TOP CONTRIBUTORS

Andrew Liyana

Jonathan J. Smith

Canadian Imperial Bank of Commerce (CM), commonly called CIBC, is one of Canada's Big Five Banks; CIBC's 354 billion in total assets ranks 4th among peers, while the bank's market capitalization of 1.86B at on December 24, 2008 is 5th. Similar to Bank Of Montreal (BMO), CIBC had significant exposure to US capital and real estate market. With 2008 write-offs of C$6.8 billion, CIBC was hardest hit by the 2008 Financial Crisis among the Big Five.^[1] CIBC took measures to counter the impact of large losses and further exposure to the toxic subprime mortgage market. These steps included selling its US investment banking operations to Oppenheimer Holdings (OPY), entering a deal with Cerberus to limit US residential exposure, and issuing equity shares. These actions helped the bank boast the highest tier 1 capital ratio (10.5%) among North American banks.^[2]

Even though CIBC suffered writedowns of C$6.8 billion from the 2008 Financial Crisis, the bank competes in a highly regulated Canadian banking sector that has limited leverage and required conservative lending practices, which has left the Canadian Banks relatively unscathed through 2008.^[3] Canadian banks only accounted for 2% of the estimated $720 billion US dollars in writedowns by global banks and brokers during 2008.^[4] In fact, the Geneva-based World Economic Forum placed Canadian banks as the soundest in the World based on the likelihood and extent of government intervention necessary to support banks in each country.^[5] The US was ranked 40th in the survey of 12,000 corporate executives. Focusing on banks' balance sheets, Canadian banks fair much better than their US and European counter-parts. Canadian banks average a tier 1 risk-based capital ratio of 9.8%, or twice that of the average American investment bank and three times greater than the mean of European commerical banks.^[6] The Canadian Government issued $75 billion in mortgage issuance to keep the international playing field level as other countries (especially the US and European nations) provided guarantees to bank assets.^[6]

Financial Highlights

CIBC's retail markets have held well as the Canadian housing market has not imploded like the US; however, CIBC's World Markets division, which did have exposure to US real estate investments, had terrible performance in 2008.^[7]

The retail banking division of CIBC has provided stable and positive earnings. Over 2006-2008, the division consistently earned between C$2-3 billion dollars.^[7] Management and banking fees tend to be static, while fluctuations occurring in interest income have a greater influence on CIBC's bottom-line. For instance, the 0.12% increase in the net interest rate spread, the difference between what CIBC pays on borrowed money and receives on lent money, added C$394 million to net income in 2008 compared to 2007.^[7]

Net income generated by the World Markets business segment fell in management's target of C$300-500million per year during FY 2006 and 2007; however, a global meltdown in financial markets led to a loss of C$4.2 billion for FY 2008.

Tier 1 Capital Ratio%

Tier-1 is a gauge of a bank's financial solvency. In order to maintain a healthy ratio, CIBC issued $2.9 billion worth of common shares during FY 2008. While this offering helps sure up capital, it dilutes the current shareholder base. At 10.5%, CIBC has the highest tier 1 capital ratio among North American banks.^[2] Canadian banks average 9.8%^[6], which is 2.8% above the regulatory requirement in Canada. The ratio is a measure of equity and retained earnings to risk-adjusted assets and provides a general guide for determining a bank's financial health.^[6] As a bank approaches the regulatory limit, it becomes restricted in originating loans and making investments with higher potential returns, which impacts operating income negatively. Further, the bank risks regulatory intervention. Over the 2003-2008, CIBC's tier 1 ratio has fluctuated from as high as 10.8% in 2003 to as low as 8.5% in 2005.^[8]

Business Financials

Personal and small business banking, which includes items such as checking and ATM fees, forms 36% of revenue generated in CIBC's domestic retail business.^[7] These business segments benefit from strong domestic growth in Canada and rising spreads in the rate in lending relative to the cost of borrowing.

For 2008, the retail brokerage division generated C$1.07 billion in revenue. Asset management and brokerage fees tend to increase when financial markets are appreciating and investors are trading more frequently.^[7]

CIBC operates in two main business segments:

CIBC Retail Markets (2008 Revenue of $9,253 million, Net Income of $2,261 million)^[7]

As the core of CIBC's business, retail markets consist of everyday personal and business banking as well as wealth management services. CIBC makes money by charging fees to provide services such as checking, bill payment, and investment advice, but also, by borrowing money and lending at a higher rate of interest. This difference between what CIBC pays to borrow money and the revenue earned from lending money is referred to as the net interest rate spread. For FY 2008, CIBC expanded the net interest margin to 1.51% from 1.39% as a result of higher growth in retail products and higher interest income from its FirstCaribbean unit.^[7]

Domestic personal and small business banking and loans accounted for two-thirds of the C$9.3 billion in revenue. Lending in credit cards generated C$1.75 billion in revenue, while mortgages and personal lending added C$1.146 billion. Forming the remaining one-third of the Retail Markets 2008 revenue was CIBC's Brokerage, Asset Management, commercial banking, and FirstCaribbean operations. Of these four categories, brokerage, which includes advisory and trade transaction fees, generates the most revenue.^[7]

CIBC World Markets (2008 Revenue of -5,851 million, Net Income of -4,201 million)^[7]

CIBC World Markets is the corporate and investment banking division of CIBC. Services include providing advice and structuring merger and acquisitions (M&A), issuing debt and equity offerings on the behalf of governments and corporations, and trade executions. CIBC profits by charging fees for advice on financial deals, buying profitable investments, and billing customers for financial transactions. During 2008, a slowdown in M&A activity led to a decrease in investment banking revenue of 18% from 2007's 1,019 million. Similar merchant banking shed C$51 million from the C$1,052 million generated in 2007. While these decreases hurt CIBC bottom-line, the worse impact to CIBC's balance sheet was the capital markets division. Investments in the US real estate market led to a negative C$6.6 billion contribution to 2008 revenue. Losses from counter-party's failing to follow through on financial obligations, as well as, a plummeting values in market values of real estate structured debt, such as mortgage-backed securities(MBS), led to writedowns in excess of C$6.8 billion.^[1]

World Markets Restructuring

As a result of severe losses in the division (C$4.2 billion for FY 2008) and further exposure to the US mortgage market, CIBC took measures to reduce risk.^[7] One changed included a return to focusing on four core business areas; 1) Global Equities, 2) Fixed Income and Currencies, 3) Investment, Corporate, and Merchant Banking, and 4) Real Estate Finance. CIBC sold its investment banking branch to Oppenheimer Holdings (OPY) in January of 2008.^[9] CIBC also decided to exit its European leveraged finance business during FY 2008. In order to limit downside risk stemming from a poor US real estate market, CIBC struck a deal with Cerberus. In exchange for interim payments, Cerberus guarantees C$1 billion of the residential portfolio that was valued at C$1.186 billion in October 2008.^[10] Without the deal, a total writedown of US real estate investments would have led to a 1.08% decline in CIBC's Tier 1 Capital Ratio%, but with the transaction, the downside is limited to 0.45%.^[10] The third step taken by CIBC included common and preferred share issuances in order to shore up capital. The Canadian bank raised C$2.9 billion through common share offerings early in 2008 and 200 million in preferred shares in January of 2009.^[11]

Loan Portfolio

Loans form 48.45% of CIBC's total assets. Residential mortgages form the largest portion of CIBC's loan book.^[7]

At C$171 billion, loans form 48.5% of CIBC's C$354 billion in total assets. Residential mortgages account for 53% of the Canadian bank's loans, while credit cards form a smaller 6%. As of the end of FY 2008 (October 2008), CIBC set aside C$1.446 billion, or 0.85%, for bad debt.^[7] The health of the Canadian economy will impact the rate of defaults on debt obligations to CIBC by individuals and small businesses.

Trends and Forces

2008 Financial Crisis

The 2008 Financial Crisis has restricted liquidity, increased defaults, and has led to decline in value of financial investments. Any of which is bad for banks, but combined amounts to a perfect storm. The impact has been substantial. CIBC wrote down $6.8 billion during FY 2008 related to decline in valuations of investments backed by US real estate mortgages.^[7] U.S. competitors such as Bear Stearns Companies (BSC), Lehman Brothers (LEH), and Washington Mutual (WM) failed. While not immune, Canadian banks, including the most damaged one, CIBC^[12], have weathered the storm better than European and American counter-parts.^[6] The Bank of Canada, which is the "Federal Reserve" of Canada, reported in December of 2008 that more conservative lending practices sheltered the industry more so than competitors in outside countries.^[3] Nevertheless, Canadian banks are not immune to investment write-downs and a slowing global economy can stall the demand for Canadian exports. For October 2008, sales of existing homes in Canada fell 14% to a six-year low and prices collapsed 10% compared to a year ago.^[13] However, a smaller subprime market and homeowner's equity averaging 70%, compared to the US at 48%, acts as a shelter against losses from Canadian mortgages.^[14]

Canada's economic health

Unlike Canada's most international bank, Scotiabank (BNS), or Canada's largest bank, Royal Bank Of Canada (RY), CIBC does not generate large amounts of business outside Canada. It should be noted that it made large purchases in US real estate derivatives, but in terms of personal and commercial banking outside Canada, CIBC is not on the same level as its larger counter-parts. FirstCaribbean bank, a subsidiary of CIBC, generated 6.2% of retail market's revenue; whereas, international banking accounted for 35.6% of Scotiabank's revenue.^[15] This lack of diversification places more emphasis on the health of the Canadian economy compared to industry peers. High unemployment and poor business sales lead to greater defaults on loans issued by CIBC. Employment in January 2009 fell by 129,000 in January (-0.8%), which pushed the unemployment rate up to 7.2%. To put in perspective, it would be the same percentage in the US if 1.3 million Americans lost jobs. This drop was larger than any monthly decline observed over the past 20 years.^[16]

The USD/CAD relationship impacts operating revenue and net income.

A weakening Canadian dollar helps support the Canadian economy, which relies heavily on exports. With more than 85% of revenue being generated in Canada, CIBC relies on the health of the Canadian economy to grow revenue and limit losses on loans and other investments.^[17]

CIBC's business operations, as well as its ADR share prices are effected by fluctuations in the U.S. Dollar (USD) and the Canadian Dollar (CAD). On one hand, a rise in the US Dollar translates to higher asset values of its American investments, but also reduces the dividend paid on the ADR all else equal. On the other hand, the Canadian economy is largely linked to exports of natural resources.^[18] Weighing the effect of each impact of fluctuating USD/CAD relationships shows a strong Canadian currency is worse for CIBC as it has limited operations in the United States, but is heavily dependent on Canadians ability to pay back loans. CIBC exited investment banking and has tried to liquidate exposure to the US real estate market where possible.^[7] As the CAD depreciates, it boosts domestic revenue for Canadian resources. For instance, if oil trades for $50USD/bl, and the USD/CAD is 1, then a Canadian exporter receives $50CAD/bl for his oil. Now if the CAD depreciates 20% relative to the USD and oil does not move, he would then receive $60CAD/bl for the same oil; thus, improving his return. In a nutshell, a weak Canadian dollar can boost the domestic economy and cushion the impact of falling natural resource prices. Therefore, Canada's economic health is dependent on the USD/CAD relationship. As of December 21, 2008, the Canadian dollar is worth 82 cents of the US dollar. In early December 2008, the Bank of Canada expressed concern that a strengthening Canadian dollar could hurt Canadian banks by leading to a worse recession in Canada.^[3] Higher unemployment and decreasing natural resource prices would lead to lower repayment of loans and decreasing financial activity among energy and mining companies.

The Canadian Banking System

Please view the Canadian Banking System page (link at bottom of article) to see a general outline of the Canadian banking structure and a comparison between US and Canadian banks. A few highlights include that the Big Five, which includes CIBC, control 90% of Canadian domestic banking assets, while the five largest banks in the United States only accounted for 9.7% of total American banking assets in 2002.^[19] Another stark contrast that impacts CIBC is the ability and/or willingness of Canandians to pay back loans. Since limiting exposure to the US subprime market, CIBC now is even more dependent on loans issued in the domestic market.^[7] Loan delinquency rates in Canada is 0.29% compared to 2.20% in the US as published by the CBA, Mortgage Bankers' Association in July 2008.^[14]

Competition

Comparing the Big Five

Data as of latest Quarterly/Annual Report and Yahoo! Finance Page^[20] as of December 24, 2008:

Write-downs

According to the Bank of Canada and a survey by the World Economic Forum, Canadian banks weathered the 2008 Financial Crisis better than peers in outside nations.^[3] Nevertheless, they are not immune. Between 2007 and as of quarter ended Oct 31 (4Q FY2008 for most banks), Canadian banks had written down C$16.17 billion compared to global banks and brokers having written down USD$720 billion.^[4] Canadian Imperial Bank of Commerce (CM) has written down the largest amount in 2008 at C$6.8 billion,^[26] while RBC made C$2.79 billion of writedowns as of December 2008. Bank of Nova Scotia (BNS) took an after-tax writedown of C$595 million for its 4th quarter of fiscal year 2008.^[27] The remaining two of Canada's big five are not unscathed as well. Between the third quarter of 2007 and November 19, 2008, Bank Of Montreal (BMO) has written down C$899 million and Toronto-Dominion Bank (TD) C$65 million.^[26]

Market Share

With a market capitalization just shy of $2 billion, CIBC is the 5th largest Canadian bank of Canada's Big Five. These five banks, all included in Forbes Top 200 Banks, dwarf the remaining 14 domestic banks in terms of market cap and assets).^[28] While smallest in terms of market cap of the majors, CIBC has been the largest mergers and acquisitions (M&A) advisor in Canada for the past six years.^[2] Similar, CIBC has healthy market share in the following banking categories;

• 14.2 billion in card loans administered (17.5% market share)
• 123.7 billion in residential mortgages administered (14.1%)
• 89.4 billion in personal deposits and guaranteed investment certificates (18.2%)
• 29.6 billion in personal loans such as student, brokerage, and small business loans (9.1%)
• 56.8 billion in Assets Under Management (AUM) in mutual funds & managed accounts (8.6%)

References

1. ↑ ^{1.0 1.1} CBC News: CIBC to Use $1B Cerberus Cash to Stop Mortgage Writedowns October 3, 2008
2. ↑ ^{2.0 2.1 2.2} CIBC Company Website – Investor Resources Section – “Investor Presentation: December 2008”
3. ↑ ^{3.0 3.1 3.2 3.3} Bank of Canada “Financial System Review “Highlights – December 2008”
4. ↑ ^{4.0 4.1} Bloomberg "Royal Bank Drops Forecast as Writedowns Cut Profit" By Doug Alexander, Dec. 5, 2008
5. ↑ Reuter’s “Canada rated world’s soundest bank system: survey” October 2008
6. ↑ ^{6.0 6.1 6.2 6.3 6.4} Time Magazine "Why Canada's Banks Don't Need Help" Erik Heinrich Nov 10, 2008
7. ↑ ^{7.00 7.01 7.02 7.03 7.04 7.05 7.06 7.07 7.08 7.09 7.10 7.11 7.12 7.13 7.14} CIBC (CM), Form 10-K, FY 2008, “Management’s Discussion and Analysis”
8. ↑ Assortment of CIBC (CM) 10-K Filings 2005-2008
9. ↑ CIBC sells US banking equities to Oppenheimer, By Grant Surridge, November 4, 2007
10. ↑ ^{10.0 10.1} CIBC Company Website – Investor Resources Section – “Investor Presentation: October 2008”
11. ↑ Nanaimo Daily News "CIBC to sell $200M in Preferred Shares" January 27, 2009
12. ↑ Business News Network "CIBC shakes up investment banking business" Sinclair Stewart of The Globe and Mail, January 13, 2009
13. ↑ Times Colonist "Canadian housing sales plunge as crisis deepends" By Eric Beauchesne, Friday, November 14, 2008
14. ↑ ^{14.0 14.1} “RBC Company Presentation” “December 2008 Facts” December 2008
15. ↑ Scotiabank (BNS) Form 10-K, FY 2008
16. ↑ "Unemployment Rate Rises to 7.2%" Statistics Canada Febuary 2009
17. ↑ FutureSouce.com Commodity Quotes and Charts
18. ↑ Library of Parliament, "Energy Resources: Boon or Curse For the Canadian Economy" By Philippe Bergevin, 31 March 2008
19. ↑ Wikipedia.org "Canadian and American economies compared" Accessed 1-Jan-09
20. ↑ Yahoo! Finance
21. ↑ [http://www.cibc.com/ca/pdf/investor/2008-financial-results.pdf Canadian Imperial Bank of Commerce (CM), Form 10-K, FY 2008]
22. ↑ Royal Bank of Canada (RBC) Form 10-K, FY 2008, Introduction
23. ↑ [http://www.scotiabank.com/images/en/filesaboutscotia/19551.pdf Bank of Nova Scotia (BNS), Form 10-K, FY 2008]
24. ↑ [http://www2.bmo.com/content/0,1089,divId-3_langId-1_navCode-3198,00.html Bank of Montreal (BMO), Form 10-K, FY 2008]
25. ↑ [http://www.td.com/ar2008/pdfs/ar2008.pdf Toronto-Dominion (TD), Form 10-K, FY 2008]
26. ↑ ^{26.0 26.1} FP Trading Desk, "The year of bank writedown", By David Pett, November 19, 2008
27. ↑ Morningstar.com "Bank Nova Scotia To Take C$595 Million in 4Q Writedowns" Dow Jones Newswires 11-18-08
28. ↑ Statistics Canada "Canada's Banks" August 2002