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Andrew Willis: Was CIBC (CM)’s recent quarter a red flag for the rest of the year – and other Canadian banks? And what should investors watch out for?
With CIBC’s mixed results last week starting off the earnings for the Canadian banking industry, sector strategist Eric Compton saw signs the sector may be in transition this year. Loan growth is likely to slow, he says, and more credit strain is likely to emerge.
At CIBC, we saw an uptick in mortgage delinquencies and some shifts in originations and overall balances into higher loan-to-value distributions. This could push the bank further down a precarious path in the event of a downturn – since it has the highest concentration of uninsured Canadian mortgages. Meanwhile, last quarter’s loan growth was only up 1% sequentially, and net interest income was up only half a percent.
In the second half of the year, CIBC management expects net interest income growth to pick up, but for now - and surely to the envy of Canadian homeowners - the bank seems to show a lack of sensitivity to current rate movements. Along with our doubts that the bank will be improving operating efficiency in 2023, we’re lowering our fair value estimate for CIBC stock from 73 to 69 dollars.
Will CIBC be able to hit medium-term profitability and growth goals? We’ll have to see how the bank - and consumers - fare this year as billions in mortgages come up for renewal.
For Morningstar, I’m Andrew Willis.
Bulls Say
- CIBC has significantly improved multiple measures of core banking performance, such as customer perception surveys, promoter scores, and products per a customer. The bank is now operating at a higher level.
- CIBC is more Canadian-focused than most of its peers. Its consolidated returns on tangible equity remain some of the highest in the industry.
- The government has kept the Canadian market attractive by placing barriers to entry, protecting high returns, and the government will continue to attempt to keep the housing market under control, limiting any future hits to profitability.
Bears Say
- CIBC is the most exposed to a downturn in the Canadian housing market, and the Canadian housing market is heating up once again, increasing overall risks for the economy and the banking system.
- CIBC is investing a lot in multiple business lines, with expenses running higher than peers. The bank is counting on good execution and share gains, which may not happen.
- CIBC has a history of self-inflicted wounds, and with a stretched housing market and a potential slowdown in economic growth in Canada, CIBC has not historically been one of the safer, premier Canadian banking franchises.
Editor's Note: All images are courtesy of Unsplash.com and AP Images.
