CIBC Sees Middle-of-the Pack Profitability

But capital is still strong

Eric Compton 27 August, 2020 | 3:36PM
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Capping off a strong quarter of earnings for the Canadian banks, narrow-moat-rated Canadian Imperial Bank of Commerce (CM), also called CIBC, reported decent third-quarter earnings, with EPS down 13% year over year and an adjusted return on equity of 12.9%. The EPS decline was roughly middle of the pack for peers, as adjusted preprovision revenue was up 1% year over year and provisioning declined to $ 525 million, from $ 1.4 billion in the second quarter, although provisioning was still elevated compared with $ 291 million in the third quarter of 2019. Net interest income was up 2% despite declining net interest margins, and fee income was down 3% year over year. The bank’s common equity Tier 1 ratio improved to 11.8% from 11.3% last quarter. Overall, the theme this quarter for the Canadian banks, CIBC included, is that credit costs are already receding, while revenue is generally holding up well. Pressure on retail and commercial banking revenue has been offset by strength within capital markets and wealth operations. While we don’t expect record capital market activity to continue indefinitely, depending on future economic developments, fee income could continue to recover, and provisioning could continue to recede. CIBC appears to have a manageable level of what we would consider higher-risk lending exposures, namely energy and industries most affected by COVID-19, at just under 5% of total loans, while the bank’s reserve levels are relatively in line with peers who have similar exposure levels. As we incorporate third-quarter results into our projections, we do not plan to materially change our fair value estimate of $ 117 ($85).

As we have seen with peers, the initial deferral stats generally look promising, although we are admittedly still in the earlier stages of the process. We'll know a lot more by the end of the year. Deferral balances have decreased materially for CIBC’s Canadian personal lending and business banking loan portfolios, and the bank reports that nearly all credit card accommodations that have been completed and have returned to normal payments. Impaired loans have continued to trend higher, but the increases have been within a predictable range, while write-offs haven’t really materialized just yet, although we would expect writeoffs to trend higher for the foreseeable future.

On a segment level, personal and business banking saw year-over-year declines in net income as provisioning continued to eat up profits. Lower net interest margins helped spur a decline in net interest income of 6% while lower economic activity helped drive fees lower by 13%. Lower rates are likely here to stay, and while there are mixed economic signals, there are some positive signs within that mix, which could aid a continued recovery in fees. Provisioning affected the U.S. commercial and wealth segment, driving net income down 64%, although top-line revenue is generally holding up, up 1% year over year, while expenses were controlled, down 4%. The Canadian commercial and wealth segment had a similar story, with preprovision earnings up 1%, and higher provisioning helping drive a decline in net income of 7%. The capital markets group recorded another record quarter, and net income was up 67% year over year. As we have said, record quarters can’t continue indefinitely, but the segment has provided a nice cushion while other segments have come under pressure.

 

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Eric Compton

Eric Compton  Eric Compton is an equity analyst for Morningstar,

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