Saturday, March 04, 2006

CIBC Shares Up 22% Since Enron Charge

Financial Post, Keith Kalawsky, 4 March 2006

Gerry McCaughey, will you adopt me? Okay, I already have parents. I'm not sure you even like me. But as a real McCaughey, I'd be eligible for the next Take Your Kids to Work Day. And boy, I'd like to feel the rush of running Canadian Imperial Bank of Commerce. I mean, what an awesome job.

Think about all the fun we'd have. You've told everyone you're super-serious about slashing costs by $250-million this year. You've already announced 900 job cuts. We could roam the hallways of CIBC together and hunt down that last of those pricey management consultants pretending to work on "cross-platform efficiencies" and "data reconfiguration." Could I fire one or two of them? Could I? It's like shooting fish in a barrel, I bet.

After a coffee break and a meeting with the rest of the senior executive team (or SET, as we insiders like to say) you could show me how to craft a speech designed to lull CIBC shareholders into a submissive trance. When you took the podium at the annual meeting in Quebec City, I'm sure the audience barely caught your single, fleeting reference to the "issues related to Enron." It's like the US$2.4-billion settlement was a mere nuisance.

And besides, it really wasn't your fault. What's done is done. It's a new era. It's just like you wrote in your speech: "Our focus now is on moving the bank forward" and "We will continue to work diligently on your behalf to keep CIBC moving forward." With that kind of repetitive messaging, shareholders are putty in your hands.

The Street is convinced that CIBC is moving forward. From your office atop Commerce Court in Toronto, we could marvel at how easy it has been to impress analysts since John What's-His-Name took his $50-million package and went sailing.

The bank managed to cut $89-million in costs in the first quarter of 2006, well ahead of its $65-million target. Sure, there's concern about revenue dropping as you clamp down on unsecured lending, but most analysts were quick to commend your efforts. In research notes yesterday, analysts expressed their rising confidence in CIBC's new management team. Analysts are really digging your style.

They also know that the trick to investing in banks is to buy the one in trouble and wait for its inevitable recovery. It worked after Toronto-Dominion Bank threw away billions of dollars on corporate loans. It worked when Royal Bank of Canada's expansion strategy in the U.S. hit the wall. It is working with CIBC.

As pointed out by Robert Wessel, an analyst at National Bank Financial Inc., the bank has padded its common equity by $1.4-billion in just two quarters. It seems like no matter what disasters strike CIBC -- huge losses on merchant banking, bad acquisitions or gigantic legal settlements -- the bank keeps pumping out cash like an ATM. What other businesses in Canada are so forgiving of mismanagement?

Canadians are supposedly deep in debt and profit margins are tight, but the big banks are still making good money from investment banking, mortgages and credit cards. In no time at all, analysts and investors will be asking how you're going to spend CIBC's excess cash.

Investors can't afford to carry a grudge against CIBC for Enron, bad merchant-banking investments and other misdeeds. The stock is up 22% since the surprise Enron charge, hitting a 52-week high of $83.62 yesterday.

In turn, your stock options and other incentives will be worth a bundle in a few years. I'm sure your family will share in this good fortune. Some people might say it's pretty easy to run a bank. They are just jealous.

If work gets slow later in the afternoon or we get tired of restructuring departments and flattening organizational hierarchies, maybe we could call your nemesis David Kassie at Genuity Capital Markets, that guy who stole some of your top people from CIBC World Markets Inc.

You could disguise your voice, pretend to be the CFO at, say, Telus Corp., and tell him you're ready to explore an income-trust conversion. Then we can look down from your office window as Kassie and seven investment bankers jump in cabs and race off to the airport. Suckers! I know you're not as dull as some people think.

You've got a dream job, Mr. McCaughey. Or can I start calling you dad?