Thursday, March 02, 2006

CIBC Q1 2006 Earnings

RBC Capital Markets, 2 March 2006

CIBC reported $1.63 versus $1.49 consensus and RBCCM estimate at $1.54.

Investment Opinion

Headline 9% Above Consensus, Underlying ~3% Above. CIBC’s $1.63 cash EPS reported compared very favourably to our RBCCM estimate of $1.54 and consensus at $1.49. As with other banks in Q1/06, the beneficial, but cyclical trading and loan losses assisted. Using the consensus loan loss and our trading estimate, underlying EPS was ~$1.53, 4¢ over consensus.

Lower Loan Loss Helped by 7¢. CIBC’s lower-than-expected loan loss at $166MM versus our $200MM estimate ($208MM consensus), worth ~ 7¢/share.

Trading Helped by 3¢. Higher-than-expected trading revenue at $246MM versus our $214MM estimate (no consensus available) assisted EPS by an estimated $0.03 assuming a 35% tax rate and 50% variable compensation,

Revenue Flat, Expenses Down. Revenue missed our estimate by 3-4% to generate 0% top-line growth. Fortuitously, expenses were 5% below our estimate and down 2% YoY.

Divisional Earnings. Retail & Wealth revenue (normalized) grew 3.5% (BMO flat, TD up 12%), while expenses declined 0.8%. The improved operating leverage coupled with a 7% lower loan loss accrual charged an 18% bounce in underlying retail and wealth earnings (BMO up 4%, TD up 15%). Market shares look stable except perhaps in small business (BMO also lost small business share, TD gained).

Credit Losses Down a Step Function. Although CIBC’s loan loss accrual at $166MM was below estimates, it was still a conservative 0.45% of loans, four times the 0.12% registered by BMO and double TD’s 0.25%. This may be indicating a lower average run-rate than previously envisaged broadly but we would remain vigilant given CIBC’s larger than average unsecured retail credit portfolio.

Valuation. Our $81.00 price target is set at 12.5x our 2007 cash EPS estimate of $6.50. Our target P/E for CIBC indicates a 4% discount to our target P/E for the bank sector to reflect a lower growth outlook. We have factored only mid-single-digit earnings growth over the next two years, roughly in line with our estimated loan and revenue growth for the bank. We expect that the $250 million in expense saves will be realized roughly half in 2006 ($0.25) and half in 2007, but will be partially offset by higher loan loss provisions. In our view, the primary risk remains revenue shortfall, as the bank will be focusing on cost cuts rather than revenue growth. Our price target is indicated at ~2.9x our estimated book value of $28.31 (as at Oct 31/06).