CIBC: Stock of the Week

Why is CIBC preparing for losses in real estate – should investors be worried?

Andrew Willis 18 September, 2023 | 4:45AM
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Key Takeaways for CIBC Stock:

  • CIBC is significantly increasing its allowance for real estate and construction credit losses, up 150% and 68% in Q2 and Q3, respectively.
  • Among Canadian banks, CIBC has the largest exposure to the local housing market.
  • Losses should be manageable and investors should keep an eye on medium-term growth goals which if met could lead to an upside for CIBC stock.


Andrew Willis: Earlier this year, we pointed out that the Canadian banking sector may be in transition as lending slows. Interest rates are weighing on borrowers and it seems like CIBC is seeing some cracks form when it comes to potential real estate delinquencies ahead.

We’ve noticed an uptick in money CIBC (CM) is setting aside for losses in its real estate lending business. The bank increased its allowance for credit losses by 68% for real estate and construction loans last quarter, after increasing it by 150% the quarter before that.

Stock strategist Eric Compton says the increase in provisions has been driven by a change in the bank’s macro outlook, as it sees strain on Canadian debt-service ratios – and losses on U.S. commercial real estate loans. Reserves are as high as 7.6% of U.S. office real estate loans at CIBC, and investors may also be seeing red flags as CIBC has the largest exposure to the Canadian housing market among its peers. Should CIBC stock investors be worried?

Focus on Gains as CIBC Has the Capital to Absorb Losses

The threat of a housing downturn is more of a future risk to growth than an existential risk to CIBC, Compton contends, with CIBC now having the capital and earnings to absorb any potential credit losses.

Investors should perhaps instead focus on the medium-term profitability and growth goals set by the bank, which if hit would generate upside on CIBC stock. So for now, put the provisioning in perspective before any panic selling.

For Morningstar, I’m Andrew Willis.


Image credits: 

1- Tierra Mallorca on Unsplash

2- PiggyBank on Unsplash

3- Associated Press

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Canadian Imperial Bank of Commerce69.80 CAD0.16Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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