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 is 5th. Similar to Bank Of Montreal (BMO), CIBC had significant exposure to U.S. capital and real estate markets. With 2008 write-offs of C$6.8 billion, CIBC was hardest hit by the 2008 Financial Crisis among the Big Five. CIBC took measures to counter the impact of large losses and further exposure to the toxic subprime mortgage market. These steps included selling its U.S. investment banking operations to Oppenheimer Holdings (OPY), entering a deal with Cerberus to limit U.S. residential exposure, and issuing equity shares. These actions helped the bank boast the highest tier 1 capital ratio (10.5%) among North American banks.
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. Canadian banks only accounted for 2% of the estimated $720 billion US dollars in writedowns by global banks and brokers during 2008. 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. The U.S. was ranked 40th in the survey of 12,000 corporate executives. Focusing on banks' balance sheets, Canadian banks fair much better than their U.S. 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 commercial banks. The Canadian Government issued $75 billion in mortgage issuance to keep the international playing field level as other countries (especially the U.S. and European nations) provided guarantees to bank assets.
Second Quarter 2010 Results
CIBC announced net income of $660 million for the second quarter ended April 30, 2010, compared to a net loss of $51 million for the same period last year. Diluted earnings per share were $1.59, compared to a loss per share of $0.24 a year ago. Cash diluted EPS were $1.611, compared to a cash diluted loss per share of $0.211 a year ago.
CIBC’s Tier 1 and total capital ratios at April 30, 2010 were 13.7% and 18.8%, respectively, and its efficiency ratio for the quarter was 57.5%.
Net income for the prior quarter was $652 million compared with net income of $660 million for the second quarter of 2010. Diluted EPS and cash diluted EPS for the second quarter of 2010 compared with diluted EPS of $1.58 and cash diluted EPS of $1.601, respectively, for the prior quarter.
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.
Domestic personal and small business banking and loans accounted for two-thirds of the C$13.2 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 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.
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%. 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 U.S. 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.
As a result of severe losses in the division (C$4.2 billion for FY 2008) and further exposure to the U.S. mortgage market, CIBC took measures to reduce risk. One change 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. CIBC also decided to exit its European leveraged finance business during FY 2008. In order to limit downside risk stemming from a poor U.S. 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. 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%. 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.
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%. The health of the Canadian economy will impact the rate of defaults on debt obligations to CIBC by individuals and small businesses.
The 2008 Financial Crisis has restricted liquidity, increased defaults, and has led to decline in value of financial investments. The impact has been substantial. CIBC wrote down $6.8 billion during FY 2008 related to decline in valuations of investments backed by U.S. real estate mortgages. 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, have weathered the storm better than European and American counter-parts. The Bank of Canada, which is the "Federal Reserve" of Canada, reported that more conservative lending practices sheltered the industry more so than competitors in outside countries. 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. 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.
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 U.S. 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. 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.
CIBC's business operations, as well as its ADR share prices are affected by fluctuations in the U.S. Dollar (USD) and the Canadian Dollar (CAD). On one hand, a rise in the U.S. 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. 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. 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 $60CAD/bl for the same oil; thus, improving his return. In a nutshell, a weak Canadian dollar can boost the domestic economy and cushion the impact of falling natural resource prices. Therefore, Canada's economic health is dependent on the USD/CAD relationship.
|Bank||Net Income (C$/Yr)||Assets (C$)||Market Cap (NYSE)||Yields (NYSE)||Branches||Tier 1 Capital Ratio||Employees||Customers||Forbes Global 2000 Rank|
|Canadian Imperial Bank of Commerce (CM) ||-2.060B||353,930M||1.86B||8.3%||1048||10.50%||40,457||11,000,000||159|
|Royal Bank Of Canada (RY) ||4.555B||723,859M||37.68B||7.2%||1741||9.00%||70,000||16,000,000||55|
|Bank of Nova Scotia (BNS) ||3.140B||455,500M||24.57B||7.5%||9.30%||69,000||12,500,000||92|
|Bank Of Montreal (BMO) ||1.978B||152,687M||12.37B||9.4%||1280||9.77%||37,100||8,200,000||189|
|Toronto-Dominion Bank (TD) ||3.813B||563,214M||26.92B||6.8%||2200||9.80%||52,000||10,000,000||95|
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. 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. Canadian Imperial Bank of Commerce (CM) has written down the largest amount in 2008 at C$6.8 billion, 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. 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.
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). 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. Similar, CIBC has healthy market share in the following banking categories;