low Medium High Default EAD Real estate secured personal lending Qualifying revolving retail $ 193,850 25,020 19,870 3,981 603 386 $ 42,369 6,036 14,168 6,270 877 48 2019 2018 $ Total 239,875 34,018 39,648 13,259 2,271 505 $ Total 241,305 36,106 38,687 14,363 2,509 398 $ Other retail 3,656 2,962 5,610 3,008 791 71 $ 243,710 $ 69,768 $ 16,098 $ 329,576 $ 333,368 Securitization exposures(1) The following table provides details on securitization exposures in our banking book, by credit rating: $ millions, as at October 31 Exposures under the AIRB approach S&P rating equivalent AAA to BBB- BB+ to BB- Below BB- Unrated Exposures under the standardized approach Total securitization exposures 2019 2018 EAD $ 11,394 – – 2,261 13,655 – $ 10,688 – – – 10,688 3,511 $ 14,199 $ 13,655 (1) In the first quarter of 2019, we implemented OSFI’s revisions to the CAR Guideline, including the revised securitization framework. As a result, certain exposures that were previously subject to the IRB approach are now subject to the standardized approach. In 2018, EAD was shown net of financial collateral of $6 million. Real estate secured personal lending Real estate secured personal lending comprises residential mortgages, and personal loans and lines secured by residential property (HELOC). This portfolio is low risk, as we have a first charge on the majority of the properties and a second lien on only a small portion of the portfolio. We use the same lending criteria in the adjudication of both first lien and second lien loans. Under the Bank Act (Canada), banks are limited to providing residential real estate loans of no more than 80% of the collateral value. An exception is made for mortgage loans with a higher LTV ratio if they are insured by either CMHC or a private mortgage insurer. Mortgage insurance protects banks from the risk of default by the borrower, over the term of the coverage. Mortgage insurers are subject to regulatory capital requirements, which aim to ensure that they are well capitalized. If a private mortgage insurer becomes insolvent, the Government of Canada has, provided certain conditions are met, obligations in respect of policies underwritten by certain insolvent private mortgage insurers as more fully described in the Protection of Residential Mortgage or Hypothecary Insurance Act (PRMHIA). There is a possibility that losses could be incurred in respect of insured mortgages if, among other 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 table provides details on our residential mortgage and HELOC portfolios: $ billions, as at October 31, 2019 Ontario (3) British Columbia and territories (4) Alberta Quebec Central prairie provinces Atlantic provinces Canadian portfolio (5)(6) U.S. portfolio (5) Other international portfolio (5) Total portfolio October 31, 2018 Residential mortgages (1) Insured Uninsured HELOC (2) Uninsured Total Insured Uninsured $ $ $ 28.8 10.3 13.5 5.7 3.7 4.2 66.2 – – 66.2 77.0 $ 28 % $ 25 53 38 51 51 33 – – 75.3 31.6 11.8 9.1 3.6 4.0 135.4 1.5 2.2 72 % 75 47 62 49 49 67 100 100 32 % $ 139.1 37 % $ 129.0 68 % 63 % $ $ 11.3 4.3 2.6 1.4 0.8 0.8 21.2 0.1 – 21.3 22.2 $ 100 % 100 100 100 100 100 100 100 – 100 % 100 % $ $ 28.8 10.3 13.5 5.7 3.7 4.2 66.2 – – 66.2 77.0 25 % $ 22 48 35 46 46 30 – – 86.6 35.9 14.4 10.5 4.4 4.8 156.6 1.6 2.2 29 % $ 160.4 34 % $ 151.2 75 % 78 52 65 54 54 70 100 100 71 % 66 % (1) Balances reflect principal values. (2) We did not have any insured HELOCs as at October 31, 2019 and 2018. (3) (4) Includes $14.1 billion (2018: $17.0 billion) of insured residential mortgages, $49.0 billion (2018: $45.9 billion) of uninsured residential mortgages, and $6.6 billion (2018: $6.9 billion) of HELOCs in the Greater Toronto Area (GTA). Includes $4.6 billion (2018: $5.6 billion) of insured residential mortgages, $22.1 billion (2018: $22.0 billion) of uninsured residential mortgages, and $2.7 billion (2018: $2.8 billion) of HELOCs in the Greater Vancouver Area (GVA). (5) Geographic location is based on the address of the property. (6) 72% (2018: 73%) 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. CIBC 2019 ANNUAL REPORT 57 Management’s discussion and analysis The average LTV ratios(1) for our uninsured residential mortgages and HELOCs originated and acquired during the year are provided in the following table. 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) Other international portfolio (4) Residential mortgages 63 % 61 68 68 69 72 64 % 69 72 % 2019 HELOC 67 % 64 72 73 74 74 68 % 63 n/m Residential mortgages 63 % 60 68 68 69 72 64 % 68 73 % 2018 HELOC 67 % 63 72 72 73 74 67 % 67 n/m LTV ratios for newly originated and acquired residential mortgages and HELOCs are calculated based on weighted average. (1) (2) Average LTV ratios for our uninsured GTA residential mortgages originated during the year were 62% (2018: 61%). (3) Average LTV ratios for our uninsured GVA residential mortgages originated during the year were 57% (2018: 56%). (4) Geographic location is based on the address of the property. n/m Not meaningful. The following table provides the average LTV ratios on our total Canadian residential mortgage portfolio: October 31, 2019 (1)(2) October 31, 2018 (1)(2) Insured Uninsured 55 % 54 % 54 % 53 % (1) LTV ratios for residential mortgages are calculated based on weighted average. The house price estimates for October 31, 2019 and 2018 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, 2019 and 2018, 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 50% (2018: 51%). Average LTV ratio on our uninsured GVA residential mortgage portfolio was 47% (2018: 43%). 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 other than the minimum contractual amount and/or a different frequency of payments. Contractual payment basis Canadian portfolio October 31, 2019 October 31, 2018 (1) U.S. portfolio October 31, 2019 October 31, 2018 (1) Other international portfolio October 31, 2019 October 31, 2018 (1) 0–5 years >5–10 years >10–15 years >15–20 years >20–25 years >25–30 years >30–35 years >35 years – % – % – % – % 9 % 8 % 1 % 1 % 2 % 2 % 16 % 16 % 2 % 2 % 2 % 4 % 23 % 26 % 6 % 4 % 1 % 2 % 23 % 22 % 49 % 45 % 9 % 10 % 17 % 17 % 42 % 48 % 86 % 82 % 12 % 11 % – % – % – % – % – % – % – % – % – % – % – % – % (1) Certain information has been reclassified to conform with the presentation adopted in the current year. Current customer payment basis Canadian portfolio October 31, 2019 October 31, 2018 (1) U.S. portfolio October 31, 2019 October 31, 2018 (1) Other international portfolio October 31, 2019 October 31, 2018 (1) 0–5 years >5–10 years >10–15 years >15–20 years >20–25 years >25–30 years >30–35 years >35 years 2 % 2 % 1 % 2 % 7 % 7 % 4 % 4 % 4 % 4 % 13 % 16 % 6 % 7 % 11 % 13 % 23 % 25 % 13 % 11 % 10 % 12 % 24 % 22 % 40 % 36 % 13 % 13 % 18 % 17 % 30 % 32 % 61 % 55 % 14 % 11 % 3 % 5 % – % – % 1 % 1 % 2 % 3 % – % 1 % – % 1 % (1) Certain information has been reclassified to conform with the presentation adopted in the current year. 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, 2019, our Canadian condominium mortgages were $25.2 billion (2018: $24.1 billion), of which 33% (2018: 38%) were insured. Our drawn developer loans were $1.3 billion (2018: $1.6 billion), or 1.0% (2018: 1.3%) of our business and government portfolio, and our related undrawn exposure was $4.0 billion (2018: $3.0 billion). The condominium developer exposure is diversified across 108 projects. 58 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis We stress test our mortgage and HELOC portfolio to determine the potential impact of different economic events. Our stress tests can use variables such as unemployment rates, debt service ratios and housing price changes, to model potential outcomes for a given set of circumstances. The stress testing involves variables that could behave differently in certain situations. Our main tests use economic variables in a similar range to historical events when Canada experienced economic downturns. Our results show that in an economic downturn, our strong capital position should be sufficient to absorb mortgage and HELOC losses. Credit quality performance As at October 31, 2019, total loans and acceptances after allowance for credit losses were $398.1 billion (2018: $381.7 billion). Consumer loans (comprising residential mortgages, credit cards, and personal loans, including student loans) constitute 66% (2018: 69%) of the portfolio, and business and government loans (including acceptances) constitute the remainder of the portfolio. Consumer loans were up by $1.5 billion or 1% from the prior year, primarily due to an increase in residential mortgages of $0.9 billion. Business and government loans (including acceptances) were up $14.9 billion or 13% from the prior year, mainly attributable to the real estate and construction, financial institutions, utilities, agriculture, and transportation sectors. Impaired loans The following table provides details of our impaired loans and allowances for credit losses: $ millions, as at or for the year ended October 31 Business and government loans Consumer loans Gross impaired loans Balance at beginning of year under IAS 39 Impact of adopting IFRS 9 at November 1, 2017 Balance at beginning of year under IFRS 9 Classified as impaired during the year Transferred to performing during the year Net repayments Amounts written off Recoveries of loans and advances previously written off Disposals of loans (1) Purchased credit-impaired loans Foreign exchange and other Balance at end of year Allowance for credit losses – impaired loans (2) Balance at beginning of year under IAS 39 Impact of adopting IFRS 9 at November 1, 2017 Balance at beginning of year under IFRS 9 Amounts written off Recoveries of amounts written off in previous years Charge to income statement (3) Interest accrued on impaired loans Disposals of loans (1) Transfers Foreign exchange and other Balance at end of year Net impaired loans (4) Balance at beginning of year under IAS 39 Impact of adopting IFRS 9 at November 1, 2017 Balance at beginning of year under IFRS 9 Net change in gross impaired Net change in allowance Balance at end of year $ $ $ $ $ $ 2019 Total n/a n/a 1,480 3,208 (528) (814) (1,130) – (361) – 11 $ n/a n/a 482 (1,130) 194 1,145 (40) – – (7) $ 644 $ n/a n/a 998 386 (162) Business and government loans Consumer loans $ $ $ $ $ $ $ $ $ $ 626 27 653 559 (110) (190) (116) – (182) – 7 621 191 13 204 (116) 12 188 (10) (48) – – 230 435 14 449 (32) (26) 684 195 879 1,907 (463) (532) (934) – – – 2 859 286 (25) 261 (934) 178 764 (13) – – (4) 252 398 220 618 (20) 9 607 $ 1,222 $ 391 $ 2018 Total 1,310 222 1,532 2,466 (573) (722) (1,050) – (182) – 9 1,480 477 (12) 465 (1,050) 190 952 (23) (48) – (4) 482 833 234 1,067 (52) (17) $ $ $ $ $ $ 998 0.26 % $ n/a n/a 621 1,204 (134) (239) (190) – (361) – 10 $ n/a n/a 859 2,004 (394) (575) (940) – – – 1 911 $ 955 $ 1,866 n/a n/a 230 (190) 13 350 (18) – – (9) 376 n/a n/a 391 290 (146) 535 $ $ $ $ n/a n/a 252 (940) 181 795 (22) – – 2 268 n/a n/a 607 96 (16) 687 Net impaired loans as a percentage of net loans and acceptances 0.31 % (1) Includes loans with a par value of $116 million and ECL of $48 million that were derecognized as a result of a debt restructuring agreement completed with the Government of Barbados on October 31, 2018. (2) Effective November 1, 2017, all loans that are contractually 90 days in arrears are automatically classified as impaired and as stage 3 under IFRS 9, except for credit card loans which are classified as impaired and are fully written off when payments are contractually 180 days in arrears or at the earlier of the notice of bankruptcy, settlement proposal, or enlistment of credit counselling services. The determination of impairment was generally the same under IAS 39, except (i) residential mortgages guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency were not classified as impaired until payments were contractually 365 days in arrears, and (ii) residential mortgages guaranteed or insured by a private insurer, or loans that were fully secured and in the process of collection were not classified as impaired until payments were contractually 180 days in arrears. (3) Excludes provision for credit losses on impaired undrawn credit facilities and other off-balance sheet exposures. (4) Effective November 1, 2017, net impaired loans are gross impaired loans net of stage 3 allowance for credit losses. In prior periods, net impaired loans were calculated by deducting the individual allowance and the portion of the collective allowance relating to impaired loans, which were generally loans that were past 90 days in arrears, from gross impaired loans. n/a Not applicable. CIBC 2019 ANNUAL REPORT 59 Management’s discussion and analysis Gross impaired loans As at October 31, 2019, gross impaired loans were $1,866 million, up $386 million from the prior year, primarily due to increases in the retail and wholesale sector, which includes one fraud-related impairment, and the business services sector, as well as an increase in the Canadian residential mortgages portfolio. 65% of gross impaired loans related to Canada, of which the residential mortgages and personal lending portfolios, retail and wholesale, and business services sectors accounted for the majority. 18% of gross impaired loans related to CIBC FirstCaribbean, of which the residential mortgages portfolio, real estate and construction sector, and personal lending portfolio accounted for the majority. The remaining gross impaired loans related to the U.S., of which the oil and gas, business services, and real estate and construction sectors accounted for the majority. See the “Supplementary annual financial information” section for additional details on the geographic distribution and industry classification of impaired loans. Allowance for credit losses – impaired loans Allowance for credit losses on impaired loans was $644 million, up $162 million from the prior year, primarily due to an increase in the retail and wholesale sector, which includes one fraud-related impairment, as well as increases in the business services, oil and gas, and agriculture sectors, partially offset by decreases in CIBC FirstCaribbean. Exposure to certain countries and regions Europe The following table provides 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 stage 3 allowance for credit losses, if any), deposits with banks (stated at amortized cost net of stage 3 allowance for credit losses, if any) and securities (stated at carrying value); (B) unfunded – unutilized credit commitments, letters of credit, and guarantees (stated at notional amount net of stage 3 allowance for credit losses, if any); 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 45% (2018: 46%) is to entities in countries with Aaa/AAA ratings from at least one of Moody’s or S&P. The following table provides a summary of our positions in this business: Direct exposures Funded Unfunded Derivative MTM receivables and repo-style transactions (1) $ millions, as at October 31, 2019 Corporate Sovereign Banks Corporate Banks Total unfunded (B) Corporate Sovereign Banks Net exposure (C) Total direct exposure (A)+(B)+(C) Austria Finland France Germany Ireland Luxembourg Netherlands Norway Spain Sweden Switzerland United Kingdom Other European countries Total Europe October 31, 2018 $ – $ 78 49 427 152 111 369 – 1 38 357 1,395 56 679 $ – 52 1,091 – – 462 329 – 541 – 627 – 16 $ 419 242 731 169 1,590 191 316 1 150 42 1,418 35 Total funded (A) 695 497 343 2,249 321 1,701 1,022 645 2 729 399 3,440 91 $ – $ 72 263 329 6 103 161 613 66 155 8 3,442 17 13 $ – 33 111 13 – 78 – 29 – – 280 23 13 72 296 440 19 103 239 613 95 155 8 3,722 40 $ $ 3,033 $ 3,781 $ 5,320 $ 12,134 1,821 $ 2,686 $ 3,649 $ 8,156 $ $ 5,235 $ 580 $ 5,815 4,472 $ 482 $ 4,954 $ $ $ – – 20 22 13 2 63 – – 13 4 652 – 789 626 $ $ – – – – – – – – – – – 46 70 $ 1 $ – 31 48 112 33 2 – 5 1 88 138 3 1 – 51 70 125 35 65 – 5 14 92 836 73 709 569 690 2,759 465 1,839 1,326 1,258 102 898 499 7,998 204 $ 116 $ 72 $ $ 462 $ 1,367 1,048 $ 1,746 $ $ 19,316 14,856 (1) The amounts shown are net of CVA and collateral. Collateral on derivative MTM receivables was $1.0 billion (October 31, 2018: $0.8 billion), collateral on repo-style transactions was $20.5 billion (October 31, 2018: $20.5 billion), and both are comprised of cash and investment grade debt securities. We have $589 million (2018: $465 million) of indirect exposure to European entities, as we hold debt or equity securities issued by European entities as collateral for derivative transactions and securities borrowing and lending activity from counterparties that are not in Europe. Selected exposures in certain activities In response to the recommendations of the Financial Stability Board, this section provides information on a selected activity within our continuing and exited businesses that may be of particular interest to investors based on their risk characteristics and the current market environment. U.S. real estate lending In our U.S. Commercial Banking and Wealth Management SBU, we operate a full-service real estate platform. 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, 2019, the portfolio of permanent financing exposures was $114 million (2018: $41 million). 60 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis 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. Securitization activities We engage in three types of securitization activities: we securitize assets that we originate, we securitize assets originated by third parties and we engage in trading activities related to securitized products. We securitize assets that we originate principally as a funding mechanism. The credit risk on the underlying assets in these transactions is transferred to the structured entity, with CIBC retaining first loss exposure and other investors exposed to the remaining credit risk. Securitization activities relating to assets originated by third parties can include the securitization of those assets through ABCP conduits (or similar programs) that we sponsor (includes both consolidated and non-consolidated structured entities; see the “Off-balance sheet arrangements” section and Note 6 to our consolidated financial statements for additional details), or through direct exposure to a client-sponsored special purpose vehicle. Risks associated with securitization exposures to client-originated assets are mitigated through the transaction structure, which includes credit enhancements. For the transactions where we retain credit risk on the exposures that we hold, we earn interest income on these holdings. For the transactions in the ABCP conduits, we are also exposed to liquidity risk associated with the potential inability to roll over maturing ABCP in the market. We earn fee income for the services that we provide to these ABCP conduits. We are also involved in the trading of ABS and ABCP to earn income in our role as underwriter and market maker. We are exposed to credit and market risk on the securities that we hold in inventory on a temporary basis until such securities are sold to an investor. Capital requirements for exposures arising from securitization activities are determined using one of the following approaches: SEC-IRBA, SEC-ERBA, SEC-IAA, or SEC-SA. The SEC-IAA process relies on internal risk ratings and is utilized for securitization exposures relating to ABCP conduits when external ratings are not available for the securitization exposures but the ABCP itself is externally rated. The internal assessment process involves an evaluation of a number of factors, including, but not limited to, pool characteristics, including asset eligibility criteria and concentration limits, transaction triggers, the asset seller’s risk profile, servicing capabilities, and cash flow stress testing. Cash flows are stress-tested based on historical asset performance using our internal risk rating models by asset type. These models are subject to our model risk mitigation policies and are independently reviewed by the Model Validation team in Risk Management. The stress test factors used to determine the transaction risk profile and required credit enhancement levels are tailored for each asset type and transaction based on the assessment of the factors described above and are done in accordance with our internal risk rating methodologies and guidelines. Internal risk ratings are mapped to equivalent external ratings of external credit assessment institutions (DBRS, Fitch, Moody’s and S&P) and are used to determine the appropriate risk weights for capital purposes. Securitization exposures and underlying asset performance are monitored on an ongoing basis. Risk Management serves as a second line of defence providing independent oversight regarding risk rating assumptions and adjudicating on the assignment of the internal risk ratings. SEC-IAA applies to various asset types in our ABCP conduits including, but not limited to, auto loans and leases, consumer loans, credit cards, dealer floorplan receivables, equipment loans and leases, fleet lease receivables, franchise loans, residential mortgages, and trade receivables. Internal risk ratings determined for securitization exposures are also used in the estimation of expected credit losses as required under IFRS 9, determining economic capital, and for setting risk limits. CIBC 2019 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 and control groups 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. Internal audit reports the results of its assessment to management and the Board. 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, model review and validation, 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 credit default swaps. 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. 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 10-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. Stress testing and scenario analysis provide insight into portfolio behaviour under extreme circumstances. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 62 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis The following table provides balances on the consolidated balance sheet that are subject to market risk. Certain differences between accounting and risk classifications are detailed in the footnotes below: $ millions, as at October 31 2019 2018 Subject to market risk Subject to market risk Consolidated balance sheet Trading Non- trading Not subject to market risk 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 $ 3,840 13,519 121,310 3,664 $ – 641 42,403 – $ agreements Loans Residential mortgages Personal Credit card Business and government Allowance for credit losses Derivative instruments 56,111 208,652 43,651 12,755 125,798 (1,915) 23,895 – – – – 20,226 (1) – 22,610 1,711 12,878 78,907 3,664 56,111 208,652 43,651 12,755 105,572 (1,915) 1,285 $ 2,129 – – – – – – – – – – Customers’ liability under acceptances Other assets 9,167 31,157 – 1,957 9,167 17,985 – 11,215 $ 4,380 $ 13,311 101,664 5,488 43,450 207,749 43,058 12,673 109,555 (1,639) 21,431 10,265 25,714 Trading – 96 49,784 – $ – – – – 15,730 (1) – 19,132 Non- trading 2,340 13,215 51,880 5,488 43,450 207,749 43,058 12,673 93,825 (1,639) 2,299 – 561 10,265 15,474 Not subject to market risk Non-traded risk primary risk sensitivity $ 2,040 – – – 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 9,679 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 $ 651,604 $ 87,837 $ 550,423 $ 13,344 $ 597,099 $ 85,303 $ 500,077 $ 11,719 $ 485,712 $ 44 (2) $ 437,634 $ 48,034 $ 461,015 $ 507 (2) $ 414,051 $ 46,457 Interest rate 15,635 1,822 51,801 25,113 9,188 19,069 4,684 14,721 – – 23,679 – 2,096 – 914 1,822 51,801 1,434 9,188 8,111 4,684 – – – – – 8,862 – 13,782 2,731 30,840 20,973 10,296 18,266 4,080 13,731 – – 19,013 – 2,051 – 51 2,731 30,840 1,960 10,296 8,527 4,080 – – – – – 7,688 – Interest rate Interest rate Interest rate Interest rate, foreign exchange Interest rate Interest rate Interest rate $ 613,024 $ 40,540 $ 515,588 $ 56,896 $ 561,983 $ 35,302 $ 472,536 $ 54,145 (1) Excludes $115 million (2018: $39 million) of loans that are warehoused for future securitization purposes. These are considered non-trading for market risk purposes. (2) 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. 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 2019 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 10.1 2.0 10.4 4.3 5.0 2.4 n/m $ Low 2.8 0.9 1.7 0.6 1.1 1.3 n/m 2019 As at Average $ 8.5 1.5 3.4 2.9 3.9 1.9 (15.3) $ 5.2 1.3 3.1 2.1 2.4 1.7 (10.1) $ High 7.6 2.0 8.4 4.6 4.7 2.7 n/m $ Low 2.9 0.5 1.7 0.5 1.0 0.9 n/m 2018 As at Average $ 3.5 1.6 3.7 1.3 1.5 1.3 (7.9) $ 4.5 1.0 2.8 1.6 1.8 1.5 (7.9) Total VaR (one-day measure) $ 10.8 $ 3.6 $ 6.8 $ 5.7 $ 10.4 $ 4.0 $ 5.0 $ 5.3 (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, 2019 was up $0.4 million from the prior year. The increase was primarily due to increases in interest rate, commodity and foreign exchange risks. 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 2, 2008 to August 31, 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 37.0 18.1 20.2 29.5 11.9 7.3 n/m $ Low 8.9 7.9 1.4 0.6 1.3 4.1 n/m 2019 As at Average $ 26.4 11.1 2.2 6.5 11.9 4.9 (42.0) $ 19.4 12.1 3.9 10.4 4.8 5.5 (40.9) $ High 33.8 17.9 7.8 15.5 7.9 6.7 n/m $ Low 6.8 4.0 0.8 0.5 1.3 2.6 n/m $ As at 14.2 17.9 6.3 2.7 2.5 6.3 (33.4) 2018 Average $ 17.4 9.6 3.4 5.3 2.5 4.6 (30.4) Stressed total VaR (one-day measure) $ 47.1 $ 3.5 $ 21.0 $ 15.2 $ 22.6 $ 3.7 $ 16.5 $ 12.4 (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, 2019 was up $2.8 million from the prior year. The increase was driven by an increase in foreign exchange, credit spread, commodity and interest rate risks related to positioning in the trading book. 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 IRC (one-year measure) (1) High 268.8 111.2 371.4 $ $ Low 124.0 45.5 186.5 $ $ As at 132.1 67.7 199.8 $ $ 2019 Average $ $ 180.2 72.2 252.4 High 214.2 155.5 291.5 $ $ Low 71.5 33.3 147.8 $ $ As at 176.1 53.1 229.2 $ $ 2018 Average $ $ 143.2 57.6 200.8 (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, 2019 was up $51.6 million from the prior year due to less diversification effect within our fixed income 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 was one negative back-testing breach of the total VaR measure, in line with statistical expectations. 64 CIBC 2019 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 99.6% of the days. The largest gain of $16.6 million occurred on August 30, 2019. It was attributable to the normal course of business within our global markets line of business, notably in equity derivatives. The largest loss of $0.6 million occurred on August 16, 2019, mainly driven by a loss in equity derivatives. Average daily trading revenue (TEB) was $5.6 million during the year, and the average daily TEB was $0.7 million. The large increase in VaR in May 2019 was the result of a large transaction in our equity underwriting business. Frequency distribution of daily 2019 trading revenue (TEB) (1) The histogram below presents the frequency distribution of daily trading revenue (TEB) for 2019. s y a D e u n e v e R g n d a r T i 50 45 40 35 30 25 20 15 10 5 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. Trading Revenue (TEB) VaR $ millions 20 15 10 5 0 (5) (10) (15) Jan-19 (1) Excludes certain month-end transfer pricing and other miscellaneous adjustments. Mar-19 Nov-18 Dec-18 Feb-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Stress testing and scenario analysis Stress testing and scenario analysis is designed to add insight to possible outcomes of abnormal market conditions, and to highlight possible risk concentrations. We measure the effect on portfolio values under a wide range of extreme moves in market risk factors. Our approach simulates the impact on earnings of extreme market events over a one-month time horizon, assuming that no risk-mitigating actions are taken during this period to reflect the reduced market liquidity that typically accompanies such events. Scenarios are developed using historical market data during periods of market disruption, or are based on hypothetical impacts of economic events, political events, and natural disasters as predicted by economists, business leaders, and risk managers. Among the historical scenarios are the 1994 period of U.S. Federal Reserve tightening, and the market events following the 2008 market crisis. The hypothetical scenarios include potential market crises originating in North America, Europe and Asia. In March 2019, a subprime crisis traded scenario was introduced and replaced the “historical” subprime crisis scenario. The subprime crisis traded scenario incorporates trading behaviour by assuming that positions can be dynamically hedged during the course of the scenario, which reduces the holding period (vs. “historical” subprime crisis scenario). In September 2019, two updated Brexit scenarios were re-introduced in accordance with the latest events in the U.K. and Europe: a (i) Brexit “leaves” – hard Brexit scenario where the U.K. leaves the European Union without a formal agreement, or after snap elections are won by hardline conservatives, and (ii) a Brexit “remains” – second referendum scenario where a British snap election is won by a Liberal Party-Labour Party coalition, triggering a second referendum leading to the revocation of Article 50. CIBC 2019 ANNUAL REPORT 65 Management’s discussion and analysis Below are examples of the core stress test scenarios which are currently run on a daily basis to add insight into potential exposures under stress: (cid:129) Subprime crisis traded (cid:129) U.S. Federal Reserve tightening – 1994 (cid:129) U.S. sovereign debt default and downgrade (cid:129) Brexit “leaves” – hard Brexit (cid:129) Canada market crisis (cid:129) U.S. protectionism (cid:129) Eurozone bank crisis (cid:129) Brexit “remains” – second referendum (cid:129) Quantitative easing tapering and asset price correction (cid:129) Oil shock and equity correction (cid:129) Chinese hard landing Stress testing scenarios are periodically reviewed and amended as necessary to ensure they remain relevant. Under stress limit monitoring, limits are placed on the maximum acceptable loss based on risk appetite in aggregate, at the detailed portfolio level, and for specific asset classes. 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, 2019 Maturity less than 1 year Maturity 1–3 years Maturity 4–5 years Maturity in excess of 5 years Positive Negative $ 453 394 256 473 $ 615 797 254 18 $ Net (162) (403) 2 455 $ 1,576 $ 1,684 $ (108) Non-trading activities Structural interest rate risk Structural interest rate risk primarily consists of the risk arising due to mismatches in assets and liabilities, which do not arise from trading and trading- related businesses. 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 commitment and prepayment exposures of mortgage products, non-maturity deposits and some guaranteed investment certificates products with early redemption features. A variety of cash instruments and derivatives, primarily interest rate swaps, 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 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 interest income sensitivity is a measure of the impact of potential changes in interest rates on the projected 12-month pre-tax net interest 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. 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 potential early withdrawals, of an immediate and sustained 100 basis point increase or decrease in all interest rates. Structural interest rate sensitivity – measures $ millions (pre-tax), as at October 31 100 basis point increase in interest rates Increase (decrease) in net interest income Increase (decrease) in present value of shareholders’ equity 100 basis point decrease in interest rates Increase (decrease) in net interest income Increase (decrease) in present value of shareholders’ equity (1) Includes CAD and other currency exposures. CAD (1) 2019 USD $ 192 (511) (190) 388 $ 24 (307) $ (35) 206 2018 USD $ 32 (230) (58) 269 CAD (1) 170 (396) (246) 316 Foreign exchange risk Structural foreign exchange risk primarily consists of the risk inherent in: (a) net investments in foreign operations due to changes in foreign exchange rates; and (b) foreign currency denominated risk-weighted assets and foreign currency denominated capital deductions. 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 CRO, 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, 2019 by approximately $153 million (2018: $130 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. Typically, 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 $3 million (2018: $8 million) on an after-tax basis. This amount will be released from AOCI to offset the hedged currency fluctuations as the expenses are incurred. 66 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis 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 through other comprehensive income. This income volatility may not be representative of the overall risk. Equity risk Non-trading equity risk arises primarily in our strategy and corporate development activities and our merchant banking activities. The investments comprise public and private equities, investments in limited partnerships, and equity-accounted investments. The following table provides the amortized cost and fair values of our non-trading equities: $ millions, as at October 31 2019 Equity securities designated at FVOCI Equity-accounted investments in associates (1) 2018 Equity securities designated at FVOCI Equity-accounted investments in associates (1) Amortized cost Fair value $ $ $ $ 533 57 590 468 63 531 $ $ $ $ 602 85 687 562 101 663 (1) Excludes our equity-accounted joint ventures. See Note 25 to the consolidated financial statements for further details. Pension risk A number of defined benefit pension plans are operated globally. As at October 31, 2019, our consolidated defined benefit pension plans were in a net asset position of $116 million, compared with $311 million as at October 31, 2018. The change in the net asset position of our pension plans is disclosed in Note 18 to the consolidated financial statements. 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 18 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. Within Treasury, the Pension Investment Management department is responsible for developing and implementing custom investment strategies to sustainably deliver pension benefits within manageable risk tolerances and capital impact. Key risks include actuarial risks (such as longevity risk), interest rate risk, currency risk, market (investment) risk, and health-care cost inflation risks. The CIBC Pension Plan principally manages these risk exposures through its liability-driven investment strategy, which includes the use of derivatives for risk management and rebalancing purposes, as well as the ability to enhance returns. The use of derivatives within the CIBC Pension Plan is governed by the plan’s derivatives policy that was approved by the PBMC. The fair value of derivatives held in the CIBC Pension Plan is disclosed in Note 18 to the consolidated financial statements. A principal risk for the CIBC Pension Plan is interest rate risk which it mitigates through a combination of physical bonds and a bond overlay program funded through the use of repurchase agreements. The plan also operates a currency overlay strategy, which may use forwards or similar instruments, to manage and mitigate its currency risk. Investment risk is mitigated through a multi-asset portfolio construction process that diversifies across a variety of market risk drivers. CIBC 2019 ANNUAL REPORT 67 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. Liquidity risk is managed using the three lines of defence model, and the ongoing management of liquidity risk is 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 of the measurement, monitoring and control of liquidity risk, as the second line of defence. Internal audit, as the third line of defence, provides independent assessment of the design and operating effectiveness of liquidity risk management controls, processes and systems. Internal audit reports the results of its assessment to management and the Board. 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 consider CIBC’s business activities. The Liquidity Risk Management Committee, a subcommittee of GALCO, is responsible for ensuring 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. CIBC branches and subsidiaries possessing unique liquidity characteristics, due to distinct businesses or jurisdictional requirements, maintain local liquidity practices 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. These limits ensure unencumbered liquid assets are available for liquidity purposes. We maintain a detailed global contingency funding plan 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, articulates implementation, and defines escalation procedures, and is aligned to CIBC’s risk appetite. In order to reflect CIBC’s organizational complexity, regional and subsidiary contingency funding plans 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 combines contractual and behavioural cash flows to measure 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. These cash flows incorporate both contractual and behavioural on- and off-balance sheet cash flows. Our liquidity measurement system provides liquidity risk exposure reports that include the calculation of the internal liquidity stress tests 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. 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 limits approved by Risk Management. 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, contingent liquidity utilization, and liquid asset marketability. 68 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Liquid assets Available liquid assets include unencumbered cash and marketable securities from on- and off-balance sheet sources, that can be used to access funding in a timely fashion. Encumbered liquid 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. Encumbered and unencumbered liquid assets from on- and off-balance sheet sources are summarized as follows: $ millions, as at October 31 Bank owned liquid assets Securities received as collateral Total liquid assets Encumbered liquid assets Unencumbered liquid assets (1) 2019 Cash and deposits with banks $ 17,359 $ – $ 17,359 $ 784 $ 16,575 Securities issued or guaranteed by sovereigns, central banks, and multilateral development banks Other debt securities Equities Canadian government guaranteed National Housing Act mortgage-backed securities Other liquid assets (2) 85,881 4,928 26,441 41,378 11,196 86,205 3,139 15,766 876 463 172,086 8,067 42,207 42,254 11,659 2018 Cash and deposits with banks Securities issued or guaranteed by sovereigns, central banks, and multilateral development banks Other debt securities Equities Canadian government guaranteed National Housing Act mortgage-backed securities Other liquid assets (2) $ $ 187,183 17,691 $ $ 106,449 – $ $ 293,632 17,691 $ $ 67,478 6,684 25,018 39,465 6,500 74,933 2,092 20,641 834 1,598 142,411 8,776 45,659 40,299 8,098 100,203 1,838 23,623 11,627 6,864 144,939 686 75,431 1,240 27,859 10,182 6,621 71,883 6,229 18,584 30,627 4,795 $ $ 148,693 17,005 66,980 7,536 17,800 30,117 1,477 (1) Unencumbered liquid assets are defined as on-balance sheet assets, assets borrowed or purchased under resale agreements, and other off-balance sheet collateral received less encumbered liquid assets. Includes cash pledged as collateral for derivatives transactions, select ABS and precious metals. (2) $ 162,836 $ 100,098 $ 262,934 $ 122,019 $ 140,915 The following table summarizes unencumbered liquid assets held by CIBC (parent) and its domestic and foreign subsidiaries: $ millions, as at October 31 CIBC (parent) Domestic subsidiaries Foreign subsidiaries $ 2019 108,878 8,588 31,227 $ 2018 99,486 15,988 25,441 $ 148,693 $ 140,915 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 increased $7.8 billion from October 31, 2018, primarily due to regular business activities, including deposit growth. Furthermore, CIBC maintains access eligibility to the Bank of Canada’s Emergency Lending Assistance program and the Federal Reserve Bank’s Discount Window. 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. The following table provides a summary of our total on- and off-balance sheet encumbered and unencumbered assets: Encumbered Unencumbered Total assets $ millions, as at October 31 2019 Cash and deposits with banks Securities Loans, net of allowance (3) Other assets 2018 Cash and deposits with banks Securities Loans, net of allowance (3) Other assets Pledged as collateral – 121,349 2,000 6,186 129,535 – 104,039 1,600 5,071 110,710 $ $ $ $ Other (1) 784 283 40,204 – 41,271 686 130 44,553 – 45,369 $ $ $ $ $ Available as collateral 16,575 102,867 35,073 1,815 156,330 17,005 96,021 33,499 251 146,776 $ $ $ Other (2) – – 310,688 56,218 366,906 – – 292,507 52,088 344,595 $ $ $ $ $ $ $ $ 17,359 224,499 387,965 64,219 694,042 17,691 200,190 372,159 57,410 647,450 Includes assets supporting CIBC’s long-term funding activities and assets restricted for legal or other reasons, such as restricted cash. (1) (2) Other unencumbered assets are not subject to any restrictions on their use to secure funding or as collateral, however they are not considered immediately available to existing borrowing programs. Loans included as available as collateral represent the loans underlying National Housing Act mortgage-backed securities and Federal Home Loan Banks eligible loans. (3) 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 different capital and liquidity requirements, 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. CIBC 2019 ANNUAL REPORT 69 Management’s discussion and analysis 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 maturing non-HQLA marketable assets. The LCR is disclosed using a standard OSFI-prescribed disclosure template. $ millions, average of the three months ended October 31, 2019 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 157,628 73,788 83,840 141,785 47,194 73,598 20,993 n/a 101,231 12,388 3,320 85,523 2,796 286,860 n/a 67,149 17,597 7,518 $ 119,440 10,598 2,214 8,384 69,206 11,504 36,709 20,993 6,198 24,396 5,829 3,320 15,247 2,796 5,430 118,624 7,013 8,904 7,518 $ 92,264 $ 23,435 n/a n/a n/a n/a n/a n/a Total adjusted value 119,440 $ 95,189 $ 125 % Total adjusted value $ $ 117,910 91,332 129 % 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, 2019 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, 2019 decreased to 125% from 129% in the prior quarter, mainly due to higher net cash outflows, partially offset by an increase in HQLA. 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 market conditions 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 Treasury, in conjunction with CIBC’s SBUs and other functional groups. 70 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Funding CIBC funds its operations with client-sourced deposits, supplemented with a wide range of wholesale funding. CIBC’s principal approach aims to fund its consolidated balance sheet with deposits primarily raised from personal and commercial banking channels. Personal deposits accounted for $178.1 billion as at October 31, 2019 (2018: $163.9 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. The following table provides the contractual maturities at carrying values of CIBC’s wholesale funding sources: $ millions, as at October 31, 2019 Deposits from banks (1) Certificates of deposit and commercial paper Bearer deposit notes and bankers’ acceptances Asset-backed commercial paper Senior unsecured medium-term notes (2) Senior unsecured structured notes Covered bonds/asset-backed securities Mortgage securitization Covered bonds Cards securitization Subordinated liabilities Other Of which: Secured Unsecured October 31, 2018 Less than 1 month 1–3 months 3–6 months 6–12 months Less than 1 year total 1–2 years Over 2 years 1,391 $ 6,641 641 – 3,101 – – – – – 263 57 $ 112 $ 3 $ 1,563 $ – $ 9,412 1,209 – 2,049 – 520 1,469 – – 20 17,611 3,427 – 1,804 – 794 – 1,317 – – 17,666 65 – 6,271 247 719 1,852 856 – – 51,330 5,342 – 13,225 247 2,033 3,321 2,173 – 283 399 – – 7,913 – 3,677 4,400 774 – – – $ – – – 23,907 – 11,384 11,133 – 4,684 5 Total 1,563 51,729 5,342 – 45,045 247 17,094 18,854 2,947 4,684 288 12,037 $ 14,736 $ 25,065 $ 27,679 $ 79,517 $ 17,163 $ 51,113 $ 147,793 – $ 1,989 $ 2,111 $ 3,427 $ 7,527 $ 12,037 12,747 22,954 24,252 71,990 8,851 $ 8,312 22,517 $ 28,596 38,895 108,898 12,037 $ 14,736 $ 25,065 $ 27,679 $ 79,517 $ 17,163 $ 51,113 $ 147,793 12,815 $ 18,208 $ 20,495 $ 29,167 $ 80,685 $ 17,421 $ 52,711 $ 150,817 $ $ $ $ $ (1) (2) Includes non-negotiable term deposits from banks. Includes wholesale funding liabilities which are subject to conversion under bail-in regulations. See the “Capital management” section for additional details. CIBC’s wholesale funding is diversified by currency as demonstrated in the table that follows: $ billions, as at October 31 CAD USD Other $ 49.2 73.0 25.6 $ 147.8 2019 33 % 50 17 100 % $ 49.6 80.8 20.4 $ 150.8 2018 33 % 54 13 100 % Our funding volumes decreased modestly relative to 2018 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. We manage liquidity risk in a manner that enables us to withstand severe liquidity stress events. Wholesale funding may present higher run-off risks in stress situations, for which we maintain significant portfolios of unencumbered liquid assets. See the “Liquid assets” section for additional details. Funding plan Our funding plan is updated at least quarterly, or in response to material changes in underlying assumptions and business developments. 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, macroeconomic backdrop and liquidity positioning. CIBC 2019 ANNUAL REPORT 71 Management’s discussion and analysis Our credit ratings are summarized in the following table: As at October 31, 2019 Deposit/Counterparty (1) Legacy senior debt (2) Senior debt (3) Subordinated indebtedness Subordinated indebtedness – NVCC (4) Preferred shares – NVCC (4) Short-term debt Outlook DBRS AA AA AA(L) A(H) A(L) Pfd-2 R-1(H) Stable Fitch AA- AA- AA- A+ A+ n/a F1+ Stable Moody’s Aa2 Aa2 A2 Baa1 Baa1 Baa3 P-1 Stable S&P A+ A+ BBB+ BBB+ BBB P-3(H) A-1 Stable (1) DBRS Long-Term Issuer Rating; Moody’s Long-Term Deposit and Counterparty Risk Assessment Rating; S&P’s Issuer Credit Rating; Fitch Long-Term Issuer Default and Derivative Counterparty Rating. Includes senior debt issued prior to September 23, 2018 as well as senior debt issued on or after September 23, 2018 which is not subject to the bail-in regulations. (2) (3) Comprises liabilities which are subject to conversion under the bail-in regulations. (4) Comprises instruments which are treated as NVCC in accordance with OSFI’s capital adequacy guidelines. n/a Not applicable. 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 (1) Restated. $ 2019 0.1 0.2 0.3 2018 $ 0.1 0.2 (1) 0.3 (1) Regulatory developments concerning liquidity OSFI’s LAR guideline became effective in 2015. It is shaped by the BCBS’ liquidity standards, and includes the LCR, net stable funding ratio (NSFR) and other liquidity monitoring tools, including the OSFI-designed supervisory tool known as the NCCF. OSFI uses the LAR and associated metrics to assess individual banks’ liquidity adequacy. On October 31, 2014, the BCBS published its final NSFR guideline. In April 2019, OSFI issued updated NSFR guidelines following industry and public consultation, clarifying details of the NSFR implementation and its application to the Canadian financial industry. D-SIBs will implement the updated NSFR guidelines beginning January 2020, with public disclosures required to be produced beginning in the first quarter of 2021. Consistent with the requirements above, we submit the LCR and NCCF to OSFI on a monthly basis and the NSFR on a quarterly basis. We provide the LCR and NSFR to the BCBS twice annually. 72 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis 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, 2019 Assets Cash and non-interest-bearing deposits with banks Interest-bearing deposits with banks Securities Cash collateral on securities borrowed Securities purchased under resale agreements Loans Residential mortgages Personal Credit card Business and government Allowance for credit losses Derivative instruments Customers’ liability under acceptances Other assets Less than 1 month 1–3 months 3–6 months 6–9 months 9–12 months 1–2 years 2–5 years Over 5 years No specified maturity Total $ $ 3,840 13,519 5,316 3,664 31,179 $ – – 3,800 – 18,164 2,457 774 268 14,731 – 2,883 8,242 – 4,652 562 536 4,844 – 3,588 880 – – – 3,228 – 5,874 10,505 983 804 4,829 – 1,475 42 – $ – – 2,554 – 464 15,312 992 804 5,407 – 943 2 – $ – – 2,578 – 430 13,379 879 804 4,300 – 744 1 – $ – – 9,669 – – 46,194 208 3,214 16,600 – 2,598 – – $ – – 41,252 – – 106,660 2,610 6,325 40,627 – 3,757 – – $ – – 25,768 – – 9,106 2,999 – 14,103 – 7,907 – – $ – – 27,145 – – $ 3,840 13,519 121,310 3,664 56,111 387 33,644 – 20,357 (1,915) – – 31,157 208,652 43,651 12,755 125,798 (1,915) 23,895 9,167 31,157 $ 86,873 $ 37,026 $ 27,740 $ 26,478 $ 23,115 $ 78,483 $ 201,231 $ 59,883 $ 110,775 $ 651,604 October 31, 2018 $ 71,919 $ 28,094 $ 22,273 $ 28,495 $ 19,833 $ 83,405 $ 187,178 $ 53,821 $ 102,081 $ 597,099 Liabilities Deposits (1) Obligations related to securities sold short Cash collateral on securities lent Obligations related to securities sold under repurchase agreements Derivative instruments Acceptances Other liabilities Subordinated indebtedness Equity $ 19,732 15,635 1,822 $ 27,662 – – $ 43,422 – – $ 30,962 – – $ 25,002 – – $ 28,356 – – $ 49,713 – – $ 11,800 – – $ 249,063 – – $ 485,712 15,635 1,822 39,746 3,605 8,263 – – – 11,207 3,790 880 – – – 460 683 42 – – – 242 1,828 2 – – – 146 929 1 – – – – 3,287 – – – – – 4,694 – – – – – 6,297 – – 4,684 – – – – 19,069 – 38,580 51,801 25,113 9,188 19,069 4,684 38,580 $ 88,803 $ 43,539 $ 44,607 $ 33,034 $ 26,078 $ 31,643 $ 54,407 $ 22,781 $ 306,712 $ 651,604 October 31, 2018 $ 78,258 $ 33,933 $ 36,399 $ 32,776 $ 27,726 $ 29,779 $ 56,793 $ 19,607 $ 281,828 $ 597,099 (1) Comprises $178.1 billion (2018: $163.9 billion) of personal deposits; $296.4 billion (2018: $282.7 billion) of business and government deposits and secured borrowings; and $11.2 billion (2018: $14.4 billion) of bank deposits. 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. CIBC 2019 ANNUAL REPORT 73 Management’s discussion and analysis Credit-related commitments The following table provides the contractual maturity of notional amounts of off-balance sheet 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, 2019 Less than 1 month 1–3 months 3–6 months 6–9 months 9–12 months 1–2 years 2–5 years Over 5 years No specified maturity (1) Total Securities lending (2) Unutilized credit commitments Backstop liquidity facilities Standby and performance letters of credit Documentary and commercial letters of credit Other commitments to extend credit $ 36,233 $ 1,055 – 1,812 76 2,937 4,564 $ 5,844 8,685 2,491 85 – 3,423 $ 2,645 1,089 1,876 26 – – $ – $ – $ – $ 4,047 587 3,421 8 – 3,191 464 2,148 22 – 13,963 32 789 – – 49,350 – 853 7 – – 2,867 13 99 – – $ – 158,076 – – – – $ 44,220 241,038 10,870 13,489 224 2,937 October 31, 2018 (3) $ 43,191 $ 22,587 $ 11,367 $ 6,716 $ 4,879 $ 11,622 $ 47,445 $ 2,449 $ 150,139 $ 300,395 $ 42,113 $ 21,669 $ 9,059 $ 8,063 $ 5,825 $ 14,784 $ 50,210 $ 2,979 $ 158,076 $ 312,778 Includes $122.0 billion (2018: $116.5 billion) of personal, home equity and credit card lines, which are unconditionally cancellable at our discretion. (1) (2) Excludes securities lending of $1.8 billion (2018: $2.7 billion) for cash because it is reported on the consolidated balance sheet. (3) Certain prior period amounts have been revised from those previously presented. Other contractual obligations The following table provides the contractual maturities of other contractual obligations affecting our funding needs: $ millions, as at October 31, 2019 Operating leases (1) Purchase obligations (2) Pension contributions (3) Underwriting commitments Investment commitments October 31, 2018 Less than 1 month 1–3 months 3–6 months 6–9 months 9–12 months $ 42 102 17 60 1 $ 222 $ 331 $ 84 214 33 – 4 $ 335 $ 304 $ 127 223 49 – – $ 399 $ 370 $ 127 189 49 – – $ 365 $ 347 $ 130 161 49 – 4 $ 344 $ 342 1–2 years $ 529 451 – – 1 $ 981 $ 970 2–5 years $ 1,255 619 – – 8 $ 1,882 Over 5 years $ 3,253 89 – – 240 $ 3,582 Total $ 5,547 2,048 197 60 258 $ 8,110 $ 1,964 $ 3,751 $ 8,379 Includes rental payments, related taxes and estimated operating expenses. (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, and 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. 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. 74 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Governance and management Operational risk is managed through the three lines of defence model and articulated in the Operational Risk Management Policy. (i) As the first line of defence, CIBC’s SBUs and functional groups own the risks and are accountable and responsible for identifying and assessing risks inherent in their activities in accordance with the CIBC risk appetite. In addition, they establish and maintain controls to mitigate such risks. The first line of defence may include control groups within the relevant area to facilitate the control framework and other risk-related processes. Control groups provide subject matter expertise to the business lines and/or implement and maintain enterprise-wide control programs and activities. While control groups collaborate with the lines of business in identifying and managing risk, they also challenge risk decisions and risk mitigation strategies. The second line of defence is independent from the first line of defence and provides an enterprise-wide view of specific risk types, guidance and effective challenge to risk and control activities. Risk Management is the primary second line of defence. Risk Management may leverage or rely on subject matter expertise of other groups (e.g., third parties or control groups) to better inform their independent assessments, as appropriate. (iii) As the third line of defence, CIBC’s internal audit function provides reasonable assurance of the design and operating effectiveness of CIBC’s (ii) controls, processes and systems. Internal audit reports the results of its assessment to management and the Board. A strong risk culture and communication between the three lines of defence are important characteristics of effective risk management. 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. 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, change initiative risk assessments and in-depth risk reviews to form a holistic operational risk profile for the business lines. Under the three lines of defence model, GORM and relevant control groups 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. 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 challenged by GORM, as well as control groups, 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. In advance of the Basel III capital reforms, institutions that are currently approved to use the AMA for operational risk capital are required to report using the current standardized approach for fiscal year 2020 (see the “Capital management” section for further details). 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. Risk mitigation Our primary tool for mitigating operational risk exposure is a robust internal control environment. Our internal control framework outlines key principles, structure and processes underpinning CIBC’s approach to managing risks through effective controls. Under our 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. CIBC 2019 ANNUAL REPORT 75 Management’s discussion and analysis 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, conduct 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. Conduct risk is the risk that actions or omissions of the organization, employees, contingent workers and/or suppliers do not meet the standards of our desired culture and values, 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) misconduct by our employees or agents. The RMC, together with the Reputation and Legal Risks Committee, Reputation Risk 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 Reputation Risk Management Framework, Global Reputation and Legal Risks Policy and Conduct Risk Framework set standards for safeguarding our reputation through pro-active identification, measurement and management of potential reputation, conduct and legal risks. These policies are 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 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 Senior Vice-President, Chief Compliance Officer and Global Regulatory Affairs, and approved by the RMC, 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. 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, or that help protect the integrity of the capital markets. See the “Regulatory developments” section for further details. 76 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Environmental and related social risk Environmental and related social risk is the risk of financial loss or damage to reputation associated with environmental issues including related social 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, with the most recent biennial update and approval by our CRO in 2018, 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. Within CIBC’s Risk Management function, the Enterprise and Conduct Risk group provides independent oversight of the measurement, monitoring and control of environmental risk. This group is led by the Senior Vice-President, Enterprise & Conduct Risk, who has direct accountability to the CRO for conduct and environmental risk oversight. Our environmental risk management team is responsible for developing environmental strategy, setting environmental performance standards and targets, and reporting on performance. There is also an enterprise-wide Environmental Management Committee, comprised of senior executives from our SBUs and functional groups, that meets quarterly and provides input into our environmental strategy and provides oversight of CIBC’s environmental initiatives. The corporate environmental policy is addressed by an integrated corporate environmental management program that is under the overall management of the environmental risk management team. Environmental and related social evaluations are integrated into our credit and investment risk assessment processes, with environmental and related social risk management standards and procedures in place for all sectors. In addition, environmental and related social risk assessments in project finance, project-related corporate and bridge loans are required, in accordance with our commitment to the Equator Principles, which are a voluntary set of guidelines for financial institutions based on the screening criteria of the International Finance Corporation. We adopted the Equator Principles in 2003. An escalation process is in place for transactions with the potential to have significant environmental and related social risk, with escalation up to the Reputation and Legal Risks Committee for senior executive review, if required. We also conduct ongoing research and benchmarking on environmental issues such as climate change as they may pertain to responsible lending practices. We are a participant in the CDP (formerly Carbon Disclosure Project) climate change program, which promotes corporate disclosure to the investment community on greenhouse gas emissions and climate change management. We are also a supporter of the reporting framework developed by the Task Force on Climate-related Financial Disclosures (TCFD), which provides guidance for voluntary, consistent climate-related risk disclosures. In 2019, CIBC published its first climate-related disclosure aligned to the TCFD recommendations and structured around its four core elements. Our TCFD report, available at https://www.cibc.com/content/dam/about_cibc/inside_cibc/ environment/building-a-sustainable-future-report-en.pdf provides details as to how CIBC is identifying and managing both physical and transition risks associated with climate change. In addition, we are a member of the United Nations Environment Programme Finance Initiative (UNEP FI), which has a mission to promote sustainable finance and is guiding our approach to assessing climate change risks, as well as identifying opportunities associated with transitioning to a low carbon economy. In 2018, CIBC Asset Management Inc. became a signatory to the United Nations-supported Principles for Responsible Investment, which commit signatories to incorporate environmental and social issues into investment analysis and decision making across all investment classes. The environmental risk management team 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. More information on our environmental governance, policy, management and performance can be found in our Corporate Responsibility Report, which is available at https://www.cibc.com/content/cibcpublic/en/about-cibc/corporate-responsibility.html. The information provided on our website does not form a part of this document. CIBC 2019 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. CIBC adopted IFRS 15 “Revenue from Contracts with Customers” (IFRS 15) as at November 1, 2018 in place of prior guidance, including IAS 18 “Revenue” (IAS 18) and IFRIC 13 “Customer Loyalty Programmes” (IFRIC 13). We applied IFRS 15 on a modified retrospective basis. As permitted, we did not restate our prior period comparative consolidated financial statements, which are reported under the prior guidance. The application of IFRS 15 did not significantly impact our critical accounting policies. CIBC adopted IFRS 9 “Financial Instruments” (IFRS 9) in place of IAS 39 “Financial Instruments: Recognition and Measurement” (IAS 39) in 2018 to comply with OSFI’s advisory that requires that D-SIBs adopt IFRS 9 for their annual periods beginning on November 1, 2017, one year earlier than required by the International Accounting Standards Board (IASB). We applied IFRS 9 on a retrospective basis. As permitted, we did not restate our prior period comparative consolidated financial statements. Amounts reported relating to periods ended on or before October 31, 2017 are reported under IAS 39 and are therefore not comparable to the information presented for 2018 or 2019. IFRS 9 impacted our critical accounting policies in two principal areas: classification and measurement and impairment. Use and classification of financial instruments As a financial institution, our assets and liabilities primarily comprise financial instruments, which include deposits, securities, loans, derivatives, acceptances, repurchase agreements, and subordinated indebtedness. 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. Judgment is applied in determining the appropriate classification of financial instruments under IFRS 9, in particular as it relates to the assessment of whether debt financial assets meet the solely payment of principal and interest (SPPI) test, and the assessment of the business model used to manage financial assets. For details on the accounting for these instruments under IFRS 9 and the differences from IAS 39, see Note 2 to the consolidated financial statements. Accounting for AFS securities under IAS 39 AFS securities included debt and equity securities. AFS securities were measured at fair value, with the difference between the fair value and the amortized cost included in AOCI. Only equities that did not have a reliably measurable fair value were carried at cost. We had determined that all of our equity securities had reliable fair values. AFS securities were subject to quarterly reviews to assess whether or not there was an impairment. The assessment of impairment depended on whether the instrument was debt or equity in nature. AFS debt securities were identified as impaired when there was objective observable evidence concerning the inability to collect the contractual principal or interest. Factors that were reviewed for impairment assessment included, but were 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 existed if there had been a significant or prolonged decline in the fair value of the investment below its cost. In making the impairment assessment, we also considered whether there had been significant adverse changes to the technological, market, economic, or legal environments in which the issuer operates or if the issuer was experiencing significant financial difficulty. Realized gains and losses on disposal and write-downs to reflect impairment in the value of AFS securities were recorded in the consolidated statement of income. Previously recognized impairment losses for debt securities (but not equity securities) were reversed if a subsequent increase in fair value could be objectively identified and was related to an event occurring after the impairment loss was recognized. Once an AFS equity security was impaired, all subsequent declines in fair value were charged directly to income. Accounting for FVOCI securities under IFRS 9 FVOCI securities include debt securities that meet the SPPI criteria and the “Hold to collect and for sale” business model and equity securities that are designated at FVOCI upon initial recognition. Impairment of equity securities designated at FVOCI is not required under IFRS 9 because unrealized gains or losses are recognized in Other comprehensive income (OCI) and are directly reclassified to retained earnings upon disposition of the equity securities with no recycling to profit or loss. Similar to the accounting for AFS debt securities under IAS 39, FVOCI debt securities under IFRS 9 are measured at fair value, with the difference between the fair value and the amortized cost included in AOCI. However, unlike IAS 39, FVOCI debt securities are subject to the expected credit losses impairment model under IFRS 9. For more details, refer to “Allowance for credit losses under IFRS 9“ section below and Note 1 to the consolidated financial statements. Determination of fair value of financial instruments Under IFRS 9, debt and equity securities mandatorily measured and designated at FVTPL (IAS 39: Debt and equity trading securities), business and government loans mandatorily measured and designated at FVTPL (IAS 39: Trading business and government loans), obligations related to securities sold short, derivative contracts, FVOCI securities (IAS 39: 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. The transition to IFRS 9 did not impact the definition of fair value, which 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 78 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis 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, including independent validation of valuation inputs 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 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 Securities mandatorily measured and designated at FVTPL and loans mandatorily measured at FVTPL Debt securities measured at FVOCI and equity securities designated at FVOCI Derivative instruments Liabilities Deposits and other liabilities (2) Derivative instruments Level 3 2019 Total (1) Level 3 2018 Total (1) $ $ $ $ 1,034 291 412 1,737 601 268 869 1.4 % $ 0.6 1.7 1.1 % $ 833 285 222 1,340 5.4 % $ 1.1 1.7 % $ 423 359 782 1.2 % 0.8 1.0 1.0 % 5.3 % 1.7 1.8 % (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, and credit risk. 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. The level of fair value adjustments could change as events warrant and may not reflect ultimate realizable amounts. As at October 31, 2019, the total valuation adjustments related to financial instruments carried at fair value on the consolidated balance sheet was $231 million (2018: $243 million), primarily related to credit risk, bid-offer spreads, and parameter uncertainty of our derivative assets and liabilities. Impairment of financial assets Allowance for credit losses under IAS 39 We established and maintained an allowance for credit losses that was considered the best estimate of probable credit-related losses existing in our portfolio of on- and off-balance sheet loan exposures, giving due regard to current conditions. The allowance for credit losses consisted of individual and collective components. Individual allowances The majority of our business and government loan portfolios were assessed for impairment on an individual loan basis. Individual allowances were established when impaired loans were identified within the individually assessed portfolios. A loan was classified as impaired when we were of the opinion that there was no longer reasonable assurance of the full and timely collection of contractual principal and interest. The individual allowance was the amount required to reduce the carrying value of an impaired loan to its estimated realizable amount. This was determined by discounting the expected future cash flows at the effective interest rate inherent in the loan. Individual allowances were not established for portfolios that were 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 took a portfolio approach to establish the collective allowance under IAS 39. As it was not practical to review each individual loan, we utilized 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 enabled CIBC to determine appropriate PD and LGD parameters, which were used in the calculation of the portion of the collective allowance for current accounts. For credit card loans, non-current residential mortgages, personal loans and certain small business loans, the historical loss experience enabled CIBC to calculate flows to write off in our models that determine the collective allowance that pertained to these loans. We also considered estimates of the time periods over which losses that were 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 affected the allowance calculation were updated, based on our experience and the economic environment. CIBC 2019 ANNUAL REPORT 79 Management’s discussion and analysis Business and government allowances For groups of individually assessed loans for which no objective evidence of impairment had been identified on an individual basis, a collective allowance was provided for losses which we estimated were 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 incorporated a number of factors, including the size of the portfolios, expected loss rates, and relative risk profiles. We also considered estimates of the time periods over which losses that were 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 affected the collective allowance calculation were updated, based on our experience and the economic environment. Expected loss rates for business loan portfolios were 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 reflected our historical loss experience and were supplemented by data derived from defaults in the public debt markets. Historical loss experience was adjusted based on observable data to reflect the effects of current conditions. LGD estimates were based on our experience over past years. Allowance for credit losses under IFRS 9 The new impairment guidance sets out an expected credit loss (ECL) model applicable to all debt instrument financial assets classified as amortized cost or FVOCI. 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 significantly changed 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. The incurred loss model under IAS 39 incorporated a single best estimate, the time value of money and information about past events and current conditions. The objective of IFRS 9 is to record lifetime losses on all financial instruments which have experienced a significant increase in credit risk since their initial recognition. As a result, ECL allowances are 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 since initial recognition. The incurred loss model recognized 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, lifetime ECLs are recognized earlier under IFRS 9. For our business and government portfolios, the individually assessed allowances for impaired instruments recognized under IAS 39 were generally replaced by stage 3 allowances under IFRS 9, while the collective allowances for performing financial instruments were generally replaced by either stage 1 or stage 2 allowances under IFRS 9. For our retail portfolios, the portion of our collective allowances that related to impaired financial instruments under IAS 39 was generally replaced by stage 3 allowances, while the performing portion of our collective allowances was generally replaced by either stage 1 or stage 2 allowances under IFRS 9. Key drivers of expected credit loss The ECL impairment requirements of IFRS 9 require that we make judgments and estimates related to matters that are uncertain. In particular, the ECL requirements of IFRS 9 incorporate the following elements that are subject to a high level of judgment: (cid:129) (cid:129) (cid:129) Determining when a significant increase in credit risk of a loan has occurred; Measuring both 12-month and lifetime credit losses; and Forecasting forward-looking information for multiple scenarios and determining the probability weighting of each scenario. In addition, the interrelationship between these elements is also subject to a high degree of judgment. Changes in the judgments and estimates related to IFRS 9 can have a significant impact on the level of ECL allowance recognized and the period-over-period volatility of the provision for credit losses. Changes in a particular period could have a material impact on our financial results. See Note 5 to our consolidated financial statements for more information concerning the high level of judgment inherent in the estimation of ECL allowance under IFRS 9. 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 are 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 consider 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 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 Unbiased probability-weighted LGD based on estimated LGD including impact of relevant forward-looking assumptions such as changes in collateral value Discounted using the original effective interest rate Amortization and repayment of principal and interest from the balance sheet date to the default date is also captured ECL is discounted from the default date to the reporting date PD LGD EAD Other Attribution of provision for credit losses As part of the adoption of IFRS 9, we recognize provision for credit losses on both impaired (stage 3) and performing (stages 1 and 2) loans in the respective SBUs. In 2017 and prior periods, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses related to CIBC Bank USA, which was recognized in U.S. Commercial Banking and Wealth Management, and provision for credit 80 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking. Provision for credit losses recognized directly on our consolidated statement of income is in respect to financial instruments classified as loans and bankers’ acceptances. Provision for credit losses for FVOCI debt securities and amortized cost securities are recognized in gains (losses) from debt securities measured at FVOCI and amortized cost, net in the consolidated statement of income. 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. As permitted, we have elected to not adopt the IFRS 9 hedge accounting requirements and instead have retained the IAS 39 hedge accounting requirements. As required, we have adopted the hedge accounting disclosure requirements under amendments to IFRS 7 that were effective in 2018. 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 structured entities (SEs) that have purchased and securitized our own assets including Cards II 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. IFRS 9 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. 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, 2019, we had goodwill of $5,449 million (2018: $5,564 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 result in an impairment charge. In the fourth quarter of 2019 we performed our annual impairment test of CIBC FirstCaribbean and determined that the estimated recoverable amount of the CIBC FirstCaribbean CGU was less than its carrying amount as a result of our assessment of the valuation implied by the expected sale of CIBC’s controlling interest in CIBC FirstCaribbean. As a result, we recognized a goodwill impairment charge of $135 million, which reduced the carrying amount of the goodwill relating to the CIBC FirstCaribbean CGU to $278 million (US$211 million) as at October 31, 2019. Reductions in the estimated recoverable amount of the CIBC FirstCaribbean CGU could arise from various factors, including closing adjustments related to the planned sale of CIBC’s controlling interest in CIBC FirstCaribbean and other changes in market conditions. For additional information, see Note 3 and Note 8 to our consolidated financial statements. Other intangible assets and long-lived assets As at October 31, 2019, we had other intangible assets with an indefinite life of $142 million (2018: $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. CIBC 2019 ANNUAL REPORT 81 Management’s discussion and 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. 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, which gives rise to uncertainty. 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. For tax positions where there is uncertainty regarding the ultimate determination of the tax impact, including positions which are under audit, dispute or appeal, we recognize provisions to consider this uncertainty based on our best estimate of the amount expected to be paid based on an assessment of the relevant factors. 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 (NIFOs) 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 tax assets should not be recognized. The factors used to assess the probability of realization are based on 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 NIFOs, 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 19 to the consolidated financial statements. Contingent liabilities and provisions 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 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 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. A description of significant ongoing matters to which CIBC is a party can be found in Note 22 to the consolidated financial statements. The provisions disclosed in Note 22 include all of CIBC’s accruals for legal matters as at October 31, 2019, including amounts related to the significant legal proceedings described in that note and to other legal matters. 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 $1.1 billion as at October 31, 2019. 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, 2019 consist of the significant legal matters disclosed in Note 22 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. 82 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis 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 defined benefit plan 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 18 and Note 1 to the consolidated financial statements. Accounting developments Transition to IFRS 16 IFRS 16 “Leases”, issued in January 2016, replaces IAS 17 “Leases”, and is effective for annual periods beginning on or after January 1, 2019, which for us will be on November 1, 2019. As a lessee, the new standard will result in on-balance sheet recognition for most leases that are considered operating leases under IAS 17, which will result in a gross-up of the consolidated balance sheet through the recognition of a liability for the present value of future lease payments (i.e. lease liability) and an asset representing the right to use the underlying asset (i.e. right-of-use asset). We will no longer recognize the impacted lease payments through operating expenses; instead, we will recognize depreciation expense on the right-of-use asset and interest expense on the lease liability in the consolidated statement of income. Accounting for leases by lessors remains mostly unchanged from IAS 17. However, on transition, intermediate lessors are required to reassess subleases by reference to the right-of-use asset arising from the head lease that could result in on-balance sheet recognition for certain subleases previously classified as operating subleases. The application of IFRS 16 mainly will apply to our office and banking centre leases, as well as certain subleases previously classified as operating subleases. We expect to adopt IFRS 16 for the fiscal year beginning November 1, 2019 using the modified retrospective method, with no restatement of comparative periods. As at November 1, 2019, the adoption of IFRS 16 is expected to result in the recognition of approximately $1.6 billion of right-of-use assets and corresponding lease liabilities on our consolidated balance sheet. The reassessment of certain subleases related to a previously recognized finance lease property, a portion of which is rented out and considered investment property, is expected to result in an increase of approximately $0.1 billion as a result of the recognition of additional sublease-related assets, net of the derecognition of amounts related to the corresponding head lease. As at November 1, 2019, the after-tax impact to retained earnings as a result of adopting IFRS 16 is expected to be an increase of $0.1 billion, and the impact to our CET1 ratio is expected to be a reduction of approximately 2 basis points. In addition, the following permitted recognition exemptions and practical expedients have been applied: (cid:129) (cid:129) A single discount rate curve has been applied to portfolios of leases with reasonably similar characteristics at the date of application. In contracts where we are the lessee, we have not reassessed contracts that were identified as finance leases under the previous accounting standard (IAS 17). We have elected to exclude leases of assets considered as low value and certain short-term leases. We have applied the onerous lease provisions recognized as at October 31, 2019 as an alternative to performing an impairment review of our right-of-use assets as at November 1, 2019. Where an onerous lease provision was recorded on a lease, the right-of-use asset has been reduced by the amount of that provision on transition and no further impairment review was performed. We have elected not to separate lease and non-lease components of a lease contract when calculating the lease liability and corresponding right-of-use asset for certain classes of assets. Non-lease components may consist of, but are not limited to, common area maintenance expenses and utility charges. Other occupancy costs not within the scope of IFRS 16 will continue to be recorded as operating expenses. (cid:129) (cid:129) (cid:129) The actual impacts of the initial application of IFRS 16 may vary from our estimates based on final application and testing of the internal control over financial reporting related to IFRS 16, as well as revisions to the accounting policies and judgments, including application of practical expedients. We have updated our accounting systems and internal control processes in response to the standard, and are in the final stages of testing and acceptance for our transition to IFRS 16. IFRIC 23 “Uncertainty over Income Tax Treatments” (IFRIC 23) In June 2017, the IASB issued IFRIC 23, which clarifies the accounting for uncertainties in income taxes. IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019, which for us is on November 1, 2019. There will be no impact to our consolidated financial statements as a result of adopting IFRIC 23. Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and IFRS 7 As discussed in the “Other regulatory developments” section, certain regulatory actions have led to uncertainties with respect to the long-term viability of certain interest rate benchmarks. The IASB is addressing the interest rate benchmark reform and its effects on financial reporting in two phases. The first phase focuses on issues affecting financial reporting in the period before the interest rate benchmark reform, and the second phase focuses on potential issues that might affect financial reporting once the existing rate is replaced with an alternative rate. In September 2019, the IASB finalized phase one through the issuance of “Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and IFRS 7”, which provides relief for specific hedge accounting requirements to address uncertainties in the period before the interest rate benchmark reform, and provides specific disclosure requirements for the affected hedging relationships. The amendments are effective for annual periods beginning on or after January 1, 2020. As permitted under IFRS 9, we CIBC 2019 ANNUAL REPORT 83 Management’s discussion and analysis have elected to continue to apply the hedge accounting requirements of IAS 39. Therefore, the amendments will apply to IAS 39 and IFRS 7 for us, mandatorily effective on November 1, 2020. Earlier application is permitted. We continue to evaluate the impact of the amendments to IAS 39 and IFRS 7 on our consolidated financial statements. The IASB has commenced discussions related to the second phase of the project and we continue to monitor the developments in this area. Conceptual Framework for Financial Reporting In March 2018, the IASB issued a revised version of its “Conceptual Framework for Financial Reporting” (Conceptual Framework). The Conceptual Framework sets out the fundamental concepts that underlie the preparation and presentation of financial statements and serves to guide the IASB in developing IFRS standards. The Conceptual Framework also assists entities in developing accounting policies when no IFRS standard applies to a particular transaction, and more broadly, the Conceptual Framework helps entities to understand and interpret the standards. The Conceptual Framework is effective for annual periods beginning on or after January 1, 2020, which for us will be on November 1, 2020. Early application is permitted. We are currently assessing the impact of the Conceptual Framework on our consolidated financial statements. Transition to IFRS 17 IFRS 17 “Insurance Contracts” (IFRS 17), issued in May 2017, replaces IFRS 4 “Insurance Contracts”, and was originally effective for annual periods beginning on or after January 1, 2021, which for us is on November 1, 2021. In June 2019, the IASB released an exposure draft proposing amendments to IFRS 17, including the expected proposal to defer the effective date from reporting periods beginning on or after January 1, 2021 to January 1, 2022. The IASB plans to finalize the amendments to IFRS 17 in 2020, subsequent to the comment period ended September 2019. IFRS 17 provides comprehensive guidance on the recognition, measurement, presentation and disclosure of insurance contracts. We continue to evaluate the impact of IFRS 17 on our consolidated financial statements. Other regulatory developments Reforms to interest rate benchmarks Various interest rate and other indices that are deemed to be “benchmarks” are the subject of international regulatory guidance and proposals for reform. The U.K.’s Financial Conduct Authority announced in July 2017 that it would not compel banks to submit LIBOR rates after December 2021. This may cause LIBOR and other current benchmarks to disappear entirely, perform differently than in the past, create disincentives for market participants to continue to administer and contribute to certain benchmarks, or have other consequences which cannot be predicted. Accordingly, this uncertainty in respect of relevant benchmarks may adversely affect the value of, return on, or trading market for contracts linked to any such benchmark. A significant number of CIBC’s derivative, lending and deposit contracts reference various interest rate benchmarks, including contracts with maturity dates which extend beyond December 2021. CIBC also holds securities that reference interest rate benchmarks. In response to the proposed reforms to interest rate benchmarks, CIBC has established an Enterprise IBOR Transition Program (the “Program”) that is supported by a formal governance structure and dedicated working groups that include stakeholders from frontline businesses as well as functional groups such as Technology and Operations, Risk Management, Legal, and Finance, to assess the impact across all of our products. A comprehensive initial impact assessment of contracts that reference various interbank offered rates (IBOR) has been completed to inform an enterprise-wide project plan to support the Program. Key features of this plan include: (cid:129) (cid:129) (cid:129) Development of detailed business-level remediation plans for affected contracts, processes and systems; An enterprise-wide communication strategy which includes both external and internal stakeholders; and Formalization of an enterprise-wide exposure management process. An IBOR Steering Committee has been established with responsibility for oversight and execution of the Program, including: (cid:129) (cid:129) (cid:129) (cid:129) Ensuring key project milestones are met; Providing direction and guidance on a holistic basis; Reviewing and resolving key issues and risks; and Ensuring that our transition strategies and any transition actions remain consistent with CIBC’s overall strategy, risk appetite, and control framework. The Program provides regular updates to senior management, including ExCo. CIBC continues to actively engage with the industry through various working groups to ensure alignment with market developments in relevant jurisdictions, and will continue to monitor developments in this area including accounting developments intended to address interest rate benchmark reform as discussed under the “Accounting developments” section. For a discussion of other regulatory developments, see the “Taxes”, “Capital management”, and “Management of risk” sections. Client Focused Reforms In October 2019, the Canadian Securities Administrators published “Reforms to Enhance the Client-Registrant Relationship”, an amendment to National Instrument 31-103 and its companion policy (referred to as the “Client Focused Reforms”), which is intended to raise the standard of conduct required for registered dealers and advisors to ensure that registrants put client interests’ first. The Client Focused Reforms are supported by the introduction of a know-your-product provision and enhancements to the know-your-client, suitability, conflicts of interest, and relationship disclosure information requirements. The Client Focused Reforms will come into effect on December 31, 2019 and will be phased in over a two-year period. These requirements will impact our Canadian Commercial Banking and Wealth Management and Canadian Personal and Small Business Banking SBUs and we expect to implement changes to our policies and procedures to comply with these requirements. CDIC – Deposit protection modernization In April 2019, the Canadian federal government approved changes to the Canada Deposit Insurance Corporation Act intended to strengthen and modernize deposit protection. The changes will occur in two phases. The first phase, effective on April 30, 2020, includes changes to extend CDIC coverage to foreign currency deposits and deposits with terms greater than 5 years and to eliminate coverage for travellers’ cheques. The second phase, effective on April 30, 2021, includes additional changes such as providing separate coverage for certain registered plans and introducing new requirements for deposits held in trust. 84 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis 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 24, 17, 18 and 25 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’ Auditor The “Policy on the Scope of Services of the Shareholders’ Auditor” sets out the parameters for the engagement of the shareholders’ auditor 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’ auditor and prohibits CIBC from engaging the shareholders’ auditor for “prohibited” services. The Audit Committee is also accountable for the oversight of the work of the shareholders’ auditor and for an annual assessment of the engagement team’s qualifications, performance and independence, including lead audit partner rotation. 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’ auditor are disclosed in our Management Proxy Circular. Controls and procedures Disclosure controls and procedures CIBC’s disclosure controls and procedures are designed to provide reasonable assurance that relevant information is accumulated and communicated to CIBC’s management, including the President and Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. 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, 2019 (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, 2019, 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 auditor, has audited the consolidated financial statements of CIBC for the year ended October 31, 2019, and has also issued a report on internal control over financial reporting under standards of the Public Company Accounting Oversight Board (United States). 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, 2019 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. CIBC 2019 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 2019 2018 2017 2019 2018 2017 2019 2018 2017 Average balance Interest Average rate Domestic assets (1) Cash and deposits with banks Securities 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 $ 7,156 $ 5,541 $ 3,294 $ 164 $ 95 $ 66,954 58,854 57,923 1,852 1,434 23,950 203,575 53,490 63,131 320,196 3,837 10,248 10,170 17,386 25,320 204,536 52,314 54,298 311,148 2,041 11,660 10,038 15,007 27,406 194,350 49,901 48,060 292,311 1,024 11,687 9,435 14,185 496 6,347 4,012 2,434 404 5,740 3,731 1,824 12,793 11,295 128 – – – 12 – – – 31 1,390 276 4,698 3,378 1,429 9,505 5 – – – Total domestic assets 459,897 439,609 417,265 15,433 13,240 11,207 $ $ Foreign assets (1) Cash and deposits with banks Securities Securities borrowed or purchased under resale agreements Loans Residential mortgages Personal and credit card Business and government Total loans Other interest-bearing assets Derivative instruments Other non-interest-bearing assets Total foreign assets Total assets Domestic liabilities (1) Deposits Personal Business and government Bank Secured borrowings Total deposits Derivative instruments Acceptances Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Other liabilities Subordinated indebtedness Total domestic liabilities Foreign liabilities (1) Personal Deposits Business and government Bank Secured borrowings Total deposits Derivative instruments Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Other liabilities Subordinated indebtedness Total foreign liabilities Total liabilities Shareholders’ equity Non-controlling interests 13,305 49,059 35,491 3,815 1,435 55,443 60,693 555 13,419 7,297 14,283 43,300 29,719 3,401 1,266 47,117 51,784 265 12,387 7,094 18,451 34,265 19,228 2,711 916 32,719 36,346 137 12,646 4,027 232 927 978 201 105 2,819 3,125 2 – – 187 835 649 176 98 2,319 2,593 1 – – 149 500 219 140 83 1,295 1,518 – – – 179,819 158,832 125,100 5,264 4,265 2,386 157,537 $ 153,092 1,915 39,111 148,143 $ 134,382 2,188 43,085 143,640 $ 129,851 2,256 38,642 1,861 $ 3,033 29 1,037 1,299 $ 1,378 26 952 351,655 10,790 10,171 15,412 15,995 14,621 4,549 327,798 11,207 10,039 14,708 13,699 13,754 3,645 314,389 11,960 9,436 13,400 9,178 11,782 3,088 5,960 – – 285 477 9 193 3,655 – – 269 329 (7) 170 851 1,008 13 613 2,485 – – 224 130 (3) 138 423,193 394,850 373,233 6,924 4,416 2,974 15,543 97,429 12,277 226 125,475 14,130 1,089 35,413 3,014 150 179,271 602,464 37,072 180 13,511 101,583 12,543 – 127,637 11,905 592 27,364 2,420 151 170,069 564,919 33,336 186 10,182 83,461 16,105 – 109,748 12,942 389 17,125 1,810 194 142,208 515,441 26,726 198 193 2,068 197 4 2,462 – 6 721 28 5 3,222 10,146 – – 114 2,319 152 – 2,585 – 3 407 25 4 3,024 7,440 – – 66 1,274 128 – 1,468 – 2 124 44 4 1,642 4,616 – – 4,616 2.29 % 1.71 % 0.94 % 2.77 2.40 2.44 2.07 3.12 7.50 3.86 4.00 3.34 – – – 3.36 1.74 1.89 2.76 5.27 7.32 5.08 5.15 0.36 – – 2.93 1.60 2.81 7.13 3.36 3.63 0.59 – – – 3.01 1.31 1.93 2.18 5.17 7.74 4.92 5.01 0.38 – – 2.69 1.01 2.42 6.77 2.97 3.25 0.49 – – – 2.69 0.81 1.46 1.14 5.16 9.06 3.96 4.18 – – – 1.91 1.18 % 0.88 % 0.59 % 1.98 1.51 2.65 0.78 0.58 1.59 1.03 1.19 2.21 1.69 – – 1.85 2.98 0.06 4.24 1.64 1.24 2.12 1.60 1.77 1.96 – 0.55 2.04 0.93 3.33 1.80 1.68 – – 1.12 – – 1.83 2.40 (0.05) 4.66 1.12 0.84 2.28 1.21 – 2.03 – 0.51 1.49 1.03 2.65 1.78 1.32 – – 0.79 – – 1.67 1.42 (0.03) 4.47 0.80 0.65 1.53 0.79 – 1.34 – 0.51 0.72 2.43 2.06 1.15 0.90 – – 1.59 % 1.24 % 0.85 % 639,716 $ 598,441 $ 542,365 $ 20,697 $ 17,505 $ 13,593 3.24 % 2.93 % 2.51 % Total liabilities and equity $ 639,716 $ 598,441 $ 542,365 $ 10,146 $ 7,440 $ Net interest income and margin $ 10,551 $ 10,065 $ 8,977 1.65 % 1.68 % 1.66 % Additional disclosures: Non-interest-bearing deposit liabilities Domestic Foreign $ 48,478 $ 14,582 47,879 $ 14,311 45,691 9,159 (1) Classification as domestic or foreign is based on domicile of debtor or customer. 86 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Volume/rate analysis of changes in net interest income $ millions 2019/2018 2018/2017 Increase (decrease) due to change in: Increase (decrease) due to change in: Average balance Average rate Average balance Average rate Domestic assets (1) Cash and deposits with banks Securities Securities borrowed or purchased under resale agreements Loans Residential mortgages Personal and credit card Business and government Total loans Other interest-bearing assets Change in domestic interest income Foreign assets (1) Cash and deposits with banks Securities Securities borrowed or purchased under resale agreements Loans Residential mortgages Personal and credit card Business and government Total loans Other interest-bearing assets Change in foreign interest income Total change in interest income Domestic liabilities (1) Personal Deposits Business and government Bank Secured borrowings Total deposits Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Other liabilities Subordinated indebtedness Change in domestic interest expense Foreign liabilities (1) Personal Deposits Business and government Bank Secured borrowings Total deposits Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Other liabilities Subordinated indebtedness Change in foreign interest expense Total change in interest expense Change in total net interest income $ $ $ $ $ 28 197 (22) (27) 84 297 354 11 568 (13) 111 126 21 13 410 444 1 669 1,237 82 192 (3) (88) 183 13 55 - 42 293 17 (95) (3) – (81) 3 120 6 – 48 341 896 (1) Classification as domestic or foreign is based on domicile of debtor or customer. $ $ $ $ $ $ Total 69 418 92 607 281 610 1,498 116 2,193 45 92 329 25 7 500 532 1 999 3,192 562 1,655 3 85 2,305 16 148 16 23 $ $ $ 41 221 114 634 197 313 1,144 105 1,625 58 (19) 203 4 (6) 90 88 – 330 1,955 480 1,463 6 173 2,122 3 93 16 (19) 2,215 2,508 62 (156) 48 4 (42) – 194 (3) 1 150 79 (251) 45 4 (123) 3 314 3 1 198 $ $ 2,365 (410) $ $ 2,706 486 $ $ 21 22 (21) 246 163 185 594 5 621 (34) 132 119 36 32 570 638 – 855 1,476 27 35 – 70 132 22 64 (1) 25 242 22 277 (28) – 271 1 74 15 (1) 360 602 874 $ $ $ Total 64 44 128 1,042 353 395 1,790 7 2,033 38 335 430 36 15 1,024 1,075 1 1,879 3,912 448 370 13 339 1,170 45 199 (4) 32 $ $ $ 43 22 149 796 190 210 1,196 2 1,412 72 203 311 – (17) 454 437 1 1,024 2,436 421 335 13 269 1,038 23 135 (3) 7 1,200 1,442 26 768 52 – 846 – 209 (34) 1 1,022 2,222 214 $ $ $ $ 48 1,045 24 – 1,117 1 283 (19) – 1,382 2,824 1,088 CIBC 2019 ANNUAL REPORT 87 Management’s discussion and analysis Analysis of net loans and acceptances Canada (1) $ millions, as at October 31 Residential mortgages Student Personal Credit card 2019 2018 2017 2016 2015 $ 204,383 $ 203,930 $ 203,787 $ 184,610 $ 166,616 $ 24 41,882 12,143 33 41,473 12,060 50 39,483 11,805 73 36,896 11,755 110 35,412 11,279 Total net consumer loans 258,432 257,496 255,125 233,334 213,417 6,064 7,565 5,720 7,037 2,465 3,972 18,465 6,965 5,222 1,024 628 651 191 557 2,193 2,281 3,221 857 – 6,426 6,885 5,219 7,018 2,318 3,294 16,297 6,011 5,064 824 446 575 275 527 1,880 2,291 2,870 954 – 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 – Non-residential mortgages Financial institutions Retail and wholesale Business services Manufacturing – capital goods Manufacturing – consumer goods Real estate and construction (2) Agriculture Oil and gas Mining Forest products Hardware and software Telecommunications and cable Publishing, printing, and broadcasting Transportation Utilities Education, health and social services (2) Governments Others Stage 1 and 2 allowance for credit losses (2017 and prior: Collective allowance allocated to business and government loans) (3)(4) Total net business and government loans, including acceptances 2019 1,527 – 435 35 1,997 115 8,111 2,066 4,570 2,399 958 16,871 124 3,190 154 162 1,215 314 92 1,263 1,759 2,941 127 – $ 2018 1,152 – 356 36 1,544 39 5,529 1,914 3,840 2,143 695 14,559 79 2,375 60 215 1,082 887 102 893 1,226 3,040 92 – $ U.S. (1) 2017 902 – 326 35 1,263 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 2016 2015 $ – – 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 (144) (98) (195) (215) (218) (138) (108) (83) (58) (50) 74,934 69,076 60,760 55,690 49,558 46,293 38,662 34,183 16,338 12,626 Total net loans and acceptances $ 333,366 $ 326,572 $ 315,885 $ 289,024 $ 262,975 $ 48,290 $ 40,206 $ 35,446 $ 16,430 $ 12,714 (1) Classification by country is primarily based on domicile of debtor or customer. (2) Certain comparative information has been reclassified. (3) Stage 3 allowance for credit losses (2017 and prior: individual allowance) is allocated to business and government loans, including acceptances, by category above. (4) Stage 1 and 2 allowances (2017 and prior: collective allowances) are primarily allocated based on the geographic location where they are recorded. 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 (2) Agriculture Oil and gas Mining Forest products Hardware and software Telecommunications and cable Publishing, printing, and broadcasting Transportation Utilities Education, health and social services (2) Governments Others Stage 1 and 2 allowance for credit losses (2017 and prior: Collective allowance allocated to business and government loans) (3)(4) Total net business and government loans, including acceptances $ $ 2019 2,531 – 757 157 3,445 258 2,103 467 1,822 128 61 1,529 104 253 642 – – 185 81 2,012 1,744 34 1,657 – $ 2018 2,453 – 715 159 3,327 266 2,043 438 1,675 125 92 1,624 25 440 710 – – 208 85 1,642 647 28 1,598 – $ 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 2019 2018 2017 2016 2015 2,406 $ 208,441 $ 207,535 33 42,544 12,255 24 43,074 12,335 – 476 150 $ 207,068 $ 187,077 73 37,471 11,946 50 40,392 11,992 $ 169,022 110 35,939 11,466 3,032 245 3,291 548 1,370 293 119 1,124 40 324 446 – 12 388 79 899 785 32 1,611 711 263,874 262,367 259,502 236,567 216,537 6,437 17,779 8,253 13,429 4,992 4,991 36,865 7,193 8,665 1,820 790 1,866 690 730 5,468 5,784 6,196 2,641 – 6,731 14,457 7,571 12,533 4,586 4,081 32,480 6,115 7,879 1,594 661 1,657 1,370 714 4,415 4,164 5,938 2,644 – 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 (73) (90) (73) (65) (57) (355) (296) (351) (338) (325) 13,007 11,556 11,113 11,186 12,260 134,234 119,294 106,056 83,214 74,444 Total net loans and acceptances $ 16,452 $ 14,883 $ 14,227 $ 14,327 $ 15,292 $ 398,108 $ 381,661 $ 365,558 $ 319,781 $ 290,981 (1) Classification by country is primarily based on domicile of debtor or customer. (2) Certain comparative information has been reclassified. (3) Stage 3 allowance for credit losses (2017 and prior: individual allowance) is allocated to business and government loans, including acceptances, by category above. (4) Stage 1 and 2 allowances (2017 and prior: collective allowances) are primarily allocated based on the geographic location where they are recorded. 88 CIBC 2019 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 under IAS 39 Impact of adopting IFRS 9 at November 1, 2017 Balance at beginning of year under IFRS 9 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) Residential mortgages 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 and other off-balance sheet exposures 2019 n/a n/a 1,741 1,286 $ $ 2018 (1) 1,737 63 1,800 870 $ 2017 1,813 n/a n/a 829 $ 2016 1,762 n/a n/a 1,051 $ 2015 1,736 n/a n/a 771 22 – 897 30 7 14 160 19 – 866 37 35 14 79 21 – 869 51 17 19 80 13 – 842 116 21 18 143 14 1 781 42 18 16 132 1,130 1,050 1,057 1,153 1,004 173 6 2 6 7 194 936 (40) (7) 174 6 – 4 6 190 860 (23) (46) 168 15 – 5 5 193 864 (26) (15) 163 8 – 6 6 183 970 (29) (1) 171 8 – 5 2 186 818 (23) 96 $ $ 2,044 1,915 129 $ $ 1,741 1,639 102 $ $ 1,737 1,618 119 $ $ 1,813 1,691 122 $ $ 1,762 1,670 92 Ratio of net write-offs during the year to average loans outstanding during the year 0.25 % 0.24 % 0.26 % 0.33 % 0.30 % (1) Effective November 1, 2017, all loans that are contractually 90 days in arrears are automatically classified as impaired and as stage 3 under IFRS 9, except for credit card loans which are classified as impaired and are fully written off when payments are contractually 180 days in arrears or at the earlier of the notice of bankruptcy, settlement proposal, or enlistment of credit counselling services. The determination of impairment was generally the same under IAS 39, except (i) residential mortgages guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency were not classified as impaired until payments were contractually 365 days in arrears, and (ii) residential mortgages guaranteed or insured by a private insurer, or loans that were fully secured and in the process of collection were not classified as impaired until payments were contractually 180 days in arrears. (2) Classification as domestic or foreign is primarily based on domicile of debtor or customer. n/a Not applicable. Allowance for credit losses on impaired loans as a percentage of gross impaired loans $ millions, as at October 31 Domestic (4) Residential mortgages Personal loans Business and government Total domestic Foreign (4) Residential mortgages Personal loans Business and government Total foreign Total allowance 2019 2018 (2) 2017 (3) 2016 (3) 2015 (3) 2019 2018 (2) 2017 (3) 2016 (3) 2015 (3) Allowance for credit losses (1) Allowance as a % of gross impaired loans $ $ 61 98 217 376 79 30 159 268 644 $ $ 54 79 56 189 89 30 174 293 482 $ $ 22 110 43 175 123 31 148 302 477 $ $ 20 105 63 188 148 40 196 384 572 $ $ 167 46 236 449 646 21 99 77 10.5 % 10.9 % 62.4 45.8 57.7 41.5 197 31.0 24.6 46.5 63.8 36.4 41.0 49.4 66.7 35.8 41.2 7.5 % 8.0 % 9.3 % 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 34.5 % 32.6 % 36.4 % 34.5 % 45.5 % (1) Excludes allowance on undrawn credit facilities and other off-balance sheet exposures. (2) Effective November 1, 2017, all loans that are contractually 90 days in arrears are automatically classified as impaired and as stage 3 under IFRS 9, except for credit card loans which are classified as impaired and are fully written off when payments are contractually 180 days in arrears or at the earlier of the notice of bankruptcy, settlement proposal, or enlistment of credit counselling services. The determination of impairment was generally the same under IAS 39, except (i) residential mortgages guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency were not classified as impaired until payments were contractually 365 days in arrears, and (ii) residential mortgages guaranteed or insured by a private insurer, or loans that were fully secured and in the process of collection were not classified as impaired until payments were contractually 180 days in arrears. (3) Under IAS 39, comprises individual allowance, and collective allowance related to personal, scored small business, and mortgage impaired loans that are greater than 90 days delinquent. (4) Classification as domestic or foreign is primarily based on domicile of debtor or customer. CIBC 2019 ANNUAL REPORT 89 Management’s discussion and analysis Allowance on performing loans as a percentage of net loans and acceptances $ millions, as at October 31 Domestic Residential mortgages Personal loans Credit cards Business and government Total domestic Foreign Residential mortgages Personal loans Credit cards Business and government Total foreign 2019 2018 (3) 2017 2016 2015 2019 2018 (3) 2017 2016 2015 Allowance for credit losses (1)(2) Allowance as a % of net loans and acceptances $ $ 38 415 413 144 1,010 33 10 7 211 261 $ 29 362 415 98 904 42 10 3 198 253 $ $ 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 – % – % – % – % – % 1.0 3.4 0.2 0.3 0.8 0.8 3.6 0.4 0.4 0.9 3.4 0.1 0.3 1.2 0.9 1.5 0.4 0.5 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 Total stage 1 and 2 allowance (2017 and prior: total allowance) $ 1,271 $ 1,157 $ 1,141 $ 1,119 $ 1,024 0.3 % 0.3 % 0.3 % 0.3 % 0.4 % (1) Excludes allowance on undrawn credit facilities and other off-balance sheet exposures. (2) Stage 1 and 2 allowances (2017 and prior: collective allowances) are primarily allocated based on the geographic location where they are recorded. (3) Effective November 1, 2017, all loans that are contractually 90 days in arrears are automatically classified as impaired and as stage 3 under IFRS 9, except for credit card loans which are classified as impaired and are fully written off when payments are contractually 180 days in arrears or at the earlier of the notice of bankruptcy, settlement proposal, or enlistment of credit counselling services. The determination of impairment was generally the same under IAS 39, except (i) residential mortgages guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency were not classified as impaired until payments were contractually 365 days in arrears, and (ii) residential mortgages guaranteed or insured by a private insurer, or loans that were fully secured and in the process of collection were not classified as impaired until payments were contractually 180 days in arrears. Net loans and acceptances by geographic location(1) $ millions, as at October 31 Canada 2019 2018 2017 2016 2015 Atlantic provinces Quebec Ontario Prairie provinces Alberta, Northwest Territories and Nunavut British Columbia and Yukon Stage 1 and 2 allowance (2017 and prior: collective allowance) allocated $ 14,578 30,113 169,073 14,680 45,103 60,829 $ 14,036 28,598 165,592 13,947 44,896 60,407 $ 14,194 27,027 157,987 13,746 44,354 59,479 $ 14,006 25,471 139,254 13,341 43,308 54,567 $ 13,598 23,093 125,584 12,877 41,197 47,478 to Canada (2) Total Canada U.S. Other countries (1,010) (3) (904) (3) (902) (4) (923) (4) (852) (4) 333,366 48,290 16,452 326,572 40,206 14,883 315,885 35,446 14,227 289,024 262,975 16,430 14,327 12,714 15,292 Total net loans and acceptances $ 398,108 $ 381,661 $ 365,558 $ 319,781 $ 290,981 (1) Classification by country is primarily based on domicile of debtor or customer. (2) Stage 1 and 2 allowances (2017 and prior: collective allowances) are primarily allocated based on the geographic location where they are recorded. (3) Stage 3 allowance for credit losses (2017 and prior: individual allowance) is allocated to provinces above, including acceptances. (4) Under IAS 39, 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. 90 CIBC 2019 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 (3) Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other (3) Total gross impaired – business and government loans $ 581 1 156 738 3 2 283 6 38 53 46 2 4 32 5 474 Total gross impaired loans Other past due loans (4) Total gross impaired and other past due loans 1,212 96 $ 1,308 Allowance for credit losses 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 (3) Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other (3) 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 (3) Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other (3) Total net impaired – business and government loans Total net impaired loans $ $ $ $ 61 – 98 159 – 1 151 4 16 24 11 – 2 5 3 217 376 520 1 58 579 3 1 132 2 22 29 35 2 2 27 2 257 836 Canada (1) U.S. (1) 2019 2018 (2) 2017 2016 2015 2019 2018 (2) 2017 2016 2015 $ $ 497 2 135 634 $ 292 2 114 408 $ $ $ $ 3 5 62 7 39 8 1 2 3 – 5 135 769 100 869 54 – 79 133 – – 26 4 15 4 1 1 2 – 3 56 189 443 2 56 501 3 5 36 3 24 4 – 1 1 – 2 79 $ $ $ $ 7 – 38 6 33 9 2 3 2 – 3 103 511 337 848 22 – 110 132 2 – 18 5 9 – 2 2 2 – 3 43 175 270 2 4 276 5 – 20 1 24 9 – 1 – – – 60 $ $ $ $ $ 580 $ 336 $ 251 3 120 374 4 1 23 19 23 4 121 4 1 – 4 204 578 362 940 20 – 105 125 2 – 16 7 10 1 21 3 1 – 2 63 188 231 3 15 249 2 1 7 12 13 3 100 1 – – 2 141 390 $ $ $ $ $ 225 5 103 333 4 – 26 8 9 1 126 2 1 – 3 180 513 337 850 21 – 99 120 1 – 19 6 7 – 39 2 1 – 2 77 197 204 5 4 213 3 – 7 2 2 1 87 – – – 1 $ $ $ $ $ $ $ $ $ $ 16 – 5 21 – 37 89 35 46 – 69 2 – – 23 301 322 – 322 3 – 1 4 – 1 28 – 28 – 34 – – – 10 101 105 13 – 4 17 – 36 61 35 18 – 35 2 – – 13 $ $ $ $ $ 13 – 2 15 – 65 44 14 90 – 54 2 1 – 56 326 341 – 341 2 – – 2 – 14 27 1 41 – 5 – – – – 88 90 11 – 2 13 – 51 17 13 49 – 49 2 1 – 56 103 316 $ 200 217 $ 238 251 $ $ 9 – 2 11 – 8 52 1 137 – 114 2 – – 45 359 370 – 370 – – – – – – 16 – 41 – 8 – – – – 65 65 9 – 2 11 – 8 36 1 96 – 106 2 – – 45 294 305 $ – $ – – – – – 5 – 62 – 248 – – – – 315 315 – $ $ 315 $ – $ – – – – – 4 – 20 – 8 – – – – 32 $ $ 32 $ – $ – – – – – 1 – 42 – 240 – – – – 283 $ 283 $ – – – – – – – – 94 – 1 – – 10 – 105 105 – 105 – – – – – – – – 27 – – – – 6 – 33 33 – – – – – – – – 67 – 1 – – 4 – 72 72 (1) Classification by country is primarily based on domicile of debtor or customer. (2) Effective November 1, 2017, all loans that are contractually 90 days in arrears are automatically classified as impaired and as stage 3 under IFRS 9, except for credit card loans which are classified as impaired and are fully written off when payments are contractually 180 days in arrears or at the earlier of the notice of bankruptcy, settlement proposal, or enlistment of credit counselling services. The determination of impairment was generally the same under IAS 39, except (i) residential mortgages guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency were not classified as impaired until payments were contractually 365 days in arrears, and (ii) residential mortgages guaranteed or insured by a private insurer, or loans that were fully secured and in the process of collection were not classified as impaired until payments were contractually 180 days in arrears. (3) Certain comparative information has been reclassified. (4) Represents loans where repayment of principal or payment of interest is contractually in arrears between 90 and 180 days. CIBC 2019 ANNUAL REPORT 91 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 (3) Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other (3) Total gross impaired – business and government loans Total gross impaired loans Other past due loans (4) Other (1) Total 2019 2018 (2) 2017 2016 2015 2019 2018 (2) 2017 2016 2015 $ 154 – 42 196 17 – 43 4 59 – – – 2 – 11 136 332 3 $ 167 – 43 $ 212 – 53 $ 263 – 70 $ 348 – 79 $ 210 265 15 1 52 4 72 1 – – 3 – 12 160 370 3 17 2 57 5 78 1 – – 4 – – 164 429 3 333 17 3 94 210 104 1 – – 2 – 1 432 765 3 427 34 5 141 47 139 3 2 – 2 1 – 374 801 3 $ 751 1 203 955 20 39 415 45 143 53 115 4 6 32 39 911 $ 677 2 180 859 18 71 158 25 201 9 55 4 7 – 73 621 $ 513 2 169 684 24 10 147 12 248 10 116 5 6 – 48 626 514 3 190 707 21 4 122 229 189 5 369 4 3 – 5 951 $ 573 5 182 760 38 5 167 55 242 4 129 2 3 11 3 659 1,866 99 1,480 103 1,310 340 1,658 365 1,419 340 Total gross impaired and other past due loans $ 335 $ 373 $ 432 $ 768 $ 804 $ 1,965 $ 1,583 $ 1,650 $ 2,023 $ 1,759 Allowance for credit losses 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 (3) Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other (3) 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 (3) Agriculture Resource-based industries Telecommunications, media and technology Transportation Utilities Other (3) Total net impaired – business and government loans $ 76 – 29 105 $ 87 – 30 $ 123 – 31 $ 148 – 40 $ 167 – 46 $ 117 154 188 213 5 – 18 2 30 – – – 1 – 2 58 7 1 28 3 39 1 – – 2 – 5 86 9 – 29 3 39 1 – – 2 – – 83 12 2 48 45 54 1 – – 2 – – 17 3 65 43 68 3 1 – 2 1 – 164 203 $ 163 $ 203 $ 237 $ 352 $ 416 $ 78 – 13 91 12 – 25 2 29 – – – 1 – 9 78 $ 80 – 13 93 8 – 24 1 33 – – – 1 – 7 74 $ 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 $ $ $ $ $ 140 – 128 268 5 2 197 6 74 24 45 – 3 5 15 376 644 611 1 75 687 15 37 218 39 69 29 70 4 3 27 24 535 Total net impaired loans $ 169 $ 167 $ 192 $ 413 $ 385 $ 1,222 $ 143 – 109 252 7 15 81 8 95 5 6 1 4 – 8 230 482 534 2 71 607 11 56 77 17 106 4 49 3 3 – 65 391 998 $ $ $ $ 145 – 141 286 11 – 63 8 89 1 10 2 4 – 3 191 477 368 2 28 398 13 10 84 4 159 9 106 3 2 – 45 435 833 $ $ $ $ $ $ 168 – 145 313 14 2 68 52 84 2 29 3 3 – 2 259 572 346 3 45 394 7 2 54 177 105 3 340 1 – – 3 692 $ 1,086 $ 188 – 145 333 18 3 84 49 102 3 40 2 3 7 2 313 646 385 5 37 427 20 2 83 6 140 1 89 – – 4 1 346 773 (1) Classification by country is primarily based on domicile of debtor or customer. (2) Effective November 1, 2017, all loans that are contractually 90 days in arrears are automatically classified as impaired and as stage 3 under IFRS 9, except for credit card loans which are classified as impaired and are fully written off when payments are contractually 180 days in arrears or at the earlier of the notice of bankruptcy, settlement proposal, or enlistment of credit counselling services. The determination of impairment was generally the same under IAS 39, except (i) residential mortgages guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency were not classified as impaired until payments were contractually 365 days in arrears, and (ii) residential mortgages guaranteed or insured by a private insurer, or loans that were fully secured and in the process of collection were not classified as impaired until payments were contractually 180 days in arrears. (3) Certain comparative information has been reclassified. (4) Represents loans where repayment of principal or payment of interest is contractually in arrears between 90 and 180 days. 92 CIBC 2019 ANNUAL REPORT Management’s discussion and analysis Deposits $ millions, for the year ended October 31 2019 2018 2017 2019 2018 2017 2019 2018 2017 Average balance Interest Rate Deposits in domestic bank offices (1) Payable on demand Personal Business and government Bank Payable after notice Personal Business and government Bank Payable on a fixed date Personal Business and government Bank Secured borrowings Total domestic Deposits in foreign bank offices Payable on demand Personal Business and government Bank Payable after notice Personal Business and government Payable on a fixed date Personal Business and government Bank Secured borrowings Total foreign Total deposits $ 9,939 $ 43,539 4,517 99,859 44,691 256 51,522 85,978 1,161 39,111 $ 10,216 $ 42,784 4,632 98,054 38,621 415 43,561 76,674 1,625 43,085 10,567 41,607 4,419 95,035 34,510 359 41,688 72,260 1,681 38,642 380,573 359,667 340,768 1,687 15,687 13 6,909 9,544 3,164 51,082 8,245 226 96,557 1,693 14,149 10 5,239 7,740 2,891 55,997 8,049 – 95,768 1,120 7,697 5 3,487 2,857 1,925 54,381 11,897 – 83,369 17 585 3 855 927 4 1,040 2,063 23 1,037 6,554 2 70 – 82 185 58 1,271 196 4 1,868 $ 15 432 1 644 606 6 676 1,442 27 952 4,801 1 33 – 39 96 38 1,088 144 – 1,439 $ 13 228 1 429 332 4 434 1,040 12 613 3,106 1 8 – 22 18 18 656 124 – 847 0.17 % 1.34 0.07 0.15 % 0.12 % 1.01 0.02 0.55 0.02 0.86 2.07 1.56 2.02 2.40 1.98 2.65 1.72 0.12 0.45 – 1.19 1.94 1.83 2.49 2.38 1.77 1.93 0.66 1.57 1.45 1.55 1.88 1.66 2.21 1.33 0.06 0.23 – 0.74 1.24 1.31 1.94 1.79 – 1.50 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 $ 477,130 $ 455,435 $ 424,137 $ 8,422 $ 6,240 $ 3,953 1.77 % 1.37 % 0.93 % (1) Deposits by foreign depositors in our domestic bank offices amounted to $29.3 billion (2018: $32.3 billion; 2017: $26.8 billion). Short-term borrowings $ millions, as at or for the year ended October 31 Amounts outstanding at end of year Obligations related to securities sold short Obligations related to securities lent or sold under repurchase agreements Total short-term borrowings Obligations related to securities sold short Average balance Maximum month-end balance Average interest rate Obligations related to securities lent or sold under repurchase agreements Average balance Maximum month-end balance Average interest rate Fees paid to the shareholders’ auditor $ millions, for the year ended October 31 Audit fees (1) Audit-related fees (2) Tax fees (3) All other fees (4) Total 2019 2018 2017 $ $ $ $ 15,635 53,623 69,258 16,501 18,448 1.76 % 51,408 57,346 $ $ $ $ 13,782 33,571 47,353 15,300 17,162 1.78 % 41,063 45,343 $ $ $ $ 13,713 29,995 43,708 13,789 15,211 1.64 % 26,303 33,261 2.33 % 1.79 % 0.97 % $ 2019 22.3 1.7 1.9 0.1 $ 2018 26.0 2.5 2.4 0.1 $ 2017 21.1 2.6 1.1 0.1 $ 26.0 $ 31.0 $ 24.9 (1) (2) (3) (4) For the audit of CIBC’s annual financial statements and the audit of certain of its subsidiaries, as well as other services normally provided by the principal auditor in connection with CIBC’s statutory and regulatory filings. Audit fees also include the audit of internal control 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 accounting consultation, various agreed upon procedures and translation of financial reports. For tax compliance and advisory services. Includes fees for non-audit services. CIBC 2019 ANNUAL REPORT 93 Consolidated financial statements Consolidated financial statements 95 96 99 102 103 104 105 106 107 108 Financial reporting responsibility Independent auditor’s report – Canadian generally accepted auditing standards Report of independent registered public accounting firm – Standards of the Public Company Accounting Oversight Board (United States) Report of independent registered public accounting firm – Internal control over financial reporting 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 Note 16 – Note 17 – Note 18 – Note 19 – Note 20 – Note 21 – Note 22 – Note 23 – Note 24 – Note 25 – Capital Trust securities Share-based payments Post-employment benefits Income taxes Earnings per share Commitments, guarantees and pledged assets Contingent liabilities and provisions Concentration of credit risk Related-party transactions Investments in equity-accounted associates and joint ventures Significant subsidiaries Financial instruments – disclosures Note 26 – Note 27 – Note 28 – Offsetting financial assets and liabilities Note 29 – Note 30 – Note 31 – Interest income and expense Segmented and geographic information Future accounting policy changes 108 Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 – – – – – – Basis of preparation and summary of significant 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 Deposits Note 7 Note 8 Note 9 Note 10 – Note 11 – Other liabilities Note 12 – Note 13 – Note 14 – Note 15 – Derivative instruments Designated accounting hedges Subordinated indebtedness Common and preferred share capital 123 131 133 136 143 146 147 149 149 149 150 154 159 159 163 164 166 172 174 175 177 180 181 182 183 184 185 186 187 190 94 CIBC 2019 ANNUAL REPORT Consolidated financial statements Financial reporting responsibility 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. CIBC’s system of internal controls and supporting procedures are designed to provide reasonable assurance that transactions are authorized, assets are safeguarded and proper records are maintained. These internal controls and supporting procedures include the communication of policies and guidelines, the establishment of an organizational structure that provides appropriate and well-defined responsibilities and accountability, and the careful selection and training of qualified staff. 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. CIBC’s Chief Executive Officer and Chief Financial Officer have certified CIBC’s annual filings with the SEC under the U.S. Sarbanes-Oxley Act 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 unfettered 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 service quality of the shareholders’ auditor and internal auditors. Ernst & Young LLP, the shareholders’ auditor, obtains 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 Hratch Panossian Chief Financial Officer December 4, 2019 CIBC 2019 ANNUAL REPORT 95 Consolidated financial statements Independent auditor’s report To the shareholders and directors of Canadian Imperial Bank of Commerce Opinion We have audited the consolidated financial statements of Canadian Imperial Bank of Commerce (CIBC), which comprise the consolidated balance sheets as at October 31, 2019 and 2018, and the consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and the consolidated statements of cash flows for each of the years in the three-year period ended October 31, 2019, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “consolidated financial statements”). In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of CIBC as at October 31, 2019 and 2018, and its consolidated financial performance and its consolidated cash flows for each of the years in the three-year period ended October 31, 2019 in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Basis for opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the ”Auditor’s responsibilities for the audit of the consolidated financial statements” section of our report. We are independent of CIBC in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the year ended October 31, 2019. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the “Auditor’s responsibilities for the audit of the consolidated financial statements” section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. Key audit matter Allowance for credit losses As more fully described in Note 1 and Note 5 to the consolidated financial statements, CIBC has used an expected credit loss (ECL) model to recognize $1,915 million in allowances for credit losses on its consolidated balance sheet. ECL allowances represent an unbiased and probability-weighted amount, which is determined by evaluating a range of possible outcomes and reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. Forward-looking information (FLI), which involves significant judgment, is explicitly incorporated into the estimation of ECL allowances. ECL allowances are measured at amounts equal to either (i) 12-month ECL; or (ii) lifetime ECL for those financial instruments that have experienced a significant increase in credit risk (SICR) since initial recognition or when there is objective evidence of impairment. Auditing the allowance for credit losses was complex and required the involvement of specialists due to the inherent complexity of the models, assumptions, judgments and the interrelationship of these variables in measuring the ECL. Significant assumptions and judgments with respect to the estimation of the allowance for credit losses include (i) the determination of when a loan has experienced a SICR; (ii) the forecast of FLI for multiple economic scenarios and the probability weighting of those scenarios; (iii) the calculation of both 12-month and lifetime credit losses; and (iv) the application of expert credit judgment. The allowance for credit losses is a significant estimate for which variations in model methodology, assumptions and judgments can have a material effect on the measurement of expected credit losses. How our audit addressed the key audit matter We obtained an understanding, evaluated the design and tested the operating effectiveness of management’s controls, including those related to technology, over the allowance for credit losses. The controls we tested included, amongst others, controls over model development and validation, economic forecasting, data completeness and accuracy, and the governance and oversight controls over the review of the overall ECL, including the application of expert credit judgment. To test the allowance for credit losses, amongst other procedures, we assessed, with the assistance of our credit risk specialists, whether the methodology and assumptions used in significant models that estimate ECL are consistent with the requirements of IFRS, CIBC’s own historical data and industry standards. This included an assessment of the thresholds used to determine a SICR. For a sample of FLI variables, with the assistance of our economic specialists, we evaluated management’s forecasting methodology and compared management’s FLI to independently derived forecasts and publicly available information. We also evaluated the scenario probability weights used in the ECL models. On a sample basis, we independently recalculated the ECL. We assessed the application of management’s expert credit judgment by evaluating that the amounts recorded were reflective of the credit quality and macroeconomic trends, among other factors. We tested the completeness and accuracy of data used in the measurement of the ECL. We also assessed the adequacy of the allowance for credit loss financial statement note disclosures. 96 CIBC 2019 ANNUAL REPORT Consolidated financial statements Key audit matter Fair value measurement of derivatives As more fully described in Note 2 and Note 12 of the consolidated financial statements, CIBC has recognized $24 billion in derivative assets and $25 billion in derivative liabilities. The portfolio of derivative instruments is presented by level within the fair value hierarchy, with a majority of the portfolio classified as Level 2. While derivative instruments classified as Level 1 have quoted market prices, those classified as Level 2 and 3 require valuation techniques that use observable and non-observable market inputs, and involve the application of management judgment. Auditing the valuation of certain derivatives was complex and required the application of significant auditor judgment, as well as involvement of valuation specialists for those derivatives where the fair value was determined based on complex models and/or where the fair value was calculated based on non-observable market inputs. The significant inputs and assumptions used to determine fair value, among other factors, included interest rates, foreign exchange rates, equity prices, commodity prices, correlations and volatilities. The valuation of derivatives is sensitive to these inputs as they are forward-looking and could be affected by future economic and market conditions. How our audit addressed the key audit matter We obtained an understanding, evaluated the design and tested the operating effectiveness of management’s controls, including those related to technology, over the valuation of CIBC’s derivatives portfolio. For example, we tested controls over the development and validation of models used to determine the fair value of derivatives, as well as controls over the independent price verification process, which includes a review of the significant inputs described above. Key audit matter To test the valuation of these derivatives, our audit procedures included, among others, an evaluation of the methodologies and significant inputs used by CIBC. With the assistance of our valuation specialists, we performed an independent valuation for a sample of derivatives to assess the modelling assumptions and significant inputs used by CIBC to estimate the fair value. We independently obtained significant inputs and assumptions from external market data in performing our independent valuation. For a sample of models and with the assistance of our valuation specialists, we assessed the valuation methodologies used by CIBC to determine fair value. We also assessed the adequacy of the disclosures related to the fair value measurement of derivatives. Measurement of uncertain tax provisions CIBC describes its significant accounting judgments, estimates and assumptions in relation to accounting for uncertainty in income taxes in Note 19 of the consolidated financial statements. CIBC operates in a tax environment with constantly evolving and complex tax legislation for financial institutions. Uncertainty in tax positions may arise as tax legislation is subject to interpretation. Estimating uncertain tax provisions requires management judgment to be applied in the interpretation of tax laws across the various jurisdictions in which CIBC operates. This includes judgment in the determination of whether it is probable that CIBC will have to make a payment to tax authorities relating to certain complex tax positions and, when probable, the measurement of such provision when recognized. Auditing the recognition and measurement of CIBC’s uncertain tax provisions required the involvement of our tax professionals and the application of judgment, including the interpretation of tax legislation and jurisprudence. How our audit addressed the key audit matter We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over the recognition and measurement of CIBC’s uncertain tax provisions. This included controls over management’s assessment of the technical merits of tax positions and the process related to the measurement of any related income tax provisions. With the assistance of our tax professionals, our audit procedures included, among others, an assessment of the technical merits of income tax positions taken by CIBC and any related uncertain tax provisions recorded. Furthermore, we reviewed and evaluated correspondence from the relevant income tax authorities, income tax advice obtained by CIBC from external advisors, and CIBC’s internal documentation with respect to uncertain tax positions. We evaluated the reasonability of CIBC’s treatment of any new information received during the year relating to the amounts recorded. We evaluated the application of CIBC’s accounting policy for income taxes and whether it had been applied consistently and is in accordance with IFRS and assessed the adequacy of income tax disclosures. Other information Management is responsible for the other information. The other information comprises: (cid:129) (cid:129) Management’s discussion and analysis; and The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. We obtained management’s discussion and analysis and the Annual Report prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. CIBC 2019 ANNUAL REPORT 97 Consolidated financial statements Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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. In preparing the consolidated financial statements, management is responsible for assessing CIBC’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate CIBC or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing CIBC’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: (cid:129) Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of CIBC’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on CIBC’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause CIBC to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within CIBC to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. /s/ Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada December 4, 2019 98 CIBC 2019 ANNUAL REPORT Consolidated financial statements Report of independent registered public accounting firm To the shareholders and directors of Canadian Imperial Bank of Commerce Opinion on the consolidated financial statements We have audited the accompanying consolidated balance sheets of Canadian Imperial Bank of Commerce (CIBC) as of October 31, 2019 and 2018, the related 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, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of CIBC at October 31, 2019 and 2018, and its consolidated financial performance and its consolidated cash flows for each of the years in the three-year period ended October 31, 2019 in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Adoption of IFRS 9 As discussed in Note 1 to the consolidated financial statements, CIBC changed its method of accounting for the classification and measurement of financial instruments in 2018 due to the adoption of IFRS 9 “Financial Instruments”. Our opinion is not qualified with respect to this matter. Report on internal control over financial reporting We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), CIBC’s internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated December 4, 2019 expressed an unqualified opinion thereon. Basis for opinion These consolidated financial statements are the responsibility of CIBC’s management. Our responsibility is to express an opinion on CIBC’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to CIBC in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. CIBC 2019 ANNUAL REPORT 99 Consolidated financial statements Description of the matter Allowance for credit losses As more fully described in Note 1 and Note 5 to the consolidated financial statements, CIBC has used an expected credit loss (ECL) model to recognize $1,915 million in allowances for credit losses on its consolidated balance sheet. ECL allowances represent an unbiased and probability-weighted amount, which is determined by evaluating a range of possible outcomes and reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. Forward-looking information (FLI), which involves significant judgment, is explicitly incorporated into the estimation of ECL allowances. ECL allowances are measured at amounts equal to either (i) 12-month ECL; or (ii) lifetime ECL for those financial instruments that have experienced a significant increase in credit risk (SICR) since initial recognition or when there is objective evidence of impairment. Auditing the allowance for credit losses was complex and required the involvement of specialists due to the inherent complexity of the models, assumptions, judgments and the interrelationship of these variables in measuring the ECL. Significant assumptions and judgments with respect to the estimation of the allowance for credit losses include (i) the determination of when a loan has experienced a SICR; (ii) the forecast of FLI for multiple economic scenarios and the probability weighting of those scenarios; (iii) the calculation of both 12-month and lifetime credit losses; and (iv) the application of expert credit judgment. The allowance for credit losses is a significant estimate for which variations in model methodology, assumptions and judgments can have a material effect on the measurement of expected credit losses. How we addressed the matter in our audit We obtained an understanding, evaluated the design and tested the operating effectiveness of management’s controls, including those related to technology, over the allowance for credit losses. The controls we tested included, amongst others, controls over model development and validation, economic forecasting, data completeness and accuracy, and the governance and oversight controls over the review of the overall ECL, including the application of expert credit judgment. To test the allowance for credit losses, amongst other procedures, we assessed, with the assistance of our credit risk specialists, whether the methodology and assumptions used in significant models that estimate ECL are consistent with the requirements of IFRS, CIBC’s own historical data and industry standards. This included an assessment of the thresholds used to determine a SICR. For a sample of FLI variables, with the assistance of our economic specialists, we evaluated management’s forecasting methodology and compared management’s FLI to independently derived forecasts and publicly available information. We also evaluated the scenario probability weights used in the ECL models. On a sample basis, we independently recalculated the ECL. We assessed the application of management’s expert credit judgment by evaluating that the amounts recorded were reflective of the credit quality and macroeconomic trends, among other factors. We tested the completeness and accuracy of data used in the measurement of the ECL. We also assessed the adequacy of the allowance for credit loss financial statement note disclosures. Description of the matter Fair value measurement of derivatives As more fully described in Note 2 and Note 12 of the consolidated financial statements, CIBC has recognized $24 billion in derivative assets and $25 billion in derivative liabilities. The portfolio of derivative instruments is presented by level within the fair value hierarchy, with a majority of the portfolio classified as Level 2. While derivative instruments classified as Level 1 have quoted market prices, those classified as Level 2 and 3 require valuation techniques that use observable and non-observable market inputs, and involve the application of management judgment. Auditing the valuation of certain derivatives was complex and required the application of significant auditor judgment, as well as involvement of valuation specialists for those derivatives where the fair value was determined based on complex models and/or where the fair value was calculated based on non-observable market inputs. The significant inputs and assumptions used to determine fair value, among other factors, included interest rates, foreign exchange rates, equity prices, commodity prices, correlations and volatilities. The valuation of derivatives is sensitive to these inputs as they are forward-looking and could be affected by future economic and market conditions. How we addressed the matter in our audit We obtained an understanding, evaluated the design and tested the operating effectiveness of management’s controls, including those related to technology, over the valuation of CIBC’s derivatives portfolio. For example, we tested controls over the development and validation of models used to determine the fair value of derivatives, as well as controls over the independent price verification process, which includes a review of the significant inputs described above. To test the valuation of these derivatives, our audit procedures included, among others, an evaluation of the methodologies and significant inputs used by CIBC. With the assistance of our valuation specialists, we performed an independent valuation for a sample of derivatives to assess the modelling assumptions and significant inputs used by CIBC to estimate the fair value. We independently obtained significant inputs and assumptions from external market data in performing our independent valuation. For a sample of models and with the assistance of our valuation specialists, we assessed the valuation methodologies used by CIBC to determine fair value. We also assessed the adequacy of the disclosures related to the fair value measurement of derivatives. 100 CIBC 2019 ANNUAL REPORT Consolidated financial statements Description of the matter Measurement of uncertain tax provisions CIBC describes its significant accounting judgments, estimates and assumptions in relation to accounting for uncertainty in income taxes in Note 19 of the consolidated financial statements. CIBC operates in a tax environment with constantly evolving and complex tax legislation for financial institutions. Uncertainty in tax positions may arise as tax legislation is subject to interpretation. Estimating uncertain tax provisions requires management judgment to be applied in the interpretation of tax laws across the various jurisdictions in which CIBC operates. This includes judgment in the determination of whether it is probable that CIBC will have to make a payment to tax authorities relating to certain complex tax positions and, when probable, the measurement of such provision when recognized. Auditing the recognition and measurement of CIBC’s uncertain tax provisions required the involvement of our tax professionals and the application of judgment, including the interpretation of tax legislation and jurisprudence. How we addressed the matter in our audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of management’s controls over the recognition and measurement of CIBC’s uncertain tax provisions. This included controls over management’s assessment of the technical merits of tax positions and the process related to the measurement of any related income tax provisions. With the assistance of our tax professionals, our audit procedures included, among others, an assessment of the technical merits of income tax positions taken by CIBC and any related uncertain tax provisions recorded. Furthermore, we reviewed and evaluated correspondence from the relevant income tax authorities, income tax advice obtained by CIBC from external advisors, and CIBC’s internal documentation with respect to uncertain tax positions. We evaluated the reasonability of CIBC’s treatment of any new information received during the year relating to the amounts recorded. We evaluated the application of CIBC’s accounting policy for income taxes and whether it had been applied consistently and is in accordance with IFRS and assessed the adequacy of income tax disclosures. We have served as CIBC’s auditor since 2002. /s/ Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada December 4, 2019 CIBC 2019 ANNUAL REPORT 101 Consolidated financial statements Report of independent registered public accounting firm To the shareholders and directors of Canadian Imperial Bank of Commerce Opinion on internal control over financial reporting We have audited Canadian Imperial Bank of Commerce’s (CIBC) internal control over financial reporting as of October 31, 2019, 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). In our opinion, CIBC maintained, in all material respects, effective internal control over financial reporting as of October 31, 2019, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of CIBC as of October 31, 2019 and 2018, and the related 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, 2019, and the related notes and our report dated December 4, 2019 expressed an unqualified opinion thereon. Basis for opinion 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” section 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to CIBC in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. 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. Definition and limitations of internal control over financial reporting 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 generally accepted accounting principles. 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 generally accepted accounting principles, 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. /s/ Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada December 4, 2019 102 CIBC 2019 ANNUAL REPORT 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) 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 25) Deferred tax assets (Note 19) 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 19) 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 2019 2018 $ 3,840 $ 4,380 13,519 121,310 3,664 56,111 208,652 43,651 12,755 125,798 (1,915) 388,941 23,895 9,167 1,813 5,449 1,969 586 517 20,823 64,219 13,311 101,664 5,488 43,450 207,749 43,058 12,673 109,555 (1,639) 371,396 21,431 10,265 1,795 5,564 1,945 526 601 15,283 57,410 $ 651,604 $ 597,099 $ 178,091 257,502 11,224 38,895 485,712 15,635 1,822 51,801 25,113 9,188 38 19,031 53,370 4,684 2,825 13,591 125 20,972 881 38,394 186 38,580 $ 163,879 240,149 14,380 42,607 461,015 13,782 2,731 30,840 20,973 10,296 43 18,223 49,535 4,080 2,250 13,243 136 18,537 777 34,943 173 35,116 $ 651,604 $ 597,099 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 Nicholas D. Le Pan Director CIBC 2019 ANNUAL REPORT 103 Consolidated financial statements Consolidated statement of income Millions of Canadian dollars, except as noted, for the year ended October 31 2019 2018 2017 Interest income(1) 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 Gains (losses) from financial instruments measured/designated at fair value through profit or loss (FVTPL), net (2017: Trading income (loss) and designated at fair value (FVO) gains (losses), net) Gains (losses) from debt securities measured at fair value through other comprehensive income (FVOCI) and amortized cost, net (2017: Available-for-sale (AFS) debt and equity securities gains, net) (Note 4) Foreign exchange other than trading (FXOTT) Income from equity-accounted associates and joint ventures (Note 25) Other Total revenue Provision for credit losses (Note 5) Non-interest expenses Employee compensation and benefits Occupancy costs Computer, software and office equipment Communications Advertising and business development Professional fees Business and capital taxes Other (Notes 3 and 8) Income before income taxes Income taxes (Note 19) 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 20) Basic Diluted Dividends per common share (in dollars) (Note 15) $ 16,048 2,779 1,474 396 20,697 8,422 291 1,198 198 37 10,146 10,551 475 908 958 458 1,305 1,595 430 313 761 34 304 92 427 8,060 18,611 1,286 5,726 892 1,874 303 359 226 110 1,366 $ 13,901 2,269 1,053 282 17,505 6,240 272 736 174 18 7,440 10,065 420 877 851 510 1,247 1,624 431 357 603 (35) 310 121 453 7,769 17,834 870 5,665 875 1,742 315 327 226 103 1,005 10,856 10,258 $ $ $ $ $ 6,469 1,348 5,121 25 111 4,985 5,096 11.22 11.19 5.60 $ $ $ $ $ 6,706 1,422 5,284 17 89 5,178 5,267 11.69 11.65 5.32 $ $ $ $ $ $ 11,028 1,890 495 180 13,593 3,953 226 254 142 41 4,616 8,977 452 843 744 463 1,034 1,573 427 349 227 143 252 101 695 7,303 16,280 829 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 (1) Interest income included $18.8 billion for the year ended October 31, 2019 (2018: $16.0 billion) calculated based on the effective interest rate method. The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. 104 CIBC 2019 ANNUAL REPORT Consolidated financial statements Consolidated statement of comprehensive income Millions of Canadian dollars, for the year ended October 31 Net income 2019 2018 2017 $ 5,121 $ 5,284 $ 4,718 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 hedges of investments in foreign operations Net change in debt securities measured at FVOCI (2017: AFS debt and equity securities) Net gains (losses) on securities measured at FVOCI Net (gains) losses reclassified to net income Net change in cash flow hedges Net gains (losses) on derivatives designated as cash flow hedges Net (gains) losses 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 Net gains (losses) on equity securities designated at FVOCI Total OCI (1) Comprehensive income Comprehensive income attributable to non-controlling interests Preferred shareholders Common shareholders Comprehensive income attributable to equity shareholders (21) (10) (31) 244 (28) 216 137 (6) 131 (220) 28 (2) 122 5,243 25 111 5,107 5,218 $ $ $ $ 635 (349) 286 (142) (29) (171) (25) (26) (51) 226 (2) 29 317 (1,148) 772 (376) 6 (107) (101) 70 (60) 10 139 (10) n/a (338) $ $ $ $ 5,601 17 89 5,495 5,584 $ $ $ $ 4,380 19 52 4,309 4,361 Includes $44 million of gains for 2019 (2018: $19 million of losses; 2017: $24 million of losses) relating to our investments in equity-accounted associates and joint ventures. (1) n/a Not applicable. Millions of Canadian dollars, for the year ended October 31 Income tax (expense) benefit allocated to each component of OCI Subject to subsequent reclassification to net income Net foreign currency translation adjustments Net gains (losses) on investments in foreign operations Net gains (losses) on hedges of investments in foreign operations Net change in debt securities measured at FVOCI (2017: AFS debt and equity securities) Net gains (losses) on securities measured at FVOCI Net (gains) losses reclassified to net income Net change in cash flow hedges Net gains (losses) on derivatives designated as cash flow hedges Net (gains) losses 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 Net gains (losses) on equity securities designated at FVOCI n/a Not applicable. 2019 2018 2017 $ $ – (16) (16) (36) 10 (26) (49) 2 (47) 77 (10) – (22) $ (31) 43 12 $ 42 (170) (128) 18 8 26 8 9 17 (87) 1 (11) (42) $ (23) 36 13 (23) 22 (1) (54) 4 n/a $ (166) The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. CIBC 2019 ANNUAL REPORT 105 Consolidated financial statements Consolidated statement of changes in equity Millions of Canadian dollars, for the year ended October 31 Preferred shares (Note 15) Balance at beginning of year Issue 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 Issued pursuant to the acquisition of Wellington Financial 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 Compensation expense arising from equity-settled share-based awards Exercise of stock options and settlement of other equity-settled share-based awards Other Balance at end of year Retained earnings Balance at beginning of year Impact of adopting IFRS 9 at November 1, 2017 Impact of adopting IFRS 15 at November 1, 2018 Balance at beginning of year Net income attributable to equity shareholders Dividends (Note 15) Preferred Common Premium on purchase of common shares for cancellation Realized gains (losses) on equity securities designated at FVOCI reclassified from AOCI Other (1) 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 debt securities measured at FVOCI (2017: AFS debt and equity securities) Balance at beginning of year under IAS 39 Impact of adopting IFRS 9 at November 1, 2017 Balance at beginning of year under IFRS 9 Net change in securities measured at FVOCI 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 Net gains (losses) on equity securities designated at FVOCI Impact of adopting IFRS 9 at November 1, 2017 Balance at beginning of year under IFRS 9 Net gains (losses) on equity securities designated at FVOCI Realized gains (losses) on equity securities designated at FVOCI reclassified to retained earnings (2) Balance at end of year Total AOCI, net of income tax Non-controlling interests Balance at beginning of year under IAS 39 Impact of adopting IFRS 9 at November 1, 2017 Balance at beginning of year under IFRS 9 Net income attributable to non-controlling interests Dividends Other Balance at end of year Equity at end of year 2019 2,250 575 – 2,825 $ $ $ 13,243 – – – 377 (30) 1 $ 13,591 2018 1,797 450 3 2,250 $ $ $ 12,548 194 – 47 555 (104) 3 $ 13,243 2017 1,000 800 (3) 1,797 $ $ $ 8,026 3,443 126 – 957 – (4) $ 12,548 $ $ 136 – 16 (27) – 125 $ $ 137 – 31 (32) – 136 $ $ 72 72 7 (15) 1 137 $ 18,537 n/a 6 18,543 5,096 (111) (2,488) (79) 18 (7) $ 20,972 $ 16,101 (144) n/a 15,957 5,267 (89) (2,356) (313) 49 22 $ 18,537 $ 13,584 n/a n/a n/a 4,699 (52) (2,121) – n/a (9) $ 16,101 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 1,024 (31) 993 n/a n/a (139) 216 77 (18) 131 113 (143) (220) (363) (12) 28 16 n/a 65 (2) (18) 45 881 n/a n/a 173 25 (11) (1) 186 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 738 286 1,024 60 (28) 32 (171) (139) 33 (51) (18) (369) 226 (143) (10) (2) (12) 85 85 29 (49) 65 777 202 (4) 198 17 (31) (11) 173 $ $ $ $ $ $ $ $ $ $ $ $ $ 1,114 (376) 738 161 n/a n/a (101) 60 23 10 33 (508) 139 (369) – (10) (10) n/a n/a n/a n/a n/a 452 201 n/a n/a 19 (8) (10) 202 $ 38,580 $ 35,116 $ 31,237 (1) In 2018, includes the recognition of loss carryforwards relating to foreign exchange translation amounts on CIBC’s net investment in foreign operations that were previously reclassified to retained earnings as part of our transition to IFRS in 2012. Includes nil reclassified to retained earnings (2018: $11 million; 2017: n/a), relating to our investments in equity-accounted associates and joint ventures. (2) n/a Not applicable. The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. 106 CIBC 2019 ANNUAL REPORT Consolidated financial statements Consolidated statement of cash flows Millions of Canadian dollars, for the year ended October 31 2019 2018 2017 Cash flows provided by (used in) operating activities Net income Adjustments to reconcile net income to cash flows provided by (used in) operating activities: Provision for credit losses Amortization and impairment (1) Stock options and restricted shares expense Deferred income taxes Losses (gains) from debt securities measured at FVOCI and amortized cost (2017: AFS debt and equity securities (gains), net) Net losses (gains) on disposal of land, buildings and equipment Other non-cash items, net Net changes in operating assets and liabilities Interest-bearing deposits with banks Loans, net of repayments Deposits, net of withdrawals Obligations related to securities sold short Accrued interest receivable Accrued interest payable Derivative assets Derivative liabilities Securities measured at FVTPL (2017: Trading and FVO securities) Other assets and liabilities designated at fair value (2017: 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 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 securities measured/designated at FVOCI and amortized cost (2017: Purchase of AFS securities) Proceeds from sale of securities measured/designated at FVOCI and amortized cost (2017: Proceeds from sale of AFS securities) Proceeds from maturity of debt securities measured at FVOCI and amortized cost (2017: 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 (2) Cash interest paid Cash interest received Cash dividends received Cash income taxes paid $ 5,121 $ 5,284 $ 4,718 1,286 838 16 108 (34) (7) (229) (208) (17,653) 19,838 1,853 (122) 138 (2,484) 4,037 (1,826) 1,222 (309) (909) 20,961 1,824 (10,785) (4,041) 18,635 1,500 (1,001) 568 157 (109) 1 (2,406) (1,290) 870 657 31 69 35 (14) (292) (2,599) (16,155) 20,770 69 (341) 205 2,780 (2,084) (647) (380) (301) 707 2,869 (453) (1,195) (18) 9,867 1,534 (638) 445 186 (417) 6 (2,109) (993) 829 542 7 21 (143) (305) (15) 394 (30,547) 18,407 3,375 (34) 90 3,588 (5,549) (657) 1,071 (1,063) (494) 16,277 398 (10,556) 2,103 2,457 – (55) 792 194 – (7) (1,425) (501) (42,304) (33,011) (37,864) 13,764 12,992 18,787 10,948 (25) - (272) (17,889) 4 (540) 4,380 3,840 10,008 19,840 735 1,549 $ $ 12,402 (315) 200 (255) (7,987) 53 940 3,440 4,380 7,235 16,440 724 1,654 19,368 (2,517) 60 201 (1,965) (51) (60) 3,500 3,440 4,526 12,611 949 2,204 $ $ $ $ (1) Comprises amortization and impairment of buildings, furniture, equipment, leasehold improvements, goodwill, software and other intangible assets. (2) Includes restricted balance of $479 million (2018: $438 million; 2017: $436 million). The accompanying notes and shaded sections in “MD&A – Management of risk” are an integral part of these consolidated financial statements. CIBC 2019 ANNUAL REPORT 107 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 (SBUs) – Canadian Personal and Small Business Banking, Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets – CIBC provides a full range of financial products and services to 10 million personal banking, business, public sector and institutional clients in Canada, the U.S. and around the world. Refer to Note 30 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, except for the adoption of IFRS 9 “Financial Instruments” effective November 1, 2017 and the adoption of IFRS 15 “Revenue from Contracts with Customers” effective November 1, 2018, both of which were adopted without restatement of comparative periods as discussed below under the sections titled “Accounting for financial instruments” and “Fee and commission income”. 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 December 4, 2019. 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, allowance for credit losses, the evaluation of whether to consolidate structured entities (SEs), asset impairment, income taxes, provisions and contingent liabilities, post-employment and other long-term benefit plan assumptions and valuation of self-managed loyalty points programs. 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 control of its subsidiaries through a shareholding of more than 50% of the voting rights, 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 26. 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. 108 CIBC 2019 ANNUAL REPORT 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, 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 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. In 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 FVOCI 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, 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, including a partial disposal of a foreign operation that involves the loss of control. On partial disposal of a foreign operation that does not involve the loss of control, 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. Accounting for financial instruments CIBC adopted IFRS 9 “Financial Instruments” (IFRS 9) in place of IAS 39 “Financial Instruments: Recognition and Measurement” (IAS 39) as of November 1, 2017 to comply with OSFI’s advisory that requires that domestic systemically important banks (D-SIBs) adopt IFRS 9 for their annual periods beginning on November 1, 2017, one year earlier than required by the IASB. We applied IFRS 9 on a retrospective basis. As permitted, we did not restate our prior period comparative consolidated financial statements. Amounts reported relating to the year ended October 31, 2017 are reported under IAS 39 and are therefore not comparable to the information presented for 2018 or 2019. The adoption of IFRS 9 in the first quarter of 2018 resulted in changes in accounting policy in two principal areas, classification and measurement and impairment, as described in more detail below. We had previously early adopted the “own credit” provisions of IFRS 9 as of November 1, 2014 and we have elected, as a policy choice permitted under IFRS 9, to continue to apply the hedge accounting requirements of IAS 39. Classification and measurement of financial instruments under IAS 39 CIBC recognizes financial instruments on its consolidated balance sheet when it becomes a party to the contractual provisions of the instrument. Under IAS 39, all financial assets were classified at initial recognition as trading, AFS, fair value option (FVO), held-to-maturity (HTM), or loans and receivables, based on the purpose for which the instrument was acquired and its characteristics. All financial assets and derivatives were 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 could not be reliably measured. Reclassification of non-derivative financial assets out of trading to loans and receivables was allowed when they were no longer held for trading, and if they met the definition of loans and receivables and we had 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 was also allowed under rare circumstances. Non-derivative financial assets could be reclassified out of AFS to loans and receivables if they met the definition of loans and receivables and we had 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 had the intention to hold the financial assets until maturity. Financial liabilities, other than derivatives, obligations related to securities sold short and FVO liabilities, were measured at amortized cost. Derivatives, obligations related to securities sold short and FVO liabilities were measured at fair value. Interest expense was recognized on an accrual basis using the effective interest rate method. Loans and receivables Under IAS 39, loans and receivables were defined as non-derivative financial assets with fixed or determinable payments that did not have a quoted market price in an active market and for which we did not intend to sell immediately or in the near term at the time of inception. Loans and receivables were recognized initially at fair value, which represents the cash advanced to the borrower plus direct and incremental transaction costs. Subsequently, they were measured at amortized cost, using the effective interest rate method, net of an allowance for credit losses. Interest income was recognized on an accrual basis using the effective interest rate method. Certain loans and receivables could be designated at fair value (see below). Trading financial instruments Under IAS 39, trading financial instruments were defined as assets and liabilities that were held for trading activities or that were part of a managed portfolio with a pattern of short-term profit-taking. These were measured initially at fair value. Loans and receivables that we intended to sell immediately or in the near term were classified as trading financial instruments. Trading financial instruments were 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 were included in Non-interest income as Trading income (loss), except to the extent they were economically hedging an FVO asset or liability, in which case the gains and losses were included in FVO gains (losses), net. Dividends and interest income earned on trading securities and dividends and interest expense incurred on securities sold short were included in Interest income and Interest expense, respectively. CIBC 2019 ANNUAL REPORT 109 Consolidated financial statements AFS financial assets Under IAS 39, AFS financial assets were defined as non-derivative financial assets that were not classified as trading, FVO or loans and receivables, and were measured initially at fair value, plus direct and incremental transaction costs. Only equity instruments whose fair value could not be reliably measured were measured at cost. We determined that all of our equity securities had reliable fair values. As a result, all AFS financial assets were remeasured at FVOCI subsequent to initial recognition, except that foreign exchange gains or losses on AFS debt instruments were recognized in the consolidated statement of income. Unrealized foreign exchange gains or losses on AFS equity securities, along with all other fair value changes, were recognized in OCI until the investment was sold or impaired, whereupon the cumulative gains and losses previously recognized in OCI were 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 were included in AFS securities gains (losses), net. Dividends and interest income from AFS financial assets were included in Interest income. Designated at fair value financial instruments Under IAS 39, FVO financial instruments were defined as those that we designated on initial recognition as instruments that we would measure at fair value through the consolidated statement of income. This designation, once made, was irrevocable. In addition to the requirement that reliable fair values were available, there were restrictions imposed by IFRS and by OSFI on the use of this designation. The criteria for applying the FVO at inception were met when: (i) the application of the FVO eliminated or significantly reduced the measurement inconsistency that otherwise would arise from measuring assets or liabilities on a different basis; or (ii) the financial instruments were part of a portfolio which was managed on a fair value basis, in accordance with our investment strategy, and were reported internally on that basis. FVO could also be applied to financial instruments that had one or more embedded derivatives that would otherwise require bifurcation as they significantly modified 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 were managed as economic hedges of the FVO financial instruments, were included in FVO gains (losses), net. Dividends and interest earned and interest expense incurred on FVO assets and liabilities were included in Interest income and Interest expense, respectively. Changes in the fair value of FVO liabilities that were attributable to changes in own credit risk were recognized in OCI. Classification and measurement of financial instruments under IFRS 9 Under IFRS 9, all financial assets must be classified at initial recognition as financial instruments mandatorily measured at FVTPL (trading and non-trading), financial instruments measured at amortized cost, debt financial instruments measured at FVOCI, equity financial instruments designated at FVOCI, or financial instruments designated at FVTPL, based on the contractual cash flow characteristics of the financial assets and the business model under which the financial assets are managed. All financial assets and derivatives are required to be measured at fair value with the exception of financial assets measured at amortized cost. Financial assets are required to be reclassified when and only when the business model under which they are managed has changed. All reclassifications are to be applied prospectively from the reclassification date. 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 FVTPL. The SPPI test is conducted to identify whether the contractual cash flows of a financial instrument are “solely payments of principal and interest” such that any variability in the contractual cash flows is consistent with a “basic lending arrangement”. “Principal” for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset, for example, due to repayments of principal or amortization of the premium/ discount. “Interest” for the purpose of this test is defined as the consideration for the time value of money and credit risk, which are the most significant elements of interest within a lending arrangement. Contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. 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 payouts, are measured at FVTPL. For debt instrument financial assets that meet the SPPI test, classification at initial recognition is 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 are classified as FVTPL. Debt instruments that are managed on a “hold to collect and for sale” basis are classified as FVOCI for debt. Debt instruments that are managed on a “hold to collect” basis are classified as amortized cost. We consider the following in our determination of the applicable business model for financial assets: I) II) III) IV) The business purpose of the portfolio; The risks that are being managed and the type of business activities that are being carried out on a day-to-day basis to manage the risks; The basis on which performance of the portfolio is being evaluated; and The frequency and significance of sales activity. All equity instrument financial assets are classified at initial recognition as FVTPL unless they are not held with the intent for short-term profit-taking and an irrevocable designation is made to classify the instrument as FVOCI for equities. The classification and measurement of financial liabilities remain essentially unchanged from the IAS 39 requirements, except that changes in the fair value of liabilities designated at FVTPL using the FVO which are attributable to changes in own credit risk are presented in OCI, rather than profit or loss. We early adopted the “own credit” provisions of IFRS 9 as of November 1, 2014. Derivatives continue to be measured at FVTPL under IFRS 9, except to the extent that they are designated in a hedging relationship, in which case the IAS 39 hedge accounting requirements continue to apply. Financial instruments mandatorily measured at FVTPL (trading and non-trading) Under IFRS 9, trading financial instruments are mandatorily measured at FVTPL as they are held for trading purposes or are part of a managed portfolio with a pattern of short-term profit-taking. Non-trading financial assets are also mandatorily measured at fair value if their contractual cash flow characteristics do not meet the SPPI test or if they are managed together with other financial instruments on a fair value basis. Trading and non-trading financial instruments mandatorily measured at FVTPL 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 Gains (losses) from financial instruments measured/designated at FVTPL, net. Interest income and dividends earned on trading and non-trading securities and dividends and interest expense incurred on securities sold short are included in Interest income and Interest expense, respectively. Financial instruments designated at FVTPL (fair value option) Under IFRS 9, financial instruments designated at FVTPL are those that we voluntarily designate at initial recognition as instruments that we will measure at fair value through the consolidated statement of income that would otherwise fall into a different accounting category. As was the case under IAS 39, the 110 CIBC 2019 ANNUAL REPORT Consolidated financial statements FVO designation, once made, is irrevocable and can only be applied if reliable fair values are available, when doing so eliminates or significantly reduces the measurement inconsistency that would otherwise arise from measuring assets or liabilities on a different basis and if certain OSFI requirements are met. Financial liabilities may also be designated at FVTPL when they 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. Designation at FVTPL may also be applied to financial liabilities that have one or more embedded derivatives that would otherwise require bifurcation. Unlike IAS 39, however, there is no need to apply FVO to equity instruments as the default accounting is financial instruments mandatorily measured at FVTPL. As was the case under IAS 39, we apply the FVO to certain mortgage commitments. Gains and losses realized on dispositions and unrealized gains and losses from changes in the fair value of FVO financial instruments are treated in the same manner as financial instruments which are mandatorily measured at FVTPL, except that changes in the fair value of FVO liabilities that are attributable to changes in own credit risk are recognized in OCI. Dividends and interest earned and interest expense incurred on FVO assets and liabilities are included in Interest income and Interest expense, respectively. Financial assets measured at amortized cost Under IFRS 9, financial assets measured at amortized cost are debt financial instruments with contractual cash flows that meet the SPPI test and are managed on a “hold to collect” basis. These financial assets are recognized initially at fair value plus or minus direct and incremental transaction costs, and are subsequently measured at amortized cost, using the effective interest rate method, net of an allowance for expected credit losses (ECL). Consistent with IAS 39, loans measured at amortized cost under IFRS 9 include residential mortgages, personal loans, credit cards and most business and government loans. Most securities classified as HTM under IAS 39 and certain portfolios of treasury securities that were classified as AFS under IAS 39 (but which are managed on a “hold to collect” basis) are also classified as amortized cost under IFRS 9. Also consistent with IAS 39, most deposits with banks, securities purchased under resale agreements, cash collateral on securities borrowed and most customers’ liability under acceptances are accounted for at amortized cost under IFRS 9. Debt financial assets measured at FVOCI Under IFRS 9, debt financial instruments measured at FVOCI are non-derivative financial assets with contractual cash flows that meet the SPPI test and are managed on a “hold to collect and for sale” basis. Subsequent measurement of debt instruments classified at FVOCI under IFRS 9 operates in a similar manner to AFS debt securities under IAS 39, except that the ECL impairment model must be applied to these instruments under IFRS 9. As a result, FVOCI debt instruments are measured initially at fair value, plus direct and incremental transaction costs. Subsequent to initial recognition, FVOCI debt instruments are remeasured at FVOCI, with the exception that changes in ECL allowances in addition to related foreign exchange gains or losses are recognized in the consolidated statement of income. Cumulative gains and losses previously recognized in OCI are transferred from AOCI to the consolidated statement of income when the debt instrument is sold. Realized gains and losses on sale, determined on an average cost basis, and changes in ECL allowances, are included in Gains (losses) from debt securities measured at FVOCI and amortized cost, net in the consolidated statement of income. Interest income from FVOCI debt instruments is included in Interest income. FVOCI debt instruments include our treasury securities which are managed on a “hold to collect and for sale” basis. A debt financial instrument is classified as impaired (stage 3) when one or more events that have a detrimental impact on the estimated future cash flows of that financial instrument have occurred after its initial recognition. Evidence of impairment includes indications that the borrower is experiencing significant financial difficulties, or a default or delinquency has occurred. Equity financial instruments designated at FVOCI Under IFRS 9, equity financial instruments are measured at FVTPL unless an irrevocable designation is made to measure them at FVOCI. Gains or losses from changes in the fair value of equity instruments designated at FVOCI, including any related foreign exchange gains or losses, are recognized in OCI. In contrast to AFS equity securities under IAS 39, amounts recognized in OCI will not be subsequently recycled to profit or loss, with the exception of dividends, which are recognized as interest income when received in the consolidated statement of income. Instead, cumulative gains or losses upon derecognition of the equity instrument will be transferred within equity from AOCI to retained earnings and presented in Realized gains (losses) on equity securities designated at FVOCI reclassified to retained earnings in the consolidated statement of changes in equity. Financial assets designated as FVOCI include non-trading equity securities, primarily related to our investment in private companies and limited partnerships. Impairment of financial assets under IAS 39 We classified a loan as impaired when, in our opinion, there was objective evidence of impairment as a result of one or more loss events that 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 included indications that the borrower was experiencing significant financial difficulties, or a default or delinquency had occurred. Generally, loans on which repayment of principal or payment of interest was contractually 90 days in arrears were automatically considered impaired unless they were fully secured and in the process of collection. Notwithstanding management’s assessment of collectability, such loans were considered impaired if payments were 180 days in arrears. Exceptions were as follows: (cid:129) Credit card loans were not classified as impaired and were fully written off at the earlier of the notice of bankruptcy, settlement proposal, enlistment of credit counselling services, or when payments were contractually 180 days in arrears. Loans guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency were classified as impaired only when payments were contractually 365 days in arrears. (cid:129) In certain circumstances, we could modify a loan for economic or legal reasons related to a borrower’s financial difficulties. Once a loan was modified, if management still did not expect full collection of payments under the modified loan terms, the loan was classified as impaired. An impaired loan was 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 had been classified as impaired, interest income was 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 was accrued only to the extent that there was an expectation of receipt. A loan was no longer considered impaired when all past due amounts, including interest, had been recovered, and it was determined that the principal and interest were 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 was modified and management expected full collection of payments under the modified loan terms, the loan was not considered impaired. No portion of cash received on an impaired loan was recognized in the consolidated statement of income until the loan returned to unimpaired status. Loans were written off, either partially or in full, against the related allowance for credit losses when we judged that there was no realistic prospect of future recovery in respect of amounts written off. When loans were secured, this was generally after all collateral had been realized or transferred to CIBC, or CIBC 2019 ANNUAL REPORT 111 Consolidated financial statements in certain circumstances, when the net realizable value of any collateral and other available information suggested that there was no reasonable expectation of further recovery. In subsequent periods, any recoveries of amounts previously written off were credited to the provision for credit losses. Allowance for credit losses Under IAS 39, allowance for credit losses consisted of individual and collective components: Individual allowance We conducted 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 established an allowance for credit losses when there was objective evidence that a loan is impaired. Collective allowance Loans were grouped in portfolios of similar credit risk characteristics and impairment was assessed on a collective basis in two circumstances: (i) (ii) Incurred but not yet identified credit losses – for groups of individually assessed loans for which no objective evidence of impairment had been identified on an individual basis: (cid:129) A collective allowance was provided for losses which we estimated were inherent in the business and government portfolio as at the reporting date, but which had not yet been specifically identified from an individual assessment of the loan. The collective allowance was established with reference to expected loss rates associated with different credit portfolios at different risk levels and the estimated time period for losses that were present but yet to be specifically identified. We also considered estimates of the time periods over which losses that were present would be identified and a provision taken, our view of economic and portfolio trends, and evidence of credit quality improvements or deterioration. The period between a loss occurring and its identification was estimated by management for each identified portfolio. The parameters that affected the collective allowance calculation were updated regularly, based on our experience and that of the market in general. Expected loss rates were 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 reflected our historical loss experience and were supplemented by data derived from defaults in the public debt markets. Historical loss experience was adjusted based on current observable data to reflect the effects of current conditions. LGD estimates were based on our experience over past years. (cid:129) (cid:129) For groups of loans where each loan was not considered to be individually significant: (cid:129) Residential mortgages, credit card loans, personal loans, and certain small business loan portfolios consisted of large numbers of homogeneous balances of relatively small amounts, for which collective allowances were 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 enabled CIBC to determine appropriate PD and LGD parameters, which were used in the calculation of the collective allowance. For credit card loans, the historical loss experience enabled CIBC to calculate roll-rate models in order to determine an allowance amount driven by flows to write-off. We also considered estimates of the time periods over which losses that were 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 affected the collective allowance calculation were updated regularly, based on our experience and that of the market in general. (cid:129) (cid:129) Individual and collective allowances were provided for off-balance sheet credit exposures that were not measured at fair value. These allowances were included in Other liabilities. AFS debt instruments An AFS debt instrument was identified as impaired when there was objective observable evidence about our inability to collect the contractual principal or interest. When an AFS debt instrument was determined to be impaired, an impairment loss was 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 were reversed in the consolidated statement of income if the fair value subsequently increases and the increase could 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 existed if there had been a significant or prolonged decline in the fair value of the investment below its cost, or if there was information about significant adverse changes in the technological, market, economic, or legal environment in which the issuer operates, or if the issuer was experiencing significant financial difficulty. When an AFS equity instrument was determined to be impaired, an impairment loss was 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 could not be subsequently reversed. Further decreases in fair value subsequent to the recognition of an impairment loss were recognized directly in the consolidated statement of income, and subsequent increases in fair value were recognized in OCI. Impairment of financial assets under IFRS 9 Under IFRS 9, ECL allowances are recognized on all financial assets that are debt instruments classified either as amortized cost or FVOCI and for all loan commitments and financial guarantees that are not measured at FVTPL. The application of an ECL model represents a significant change from the incurred loss model under IAS 39. 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. Forward-looking information is explicitly incorporated into the estimation of ECL allowances, which involves significant judgment (see Note 5 for additional details). In contrast, the incurred loss model under IAS 39 incorporated a single best estimate, the time value of money and information about past events and current conditions. ECL allowances for loans and acceptances are included in allowance for credit losses on the consolidated balance sheet. ECL allowances for FVOCI debt securities are included as a component of the carrying value of the securities, which are measured at fair value. ECL allowances for other financial assets are included in the carrying value of the instrument. ECL allowances for guarantees and loan commitments are included in other liabilities. 112 CIBC 2019 ANNUAL REPORT Consolidated financial statements ECL allowances are 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 since initial recognition or when there is objective evidence of impairment. In contrast, under the incurred loss model lifetime credit losses were recognized when there was objective evidence of impairment and allowances for incurred but not identified credit losses were also recognized. The calculation of ECL allowances is based on the expected value of three probability-weighted scenarios to measure the expected cash shortfalls, discounted at the effective interest rate. A cash shortfall is the difference between the contractual cash flows that are due and the cash flows that we expect to receive. The key inputs in the measurement of ECL allowances are as follows: The PD is an estimate of the likelihood of default over a given time horizon; The LGD is an estimate of the loss arising in the case where a default occurs at a given time; and The exposure at default (EAD) is an estimate of the exposure at a future default date. Lifetime ECL is the expected credit losses that result from all possible default events over the expected life of a financial instrument. 12-month ECL is the portion of lifetime expected credit losses that represent the expected credit losses that result from default events on the financial instrument that are possible within the 12 months after the reporting date. Due to the inclusion of relative credit deterioration criteria and consideration of forward-looking information, lifetime credit losses are generally recognized earlier under IFRS 9. Stage migration and significant increase in credit risk As a result of the requirements above, financial instruments subject to ECL allowances are categorized into three stages. For performing financial instruments: Stage 1 is comprised of all performing financial instruments which have not experienced a significant increase in credit risk since initial recognition. We recognize 12 months of ECL for stage 1 financial instruments. In assessing whether credit risk has increased significantly, we 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 its initial recognition. Stage 2 is comprised of all performing financial instruments which have experienced a significant increase in credit risk since initial recognition. We 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 significant increase in credit risk since initial recognition, then we revert to recognizing 12 months of ECL as the financial instrument has migrated back to stage 1. We determine whether a financial instrument has experienced a significant increase in credit risk since its initial recognition on an individual financial instrument basis. Changes in the required ECL allowance, including the impact of financial instruments migrating between stage 1 and stage 2, are recorded in Provision for credit losses in the consolidated statement of income. Significant judgment is required in the application of significant increase in credit risk (see Note 5 for additional details). Stage 3 financial instruments are those that we have classified as impaired. We recognize lifetime ECL for all stage 3 financial instruments. We classify a financial instrument as impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial instrument have occurred after its initial recognition. Evidence of impairment includes indications that the borrower is experiencing significant financial difficulties, or a default or delinquency has occurred. Under IFRS 9, all financial instruments on which repayment of principal or payment of interest is contractually 90 days in arrears are automatically considered impaired, except for credit card loans, which are classified as impaired and are fully written off when payments are contractually 180 days in arrears or at the earlier of the notice of bankruptcy, settlement proposal, or enlistment of credit counselling services. The determination of impairment was the same under IAS 39, except that under IAS 39: (i) residential mortgages guaranteed or insured by a Canadian government (federal or provincial) or a Canadian government agency were classified as impaired only when payments were contractually 365 days in arrears; and (ii) residential mortgages guaranteed or insured by a private insurer, or loans that were fully secured and in the process of collection, were classified as impaired only when payments were contractually 180 days in arrears. A financial instrument 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 financial instrument with all criteria for the impaired classification having been remedied. Financial instruments 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 those amounts. When financial instruments 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. Purchased loans Both purchased performing and purchased credit-impaired loans are initially measured at their acquisition date fair values. As a result of recording these loans at fair value, no allowance for credit losses is recognized in the purchase equation at the acquisition date under either IAS 39 or IFRS 9. Fair value is determined by estimating the 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 under both IAS 39 and IFRS 9. The remaining unamortized amounts relating to those loans are recorded in income in the period that the loan is repaid. Under IFRS 9, ECL allowances are established in Provision for credit losses in the consolidated statement of income immediately after the acquisition date based on classifying each loan in stage 1, since the acquisition date is established as the initial recognition date of purchased performing loans for the purpose of assessing whether a significant increase in credit risk has occurred. Subsequent to the acquisition date, ECL allowances are estimated in a manner consistent with our significant increase in credit risk and impairment policies that we apply to loans that we originate. In contrast, under IAS 39 collective allowances were established after the acquisition date as the purchased loan portfolio turned over and to the extent that the credit quality of the acquired portfolio deteriorated. Under IAS 39, actual individual allowances for credit losses were recorded as they arose subsequent to the acquisition date in a manner that was consistent with our IAS 39 impairment policy for loans that we originated. For purchased credit-impaired loans under both IAS 39 and IFRS 9, 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 for purchased credit-impaired loans. Decreases in the expected cash flows will CIBC 2019 ANNUAL REPORT 113 Consolidated financial statements result in an increase in our allowances under IFRS 9, which is consistent with the previous IAS 39 requirements. Increases in the expected cash flows will result in a recovery of the ECL allowance under IFRS 9. Under IAS 39, increases in the expected cash flows resulted in a recovery of provision for credit losses and a reduction in our allowance for credit losses, or if no allowance existed, an increase in interest income. ECL allowances for purchased credit- impaired loans are reported in stage 3. Originated credit impaired financial assets The accounting for originated credit-impaired financial assets operates in a similar manner to the accounting for purchased credit-impaired loans in that originated credit-impaired assets are initially recognized at fair value with no initial expected credit loss allowance as concerns about the collection of future cash flows is instead reflected in the origination date discount. The time value of money component of the discount is amortized to interest income over the expected remaining life of the financial asset using the effective interest rate method. Changes in expectation regarding the contractual cash flows for loans are recognized immediately in provision for credit losses and for securities are recognized in Gains (losses) from debt securities measured at FVOCI and amortized cost, net. This accounting generally applies to financial assets that result from debt restructuring arrangements in which a previously impaired financial asset is exchanged for a new financial asset that is either recognized at a fair value that represents a deep discount to par or for which there are significant concerns over the ability to collect the contractual cash flows. Other significant accounting policies related to the accounting for financial instruments following the application of IFRS 9 are as follows: Determination of fair value The transition to IFRS 9 did not impact the definition of fair value, which continues to be 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 financial instruments mandatorily measured or designated at FVTPL are expensed as incurred under IFRS 9, consistent with the accounting for transaction costs related to trading and FVO instruments under IAS 39. Transaction costs are amortized over the expected life of the instrument using the effective interest rate method for instruments measured at amortized cost under both IFRS 9 and IAS 39, and debt instruments measured at FVOCI under IFRS 9 and as AFS under IAS 39. For equity instruments designated at FVOCI under IFRS 9 and for equity instruments accounted for at AFS under IAS 39, transaction costs are included in the instrument’s carrying value. Date of recognition of securities Under IFRS 9, we continue to account for all securities on our consolidated balance sheet using settlement date accounting, consistent with our accounting under IAS 39. Effective interest rate Under IFRS 9, interest income and expense for all financial instruments measured at amortized cost and for debt securities measured at FVOCI is recognized in Interest income and Interest expense using the effective interest rate method, which is similar to the requirements under IAS 39 for loans and receivables and AFS debt securities. 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. Under IFRS 9, interest income is recognized on stage 1 and stage 2 financial assets measured at amortized cost by applying the effective interest rate to the gross carrying amount of the financial instrument. For stage 3 financial instruments, interest income is recognized using the rate of interest used to discount the estimated future cash flows for the purpose of measuring the impairment loss and applied to the net carrying value of the financial instrument, which is similar to the methodology under IAS 39 applied to impaired loans. Securitizations and derecognition of financial assets Securitization of our own assets provides us with an additional source of liquidity. As we generally retain substantially all of the risks and rewards of the transferred assets, assets remain on the consolidated balance sheet and funding from these transactions is accounted for as Deposits – secured borrowing transactions. Under both IAS 39 and IFRS 9, 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 Under both IFRS 9 and IAS 39, 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. 114 CIBC 2019 ANNUAL REPORT Consolidated financial statements 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. Under both IAS 39 and IFRS 9, 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 applicable allowance. Under IFRS 9 the allowance is calculated using the ECL methodology, while under IAS 39 the allowance, if any, represented the present value of any expected payment when a payment under the guarantee had 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. 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 gains (losses) from financial instruments measured/designated at FVTPL, net under IFRS 9 and FVO gains (losses), net under IAS 39. 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. 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. 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 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. These transactions are classified and measured at amortized cost under IFRS 9, as they meet the SPPI criteria and are managed under a hold to collect business model. Under IAS 39, they were also generally accounted for at amortized cost unless they were designated under the FVO. Under IFRS 9, an ECL is applied to these instruments, while under IAS 39 an allowance was only provided to the extent there was an impairment. Under both IFRS 9 and IAS 39, 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. These transactions are classified and measured at amortized cost as they meet the SPPI criteria and are managed under a hold to collect business model. Under IFRS 9, an ECL is applied to these instruments, while under IAS 39 an allowance was only provided to the extent there was an impairment. Interest income on cash collateral paid and interest expense on cash collateral received together with the security borrowing fees and security lending income are 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. 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. Under both IAS 39 and IFRS 9, 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 were recognized immediately in Trading income (loss) under IAS 39 and are recognized in Gains (losses) from financial instruments measured/designated at FVTPL, net under IFRS 9. 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 As permitted under IFRS 9, we have elected to continue to apply the hedge accounting requirements of IAS 39. However, in 2018, we adopted the new hedge accounting disclosure requirements under the amendments to IFRS 7 “Financial Instruments: Disclosures.” Details of the additional disclosures are provided in Note 13. CIBC 2019 ANNUAL REPORT 115 Consolidated financial statements 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. 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 NIFOs 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 that involves the loss of control, 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 was included in FVO gains (losses), net under IAS 39 and Gains (losses) from financial instruments measured/designated at FVTPL, net under IFRS 9. 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, or in the case of economic hedges of cash-settled share-based payment obligations, in compensation expense, as appropriate. Embedded derivatives Under both IAS 39 and IFRS 9, derivatives embedded in financial liabilities 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 FVTPL or designated as FVTPL using the 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 the consolidated statement of income. The residual amount of the host 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 FVTPL. Under IFRS 9, embedded derivatives are no longer bifurcated from financial assets as was the case under IAS 39. Instead the financial asset is classified in its entirety into the appropriate classification at initial recognition through an assessment of the contractual cash flow characteristics of the asset and the business model under which it is managed. 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 FVOCI debt and equity securities under IFRS 9 (AFS under IAS 39), 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 116 CIBC 2019 ANNUAL REPORT Consolidated financial statements 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. 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. 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. Land, buildings and equipment Land is recognized initially at cost and is subsequently measured at cost less any accumulated impairment losses. Buildings, furniture, equipment and leasehold improvements are recognized initially at cost and are subsequently measured at cost less accumulated depreciation and any accumulated impairment losses. Depreciation commences when the assets are available for use and is recognized on a straight-line basis to depreciate the cost of these assets to their estimated residual value over their estimated useful lives. The estimated useful lives are as follows: (cid:129) (cid:129) (cid:129) (cid:129) Buildings – 40 years Computer equipment – 3 to 7 years Office furniture and other equipment – 4 to 15 years Leasehold improvements – over the estimated useful life Depreciation methods, useful lives and residual values are reviewed at each annual reporting date and are adjusted if appropriate. Gains and losses on disposal are included in Non-interest income – Other. We consider a portion of land and a building underlying a finance lease arrangement as investment property since we sub-lease this portion to third parties. Our investment property is recognized initially at cost and is subsequently measured at cost less accumulated depreciation and any accumulated impairment losses. Our investment property is depreciated on a straight-line basis over its estimated useful life, being the term of the lease. Rental income is included in Non-interest income – Other. Goodwill, software and other intangible assets Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets, liabilities and contingent liabilities acquired in business combinations. Identifiable intangible assets are recognized separately from goodwill when they are separable or arise from contractual or other legal rights, and have fair values that can be reliably measured. Goodwill is not amortized, but is subject to impairment review at least annually or more frequently if there are indicators that the goodwill may be impaired. Refer to the “Impairment of non-financial assets” policy below. Intangible assets represent software and customer relationships, core deposit intangibles, investment management contracts, and brand names recognized as part of past acquisitions. Intangible assets with definite useful lives are measured at cost less accumulated amortization and accumulated impairment losses. Each intangible asset is assessed for legal, regulatory, contractual, competitive or other factors to determine if the useful life is definite. Intangible assets with definite useful lives are amortized over their estimated useful lives, which are as follows: (cid:129) (cid:129) (cid:129) Software – 5 to 10 years Contract-based intangibles – 8 to 15 years Core deposit and customer relationship intangibles – 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 CIBC 2019 ANNUAL REPORT 117 Consolidated financial statements 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. 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. 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, which gives rise to uncertainty. For tax positions where there is uncertainty regarding the ultimate determination of the tax impact, including positions which are under audit, dispute or appeal, we recognize provisions to consider this uncertainty based on our best estimate of the amount expected to be paid based on an assessment of the relevant factors. 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. 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. 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. 118 CIBC 2019 ANNUAL REPORT Consolidated financial statements 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. 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) 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, 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. 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. As part of our acquisition of Wellington Financial Fund V LP (Wellington Financial) in the first quarter of 2018, equity-settled awards in the form of exchangeable shares with specific service and non-market performance vesting conditions were issued to selected employees. Compensation expense in respect of the exchangeable shares is based on the grant date fair value, adjusted for changes in the estimated impact of the non-market performance conditions. 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 our 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. CIBC 2019 ANNUAL REPORT 119 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 contingently issuable shares and the exercise of stock options based on the treasury stock method. The number of contingently issuable shares included in diluted EPS is based on the number of shares that would be issuable if the end of the reporting period were the end of the contingency period. For stock options, 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. Instruments determined to have an antidilutive effect for the period are excluded from the calculation of diluted EPS. Fee and commission income CIBC adopted IFRS 15 “Revenue from Contracts with Customers” (IFRS 15) as at November 1, 2018 in place of prior guidance, including IAS 18 “Revenue” (IAS 18) and IFRIC 13 “Customer Loyalty Programmes” (IFRIC 13). We applied IFRS 15 on a modified retrospective basis. As permitted, we did not restate our prior period comparative consolidated financial statements, which are reported under the prior guidance. The impact of adopting IFRS 15 was not significant (see “Transition impact from adoption of IFRS 15” section below). 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. The application of this guidance involves the use of judgment. IFRS 15 excludes from its scope revenue related to financial instruments, lease contracts and insurance contracts. As a result, the majority of our revenue was not impacted by the adoption of this standard, including net interest income, net gains (losses) from financial instruments measured/designated at FVTPL and net gains (losses) from debt securities measured at FVOCI. Measurement differences resulting from the adoption of IFRS 15 include the upfront expensing of previously deferred mutual fund sales commissions. In addition, the adoption of IFRS 15 has resulted in the revaluation of our self-managed credit card loyalty points liability, which is now subject to both upward and downward remeasurement to reflect the expected cost of redemption as this expectation changes over time. Previously, under IFRIC 13, decreases in the expected cost of redemptions were only recognized as points were redeemed, while increases were recognized immediately. In addition, the adoption of IFRS 15 has resulted in changes to the presentation of certain revenue and expense items in the consolidated statement of income. Presentation differences include the net presentation of certain expenditures where CIBC is deemed the agent rather than the principal and the gross presentation of certain expenditures where CIBC is deemed the principal rather than the agent. Our prior period comparative consolidated financial statements are reported under the prior guidance, without restatement; however, the measurement and presentation differences in the current period are not significant. Our accounting policies under both IFRS 15 and IAS 18 are provided below. Fee and commission income (IAS 18 and IFRIC 13) The recognition of fee and commission income was 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 was recognized when the act was completed. Income earned from the provision of services was recognized as revenue as the services were provided. Income which formed an integral part of the effective interest rate of a financial instrument was recognized as an adjustment to the effective interest rate. Fee and commission income (IFRS 15) The recognition of fee and commission income is determined by the purpose of the fee or commission and the terms specified in the contract with the customer. Revenue is recognized when, or as, a performance obligation is satisfied by transferring control of the service to the customer, in the amount of the consideration to which we expect to be entitled. Revenue may therefore be recognized at a point in time upon completion of the service or over time as the services are provided. When revenue is recognized over time, we are generally required to provide the services each period, such that control of the services is transferred evenly to the customer, and we therefore measure our progress towards completion of the service based upon the time elapsed. For contracts where the transaction price includes variable consideration, revenue is only recognized to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved, which typically occurs by the end of the reporting period. When another party is involved in providing a service to a customer, we determine whether the nature of our performance obligation is that of a principal or an agent. If we control the service before it is transferred to the customer, we are acting as the principal and present revenue separately from the amount paid to the other party; otherwise we are the agent and present revenue net of the amount paid to the other party. Our performance obligations typically have a term of one year or less, with payment received upon satisfaction of the performance obligation or shortly afterwards, and as a result there is no significant financing component and we do not typically capitalize the costs of obtaining contracts with our customers. Income which forms an integral part of the effective interest rate of a financial instrument continues to be recognized as an adjustment to the effective interest rate. In addition to these general principles, the following specific policies applied under IAS 18 and IFRIC 13 in 2017 and 2018, and IFRS 15 in 2019: Underwriting and advisory fees are earned on debt and equity securities placements and transaction-based advisory services. Under IAS 18 and IFRS 15, underwriting fees are typically recognized at the point in time when the transaction is completed. Under IAS 18 and IFRS 15, advisory fees are generally recognized as revenue over the period of the engagement as the related services are provided or at the point in time when the transaction is completed. Deposit and payment fees arise from personal and business deposit accounts and cash management services. Under IAS 18 and IFRS 15, monthly and annual fees are recognized over the period that the related services are provided. Under IAS 18 and IFRS 15, transactional fees are recognized at the point in time the related services are provided. Credit fees consist of loan syndication fees, loan commitment fees, letter of credit fees, banker’s acceptance stamping fees, and securitization fees. Under IAS 18 and IFRS 15, credit fees are generally recognized over the period that the related services are provided, except for loan syndication fees, which are typically recognized at the point in time that the financing placement is completed. Card fees primarily include interchange income, overlimit fees, cash advance fees, and annual fees. Under IAS 18 and IFRS 15, card fees are recognized at the point in time the related services are provided, except for annual fees, which are recognized over the 12-month period to which they relate. Under IFRIC 13 and IFRS 15, the cost of credit card loyalty points is recognized as a reduction of interchange income when the loyalty points are issued for both self-managed and third-party loyalty points programs. Under IFRIC 13, credit card loyalty points for self-managed loyalty programs were 120 CIBC 2019 ANNUAL REPORT Consolidated financial statements recognized as deferred revenue when the loyalty points were issued and as revenue when the loyalty points were redeemed. Under IFRS 15, credit card loyalty point liabilities are recognized for self-managed loyalty point programs and are subject to periodic remeasurement to reflect the expected cost of redemption as this expectation changes over time. Commissions on securities transactions include brokerage commissions for transactions executed on behalf of clients, trailer fees and mutual fund sales commissions. Under IAS 18 and IFRS 15, brokerage commissions and mutual fund sales commissions are generally recognized at the point in time that the related transaction is executed. Under IAS 18 and IFRS 15, trailer fees are typically recognized over time based upon the daily net asset value of the mutual fund units held by clients. Investment management fees are primarily based on the respective value of the assets under management (AUM) or assets under administration (AUA) and, under IAS 18 and IFRS 15, are recognized over the period that the related services are provided. Under IAS 18 and IFRS 15, investment management fees relating to our asset management and private wealth management business are generally calculated based on point-in-time AUM balances, and investment management fees relating to our retail brokerage business are generally calculated based on point-in-time AUM or AUA balances. Under IAS 18 and IFRS 15, custodial fees are recognized as revenue over the applicable service period, which is generally the contract term. Mutual fund fees are earned on fund management services and, under IAS 18 and IFRS 15, are recognized over the period that the mutual funds are managed based upon the daily net asset values of the respective mutual funds. In certain circumstances, CIBC may, on a discretionary basis, elect to absorb certain expenses that would otherwise be payable by the mutual funds directly. Under IAS 18 and IFRS 15, these expenses are recognized in Non-interest expenses on the consolidated statement of income. Transition impact from adoption of IFRS 15 As indicated above, CIBC adopted IFRS 15 as at November 1, 2018 in place of prior guidance, including IAS 18 and IFRIC 13. We applied IFRS 15 on a modified retrospective basis by recognizing a cumulative $6 million after-tax credit from the initial application in opening November 1, 2018 retained earnings. The impact of the initial adoption of IFRS 15 related to the upfront expensing of previously deferred mutual fund sales commissions and the revaluation of our self-managed credit card loyalty points liability. CIBC 2019 ANNUAL REPORT 121 Consolidated financial statements Transition impact from adoption of IFRS 9 As indicated above, CIBC adopted IFRS 9 in place of IAS 39 as of November 1, 2017. As permitted, we did not restate our prior period comparative consolidated financial statements. Amounts reported relating to periods ended on or before October 31, 2017 are reported under IAS 39 and are therefore not comparable to the information presented for 2018 or 2019. Differences in the carrying amounts of financial instruments that resulted from the adoption of IFRS 9, other than from the voluntary adoption of the “own credit” provisions, have been recognized in our opening November 1, 2017 retained earnings and AOCI as if we had always followed the requirements of IFRS 9. The following table reconciles the carrying amounts under IAS 39 to the carrying amounts under IFRS 9, and the impact, net of tax, on shareholders’ equity and total equity due to the transition to IFRS 9 on November 1, 2017: $ millions ASSETS Cash and non-interest-bearing deposits with banks Interest-bearing deposits with banks Securities Trading and FVO securities Opening balance To securities mandatorily measured and designated at FVTPL Closing balance AFS and HTM securities Opening balance To debt securities measured at FVOCI To equity securities designated at FVOCI To securities mandatorily measured at FVTPL To securities measured at amortized cost Closing balance Securities mandatorily measured and designated at FVTPL Opening balance From AFS securities From trading and FVO securities From loans Closing balance Debt securities measured at FVOCI Equity securities designated at FVOCI Opening balance From AFS securities Closing balance Opening balance From AFS securities Closing balance Securities measured at amortized cost Opening balance From AFS and HTM securities Closing balance Cash collateral on securities borrowed Securities purchased under resale agreements Loans Loans, net of allowance for credit losses Loans mandatorily measured at FVTPL Other Total assets LIABILITIES AND EQUITY Deposits (8) Cash collateral on securities lent Obligations related to securities sold under repurchase agreements Subordinated indebtedness Obligations related to securities sold short Other Total liabilities Equity Preferred shares Common shares Contributed surplus Retained earnings Accumulated other comprehensive income Opening balance Reclassification of AFS debt securities to securities measured at amortized cost Reclassification of AFS equity securities to securities mandatorily measured at FVTPL Recognition of ECL under IFRS 9 on debt securities measured at FVOCI Closing balance Total shareholders’ equity Non-controlling interests Total equity IAS 39 carrying amount as at Oct. 31, 2017 Reclassification Remeasurements IFRS 9 carrying amount as at Nov. 1, 2017 $ 3,440 10,712 $ – – $ – – $ 3,440 10,712 50,827 42,592 – – – – $ $ 93,419 5,035 40,383 (6) 356,734 – 356,734 55,541 565,264 439,706 2,024 27,971 3,209 13,713 47,404 534,027 1,797 12,548 137 16,101 452 31,035 202 31,237 565,264 $ $ $ $ (50,827) (1) (32,945) (2) (459) (3) (1,092) (4) (8,096) (5) 1,092 (4) 50,827 (1) 12 (4) 32,945 (2) 459 (3) 8,110 (5) 26 – – (375) (4) 363 (4) (12) 2 16 – – – – – – – – – – 4 16 (4) 16 – 16 16 – – 51,931 32,945 459 8,110 93,445 5,035 40,383 356,221 363 356,584 55,568 565,167 439,706 2,024 27,971 3,209 13,713 47,398 534,021 1,797 12,548 137 15,957 $ $ 509 30,948 198 31,146 565,167 $ – – – (138) (7) – (138) 25 (113) – – – – – (6) (6) – – – (148) 45 (103) (4) (107) (113) $ $ $ In our structured credit run-off portfolio, certain securities have been reclassified from FVO to securities mandatorily measured at FVTPL. (1) (2) Certain AFS debt securities have been reclassified to debt securities measured at FVOCI as the securities met the “solely payment of principal and interest” criteria under IFRS 9 and are managed under a “hold to collect and to sell” business model. (3) Certain securities have been reclassified from AFS to equity securities designated at FVOCI. (4) Certain asset-backed securities and asset-backed loans have been reclassified from either AFS or loans to securities or loans mandatorily measured at FVTPL. (5) Certain debt securities have been reclassified from AFS to securities measured at amortized cost as they met the “solely payment of principal and interest” criteria under IFRS 9 and are held within a business model whose objective is to hold assets to collect the contractual cash flows. The fair value of these securities that were still held at October 31, 2018 was $3,970 million. The change in fair value of these securities that would have been recognized in OCI during the year was a loss of $35 million had these securities continued to be measured at fair value through OCI. In addition, certain HTM securities that are managed under a “hold to collect” business model were reclassified to securities measured at amortized cost. Includes $1,450 million of certain securities purchased under resale agreements that are measured at FVTPL using the FVO under IAS 39 and as mandatorily measured at FVTPL under IFRS 9. (6) (7) Comprises measurement adjustments of $69 million related to ECL and $69 million related to the application of the effective interest rate method recognized upon transition to IFRS 9. (8) Includes FVO deposits of $5,947 million under both IAS 39 and IFRS 9. The most significant impact was in respect of the transition from an incurred loss model under IAS 39 to an ECL model under IFRS 9 for the determination of allowances for credit losses. For our business and government portfolios, the individually assessed allowances for impaired instruments recognized under IAS 39 have generally been replaced by stage 3 allowances under IFRS 9, while the collective allowances for performing financial instruments have generally been 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 have generally been replaced by stage 3 allowances under IFRS 9, while the performing portion of our collective allowances have generally been replaced by either stage 1 or stage 2 allowances under IFRS 9. 122 CIBC 2019 ANNUAL REPORT Individual allowance IAS 39 Collective allowance Consolidated financial statements The following table reconciles the closing allowance for credit losses in accordance with IAS 39 as at October 31, 2017, to the opening ECL allowance determined in accordance with IFRS 9 as at November 1, 2017: $ millions, as at October 31, 2017 November 1, 2017 IFRS 9 Total Remeasurements Stage 1 Stage 2 Stage 3 Total (1) Loans Residential mortgages Personal Credit card Business and government Comprises: Loans Undrawn credit facilities and other off-balance sheet exposures (2) Securities Debt securities measured at FVOCI (3) $ $ $ 2 7 – 183 192 192 – n/a $ $ $ 201 488 386 470 1,545 1,426 119 n/a $ $ $ 203 495 386 653 1,737 1,618 119 n/a $ $ $ 19 (19) 128 (65) 63 69 (6) $ $ $ 28 164 101 234 527 474 53 $ $ $ 43 202 413 150 808 748 60 $ 49 $ 14 $ 35 $ $ $ $ 151 110 – 204 465 465 – – $ $ $ $ 222 476 514 588 1,800 1,687 113 49 In addition, ECL allowances for other financial assets classified as amortized cost were immaterial as at November 1, 2017. Included in other liabilities on the consolidated balance sheet. (1) (2) (3) The ECL allowances for debt securities measured at FVOCI are recognized in AOCI and do not affect the carrying value on our consolidated balance sheet, as these securities are measured at fair value. n/a Not applicable under IAS 39. Note 2 Fair value measurement This note presents the fair values of financial instruments and explains how we determine those values. Note 1, “Basis of preparation and summary of significant accounting policies” sets out the accounting treatment for each measurement category of financial instruments. Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, between market participants in an orderly transaction in the principal market at the measurement date under current market conditions (i.e., the exit price). The determination of fair value requires judgment and is based on market information, where available and appropriate. Fair value measurements are categorized into three levels within a fair value hierarchy (Level 1, 2 or 3) based on the valuation inputs used in measuring the fair value, as outlined below. (cid:129) Level 1 – Unadjusted quoted market prices in active markets for identical assets or liabilities we can access at the measurement date. Bid prices, ask prices or prices within the bid and ask, which are the most representative of the fair value, are used as appropriate to measure fair value. Fair value is best evidenced by an independent quoted market price for the same instrument in an active market. An active market is one where transactions are occurring with sufficient frequency and volume to provide quoted prices on an ongoing basis. Level 2 – Quoted prices for identical assets or liabilities in markets that are inactive or observable market quotes for similar instruments, or use of valuation techniques where all significant inputs are observable. Inactive markets may be characterized by a significant decline in the volume and level of observed trading activity or through large or erratic bid/offer spreads. In instances where traded markets do not exist or are not considered sufficiently active, we measure fair value using valuation models. Level 3 – Non-observable or indicative prices or use of valuation techniques where one or more significant inputs are non-observable. (cid:129) (cid:129) For a significant portion of our financial instruments, quoted market prices are not available because of the lack of traded markets, and even where such markets do exist, they may not be considered sufficiently active to be used as a final determinant of fair value. When quoted market prices in active markets are not available, we would consider using valuation models. The valuation model and technique we select maximizes the use of observable market inputs to the extent possible and appropriate in order to estimate the price at which an orderly transaction would take place at the measurement date. In an inactive market, we consider all reasonably available information, including any available pricing for similar instruments, recent arm’s-length market transactions, any relevant observable market inputs, indicative dealer or broker quotations, and our own internal model-based estimates. Valuation adjustments are an integral component of our fair valuation process. We apply judgment in establishing valuation adjustments that take into account various factors that may have an impact on the valuation. Such factors include, but are not limited to, the bid-offer spread, illiquidity due to lack of market depth, parameter uncertainty and other market risk, model risk and credit risk. Generally, the unit of account for a financial instrument is the individual instrument, and valuation adjustments are applied at an individual instrument level, consistent with that unit of account. In cases where we manage a group of financial assets and liabilities that consist of substantially similar and offsetting risk exposures, the fair value of the group of financial assets and liabilities is 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, including independent validation of valuation inputs 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. 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. CIBC 2019 ANNUAL REPORT 123 Consolidated financial statements 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 is 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. The fair value of government issued or guaranteed securities that are not traded in an active market is 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. The 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 certain Community Reinvestment Act equity 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 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 Community Reinvestment Act equity investments and FHLB stock approximates fair value. Loans The fair value of variable-rate loans and loans for which interest rates are repriced or reset frequently is 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 associated allowance for credit losses. 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. Other assets and other liabilities Other assets and other liabilities mainly comprise accrued interest receivable or payable, brokers’ client accounts receivable or payable, precious metals 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, except for the fair value of precious metals, which is quoted in an active market. 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 deposits designated at FVTPL 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 124 CIBC 2019 ANNUAL REPORT Consolidated financial statements 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. Mortgage commitments The fair value of mortgage commitments designated at FVTPL 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. CIBC 2019 ANNUAL REPORT 125 Consolidated financial statements Fair value of financial instruments $ millions, as at October 31 2019 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 $ millions, as at October 31 2018 Financial assets Carrying value Amortized cost Mandatorily measured at FVTPL Designated at FVTPL Fair value through OCI Fair value Fair value over (under) carrying value Total $ 16,720 20,115 3,664 $ 639 53,984 – $ – 413 – $ – 46,798 – $ 17,359 121,310 3,664 $ 17,359 121,453 3,664 50,913 5,198 $ 208,381 43,098 12,335 103,885 – 9,167 13,829 176,340 248,367 11,224 38,680 – 9,188 – 1,822 51,801 14,066 4,684 $ 60 – – 21,182 23,895 – – – – – – 25,113 – 15,635 – – 114 – – – – – – – – – $ $ 1,751 9,135 – 215 – – – – – 12 – Carrying value – – – – – – – – – – – – – – – – – – – 56,111 56,111 $ 208,441 43,098 12,335 125,067 23,895 9,167 13,829 178,091 257,502 11,224 38,895 25,113 9,188 15,635 1,822 51,801 14,192 4,684 $ 208,693 43,120 12,335 125,160 23,895 9,167 13,829 178,046 257,872 11,224 39,223 25,113 9,188 15,635 1,822 51,801 14,192 4,925 $ $ – 143 – – 252 22 – 93 – – – (45) 370 – 328 – – – – – – 241 Amortized cost Mandatorily measured at FVTPL Designated at FVTPL Fair value through OCI Fair value Fair value over (under) carrying value Total 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 $ 17,637 12,876 5,488 $ 54 52,394 – $ – 184 – $ – 36,210 – $ 17,691 101,664 5,488 $ 17,691 101,507 5,488 40,128 3,322 $ 207,523 42,577 12,255 92,605 – 10,265 10,230 163,113 233,174 14,380 42,481 – 10,296 – 2,731 30,840 13,030 4,080 $ 12 – – 16,424 21,431 – – – – – – 20,973 – 13,782 – – 95 – – – – – – – – – $ $ 766 6,975 – 126 – – – – – 17 – – – – – – – – – – – – – – – – – – – – 43,450 43,450 $ 207,535 42,577 12,255 109,029 21,431 10,265 10,230 163,879 240,149 14,380 42,607 20,973 10,296 13,782 2,731 30,840 13,142 4,080 $ 205,868 42,559 12,255 108,917 21,431 10,265 10,230 163,642 240,374 14,380 42,868 20,973 10,296 13,782 2,731 30,840 13,142 4,340 $ $ – (157) – – (1,667) (18) – (112) – – – (237) 225 – 261 – – – – – – 260 126 CIBC 2019 ANNUAL REPORT Consolidated financial statements Fair value of derivative instruments $ millions, as at October 31 Held for trading Interest rate derivatives Over-the-counter – Forward rate agreements – Swap contracts – Purchased options – Written options Exchange-traded – Purchased options Total interest rate derivatives Foreign exchange derivatives Over-the-counter – Forward contracts – Swap contracts – Purchased options – Written options Total foreign exchange derivatives Credit derivatives Over-the-counter – Credit default swap contracts – protection purchased – 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 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 – Forward contracts – Swap contracts Total foreign exchange derivatives – Credit default swap contracts – protection purchased Credit derivatives Over-the-counter Total credit derivatives Equity derivatives Over-the-counter Total equity derivatives Total held for ALM Total fair value Less: effect of netting Positive Negative 2019 Net Positive Negative $ 67 8,528 92 – 8,687 4 4 $ 241 7,697 – 128 8,066 – – $ (174) $ 831 92 (128) 621 4 4 113 $ 8 $ 4,603 92 – 4,808 1 1 5,901 – 100 6,009 – – 2018 Net 105 (1,298) 92 (100) (1,201) 1 1 8,691 8,066 625 4,809 6,009 (1,200) 5,152 2,971 214 – 8,337 8,337 105 – 105 1,262 2,384 3,646 287 69 356 1,289 314 1,603 5,711 3,330 – 196 9,237 9,237 21 107 128 2,561 1,825 4,386 167 45 212 1,517 253 1,770 (559) (359) 214 (196) (900) (900) 84 (107) (23) (1,299) 559 (740) 120 24 144 (228) 61 (167) 2,916 4,825 240 – 7,981 7,981 115 3 118 1,951 1,659 3,610 63 143 206 2,527 67 2,594 22,738 23,799 (1,061) 19,318 2 439 14 – 455 31 571 602 – – 100 100 1 256 – – 257 28 1,026 1,054 3 3 – – 1,157 23,895 (14,572) 1,314 25,113 (14,572) 1 183 14 – 198 3 (455) (452) (3) (3) 100 100 (157) (1,218) – – 773 11 – 784 117 1,205 1,322 – – 7 7 2,655 4,979 – 233 7,867 7,867 13 131 144 2,340 1,490 3,830 29 229 258 838 258 1,096 19,204 1 243 – 8 252 7 1,461 1,468 3 3 46 46 $ 9,323 $ 10,541 $ (1,218) $ 9,642 $ 9,184 $ 2,113 1,769 21,431 (11,789) 20,973 (11,789) 261 (154) 240 (233) 114 114 102 (128) (26) (389) 169 (220) 34 (86) (52) 1,689 (191) 1,498 114 (1) 530 11 (8) 532 110 (256) (146) (3) (3) (39) (39) 344 458 – 458 CIBC 2019 ANNUAL REPORT 127 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 Amortized cost securities Loans Residential mortgages Personal Credit card Business and government Investment in equity-accounted associates (1) Financial liabilities Deposits Personal Business and government Bank Secured borrowings Subordinated indebtedness Level 1 Level 2 Level 3 Quoted market price Valuation technique – observable market inputs Valuation technique – non-observable market inputs 2019 2018 2019 2018 2019 2018 Total 2019 Total 2018 $ – $ – $ 20,242 $ 12,283 $ 524 $ 436 $ 20,766 $ 12,719 – – – – 9 – – – – – – – – – – – – – – – 208,633 43,120 12,335 103,978 76 205,856 42,559 12,255 92,493 101 208,633 43,120 12,335 103,978 85 205,856 42,559 12,255 92,493 101 $ – – – – – $ – – – – – $ 53,994 123,144 6,113 36,049 4,925 $ 48,116 120,612 10,003 38,612 4,340 $ $ 1,635 2,508 – 2,959 – 1,989 1,489 – 4,130 – $ 55,629 125,652 6,113 39,008 4,925 $ 50,105 122,101 10,003 42,742 4,340 (1) See Note 25 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 2019 2018 2019 2018 Quoted market price Valuation technique – observable market inputs Valuation technique – non-observable market inputs 2018 2019 Total 2019 Total 2018 Level 1 Level 2 Level 3 Financial assets Deposits with banks Securities mandatorily measured and designated at $ FVTPL Government issued or guaranteed Corporate equity Corporate debt Mortgage- and asset-backed Loans mandatorily measured at FVTPL Business and government Residential mortgages Debt securities measured at FVOCI Government issued or guaranteed Corporate debt Mortgage- and asset-backed Equity securities designated at FVOCI Corporate equity Securities purchased under resale agreements measured at FVTPL Derivative instruments Interest rate Foreign exchange Credit Equity Precious metal Other commodity Total financial assets Financial liabilities Deposits and other liabilities (3) Obligations related to securities sold short Derivative instruments Interest rate Foreign exchange Credit Equity Precious metal Other commodity – $ – $ 639 $ 54 $ – $ – $ 639 $ 54 2,372 25,852 – – 28,224 – – – 2,369 – – 2,369 45 45 – 4,264 25,140 – – 29,404 – – – 2,844 – – 2,844 42 42 – 19,306 (1) 684 3,760 2,220 (2) 25,970 16,328 (1) 208 3,675 2,612 (2) 22,823 20,351 60 20,411 35,460 5,621 2,746 43,827 266 266 15,942 12 15,954 24,763 4,543 3,498 32,804 235 235 5,198 3,322 – 7 23 173 203 831 – 831 – – – – 291 291 – – 6 26 319 351 482 – 482 – – – – 285 285 – 4 – – 2,383 – 383 2,770 $ 33,408 – – – 1,727 – 143 1,870 $ 34,160 9,086 8,939 1 1,111 356 1,220 20,713 $ 117,024 $ $ – (7,258) (7,258) – – – (1,824) – (300) (2,124) (9,382) $ – (4,443) (4,443) – – – (1,489) – (487) (1,976) (6,419) $ $ (10,626) (8,377) (19,003) (8,322) (10,291) (19) (2,407) (212) (1,470) (22,721) (41,724) 5,593 9,303 3 1,783 206 2,451 19,339 94,531 (7,556) (9,339) (16,895) $ $ (6,152) (9,335) (16) (2,268) (258) (609) (18,638) $ (35,533) 56 – 104 252 – – 412 $ 1,737 – – 115 107 – – 222 $ 1,340 $ $ (601) – (601) (1) – (112) (155) – – (268) (869) $ $ (423) – (423) (109) – (131) (119) – – (359) (782) 21,678 26,543 3,783 2,393 54,397 21,182 60 21,242 37,829 5,621 2,746 46,196 602 602 20,592 25,354 3,701 2,931 52,578 16,424 12 16,436 27,607 4,543 3,498 35,648 562 562 5,198 3,322 9,146 8,939 105 3,746 356 1,603 23,895 $ 152,169 5,593 9,303 118 3,617 206 2,594 21,431 $ 130,031 $ (11,227) $ (15,635) (26,862) (7,979) (13,782) (21,761) (8,323) (10,291) (131) (4,386) (212) (1,770) (25,113) (51,975) $ (6,261) (9,335) (147) (3,876) (258) (1,096) (20,973) (42,734) $ Total financial liabilities $ Includes $56 million related to securities designated at FVTPL (2018: $52 million). Includes $357 million related to asset-backed securities designated at FVTPL (2018: $132 million). (1) (2) (3) Comprises deposits designated at FVTPL of $10,458 million (2018: $7,517 million), net bifurcated embedded derivative liabilities of $643 million (2018: $350 million), other liabilities designated at FVTPL of $12 million (2018: $17 million), and other financial liabilities measured at fair value of $114 million (2018: $95 million). 128 CIBC 2019 ANNUAL REPORT Consolidated financial statements Transfers between levels in the fair value hierarchy are deemed to have occurred at the beginning of the year 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 $25 million of securities mandatorily measured at FVTPL (2018: $211 million) and $431 million of securities sold short (2018: $854 million) from Level 1 to Level 2, and $379 million of securities sold short (2018: nil) from Level 2 to Level 1 due to changes in the observability of the inputs used to value these securities. In addition, transfers between Level 2 and Level 3 were made during 2019 and 2018, primarily due to changes in the observability of certain market volatility inputs that were used in measuring the fair value of our embedded derivatives. 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 2019 Securities mandatorily measured at FVTPL Corporate equity Corporate debt Mortgage- and asset-backed Securities designated at FVTPL Asset-backed Loans mandatorily measured at FVTPL Business and government Debt securities measured at FVOCI Government issued or guaranteed Corporate debt Mortgage- and asset-backed Equity securities designated at FVOCI Corporate equity Derivative instruments Interest rate Credit Equity Total assets Deposits and other liabilities (6) Derivative instruments Interest rate Credit Equity Total liabilities 2018 Securities mandatorily measured at FVTPL Corporate equity Corporate debt Mortgage- and asset-backed Securities designated at FVTPL Asset-backed Loans mandatorily measured at FVTPL Business and government Debt securities measured at FVOCI Government issued or guaranteed Corporate debt Mortgage- and asset-backed Equity securities designated at FVOCI Corporate equity Derivative instruments Interest rate Credit Equity Total assets Deposits and other liabilities (6) Derivative instruments Interest rate Credit Equity Total liabilities Net gains (losses) included in income (1) IAS 39 Opening balance Reclassification upon adoption of IFRS 9 (2) IFRS 9 Opening balance Realized (3) Unrealized (3)(4) Net unrealized gains (losses) included in OCI (5) Transfer in to Level 3 Transfer out of Level 3 Purchases/ Issuances Sales/ Settlements Closing balance n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 32 – 3 94 $ 103 – 4 1,674 289 28 130 38 $ 2,395 $ (369) (20) (148) (77) $ (614) n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a $ 6 26 319 – 482 – – – 285 – 115 107 $ – – – – – – – – – – (9) – $ 1 (3) 1 $ $ – – – – – – – – – 59 (2) 15 – (1) – – – 2 – – – $ 1,340 $ (9) $ 71 $ 1 $ – – – – – – – – – – – – – $ – – – – – – – – – – – (24) $ (423) $ – $ (113) $ – $ (100) $ 117 $ (288) $ (24) $ 1,208 $ – – 74 – $ – $ – (221) – 7 23 173 – 856 (506) 831 – – – 74 2 – 202 – – – (70) (5) – (48) – – – 291 56 104 252 $ $ (850) $ 1,737 206 $ (601) (109) (131) (119) $ (782) $ – 9 – 9 2 – 3 – – – (5) – (3) – (17) – $ $ $ 10 – 707 (94) 363 – – (1,674) (10) – – – 42 – 710 – 466 – 4 – 279 28 130 38 $ (698) $ 1,697 $ (20) $ $ – – – – – $ (369) $ – (20) (148) (77) – 17 – 132 3 (89) $ (67) $ (3) – 9 – (5) – 1 – (2) (20) 2 (27) $ (45) $ 117 (79) (2) 40 – – – – – – – – 77 – – (70) (24) 7 46 (1) (112) (155) $ – $ (100) $ 194 $ (358) $ 235 $ (869) $ – – – – (5) – – – 5 – – – $ – $ – – – – $ – – 12 – – 479 – – – – – 12 $ $ – – – – – 26 95 – $ (35) $ – (510) – 6 26 319 – (2) 795 (767) 482 – – – – – – (1) – 26 – 219 – – 109 (479) (26) – (213) (8) – (24) – – – 285 – 115 107 $ 503 $ (3) $ 1,270 $ (2,062) $ 1,340 $ (126) $ 81 $ (226) $ 100 $ (423) – – (71) – – 46 – – (147) (10) 2 90 (109) (131) (119) $ (614) $ 17 $ 76 $ – $ (197) $ 127 $ (373) $ 182 $ (782) Includes foreign currency gains and losses related to debt securities measured at FVOCI. (1) Cumulative AOCI gains or losses related to equity securities designated at FVOCI are reclassified from AOCI to retained earnings at the time of disposal or derecognition. (2) Certain reclassifications have been made upon adoption of IFRS 9. See Note 1 for more details about our transition to IFRS 9 on November 1, 2017. (3) (4) Comprises unrealized gains and losses relating to these assets and liabilities held at the end of the reporting year. (5) Foreign exchange translation on loans mandatorily measured at FVTPL held by foreign operations and denominated in the same currency as the foreign operations is included in OCI. (6) n/a Not applicable. Includes deposits designated at FVTPL of $135 million (2018: $112 million) and net bifurcated embedded derivative liabilities of $466 million (2018: $311 million). CIBC 2019 ANNUAL REPORT 129 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 Securities mandatorily measured at FVTPL Corporate equity Corporate debt Mortgage- and asset-backed $ Equity securities designated at FVOCI Corporate equity Limited partnerships Private companies Loans mandatorily measured at FVTPL Business and government Derivative instruments Interest rate Credit Equity Total assets Deposits and other liabilities Derivative instruments Interest rate 252 $ $ 1,737 (601) (1) Valuation techniques Key non-observable inputs Valuation multiple Discounted cash flow Earnings multiple Discount rate Credit spread Market proxy or direct broker quote Market proxy or direct broker quote Discounted cash flow Range of inputs Low 15.1 7.5 % 0.9 % 0.0 % High 15.1 7.5 % 2.3 % 0.5 % Adjusted net asset value (1) Adjusted net asset value (1) Valuation multiple Net asset value Net asset value Revenue multiple n/a n/a 2.6 n/a n/a 2.6 Discounted cash flow Credit spread 0.6 % 1.6 % 2019 7 23 173 225 66 831 56 n/a Market volatility 104 Market proxy or direct broker quote Market proxy or direct broker quote Proprietary model (2) Option model Option model Option model n/a 49.7 % 0.0 % 14.0 % 23.3 % n/a 69.4 % 20.5 % 14.0 % 88.8 % Market volatility Market correlation Market volatility Market correlation 4.8 % 58.7 % (64.0) % 100.0 % Credit Equity (112) Market proxy or direct broker quote Market proxy or direct broker quote Market correlation (155) Option model Total liabilities $ (869) Proprietary model (2) Option model n/a Market volatility n/a 49.7 % 0.0 % 7.1 % n/a 69.4 % 20.5 % 98.0 % (1) Adjusted net asset value is determined using reported net asset values obtained from the fund manager or general partner of the limited partnership or the limited liability company and may be adjusted for current market levels where appropriate. (2) Using valuation techniques that we consider to be non-observable. 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 interrelationships between those inputs, where applicable, and the change in fair value if changing one or more of the non-observable inputs within a reasonably possible range would impact the fair value significantly. The fair value of our investments in private companies is based on recent transactions, if available. Otherwise, the fair value 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. An increase or a decrease in earnings multiples or revenue multiples generally results in an increase or a decrease, respectively, in the fair value of our investments in private companies. By adjusting the multiple upward and downward within a reasonably possible range, the aggregate fair value of our investments in private companies would increase by $48 million or decrease by $2 million (2018: increase by $11 million or decrease by $8 million). The fair value of our limited partnerships is determined based on the net asset value provided by the fund managers, adjusted as appropriate. The fair value of limited partnerships 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 limited partnerships would increase or decrease by $34 million (2018: $23 million). While our standalone derivatives are recorded as derivative assets or derivative liabilities, our derivatives embedded in our structured note deposit liabilities or deposit liabilities designated at FVTPL are recorded within deposits and other liabilities. The determination of the fair value of certain Level 3 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 interrelationships 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 net Level 3 standalone derivatives and embedded derivatives would increase by $45 million or decrease by $33 million (2018: increase by $67 million or decrease by $68 million). 130 CIBC 2019 ANNUAL REPORT Consolidated financial statements Financial instruments designated at FVTPL Financial assets designated at FVTPL include certain debt securities that were designated at FVTPL on the basis of being managed together with derivatives to eliminate or significantly reduce financial risks. Deposits and other liabilities designated at FVTPL 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 securities designated at FVTPL represents our maximum exposure to credit risk related to these assets designated at FVTPL. The change in fair value attributable to change in credit risk of these assets designated at FVTPL during the year is insignificant (2018: insignificant). The fair value of a liability designated at FVTPL reflects the credit risk relating to that liability. For those liabilities designated at FVTPL 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 liability designated at FVTPL. The pre-tax impact of changes in CIBC’s own credit risk on our liabilities designated at FVTPL was gains of $39 million for the year and gains of $21 million cumulatively (2018: losses of $4 million for the year and losses of $18 million cumulatively). A net loss of $32 million, net of hedges, was realized for assets designated at FVTPL and liabilities designated at FVTPL, which is included in the consolidated statement of income under Gains (losses) from financial instruments measured/designated at FVTPL, net (2018: a net gain of $37 million). The estimated contractual amount payable at maturity of deposits designated at FVTPL, which is based on the par value and the intrinsic value of the applicable embedded derivatives, is $283 million higher (2018: $391 million higher) than its fair value. Note 3 Significant transactions Sale of FirstCaribbean International Bank Limited On November 8, 2019, we announced that we had entered into a definitive agreement to sell our controlling interest in FirstCaribbean International Bank Limited (CIBC FirstCaribbean) to GNB Financial Group Limited (GNB). Under the terms of the agreement, GNB will acquire 66.73% of CIBC FirstCaribbean’s outstanding shares from CIBC for total consideration of approximately US$797 million, subject to closing adjustments to reflect certain changes in CIBC FirstCaribbean’s book value prior to closing. The total consideration is comprised of approximately US$200 million in cash and secured financing provided by CIBC for the remainder. CIBC will also provide secured financing to facilitate the purchase of any shares tendered by the minority shareholders of CIBC FirstCaribbean under the take-over bid required by local securities laws. We expect to retain a minority interest in CIBC FirstCaribbean of approximately 24.9% after closing, which will be accounted for as an investment in associate using the equity method. This transaction is subject to regulatory approvals and is expected to close in 2020. Cumulative foreign exchange translation gains, net of designated hedges, related to our investment in CIBC FirstCaribbean of approximately $280 million after-tax were included in AOCI as at October 31, 2019. Our cumulative foreign exchange translation gains relating to CIBC FirstCaribbean will be reclassified into income upon closing, and remain subject to change from movements in foreign exchange rates until closing. Due to the valuation implied from the expected sale of our controlling interest in CIBC FirstCaribbean, we recognized a goodwill impairment charge of $135 million in the fourth quarter of 2019 (see Note 8 for additional details). 2019 Acquisition of Cleary Gull On September 9, 2019, we completed the acquisition of substantially all of the assets and operations of Cleary Gull Inc. (Cleary Gull), a Milwaukee-based boutique investment banking firm specializing in middle-market mergers and acquisitions, private capital placement and debt advisory across the United States. Goodwill and intangible assets of $16 million were recognized as a result of the acquisition. The results of the acquired business have been consolidated from the date of close and are included in our Capital Markets strategic business unit. Acquisition of Lowenhaupt Global Advisors On September 1, 2019, we completed the acquisition of substantially all of the assets and operations of Lowenhaupt Global Advisors, LLC (LGA), a wealth advisory firm in St. Louis and New York that provides independent advice on family wealth transfer, taxation, investment portfolio allocation and business structuring. Goodwill and intangible assets of $14 million were recognized as a result of the acquisition. The results of the acquired business have been consolidated from the date of close and are included in our U.S. Commercial Banking and Wealth Management strategic business unit. Finalization of arrangement with Air Canada Following the close of Air Canada’s acquisition of the Aeroplan loyalty business from Aimia Inc. on January 10, 2019, we will be offering credit cards under Air Canada’s new loyalty program, which is expected to launch in 2020. This program will allow CIBC’s Aeroplan cardholders to transfer their Aeroplan Miles to Air Canada’s new loyalty program. To secure our participation in Air Canada’s new loyalty program for a period of 10 years, we paid Air Canada $200 million plus applicable sales tax, which we recognized as an expense in the first quarter of 2019. In addition, we made a payment of $92 million plus applicable sales tax in the first quarter of 2019 as a prepayment to be applied towards future monthly payments in respect of Aeroplan Miles over a 10-year period. CIBC 2019 ANNUAL REPORT 131 Consolidated financial statements 2018 Acquisition of Wellington Financial On January 5, 2018, CIBC acquired both the loan assets of Wellington Financial and its management team for a combination of cash, common shares, and exchangeable shares. The acquisition supports the launch of CIBC Innovation Banking, a full service business that delivers strategic advice and funding to North American technology and innovation clients at each stage of their business cycle, and further deepens CIBC’s capabilities and complements CIBC Bank USA’s existing commercial banking team. Goodwill of $62 million was recognized as a result of the acquisition. The exchangeable shares issued as part of the consideration for the acquisition are economically equivalent to CIBC common shares, and are subject to various vesting and performance conditions. A portion of the exchangeable shares are treated as equity-settled share-based compensation awards, and are amortized into income over the relevant vesting periods. The results of the acquired business have been consolidated from the date of close and are included in our Canadian Commercial Banking and Wealth Management SBU. 2017 (finalized in 2018) 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. During the first quarter of 2018, we finalized the purchase price allocation, and recognized an increase in goodwill of $29 million primarily due to additional information arising from the settlement of the dispute with former PrivateBancorp shareholders who validly exercised their dissent and appraisal rights under Delaware law. The following summarizes the total purchase consideration of $6.6 billion as of the acquisition date, including the impact of final settlement of obligation to dissenting shareholders in the first quarter of 2018: $ 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 estimated in 2017 Adjustment to purchase consideration in 2018 (3) Total final purchase consideration $ $ $ $ 3,443 2,770 327 72 6,612 29 6,641 (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. 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. This matter was settled in November 2017 through a combination of $162 million cash and $194 million CIBC common shares, and resulted in an increase in goodwill of $29 million. (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 fair values of identifiable assets acquired and liabilities assumed at the acquisition date that were reflected in 2017, updated for the impact of final settlement of obligation to dissenting shareholders in the first quarter of 2018: $ 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 3,853 6,641 (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 $3.9 billion primarily reflects the expected growth of our combined U.S. Commercial Banking and Wealth Management businesses, the ability to cross sell products between SBUs, and expected synergies from the integration of certain technology and operational platforms. Goodwill is not expected to be deductible for tax purposes. All results of operations are included in our U.S. Commercial Banking and Wealth Management SBU. In 2017, our acquisition of PrivateBancorp 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 2017 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. 132 CIBC 2019 ANNUAL REPORT 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 expands 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 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. During the first quarter of 2018, we finalized the purchase price allocation. No adjustments were recorded as a result of the finalization. All results of operations are included in our U.S. Commercial Banking and Wealth Management strategic business unit. Transaction and integration costs are included in Corporate and Other. Note 4 Securities Securities $ millions, as at October 31 Debt securities measured at FVOCI Equity securities designated at FVOCI Securities measured at amortized cost (1) Securities mandatorily measured and designated at FVTPL 2019 46,196 602 20,115 54,397 121,310 $ $ 2018 35,648 562 12,876 52,578 101,664 $ $ (1) During the year, $110 million of amortized cost debt securities were disposed of shortly before their maturity resulting in a realized loss of less than $1 million (October 31, 2018: nil). CIBC 2019 ANNUAL REPORT 133 Consolidated financial statements $ millions, as at October 31 Within 1 year 1 to 5 years 5 to 10 years Over 10 years No specific maturity 2019 Total 2018 Total Carrying Carrying value Yield (1) value Yield (1) Carrying value Carrying Yield (1) value Yield (1) Carrying value Yield (1) Carrying value Yield (1) Carrying value Yield (1) Residual term to contractual maturity Debt securities measured at FVOCI Securities issued or guaranteed by: Canadian federal government Other Canadian governments U.S. Treasury and agencies Other foreign governments Mortgage-backed securities (2) Asset-backed securities Corporate debt $ 2,452 1,051 4,128 2,227 – – 1,007 1.5 % $ 1.7 1.9 2.2 – – 1.8 8,165 7,995 5,209 2,840 396 – 4,609 1.8 % $ 1.8 2.1 2.4 1.9 – 2.5 234 3,225 34 129 248 – 5 2.1 % $ 2.1 1.6 5.2 2.4 – 2.4 – – – 140 2,055 47 – – % $ – – 5.6 2.5 2.4 – $ 10,865 $ 29,214 $ 3,875 $ 2,242 Equity securities designated at FVOCI Corporate public equity Corporate private equity $ $ – – – – – Securities measured at amortized cost 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 debt $ – – 781 234 231 5 280 $ $ $ $ $ $ – – – – – 546 2,180 5,146 42 962 153 1,764 – – – – – 36 4,514 – – 987 305 75 $ $ $ – – – – – – 54 – 384 1,436 – – $ 1,531 $ 10,793 $ 5,917 $ 1,874 Securities mandatorily measured and designated at FVTPL Securities issued or guaranteed by: Canadian federal government Other Canadian governments U.S. Treasury and agencies Other foreign governments Mortgage-backed securities (4) Asset-backed securities Corporate debt 1,999 1,683 121 238 95 155 789 2,463 1,347 2,737 703 968 451 2,245 $ $ $ 1,274 1,049 1,943 164 112 228 571 $ 1,467 4,183 273 34 – 384 178 Corporate public equity Corporate private equity $ 5,080 $ 10,914 $ 5,341 $ 6,519 – – – $ – – – $ – – – $ – – – $ Total securities (6) $ 17,476 $ 50,921 $ 15,133 $ 10,635 $ $ $ $ $ $ $ – – – – – – – – – % $ – – – – – – 10,851 12,271 9,371 5,336 2,699 47 5,621 1.7 % $ 1.9 2.0 2.5 2.4 2.4 2.4 6,620 9,249 7,742 3,996 3,430 68 4,543 2.1 % 2.7 1.8 2.3 2.5 2.5 2.3 $ 46,196 $ 35,648 n/m n/m 46 556 602 – – – – – – – – – – – – – – – – 26,523 20 $ 26,543 $ 27,145 $ $ $ n/m n/m 46 556 602 582 6,748 5,927 660 3,616 463 2,119 $ $ $ n/m n/m 43 519 562 180 4,872 2,329 693 3,727 344 731 $ 20,115 $ 12,876 $ 7,203 8,262 5,074 1,139 1,175 1,218 3,783 $ 10,708 8,055 905 924 1,774 1,157 3,701 $ 27,854 $ 27,224 26,523 20 $ 26,543 $ 121,310 25,348 (5) 6 (5) $ 25,354 $ 101,664 (1) Represents the weighted-average yield, which is determined by applying the weighted average of the yields of individual fixed income securities. (2) Includes securities backed by mortgages insured by the Canada Mortgage and Housing Corporation (CMHC), with amortized cost of $232 million (2018: $517 million) and fair value of $232 million (2018: $518 million); securities issued by Federal National Mortgage Association (Fannie Mae), with amortized cost of $1,127 million (2018: $1,267 million) and fair value of $1,136 million (2018: $1,238 million); securities issued by Federal Home Loan Mortgage Corporation (Freddie Mac), with amortized cost of $487 million (2018: $689 million) and fair value of $492 million (2018: $673 million); and securities issued by Government National Mortgage Association, a U.S. government corporation (Ginnie Mae), with amortized cost of $841 million (2018: $1,003 million) and fair value of $839 million (2018: $1,001 million). Includes securities backed by mortgage insured by the Canada Mortgage and Housing Corporation (CMHC) with amortized cost of $858 million (2018: $806 million) and fair value of $859 million (2018: $807 million); securities issued by Fannie Mae, with amortized cost of $1,037 million (2018: $1,275 million) and fair value of $1,048 million (2018: $1,226 million); securities issued by Freddie Mac, with amortized cost of $1,610 million (2018: $1,527 million) and fair value of $1,651 million (2018: $1,461 million); and securities issued by Ginnie Mae, with amortized cost of $98 million (2018: $119 million) and fair value of $99 million (2018: $113 million). Includes securities backed by mortgages insured by the CMHC of $1,135 million (2018: $1,701 million). (3) (4) (5) Certain information has been reclassified to conform to the presentation adopted in the current year. (6) Includes securities denominated in U.S. dollars with carrying value of $54.4 billion (2018: $40.3 billion) and securities denominated in other foreign currencies with carrying value of $1,813 million (2018: $1,799 million). n/m Not meaningful. Fair value of debt securities measured and equity securities designated at FVOCI $ 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 debt Corporate public equity (2) Corporate private equity Amortized cost (1) Gross unrealized gains Gross unrealized losses $ $ 10,842 12,252 9,353 5,318 2,688 47 5,608 46,108 40 493 533 46,641 $ $ 12 22 25 25 15 – 16 115 15 85 100 215 $ $ (3) $ (3) (7) (7) (4) – (3) (27) (9) (22) (31) (58) $ 2019 Fair value 10,851 12,271 9,371 5,336 2,699 47 5,621 46,196 46 556 602 46,798 Amortized cost Gross unrealized gains Gross unrealized losses $ $ 6,608 9,220 7,824 3,997 3,476 68 4,567 35,760 34 434 468 36,228 $ $ 15 31 7 16 5 – 2 76 14 100 114 190 $ $ (3) (2) (89) (17) (51) – (26) (188) (5) (15) (20) (208) $ $ 2018 Fair value 6,620 9,249 7,742 3,996 3,430 68 4,543 35,648 43 519 562 36,210 (1) Net of allowance for credit losses for debt securities measured at FVOCI of $23 million (2018: $23 million). (2) Includes restricted stock. 134 CIBC 2019 ANNUAL REPORT Consolidated financial statements Fair value of equity securities designated at FVOCI that were disposed of during the year was $20 million (2018: $35 million). Net realized cumulative after-tax gains of $18 million for the year (2018: $38 million) resulting from dispositions of equity securities designated at FVOCI and return on capital distributions from limited partnerships designated at FVOCI were reclassified from AOCI to retained earnings. Dividend income recognized for the year ended October 31, 2019 on equity securities designated at FVOCI that were still held as at October 31, 2019 was $9 million (2018: $5 million). No dividend income was recognized on equity securities designated at FVOCI that were disposed of during the year (2018: nil). The table below presents profit or loss recognized on FVOCI securities (2017: AFS securities): $ millions, for the year ended October 31 Realized gains Realized losses Provision for credit losses on debt securities Impairment write-downs Equity securities n/a Not applicable. 2019 $ 40 (2) (3) n/a $ 35 $ 2018 56 (13) (78) n/a $ 2017 178 (25) n/a (10) $ (35) $ 143 Allowance for credit losses The following table provides a reconciliation of the opening balance to the closing balance of the ECL allowance under IFRS 9 for debt securities measured at FVOCI: $ millions, as at or for the year ended October 31 2019 Debt securities measured at FVOCI Balance at beginning of year Provision for (reversal of) credit losses (1) Write-offs Other Balance at end of year 2018 Debt securities measured at FVOCI Balance at beginning of year Provision for (reversal of) credit losses (1) Write-offs Other Balance at end of year Stage 1 Stage 2 Stage 3 Collective provision 12-month ECL performing Collective provision lifetime ECL performing Collective and individual provision lifetime ECL credit-impaired $ $ $ $ 15 – – (1) 14 14 1 – – 15 $ $ $ 3 – – – 3 35 (32) – – $ $ $ 5 4 (4) 1 6 – 109 (5) (99) (2) $ 3 $ 5 $ 23 Total $ $ $ 23 4 (4) – 23 49 78 (5) (99) (1) (2) Included in the gains (losses) from debt securities measured at FVOCI and amortized cost, net on our consolidated statement of income. Includes ECL of $99 million relating to Barbados debt securities that were derecognized in the fourth quarter of 2018 as a result of a debt restructuring agreement completed with the Government of Barbados. Barbados debt restructuring As a result of a comprehensive debt restructuring agreement completed with the Government of Barbados in the fourth quarter of 2018, which impacts Barbados dollar-denominated debt instruments and excludes U.S. dollar-denominated debt, we derecognized debt securities measured at FVOCI with a par value of $467 million and expected credit losses of $99 million, and derecognized loans measured at amortized cost with a par value of $116 million and expected credit losses of $48 million. In exchange for the securities and loans that were derecognized, we recognized longer-dated securities with a par value of $522 million as originated credit-impaired amortized cost securities at a carrying value equal to the estimated fair value of $375 million with no initial allowance for expected credit losses as risk of future losses was reflected in the acquisition date discount, and recognized shorter-dated securities with a par value of $61 million as stage 1 amortized cost securities with expected credit losses of $1 million. CIBC 2019 ANNUAL REPORT 135 Consolidated financial statements Note 5 Loans(1)(2) $ millions, as at October 31 Residential mortgages (4) Personal Credit card Business and government (4) Gross amount Stage 3 allowance $ 208,652 43,651 12,755 125,798 $ 390,856 $ 140 128 – 376 $ 644 Stages 1 and 2 allowance $ 71 425 420 355 2019 Net total Total allowance (3) Gross amount Stage 3 allowance Stages 1 and 2 allowance Total allowance 2018 Net total $ 211 $ 208,441 43,098 553 12,335 420 125,067 731 $ 207,749 43,058 12,673 109,555 $ 143 109 – 230 $ 71 372 418 296 $ 214 $ 207,535 42,577 481 12,255 418 109,029 526 $ 1,271 $ 1,915 $ 388,941 $ 373,035 $ 482 $ 1,157 $ 1,639 $ 371,396 (1) (2) (3) (4) Loans are net of unearned income of $469 million (2018: $421 million). Includes gross loans of $69.5 billion (2018: $61.0 billion) denominated in U.S. dollars and $6.7 billion (2018: $4.8 billion) denominated in other foreign currencies. Includes ECL allowances for customers’ liability under acceptances. Includes $60 million of residential mortgages (2018: $12 million) and $21,182 million of business and government loans (2018: $16,424 million) that are measured at FVTPL. 136 CIBC 2019 ANNUAL REPORT Consolidated financial statements Allowance for credit losses The following table provides a reconciliation of the opening balance to the closing balance of the ECL allowance under IFRS 9: $ millions, as at or for the year ended October 31 Stage 1 Stage 2 Collective provision 12-month ECL performing Collective provision lifetime ECL performing Stage 3 Collective and individual provision lifetime ECL credit-impaired (1) Residential mortgages Balance at beginning of year Originations net of repayments and other derecognitions Changes in model Net remeasurement (2) Transfers (2) – to 12-month ECL – to lifetime ECL performing – to lifetime ECL credit-impaired Provision for (reversal of) credit losses (3) Write-offs (4) Recoveries Interest income on impaired loans Foreign exchange and other Balance at end of year Personal Balance at beginning of year Originations net of repayments and other derecognitions Changes in model Net remeasurement (2) Transfers (2) – to 12-month ECL – to lifetime ECL performing – to lifetime ECL credit-impaired Provision for (reversal of) credit losses (3) Write-offs (4) Recoveries Interest income on impaired loans Foreign exchange and other Balance at end of year Credit card Balance at beginning of year Originations net of repayments and other derecognitions Changes in model Net remeasurement (2) Transfers (2) – to 12-month ECL – to lifetime ECL performing – to lifetime ECL credit-impaired Provision for (reversal of) credit losses (3) Write-offs (4) Recoveries Interest income on impaired loans Foreign exchange and other Balance at end of year Business and government Balance at beginning of year Originations net of repayments and other derecognitions Changes in model Net remeasurement (2) Transfers (2) – to 12-month ECL – to lifetime ECL performing – to lifetime ECL credit-impaired Provision for (reversal of) credit losses (3) Write-offs (4) Recoveries Interest income on impaired loans Foreign exchange and other Balance at end of year Total ECL allowance (5) Comprises: Loans Undrawn credit facilities and other off-balance sheet exposures (6) $ $ $ $ $ $ $ $ $ $ 27 4 (2) (41) 42 (3) – – – – – 1 28 190 45 (14) (194) 183 (37) – (17) – – – 1 174 102 – 36 (190) 229 (33) – 42 – – – 1 145 180 32 – (17) 71 (21) (2) 63 – – – (4) 239 586 526 60 $ $ $ $ $ $ $ $ $ $ 44 (11) (6) 32 (30) 22 (7) – – – – (1) 43 199 (50) 30 283 (179) 51 (63) 72 – – – – 271 370 (50) (48) 477 (229) 33 (215) (32) – – – 2 340 147 (19) 1 97 (64) 25 (29) 11 – – – – 158 812 745 67 $ $ $ $ $ $ $ $ $ $ 143 (23) (5) 94 (12) (19) 7 42 (29) 2 (17) (1) 140 109 – – 309 (4) (14) 63 354 (395) 62 (5) 3 128 – – – 184 – – 215 399 (516) 117 – – – 230 (21) 3 350 (7) (4) 31 352 (190) 13 (18) (9) 378 646 644 2 2019 Total 214 (30) (13) 85 – – – 42 (29) 2 (17) (1) 211 498 (5) 16 398 – – – 409 (395) 62 (5) 4 573 472 (50) (12) 471 – – – 409 (516) 117 – 3 485 557 (8) 4 430 – – – 426 (190) 13 (18) (13) 775 2,044 1,915 129 $ $ $ $ $ $ $ $ $ $ Includes the ECL allowance for purchased credit-impaired loans from the acquisition of The PrivateBank. (1) (2) Transfers represent the amount of the ECL allowance at the beginning of the quarter in which the loan migration occurred. Net remeasurement represents the current period change in ECL allowances for transfers, net write-offs, changes in forecasts of forward-looking information, parameter updates, and partial repayments in the period. (3) Provision for (reversal of) credit losses for loans and undrawn credit facilities and other off-balance sheet exposures is presented as Provision for (reversal of) credit losses on our consolidated statement of income. (4) We generally continue to pursue collection on the amounts that were written off. The degree of collection efforts varies from one jurisdiction to another, depending on the local regulations and original agreements with customers. (5) See Note 4 for the ECL allowance on debt securities measured at FVOCI. The ECL allowances for other financial assets classified at amortized cost were immaterial as at October 31, 2019 and were excluded from the table above. Other financial assets classified at amortized cost are presented on our consolidated balance sheet net of ECL allowances. Included in Other liabilities on our consolidated balance sheet. (6) CIBC 2019 ANNUAL REPORT 137 Consolidated financial statements $ millions, as at or for the year ended October 31 Stage 1 Stage 2 Collective provision 12-month ECL performing Collective provision lifetime ECL performing Stage 3 Collective and individual provision lifetime ECL credit-impaired (1) Residential mortgages Balance at beginning of year Originations net of repayments and other derecognitions Changes in model Net remeasurement (2) Transfers (2) – to 12-month ECL – to lifetime ECL performing – to lifetime ECL credit-impaired Provision for (reversal of) credit losses (3) Write-offs (4) Recoveries Interest income on impaired loans Foreign exchange and other Balance at end of year Personal Balance at beginning of year Originations net of repayments and other derecognitions Changes in model Net remeasurement (2) Transfers (2) – to 12-month ECL – to lifetime ECL performing – to lifetime ECL credit-impaired Provision for (reversal of) credit losses (3) Write-offs (4) Recoveries Interest income on impaired loans Foreign exchange and other Balance at end of year Credit card Balance at beginning of year Originations net of repayments and other derecognitions Changes in model Net remeasurement (2) Transfers (2) – to 12-month ECL – to lifetime ECL performing – to lifetime ECL credit-impaired Provision for (reversal of) credit losses (3) Write-offs (4) Recoveries Interest income on impaired loans Foreign exchange and other Balance at end of year Business and government Balance at beginning of year Originations net of repayments and other derecognitions Changes in model Net remeasurement (2) Transfers (2) – to 12-month ECL – to lifetime ECL performing – to lifetime ECL credit-impaired Provision for (reversal of) credit losses (3) Write-offs (4) Recoveries Interest income on impaired loans Foreign exchange and other Balance at end of year Total ECL allowance (6) Comprises: Loans Undrawn credit facilities and other off-balance sheet exposures (7) $ $ $ $ $ $ $ $ $ $ 28 7 (2) (25) 20 (1) – (1) – – – – 27 164 34 (2) (116) 151 (40) – 27 – – – (1) 190 101 – – (143) 179 (35) – 1 – – – – 102 234 19 (11) (109) 66 (21) (1) (57) – – – 3 180 499 450 49 $ $ $ $ $ $ $ $ $ $ 43 (6) 1 13 (16) 9 (2) (1) – – – 2 44 202 (22) – 148 (148) 49 (31) (4) – – – 1 199 413 (24) 2 370 (179) 35 (247) (43) – – – – 370 150 (10) (7) 72 (60) 25 (24) (4) – – – 1 147 760 707 53 $ $ $ $ $ $ $ $ $ $ 151 (13) 22 60 (4) (8) 2 59 (54) – (10) (3) 143 110 (5) – 299 (3) (9) 31 313 (368) 58 (3) (1) 109 – – – 145 – – 247 392 (512) 120 – – – 204 (15) 1 187 (6) (4) 25 188 (116) 12 (10) (48) (5) 230 482 482 – 2018 Total 222 (12) 21 48 – – – 57 (54) – (10) (1) 214 476 7 (2) 331 – – – 336 (368) 58 (3) (1) 498 514 (24) 2 372 – – – 350 (512) 120 – – 472 588 (6) (17) 150 – – – 127 (116) 12 (10) (44) 557 1,741 1,639 102 $ $ $ $ $ $ $ $ $ $ Includes the ECL allowance for purchased credit-impaired loans from the acquisition of The PrivateBank. (1) (2) Transfers represent the amount of the ECL allowance at the beginning of the quarter in which the loan migration occurred. Net remeasurement represents the current period change in ECL allowances for transfers, net write-offs, changes in forecasts of forward-looking information, parameter updates, and partial repayments in the period. (3) Provision for (reversal of) credit losses for loans and undrawn credit facilities and other off-balance sheet exposures is presented as Provision for (reversal of) credit losses on our consolidated statement of income. (4) We generally continue to pursue collection on the amounts that were written off. The degree of collection efforts varies from one jurisdiction to another, depending on the local (5) regulations and original agreements with customers. Includes ECL of $48 million relating to Barbados loans that were derecognized in the fourth quarter of 2018 as a result of a debt restructuring agreement completed with the Government of Barbados. (6) See Note 4 for the ECL allowance on debt securities measured at FVOCI. The ECL allowances for other financial assets classified at amortized cost were immaterial as at October 31, 2018 and were excluded from the table above. Other financial assets classified at amortized cost are presented on our consolidated balance sheet net of ECL allowances. Included in Other liabilities on our consolidated balance sheet. (7) Inputs, assumptions and model techniques Our ECL allowances are estimated using complex models that incorporate inputs, assumptions and model techniques that involve a high degree of management judgment. In particular, the following ECL elements are subject to a high level of judgment that can have a significant impact on the level of ECL allowances provided: (cid:129) (cid:129) Determining when a significant increase in credit risk of a loan has occurred; Measuring both 12-month and lifetime credit losses; and 138 CIBC 2019 ANNUAL REPORT Consolidated financial statements (cid:129) Forecasting forward-looking information for multiple scenarios and determining the probability weighting of the scenarios. In addition, the interrelationship between these elements is also subject to a high degree of judgment which can also have a significant impact on the level of ECL recognized. Determining when a significant increase in credit risk has occurred The determination of whether a loan has experienced a significant increase in credit risk has a significant impact on the level of ECL allowance as loans that are in stage 1 are measured at 12-month ECL, while loans in stage 2 are measured at lifetime ECL. Migration of loans between stage 1 and stage 2 can cause significant volatility in the amount of the recognized ECL allowances and the provision for credit losses in a particular period. For the majority of our retail loan portfolios, we determine a significant increase in credit risk based on relative changes in the loan’s lifetime PD since its initial recognition. The PDs used for this purpose are the expected value of our upside, downside and base case lifetime PDs. Significant judgment is involved in determining the upside, downside and base case lifetime PDs through the incorporation of forward-looking information into long run PDs, in determining the probability weightings of the scenarios, and in determining the relative change in PDs that are indicative of a significant increase in credit risk for our various retail products. Increases in the expected PDs or decreases in the thresholds for changes in PDs that are indicative of a significant increase in credit risk can cause significant migration of loans from stage 1 to stage 2, which in turn can cause a significant increase in the amount of ECL allowances recognized. In contrast, decreases in the expected PDs or increases in the thresholds for changes in PDs that are indicative of a significant increase in credit risk can cause significant migration of loans from stage 2 to stage 1. For the majority of our business and government loan portfolios, we determine a significant increase in credit risk based on relative changes in internal risk ratings since initial recognition. Significant judgment is involved in the determination of the internal risk ratings. Deterioration or improvement in the risk ratings or adjustments to the risk rating downgrade thresholds used to determine a significant increase in credit risk can cause significant migration of loans and securities between stage 1 and stage 2, which in turn can have a significant impact on the amount of ECL allowances recognized. While potentially significant to the level of ECL allowances recognized, the thresholds for changes in PDs that are indicative of a significant increase in credit risk for our retail portfolios and the risk rating downgrade thresholds used to determine a significant increase in credit risk for our business and government loan portfolios are not expected to change frequently. All loans on which repayment of principal or payment of interest is contractually 30 days in arrears and all business and government loans that have migrated to the watch list are automatically migrated to stage 2 from stage 1. As at October 31, 2019, if the ECL for the stage 2 performing loans were measured using stage 1 ECL as opposed to lifetime ECL, the expected credit losses would be $305 million lower than the total recognized IFRS 9 ECL on performing loans (2018: $273 million). Measuring both 12-month and lifetime expected credit losses Our ECL models leverage the PD, LGD, and EAD parameters, as well as the portfolio segmentation used to calculate Basel expected loss regulatory adjustments for the portion of our retail and business and government portfolios under the advanced internal ratings-based (AIRB) approach. Adjustments are 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 consider forward-looking information. For standardized business and government portfolios, available long-run PDs, LGDs and EADs are also converted to point-in-time parameters through the incorporation of forward- looking information for the purpose of measuring ECL under IFRS 9. Significant judgment is involved in determining which forward-looking information variables are relevant for particular portfolios and in determining the extent by which through-the-cycle parameters should be adjusted for forward-looking information to determine point-in-time parameters. While changes in the set of forward-looking information variables used to convert through-the-cycle PDs, LGDs and EADs into point-in-time parameters can either increase or decrease ECL allowances in a particular period, changes to the mapping of forward-looking information variables to particular portfolios are expected to be infrequent. However, changes in the particular forward-looking information parameters used to quantify point-in-time parameters will be frequent as our forecasts are updated on a quarterly basis. Increases in the level of pessimism in the forward-looking information variables will cause increases in expected credit losses, while increases in the level of optimism in the forward-looking information variables will cause decreases in expected credit losses. These increases and decreases could be significant in any particular period and will start to occur in the period where our outlook of the future changes. With respect to the lifetime of a financial instrument, the maximum period considered when measuring ECL is the maximum contractual period over which we are exposed to credit risk. For revolving facilities, such as credit cards, the lifetime of a credit card account is the expected behavioural life. Significant judgment is involved in the estimate of the expected behavioural life. Increases in the expected behavioural life will increase the amount of ECL allowances, in particular for revolving loans in stage 2. Forecasting forward-looking information for multiple scenarios and determining the probability weighting of the scenarios As indicated above, forward-looking information is incorporated into both our assessment of whether the financial asset has experienced a significant increase in credit risk since its initial recognition and in our estimate of ECL. From analysis of historical data, our risk management function has identified and reflected in our ECL allowance those relevant forward-looking information variables that contribute to credit risk and losses within our retail and business and government loan portfolios. Within our retail loan portfolio, key forward-looking information variables include unemployment rates, housing prices and gross domestic product (GDP) growth. In many cases these variables are forecasted at the provincial level. Housing prices are also forecasted at the municipal level in some cases. Within our business and government loan portfolio, key drivers that impact the credit performance of the entire portfolio include S&P 500 growth rates, business credit growth rates, unemployment rates and credit spreads, while forward-looking information variables such as commodity prices and mining activity are significant for certain portfolios. Our forecasting process leverages the process used prior to the adoption of IFRS 9. For the majority of our loan portfolios, our forecast of forward- looking information variables is established from a “base case” or most likely scenario that is used internally by management for planning and forecasting purposes. For most of the forward-looking information variables related to our Canadian businesses, we have forecast scenarios by province. In forming the “base case” scenario, we consider the forecasts of monetary authorities such as the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), and the Bank of Canada, as well as private sector economists. We then derive reasonably possible “upside case” and “downside case” scenarios using external forecasts that are above and below our “base case” and the application of management judgment. A probability weighting is assigned to our “base case”, “upside case” and “downside case” scenarios based on management judgment. CIBC 2019 ANNUAL REPORT 139 Consolidated financial statements The following table provides the base case, upside case and downside case scenario forecasts for select forward-looking information variables used to estimate our ECLs. The base case, upside case and downside case amounts shown represent the average value of the forecasts over the respective projection horizons. As at October 31, 2019 Canadian GDP year-over-year growth (1) Canadian unemployment rate (1) Canadian Housing Price Index growth (1) S&P 500 Index growth rate West Texas Intermediate Oil Price (US$) Base case Upside case Downside case Average value over the next 12 months Average value over the remaining forecast period Average value over the next 12 months Average value over the remaining forecast period Average value over the next 12 months Average value over the remaining forecast period 1.5 % 6.1 % 1.6 % 5.0 % 60 $ 1.8 % 5.9 % 2.2 % 4.7 % 60 $ 2.3 % 5.5 % 4.8 % 8.2 % 67 $ 2.5 % 5.5 % 4.0 % 6.6 % 74 $ 0.6 % 6.4 % (2.2)% (3.7)% 47 $ 0.8 % 6.5 % (0.8)% (10.3)% 43 $ As at October 31, 2018 Canadian GDP year-over-year growth (1) Canadian unemployment rate (1) Canadian Housing Price Index growth (1) S&P 500 Index growth rate West Texas Intermediate Oil Price (US$) Base case Average value over the next 12 months Average value over the remaining forecast period 1.9 % 5.8 % 2.2 % 4.6 % 67 $ 1.4 % 6.0 % 2.3 % (1.4)% 65 $ Upside case Average value over the forecast period 2.3 % 5.3 % 6.4 % 11.3 % 78 $ Downside case Average value over the forecast period 1.2 % 6.4 % (1.2)% (10.8)% 52 $ (1) Federal-level forward-looking forecasts are presented in the table above, which represent the aggregation of the provincial-level forecasts used to estimate our ECL. Housing Price Index growth rates are also forecasted at the municipal level in some cases. As a result, the forecasts for individual provinces or municipalities reflected in our ECLs will differ from the federal forecasts presented above. The forecasting process is overseen by a governance committee consisting of internal stakeholders from across our bank including Risk Management, Economics, Finance and the impacted SBUs and involves a significant amount of judgment both in determining the forward-looking information forecasts for our various scenarios and in determining the probability weighting assigned to the scenarios. In general, a worsening of our outlook on forecasted forward-looking information for each scenario, an increase in the probability of the “downside case” scenario occurring, or a decrease in the probability of the “upside case” scenario occurring will increase the number of loans migrating from stage 1 to stage 2 and increase the estimated ECL allowance. In contrast, an improvement in our outlook on forecasted forward-looking information, an increase in the probability of the “upside case” scenario occurring, or a decrease in the probability of the “downside case” scenario occurring will have the opposite impact. It is not possible to meaningfully isolate the impact of changes in the various forward-looking information variables for a particular scenario because of both the interrelationship between the variables and the interrelationship between the level of pessimism inherent in a particular scenario and its probability of occurring. As indicated above, forecasting forward-looking information for multiple scenarios and determining the probability weighting of the scenarios involves a high degree of management judgment. If we were to only use our base case scenario for the measurement of ECL for our performing loans, our ECL allowance would be $63 million lower than the recognized ECL as at October 31, 2019 (2018: $45 million). If we were to only use our downside case scenario for the measurement of ECL for our performing loans, our ECL allowance would be $254 million higher than the recognized ECL as at October 31, 2019 (2018: $241 million). This sensitivity is isolated to the measurement of ECL and therefore did not consider changes in the migration of exposures between stage 1 and stage 2 from the determination of the significant increase in credit risk that would have resulted in a 100% base case scenario or a 100% downside scenario. Management overlays to ECL allowance estimates are adjustments which we use in circumstances where we judge that our existing inputs, assumptions and model techniques do not capture all relevant risk factors. The emergence of new macroeconomic, microeconomic or political events, along with expected changes to parameters, models or data that are not incorporated in our current parameters, internal risk rating migrations, or forward-looking information are examples of such circumstances. The use of management overlays requires the application of significant judgment that may impact the amount of ECL allowances recognized. 140 CIBC 2019 ANNUAL REPORT Consolidated financial statements The following tables provide the gross carrying amount of loans, and the contractual amounts of undrawn credit facilities and other off-balance sheet exposures based on the application of our 12-month point in time PDs under IFRS 9 to our risk management PD bands for retail exposures, and based on our internal risk ratings for business and government exposures. Refer to “Credit risk” section of the MD&A for details on the CIBC risk categories. Loans(1) $ millions, as at October 31 Residential mortgages – Exceptionally low – Very low – Low – Medium – High – Default – Not rated Gross residential mortgages (5)(6) ECL allowance Net residential mortgages Personal – Exceptionally low – Very low – Low – Medium – High – Default – Not rated Gross personal (6) ECL allowance Net personal Credit card – Exceptionally low – Very low – Low – Medium – High – Default – Not rated Gross credit card ECL allowance Net credit card Business and government (7) – Investment grade – Non-investment grade – Watchlist – Default – Not rated Gross business and government (5)(8) ECL allowance Net business and government Stage 1 Stage 2 Stage 3 (2)(3)(4) $ $ $ 142,260 37,140 17,315 1,207 11 – 2,251 200,184 28 200,156 24,258 4,321 4,955 3,703 302 – 720 38,259 160 38,099 3,015 1,142 5,619 1,344 10 – 158 11,288 129 11,159 46,800 80,780 374 – 752 128,706 209 128,497 $ – – 1,010 5,312 1,162 – 233 7,717 43 7,674 – 1,353 1,582 1,611 613 – 29 5,188 265 4,923 – 83 274 565 538 – 7 1,467 291 1,176 251 3,443 1,575 – 79 5,348 146 5,202 – – – – – 597 154 751 140 611 – – – – – 164 40 204 128 76 – – – – – – – – – – – – – 866 45 911 376 535 2019 Total 142,260 37,140 18,325 6,519 1,173 597 2,638 208,652 211 208,441 24,258 5,674 6,537 5,314 915 164 789 43,651 553 43,098 3,015 1,225 5,893 1,909 548 – 165 12,755 420 12,335 47,051 84,223 1,949 866 876 134,965 731 134,234 Stage 1 Stage 2 Stage 3 (2)(3)(4) $ $ $ 141,556 40,225 15,321 859 – – 2,163 200,124 27 200,097 23,808 3,813 5,954 4,428 245 – 677 38,925 176 38,749 3,405 1,747 3,809 1,011 10 – 162 10,144 88 10,056 42,993 69,560 279 – 1,040 113,872 159 113,713 – – 798 4,905 996 – 249 6,948 44 6,904 – 1,374 702 1,151 691 – 33 3,951 196 3,755 – 50 710 1,241 528 – – 2,529 330 2,199 221 3,819 1,201 – 86 5,327 137 5,190 – – – – – 510 167 677 143 534 – – – – – 142 40 182 109 73 – – – – – – – – – – – – – 504 117 621 230 391 998 $ 2018 Total 141,556 40,225 16,119 5,764 996 510 2,579 207,749 214 207,535 23,808 5,187 6,656 5,579 936 142 750 43,058 481 42,577 3,405 1,797 4,519 2,252 538 – 162 12,673 418 12,255 43,214 73,379 1,480 504 1,243 119,820 526 119,294 $ 381,661 Total net amount of loans $ 377,911 $ 18,975 $ 1,222 $ 398,108 $ 362,615 $ 18,048 $ (1) Other financial assets classified at amortized cost were excluded from the table above as their ECL allowances were immaterial as at October 31, 2019. In addition, the table excludes debt securities measured at FVOCI, for which ECL allowances of $23 million (2018: $23 million) were recognized in AOCI. Includes purchased credit-impaired loans from the acquisition of The PrivateBank. (2) (3) Excludes foreclosed assets of $25 million (2018: $14 million) which were included in Other assets on our consolidated balance sheet. (4) As at October 31, 2019, 90% (2018: 89%) of stage 3 impaired loans were either fully or partially collateralized. (5) (6) The internal risk rating grades presented for residential mortgages and certain personal loans do not take into account loan guarantees or insurance issued by the Canadian Includes $60 million (2018: $12 million) of residential mortgages and $21,182 million (2018: $16,424 million) of business and government loans that are measured at FVTPL. government (federal or provincial), Canadian government agencies, or private insurers, as the significant increase in credit risk of these loans is based on relative changes in the loans’ lifetime PD without considering collateral or other credit enhancements. (7) Certain comparative information has been reclassified between internal risk rating categories. Includes customers’ liability under acceptances of $9,167 million (2018: $10,265 million). (8) CIBC 2019 ANNUAL REPORT 141 Consolidated financial statements Undrawn credit facilities and other off-balance sheet exposures $ millions, as at October 31 Retail – Exceptionally low – Very low – Low – Medium – High – Default – Not rated Gross retail ECL allowance Net retail Business and government (1) – Investment grade – Non-investment grade – Watchlist – Default – Not rated Gross business and government ECL allowance Net business and government Total net undrawn credit facilities and other off-balance sheet exposures Stage 1 Stage 2 Stage 3 $ 106,696 7,341 10,974 1,737 255 – 397 127,400 30 127,370 78,906 52,379 65 – 688 132,038 30 132,008 $ 120 1,126 1,357 752 495 – 32 3,882 55 3,827 296 1,282 575 – 60 2,213 12 2,201 $ – – – – – 19 – 19 – 19 – – – 69 – 69 2 67 $ 2019 Total 106,816 8,467 12,331 2,489 750 19 429 131,301 85 131,216 79,202 53,661 640 69 748 134,320 44 134,276 Stage 1 Stage 2 Stage 3 $ 100,772 10,217 7,873 1,729 234 – 348 121,173 28 121,145 78,678 41,780 81 – 670 121,209 21 121,188 $ – 1,014 1,612 1,188 417 – 33 4,264 43 4,221 390 1,198 404 – 49 2,041 10 2,031 $ – – – – – 13 – 13 – 13 – – – 7 – 7 – 7 $ 2018 Total 100,772 11,231 9,485 2,917 651 13 381 125,450 71 125,379 79,068 42,978 485 7 719 123,257 31 123,226 $ 259,378 $ 6,028 $ 86 $ 265,492 $ 242,333 $ 6,252 $ 20 $ 248,605 (1) Certain comparative information has been reclassified between internal risk rating categories. 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 $8 million, $20 million and $134 million; and fair values of $6 million, $14 million, and $105 million, respectively, as at October 31, 2019, October 31, 2018, and June 23, 2017 (the acquisition date). Loans contractually past due 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 $ 2,608 763 559 555 $ 31 to 90 days 862 185 180 177 $ 4,485 $ 1,404 Over 90 days $ $ – – 99 – 99 $ 2019 Total 3,470 948 838 732 $ 2018 Total 3,354 937 822 683 $ 5,988 $ 5,796 During the year, gross interest income that would have been recorded if impaired loans were treated as current was $99 million (2018: $81 million), of which $46 million (2018: $27 million) was in Canada and $53 million (2018: $54 million) was outside Canada. During the year, interest recognized on impaired loans was $40 million (2018: $23 million), and interest recognized on loans before being classified as impaired was $58 million (2018: $59 million), of which $43 million (2018: $41 million) was in Canada and $15 million (2018: $18 million) was outside Canada. 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 $ 2019 20,697 10,146 10,551 1,286 $ 2018 17,505 7,440 10,065 870 $ 9,265 $ 9,195 2017 13,593 4,616 8,977 829 8,148 $ $ Modified financial assets From time to time, we may modify the contractual terms of loans classified as stage 2 and stage 3 for which the borrower has experienced financial difficulties, through the granting of a concession in the form of below-market rates or terms that we would not otherwise have considered. Changes to the present value of the estimated future cash payments through the expected life of the modified loan discounted at the loan’s original effective interest rate are recognized through changes in the ECL allowance and provision for credit losses. During the year ended October 31, 2019, loans classified as stage 2 with an amortized cost of $223 million (2018: $133 million) and loans classified as stage 3 with an amortized cost of $123 million (2018: $119 million), in each case before the time of modification, were modified through the granting of a financial concession in response to the borrower having experienced financial difficulties. In addition, the gross carrying amount of previously modified stage 2 or stage 3 loans that have returned to stage 1 during the year ended October 31, 2019 was $15 million (2018: $42 million). 142 CIBC 2019 ANNUAL REPORT 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. 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), which 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, 2019, $2.9 billion of credit card receivable assets with a fair value of $2.9 billion (2018: $4.1 billion with a fair value of $4.1 billion) supported associated funding liabilities of $2.9 billion with a fair value of $2.9 billion (2018: $4.1 billion with a fair value of $4.1 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, 2019, our structured program had outstanding covered bond liabilities of nil with a fair value of nil (2018: $0.3 billion with a fair value of $0.3 billion) and our legislative program had outstanding covered bond liabilities of $18.9 billion with a fair value of $19.0 billion (2018: $19.5 billion with a fair value of $19.6 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, 2019, the total assets and non-controlling interests in consolidated CIBC-managed investment funds were $23 million and $15 million, respectively (2018: $64 million and $31 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, 2019, the program had outstanding loans of $55 million (2018: $59 million). 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. The multi-seller conduits acquire direct or indirect ownership or security interests in pools of financial assets from our clients and finance the acquisitions by issuing asset-backed commercial paper (ABCP) to investors. The single-seller conduit acquires financial assets and finances these acquisitions through a credit facility provided by a syndicate of financial institutions. The sellers to the conduits may continue to service the assets and may be exposed to credit losses realized on these assets, typically through the provision of over-collateralization or another form of retained interest. The conduits may obtain credit enhancement from third-party providers. As at October 31, 2019, the total assets in the single-seller conduit and multi-seller conduits amounted to $0.5 billion and $7.1 billion, respectively (2018: $0.5 billion and $7.1 billion, respectively). We generally provide the multi-seller conduits with commercial paper backstop liquidity facilities, securities distribution, and provide both the single and multi-seller conduits with accounting, cash management, and operations services. The liquidity facilities for the managed and administered multi-seller conduits require us to provide funding, subject to the satisfaction of certain conditions with respect to the conduits, for ABCP not placed with external investors. We also may purchase ABCP issued by the multi-seller conduits for market-making purposes. CIBC 2019 ANNUAL REPORT 143 Consolidated financial statements We are required to maintain certain short-term and/or long-term debt ratings with respect to the liquidity facilities that we provide to the sponsored multi-seller conduits. If we are downgraded below the level specified under the terms of those facilities, we must provide alternative satisfactory liquidity arrangements, such as procuring an alternative liquidity provider that meets the minimum rating requirements. We may also act as the counterparty to derivative contracts entered into by a multi-seller conduit in order to convert the yield of the underlying assets to match the needs of the multi-seller conduit’s investors or to mitigate the interest rate, basis, and currency risk within the conduit. 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 loans, liquidity and credit facilities to third-party SEs. We also have investments in limited partnerships in which we generally are a passive investor of the limited partnerships as a limited partner, and in some cases, we are the co-general partner and have significant influence over the limited partnerships. Similar to other limited partners, we are obligated to provide funding up to our commitment level to these limited partnerships. 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. 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, 2019, the total AUM in the non-consolidated CIBC-managed investment funds amounted to $122.7 billion (2018: $114.4 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, 2019, the assets in the CIBC structured CDO vehicles have a total principal amount of $232 million (2018: $334 million). 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. 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 $279 million (2018: $241 million). 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, 2019, the total assets of these limited liability entities were $4.8 billion (2018: $4.6 billion). 144 CIBC 2019 ANNUAL REPORT 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, 2019 On-balance sheet assets at carrying value (3) Securities Loans Investments in equity-accounted associates and joint ventures October 31, 2018 On-balance sheet liabilities at carrying value (3) Deposits Derivatives (4) October 31, 2018 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, 2018 Single-seller and multi-seller conduits Third-party structured vehicles – continuing Structured vehicles run-off (1) $ $ $ $ $ $ $ $ $ 26 87 – 113 102 – – – – 113 – 7,137 (5) – 7,250 7,238 $ $ $ $ $ $ $ $ $ 1,930 1,415 – 3,345 3,347 – – – – 3,345 – 2,358 – 5,703 5,003 $ $ $ $ $ $ $ $ $ 3 – – 3 3 – 112 112 131 3 27 13 (30) 13 13 Other (2) 320 – 12 332 303 302 – 302 1,600 332 – 127 (41) 418 368 $ $ $ $ $ $ $ $ $ Includes CIBC structured CDO vehicles and third-party structured vehicles. Includes pass-through investment structures, CIBC Capital Trust, and CIBC-managed investment funds and Community Reinvestment Act-related investment vehicles. (1) (2) (3) Excludes SEs established by CMHC, Fannie Mae, Freddie Mac, Ginnie Mae, FHLB, Federal Farm Credit Bank, and Student Loan Marketing Association. (4) 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 client facilitation. (5) Excludes an additional $1.6 billion (2018: $1.7 billion) relating to our backstop liquidity facilities provided to the multi-seller conduits as part of their commitment to fund purchases of additional assets. Also excludes $26 million (2018: $9 million) of 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 CMHC. Under the Canada Mortgage Bond Program, sponsored by 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 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 does 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. CIBC 2019 ANNUAL REPORT 145 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) Securities lent for cash collateral (2) Securities lent for securities collateral (2) Associated liabilities (3) Carrying amount 16,245 $ 15,663 45 21,789 2019 Fair value 16,264 15,663 45 21,789 53,742 $ 53,761 54,591 $ 54,734 $ $ $ Carrying amount 18,433 10,482 15 21,277 50,207 50,448 $ $ $ 2018 Fair value 18,286 10,482 15 21,277 50,060 50,564 $ $ $ (1) Consists mainly of Canadian residential mortgage loans transferred to Canada Housing Trust. Certain cash in transit balances related to the securitization process amounting to $738 million (2018: $705 million) have been applied to reduce these balances. (2) Does not include over-collateralization of assets pledged. Repurchase and securities lending arrangements are conducted with both CIBC-owned and third-party assets on a pooled basis. The carrying amounts represent an estimated allocation related to the transfer of our own financial assets. Includes the obligation to return off-balance sheet securities collateral on securities lent. (3) Note 7 Land, buildings and equipment $ millions, as at or for the year ended October 31 2019 Cost Balance at beginning of year Additions (3) Disposals (4) Adjustments (5) Balance at end of year 2018 Balance at end of year 2019 Accumulated depreciation Balance at beginning of year Depreciation (4) Disposals (4) Adjustments (5) Balance at end of year 2018 Balance at end of year Net book value As at October 31, 2019 As at October 31, 2018 Land and buildings (1) Computer equipment Office furniture, equipment and other (2) Leasehold improvements $ $ $ $ $ $ $ $ 1,384 22 (23) – 1,383 1,384 644 38 (13) – 669 644 714 740 $ $ $ $ $ $ $ $ 1,164 118 (239) – 1,043 1,164 953 105 (239) – 819 953 224 211 $ $ $ $ $ $ $ $ 937 82 (6) – 1,013 937 477 48 (4) – 521 477 492 460 $ $ $ $ $ $ $ $ 1,134 70 (1) 1 1,204 1,134 750 72 (1) – 821 750 383 384 Total 4,619 292 (269) 1 4,643 4,619 2,824 263 (257) – 2,830 2,824 1,813 1,795 $ $ $ $ $ $ $ $ (1) (2) (3) (4) (5) Includes land and building underlying a finance lease arrangement. See below for further details. Includes $173 million (2018: $152 million) of work-in-progress not subject to depreciation. Includes acquisitions through business combinations of $1 million (2018: nil). Includes write-offs of fully depreciated assets. Includes foreign currency translation adjustments. Net additions and disposals during the year were: Canadian Personal and Small Business Banking net additions of $3 million (2018: net additions of $45 million); Canadian Commercial Banking and Wealth Management net additions of $3 million (2018: net additions of $6 million); U.S. Commercial Banking and Wealth Management net additions of $27 million (2018: net additions of $28 million); Capital Markets net additions of $1 million (2018: net additions of $1 million); and Corporate and Other net disposals of $11 million (2018: net additions of $138 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 Depreciation Foreign currency adjustments Balance at end of year 2019 2018 $ 363 (24) – $ 379 (23) 7 $ 339 $ 363 Rental income of $98 million (2018: $97 million; 2017: $99 million) was generated from the investment property. Interest expense of $24 million (2018: $25 million; 2017: $28 million) and non-interest expenses of $44 million (2018: $49 million; 2017: $40 million) were incurred in respect of the finance lease property. Our commitment related to the finance lease is disclosed in Note 21. 146 CIBC 2019 ANNUAL REPORT Consolidated financial statements Note 8 Goodwill, software and other intangible assets Goodwill The carrying amount of goodwill is reviewed for impairment annually as at August 1 and whenever there are events or changes in circumstances which indicate that the carrying amount may not be recoverable. Goodwill is allocated to CGUs for the purposes of impairment testing based on the lowest level for which identifiable cash inflows are largely independent of cash inflows from other assets or groups of assets. The goodwill impairment test is performed by comparing the recoverable amount of the CGU to which goodwill has been allocated with the carrying amount of the CGU including goodwill, with any deficiency recognized as impairment to goodwill. The recoverable amount of a CGU is defined as the higher of its estimated fair value less cost to sell and value in use. We have three significant CGUs to which goodwill has been allocated. The changes in the carrying amount of goodwill are allocated to each CGU as follows: $ millions, as at or for the year ended October 31 2019 Balance at beginning of year Acquisitions Impairment Foreign currency translation adjustments Balance at end of year 2018 Balance at beginning of year (1) Acquisitions Impairment Foreign currency translation adjustments Balance at end of year CGUs CIBC FirstCaribbean Canadian Wealth Management $ $ $ $ 413 – (135) – 278 405 – – 8 413 $ $ $ $ 884 – – – 884 884 – – – 884 U.S. Commercial Banking and Wealth Management $ $ $ 4,078 4 – 2 4,084 3,952 29 (2) – 97 $ 4,078 Other 189 14 – – 203 126 62 – 1 189 $ $ $ $ $ $ $ Total 5,564 18 (135) 2 5,449 5,367 91 – 106 $ 5,564 (1) Net of cumulative impairment charges for CIBC FirstCaribbean goodwill of $623 million, and nil for other CGUs. (2) Additional goodwill recognized from our acquisition of The PrivateBank. See Note 3 for additional details. Impairment testing of goodwill and key assumptions CIBC FirstCaribbean CIBC acquired a controlling interest in 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 approximately US$12 billion, operates in the Caribbean and is traded on the stock exchanges of Barbados and Trinidad. The results of CIBC FirstCaribbean are included in Corporate and Other. In the fourth quarter of 2019, we performed our annual impairment test and determined that the estimated recoverable amount of the CIBC FirstCaribbean CGU was less than its carrying amount as a result of our assessment of the valuation implied by the expected sale of CIBC’s controlling interest in CIBC FirstCaribbean. As a result, we recognized a goodwill impairment charge in other non-interest expense of $135 million. This charge is reflected in Corporate and Other. Estimation of the recoverable amount is an area of significant judgment. Reductions in the estimated recoverable amount could arise from various factors, including closing adjustments related to the planned sale of CIBC’s controlling interest in CIBC FirstCaribbean and other changes in market conditions. See Note 3 for additional details on the expected sale of our controlling interest in CIBC FirstCaribbean. 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 8.0 to 10.9 as at August 1, 2019 (August 1, 2018: 9.2 to 19.2). 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, 2019. As a result, no impairment charge was recognized during 2019. If alternative reasonably possible changes in key assumptions were applied, the result of the impairment test would not differ. U.S. Commercial Banking and Wealth Management During 2017, we completed the acquisitions of The PrivateBank and Geneva Advisors. In addition, during 2019, we completed the acquisition of LGA. The goodwill arising from these acquisitions has been allocated to the U.S. Commercial Banking and Wealth Management CGU. The recoverable amount of U.S. Commercial Banking and Wealth Management is based on a value in use calculation that is estimated using a five-year cash flow projection approved by management, and an estimate of the capital required to be maintained to support ongoing operations. We have determined that for the impairment testing performed as at August 1, 2019, the estimated recoverable amount of the CIBC U.S. Commercial Banking and Wealth Management CGU was in excess of its carrying amount. As a result, no impairment charge was recognized during 2019. A terminal growth rate of 3.5% as at August 1, 2019 (August 1, 2018: 3.5%) was applied to the years after the five-year forecast. All of the forecasted cash flows were discounted at an after-tax rate of 9.0% as at August 1, 2019 (10.2% pre-tax) which we believe to be a risk-adjusted discount rate appropriate to U.S. Commercial Banking and Wealth Management (we used an after-tax rate of 10.0% as at August 1, 2018). 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; and (iii) beta adjustment to the equity risk premium based on a review of betas of comparable publicly traded financial institutions in the region. The terminal growth rate was based on management’s expectations of real growth and forecast inflation rates. See Note 3 for additional details on our acquisitions of The PrivateBank, Geneva Advisors and LGA. CIBC 2019 ANNUAL REPORT 147 Consolidated financial statements 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, 2019, the estimated recoverable amount of these CGUs was in excess of their carrying amounts. Allocation to strategic business units Goodwill of $5,449 million (2018: $5,564 million) is allocated to the SBUs as follows: Canadian Commercial Banking and Wealth Management of $954 million (2018: $954 million), Corporate and Other of $327 million (2018: $462 million), U.S. Commercial Banking and Wealth Management of $4,084 million (2018: $4,078 million), Capital Markets of $77 million (2018: $63 million), and Canadian Personal and Small Business Banking of $7 million (2018: $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 2019 2018 Balance at beginning of year Foreign currency translation adjustments Balance at end of year Balance at beginning of year Foreign currency translation adjustments Balance at end of year (1) Represents management contracts purchased as part of past acquisitions. (2) Acquired as part of the CIBC FirstCaribbean acquisition. The components of finite-lived software and other intangible assets are as follows: Contract based (1) Brand name (2) Total $ $ $ $ 116 – 116 116 – 116 $ $ $ $ 26 – 26 25 1 26 $ $ $ $ 142 – 142 141 1 142 $ millions, as at or for the year ended October 31 2019 Gross carrying amount Balance at beginning of year Acquisition through business combinations Additions Disposals (5) Adjustments (6) Balance at end of year 2018 Balance at end of year 2019 Accumulated amortization Balance at beginning of year Amortization and impairment (5) Disposals (5) Adjustments (6) Balance at end of year 2018 Balance at end of year Net book value As at October 31, 2019 As at October 31, 2018 Core deposit Software (1) intangibles (2) Contract based (3) Customer relationships (4) $ $ $ $ $ $ $ $ 2,986 – 452 (386) – 3,052 2,986 1,685 331 (385) – 1,631 1,685 1,421 1,301 $ $ $ $ $ $ $ $ 611 – – – – 611 611 320 69 – – 389 320 222 291 $ $ $ $ $ $ $ $ 34 3 – – 1 38 34 6 5 – – 11 6 27 28 $ $ $ $ $ $ $ $ 314 9 – – (1) 322 314 131 35 – (1) 165 131 157 183 Total 3,945 12 452 (386) – 4,023 3,945 2,142 440 (385) (1) 2,196 2,142 1,827 1,803 $ $ $ $ $ $ $ $ Includes $515 million (2018: $467 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 including The PrivateBank and Geneva Advisors in 2017, as well as LGA and Cleary Gull in 2019. (4) Represents customer relationships associated with past acquisitions including The PrivateBank and Geneva Advisors in 2017, and LGA in 2019. (5) (6) Includes write-offs of fully amortized assets. Includes foreign currency translation adjustments. Net additions and disposals of gross carrying amount during the year were: Canadian Personal and Small Business Banking net disposals of $12 million (2018: net additions of nil); Canadian Commercial Banking and Wealth Management net disposals of nil (2018: net disposals of nil); U.S. Commercial Banking and Wealth Management net additions of $10 million (2018: net additions of $12 million); Capital Markets net disposals of $1 million (2018: net additions of nil); and Corporate and Other net additions of $81 million (2018: net additions of $351 million). 148 CIBC 2019 ANNUAL REPORT Consolidated financial statements Note 9 Other assets $ millions, as at October 31 Accrued interest receivable Defined benefit asset (Note 18) Precious metals (1) Brokers’ client accounts Current tax receivable Other prepayments Derivative collateral receivable Accounts receivable Other (1) Includes gold and silver bullion that are measured at fair value using unadjusted market prices quoted in active markets. Payable on Payable after Payable on a demand (3) notice (4) fixed date (5)(6) $ 12,182 62,706 5,120 – $ 108,485 60,379 191 – $ 57,424 134,417 5,913 38,895 $ 80,008 $ 169,055 $ 236,649 Note 10 Deposits(1)(2) $ 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 (9): Non-interest-bearing deposits Canada U.S. Other international Interest-bearing deposits Canada U.S. Other international $ 2019 1,414 175 1,815 5,471 3,542 745 6,185 759 717 $ 2018 1,292 362 251 2,997 3,175 685 5,071 868 582 $ 20,823 $ 15,283 $ $ $ $ $ 2019 Total 178,091 257,502 11,224 38,895 485,712 475,254 10,458 485,712 51,880 7,876 4,647 344,756 56,844 19,709 $ $ $ $ $ 2018 Total 163,879 240,149 14,380 42,607 461,015 453,498 7,517 461,015 49,858 7,737 4,378 321,188 57,522 20,332 $ 485,712 $ 461,015 Includes deposits of $152.8 billion (2018: $155.5 billion) denominated in U.S. dollars and deposits of $30.0 billion (2018: $24.3 billion) denominated in other foreign currencies. (1) (2) Net of purchased notes of $2,930 million (2018: $2,689 million). (3) (4) (5) (6) 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 $8,985 million (2018: $190 million) of deposits which are subject to the bank recapitalization (bail-in) conversion regulations issued by the Department of Finance (Canada). These regulations provide certain statutory powers to the Canada Deposit Insurance Corporation (CDIC), including the ability to convert specified eligible shares and liabilities of CIBC into common shares in the event that CIBC is determined to be non-viable. Includes $302 million (2018: $1,600 million) of Notes issued to CIBC Capital Trust. (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 vehicles. (9) Classification is based on geographical location of the CIBC office. Note 11 Other liabilities $ millions, as at October 31 Accrued interest payable Defined benefit liability (Note 18) Gold and silver certificates Brokers’ client accounts Derivative collateral payable Negotiable instruments Accrued employee compensation and benefits Accounts payable and accrued expenses Other (1) (1) Certain prior period amounts have been revised from those previously presented. $ 2019 1,438 737 114 4,940 3,823 991 2,281 2,062 2,645 $ 2018 1,300 645 95 3,829 4,118 930 2,303 2,138 2,865 $ 19,031 $ 18,223 CIBC 2019 ANNUAL REPORT 149 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) (1) Assets 22,738 1,157 23,895 $ $ 2019 Liabilities $ $ 23,799 1,314 25,113 Assets 19,318 2,113 21,431 $ $ 2018 Liabilities $ $ 19,204 1,769 20,973 (1) Comprised of derivatives that qualify for hedge accounting under IAS 39 and derivatives used for economic hedges. Derivatives used by CIBC The majority of our derivative contracts are OTC transactions, which 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. 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. 150 CIBC 2019 ANNUAL REPORT Consolidated financial statements 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 2019 2018 Residual term to contractual maturity Less than 1 year 1 to 5 years Over 5 years Total notional amounts Trading ALM Trading ALM (1) 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 Total foreign exchange derivatives 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 (2) Exchange-traded $ 10,565 $ 506 $ 284,672 69,635 1,377,618 9,788 10,152 1,762,430 113,047 14,613 5,755 113,415 35,446 169,947 1,308,226 4,046 4,711 1,522,882 25,633 3 3 25,639 – $ – 76,013 450,208 1,407 818 528,446 213 – – 213 11,071 $ 8,591 $ 320,118 315,595 3,136,052 15,241 15,681 3,813,758 138,893 14,616 5,758 159,267 320,118 275,418 2,780,206 12,883 14,670 3,411,886 136,627 14,616 5,758 157,001 2,480 – 40,177 355,846 2,358 1,011 401,872 2,266 – – 2,266 $ 5,925 $ 273,528 242,620 2,264,721 8,697 10,417 2,805,908 99,156 7,273 2,500 108,929 464 – 52,077 308,915 3,091 1,841 366,388 2,148 – – 2,148 1,895,845 1,548,521 528,659 3,973,025 3,568,887 404,138 2,914,837 368,536 892,730 338,753 17,823 22,243 1,271,549 26 1,271,575 – 65 – 177 – 242 59,325 71,094 130,419 9,445 3,214 12,659 10,961 72,274 1,408 1,684 86,327 – 86,327 – 600 835 201 33 1,669 18,350 18,272 36,622 369 21 390 1,266 32,745 54 20 34,085 – 34,085 904,957 443,772 19,285 23,947 1,391,961 892,117 398,262 19,285 23,947 1,333,611 26 1,391,987 26 1,333,637 – 377 296 – 148 821 428 163 591 – – – – 1,042 1,131 378 181 2,732 78,103 89,529 167,632 9,814 3,235 13,049 – 940 973 328 181 2,422 74,756 89,529 164,285 9,814 3,235 13,049 12,840 45,510 – – 58,350 – 58,350 – 102 158 50 – 310 3,347 – 3,347 – – – 18,229 59 14,552 32,840 3,343,580 $ 3,121,279 222,301 16,061 43 8,245 24,349 1,697,878 $ 1,645,701 52,177 2,529 – 289 2,818 566,974 $ 566,309 665 36,819 102 23,086 60,007 5,608,432 $ 5,333,289 275,143 36,819 102 23,086 60,007 5,142,287 $ 4,869,410 272,877 – – – – 466,145 463,879 2,266 387,509 299,073 20,562 22,513 729,657 21,189 59,209 2 30 80,430 11 – 729,668 80,430 – 634 443 157 211 1,445 100,762 82,038 182,800 4,899 1,091 5,990 33,261 29 26,952 60,242 – 125 158 102 – 385 1,484 – 1,484 – – – – – – – $ 3,894,982 $ 3,675,961 219,021 450,835 448,687 2,148 (1) Certain prior period amounts have been revised from those previously presented. (2) For OTC derivatives that are not centrally cleared, $1,596.7 billion (2018: $1,064.5 billion) are with counterparties that have two-way collateral posting arrangements, $94.2 billion (2018: $33.8 billion) are with counterparties that have one-way collateral posting arrangements, and $184.8 billion (2018: $185.8 billion) are with counterparties that have no collateral posting arrangements. All counterparties with whom we have one-way collateral posting arrangements are sovereign entities. CIBC 2019 ANNUAL REPORT 151 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 are financial instruments where valuation is linked to changes in interest rates, foreign exchange rates, equity, commodity, credit prices or indices. Changes in value as a result of the aforementioned risk factors is referred to as market risk. Market risk arising from derivative trading activities is managed in order to mitigate risk in line with CIBC’s risk appetite. To manage market risk, we set market risk limits and may enter into hedging transactions. 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 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.). 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. 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. 152 CIBC 2019 ANNUAL REPORT Consolidated financial statements The following table summarizes our credit exposure arising from derivatives, which includes the current replacement cost, credit equivalent amount and risk-weighted amount. In 2019, we prospectively adopted the Standardized Approach for Counterparty Credit Risk (SA-CCR) for the determination of capital requirements relating to counterparty credit risk, which impacted the calculation of replacement cost, credit equivalent amount and risk-weighted assets, as summarized below. 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. Beginning in 2019, replacement cost also includes the impact of certain collateral amounts and the impact of master netting agreements. Prior to 2019, these amounts were previously excluded from this calculation. Beginning in 2019, the credit equivalent amount is calculated as the sum of replacement cost and the potential future exposure, multiplied by an alpha of 1.4, and is reduced by CVA losses. Prior to 2019, the credit equivalent amount was the sum of the current replacement cost and the potential credit exposure, adjusted for master netting agreements and the impact of collateral. The potential credit exposure was 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 was then multiplied by counterparty risk variables to arrive at the risk-weighted amount. The risk-weighted amount is used in determining the regulatory capital requirements for derivatives. $ millions, as at October 31 2019 (1) Current replacement cost Trading ALM Total Credit equivalent amount Risk- weighted amount Current replacement cost Trading ALM Total Credit equivalent amount 2018 Risk- weighted amount $ 9 $ 113 $ – $ 113 $ 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 $ – $ 13 $ 2,503 17 2,520 4 2,524 939 735 84 1,758 2 – 2 265 682 947 51 4 55 697 9 706 155 – 168 – 168 4 4 – 8 1 – 1 5 – 5 – – – 62 – 62 13 2,658 17 2,688 4 2,692 943 739 84 1,766 $ 69 7,140 87 7,296 192 7,488 7,136 3,546 471 11,153 3 – 3 270 682 952 51 4 55 759 9 768 25 2 27 4,832 3,593 8,425 332 171 503 3,928 1,200 5,128 32,724 2,507 67 2,583 5 2,588 1,737 687 143 2,567 7 2 9 1,018 103 1,121 115 7 122 1,195 48 1,243 245 6,990 14,885 4,603 92 4,808 1 4,809 2,916 4,825 240 7,981 115 3 118 1,951 1,659 3,610 63 143 206 2,527 67 2,594 773 11 784 – 784 117 1,205 – 1,322 – – – 7 – 7 – – – – – – 5,376 103 5,592 1 5,593 3,033 6,030 240 9,303 115 3 118 1,958 1,659 3,617 63 143 206 2,527 67 2,594 $ 39 5,359 20 5,418 170 5,588 3,793 4,528 259 8,580 46 3 49 2,259 4,131 6,390 62 17 79 4,046 1,480 5,526 2 539 8 549 5 554 1,017 886 83 1,986 9 – 9 535 116 651 23 1 24 1,523 59 1,582 224 4,236 9,266 Common equity tier 1 (CET1) CVA charge Total derivatives before netting 5,992 244 Less: effect of netting Total derivatives 6,236 n/a 6,236 $ 19,318 2,113 21,431 (11,789) 26,212 $ 32,724 $ 14,885 $ 9,642 $ 26,212 $ 9,266 (1) In 2019, we adopted SA-CCR for the determination of capital requirements relating to counterparty credit risk, which impacted the calculation of replacement cost, credit equivalent amount and risk-weighted assets. Comparative amounts presented have not been restated. n/a Not applicable. The following table presents the current replacement cost of derivatives by geographic region based on the location of the derivative counterparty: $ millions, as at October 31 2019 Canada U.S. Other countries Total Canada U.S. Derivative instruments By counterparty type Financial institutions Governments Corporate Less: effect of netting Total derivative instruments $ $ 534 891 951 2,376 n/a 2,376 $ $ 1,063 – 1,017 2,080 n/a 2,080 $ $ 549 8 1,223 1,780 n/a 1,780 $ $ 2,146 899 3,191 6,236 n/a 6,236 $ $ 4,864 3,361 1,268 9,493 (5,673) 3,820 $ $ 5,206 – 993 6,199 (3,252) 2,947 (1) Prior period amounts have been restated to include exchange-traded derivatives to align to the current period presentation. n/a Not applicable. Other countries $ $ 4,947 9 783 5,739 (2,864) 2,875 2018 (1) Total $ $ 15,017 3,370 3,044 21,431 (11,789) 9,642 CIBC 2019 ANNUAL REPORT 153 Consolidated financial statements Note 13 Designated accounting hedges Hedge accounting We apply hedge accounting as part of managing the market risk of certain non-trading portfolios arising from changes due to interest rates, foreign exchange rates, and equity market prices. Please see the shaded sections of “Non-trading activities” on page 66 of the MD&A for further information on our risk management strategy for these risks. See Note 12 for further information on the derivatives used by CIBC. Interest rate risk The majority of our derivative contracts used to hedge certain exposures to benchmark interest rate risk are interest rate swaps. For fair value hedges, we convert our fixed interest rate exposures from the hedged financial instruments to floating interest rate exposures. For cash flow hedges, we convert certain exposures to cash flow variability from our variable rate instruments to fixed interest rate exposures. Foreign currency risk For our fair value hedges, we mainly use various combinations of cross-currency interest rate swaps and interest rate swaps to hedge our exposures to foreign currency risk together with interest rate risk, converting our fixed foreign currency rate exposures to floating functional currency rate exposures. For our cash flow hedges, the majority of our derivative contracts are used to hedge our exposures to cash flow variability arising from fluctuations in foreign exchange rates, and mainly consist of cross-currency interest rate swaps. We also use foreign exchange forwards and synthetic forwards created from interest rate swaps to hedge certain foreign currency contractual expenses. For NIFO hedges, we use a combination of foreign denominated deposit liabilities and foreign exchange forwards to manage our foreign currency exposure of our NIFOs with a functional currency other than the Canadian dollar. Equity price risk We use cash-settled total return swaps in designated cash flow hedge relationships to hedge changes in CIBC’s share price in respect of certain cash- settled share-based compensation awards. Note 17 provides details on our cash-settled share-based compensation plans. For the hedge relationships above, hedge effectiveness is assessed at the inception of the hedge relationship and on an ongoing basis, primarily using the dollar offset method. The sources of hedge ineffectiveness are mainly attributed to the following: (cid:129) (cid:129) (cid:129) Utilization of hedging instruments that have a non-zero fair value at the inception of the hedge relationship; Differences in fixed rates, when contractual coupons of the fixed rate hedged items are designated; Differences in the discounting factors between the hedged item and the hedging instruments arising from different rate reset frequencies and timing of cash flows; and Differences in the discount curves to determine the basis adjustments of the hedged items and the fair value of the hedging derivatives, including from the application of OIS and CVA to the valuation of derivatives when they are applicable. (cid:129) 154 CIBC 2019 ANNUAL REPORT Consolidated financial statements Designated hedging instruments The following table provides a summary of financial instruments designated as hedging instruments: Notional amount of the hedging instrument (1) Maturity range Fair value of the hedging derivatives Less than 1 year 1-5 years Over 5 years Assets Liabilities Gains (losses) on changes in fair value used for calculating hedge ineffectiveness $ millions, as at October 31 2019 Cash flow hedges Foreign exchange risk Foreign exchange forwards Cross-currency interest rate swaps $ 17 6,619 Interest rate risk Interest rate swaps Equity share price risk Equity swaps NIFO hedges Foreign exchange risk Foreign exchange forwards Deposits (2) Fair value hedges Interest rate risk Interest rate swaps Foreign exchange / interest rate risk Cross-currency interest rate swaps Interest rate swaps Interest rate risk Interest rate swaps Equity share price risk Equity swaps NIFO hedges Foreign exchange risk Foreign exchange forwards Deposits (2) Fair value hedges Interest rate risk Interest rate swaps Foreign exchange / interest rate risk Cross-currency interest rate swaps Interest rate swaps $ $ $ $ 17 859 $ – 5,760 3,122 1,030 5,028 15,058 173 $ 20,991 598 17,616 18,214 $ $ – – – $ $ $ $ – – – – – – – – $ – 104 $ – 177 4 93 – – $ 201 $ 177 $ $ 7 n/a 7 $ $ 2 n/a 2 18,180 1,203 $ 26,019 $ $ 598 17,616 18,214 $ 194,398 $ 63,723 $ 114,455 $ 16,220 $ 291 $ 219 $ $ $ 34,627 16,477 $ 245,502 $ 289,735 7,226 2,937 73,886 97,128 20,597 10,158 6,804 3,382 $ 145,210 $ 26,406 $ 166,201 $ 26,406 – 5,044 4,073 1,233 4,468 1,406 395 173 $ 24,433 $ 14,083 $ 10,350 $ $ 193 17,158 17,351 $ $ 193 17,158 17,351 $ $ – – – $ $ $ $ – – – – – – – – $ $ $ 339 155 785 993 682 – 901 $ $ 1,080 2 351 $ – 234 – – 15 89 $ 353 $ 338 $ $ 11 n/a 11 $ $ 6 n/a 6 $ 174,556 $ 50,347 $ 110,948 $ 13,261 $ 380 $ 164 36,308 17,310 15,528 3,850 19,267 12,817 1,513 643 799 23 $ 228,174 $ 69,725 $ 143,032 $ 15,417 $ 1,202 $ 795 – 959 $ 269,958 $ 101,159 $ 153,382 $ 15,417 $ 1,566 $ 1,303 2018 Cash flow hedges Foreign exchange risk Foreign exchange forwards Cross-currency interest rate swaps $ 138 18,421 138 13,377 $ $ (7) (168) 193 (1) $ 17 $ $ – 6 6 $ (276) 41 142 $ (93) $ (70) $ $ $ (5) 82 (57) 26 46 (4) (388) $ (392) $ (36) (63) (15) $ (114) $ (460) (1) For some hedge relationships, we apply a combination of derivatives to hedge the underlying exposures, therefore, the notional amounts of the derivatives generally exceed the carrying amount of the hedged items. (2) Notional amount represents the principal amount of deposits as at October 31, 2019 and October 31, 2018. n/a Not applicable. CIBC 2019 ANNUAL REPORT 155 Average exchange rate (1) Average fixed interest rate (1) Average share price n/a n/a n/a n/a n/a CAD USD 2.10 % 1.62 % 1.32 0.99 1.51 1.66 1.32 n/a n/a n/a 0.90 0.17 1.31 1.30 1.65 1.32 n/a n/a 1.29 1.51 1.72 1.28 n/a n/a n/a 0.93 0.17 0.01 n/a CAD EUR GBP n/a CAD 1.49 1.60 1.30 n/a n/a EUR GBP n/a n/a n/a n/a 1.93 % 0.12 % 1.06 % 1.61 % 0.08 % 0.71 % n/a n/a n/a n/a n/a n/a n/a n/a 1.84 % 0.10 % 1.06 % 2.36 % 0.05 % 0.78 % CAD USD 2.45 % 2.16 % n/a n/a n/a n/a n/a n/a n/a $ 108.59 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a $ 109.52 n/a n/a n/a n/a n/a n/a n/a n/a n/a Consolidated financial statements The following table provides the average rate or price of the hedging derivatives: As at October 31 2019 Cash flow hedges Foreign exchange risk Foreign exchange forwards Cross-currency interest rate swaps Interest rate risk Interest rate swaps Equity share price risk Equity swaps NIFO hedges Foreign exchange risk Foreign exchange forwards Fair value hedges Interest rate risk Interest rate swaps Foreign exchange / interest rate risk Cross-currency interest rate swaps Interest rate swaps 2018 Cash flow hedges Foreign exchange risk Foreign exchange forwards Cross-currency interest rate swaps Interest rate risk Interest rate swaps Equity share price risk Equity swaps NIFO hedges Foreign exchange risk Foreign exchange forwards Fair value hedges Interest rate risk Interest rate swaps Foreign exchange / interest rate risk Cross-currency interest rate swaps Interest rate swaps USD – CAD AUD – CAD EUR – CAD GBP – CAD USD – CAD AUD – CAD HKD – CAD USD – CAD EUR – CAD GBP – CAD USD – CAD USD – CAD EUR – CAD GBP – CAD USD – CAD AUD – CAD HKD – CAD JPY – CAD EUR – CAD GBP – CAD USD – CAD Includes average foreign exchange rates and interest rates relating to significant hedging relationships. (1) n/a Not applicable. 156 CIBC 2019 ANNUAL REPORT Consolidated financial statements Designated hedged items The following table provides information on designated hedged items: $ millions, as at or for the year ended October 31 Assets Liabilities Assets Liabilities Carrying amount of the hedged item Accumulated amount of fair value hedge adjustments on the hedged item Gains (losses) on change in fair value used for calculating hedge ineffectiveness 2019 Cash flow hedges (1) Foreign exchange risk Forecasted expenses Deposits Interest rate risk Loans Equity share price risk Share-based payment NIFO hedges Fair value hedges (2) Interest rate risk Securities Loans Deposits Subordinated indebtedness Foreign exchange / interest rate risk Loans Deposits 2018 Cash flow hedges (1) Foreign exchange risk Forecasted expenses Deposits Interest rate risk Loans Equity share price risk Share-based payment NIFO hedges Fair value hedges (2) Interest rate risk Securities Loans Deposits Subordinated indebtedness Foreign exchange / interest rate risk Loans Deposits n/a n/a n/a n/a n/a n/a n/a n/a – – 533 89 – 57 679 n/a n/a n/a n/a n/a n/a $ $ $ $ n/a – – 18,169 – – 18,169 18,214 25,763 62,987 – – 6 – $ $ $ $ n/a 2,860 – – – 1,169 4,029 – – – 84,173 3,761 – 17,222 n/a n/a n/a n/a n/a n/a n/a n/a 633 132 – – – – $ $ $ 88,756 $ 105,156 $ 765 $ n/a n/a n/a n/a n/a n/a $ $ $ $ n/a – 4,463 – 4,463 17,351 17,046 61,363 – – 6 – $ $ $ $ n/a 13,456 – 1,186 14,642 – – – 72,839 3,893 – 19,844 $ (370) (1,036) – – – – $ – – (1,205) (48) – (112) $ $ $ $ $ $ $ $ $ 7 168 – (193) – 1 (17) (6) 1,013 1,151 (1,750) (137) – (180) 97 5 (81) 57 (27) (46) 392 (338) (626) 907 58 – 82 83 $ 78,415 $ 96,576 $ (1,406) $ (1,365) $ (1) As at October 31, 2019, the amount remaining in AOCI related to discontinued cash flow hedges was immaterial (2018: immaterial). (2) As at October 31, 2019, the accumulated fair value hedge net liability adjustment remaining on the consolidated balance sheet related to discontinued fair value hedges was $112 million (2018: $153 million). n/a Not applicable. CIBC 2019 ANNUAL REPORT 157 Consolidated financial statements Hedge accounting gains (losses) on the consolidated statement of income and consolidated statement of comprehensive income $ millions, for the year ended October 31 2019 Cash flow hedges Foreign exchange risk Interest rate risk Equity share price risk NIFO hedges – foreign exchange risk Hedges of net investment in foreign operations 2018 Cash flow hedges Foreign exchange risk Interest rate risk Equity share price risk NIFO hedges – foreign exchange risk Hedges of net investment in foreign operations Beginning balance of AOCI – hedge reserve (after-tax) Change in the value of the hedging instrument recognized in OCI (before-tax) $ $ $ $ $ $ 5 (45) 22 (18) (1,129) 5 (3) 31 33 $ (1) 188 (1) $ 186 $ $ 6 6 (56) 17 $ (33) (780) $(392) Amount reclassified from accumulated OCI to income (before-tax) (1) Tax benefit (expense) Ending balance of AOCI hedge reserve (after-tax) Hedge ineffectiveness gains (losses) recognized in income $ $ $ $ $ $ (8) 6 (6) (8) – (6) (2) (27) (35) – $ 2 (51) 2 $(47) $ (2) 98 17 $ 113 $(16) $(1,139) $ – 16 1 $ 17 $ 43 $ $ 5 (45) 22 (18) $(1,129) $ $ $ $ $ $ – – – – – – – (1) (1) – (1) During the year ended October 31, 2019, the amount reclassified from AOCI to net income for cash flow hedges of forecasted transactions that were no longer expected to occur was immaterial (2018: nil). $ millions, for the year ended October 31 2019 2018 Fair value hedges Interest rate risk Foreign exchange / interest rate risk Fair value hedges Interest rate risk Foreign exchange / interest rate risk Gains (losses) on the hedging instruments Gains (losses) on the hedged items attributable to hedged risk Hedge ineffectiveness gains (losses) recognized in income $ (276) 183 $ $ $ (93) (36) (78) (114) $ 277 (180) $ $ $ 97 1 82 83 $ $ $ $ $ $ $ 1 3 4 (35) 4 (31) 2017 (24) 73 49 – The following table presents hedge ineffectiveness gains (losses) recognized in the consolidated statement of income for 2017: $ 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. 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 year ended October 31, 2017. 158 CIBC 2019 ANNUAL REPORT 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 % 5.75 (3) 3.00 (5)(6) 3.42 (6)(8) 3.45 (6)(9) 8.70 2.95 (6)(10) 11.60 10.80 8.70 8.70 8.70 Floating (11) Floating (13) Contractual maturity date July 11, 2024 (4) October 28, 2024 January 26, 2026 April 4, 2028 May 25, 2029 (4) June 19, 2029 January 7, 2031 May 15, 2031 May 25, 2032 (4) May 25, 2033 (4) May 25, 2035 (4) July 31, 2084 August 31, 2085 Earliest date redeemable At greater of Canada Yield Price (1) and par At par Denominated in foreign currency TT$175 million $ October 28, 2019 (7) January 26, 2021 April 4, 2023 June 19, 2024 January 7, 1996 May 15, 2021 July 27, 1990 August 20, 1991 US$65 million (12) US$17 million Subordinated indebtedness sold short (held) for trading purposes 2019 2018 Par value 34 – 1,000 1,500 25 1,500 200 150 25 25 25 85 23 4,592 3 Carrying value (2) $ 34 – 991 1,533 40 1,494 200 149 42 44 46 85 23 4,681 3 $ Par value 34 1,000 1,000 1,500 25 – 200 150 25 25 25 86 23 4,093 37 Carrying value (2) $ 34 986 966 1,479 38 – 178 132 39 40 42 86 23 4,043 37 $ 4,595 $ 4,684 $ 4,130 $ 4,080 (1) Canada Yield Price: a price calculated at the time of redemption to provide a yield to maturity equal to the yield of a Government of Canada bond of appropriate maturity plus a pre-determined spread. (2) Carrying values of fixed-rate subordinated indebtedness notes reflect the impact of interest rate hedges in an effective hedge relationship. (3) Guaranteed Subordinated Term Notes in Trinidad and Tobago dollars issued on July 11, 2018 by FirstCaribbean International Bank (Trinidad & Tobago) Limited, a subsidiary of CIBC FirstCaribbean, and guaranteed on a subordinated basis by CIBC FirstCaribbean. (4) Not redeemable prior to maturity date. (5) 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. (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). (7) On October 28, 2019, we redeemed all $1.0 billion of our 3.00% Debentures due October 28, 2024. In accordance with their terms, the Debentures were redeemed at 100% of (8) (9) their principal amount, plus accrued and unpaid interest thereon. Interest rate is fixed at the indicated rate until the earliest date redeemable at par by CIBC and, thereafter, at a rate of 2.57% above the three-month Canadian dollar bankers’ acceptance rate. Interest rate is fixed at the indicated rate until the earliest date redeemable at par by CIBC and, thereafter, at a rate of 1.00% above the three-month Canadian dollar bankers’ acceptance rate. (10) Interest rate is fixed at the indicated rate until the earliest date redeemable at par by CIBC and, thereafter, at a rate of 1.18% above the three-month Canadian dollar bankers’ acceptance rate. (11) Interest rate is based on the six-month US$ London Interbank Offered Rate (LIBOR) plus 0.25%. (12) US$1 million (2018: nil) of this issue was repurchased and cancelled during the year. (13) Interest rate is based on the six-month US$ LIBOR plus 0.125%. Note 15 Common and preferred share capital The following table presents the outstanding number of shares and dividends paid: Outstanding shares and dividends paid $ millions, except number of shares and per share amounts, as at or for the year ended October 31 2019 2018 2017 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 445,325,744 $ 13,589 $ 2,488 $ 5.60 442,823,361 $ 13,242 $ 2,356 $ 5.32 439,329,713 $ 12,550 $ 2,121 $ 5.08 Class A Preferred Shares Series 39 Series 41 Series 43 Series 45 Series 47 Series 49 Series 51 16,000,000 12,000,000 12,000,000 32,000,000 18,000,000 13,000,000 10,000,000 400 300 300 800 450 325 250 16 11 11 35 20 13 5 0.96 0.94 0.90 1.10 1.13 1.00 0.53 16,000,000 12,000,000 12,000,000 32,000,000 18,000,000 – – 400 300 300 800 450 – – $ 2,825 $ 111 $ 2,250 $ 16 11 11 35 16 – – 89 Treasury shares – common shares Treasury shares – preferred shares 15,931 $ – 2 – 3,019 $ – 1 – 0.98 0.94 0.90 1.10 0.88 – – 16,000,000 12,000,000 12,000,000 32,000,000 – – – 400 300 300 800 – – – $ 1,800 $ (16,410) $ (116,671) (2) (3) 0.98 0.94 0.90 0.46 – – – 16 11 11 14 – – – 52 CIBC 2019 ANNUAL REPORT 159 Consolidated financial statements Common shares CIBC’s authorized capital consists of an unlimited number of common shares, without nominal or par value. Common shares issued $ millions, except number of shares, as at or for the year ended October 31 Number of shares 2019 Amount Number of shares 2018 Amount Number of shares 2017 Amount Balance at beginning of year Issuance pursuant to: 442,826,380 $ 13,243 439,313,303 $ 12,548 397,070,280 $ 8,026 Acquisition of The PrivateBank Acquisition of Geneva Advisors Acquisition of Wellington Financial Equity-settled share-based compensation plans Shareholder investment plan (1) Employee share purchase plan – – – 511,567 1,777,738 1,213,078 – – – 52 194 131 1,689,450 – 378,848 999,675 2,880,782 1,044,893 194 – 47 95 337 123 32,137,402 1,204,344 – 990,934 6,870,584 1,071,051 3,443 126 – 91 749 117 Purchase of common shares for cancellation Treasury shares 446,328,763 (1,000,000) 12,912 $ 13,620 (30) 1 446,306,951 (3,500,000) 19,429 $ 13,344 (104) 3 439,344,595 – (31,292) $ 12,552 – (4) Balance at end of year (2) 445,341,675 $ 13,591 442,826,380 $ 13,243 439,313,303 (3) $ 12,548 (1) Commencing with the dividends paid on April 27, 2018, the shares for the Dividend Reinvestment Option and the Stock Dividend Option of the Shareholder Investment Plan (the Plan) were issued from Treasury without discount. Prior to this, these shares were issued at a 2% discount from average market price. The participants in the Share Purchase Option of the Plan continue to receive shares issued from Treasury with no discount. (2) Excludes nil restricted shares as at October 31, 2019 (2018: 60,764; 2017: 190,285). (3) Excludes 2,010,890 common shares which were issued and outstanding but which had not been acquired by a third party as at October 31, 2017. These shares were issued as a component of our acquisition of The PrivateBank. Common shares reserved for issue As at October 31, 2019, 15,310,806 common shares (2018: 15,703,861) were reserved for future issue pursuant to stock option plans, 14,383,104 common shares (2018: 16,160,842) were reserved for future issue pursuant to the Shareholder Investment Plan, 9,772,134 common shares (2018: 3,043,087) were reserved for future issue pursuant to the employee share purchase plan and other activities, and 1,789,893,750 common shares (2018: 1,561,767,500) 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. Normal course issuer bid On May 31, 2019, we announced that the Toronto Stock Exchange (TSX) had accepted the notice of CIBC’s intention to commence a normal course issuer bid. Purchases under this bid will terminate upon the earlier of: (i) CIBC purchasing up to a maximum of 9 million common shares; (ii) CIBC providing a notice of termination; or (iii) June 3, 2020. Our previous bid terminated on June 3, 2019. During the year, we purchased and cancelled 1,000,000 common shares under the current bid at an average price of $109.06 for a total amount of $109 million. The following table shows common shares purchased and cancelled under previously expired NCIBs. $ millions, except number of shares, as at or for the year ended October 31 TSX approval date March 10, 2017 (1) May 31, 2018 (2) (1) No common shares were repurchased under this NCIB. (2) Common shares were repurchased at an average price of $119.22 under this NCIB. 2019 Number of shares Amount – – – $ $ – – – Number of shares – 3,500,000 3,500,000 2018 Amount $ $ – 417 417 Number of shares – – – 2017 Amount $ $ – – – 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. 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, 45, 47, 49, and 51 (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 terms of the preferred shares. Non-cumulative Rate Reset Class A Preferred Shares Series 39 (NVCC) (Series 39 shares) and Non-cumulative Floating Rate Class A Preferred Shares Series 40 (NVCC) (Series 40 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 paid quarterly cash dividends, as declared, at a rate of 3.90%. The dividend was reset to 3.713%, payable quarterly as and when declared by the Board, effective for the five-year period commencing July 31, 2019. On July 31, 2024, 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 had the right to convert their shares on a one-for-one basis into Series 40 shares, subject to certain conditions, on July 31, 2019. As the conditions for conversion were not met, no Series 40 shares were issued, and all of the Series 39 shares remain outstanding. Holders of the Series 39 shares will have the right to convert their shares on a one-for-one basis into Series 40 shares, subject to certain conditions, on July 31, 2024 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 then outstanding Series 40 shares may convert their shares on a one-for-one basis into Series 39 shares, subject to certain conditions, on July 31, 2029 and on July 31 every five years thereafter. 160 CIBC 2019 ANNUAL REPORT Consolidated financial statements 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, 2024, 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, 2029, 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 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 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. Non-cumulative Rate Reset Class A Preferred Shares Series 47 (NVCC) (Series 47 shares) On January 18, 2018, we issued 18 million Non-cumulative Rate Reset Class A Preferred Shares Series 47 (NVCC) (Series 47 shares) with a par value of $25.00 per share, for gross proceeds of $450 million. For the initial five-year period to the earliest redemption date of January 31, 2023, the Series 47 shares pay quarterly cash dividends, if declared, at a rate of 4.50%. On January 31, 2023, and on January 31 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 2.45%. Holders of the Series 47 shares will have the right to convert their shares on a one-for-one basis into Non-cumulative Floating Rate Class A Preferred Shares Series 48 (NVCC) (Series 48 shares), subject to certain conditions, on January 31, 2023 and on January 31 every five years thereafter. Holders of the Series 48 shares will be entitled to receive a quarterly floating rate dividend, if declared, equal to the three-month Government of Canada Treasury Bill yield plus 2.45%. Holders of the Series 48 shares may convert their shares on a one-for-one basis into Series 47 shares, subject to certain conditions, on January 31, 2028 and on January 31 every five years thereafter. Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 47 shares at par on January 31, 2023 and on January 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 48 shares at par on January 31, 2028 and on January 31 every five years thereafter. Non-cumulative Rate Reset Class A Preferred Shares Series 49 (NVCC) (Series 49 shares) On January 22, 2019, we issued 13 million Non-cumulative Rate Reset Class A Preferred Shares Series 49 (NVCC) (Series 49 shares) with a par value of $25.00 per share, for gross proceeds of $325 million. For the initial five-year period to the earliest redemption date of April 30, 2024, the Series 49 shares pay quarterly cash dividends, if declared, at a rate of 5.20%. On April 30, 2024, and on April 30 every five years thereafter, the dividend rate will reset to be equal to the then current five-year Government of Canada bond yield plus 3.31%. Holders of the Series 49 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 50 (NVCC) (Series 50 shares), subject to certain conditions, on April 30, 2024 and on April 30 every five years thereafter. Holders of the Series 50 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 3.31%. Holders of the Series 50 shares may convert their shares on a one-for-one basis into Series 49 shares, subject to certain conditions, on April 30, 2029 and on April 30 every five years thereafter. CIBC 2019 ANNUAL REPORT 161 Consolidated financial statements Subject to regulatory approval and certain provisions of the shares, we may redeem all or any part of the then outstanding Series 49 shares at par on April 30, 2024 and on April 30 every five years thereafter; we may redeem all or any part of the then outstanding Series 50 shares at par on April 30, 2029 and on April 30 every five years thereafter. Non-cumulative Rate Reset Class A Preferred Shares Series 51 (NVCC) (Series 51 shares) On June 4, 2019, we issued 10 million Non-cumulative Rate Reset Class A Preferred Shares Series 51 (NVCC) (Series 51 shares) with a par value of $25.00 per share, for gross proceeds of $250 million. For the initial five-year period to the earliest redemption date of July 31, 2024, the Series 51 shares pay quarterly cash dividends, if declared, at a rate of 5.15%. On July 31, 2024, 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 3.62%. Holders of the Series 51 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 52 (NVCC) (Series 52 shares), subject to certain conditions, on July 31, 2024 and on July 31 every five years thereafter. Holders of the Series 52 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 3.62%. Holders of the Series 52 shares may convert their shares on a one-for-one basis into Series 51 shares, subject to certain conditions, on July 31, 2029 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 51 shares at par on July 31, 2024 and on July 31 every five years thereafter; we may redeem all or any part of the then outstanding Series 52 shares at par on July 31, 2029 and on July 31 every five years thereafter. Series 39, Series 40, Series 41, Series 42, Series 43, Series 44, Series 45, Series 46, Series 47, Series 49, Series 48 and Series 51 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, Series 45, Series 47, Series 49, and Series 51 shares as equity. Terms of Class A Preferred Shares Outstanding as at October 31, 2019 Series 39 Series 41 Series 43 Series 45 Series 47 Series 49 Series 51 Quarterly dividends per share (1) $ $ $ $ $ $ $ 0.232063 0.234375 0.225000 0.275000 0.281250 0.325000 0.321875 Earliest specified redemption date July 31, 2024 January 31, 2020 July 31, 2020 July 31, 2022 January 31 2023 April 30, 2024 July 31, 2024 Cash redemption price per share $ $ $ $ $ $ $ 25.00 25.00 25.00 25.00 25.00 25.00 25.00 (1) Quarterly dividends may be adjusted depending on the timing of issuance or redemption. 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 $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 approved 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. Capital is monitored continuously for compliance. Each year, a Capital Plan and three-year outlook are established as a part of the financial plan, and they encompass all material elements of capital: forecasts of sources and uses of capital including earnings, dividends, business growth, and corporate initiatives, as well as maturities, redemptions, and issuances of capital instruments. The Capital Plan is stress-tested to ensure that it is sufficiently robust under severe but plausible stress scenarios. The level of capital and capital ratios are monitored throughout the year including a comparison to the Capital Plan. 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 has been designated by OSFI as a D-SIB in Canada, and is subject to a CET1 surcharge equal to 1.0% of risk-weighted assets (RWA). In June 2018, OSFI publicly disclosed that it requires D-SIBs to hold a Domestic Stability Buffer, currently set at 2.0% of RWA. This results in current targets, including all buffer requirements, for CET1, Tier 1 and Total capital ratios of 10.0%, 11.5%, and 13.5%, respectively. These targets may be higher for certain institutions at OSFI’s discretion. 162 CIBC 2019 ANNUAL REPORT Consolidated financial statements Regulatory capital and ratios Regulatory capital under Basel III consists of CET1, Tier 1 and Tier 2 capital. CET1 capital includes common shares, retained earnings, AOCI (excluding AOCI relating to cash flow hedges and changes to FVO liabilities attributable to changes in own credit risk), and qualifying instruments issued by a consolidated banking subsidiary to third parties, less regulatory adjustments for items such as goodwill and other intangible assets (net of related deferred tax liabilities), certain deferred tax assets, net assets related to defined benefit pension plans as reported on our consolidated balance sheet (net of related deferred tax liabilities), and certain investments. Additional Tier 1 (AT1) capital primarily includes NVCC preferred shares, qualifying instruments issued by a consolidated subsidiary to third parties, and non-qualifying innovative Tier 1 notes subject to phase-out rules for capital instruments. Tier 2 capital includes NVCC subordinated indebtedness, non-qualifying subordinated indebtedness subject to phase-out rules for capital instruments, eligible collective allowance under the standardized approach, and qualifying instruments issued by a consolidated subsidiary to third parties. Our capital ratios and leverage ratio are presented in the table below: $ millions, as at October 31 CET1 capital Tier 1 capital Total capital Total RWA (1) 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 2019 27,707 30,851 35,854 239,863 n/a n/a n/a $ 2018 24,641 27,908 32,230 n/a 216,144 216,303 216,462 11.6 % 12.9 % 15.0 % 11.4 % 12.9 % 14.9 % B A/B $ 714,343 $ 653,946 4.3 % 4.3 % (1) During 2018, before any capital floor requirement, there were three different levels of RWA for the calculation of CIBC’s CET1, Tier 1 and Total capital ratios as CIBC elected in 2014 to phase in the CVA capital charge as permitted under OSFI’s guideline. Beginning in the first quarter of 2019 the ratios are calculated by reference to the same level of RWA as the phase-in of the CVA capital charge has been completed. n/a Not applicable. During the years ended October 31, 2019 and 2018, 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. On June 30, 2019, CIBC Capital Trust redeemed all $1.3 billion of the CIBC Tier 1 Notes – Series A. In accordance with their terms, the CIBC Tier 1 Notes – Series A were redeemed at 100% of their principal amount, together with accrued and unpaid interest thereon. As a result of the redemption of the CIBC Tier 1 Notes – Series A by CIBC Capital Trust, CIBC redeemed the corresponding senior deposit notes issued by CIBC to CIBC Capital Trust on June 30, 2019. CIBC 2019 ANNUAL REPORT 163 Consolidated financial statements The table below presents the significant terms and conditions of the Notes. As at October 31, 2019, we held nil trading positions (2018: $8 million in net long trading positions) of the Notes. $ millions, as at October 31 Issue date Interest payment dates Yield Earliest redemption dates Principal amount 2019 2018 At greater of Canada Yield Price and par (1) At par Series A Series B March 13, 2009 March 13, 2009 June 30, December 31 June 30, December 31 9.976 % June 30, 2014 10.250 % June 30, 2014 June 30, 2019 June 30, 2039 $ $ – 300 300 $ $ 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 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 either 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 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. Grant date fair value of each cash-settled RSA unit granted as part of the acquisition of The PrivateBank in 2017 was based on a 10-day average volume-weighted share price prior to the acquisition date. During the year, 2,666,888 RSAs were granted at a weighted-average price of $113.01 (2018: 2,653,437 granted at a weighted-average price of $115.20; 2017: 4,331,700 granted at a weighted-average price of $105.67) and the number of RSAs outstanding as at October 31, 2019 was 8,343,235 (2018: 8,252,167; 2017: 7,590,852). Compensation expense in respect of RSAs, before the impact of hedging, totalled $319 million in 2019 (2018: $352 million; 2017: $323 million). As at October 31, 2019, liabilities in respect of RSAs, which are included in Other liabilities, were $850 million (2018: $858 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, 952,273 PSUs were granted at a weighted-average price of $113.48 (2018: 894,040 granted at a weighted-average price of $115.23; 2017: 952,434 granted at a weighted-average price of $105.15). As at October 31, 2019, the number of PSUs outstanding, before the impact of CIBC’s relative performance, was 3,033,980 (2018: 2,920,695; 2017: 2,651,991). Compensation expense in respect of PSUs, before the impact of hedging, totalled $106 million in 2019 (2018: $123 million; 2017: $128 million). As at October 31, 2019, liabilities in respect of PSUs, which are included in Other liabilities, were $319 million (2018: $328 million). Restricted stock plan As part of the acquisition of The PrivateBank in 2017, 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, 2019 was nil (2018: 60,764). Compensation expense in respect of restricted stock totalled $1 million in 2019 (2018: $4 million). Exchangeable shares As part of our acquisition of Wellington Financial in the first quarter of 2018, equity-settled awards in the form of exchangeable shares, which vest over a period of up to 5 years and have specific service and non-market performance vesting conditions, were issued to selected employees. Employees receive dividend equivalents in the form of additional exchangeable shares upon vesting. Compensation expense in respect of the exchangeable shares is based on the grant date fair value, adjusted for the impact of best estimates on the satisfaction of the service requirements and non-market performance conditions. At the acquisition, each exchangeable share was granted at $123.99, and the number of exchangeable shares outstanding as at October 31, 2019 was 386,010 (2018: 493,310). Compensation expense in respect of exchangeable shares totalled $8 million in 2019 (2018: $20 million). 164 CIBC 2019 ANNUAL REPORT Consolidated financial statements 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 plan and the DCP plan assumed through the acquisition of The PrivateBank in 2017, 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. 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 payout date and after the employee’s termination of employment. For the DCP plan, the grant date fair value for units issued as part of the acquisition of The PrivateBank in 2017 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, 173,089 DSUs were granted at a weighted-average price of $110.53 (2018: 132,739 granted at a weighted-average price of $115.60; 2017: 198,301 granted at a weighted-average price of $106.21) and the number of DSUs outstanding as at October 31, 2019 was 617,281 (2018: 447,200; 2017: 248,032). Compensation expense in respect of DSUs, before the impact of hedging, totalled $17 million in 2019 (2018: $26 million; 2017: $20 million). As at October 31, 2019, liabilities in respect of DSUs, which are included in Other liabilities, were $82 million (2018: $64 million). 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 only if the director is not 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 $3 million in 2019 (2018: $3 million; 2017: $5 million). As at October 31, 2019, liabilities in respect of DSUs, which are included in Other liabilities, were $27 million (2018: $25 million). Stock option plans 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. As at October 31, 2019, 15,310,806 (2018: 15,703,861) common shares were reserved for future issue under our stock option plans. Stock options in respect of 5,176,962 (2018: 4,713,163) common shares have been granted but not yet exercised under the ESOP. 10,133,844 (2018: 10,990,698) common shares remain available for future stock option grants. At the April 2018 Annual Meeting, CIBC received shareholder approval to increase the number of common shares reserved for issuance by 10,000,000 common shares to a maximum of 52,634,500 common shares under the ESOP. In addition, in 2017, 1,119,211 common shares were reserved for issue pursuant to the terms in the merger agreement of the acquisition of The PrivateBank, which specified that each PrivateBancorp outstanding and unexercised option was converted into an option to purchase CIBC shares. On November 30, 2017, the Board terminated the Non-Officer Director Stock Option Plan. The following tables summarize the activities of the stock options and provide additional details related to stock options outstanding and vested. 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 Number of stock options 4,713,163 894,324 (393,055) (35,714) (1,756) 5,176,962 2,290,139 10,133,844 2019 Weighted- average exercise price (1) $ $ $ 91.05 111.50 58.60 110.42 45.63 96.93 80.27 Number of stock options 4,876,673 756,516 (876,309) (42,443) (1,274) 4,713,163 1,898,125 10,990,698 2018 Weighted- average exercise price $ $ $ 84.28 120.02 67.84 103.98 45.08 91.05 71.89 2017 Weighted- average exercise price $ $ $ 86.92 75.83 76.78 99.77 58.99 84.28 64.28 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, 2019 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 $106.94 (2018: $120.55; 2017: $110.44). CIBC 2019 ANNUAL REPORT 165 Consolidated financial statements As at October 31, 2019 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 $115.01 – $125.00 Number outstanding 299,179 164,194 235,996 391,931 392,973 1,167,876 1,783,985 740,828 5,176,962 Weighted- average contractual life remaining 2.72 5.73 1.77 2.67 4.29 5.69 8.15 8.12 6.20 Weighted- average exercise price $ 30.50 60.23 71.33 79.75 90.93 99.65 111.14 120.02 Number outstanding 299,179 164,194 235,996 391,931 388,894 809,945 – – Weighted- average exercise price $ 30.50 60.23 71.33 79.75 90.94 100.46 – – $ 97.82 2,290,139 $ 80.27 The fair value of 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 fair value of in-the-money options granted as part of the acquisition of The PrivateBank in 2017 approximated their intrinsic value. 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 2019 2018 2017 2.63 % 5.87 % 18.36 % 6 years 111.50 $ $ 2.08 % 5.15 % 14.74 % 6 years 120.02 1.58 % 5.75 % 14.53 % 6 years 110.83 $ For 2019, the weighted-average grant date fair value of options was $8.22 (2018: $7.06; 2017: $5.31). The weighted-average grant date fair value of options granted pursuant to the acquisition of The PrivateBank was $63.75 in 2017. Compensation expense in respect of stock options totalled $7 million in 2019 (2018: $7 million; 2017: $5 million). 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. Employee contributions to our ESPP are used to purchase common shares from Treasury. 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 $48 million in 2019 (2018: $45 million; 2017: $43 million). Note 18 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 defined benefit obligation. 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 64,000 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 166 CIBC 2019 ANNUAL REPORT Consolidated financial statements 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. 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 2019 or 2018. 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 CIBC pension plan operates a currency overlay strategy, which may use forwards or similar instruments, to manage and mitigate its currency risk. Interest rate risk is managed as part of the CIBC pension plan’s liability-driven investment strategy through a combination of physical bonds, overlays funded in the repo market, and/or derivatives. Market (investment) risk is mitigated through a multi-asset portfolio construction process that diversifies across a variety of market risk drivers. The use of derivatives within the CIBC pension plan is governed by its derivatives policy that was approved by the Pension Benefits Management Committee (PBMC) and permits the use of derivatives to manage risk at the discretion of the Pension Investment Committee (PIC). In addition to the management of interest rate risk, risk reduction and mitigation strategies may include hedging of currency, credit spread and/or equity risks. The derivatives policy also permits the use of derivatives to enhance plan returns. 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 Management Resources and Compensation Committee (MRCC). For the Canadian pension plans, the MRCC is responsible for setting the strategy for the pension plans, reviewing material risks, performance including funded status, and approving material 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 use of synthetic 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 plan funding requirements. 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. CIBC 2019 ANNUAL REPORT 167 Consolidated financial statements 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 Loss on settlements Foreign exchange rate changes Net actuarial (gains) losses 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 $1,288 million (2018: $60 million). (2) The valuation allowance reflects the effect of asset ceiling on plans with a net defined benefit asset. $ $ $ 2019 7,370 218 1 303 5 (353) 1 (1) 1,178 8,722 7,691 323 965 229 5 (353) (6) – (1) Pension plans Other post-employment plans 2018 2019 2018 $ $ $ $ $ $ 7,613 223 – 281 5 (334) – 9 (427) 7,370 7,758 294 (234) 199 5 (334) (6) (1) 10 589 11 – 24 – (30) – – 77 671 – – – 30 – (30) – – – – (671) – $ $ $ $ 696 13 – 25 – (29) – 1 (117) 589 – – – 29 – (29) – – – – (589) – $ 8,853 $ 7,691 $ 131 (15) 116 $ 321 (10) 311 $ $ (671) $ (589) 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 (1) Other liabilities (1) Pension plans Other post-employment plans 2019 175 (59) 116 $ $ 2018 361 (50) 311 $ $ 2019 – (671) (671) $ $ 2018 – (589) (589) $ $ (1) Excludes nil of other assets (2018: $1 million) and $7 million (2018: $6 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 2019 7,982 740 8,722 8,004 849 8,853 $ $ $ $ Pension plans Other post-employment plans 2018 2019 2018 $ $ $ $ 6,684 686 7,370 6,908 783 7,691 $ $ $ $ 620 51 671 – – – $ $ $ $ 541 48 589 – – – 168 CIBC 2019 ANNUAL REPORT Consolidated financial statements Amounts recognized in the consolidated statement of income The net defined benefit expense for our defined benefit plans in Canada, the U.S., the U.K., and the Caribbean is as follows: $ 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 Loss on settlements Special termination benefits $ 2019 218 1 303 (323) – 6 1 – Pension plans Other post-employment plans 2018 2017 2019 2018 2017 $ $ 223 – 281 (294) – 6 – – $ 214 (5) 272 (279) 1 6 – 2 11 – 24 – – – – – 35 $ $ 13 – 25 – – – – – 38 $ $ 14 – 25 – – – – – 39 Net defined benefit plan expense recognized in net income $ 206 $ 216 $ 211 $ (1) The 2019, 2018 and 2017 current service costs were calculated using separate discount rates of 4.14%, 3.72%, and 3.72%, 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. 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: $ millions, for the year ended October 31 2019 2018 2017 2019 2018 2017 Pension plans Other post-employment plans Actuarial gains (losses) on defined benefit obligation arising from changes in: Demographic assumptions Financial assumptions Experience Net actuarial gains (losses) on plan assets Changes in asset ceiling excluding interest income $ – (1,133) (45) 965 (5) $ $ 4 488 (65) (234) 1 1 19 (91) 221 8 Net remeasurement gains (losses) recognized in OCI (1) $ (218) $ 194 $ 158 $ $ – (78) 1 – – (77) $ 46 67 4 – – $ 117 $ $ 26 5 5 – – 36 (1) Excludes net remeasurement gains/losses recognized in OCI in respect of immaterial subsidiaries not included in the disclosures totalling $2 million net losses (2018: $2 million of net gains; 2017: $1 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 defined benefit obligation, 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 Total Pension plans Other post-employment plans $ 2019 4,165 587 3,230 $ 2018 3,482 484 2,718 $ 7,982 $ 6,684 2019 179 – 441 620 $ $ 2018 142 – 399 541 $ $ The weighted-average duration of the defined benefit obligation for our Canadian plans is as follows: As at October 31 Weighted-average duration, in years Pension plans Other post-employment plans 2019 15.4 2018 15.5 2019 13.6 2018 12.6 CIBC 2019 ANNUAL REPORT 169 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 Alternative investments Cash and cash equivalents and other Obligations related to securities sold under repurchase agreements 2019 2018 $ 547 7 % $ 636 9 % 4,623 1,024 76 5,723 28 379 32 907 256 110 1,712 – 1,095 220 (1,293) 22 58 13 1 72 – 5 – 12 3 1 21 – 13 3 (16) – 2,636 1,027 69 3,732 23 342 25 1,077 247 93 1,807 10 507 317 (101) 733 38 15 1 54 – 5 – 16 4 1 26 – 7 5 (1) 11 (1) Asset categories are based upon risk classification including synthetic exposure through derivatives. The fair value of derivatives as at October 31, 2019 was a net derivative asset of $16 million (2018: net derivative liability of $7 million). (2) Pension benefit plan assets include CIBC issued securities and deposits of $8 million (2018: $13 million), representing 0.1% of Canadian plan assets (2018: 0.2%). All of the equity securities held as at October 31, 2019 and 2018 have daily quoted prices in active markets except hedge funds, infrastructure, and private equity. (3) All debt securities held as at October 31, 2019 and 2018 are investment grade, of which $88 million (2018: $38 million) have daily quoted prices in active markets. (4) $29 million (2018: $24 million) of the investment funds are directly held as at October 31, 2019 and 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. $ 8,004 100 % $ 6,908 100 % 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 2019 2018 2019 2018 3.1 % 2.3 % 4.1 % 2.3 % 3.0 % 2.3 % 4.0 % 2.3 % (1) Rates of compensation increase for 2019 and 2018 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 (2018: 2.3%). 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 2019 2018 23.3 24.8 24.3 25.7 23.3 24.7 24.2 25.7 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 2019 5.3 % 4.0 % 2040 2018 5.3 % 4.0 % 2040 170 CIBC 2019 ANNUAL REPORT 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. 2019 $ 1,378 (1,113) (251) 285 n/a n/a (199) 196 2019 $ 96 (77) (1) 2 (26) 30 (13) 14 The sensitivity analyses presented above are indicative only, and should be considered with caution as they have been calculated in isolation without changing 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, 2018. The next actuarial valuation of this plan for funding purposes will be effective as of October 31, 2019. The minimum contributions for 2020 are anticipated to be $197 million for the Canadian defined benefit pension plans and $28 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 2020 2021 2022 2023 2024 2025–2029 $ $ 326 28 354 $ $ 333 29 362 $ $ 340 30 370 $ $ 349 31 380 $ $ 357 32 389 $ $ 1,921 173 2,094 $ $ Total 3,626 323 3,949 Defined contributions and other plans We also maintain defined contribution plans for certain employees and make contributions to government pension plans. The expense recognized in the consolidated statement of income for these benefit plans is as follows: $ millions, for the year ended October 31 Defined contribution pension plans Government pension plans (1) (1) Includes Canada Pension Plan, Quebec Pension Plan, and U.S. Federal Insurance Contributions Act. 2019 2018 2017 $ $ 29 121 150 $ $ 27 124 151 $ $ 21 107 128 CIBC 2019 ANNUAL REPORT 171 Consolidated financial statements Note 19 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 2019 2018 (1) 2017 $ (125) 1,365 1,240 $ (39) 1,392 1,353 $ (19) 1,160 1,141 107 34 (33) 108 1,348 22 32 87 (50) 69 1,422 42 6 3 12 21 1,162 166 $ 1,370 $ 1,464 $ 1,328 (1) Excludes loss carryforwards that were recognized directly in retained earnings relating to foreign exchange translation amounts on CIBC’s net investment in foreign operations. These amounts were previously reclassified to retained earnings as part of our transition to IFRS in 2012. Components of income tax $ millions, for the year ended October 31 Current income taxes Federal Provincial Foreign Deferred income taxes Federal Provincial Foreign $ 2019 634 428 226 1,288 30 20 32 82 $ 2018 686 467 188 1,341 54 36 33 123 $ 2017 683 451 127 1,261 52 33 (18) 67 $ 1,370 $ 1,464 $ 1,328 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 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 (including Enron settlement) 2019 2018 2017 $ 1,718 26.5 % $ 1,777 26.5 % $ 1,558 26.5 % (214) (131) – 34 (23) (36) (3.3) (2.0) – 0.5 (0.4) (0.5) (220) (203) (1) 88 (29) 10 (3.3) (3.0) – 1.3 (0.4) 0.1 (137) (219) (26) 3 (25) 8 (2.3) (3.7) (0.4) – (0.4) 0.1 Income taxes in the consolidated statement of income $ 1,348 20.8 % $ 1,422 21.2 % $ 1,162 19.8 % 172 CIBC 2019 ANNUAL REPORT Consolidated financial statements Deferred income taxes Sources of and movement in deferred tax assets and liabilities Deferred tax assets $ millions, for the year ended October 31 2019 Balance at beginning of year before accounting policy changes Impact of adopting IFRS 15 at November 1, 2018 Balance at beginning of year after accounting policy changes Recognized in net income Recognized in OCI Other (3) Balance at end of year 2018 Balance at beginning of year under IAS 39 Impact of adopting IFRS 9 at November 1, 2017 Balance at beginning of year under IFRS 9 2017 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 Acquisitions Other (3) Balance at end of year Deferred tax liabilities $ millions, for the year ended October 31 2019 Balance at beginning of year before accounting policy changes Impact of adopting IFRS 15 at November 1, 2018 Balance at beginning of year after accounting policy changes Recognized in net income Recognized in OCI Other (3) Balance at end of year 2018 Balance at beginning of year under IFRS 9 (4) Recognized in net income Recognized in OCI Other (3) Balance at end of year 2017 Balance at beginning of year Recognized in net income Recognized in OCI Acquisitions Other (3) Balance at end of year Net deferred tax assets as at October 31, 2019 Net deferred tax assets as at October 31, 2018 Net deferred tax assets as at October 31, 2017 Allowance for credit losses Buildings and equipment Pension and employee benefits Provisions Financial instrument revaluation Tax loss carry- forwards (1) Other (2) $ 298 – 298 (124) – (4) $ $ $ $ $ 170 245 7 252 31 1 14 298 227 2 – 14 2 245 $ $ $ $ $ 12 – 12 14 – 21 47 69 – 69 (53) – (4) 12 88 (14) – – (5) $ $ $ $ $ $ $ $ $ $ 437 – 437 46 83 1 567 559 – 559 (45) (87) 10 437 520 19 (49) 86 (17) $ 69 $ 559 $ 16 – 16 3 – 1 20 47 – 47 (31) – – 16 31 15 – – 1 47 Total assets 994 3 997 (87) 33 43 986 1,169 27 1,196 (116) (87) 1 $ 66 – $ 38 $ – 127 $ 3 38 (14) – – 130 20 – 7 24 $ 157 $ 18 $ – 107 $ – 18 20 – – 107 22 – (2) 66 (32) (50) 17 $ 1 $ 124 20 144 (60) (1) (17) 66 25 (26) 19 111 (5) $ $ $ $ $ $ 38 $ 127 $ 994 70 $ (49) – – (3) 117 $ 3 – 10 (23) 1,078 (50) (30) 221 (50) $ 124 $ 18 $ 107 $ 1,169 Intangible assets Buildings and equipment Pension and employee benefits Goodwill Financial instrument revaluation Foreign currency Other Total liabilities $ (287) – $ (47) – $ (11) – $ (85) – $ (12) – $ – $ – 6 $ (436) (5) (5) (287) (16) – (12) (47) (12) – (9) $ (315) $ (68) $ (329) 53 – (11) $ (287) $ (158) (19) – (143) (9) $ (329) $ $ (52) – – 5 (47) $ (45) (3) – (7) 3 $ (52) $ $ $ $ (11) (1) (6) 9 (85) (1) – 2 (12) (4) – (9) (9) $ (84) $ (25) $ $ $ (10) 3 (3) (1) (11) (8) 1 (5) – 2 (93) 1 – 7 (85) (88) (5) – – – (93) $ $ $ $ (17) 3 (2) 4 (12) (54) 36 (13) – 14 (17) $ (10) $ $ $ $ $ – – – – 1 13 (1) (19) (441) (21) (7) (38) – $ (6) $ (507) (1) $ – – 1 – $ 24 $ – – – (25) 30 $ (13) 13 (24) (472) 47 8 (19) 6 $ (436) 1 $ 19 2 – 8 (328) 29 (16) (150) (7) $ (1) $ 30 $ (472) $ $ $ 479 558 697 (1) The tax loss carryforwards include $22 million (2018: $38 million; 2017: $18 million) that relate to operating losses (of which $1 million relate to Canada, $18 million relate to the U.S., and $3 million relate to the Caribbean) that expire in various years commencing in 2020, and $2 million (2018: nil, 2017: nil) that relate to U.S. capital losses that expire in 2024. (2) Certain information has been restated to conform to the presentation adopted in the current year. (3) (4) Transition impact from the adoption of IFRS 9 at November 1, 2017 was nil. Includes foreign currency translation adjustments. 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 $479 million (2018: $558 million) are presented in the consolidated balance sheet as deferred tax assets of $517 million (2018: $601 million) and deferred tax liabilities of $38 million (2018: $43 million). Unrecognized tax losses The amount of unused operating tax losses for which deferred tax assets have not been recognized was $1,908 million as at October 31, 2019 (2018: $1,051 million), of which $669 million relates to the U.S. region and $1,239 million (2018: $1,051 million) relates to the Caribbean region. These unused operating tax losses expire within 10 years. The amount of unused capital tax losses for which deferred tax assets have not been recognized was $611 million as at October 31, 2019 (2018: $614 million). These unused capital tax losses relate to Canada. CIBC 2019 ANNUAL REPORT 173 Consolidated financial statements U.S. Tax Reforms On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (U.S. tax reforms), which reduced the U.S. federal corporate income tax rate to 21% effective January 1, 2018, resulting in a significant decrease in CIBC’s U.S. deferred tax assets in the first quarter of 2018. The U.S. tax reforms introduced other important changes to U.S. corporate income tax laws including the creation of a new Base Erosion Anti-abuse Tax (BEAT) that subjects certain payments from a U.S. corporation to foreign related parties to additional taxes. In December 2018 and 2019, the Internal Revenue Service released proposed and final regulations to implement certain aspects of the U.S. tax reforms, including BEAT. CIBC continues to evaluate the impact of these regulations on our U.S. operations. 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 “Enron expenses”). In January 2019, CIBC entered into a settlement agreement (the “Agreement”) with the CRA that provides certainty with respect to the portion of the Enron expenses that are deductible in Canada. The impact of this Agreement resulted in the recognition of a net $38 million tax recovery in the first quarter of 2019. This recovery was determined after taking into account the portion of the Enron expenses that we expect to deduct in the United States, but which has not yet been agreed to by the Internal Revenue Service, and the taxable refund interest that we expect to collect from the CRA upon the reassessment of certain prior year tax returns in accordance with the Agreement. It is possible that adjustments may be required to the amount of the tax benefits recognized in the United States. Dividend Received Deduction In prior years, the CRA reassessed CIBC approximately $527 million of additional income tax by denying the tax deductibility of certain 2011 to 2013 Canadian corporate dividends on the basis that they were part of a “dividend rental arrangement”. In March 2018, CIBC filed a Notice of Appeal with the Tax Court of Canada with respect to the 2011 taxation year. The matter is now in litigation. The circumstances of the dividends subject to the reassessments are similar to those prospectively addressed by the rules in the 2015 and 2018 Canadian federal budgets. In May 2019, the CRA reassessed CIBC in respect of the 2014 taxation year for approximately $273 million of additional income tax. 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. Note 20 Earnings per share $ millions, except per share amounts, for the year ended October 31 Basic EPS Net income attributable to equity shareholders Less: preferred share dividends and premiums Net income attributable to common shareholders Weighted-average common shares outstanding (thousands) Basic EPS Diluted EPS Net income attributable to common shareholders Weighted-average common shares outstanding (thousands) Add: stock options potentially exercisable (1) (thousands) Add: restricted shares and equity-settled consideration (thousands) Weighted-average diluted common shares outstanding (thousands) Diluted EPS $ $ $ 2019 5,096 111 4,985 444,324 11.22 4,985 444,324 702 431 445,457 $ $ $ 2018 5,267 89 5,178 443,082 11.69 5,178 443,082 1,111 434 444,627 $ $ $ 2017 4,699 52 4,647 412,636 11.26 4,647 412,636 827 100 413,563 $ 11.19 $ 11.65 $ 11.24 (1) Excludes average options outstanding of 2,319,723 with a weighted-average exercise price of $114.29 (2018: 688,123 with a weighted-average exercise price of $120.02; 2017: 729,807 with a weighted-average exercise price of $111.69), as the options’ exercise prices were greater than the average market price of common shares. 174 CIBC 2019 ANNUAL REPORT Consolidated financial statements Note 21 Commitments, guarantees and pledged assets Commitments Credit-related arrangements Credit-related arrangements are generally off-balance sheet instruments and are typically entered into to meet the financing needs of clients. In addition, there are certain exposures for which we could be obligated to extend credit that are not recorded on the consolidated balance sheet. Our policy of requiring collateral or other security to support credit-related arrangements and the types of security held is generally the same as for loans. The contract amounts presented below for credit-related arrangements represent the maximum amount of additional credit that we could be obligated to extend. The contract amounts also represent the additional credit risk amounts should the contracts be fully drawn, the counterparties default and any collateral held proves to be of no value. As many of these arrangements will expire or terminate without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements or actual risk of loss. $ millions, as at October 31 Securities lending (1) Unutilized credit commitments (2) Backstop liquidity facilities Standby and performance letters of credit Documentary and commercial letters of credit Other commitments to extend credit (3) 2019 2018 Contract amounts $ 44,220 241,038 10,870 13,489 224 2,937 $ 51,550 224,746 10,520 13,242 199 138 $ 312,778 $ 300,395 (1) Excludes securities lending of $1.8 billion (2018: $2.7 billion) for cash because it is reported on the consolidated balance sheet. (2) (3) Certain prior period amounts have been revised from those previously presented. Includes $122.0 billion (2018: $116.5 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 $77.6 billion (2018: $81.2 billion) of which $6.7 billion (2018: $7.8 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 $67.8 billion (2018: $70.6 billion). Securities lending Securities lending represents our credit exposure when we lend our own or our clients’ securities to a borrower and the borrower defaults on the redelivery obligation. The borrower must fully collateralize the security lent at all times. Unutilized credit commitments Unutilized credit commitments are the undrawn portion of lending facilities that we have approved to meet the requirements of clients. These lines may include various conditions that must be satisfied prior to drawdown and include facilities extended in connection with contingent acquisition financing. The credit risk associated with these lines arises from the possibility that a commitment will be drawn down as a loan at some point in the future, prior to the expiry of the commitment. The amount of collateral obtained, if deemed necessary, is based on our credit evaluation of the borrower and may include a charge over the present and future assets of the borrower. Backstop liquidity facilities We provide irrevocable backstop liquidity facilities primarily to ABCP conduits. We are the financial services agent for some of these conduits, while other conduits are administered by third parties. The liquidity facilities for our sponsored ABCP programs, Safe Trust, Sure Trust, and Sound Trust, require us to provide funding, subject to the satisfaction of certain limited conditions with respect to the conduits, to fund non-defaulted assets. Standby and performance letters of credit These represent an irrevocable obligation to make payments to third parties in the event that clients are unable to meet their contractual financial or performance obligations. The credit risk associated with these instruments is essentially the same as that involved in extending irrevocable loan 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. Other commitments to extend credit These represent other commitments to extend credit, and primarily include forward-dated securities financing trades in the form of securities purchased under resale agreements with various counterparties that are executed on or before the end of our reporting period and that settle shortly after period end, usually within five business days. CIBC 2019 ANNUAL REPORT 175 Consolidated financial statements 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, 2019 2020 2021 2022 2023 2024 2025 and thereafter Operating leases Payments Receipts (2) $ 510 529 484 420 351 3,253 $ 132 136 138 139 138 1,164 (1) Payments include expenses related to base rent, taxes and estimated operating expenses, and exclude expenses related to certain servicing arrangements. Total rental payments in 2019 were $499 million (2018: $494 million, 2017: $476 million). Includes sub-lease income from a finance lease property, a portion of which is rented out and considered an investment property. (2) 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, 2019 2020 2021 2022 2023 2024 2025 and thereafter Less: future interest charges Present value of finance lease commitments $ $ 50 48 45 42 41 245 471 144 327 (1) Total interest expense related to finance lease arrangements was $24 million (2018: $25 million; 2017: $28 million). Other commitments As an investor in merchant banking activities, we enter into commitments to fund external private equity funds. In connection with these activities, we had commitments to invest up to $258 million (2018: $194 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, 2019, the related underwriting commitments were $60 million (2018: $176 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 indemnify each of our directors and officers, 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, 2019 and 2018 are not significant. 176 CIBC 2019 ANNUAL REPORT Consolidated financial statements Pledged assets In the normal course of business, on-and off-balance sheet assets are pledged as collateral against liabilities. The following table summarizes asset pledging amounts and the activities to which they relate: $ millions, as at October 31 Assets pledged in relation to: Securities lending Obligations related to securities sold under repurchase agreements Obligations related to securities sold short Securitizations Covered bonds Derivatives Foreign governments and central banks (1) Clearing systems, payment systems, and depositories (2) Other (1) (2) Includes assets pledged to maintain access to central bank facilities in foreign jurisdictions. Includes assets pledged in order to participate in clearing and payment systems and depositories. Note 22 Contingent liabilities and provisions $ 2019 2018 $ 46,242 51,942 15,635 19,398 20,206 12,952 784 2,400 1,247 47,894 31,058 13,782 22,893 21,544 11,680 686 5,867 675 $ 170,806 $ 156,079 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 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 $1.1 billion as at October 31, 2019. 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, 2019 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. No date has been set for a motion for summary judgment. 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 plaintiff’s motion for summary judgment that was scheduled for September 2019 has been adjourned to December 2019. CIBC 2019 ANNUAL REPORT 177 Consolidated financial statements 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. Pilon v. Amex 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 Quebec 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 Quebec 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 Quebec CPA is constitutionally applicable to federally regulated financial institutions and awarding damages against all the defendants. The court awarded compensatory damages against CIBC in the amount of $38 million plus an additional sum to be determined at a future date. The court awarded punitive damages against a number of the other defendants, but not against CIBC. CIBC and the other financial institutions appealed this decision. The appeal was heard by the Quebec Court of Appeal in September 2011. In August 2012, the Quebec Court of Appeal allowed the defendant banks’ appeals in part and overturned the trial judgment against CIBC. The plaintiffs and some of the defendant banks appealed to the Supreme Court of Canada, and that appeal was heard in February 2014. On September 19, 2014, the Supreme Court of Canada found that the relevant provisions of the Quebec CPA were constitutionally applicable to the banks, but that CIBC is not liable for damages because it fully complied with the Quebec CPA. The Giroux and Marcotte II proposed class actions were discontinued in January 2015. The Lamoureux, St. Pierre and Corriveau actions were settled in 2016 subject to court approval. Pursuant to the proposed settlement, CIBC was to 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 and the appeal was dismissed in March 2018. In July 2019, following renegotiation of certain of the terms of the settlement, the court approved the settlement. The amount of the approved settlement for these actions remained at $4.25 million. The Lamoureux, St. Pierre, and Corriveau class actions are now settled. The Pilon proposed class action was commenced in January 2018 in Quebec against CIBC and several other financial institutions. The plaintiffs allege that the defendants breached the Quebec CPA and the Bank Act when they unilaterally increased the credit limit on the plaintiffs’ credit cards. The claim seeks the return of all over limit fees charged to Quebec customers beginning in January 2015 as well as punitive damages of $500 per class member. The motion for class certification in Pilon was heard in April 2019. In August 2019, the court dismissed the certification motion. The plaintiff is appealing the 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 is scheduled to commence in October 2020. The motion for class certification in 9085-4886 Quebec Inc. (formerly Bakopanos) was heard in November 2017. In February 2018, the Court certified 9085-4886 Quebec Inc. as a class action. In May 2019, the plaintiffs’ appeal of the certification decision in 9085-4886 Quebec Inc. was heard and in July 2019, the Quebec Court of Appeal allowed the plaintiffs’ appeal. Mortgage prepayment class actions: Jordan v. CIBC Mortgages Inc. Lamarre v. CIBC Mortgages Inc. Sherry v. CIBC Mortgages Inc. Haroch v. Toronto Dominion Bank, et al. 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 was heard November 2017. In August 2018, the court certified certain of the plaintiffs’ causes of action in 178 CIBC 2019 ANNUAL REPORT Consolidated financial statements Sherry. The appeal in Sherry was heard in April 2019. The court reserved its decision. The certification motion in Jordan was heard in August 2018. In February 2019, the court certified Jordan as a class action. CIBC’s motion for leave to appeal the certification decision in Jordan was denied in June 2019. In May 2018, a new proposed class action, Haroch, was filed in the Superior Court of Quebec. The action is brought on behalf of Quebec residents who during the class period allegedly paid a mortgage prepayment charge in excess of three months’ interest. The plaintiffs allege that the defendants created complex prepayment formulas that are contrary to the Quebec Civil Code, the Quebec Consumer Protection Act and the Interest Act and seek damages back to 2015. Haroch and Lamarre have been consolidated. The motion for class certification in Haroch was heard in June 2019 and in July 2019, the court certified the matter as a class action against CIBC and CIBC Mortgages Inc. CIBC and CIBC Mortgages Inc. are seeking leave to appeal the certification decision. The leave motion is scheduled for January 2020. 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. In April 2018, the court denied the plaintiffs’ motion for summary judgment. The plaintiffs appealed the decision, which was heard in November 2018. In December 2018, the appellate court affirmed the lower court’s denial of the plaintiffs’ motion for summary judgment. Fire & Police Pension Association of Colorado v. Bank of Montreal, et al. In January 2018, a proposed class action was filed in the U.S. District Court for the Southern District of New York against CIBC, CIBC World Markets Corp., CIBC World Markets Inc. and several other financial institutions. The complaint alleges that the defendant financial institutions conspired to depress a benchmark interest rate called the Canadian Dealer Offered Rate (CDOR) by making coordinated, artificially low submissions to the survey used to calculate the CDOR. The plaintiffs allege that a depressed CDOR benefitted defendants as parties to derivatives transactions that settled by reference to that rate. The complaint asserts claims under the antitrust laws and the Commodity Exchange Act, among others. The representative plaintiff seeks to represent a putative class of entities that engaged in U.S.-based transactions in financial instruments that were priced, benchmarked, and/or settled based on CDOR between August 9, 2007 and June 30, 2014. In March 2018, the plaintiff delivered an amended claim extending the class period to December 2014. The defendants brought motions to dismiss, which the court granted in March 2019. In April 2019, the plaintiff filed a notice of intent to appeal the decision. In July 2019, the plaintiff withdrew the case with prejudice. This matter is now closed. 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 sought leave to appeal the certification decision, which was dismissed in December 2017. In Potter the court dismissed the action against the underwriters, without prejudice to the plaintiff to re-plead its allegations. Simplii Privacy Class Actions Bannister v. CIBC (formerly John Doe v. CIBC) Steinman v. CIBC In June 2018, two proposed class actions were filed against CIBC on behalf of Simplii Financial clients who allege their personal information was disclosed as a result of a security incident in May 2018. The actions allege that Simplii Financial failed to protect its clients’ personal information. The Bannister proposed class action seeks aggregated damages of approximately $550 million, while the Steinman proposed class action, which has been stayed, sought damages per class member plus punitive damages of $20 million. The motion for certification in Bannister, which was scheduled for October 2019, has been adjourned to December 2019. Pozgaj v. CIBC and CIBC Trust In September 2018, a proposed class action was filed in the Ontario Superior Court against CIBC and CIBC Trust. It alleges that the defendants should not have paid mutual fund trailing commissions to order-execution-only-dealers. The action is brought on behalf of all persons who held units of CIBC mutual funds through order-execution-only-dealers and seeks $200 million in damages. York County on Behalf of the County of York Retirement Fund v. Rambo, et al. In February 2019, a class action complaint was filed in the Northern District of California against the directors, certain officers and the underwriters of several senior note offerings of the Pacific Gas and Electric Company (PG&E) that took place between March 2016 and April 2018, the total issuance amount for the series of offerings being approximately US$4 billion. CIBC World Markets Corp. was part of the underwriting syndicate for an offering, whereby CIBC World Markets Corp. underwrote 6% of a US$650 million December 2016 issuance of senior notes. The offering involved the issuance of two tranches of notes: US$400 million of 30-year senior notes maturing in December 2046 and US$250 million of one-year floating rate notes that matured and were repaid in November 2017. The complaint alleges that the disclosure documentation associated with the note offerings contained misrepresentations and/or omissions of material facts, including with respect to PG&E’s failure to comply with various safety regulations, vegetation management programs and requirements, as well as understating the extent to which its equipment has allegedly caused multiple fires in California, including before the wildfires that occurred in California in 2017 and 2018. In October 2019, the defendants filed a motion to dismiss. CIBC 2019 ANNUAL REPORT 179 Consolidated financial statements Legal provisions The following table presents changes in our legal provisions: $ millions, for the year ended October 31 Balance at beginning of year Additional new provisions recognized Less: Amounts incurred and charged against existing provisions Unused amounts reversed Balance at end of year Restructuring 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 2019 $ 40 39 (8) (4) $ 2018 97 23 (78) (2) $ 67 $ 40 2019 $ 71 – (45) – $ 26 2018 149 28 (70) (36) 71 $ $ The amount of $26 million as at October 31, 2019 primarily represents obligations related to ongoing payments as a result of the restructuring. Note 23 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 2019 Canada U.S. Other countries Total Canada U.S. Other countries 2018 (1) Total On-balance sheet Major assets (2)(3)(4) Off-balance sheet Credit-related arrangements Financial institutions Governments Retail Corporate $ 444,317 $ 120,286 $ 55,844 $ 620,447 $ 431,917 $ 99,063 $ 40,405 $ 571,385 $ $ 47,815 9,208 130,544 61,228 13,526 10 510 28,907 $ 12,318 14 432 8,266 $ 73,659 9,232 131,486 98,401 $ 45,433 9,880 124,625 58,397 $ 16,358 10 386 25,158 $ 12,258 50 390 7,450 $ 74,049 9,940 125,401 91,005 $ 248,795 $ 42,953 $ 21,030 $ 312,778 $ 238,335 $ 41,912 $ 20,148 $ 300,395 (1) Certain prior period amounts have been revised from those previously presented. (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 agreements, and derivative instruments. Includes Canadian currency of $426.0 billion (2018: $410.5 billion) and foreign currencies of $194.4 billion (2018: $160.9 billion). (3) (4) No industry or foreign jurisdiction accounted for more than 10% of loans and acceptances net of allowance for credit losses, with the exception of the U.S., which accounted for 12.1% as at October 31, 2019 (2018: 10.5%). See Note 12 for derivative instruments by country and counterparty type of ultimate risk. In addition, see Note 21 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. 180 CIBC 2019 ANNUAL REPORT Consolidated financial statements Note 24 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, 2019, 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 $239 million (2018: $209 million), letters of credit and guarantees totalled $4 million (2018: $5 million), and undrawn credit commitments totalled $72 million (2018: $59 million). These outstanding balances are generally unsecured and we have no provision for credit losses on impaired loans relating to these amounts for the years ended October 31, 2019 and 2018. (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) Total compensation 2019 Senior officers $ $ 23 3 38 64 Directors $ $ 3 – 2 5 2018 Senior officers $ $ 23 3 35 61 Directors $ $ 2 – 2 4 (1) Comprises salaries, statutory and non-statutory benefits related to senior officers and fees related to directors recognized during the year. Also includes annual incentive plan payments related to senior officers on a cash basis. (2) Comprises grant-date fair values of awards granted in the year. Refer to the following Notes for additional details on related-party transactions: Share-based payment plans See Note 17 for details of these plans offered to directors and senior officers. Post-employment benefit plans See Note 18 for related-party transactions between CIBC and the post-employment benefit plans. Equity-accounted associates and joint ventures See Note 25 for details of our investments in equity-accounted associates and joint ventures. CIBC 2019 ANNUAL REPORT 181 Consolidated financial statements Note 25 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, 2019, the carrying value of our investments in the joint ventures was $529 million (2018: $463 million), which was included in Corporate and Other. As at October 31, 2019, loans to the joint ventures totalled nil (2018: nil) and undrawn credit commitments totalled $128 million (2018: $128 million). CIBC, The Bank of New York Mellon, and CIBC Mellon have, jointly and severally, provided indemnities to customers of the joint ventures in respect of securities lending transactions. See Note 21 for additional details. There was no unrecognized share of losses of any joint ventures, either for the year or cumulatively. In 2019 and 2018, 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 2019 88 45 133 $ $ 2018 106 (12) 94 $ $ 2017 $ $ 81 (30) 51 Associates As at October 31, 2019, the total carrying value of our investments in associates was $57 million (2018: $63 million). These investments comprise: listed associates with a carrying value of $9 million (2018: nil) and a fair value of $9 million (2018: nil); and unlisted associates with a carrying value of $48 million (2018: $63 million) and a fair value of $76 million (2018: $101 million). Of the total carrying value of our investments in associates, $5 million (2018: nil) was included in Canadian Personal and Small Business Banking, nil (2018: $1 million) in Canadian Commercial Banking and Wealth Management, $33 million (2018: $41 million) in Capital Markets, and $19 million (2018: $21 million) in Corporate and Other. As at October 31, 2019, loans to associates totalled nil (2018: nil) and undrawn credit commitments totalled $79 million (2018: $79 million). We also had commitments to invest up to nil (2018: nil) in our associates. There was no unrecognized share of losses of any associate, either for the year or cumulatively. In 2019 and 2018, 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 2019 $ $ 4 (1) 3 2018 $ $ 15 (7) 8 2017 $ $ 20 6 26 182 CIBC 2019 ANNUAL REPORT Consolidated financial statements Note 26 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, 2019 Subsidiary name (1) Canada and U.S. CIBC Asset Management Inc. CIBC BA Limited CIBC Bancorp USA Inc. Canadian Imperial Holdings Inc. CIBC Inc. CIBC Capital Corporation CIBC World Markets Corp. CIBC Bank USA CIBC Private Wealth Group, LLC CIBC Private Wealth Advisors, Inc. CIBC National Trust Company CIBC Delaware Trust Company CIBC Investor Services Inc. CIBC Life Insurance Company Limited CIBC Mortgages Inc. CIBC Securities Inc. CIBC Trust Corporation CIBC World Markets Inc. CIBC Wood Gundy Financial Services Inc. CIBC Wood Gundy Financial Services (Quebec) Inc. INTRIA Items Inc. International CIBC Australia Ltd CIBC Cayman Holdings Limited CIBC Cayman Bank Limited CIBC Cayman Capital Limited CIBC Cayman Reinsurance Limited CIBC Investments (Cayman) Limited FirstCaribbean International Bank Limited (91.7%) CIBC Bank and Trust Company (Cayman) Limited (91.7%) CIBC Fund Administration Services (Asia) Limited (91.7%) CIBC Trust Company (Bahamas) Limited (91.7%) FirstCaribbean International Bank (Bahamas) Limited (87.3%) Sentry Insurance Brokers Ltd. (87.3%) FirstCaribbean International Bank (Barbados) Limited (91.7%) FirstCaribbean International Finance Corporation (Leeward & Windward) Limited (91.7%) FirstCaribbean International Securities Limited (91.7%) FirstCaribbean International Bank (Cayman) Limited (91.7%) FirstCaribbean International Finance Corporation (Netherlands Antilles) N.V. (91.7%) FirstCaribbean International Bank (Curacao) N.V. (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%) Address of head or principal office Book value of shares owned by CIBC (2) Toronto, Ontario, Canada $ 444 – (3) 9,077 25 23 230 2 591 306 100 19 1,742 2,820 Toronto, Ontario, Canada Chicago, Illinois, 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. Chicago, Illinois, U.S. Atlanta, Georgia, U.S. Chicago, Illinois, U.S. Atlanta, Georgia, U.S. Wilmington, Delaware, 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 Mississauga, Ontario, Canada 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 George Town, Grand Cayman, Cayman Islands Warrens, St. Michael, Barbados George Town, Grand Cayman, Cayman Islands Hong Kong, China Nassau, The Bahamas Nassau, The Bahamas Nassau, The Bahamas Warrens, St. Michael, Barbados Castries, St. Lucia Kingston, Jamaica George Town, Grand Cayman, Cayman Islands Curacao, Netherlands Antilles Curacao, Netherlands Antilles Kingston, Jamaica Maraval, Port of Spain, Trinidad & Tobago Warrens, St. Michael, Barbados CIBC World Markets (Japan) Inc. CIBC World Markets plc 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 Canadian Imperial Holdings Inc., CIBC Inc., CIBC Capital Corporation, CIBC World Markets Corp., CIBC Private Wealth Group, LLC, CIBC Private Wealth Advisors, Inc., and CIBC Bancorp USA Inc., which were incorporated or organized under the laws of the State of Delaware, U.S.; CIBC National Trust Company, which was organized under the laws of the United States; 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. CIBC 2019 ANNUAL REPORT 183 Consolidated financial statements Note 27 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. Section Risk overview Credit risk Market risk Liquidity risk Operational risk Reputation, conduct and legal risk Regulatory compliance risk 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. 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. The table below sets out the categories of the on-balance sheet exposures that are subject to the credit risk framework as set out in the Capital Adequacy Requirements (CAR) Guideline issued by OSFI under the different Basel approaches based on the carrying value of those exposures in our consolidated financial statements. The credit risk framework includes counterparty credit risk exposures arising from OTC derivatives, repo-style transactions and trades cleared through CCPs, as well as securitization exposures. Items not subject to the credit risk framework include exposures that are subject to the market risk framework, amounts that are not subject to capital requirements or are subject to deduction from capital, and amounts relating to CIBC’s insurance subsidiaries, which are excluded from the scope of regulatory consolidation. $ millions, as at October 31 2019 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 Total credit exposures 2018 Total credit exposures AIRB approach Standardized approach Other credit risk (1) $ 11,247 68,960 3,663 56,111 348,100 (1,465) 23,821 9,167 15,879 $ $ 535,483 485,004 $ $ $ 3,840 9,687 1 – 39,068 (450) 74 – 385 52,605 45,529 $ $ $ 1,627 – – – 970 – – – 6,074 8,671 8,692 $ Total subject to credit risk 16,714 78,647 3,664 56,111 388,138 (1,915) 23,895 9,167 22,338 $ $ 596,759 539,225 Not subject to credit risk Total consolidated balance sheet $ $ $ 645 42,663 – – 2,718 – – – 8,819 54,845 57,874 $ 17,359 121,310 3,664 56,111 390,856 (1,915) 23,895 9,167 31,157 $ $ 651,604 597,099 (1) Includes credit risk exposures arising from other assets that are subject to the credit risk framework but are not included in the standardized or AIRB frameworks, including other balance sheet assets which are risk-weighted at 100%, significant investments in the capital of non-financial institutions, and amounts below the thresholds for capital deduction that are risk-weighted at 250%. 184 CIBC 2019 ANNUAL REPORT Consolidated financial statements Note 28 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 2019 Derivatives Cash collateral on securities borrowed Securities purchased under resale 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 $ 42,156 $ (21,206) $ 20,950 $ (14,572) $ (3,888) $ 2,490 $ 2,945 $ 23,895 agreements 59,131 (3,020) 56,111 3,664 – 3,664 – – (3,588) (55,721) 76 390 2018 Derivatives Cash collateral on securities borrowed Securities purchased under resale $ 104,951 $ (24,226) $ 80,725 $ (14,572) $ (63,197) $ 2,956 $ 33,862 5,488 $ (14,750) – $ 19,112 5,488 $ (11,789) – $ (4,794) (5,406) $ 2,529 82 agreements 45,028 (1,578) 43,450 – (43,358) 92 $ $ – – 2,945 2,319 – – $ $ 3,664 56,111 83,670 21,431 5,488 43,450 $ 84,378 $ (16,328) $ 68,050 $ (11,789) $ (53,558) $ 2,703 $ 2,319 $ 70,369 Financial liabilities $ millions, as at October 31 2019 Derivatives Cash collateral on securities lent Obligations related to securities sold under repurchase agreements 2018 Derivatives Cash collateral on securities lent Obligations related to securities sold under repurchase agreements 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 $ 43,941 1,822 $ (21,206) $ – 22,735 1,822 54,821 (3,020) 51,801 $ (14,572) $ – – (6,840) $ (1,779) 1,323 43 (51,343) 458 $ 100,584 $ (24,226) $ 76,358 $ (14,572) $ (59,962) $ 1,824 $ 33,358 2,731 $ (14,750) – $ 18,608 2,731 $ (11,789) – $ (5,539) (2,697) $ 1,280 34 32,418 (1,578) 30,840 – (30,780) 60 $ $ $ 2,378 – – 2,378 2,365 – – $ $ $ 25,113 1,822 51,801 78,736 20,973 2,731 30,840 $ 68,507 $ (16,328) $ 52,179 $ (11,789) $ (39,016) $ 1,374 $ 2,365 $ 54,544 (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 $355 million as at October 31, 2019 (2018: $531 million) 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. 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 (4) 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 2019 ANNUAL REPORT 185 Consolidated financial statements Note 29 Interest income and expense The table below provides the consolidated interest income and expense by accounting categories. $ millions, for the year ended October 31 2019 2018 2017 IFRS 9 Measured at amortized cost (1) Debt securities measured at FVOCI (1) Other (2) Total IFRS 9 Measured at amortized cost (1) Debt securities measured at FVOCI (1) Other (2) Total IAS 39 Amortized cost and HTM (1) AFS debt securities (1) Other (2) Total Interest income 17,871 960 1,866 20,697 15,275 749 1,481 17,505 11,712 480 1,401 $ $ $ $ $ Interest expense $ 9,824 n/a 322 $ 10,146 $ $ $ 7,139 n/a 301 7,440 4,359 n/a 257 $ 13,593 $ 4,616 (1) (2) Interest income for financial instruments that are measured at amortized cost and debt securities that are measured at FVOCI is calculated using the effective interest rate method. Includes interest income and expense and dividend income for financial instruments that are mandatorily measured and designated at FVTPL and equity securities designated at FVOCI. n/a Not applicable. 186 CIBC 2019 ANNUAL REPORT Consolidated financial statements Note 30 Segmented and geographic information CIBC has four strategic business units (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 business clients across Canada with financial advice, products and services through a team in our banking centres, as well as through our direct, mobile and remote channels. Canadian Commercial Banking and Wealth Management provides high-touch, relationship-oriented banking and wealth management services to middle-market companies, entrepreneurs, high-net-worth individuals and families across Canada, as well as asset management services to institutional investors. 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 solutions and top-ranked research to corporate, government and institutional clients around the world. Corporate and Other includes the following functional groups – Technology and Operations, Risk Management, Culture and Brand, and Finance, as well as other support groups. The expenses of these functional and support groups are generally allocated to the business lines within the SBUs. The majority of the functional and support costs of CIBC Bank USA are recognized directly in the U.S. Commercial Banking and Wealth Management SBU. Corporate and Other also includes the results of CIBC FirstCaribbean and other strategic investments, as well as other income statement and balance sheet items not directly attributable to the business lines. Business unit allocations Revenue, expenses, and other balance sheet resources related to certain activities are generally allocated to the lines of business within the SBUs. Treasury activities impact the financial results of the SBUs. Each line of business within our SBUs is charged or credited with a market-based cost of funds on assets and liabilities, respectively, which impacts the revenue performance of the SBUs. Once the interest and liquidity risks inherent in our client- driven assets and liabilities are transfer priced into Treasury, they are managed within CIBC’s risk framework and limits. The residual financial results associated with Treasury activities are reported in Corporate and Other, with the exception of certain Treasury activities in U.S. Commercial Banking and Wealth Management, which are reported in that SBU. Capital is attributed to the SBUs in a manner that is intended to consistently measure and align economic costs with the underlying benefits and risks associated with SBU activities. Earnings on unattributed capital remain in Corporate and Other. We review our transfer pricing methodologies on an ongoing basis to ensure they reflect changing market environments and industry practices. To measure and report the results of operations of the lines of business within our Canadian Personal and Small Business Banking and Canadian Commercial Banking and Wealth Management SBUs, we use a Manufacturer/Customer Segment/Distributor Management Model. The model uses certain estimates and allocation methodologies to process internal payments between lines of business for sales, renewals and trailer commissions to facilitate preparation of segmented financial information. Periodically, the sales, renewals and trailer commission rates paid to customer segments for certain products/services are revised and applied prospectively. Non-interest expenses incurred by our functional groups are attributed to the SBUs to which they relate based on appropriate criteria. Effective November 1, 2017, provision for credit losses on both impaired (stage 3) and performing (stages 1 and 2) loans are recognized in the respective SBUs. See “Changes made to our business segments in previous years” below for details on how provision for credit losses was attributed prior to our adoption of IFRS 9 on November 1, 2017. Changes made to our business segments in previous years 2018 We adopted IFRS 9 effective November 1, 2017. As permitted, prior period amounts were not restated. See Note 1 for additional details. Our adoption of IFRS 9 impacted how provision for credit losses is attributed to our SBUs. Prior to November 1, 2017, provision for credit losses on performing loans was recognized in Corporate and Other, with the exception of provision for credit losses related to CIBC Bank USA, which was recognized in U.S. Commercial Banking and Wealth Management, and provision for credit losses on: (i) performing residential mortgages greater than 90 days delinquent; and (ii) performing personal loans and scored small business loans greater than 30 days delinquent, which was recognized in Canadian Personal and Small Business Banking. Following our adoption of IFRS 9 on November 1, 2017, we recognize provision for credit losses on both impaired (stage 3) and performing (stages 1 and 2) loans in the respective SBUs. 2017 In 2017, we announced changes to CIBC’s leadership team and organizational structure to further accelerate our transformation. We also completed our acquisition of PrivateBancorp and its subsidiary, The PrivateBank, subsequently rebranded as CIBC Bank USA. These changes resulted in the creation of our four current SBUs: Canadian Personal and Small Business Banking, Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets. Prior to the announcement, CIBC had three SBUs: Retail and Business Banking, Wealth Management, and Capital Markets. In 2017, we also enhanced the transfer pricing methodology used by Treasury to charge and credit the SBUs for the cost and benefit of funding assets and liabilities, respectively, to better align to our liquidity risk models. Prior period amounts were reclassified accordingly as a result of these changes, with no impact on prior period consolidated net income. CIBC 2019 ANNUAL REPORT 187 Consolidated financial statements Results by reporting segments and geographic areas $ millions, for the year ended October 31 2019 Net interest income (2) Non-interest income (3)(4) Total revenue Provision for (reversal of) credit losses Amortization and impairment (5) 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 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) $ $ $ 6,382 2,376 8,758 896 96 4,649 3,117 826 2,291 – 2,291 $ 1,224 2,822 4,046 163 8 2,098 1,777 476 $ 1,383 $ 583 1,966 73 109 1,010 774 91 1,228 1,709 2,937 153 4 1,512 1,268 331 $ 1,301 $ – 1,301 $ $ 683 $ 937 – $ 683 – 937 $ $ $ 334 570 904 1 621 749 (467) (376) $ 10,551 $ 8,060 $ 7,890 6,008 18,611 13,898 1,286 838 10,018 6,469 1,348 1,111 508 7,985 4,294 1,008 (91) $ 5,121 $ 3,286 $ $ 25 (116) 25 $ 5,096 $ – 3,286 1,405 1,099 2,504 173 139 1,290 902 139 763 – 763 $ 820 643 1,463 1 181 556 725 155 570 25 545 $ $ $ $ $ 436 310 746 1 10 187 548 46 502 – 502 Average assets (6) $ 259,089 $ 62,552 $ 48,687 $ 184,566 $ 84,822 $ 639,716 $ 501,066 $ 99,152 $ 27,086 $ 12,412 2018 Net interest income (2) Non-interest income (3)(4) Total revenue Provision for (reversal of) credit losses Amortization and impairment (5) Other non-interest expenses Income (loss) before income taxes Income taxes (2) Net income (loss) Net income (loss) attributable to: Non-controlling interests Equity shareholders $ $ $ 6,167 2,438 8,605 741 98 4,297 3,469 922 2,547 – 2,547 $ 1,120 2,745 3,865 5 9 2,059 1,792 485 $ 1,236 $ 530 1,766 79 107 916 664 99 1,413 1,499 2,912 (30) 4 1,488 1,450 381 $ 1,307 $ – 1,307 $ $ 565 $ 1,069 – $ 565 – 1,069 $ $ $ 129 557 686 75 439 841 (669) (465) $ 10,065 $ 7,769 $ 7,963 6,030 17,834 13,993 870 657 9,601 6,706 1,422 740 469 7,655 5,129 1,021 (204) $ 5,284 $ 4,108 $ $ 17 (221) 17 $ 5,267 $ – 4,108 1,204 895 2,099 57 136 1,231 675 288 387 – 387 $ 793 567 1,360 75 44 530 711 72 639 17 622 $ $ $ $ $ 105 277 382 (2) 8 185 191 41 150 – 150 Average assets (6) $ 259,130 $ 55,713 $ 42,028 $ 166,231 $ 75,339 $ 598,441 $ 476,224 $ 80,935 $ 31,101 $ 10,181 2017 Net interest income (2) Non-interest income (3)(4) Total revenue Provision for (reversal of) credit losses Amortization and impairment (5) 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 2,620 8,372 766 87 4,261 3,258 838 2,420 – 2,420 $ 984 2,606 3,590 16 9 2,012 1,553 415 $ 545 $ 331 876 84 33 501 258 55 1,647 1,176 2,823 (4) 5 1,368 1,454 364 $ 1,138 $ – 1,138 $ $ 203 $ 1,090 – $ 203 – 1,090 $ $ $ 49 570 619 (33) 408 887 (643) (510) $ 8,977 $ 7,303 $ 7,829 5,720 449 675 16,280 13,549 1,124 $ 639 646 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 $ $ $ $ $ 60 262 322 – 8 172 142 36 106 – 106 Average assets (6) $ 246,316 $ 50,832 $ 19,905 $ 156,440 $ 68,872 $ 542,365 $ 451,831 $ 52,023 $ 28,553 $ 9,958 (1) Net income and average assets are allocated based on the geographic location where they are recorded. (2) U.S. Commercial Banking and Wealth Management and Capital Markets net interest income and income taxes include taxable equivalent basis (TEB) adjustments of $2 million and $177 million, respectively (2018: $2 million and $278 million, respectively; 2017: $2 million and $298 million, respectively) with an equivalent offset in Corporate and Other. (3) The fee and commission income within non-interest income consists primarily of underwriting and advisory fees, deposit and payment fees, credit fees, card fees, investment management and custodial fees, mutual fund fees and commissions on securities transactions. Underwriting and advisory fees are earned primarily in Capital Markets with the remainder earned in Canadian Commercial Banking and Wealth Management. Deposit and payment fees are earned primarily in Canadian Personal and Small Business Banking, with the remainder earned mainly in Canadian Commercial Banking and Wealth Management and Corporate and Other. Credit fees are earned primarily in Canadian Commercial Banking and Wealth Management, Capital Markets, and U.S. Commercial Banking and Wealth Management. Card fees are earned primarily in Canadian Personal and Small Business Banking, with the remainder earned mainly in Corporate and Other. Investment management and custodial fees are earned primarily in Canadian Commercial Banking and Wealth Management and U.S. Commercial Banking and Wealth Management, with the remainder earned mainly in Corporate and Other. Mutual fund fees are earned primarily in Canadian Commercial Banking and Wealth Management and U.S. Commercial Banking and Wealth Management. Commissions on securities transactions are earned primarily in Capital Markets and Canadian Commercial Banking and Wealth Management. Includes intersegment revenue, which represents internal sales commissions and revenue allocations under the Manufacturer / Customer Segment / Distributor Management Model. Prior period amounts have been restated to conform to the presentation. (4) (5) Comprises amortization and impairment of buildings, furniture, equipment, leasehold improvements, and software and other intangible assets. (6) Assets are disclosed on an average basis as this measure is most relevant to a financial institution and is the measure reviewed by management. 188 CIBC 2019 ANNUAL REPORT 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 Canadian Commercial Banking and Wealth Management Commercial banking Wealth management U.S. Commercial Banking and Wealth Management (1) Commercial banking Wealth management Other Capital Markets (1) Global markets Corporate and investment banking (2) Corporate and Other (1) International banking Other 2019 8,758 1,651 2,395 4,046 1,349 611 6 1,966 1,705 1,232 2,937 803 101 904 $ $ $ $ $ $ $ $ $ 2018 8,605 1,488 2,377 3,865 1,197 563 6 1,766 1,674 1,238 2,912 663 23 686 $ $ $ $ $ $ $ $ $ 2017 8,372 1,324 2,266 3,590 532 324 20 876 1,601 1,222 2,823 723 (104) 619 $ $ $ $ $ $ $ $ $ (1) U.S. Commercial Banking and Wealth Management and Capital Markets revenue includes a TEB adjustment of $2 million and $177 million, respectively (2018: $2 million and $278 million, respectively; 2017: $2 million and $298 million, respectively) with an equivalent offset in Corporate and Other. (2) Certain information has been reclassified to conform to the presentation adopted in 2019. Corporate and investment banking now includes the Other line of business. CIBC 2019 ANNUAL REPORT 189 Consolidated financial statements Note 31 Future accounting policy changes 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. As a lessee, the new standard will result in on-balance sheet recognition for most leases that are considered operating leases under IAS 17, which will result in a gross-up of the consolidated balance sheet through the recognition of a liability for the present value of future lease payments (i.e. lease liability) and an asset representing the right to use the underlying asset (i.e. right-of-use asset). We will no longer recognize the impacted lease payments through operating expenses; instead, we will recognize depreciation expense on the right-of-use asset and interest expense on the lease liability in the consolidated statement of income. Accounting for leases by lessors remains mostly unchanged from IAS 17. However, on transition, intermediate lessors are required to reassess subleases by reference to the right-of-use asset arising from the head lease that could result in on-balance sheet recognition for certain subleases previously classified as operating subleases. The application of IFRS 16 mainly will apply to our office and banking centre leases, as well as certain subleases previously classified as operating subleases. We expect to adopt IFRS 16 for the fiscal year beginning November 1, 2019 using the modified retrospective method, with no restatement of comparative periods. As at November 1, 2019, the adoption of IFRS 16 is expected to result in the recognition of approximately $1.6 billion of right-of-use assets and corresponding lease liabilities on our consolidated balance sheet. In addition, the reassessment of certain subleases related to a previously recognized finance lease property, a portion of which is leased and considered investment property, is expected to result in an increase in net assets of approximately $0.1 billion from the recognition of additional sublease-related assets, net of the derecognition of amounts related to the corresponding head lease. As at November 1, 2019, the after-tax impact to retained earnings as a result of adopting IFRS 16 is expected to be an increase of $0.1 billion. In addition, the following permitted recognition exemptions and practical expedients have been applied: (cid:129) (cid:129) A single discount rate curve has been applied to portfolios of leases with reasonably similar characteristics at the date of application. In contracts where we are the lessee, we have not reassessed contracts that were identified as finance leases under the previous accounting standard (IAS 17). We have elected to exclude leases of assets considered as low value and certain short-term leases. We have applied the onerous leases provisions recognized as at October 31, 2019 as an alternative to performing an impairment review of our right-of-use assets as at November 1, 2019. Where an onerous lease provision was recorded on a lease, the right-of-use asset has been reduced by the amount of that provision on transition and no further impairment review was performed. We have elected not to separate lease and non-lease components of a lease contract when calculating the lease liability and corresponding right-of-use asset for certain classes of assets. Non-lease components may consist of, but are not limited to, common area maintenance expenses and utility charges. Other occupancy costs not within the scope of IFRS 16 will continue to be recorded as operating expenses. (cid:129) (cid:129) (cid:129) The actual impacts of the initial application of IFRS 16 may vary from our estimates based on final application and testing of the internal controls over financial reporting related to IFRS 16, as well as revisions to the accounting policies and judgments, including application of practical expedients. We have updated our accounting systems and internal control processes in response to the standard, and are in the final stages of testing and acceptance for our transition to IFRS 16. IFRIC 23 “Uncertainty over Income Tax Treatments” (IFRIC 23) In June 2017, the IASB issued IFRIC 23, which clarifies the accounting for uncertainties in income taxes. IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019, which for us is on November 1, 2019. There will be no impact to our consolidated financial statements as a result of adopting IFRIC 23. Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and IFRS 7 In September 2019, the IASB issued “Interest Rate Benchmark Reform: Amendments to IFRS 9, IAS 39 and IFRS 7”, which provides relief for specific hedge accounting requirements to address uncertainties in the period before the interest rate benchmark reform, and provides specific disclosure requirements for the affected hedging relationships. The amendments are effective for annual periods beginning on or after January 1, 2020. As permitted under IFRS 9, we have elected to continue to apply the hedge accounting requirements of IAS 39. Therefore, the amendments will apply to IAS 39 and IFRS 7 for us, mandatorily effective on November 1, 2020. Earlier application is permitted. We continue to evaluate the impact of the amendments to IAS 39 and IFRS 7 on our consolidated financial statements. Conceptual Framework for Financial Reporting In March 2018, the IASB issued a revised version of its “Conceptual Framework for Financial Reporting” (Conceptual Framework). The Conceptual Framework sets out the fundamental concepts that underlie the preparation and presentation of financial statements and serves to guide the IASB in developing IFRS standards. The Conceptual Framework also assists entities in developing accounting policies when no IFRS standard applies to a particular transaction, and more broadly, the Conceptual Framework helps entities to understand and interpret the standards. The Conceptual Framework is effective for annual periods beginning on or after January 1, 2020, which for us will be on November 1, 2020. Early application is permitted. We are currently assessing the impact of the Conceptual Framework on our consolidated financial statements. IFRS 17 “Insurance Contracts” (IFRS 17) IFRS 17, issued in May 2017, replaces IFRS 4 “Insurance Contracts”, and was originally effective for annual periods beginning on or after January 1, 2021, which for us is on November 1, 2021. In June 2019, the IASB released an exposure draft proposing amendments to IFRS 17, including the expected proposal to defer the effective date from reporting periods beginning on or after January 1, 2021 to January 1, 2022. The IASB plans to finalize the amendments to IFRS 17 in 2020, subsequent to the comment period ended September 2019. IFRS 17 provides comprehensive guidance on the recognition, measurement, presentation and disclosure of insurance contracts. We continue to evaluate the impact of IFRS 17 on our consolidated financial statements. 190 CIBC 2019 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 $ $ $ 2,801 1,971 4,772 402 2,838 1,532 339 1,193 8 32 1,153 $ $ $ 2,694 2,038 4,732 291 2,670 1,771 373 1,398 6 28 1,364 $ $ $ 2,460 2,082 4,542 255 2,588 1,699 351 1,348 7 28 1,313 $ $ $ 2019 Jan. 31 2,596 1,969 4,565 338 2,760 1,467 285 1,182 4 23 1,155 Oct. 31 Jul. 31 Apr. 30 $ $ $ 2,539 1,913 4,452 264 2,591 1,597 329 1,268 2 24 1,242 $ $ $ 2,577 1,970 4,547 241 2,572 1,734 365 1,369 4 23 1,342 $ $ $ 2,476 1,900 4,376 212 2,517 1,647 328 1,319 6 24 1,289 $ $ $ 2018 Jan. 31 2,473 1,986 4,459 153 2,578 1,728 400 1,328 5 18 1,305 Net income attributable to equity shareholders $ 1,185 $ 1,392 $ 1,341 $ 1,178 $ 1,266 $ 1,365 $ 1,313 $ 1,323 Condensed consolidated balance sheet Unaudited, $ millions, as at Oct. 31 Jul. 31 Apr. 30 2019 Jan. 31 Oct. 31 Jul. 31 Apr. 30 2018 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 $ 17,359 $ 16,699 $ 14,407 $ 16,572 $ 17,691 $ 17,801 $ 121,310 119,699 121,547 109,027 101,664 102,628 17,035 102,319 $ 15,240 95,284 59,775 55,422 54,085 56,848 48,938 49,596 49,881 55,260 208,652 56,406 125,798 (1,915) 23,895 9,167 31,157 207,531 56,321 123,680 (1,771) 24,582 9,679 30,680 207,396 55,758 121,815 (1,751) 22,103 9,727 29,022 207,657 55,143 113,976 (1,715) 21,174 10,011 25,954 207,749 55,731 109,555 (1,639) 21,431 10,265 25,714 208,454 55,066 104,914 (1,641) 22,003 10,517 25,687 208,427 54,645 103,629 (1,619) 23,939 9,134 23,147 207,989 53,446 97,198 (1,626) 29,304 9,672 25,160 $ 651,604 $ 642,522 $ 634,109 $ 614,647 $ 597,099 $ 595,025 $ 590,537 $ 586,927 $ 178,091 $ 257,502 11,224 38,895 25,113 9,188 175,196 $ 253,976 12,650 39,222 25,895 9,740 174,662 $ 250,986 14,795 37,097 22,839 9,745 172,836 $ 239,697 13,062 39,112 23,337 10,051 163,879 $ 240,149 14,380 42,607 20,973 10,296 161,743 $ 239,957 12,829 45,238 21,776 10,521 69,258 19,069 4,684 38,580 65,557 16,656 5,620 38,010 65,584 17,017 4,171 37,213 60,576 15,731 4,162 36,083 47,353 18,266 4,080 35,116 47,599 16,777 4,031 34,554 161,859 230,212 14,264 42,696 22,296 9,163 54,089 17,779 4,633 33,546 $ 163,316 225,652 14,498 42,713 29,091 9,675 50,475 16,041 3,144 32,322 $ 651,604 $ 642,522 $ 634,109 $ 614,647 $ 597,099 $ 595,025 $ 590,537 $ 586,927 CIBC 2019 ANNUAL REPORT 191 Select financial measures Unaudited, as at or for the three months ended Oct. 31 Jul. 31 Apr. 30 2019 Jan. 31 Oct. 31 Jul. 31 Apr. 30 2018 Jan. 31 Return on common shareholders’ equity Return on average assets Average common shareholders’ equity ($ millions) Average assets ($ millions) Average assets to average common equity Capital and leverage CET1 ratio Tier 1 capital ratio Total capital ratio Leverage ratio Net interest margin Efficiency ratio 12.9 % 0.72 % 15.5 % 0.86 % 15.8 % 0.87 % 13.8 % 0.76 % 15.3 % 0.83 % 16.7 % 0.90 % 17.0 % 0.91 % 17.4 % 0.89 % $ $ 35,553 655,971 18.5 $ $ 35,028 648,537 18.5 $ $ 34,091 633,556 18.6 $ $ 33,183 620,599 18.7 $ $ 32,200 603,726 18.7 $ $ 31,836 605,220 19.0 $ $ 31,017 594,340 19.2 $ $ 29,677 590,344 19.9 11.6 % 12.9 % 15.0 % 4.3 % 1.69 % 59.5 % 11.4 % 12.7 % 15.2 % 4.3 % 1.65 % 56.4 % 11.2 % 12.6 % 14.5 % 4.3 % 1.59 % 57.0 % 11.2 % 12.7 % 14.7 % 4.2 % 1.66 % 60.5 % 11.4 % 12.9 % 14.9 % 4.3 % 1.67 % 58.2 % 11.3 % 12.8 % 14.8 % 4.2 % 1.69 % 56.6 % 11.2 % 12.7 % 15.1 % 4.1 % 1.71 % 57.5 % 10.8 % 12.4 % 14.1 % 4.0 % 1.66 % 57.8 % Common share information Unaudited, as at or for the three months ended Oct. 31 Jul. 31 Apr. 30 2019 Jan. 31 Oct. 31 Jul. 31 Apr. 30 2018 Jan. 31 Weighted-average basic shares outstanding (thousands) (1) Per share – basic earnings – diluted earnings – dividends – book value (2) Share price (3) – high – low – close 445,357 444,868 444,028 443,033 443,015 444,081 444,140 441,124 $ 2.59 2.58 1.44 79.87 113.20 98.20 112.31 $ 3.07 3.06 1.40 78.58 113.13 101.80 103.83 $ 2.96 2.95 1.40 77.49 114.73 105.60 112.81 $ 2.61 2.60 1.36 75.11 116.19 100.80 111.41 $ 2.81 2.80 1.36 73.83 124.59 112.24 113.68 $ 3.02 3.01 1.33 72.41 118.72 112.00 118.72 $ 2.90 2.89 1.33 69.98 121.04 110.11 111.83 $ 2.96 2.95 1.30 67.34 123.99 112.65 121.86 Dividend payout ratio 55.6 % 45.7 % 47.3 % 52.2 % 48.4 % 43.9 % 45.8 % 44.0 % (1) Excludes nil unvested restricted shares as at October 31, 2019 (2018: 60,764). (2) Common shareholders’ equity divided by the number of common shares issued and outstanding at end of period. (3) The high and low price during the period, and closing price on the last trading day of the period, on the TSX. 192 CIBC 2019 ANNUAL REPORT Ten-year statistical review Condensed consolidated statement of income Unaudited, $ millions, for the year ended October 31 Net interest income Non-interest income Total revenue Provision for credit losses Non-interest expenses Income before income taxes Income taxes Non-controlling interests Net income Net income attributable to non-controlling interests Preferred shareholders Common shareholders Net income attributable to equity 2019 2018 $ 10,551 8,060 $ 10,065 7,769 $ 18,611 1,286 10,856 6,469 1,348 – 5,121 25 111 4,985 $ $ 17,834 870 10,258 6,706 1,422 – 5,284 17 89 5,178 $ $ $ $ 2017 8,977 7,303 16,280 829 9,571 5,880 1,162 – 4,718 19 52 4,647 $ $ $ 2016 8,366 6,669 15,035 1,051 8,971 5,013 718 – 4,295 20 38 4,237 IFRS $ $ $ 2015 7,915 5,941 13,856 771 8,861 4,224 634 – 3,590 14 45 3,531 $ $ $ 2014 7,459 5,904 13,363 937 8,512 3,914 699 – $ 2013 7,453 5,252 12,705 1,121 7,608 3,976 626 – $ 2012 7,326 5,159 12,485 1,291 7,202 3,992 689 – 3,215 $ 3,350 $ 3,303 (3) $ (2) $ 9 87 3,131 99 3,253 158 3,136 $ $ $ 2011 7,062 5,373 12,435 1,144 7,486 3,805 927 – 2,878 11 177 2,690 Canadian GAAP $ $ $ 2010 6,204 5,881 12,085 1,046 7,027 4,012 1,533 27 2,452 – 169 2,283 shareholders $ 5,096 $ 5,267 $ 4,699 $ 4,275 $ 3,576 $ 3,218 $ 3,352 $ 3,294 $ 2,867 $ 2,452 Condensed consolidated balance sheet Unaudited, $ millions, as at October 31 Assets Cash and deposits with banks Securities Securities borrowed or purchased 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 IFRS Canadian GAAP $ 17,359 $ 17,691 $ 121,310 101,664 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 under resale agreements 59,775 48,938 45,418 33,810 33,334 36,796 28,728 28,474 27,479 37,342 Loans Residential mortgages Personal and credit card Business and government Allowance for credit losses Derivative instruments Customers’ liability under acceptances Other assets Liabilities and equity Deposits Personal Business and government Bank Secured borrowings Derivative instruments Acceptances Obligations related to securities lent or sold short or under repurchase agreements Capital Trust securities (1) Other liabilities Subordinated indebtedness Non-controlling interests Shareholders’ equity 208,652 56,406 125,798 (1,915) 23,895 207,749 55,731 109,555 (1,639) 21,431 207,271 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 9,167 31,157 10,265 25,714 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 $ 651,604 $ 597,099 $ 565,264 $ 501,357 $ 463,309 $ 414,903 $ 398,006 $ 393,119 $ 383,758 $ 352,040 $ 178,091 $ 163,879 $ 159,327 $ 148,081 $ 137,378 $ 130,085 $ 125,034 $ 118,153 $ 116,592 117,143 4,177 51,308 28,792 9,489 257,502 11,224 38,895 25,113 9,188 125,055 4,723 52,413 27,091 10,481 134,736 5,592 49,802 19,724 9,721 148,793 7,732 38,783 21,841 9,212 178,850 10,785 39,644 29,057 9,796 225,622 13,789 40,968 23,271 8,828 190,240 17,842 39,484 28,807 12,395 240,149 14,380 42,607 20,973 10,296 69,258 n/a 19,069 4,684 186 38,394 47,353 n/a 18,266 4,080 173 34,943 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 $ 113,294 127,759 5,618 – 26,489 7,684 37,893 – 12,572 4,773 168 15,790 (1) Commencing November 1, 2012, CIBC Capital Trust was deconsolidated. n/a Not applicable. $ 651,604 $ 597,099 $ 565,264 $ 501,357 $ 463,309 $ 414,903 $ 398,006 $ 393,119 $ 383,758 $ 352,040 CIBC 2019 ANNUAL REPORT 193 Select financial measures Unaudited, as at or for the year ended October 31 Return on equity Return on average assets Average common shareholders’ equity ($ millions) Average assets ($ millions) Average assets to average common equity Capital and leverage – Basel III CET1 ratio Tier 1 capital ratio Total capital ratio Leverage ratio Basel II Tier 1 capital ratio (1) Total capital ratio (1) Net interest margin Efficiency ratio 2019 14.5 % 0.80 % 2018 16.6 % 0.88 % 2017 18.3 % 0.87 % IFRS 2016 19.9 % 0.84 % 2015 2014 18.7 % 0.79 % 18.3 % 0.78 % 2013 21.4 % 0.83 % 2012 22.2 % 0.83 % 2011 22.2 % 0.73 % 2010 19.4 % 0.71 % Canadian GAAP $ 34,467 $ 639,716 $ 31,184 $ 598,441 $ 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 18.6 19.2 21.4 23.9 24.1 24.1 26.6 28.1 32.5 29.4 11.6 % 12.9 % 15.0 % 4.3 % n/a n/a 1.65 % 58.3 % 11.4 % 12.9 % 14.9 % 4.3 % n/a n/a 1.68 % 57.5 % 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 % 9.4 % 11.6 % 14.6 % n/a n/a n/a 1.85 % 59.9 % n/a n/a n/a n/a 13.8 % 17.3 % 1.84 % 57.7 % n/a n/a n/a n/a 14.7 % 18.4 % 1.79 % 60.2 % n/a n/a n/a n/a 13.9 % 17.8 % 1.79 % 58.1 % (1) Capital measures for fiscal year 2011 and prior fiscal years are under Canadian GAAP and have not been restated for IFRS. n/a Not applicable. 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 Dividends Preferred Common Non-controlling interests Other 2019 2018 2017 2016 2015 2014 2013 2012 2011 IFRS Canadian GAAP 2010 $ 35,116 $ 31,237 $ 23,673 $ 21,553 $ 18,783 $ 17,994 $ 16,367 $ 16,091 $ 14,799 $ 14,275 6 (1) (91) (2) (79) – 575 348 (11) 122 5,096 (111) (2,488) 13 (7) (313) – 453 695 (1) 317 5,267 (89) (2,356) (25) 22 – – – 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) – (3) 7 (4) (250) – (675) 29 (7) 145 3,218 (87) (1,567) (11) (6) (422) – – (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 – (5) – – – 563 4 9 2,452 (169) (1,350) – 6 Balance at end of year $ 38,580 $ 35,116 $ 31,237 $ 23,673 $ 21,553 $ 18,783 $ 17,994 $ 16,367 $ 16,091 $ 15,790 (1) Represents the impact of adoption of IFRS 15 “Revenue from Contracts with Customers”. (2) Represents the impact of adoption of IFRS 9 “Financial Instruments”. (3) Represents the impact of adoption of IFRS 10 “Consolidated Financial Statements”. (4) Represents the impact of adoption of amendments to IAS 19 “Employee Benefits”. (5) Represents the impact of changing the measurement date for employee future benefits. 194 CIBC 2019 ANNUAL REPORT Common share information Unaudited, as at or for the year ended October 31 Weighted-average number basic shares outstanding (thousands) (1) Per share 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 IFRS Canadian GAAP 444,324 443,082 (2) 412,636 395,389 397,213 397,620 400,880 403,685 396,233 387,802 – basic earnings – diluted earnings – dividends – book value (3) $ 11.22 $ 11.19 5.60 79.87 11.69 $ 11.65 5.32 73.83 11.26 $ 11.24 5.08 66.55 10.72 $ 10.70 4.75 56.59 8.89 $ 8.87 4.30 51.25 7.87 $ 7.86 3.94 44.30 8.11 $ 8.11 3.80 40.36 Share price (4) – high – low – close 116.19 98.20 112.31 124.59 110.11 113.68 119.86 97.76 113.56 104.46 83.33 100.50 107.16 86.00 100.28 107.01 85.49 102.89 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 Dividend payout ratio 49.9 % 45.5 % 45.6 % 44.3 % 48.4 % 50.0 % 46.8 % 46.9 % 51.7 % 59.1 % (1) Excludes nil unvested restricted shares as at October 31, 2019 (2018: 60,764). (2) Excludes 2,010,890 common shares which were issued and outstanding but which had not been acquired by a third party as at October 31, 2017. These shares were issued as a component of our acquisition of The PrivateBank. (3) Common shareholders’ equity divided by the number of common shares issued and outstanding at end of year. (4) The high and low price during the year, and closing price on the last trading day of the year, on the TSX. 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 Series 47 Series 49 Series 51 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 $ – – – – – – – – – – – – – 0.9633 0.9375 0.9000 1.1000 1.1250 0.9990 0.5256 $ – – – – – – – – – – – – – 0.9750 0.9375 0.9000 1.1000 0.8769 – – $ – – – – – – – – – – – – – 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) 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 2019 ANNUAL REPORT 195 Glossary Allowance for credit losses Under IFRS 9, allowance for credit losses represents 12 months of expected credit losses for instruments that have not been subject to a significant increase in credit risk, while allowance for credit losses represents lifetime expected credit losses for instruments that have been subject to a significant increase in credit risk, including impaired instruments. Expected credit loss allowances for loans and acceptances are included in allowance for credit losses on the consolidated balance sheet. Expected credit loss allowances for FVOCI debt securities are included as a component of the carrying value of the securities, which are measured at fair value. Expected credit loss allowances for other financial assets are included in the carrying value of the instrument. Expected credit loss allowances for guarantees and loan commitments are included in other liabilities. Under IAS 39, allowance for credit losses generally represented an allowance set up in the financial statements sufficient to absorb specifically identified and inherent credit-related losses in CIBC’s portfolio of loans, acceptances, letters of credit and guarantees. This allowance can be “collective”, assessed by reviewing a portfolio of loans with similar characteristics, or “individual”, assessed by reviewing the characteristics of an individual exposure. Allowances for credit losses are adjusted for provisions for (reversals of) credit losses and are reduced by write-offs, net of recoveries. 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 for impairment (directly or through the use of an allowance account). 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, client reporting and record keeping, 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 of an underlying financial instrument 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 instrument, index or financial 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. 196 CIBC 2019 ANNUAL REPORT 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. 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, for individuals whose compensation is included in the Employee compensation and benefits line on the consolidated statement of income. 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. 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. CIBC 2019 ANNUAL REPORT 197 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 to adjust the allowance for credit losses to the appropriate level, for both performing and impaired financial assets. Provision for credit losses for loans and acceptances and related off-balance sheet loan commitments is included in the Provision for credit losses line on the consolidated statement of income. Provision for credit losses for debt securities measured at fair value through other comprehensive income or amortized cost is included in Gains (losses) from debt securities measured at fair value through other comprehensive income (FVOCI) and amortized cost, net. 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. 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 paid 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 capital floor based on the standardized approach is also calculated by banks under the AIRB approach for credit risk and an adjustment to risk-weighted assets (RWA) 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. 198 CIBC 2019 ANNUAL REPORT Bail-in eligible liabilities Bail-in eligible liabilities include long-term (i.e., original maturity over 400 days), unsecured senior debt issued on or after September 23, 2018 that is tradable and transferrable, and any preferred shares and subordinated debt that are not considered non-viability contingent capital (NVCC). Consumer deposits, secured liabilities (for example, covered bonds), certain financial contracts (for example, derivatives) and certain structured notes are not bail-in eligible. 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 counterparty (CCP) A clearing house that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the future performance of open contracts. Common Equity Tier 1 (CET1), Tier 1 and Total capital ratios CET1, Tier 1 and total regulatory capital, divided by RWA, as defined by OSFI’s Capital Adequacy Requirements Guideline, which is based on Basel Committee on Banking Supervision (BCBS) standards. During 2018, before any capital floor requirement, there were three different levels of RWA for the calculation of CIBC’s CET1, Tier 1 and Total capital ratios. This occurred because of the option CIBC chose in 2014 for the phase-in of the credit valuation adjustment (CVA) capital charge. Beginning in 2019, the ratios are calculated by reference to the same level of RWA as the phase-in of the CVA capital charge has been completed. 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 strategic business unit, 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 (IRC) 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 (ICAAP) 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 (IMA) 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 (IRB) approach for securitization exposures Capital calculation method for securitizations available to the banks approved to use the IRB approach for underlying exposures securitized. This method comprises the securitization Internal Ratings-Based Approach (SEC-IRBA) and Internal Assessment Approach (SEC-IAA). Leverage ratio exposure The leverage ratio exposure is defined under the OSFI 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 and securitization exposures). Leverage ratio Defined as Tier 1 capital divided by the leverage ratio exposure determined in accordance with guidelines issued by OSFI, which are based on BCBS standards. CIBC 2019 ANNUAL REPORT 199 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 EAD. LGD is generally based on through-the-cycle assumptions for regulatory capital purposes, and generally based on point-in-time assumptions reflecting forward-looking information for IFRS 9 expected credit loss purposes. Market risk The risk of economic financial loss in our trading and non-trading portfolios from adverse changes in underlying market factors, including interest rates, foreign exchange rates, equity market prices, commodity prices, credit spreads and customer behaviour for retail products. Master netting agreement An industry standard agreement designed to reduce the credit risk of multiple transactions with a counterparty through the creation of a legal right of offset of exposures in the event of a default by that counterparty and through the provision for net settlement of all contracts through a single payment. Non-viability contingent capital (NVCC) Effective January 1, 2013, in order to qualify for inclusion in regulatory capital, all non-common Tier 1 and Tier 2 capital instruments must be capable of absorbing losses at the point of non-viability of a financial institution. This will ensure that investors in such instruments bear losses before taxpayers where the government determines that it is in the public interest to rescue a non-viable bank. 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 (OTC) 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. PD is generally based on through-the-cycle assumptions for regulatory capital purposes, and generally based on point-in-time assumptions reflecting forward-looking information for IFRS 9 expected credit loss purposes. Qualifying central counterparty (QCCP) An entity that is licensed to operate as a CCP and is permitted by the appropriate regulator or oversight body to operate as such with respect to the products offered by that CCP. 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 loans and lines of credit extended to individuals. Regulatory capital 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, accumulated other comprehensive income (AOCI) (excluding AOCI relating to cash flow hedges and changes to fair value option 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 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 general allowances, and qualifying instruments issued by a consolidated subsidiary to third parties. Total capital is comprised of Tier 1 capital plus Tier 2 capital. 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. 200 CIBC 2019 ANNUAL REPORT 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. Resecuritization A securitization exposure in which the risk associated with an underlying pool of exposures is tranched and at least one of the underlying exposures is a securitization exposure. 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 (RWA) RWA consist of three components: (i) RWA for credit risk are calculated using the AIRB and standardized approaches. The AIRB RWA are calculated using PDs, LGDs, EADs, and in some cases maturity adjustments, while the standardized approach applies risk weighting factors specified in the OSFI guidelines to on- and off- balance sheet exposures; (ii) RWA for market risk in the trading portfolio are based on the internal models approved by OSFI with the exception of the RWA for traded securitization assets where we are using the methodology defined by OSFI; and (iii) RWA 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 of 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 the Basel II standardized approach against the Basel III calculation, as specified by OSFI. Any shortfall in the Basel III capital requirement is added to RWA. 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 or other forms of interest to purchase the transferred assets. The SE will generally use the cash flows generated by the assets to meet the obligations under the securities or other interests issued by the SE, which may carry a number of different risk profiles. Sovereign exposures All direct credit risk exposures to governments, central banks and certain public sector entities, and exposures guaranteed by those entities. 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. Standardized approach for securitization exposures This approach comprises the calculation methods available for securitization exposures that do not require OSFI approval: securitization External Ratings- Based (SEC-ERBA) and securitization Standardized Approach (SEC-SA). 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 A value-at-risk 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 primarily consists of the risk inherent in net investments in foreign operations due to changes in foreign exchange rates, and foreign currency denominated risk-weighted assets and foreign currency denominated capital deductions. Structural interest rate risk Structural interest rate risk primarily consists of the risk arising due to mismatches in assets and liabilities, which do not arise from trading and trading- related businesses. Total loss absorbing capacity (TLAC) measure The sum of Total capital and bail-in-eligible liabilities that have a residual maturity greater than one year. 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 (VaR) 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 2019 ANNUAL REPORT 201 Shareholder information Fiscal Year November 1st to October 31st Key Dates Reporting dates 2020 First quarter results – Wednesday, February 26, 2020 Second quarter results – Thursday, May 28, 2020 Third quarter results – Thursday, August 27, 2020 Fourth quarter results – Thursday, December 3, 2020 Annual Meeting of Shareholders 2020 CIBC’s Annual Meeting of Shareholders will be held on April 8, 2020 at 9:30 a.m. (Mountain Daylight Time) in Edmonton at the JW Marriott Edmonton ICE District, Wayne Gretzky Ballroom, 10344 102 Street, Edmonton, Alberta, Canada, T5J 0K9. 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 2019: Common shares Ex-dividend date Sep 26/19 Jun 27/19 Mar 27/19 Dec 27/18 Preferred shares Stock Series 39 (1) Ticker symbol Quarterly dividend $0.232063 CM.PR.O Record date Sep 27/19 Jun 28/19 Mar 28/19 Dec 28/18 Payment date Dividends per share Oct 28/19 Jul 29/19 Apr 29/19 Jan 28/19 $1.44 $1.40 $1.40 $1.36 Number of common shares on record date 445,274,138 444,896,225 444,137,463 443,121,710 Series 41 CM.PR.P $0.234375 Series 43 CM.PR.Q $0.225000 Series 45 CM.PR.R $0.275000 Series 47 CM.PR.S $0.281250 Series 49 CM.PR.T $0.325000 Series 51 CM.PR.Y $0.321875 1The dividend rate for Series 39 was reset in accordance with the share terms effective July 31, 2019. 2020 dividend payment dates (Subject to approval by the CIBC Board of Directors) Record dates December 27, 2019 March 27, 2020 June 29, 2020 September 28, 2020 Payment dates January 28, 2020 April 28, 2020 July 28, 2020 October 28, 2020 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 9 million common shares: (ii) CIBC providing a notice of termination, or (iii) June 3, 2020. 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 pages 71 – 72 in this Annual 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: 202 CIBC 2019 ANNUAL REPORT 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/ca. 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 U.S., common shares are transferable at: Computershare Inc., By Mail: P.O. Box 43078 Providence, RI 02940-3078; By Overnight Delivery: 150 Royall Street, Canton, MA 02021, 1 800 589-9836, Website: www.computershare.com/investor. 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 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 2019 Additional print copies of the Annual Report will be available in March 2020 and may be obtained by 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 2020 et peuvent être commandés par courriel a` 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 2019 This report reviews our economic, environmental, social and governance activities over the past year and will be available in March 2020 at https://www.cibc.com/en/about-cibc/corporate-responsibility.html. Management Proxy Circular 2020 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 2020 Proxy Circular will be available in March 2020 at www.cibc.com. 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 U.S. with the U.S. 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, “CIBC Agility”, “CIBC Bank USA Smart Account”, 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 Pace It”, “CIBC Personal Portfolio Services”, “CIBC Private Wealth Management”, “CIBC Smart”, “CIBC SmartBanking”, “CIBC Team Next”, “Remi Beta Bot”, “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 2019 ANNUAL REPORT 203 Board of Directors: The Hon. John P. Manley, P.C., O.C. Chair of the Board CIBC Senior Advisor, Bennett Jones, LLP Ottawa, Ontario, Canada Joined in 2005 Brent S. Belzberg (CGC, RMC) Senior Managing Partner TorQuest Partners Toronto, Ontario, Canada Joined in 2005 Nanci E. Caldwell (MRCC) Corporate Director Woodside, California, U.S.A. Joined in 2015 Patrick D. Daniel (CGC, MRCC – Chair) Corporate Director 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 Luc Desjardins (AC) President and Chief Executive Officer Superior Plus Corp. Toronto, Ontario, Canada Joined in 2009 Victor G. Dodig President and Chief Executive Officer CIBC Toronto, Ontario, Canada Joined in 2014 Christine E. Larsen (RMC) Corporate Director Montclair, New Jersey, U.S.A. Joined in 2016 Nicholas D. Le Pan (AC – Chair) Corporate Director Ottawa, Ontario, Canada Joined in 2008 Martine Turcotte (CGC, MRCC) Vice Chair, Québec BCE Inc. and Bell Canada Verdun, Québec, Canada Joined in 2014 Barry L. Zubrow (RMC – Chair) 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 Michelle L. Collins (RMC) President Cambium LLC Chicago, Illinois, U.S.A. Joined in 2017 Linda S. Hasenfratz (MRCC) Chief Executive Officer Linamar Corporation Guelph, Ontario, Canada Joined in 2004 Jane L. Peverett (AC, CGC) Corporate Director West Vancouver, British Columbia, Canada Joined in 2009 204 CIBC 2019 ANNUAL REPORT 2019 Performance at a Glance In 2019, as a purpose-driven bank, we advanced our client-focused strategy and delivered solid performance for our shareholders. Financial Scorecard Financial Highlights For the year ended October 31 (Canadian $ in billions, except as noted) Financial results Revenue Provision for credit losses Expenses Reported/Adjusted net income(1) Financial measures (%) Reported/Adjusted efficiency ratio(1) Reported/Adjusted return on common shareholders’ equity (ROE)(1) Net interest margin Total shareholder return Common share information Reported/Adjusted earnings per share(1) Market capitalization Dividends (%) Dividend yield Reported/Adjusted dividend payout ratio(1) 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 2018 17.8 0.9 10.3 5.3/5.5 57.5/55.6 16.6/17.4 1.68 4.7 11.65/12.21 50.3 4.7 45.5/43.4 2.5 1.3 0.6 1.1 2019 18.6 1.3 10.9 5.1/5.4 58.3/55.5 14.5/15.4 1.65 4.2 11.19/11.92 50.0 5.0 49.9/46.9 2.3 1.3 0.7 0.9 Target 2019 Reported Results 2019 Adjusted Results(1) Earnings per share (EPS) growth 5%–10% on average, annually $11.19, down 4% from 2018 $11.92, down 2% from 2018 Return on equity (ROE) 15%+ 14.5% 15.4% Efficiency ratio 52% run rate in 2022(2) 58.3%, increased 80 basis points from 2018 55.5%, an improvement of 10 basis points from 2018 Basel III CET1 ratio Strong buffer to regulatory minimum 11.6% Dividend payout ratio 40%–50% 49.9% 46.9% Total shareholder return Outperform the S&P/TSX Composite Banks Index over a rolling five-year period CIBC – 38.4% Banks Index – 51.3% (1) For additional information, see the “Non-GAAP measures” section of the MD&A. (2) Medium-term through the cycle. Environmental, Social and Governance (ESG) Scorecard Reported revenue ($ billions) 18.6 17.8 16.3 Reported earnings per share ($) 11.24 11.65 11.19 Adjusted earnings per share(1) ($) 12.21 11.92 11.11 Dividend ($/share) 5.32 5.60 5.08 EnvIROnMEnT 17 18 19 17 18 19 17 18 19 17 18 19 SOCIAL CIBC Client Experience Net Promoter Score Index(2) Business mix % adjusted net income(1) 13% 17% 1% 24% 60.9 2019 45% Canadian Personal and Small Business Banking 24% Canadian Commercial Banking and Wealth Management 45% 17% Capital Markets 13% U.S. Commercial Banking and Wealth Management 1% Corporate and Other GOvERnAnCE 2019 Progress Goal • Achieved 17% of our 10-year goal for • $150 billion in support for environmental and sustainable finance(3) sustainable financing over 10 years (2018–2027) • 7% reduction in greenhouse gas (GHG) emissions(4) • 10% reduction in GHG emissions from our operations over five years (2019–2023) • CIBC Client Experience Net Promoter Score Index • Continuous improvement year over year was 60.9 • CIBC’s Engagement score of 89% or 109.9% of the global financial services norm exceeded our target • 109% of the global financial services norm • 32% women in boarded executive roles • At a minimum, between 35% and 40% women • Invested $78 million in community organizations across Canada and the U.S., including $57 million in corporate contributions and $21 million in employee-led fundraising and giving in board-approved executive roles by the end of 2022 (global) • $350 million over five years (2019–2023) in total corporate and employee giving • 47% women on the CIBC Board of Directors • At least 30% women on the CIBC Board of • 100% of non-executive directors on the Board Directors are independent • A substantial majority of independent directors • 100% of employees completed ethical • 100% completion rate training on our Code of Conduct Responsible Finance Climate Change Client Experience Employee Engagement Inclusion and Diversity Community Investment Corporate Governance Business Ethics (1) For additional information, see the “Non-GAAP measures” section of the MD&A. (2) Index based on internal NPS scores from across all of our SBUs. (3) 17% is for the combined results of 2018 and 2019 and is an estimate as the final taxonomy is still under development. (4) Applies only to CIBC’s Canadian-based real estate operations (Scope 1 and 2 GHG emissions which have not been adjusted to exclude the impacts of weather or other factors) and is based on unassured data. Third-party assured data will be published in CIBC’s 2019 Sustainability Report in March 2020. Sustainable Banking for a Modern World sustainability is at the heart of CIBC’s purpose: to help make your ambitions a reality. Inspired by this purpose, we integrate sustainability into everything we do, focusing on environmental, social and governance (esG) matters of importance to our stakeholders. Building on responsible business practices that we have embedded across CIBC, we are taking action to further reduce environmental impacts across our value chain, support programs that foster an inclusive and healthy society, and integrate best-in-class governance practices to create a sustainable future. Client Focus Responsible Banking Our purpose – to help make our clients’ ambitions a reality – is more than just words. It ensures we treat our clients with genuine care, professionalism and deliver excellence every day. By understanding their unique needs, and making their goals our own, we have the power to change our clients’ lives for the better. As our business and clients face new and intensifying environmental, social and economic challenges, we are working on all fronts to address them. Through our lending and investment decisions, and the actions we’re taking on climate change, we’re embracing our responsibility as a major North American bank to drive sustainable growth and support the low-carbon economy. Culture Building Community We’re a collaborative global team of 45,000 members driven by a shared purpose. We are guided by our core values of trust, teamwork and accountability, within an inclusive CIBC culture where our team members can realize their goals, are empowered to excel, and are appreciated for their contributions. As a relationship-focused bank, we are eager to build strong connections with community organizations and leaders, so that we can boost their ability to tackle important challenges facing society. For more than 150 years, CIBC has been a strong community partner – making a positive impact through our corporate giving, sponsorships and the volunteer spirit of our team members. Governance Good governance is the foundation of our business sustainability and underpins CIBC’s purpose. From our high ethical standards for team members and constant vigilance in safeguarding client interests to our robust controls around accountability, disclosure and risk management, strong practices are embedded across our organization. CIBC’s 2019 Sustainability Report will be available in March 2020 at www.cibc.com m o c . s l l i m n a y r b . w w w . d t L s l l i M n a y r B y b d e n g i s e D C I B C 2 0 1 9 A N N U A L R E P O R T 2 0 1 9 A N N U A L R E P O R T $50 BIllION Market Capitalization 11.6% Basel III CET1 ratio 10 MIllION Clients Who We Are CIBC is a leading North American financial institution with a market capitalization of $50 billion and a Basel III Common Equity Tier 1 capital ratio of 11.6%. 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 10 million personal banking, business, public sector and institutional clients in Canada, the U.S. and around the world. Our Purpose CIBC’s purpose is to help make your ambition a reality. Our Strategy At CIBC, we’re building a relationship-oriented bank for a modern world that delivers superior client experience and shareholder returns by focusing on four key areas: 1. Delivering a modern relationship-banking value proposition to our clients 2. Diversifying our earnings growth 3. Optimizing our operational efficiency 4. Maintaining capital and balance sheet discipline Creating Value for Our Shareholders At CIBC, we are committed to delivering sustainable earnings growth to our shareholders and creating a relationship-oriented bank for our clients. We continue to identify initiatives to free up resources that 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. Table of Contents 2019 Performance at a Glance 93 Consolidated Financial Statements ii Message from the President and Chief Executive Officer iv Executive Team vii Message from the Chair of the Board viii Enhanced Disclosure Task Force 1 Management’s Discussion and Analysis 106 Notes to the Consolidated Financial Statements 190 Quarterly Review 192 Ten-Year Statistical Review 195 Glossary 201 Shareholder Information 2 0 1 9 A N N U A L R E P O R T All paper used in the production of the CIBC 2019 Annual Report is Forest Stewardship Council® (FSC®) certified. 

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