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This transcript has been generated using machine learning technology. While this technology was trained with CIBC terminology, it may contain errors.
Romal Bryce, MVP, National Industry Programs, CIBC: Welcome everyone to our Mid-Year Commercial Markets update. Really looking forward to hearing your insights and updates. So let&#8217;s dive right in. Scott, at the beginning of the year, you spoke about cautious optimism amongst Canadian businesses, as they adapt to new normal. Just passed the midway point of the year. Has the outlook changed?
Scott Brown, SVP, Ontario &amp; Prairies, CIBC: Yeah, thanks Romal. And I think it&#8217;s safe to say, and I&#8217;m sure my colleagues here will agree, there are still no slow news days. And you know where we sit at this point in the year, I think, you know, Canadian businesses have continued to evidence an incredible amount of resiliency in the face of uncertainty. We see the wrestling of an unwavering, “let&#8217;s get on with it” approach and wrestling with information that&#8217;s coming at them very quickly. Some challenging market, you know, environment, whether it be around geopolitical concerns, whether it be around some softening in demand that we are seeing in some consumer discretionary places. You know, overall it&#8217;s a tough environment. But that resiliency piece, you know, wrestling against, you know, the the commitments in terms of what we&#8217;re trying to do is really playing out. And I think it&#8217;s really a tale of two stories right now. At the smaller end of the market, you know, we are seeing some softness. I think when we look at it right now, the entrepreneur exits have outpaced the startups that we&#8217;re seeing. But there are some bright spots, and particularly in the larger side, you know, of the companies we deal with. We&#8217;re seeing innovation investments in technologies such as AI at all time levels. We are also seeing cross-border activity and expansion as people are seeking for other areas growth beyond organic. So, there&#8217;s a lot going on in the market right now. I think the cautious optimism, you know, remains, but it&#8217;s wrestling on a daily basis.
Romal Bryce: Thanks, Scott. Appreciate the answer. Evan, over to you. In January, you noted that M&amp;A activity picked up after last Labour Day. How was the M&amp;A market evolved this first half of the year?
Evan Bennitt, SVP, Corporate Finance, CIBC: Thanks Romal. I mean, the biggest change is that buyers have adapted to uncertainty rather than just waiting for it to go away. 12 months ago, activity was really concentrated around very strong, very resilient businesses. But today we&#8217;re seeing opportunities emerge across a much broader cross-section of sectors. And that&#8217;s encouraging. It doesn&#8217;t mean that buyers are less disciplined. Due diligence is more thorough, maybe more thorough than ever. Timelines are often a little longer. Financing remains selective. But that said, where buyers have conviction, particularly in sectors they know well, they&#8217;re still prepared to move quickly and compete aggressively for high quality businesses. The theme that that Scott mentioned, we are also continuing to see very strong interest in cross-border activity. Many Canadian private equity firms are increasingly looking south. Expanding portfolio companies looking to pursue new platform acquisitions. So the ability to seamlessly execute across the border has become more important than ever.
Romal Bryce: Thanks, Evan. Tim, next question is to you. There have been announcements from both the federal and provincial governments on issues like GST rebates for home buyers and lowering of deferred development charges. Have you started seeing these changes making an impact on the market?
Tim Samis, SVP, Real Estate Finance, CIBC: Great question. Thanks Romal. So the big news here, Ontario at least, has been HST rebates for all buyers on new products. So if a new home costs $1.5 million, that&#8217;s $130,000 of savings. Those are real dollars. And the second is that the province and feds have come together to help subsidize municipal infrastructure that will allow cities to cut development charges by 40 to 60%. So I think the government should be applauded for recognizing the condition of the industry and for stepping in to help. And the goal is to ultimately reduce costs, improve affordability and stimulate some housing starts. So I guess the question is, ‘is it working?’ And I would say on the HST rebate, it was announced in March, we saw a pretty meaningful increase in sales volume in April and May. So, volumes were up two-and-a-half times year-over-year. So, so strong. That said, we have seen it start to burn off subsequent to May and partly because this is still an announcement. It actually hasn&#8217;t been formally adopted. And there&#8217;s still some questions around mechanics and eligibility. On the construction side, what we&#8217;ve seen is an increase in the sale of service lots to builders. So that&#8217;s a good leading indicator. And we have seen some clients launch projects mostly focused around low rise and affordable. That said, other clients are still telling us that costs are still too high and they can&#8217;t build product for where the demand is right now. And if you step back and think about the evolution of development charges, they&#8217;ve gone up over ten times over a 10 to 15 year period. So for a single condo started at $5000, now we&#8217;re at $50,000. So even with the material reduction, it&#8217;s still not enough to convert some projects into viability. And then on the HST, it is time bound. So construction would need to start by March of 2027 and need to be finished by December of 2029. So that&#8217;s an aggressive timeline. And so I think the measure is more effective at helping absorb existing unsold inventory, not necessarily going to stimulate the launch of new projects in the high rise space. So overall I would say mixed, certainly welcome and helpful. More on the low rise side, but not a panacea and probably a little less impactful on the high rise side.
Romal Bryce: Thank you, Tim. Jude, over to you and welcome. I know this is the first time that you&#8217;re on this panel. Why don&#8217;t you give us a state of play on the payment sector.
Jude Leclerc, SVP, Transaction Banking, CIBC: So with payments, we&#8217;re seeing there&#8217;s a number of different drivers that are changing the industry. Technology is at the centre of all of them though. We are seeing payments accelerate, launch of a real time rail in Canada. We are seeing access to liquidity turn into real time access to liquidity. And a lot of the the CFOs of our clients and the accounts payables departments, etc. are expecting to have access to liquidity information almost immediately. We are seeing far more move towards digital solutions and as well as self-serve solutions. And here at CIBC, this year, we launched an integrated receivable solution for the Commercial Bank and its clients. And we are working towards an API solution, both of which will help us greatly with our integration into our clients and that real time access that they are looking for. I think one of the things that is important for us to remember though, is that that access to technology doesn&#8217;t have the same level of maturity and adoption, depending on the segments. And so, one size fits all isn&#8217;t the right solution, and we have to work on that with our partners across the Commercial Bank to ensure that we&#8217;re working on the right types of solutions for the right types of segments. The other area where we&#8217;ve seen a lot of change is on the regulatory side. We have, after decades of a pretty sleepy space in the last ten years, many regulators have started to change the regulations in the payments and cash management space. We&#8217;ve seen BASEL III rules change how operational, non-operational deposits are treated. We&#8217;ve seen CDIC changes here, closer to Canada, change how we have to report our deposits and what gets insured. We&#8217;ve seen changes with FINTRAC and Bank of Canada as it relates to a number of things, everything from payment service providers to trust accounts, etc. So, we are having to change and keep pace, not just with the technology and the move of the industry, but also with what the regulators are asking us to do.
Romal Bryce: Thanks, Jude. Sounds like there&#8217;s a lot on the go. Scott, over to you. Previously said that Ontario and Quebec in particular were disproportionately affected by trade uncertainty. Is that still the case?
Scott Brown: You know, unfortunately for for our clients and our teams on the ground here in Ontario and in Quebec, you know that, yes. Yes, that is the case and has been the case for 15 plus months now. Recent announcements this week around Section 338 will also continue to disproportionately impact our customers, you know, here in Ontario and in with Quebec by targeting such goods as automotive, alcohol, dairy, as well as a number of other products that were previously included within our CUSMA agreements. So from a trade dispute standpoint, Ontario and Quebec continue to be disproportionately impacted. The good news is though, with the defence opportunity in front of us and the capabilities within Ontario and Quebec, these provinces, alongside Nova Scotia, have disproportionate opportunities as we build our economy and transform our economy as we look forward. You know, we&#8217;ve all heard now about our new build-by partner framework, in which we&#8217;re going to direct 70% of our spending you know, here domestically. It&#8217;s creating a tremendous opportunity. It is creating job creation. And quite frankly, there isn&#8217;t an industry or a geography that&#8217;s going to be untouched, you know, here, here in Canada with this opportunity. Those, historically within the defence sector, and those within a dual use &#8211; a number of opportunities and will be led by, you know, those key markets for us.
Romal Bryce: Excellent. Thank you. Scott. Evan, to you. You mentioned that strategic buyers with deep sector knowledge were the ones driving activity. What distinguishes those buyers and who are succeeding in today&#8217;s market?
Evan Bennitt: Yeah, look. The buyers having the most success are the ones with the clear strategy and have the confidence to act when the right opportunity comes along. Sector expertise has become a real advantage. It allows buyers to evaluate businesses more quickly and effectively, understand where they can lean in and create value, prioritize their efforts towards the highest probability opportunities, and ultimately just move decisively. We are also seeing certainty of execution as something that&#8217;s increasingly important. Sellers are looking beyond just price. They&#8217;re looking for confidence that the transaction will close. So buyers who come prepared have a disciplined financing plan and can demonstrate an ability to execute efficiently. They&#8217;re really the ones that are having the most success closing attractive opportunities.
Romal Bryce: Thanks, Evan. Tim, so the federal government still has a target to double housing starts by 2035. What other strategies or policies should be considered to help stabilize the industry in the short-term and achieve this goal in the long-term?
Tim Samis: Another great question, and it might not seem like it now, but we still need to be building homes over the medium and long-term. Population growth is not going to be stagnant forever, because if it is, we&#8217;re going to have one taxpayer for every two non-taxpayers in the long-term. Like, that doesn&#8217;t work. And if you don&#8217;t have homes, you don&#8217;t have affordable homes, we&#8217;re gonna have a hard time keeping young, talented people in the country, and we&#8217;re going to have a hard time attracting people to the country as well. So I view housing more and more actually as critical infrastructure. And so, with that in mind, what else could be done? What else could be thought about to help get more homes built over the longer term? A couple of things, I think one, more visibility on immigration policy. So today we have immigration targets, annual immigration targets that go out three years. There&#8217;s no hard targets beyond the end of 2029. So I really think that the industry and I think that municipal and provincial governments would actually benefit from a longer term picture on where immigration will be for planning and forecasting. And a bit of a tangent, but I also think there needs to be a priority on skilled trades when we think about immigration policies as well. Number two, we need better quality housing data. So today, industry data is collected by different levels of government. And there&#8217;s all sorts of different approaches and methodologies and definitions. There&#8217;s not a single comprehensive system to collect data. And there are gaps currently in the data that&#8217;s collected. So I think more clarity and visibility around how much is in the pipeline, how long it&#8217;s taking for applications to get through the permitting and approval process, and how that compares across cities. How much can we still leverage existing municipal infrastructure for additional density, the role of investors in the market and how that impacts price. These are all gaps that I think would be addressed through a single federal level source, whether it&#8217;s a Crown Corp or an agency, to collect, harmonize and share data across the industry. And that&#8217;s going to help planning and forecasting. And then, we need buyers. Homes aren&#8217;t going to be built unless we have buyers. And so, a few tools to get buyers to come off the sideline, in particular younger buyers. Stress test. So stress test ensures that people qualify at their mortgage rate plus a 200-basis point cushion. That was effective and relevant when interest rates were effectively zero. Arguably a little less relevant today when rates have increased over the last couple of years. So perhaps that cushion could be tied to where we&#8217;re at in the rate cycle, or even tied to the duration of mortgage tenor. Another consideration could be down payment. That&#8217;s the single largest hurdle for young people to get into the housing market. So perhaps relaxing or being more flexible on down payment requirements for certain eligible first time buyers would be helpful. And another concept is rate-buy-down. So in the US, developers will offer lenders a discount rate that can then be applied to a purchaser&#8217;s mortgage rate. In Canada, that can happen, but it doesn&#8217;t get factored into the stress test. So it actually doesn&#8217;t have much of an impact. Where in the US, about 50% of new sales use this tool to help stimulate demand. So, I think those are three levers to help get some buyers off the market and additionally levers that will help the overall industry and it&#8217;s important industry. So, I think it needs to to be supported.
Romal Bryce: Tim, thank you. I see a future in either politics or government. Jude as client expectations for speeding convenience continue to rise. What do you consider the most critical issue facing our clients today?
Jude Leclerc: So there&#8217;s two things. I did talk a lot about technology before. That&#8217;s one of the big ones, is investment in technology, both on our side and on the client side. But in order for us to meet our client&#8217;s needs, there&#8217;s a new technology frontier that we are all facing now, which is AI. The reality with AI is that it can accelerate a lot of our processes, it helps to transform our back end operations. It helps to transform a lot of our prospecting and our understanding of the industry. Tim talked a lot about that as it relates to real estate. But AI presupposes one very specific thing is that data is available. And CIBC, like many other banks and many of our clients, a lot of its data, especially older data, sits in legacy systems. And so, we do need to be focused on where we house our data and how we are looking to future-proof that, for the future. We are working on that next year, we are going to be replatforming all our data across the Commercial Bank. So that is going to be a very big project for us, which will allow us to then leap into the next, into the next frontier. The other thing that I think our clients face as we move fast to real time payments is also the real time controls and the real time fraud prevention. So we do know that that same technology that enables our clients to become far more versatile in everything they do, it also allows the fraudsters to do the same. And so we are always at the forefront of trying to make a number of changes to stay ahead of the fraudsters here. We&#8217;ve got a number of projects working with our fraud management teams or our (Anti Money Laundering) teams, etc. for us to help nip in the bud some of the new trends that we see coming in.
Romal Bryce: Thanks, Jude. Busy times ahead. It is. Thanks so much for being here today and for sharing your insights.

Mid-year Commercial Markets update

Mid-year Commercial Markets update

Mid-year Commercial Markets update

Scott Brown

Senior Vice-President, Ontario & Prairies

CIBC Commercial Banking

Evan Bennitt

Senior Vice-President, Corporate Finance

CIBC Commercial Banking

Tim Samis

Senior Vice-President, Real Estate Finance

CIBC Commercial Banking

Jude Leclerc

Senior Vice-President, Transaction Banking

CIBC Commercial Banking

Romal Bryce

Market Vice-President, National Industry Programs

Commercial Banking