Friday, June 02, 2006

CIBC Q2 2006 Earnings

The Globe and Mail, Paul Waldie, 2 June 2006

The Canadian Imperial Bank of Commerce is on track to cut costs by more than $500-million this year, double the bank's own target.

Gerald McCaughey, CIBC's president and chief executive officer, has made cost cutting a top priority and vowed last year to bring the bank's efficiency ratio -- a measure of how much the bank has to spend to earn one dollar of revenue -- in line with its competitors. To reach that goal, Mr. McCaughey set a target of cutting $250-million in annual costs by the end of this year.

Yesterday the bank reported that costs had dropped by $132-million to $1.82-billion in the second-quarter ended April 30, 2006. Some analysts calculated that at that rate, CIBC costs could drop by as much as $524-million this fiscal year.

During a conference call with analysts, Mr. McCaughey said the bank will review the target at the end of the year and see how it compares with other banks. "I'm very confident we will achieve the $250-million [target] and there are strong signals we will exceed it," he said, noting that the strengthening dollar has helped.

The cost-cutting initiative was one of the few bright spots for analysts in the bank's second-quarter results.

Over all, CIBC reported a profit attributable to common shareholders of $552-million, up 34 per cent from the same quarter a year earlier. However, that included a number of one-time items. Excluding the extra items, the bank's profit translated into $1.54 a share, a penny below many analysts' expectations. Revenue fell to $2.77-billion from $2.82-billion. Analysts found the results disappointing.

"This should be viewed as a fairly wide [earnings per share] miss, in our opinion," James Keating, an analyst at RBC Dominion Securities Inc., said in a note.

The bank's two main divisions -- CIBC World Markets and retail banking -- reported weak results.

Profit at World Markets fell by 4 per cent to $110-million from a year earlier. Revenue dropped 18 per cent to $607-million. The bank blamed a slow investment banking market in the United States for much of the shortfall, but said its Canadian business remained strong this quarter.

Retail banking profit surged to $432-million from $341-million a year earlier, but that included a number of one-time items. Revenue was flat at $1.96-billion.

The bank said it lost market share in several retail banking categories amid intense competition from other lenders. But part of that was also due to a strategic shift in some areas. For example, CIBC is moving away from unsecured consumer loans and looking to attract more secured loans. So far, the bank said that is paying off and growth in that area is exceeding the market.

Credit quality remains strong and the bank set aside $138-million for bad loans, down 13 per cent from $159-million a year earlier.

CIBC increased its dividend to 70 cents a share from 68 cents. Mr. McCaughey said that while CIBC is committed to paying out up to 50 per cent of its annual profit in dividend, the bank is using much of its excess cash this year to buy a 43.7-per-cent stake in Barbados-based FirstCaribbean International Bank, which cost $1.1-billion (U.S.).

Mr. McCaughey was asked how the bank will continue to meet its efficiency ratio objectives if it cannot generate substantially more revenue. He replied that cutting costs was a logical first step toward bringing the bank's efficiency ratio up to the median of other banks, but that revenue growth will come.

"I feel very strongly that we are on track with the program," he said. "It is our view that we will be able to perform adequately on the revenue side."
Bloomberg, 1 June 2006

Canadian Imperial Bank of Commerce, the country's fifth-biggest lender, said second-quarter profit rose 33 percent because of lower expenses and a tax refund. The bank boosted its dividend for the first time in five quarters.

Net income for the period ended April 30 climbed to C$585 million ($529 million), or C$1.63 a share, from C$440 million, or C$1.20, a year earlier, the Toronto-based bank said today. Revenue fell 1.9 percent to C$2.77 billion, the lowest in at least nine quarters.

Non-interest expenses fell for a third straight quarter, down 10 percent to C$1.83 billion. Chief Executive Officer Gerald McCaughey is trying to lower costs by C$250 million this fiscal year by cutting about 950 jobs and reducing advertising and bonuses.

"They have really tried to reduce their costs," said Juliette John, who helps manage the equivalent of about $15 billion at Bissett Investment Management in Calgary, including CIBC shares. "A concern further down the road is how they're actually going to maintain or grow market share."

CIBC began cutting costs last year after the bank posted its first annual loss since 1987 because of $2.4 billion in expenses to settle Enron Corp. claims. McCaughey, 50, took over as chief executive in August.

The bank is on track to surpass its C$250 million savings target, said Chief Financial Officer Tom Woods, on a conference call with analysts. Robert Wessel, an analyst at National Bank Financial, estimated the bank may cut costs by twice that amount this year, based on the savings so far.

The stock has gained 3.7 percent this year, the best performer among the country's six biggest banks.

The cost cuts, lower provisions for bad loans and reduced taxes helped counter slumping revenue from consumer and investment banking. The bank set aside C$138 million for bad loans, down 13 percent from C$159 million a year earlier.

"Credit quality is a positive," said John. "It reinforces that the environment continues to be benign, and that problems are not going to be nearly as critical to the banks in the second half" of 2006.

Consumer banking profit rose 27 percent to C$432 million, mostly because of a tax recovery. Revenue was little changed, and the bank's overall net interest margin -- the difference between what it earns and pays out in interest -- slumped to 1.47 percent, the lowest in at least nine quarters.

Margins Decline

Margins at most Canadian banks have fallen after the Bank of Canada raised its main interest rate seven straight times, including an increase last week. Net interest income fell 15 percent to C$1.04 billion, also the lowest in at least nine quarters, CIBC said. Revenue from personal and small business banking slumped 20 percent.

Lending growth is likely to decline because "competitive pressures are likely to continue to compress net interest margins," and consumers become "more conservative" because of higher rates, the bank said today in a statement.

Earnings from the CIBC World Markets investment bank fell 4.3 percent to C$110 million on lower revenue in the U.S. and losses from corporate loan hedging programs. Revenue from investment banking will likely be higher in the third quarter, Woods said.

Higher Trading

That was offset by higher trading revenue and brokerage fees, after volume on the Toronto Stock Exchange rose by a third this year as commodity stocks rose. CIBC World Markets ranks first among Canadian banks for managing new equity offerings this year, and is ninth for merger advice, according to data compiled by Bloomberg. Capital markets fees rose 8.9 percent to C$354 million at the investment bank.

"The outlook for capital markets, investment banking and wealth management businesses is positive, driven by expectations for moderate growth in the North American economy and continued strength in equity markets," the bank said.

Profit in the quarter was boosted by a C$35 million tax recovery following an audit in its retail bank, and a C$25 million reversal of loan loss provisions. The earnings were lowered by C$9 million for accounting provisions and C$7 million for an adjustment on mortgage fees.

National Bank Financial's Wessel said the bank earned C$1.55 a share before these one-time items, below his estimate of C$1.58 a share. The bank was expected to earn C$1.55 a share on that basis, based on the median estimate of seven analysts polled by Bloomberg News.

Raised Dividend

The bank boosted its dividend 3 percent to 70 cents a share, from 68 cents.

"I think that because the growth wasn't there, they gave a little bit of a carrot to shareholders, saying `thank you for bearing with us'," said John Kinsey, who helps manage the equivalent of about $800 million at Caldwell Securities in Toronto, including CIBC shares. "It wasn't a great quarter."

CIBC's Tier 1 capital ratio -- the amount of assets that the bank must set aside for regulatory purposes -- was 9.2 percent, up from 9 percent in the fiscal first quarter. That ratio fell as low as 7.5 percent last year following the Enron reserves.

CIBC reported the highest increase this quarter among the country's six main lenders. Bank of Nova Scotia, the country's third-biggest bank, said on May 29 that earnings climbed 8.2 percent to a record C$894 million on higher profit from Latin America.

Last week, Bank of Montreal, Canada's fourth-biggest bank, said earnings climbed 7.3 percent to C$644 million, or C$1.24 a share on higher investment banking and trading revenue. National Bank of Canada said profit climbed 5.9 percent to C$214 million, or C$1.26 a share.

Toronto-Dominion Bank, the second-biggest lender, said earnings rose 23 percent to C$738 million, or C$1.01 a share on higher mutual fund sales. Royal Bank of Canada, the country's No. 1 bank, said that earnings climbed 23 percent to C$1.12 billion, or 85 cents a share, led by trading revenue and mergers.