Friday, September 01, 2006

CIBC Q3 2006 Earnings

Tannis Toohey, Toronto Star
Scotia Capital, 1 September 2006

Third Quarter Earnings Increase 16% - Relatively Weak

• Canadian Imperial Bank of Commerce (CM) Q3/06 operating earnings increased 16% YOY to $1.70 per share, aided by higher security gains. Security gains were $0.08 per share in the quarter versus $0.02 per share in the previous quarter. Underlying operating earnings were relatively weak compared to the bank group.

• Total revenue declined 6%. The bank continues to lose market share in both retail loans and deposits.

• Reported cash earnings of $1.87 per share included mainly tax related adjustments and are highlighted in Table 2.

• Earnings from Retail Markets increased 12% while World Markets declined 8%. Corporate and Other earnings increased to $19 million from a loss of $24 million a year earlier with a 23% reduction in expenses.

• Return on risk-weighted assets was 2.04% versus 1.70% a year earlier. Return on Equity was 24.9%, aided by higher financial leverage, versus 19.0% a year earlier.

Total Revenue Declines 6%

• CM’s total revenue declined 6% YOY to $2,898 million, with revenues increasing 1% in Retail Markets, declining 16% in World Markets and declining 45% in Corporate & Other. Excluding the impact of security gains, revenue declined 2%

• Non-interest expenses declined 7% to $1,882 million with expense declines of 2% million in Retail Markets, 6% decline in World Markets, and 23% decline in Corporate & Other.

• The bank's operating leverage was only a modest 1% despite a significant reduction in expenses.

• The bank’s efficiency ratio (excluding amortization) improved to 64.9% from 65.5% a year earlier.

Retail Markets Earnings Increase 12%

• Retail Markets earnings increased 12% YOY to $456 million (excluding a $35 million tax recovery). Residential loans administered increased 7% to $97.3 billion with credit card loans administered up 10% to $11.6 billion.

• Deposit and payment fees declined 1% YOY to $201 million, credit fees were down 16% to $74 million, and card fees were down 26% to $61 million.

• Mutual fund revenues improved 7% YOY to $188 million with mutual fund assets under management (as reported by IFIC) increasing 3% to $45.8 billion.

• Securitization revenue increased 24% YOY to $124 million. Insurance revenues increased 44% YOY to $89 million.

• Operating leverage was 3% with revenue increasing 1% and non-interest expenses declining 2%.

Retail Market Share Continues to Erode

• The bank's market share continues to erode with market share in residential mortgages declining 50 bp to 14.2% from a year earlier. In addition, market share in consumer loans (excluding cards) declined 100 bp to 10.1% with consumer deposit market share down 70 bp to 18.9%.

• The bank is also losing market share in its credit card business with cards outstanding down 20 bp to 18.2% and card volumes down a significant 200 bp to 26.5% from 28.5% a year earlier.

Canadian Retail NIM Declines 2 bp

• Retail net interest margin (NIM) declined 2 bp in the quarter to 3.48% from 3.50% in Q2/06 (excluding a mortgage prepayment charge of $11 million).

World Markets Earnings Decline 8%

• World Markets Q3 cash operating earnings declined 8% to $159 million, excluding nonrecurring items.

• Recoveries on credit losses were $7 million in the quarter compared with provision for losses of $13 million a year earlier.

• Revenue declined 16% (excluding the mark to market adjustment of $13 million before tax). Non-interest expenses declined 6% YOY to $496 million, excluding the interest expense charge of $22 million (before tax).

Trading Revenue Solid

• Trading revenue (excluding the impact of VIEs) was solid at $209 million versus $186 million in the previous quarter and $217 million a year earlier.

Capital Market Revenue Weak

• Capital Markets revenue was $344 million versus $371 million in the previous quarter and $369 million a year earlier.

• Underwriting and advisory fees declined 11% YOY to $140 million, the lowest level in over three years.

• Commissions on securities transactions declined 4% YOY to $204 million.

Unrealized Security Deficit

• The bank's security portfolio was in a deficit position of $25 million at the end of Q3 versus a deficit of $45 million in the previous quarter and a surplus of $709 million a year earlier.

• The Bank's investment in limited partnerships has a fair value to book value surplus of $354 million versus $340 million in the previous quarter and $294 million a year earlier.

Higher Security Gains

• Security gains in Q3 were $40 million or $0.08 per share, compared with security losses of $11 million or $0.02 per share in the previous quarter and security gains of $152 million or $0.29 per share a year earlier.

• Gains on limited partnerships were $62 million or $0.12 per share (included in "other" non-interest income) compared with $49 million in the previous quarter and $73 million a year earlier.

Loan Loss Provisions Decline

• Specific LLPs declined to $152 million or 0.40% of loans versus $163 million (excluding $25 million general reversal) or 0.46% of loans in Q2/06 and $199 million or 0.54% of loans a year earlier.

• Retail Markets LLPs were $159 million or 0.50% of average loans and acceptances, versus $180 million in the previous quarter and $185 million a year earlier. World Markets had net recoveries of $7 million in the quarter versus recoveries of $16 million in the previous quarter and provisions of $13 million a year earlier.

• We are reducing our 2006 LLP estimate to $635 million or 0.43% of loans from $675 million or 0.45% of loans. We are also reducing our 2007 LLP estimate to $700 million or 0.47% of loans from $825 million or 0.55% of loans due to the increasing shift to secured personal loans from unsecured.

• Gross Impaired Loans (GILs) were $747 million versus $817 million in the previous quarter and $995 million a year earlier.

Tier 1 Ratio 9.6%

• Tier 1 ratio was 9.6% versus 9.2% at the end of the previous quarter and 7.5% a year earlier.

• The acquisition of FirstCarribean International Bank, expected in December 2006, is expected to reduce the Bank's Tier 1 ratio by 130-140 basis points.

• The common equity to risk-weighted assets (CE/RWA) ratio improved to 8.0% versus 7.8% in the previous quarter and 6.4% a year earlier.

Earnings Estimates

• We are increasing our 2006 and 2007 earnings estimates slightly to $6.53 per share and $7.00 per share from $6.40 per share and $6.90 per share, respectively.

• Our 12-month share price target is unchanged at $85, representing 13.0x our 2006 earnings estimate and 12.1x our 2007 earnings estimate.

Maintain 3-Sector Underperform

• Maintain 3-Sector Underperform rating based on continued concerns about revenue erosion, market share losses, and only a modest valuation discount despite fundamental weakness in its major business lines.
TD Newcrest, 1 September 2006


CIBC reported operating EPS of $1.70, ahead of our estimate and consensus of $1.59. The quarter benefited from higher than normal merchant banking gains, improved retail margins and lower retail credit losses. Excluding the higher than sustainable, lumpy merchant banking gains, we believe results were in-line with consensus.


Slight Positive. We are increasing our 2006 EPS estimate to $6.55 from $6.40 and our 2007 EPS estimate to $7.05 from $6.85, largely to reflect lower credit losses and a reduced tax rate assumption. As a result of the higher earnings, but despite continued meaningful domestic retail market share losses, we are increasing our 12-month target price from $86.00 to $88.00, but are maintaining our HOLD recommendation on the stock.


Retail Markets reported operating net income of $452 million vs. $404 million last quarter and $394 million in the year earlier period.

• Including securitized loans, balances were up only 1.6% versus last quarter and 5.3% year over year – under 1% excluding securitized loans, well below the pace set by the other domestic banks.

• The bank continued to lose market share in virtually every retail & commercial banking loan and deposit category. While management points to a focus on secured lending, we believe management is potentially jeopardizing long-term earnings growth.

• Net interest margins improved significantly versus last quarter, up 14 bps, but were still down 6 bps year over year. We caution this figure is not comparable to other bank net interest margin calculations, and includes a positive treasury contribution.

• Expense controls helped push down the efficiency ratio to 61.4% in Q3/06 versus 63.3% a year ago.

• Provisions for credit losses fell to $159 from $180 million last quarter and $188 million in Q3/05. Mgmt reiterated it does not expect improvement in 2006, but the signs of improvement are there, and thus we have lowered our 2007 PCL estimates.

• World Markets reported $157 million versus $119 million last quarter and $123 million in the year earlier period. We would regard this result as satisfactory, but the level of merchant banking gains raises the question of sustainability.

• Merchant banking gains increased in the quarter to $90 million (higher than guidance) versus $60 millionlast quarter. We remind that the merchant banking portfolio’s carrying value remains unchanged at $1.35 billion, and management guided to a level of roughly $50 million into the future.

• Trading revenues were $152 million in Q3/06 versus $171 million in Q2/06 and $314 million in Q3/05.

• Credit loss recoveries continue to boost results; they amounted to -$7 million versus -$16 million lastquarter and $13 million in the year earlier period. We have lowered our 2007 PCL estimates for this division.

• The efficiency ratio remained high at 76.5% from 75.6% in the same quarter last year. However, it did improve significantly by 67 bps from Q2/06 on lower litigation expenses.

Tier 1 capital was 9.6% at July, 2006, up from 9.0% at January 31, 2006. The bank noted that once the First Caribbean acquisition is completed at year-end, the Tier 1 ratio is expected to fall to 8.5%. We expect FirstCaribbean to add $0.15 to 2007 EPS.


Trading at 11.4 times 2007 earnings versus a peer group average of 12.5 times 2007 earnings, we believe CM is fairly valued at current prices and are maintaining our hold recommendation.

Justification of Target Price

Our fundamental target price of $88.00 is calculated by adding 50% of the $87.945 value derived from our 2007 P/E valuation of 12.5 times, to 50% of the $90.95 value derived from our 2007 price-to book valuation of 3.07 times. We no longer include a probability of acquisition into our CM target price.

Key Risks to Target Price

We believe the key risks are: 1) unfavorable interest rate changes; 2) persistent credit losses within the retail group; 3) volatility of beta sensitive earnings; and 4) further domestic banking market share losses.

Investment Conclusion

CIBC rung up satisfactory profits this quarter, helped by the bank’s expense management initiatives. These cost reductions and the potential of lower retail loan losses should provide earnings growth in the short-term.

We have increased our earnings estimates next year to reflect the better credit loss outlook, as well as a slightly lower than expected tax rate.

Nevertheless, retail banking and wealth management operations are losing meaningful market share, and thus we are concerned regarding the long-term potential earnings growth of the bank relative to the group. Third party contacts continue to relay anecdotal information regarding morale issues, and poaching, as management forges ahead with its cost cutting initiatives. We have lowered our valuation multiples slightly to reflect these concerns. We maintain our Hold on the stock.
The Globe and Mail, Sinclair Stewart, 1 September 2006

Canadian Imperial Bank of Commerce posted its third consecutive quarter of increased profitability yesterday, but it wasn't enough to quell murmurs that the bank's aggressive restructuring program is hurting market share and revenue growth at its retail division.

Increased merger activity and a pristine credit environment -- the dominant theme of the current earnings season -- propelled CIBC to a third-quarter profit of $629-million or $1.86 per diluted share. That is leagues ahead of the same period last year, when a $2.4-billion (U.S.) settlement over Enron Corp. drove the bank to a record loss of $1.94-billion (Canadian) or $5.77 a share.

Gerry McCaughey, the man brought in to replace former chief executive officer John Hunkin last summer and lead a mop-up effort, has been trying to bring the bank's expenses down, rebuild its capital base, and improve the quality of its retail loan portfolio.

So far, he has made significant headway on all three. The bank is ahead of its $250-million target for annual cost savings, and its Tier 1 capital ratio has climbed to 9.6 per cent -- well in excess of the 8.5 per cent it was aiming for when he took over. On the retail lending side, meanwhile, the bank is shifting a greater percentage of its portfolio to secured loans in an effort to cut down on loan-loss provisions.

Some analysts had expressed concern that CIBC was shedding market share and sales growth because its cost-cutting efforts were beginning to nick the bone. But Mr. McCaughey insisted yesterday that the slackening revenue numbers for consumer lending were not only expected, but a necessary part of fixing the bank's loan book and bringing more consistency to its bottom line contributions.

"Our results this quarter are strong and underline the continued progress we are making toward our priorities," he told analysts during a conference call. "Our actions to manage risk have had a tradeoff in terms of the impact on revenue growth in retail lending."

Overall revenue at CIBC declined by more than 10 per cent from the same quarter of last year, making CIBC the only bank to report a slide. But Jason Bilodeau, an analyst with UBS Securities, said the revenue trend is "not developing materially worse than expected," and he predicted the bank can beat expectations on the cost front this year.

Indeed, CIBC said its expenses should be lower next quarter, meaning it will likely beat its target.

When it announced its results yesterday, CIBC revealed that its share of several markets has slipped modestly, including residential mortgages, consumer deposits and consumer loans.

The retail bank did manage a 21-per-cent increase in profit, although some of that reflected a tax recovery. Loan-loss provisions for this division, which have been a thorn in the past, dropped 14 per cent to $159-million, reflecting both the favourable credit environment and the bank's efforts to shrink its book of unsecured loans.

On a cash basis, which excludes $63-million in one-time items, CIBC made $1.70 for the quarter, about a dime better than analysts had been forecasting. That failed to support the bank's shares, which fell $1.27 to $80.33 yesterday.
Financial Post, Duncan Mavin, 1 September 2006

The two smallest of Canada's big six banks turned in flat third-quarter results that made for a disappointing end to the bank earnings season.

National Bank of Canada and Canadian Imperial Bank of Commerce were the last to report numbers, but they failed to keep up with a hot pace set by their larger rivals that have delivered strong third-quarter performances in the past two weeks.

Canadian Imperial Bank of Commerce announced net income for the quarter of $662-million. That compares to a loss of $1.1-billion in the same period last year when the bank booked a provision for Enron litigation costs totaling $2.53-billion after tax. Excluding the impact of the Enron costs, however, CIBC's net income for the third quarter of 2006 was up only 5.7% compared to last year.

In comparison, Royal Bank of Canada, Toronto-Dominion Bank, and Bank of Nova Scotia have all reported third-quarter net income for 2006 up about 20% compared to last year. Bank of Montreal's net income for the third quarter was up about 30% from the previous year.

CIBC chief executive Gerry McCaughey has made cost savings the main priority for the bank, with a target of reducing expenses by $250-million by the end of this year. Although the bank is well on track to deliver on its stated cost-cutting measures, there are concerns about whether this will impede top-line growth.

RBC Capital Markets analyst Jamie Keating noted the bank's third-quarter results "were light in terms of core revenue."

Similarly, UBS Investment Research analyst Jason Bilodeau called the bank's revenue growth "sluggish" and "less than stellar," although he noted the trends are "priced into the stock."

In fact, total revenue for the quarter of $2.8-billion was down 10% compared to $3.1-billion last year, mostly as a result of a 27%, or $250-million drop in revenue at CIBC World Markets.

The bank also said it lost market share in mortgages and consumer deposits, and retail banking revenue was unchanged from last year at about $2-billion for the quarter.

Meanwhile, National Bank said net income for the third quarter was $220-million, up 6% from $207-million in the same period last year.

Chief executive Real Raymond said the results reflected strategic "discipline" and a focus on profitability, which is "more important than just trying to grab a larger share of the market."

However, despite beating analysts expectations with earnings per share of $1.25 adjusted for one-off items -- most analysts' had forecast about $1.24 -- the bank failed to impress.

"Operating profit was even weaker than we expected, down 14% [year over year] and 8% [quarter over quarter] due to margin compression and weaker net capital markets," said Desjardins Securities Research analyst Michael Goldberg.

National Bank's stock could suffer in comparison to rival banks, said Mr.Goldberg.

"This looks like a weak quarter," Mr. Keating said. In particular, the Quebec-based bank's wealth management division is growing revenues at a slower rate than its peers, he said.
RBC Capital Markets, 31 August 2006

First Impression

Q3/06 Underlying Result “In-Line”. Cash EPS of $1.87 included 17¢ of tax gains and non-core AcG-13 hedge gains. The normalized $1.70 is indicated 10¢ above $1.60 consensus, but benefited from: (i) $30MM lower-than-expected loan loss provision (7¢), (ii) merchant banking (10¢) and (iii) a low (28%) tax rate. This result was light in terms of core revenue.

Revenue & Expenses In Line (ie. Down 7% YoY normalized). Revenue of $2.84B was just below the consensus estimate, just above ours, buoyed by the securities gains and trading revenue. Expenses of $1.9B were down 6.6% YoY, in-line with the street and $26MM above our estimate.

Retail Earnings Growth of 15% Driven by Low Loan Loss, Tax Rate. Retail revenue grew 1% YoY (peer range 4-14%) while expenses were managed down 2%. Pre-tax earnings were indicated up 13% or 8% excluding the lower loan loss. Retail impaired loans were down 4% YoY, and formations of $284MM is now at the low end of the recent range.

Wholesale Earnings of $157MM - In-Line with Expectation. Revenue was down 25% YoY. Weaker-than-expected underwriting and commission fee revenue was offset by higher-than-factored merchant bank gains. Trading revenue at $210MM was also slightly better than our $199MM estimate.

Dividend Unchanged. There was no dividend increase from last quarter’s $0.70/share, as anticipated.

Balance Sheet Improving. The Tier 1 capital ratio was 9.6%, just above our 9.3% estimate. The Impaired loan coverage ratio of 212% was better than our 200% estimate.
Bloomberg, Sean B. Pasternak, 31 August 2006

Canadian Imperial Bank of Commerce, the country's fifth-largest bank by assets, had a third-quarter profit of C$662 million ($597 million), reversing a year-earlier loss, after consumer banking profit climbed.

Net income for the period ended July 31 was C$1.86 a share, compared with a loss of C$1.91 billion, or C$5.77 a share a year ago on costs to settle Enron Corp. claims, the Toronto-based bank said today.

Canadian Imperial said revenue fell 10 percent to C$2.83 billion, the first bank to report a decline this quarter, after it cut costs, and fees from investment banking, credit cards and trading fell. Chief Executive Officer Gerald McCaughey has vowed to lower costs by C$250 million this year by cutting jobs and reducing other expenses.

"Losing market share isn't necessarily a bad thing,'' said Gavin Graham, director of investments at Toronto-based Guardian Group of Funds, which owns CIBC shares among the equivalent of about $5.42 billion in assets. ``It may be a deliberate point on the part of management to say that `we don't want to be aggressively chasing market share at the top of the credit cycle'.''

Canadian Imperial shares fell C$1.27, or 1.6 percent, to C$80.33 at 4:10 p.m. trading on the Toronto Stock Exchange. The shares have risen 5.1 percent this year, topping the 4.8 percent gain for the 39-member Standard & Poor's/TSX Financials Index.

Excluding one-time items, profit was C$1.70 a share, said Robert Wessel, an analyst at National Bank Financial in Toronto. Wessel forecast C$1.68 a share on that basis. The bank was expected to earn C$1.61 a share based on the median estimate of six analysts polled by Bloomberg.

Earnings from consumer banking rose 21 percent to C$487 million because of higher revenue from mortgages and insurance, helping offset a decline in personal and small business banking and credit cards. Total revenue for the unit was little changed at C$2.04 billion.

The bank's revenue trends ``are not developing materially worse than expected,'' UBS Canada analyst Jason Bilodeau said today in a research note after results were released.

For the first three quarters of the year, CIBC's share of outstanding credit card loans slipped to 18.2 percent from 20 percent in 2003. Over the same period, the bank's share of residential mortgages slipped to 14.2 percent from 14.8 percent.

"(CIBC) is hemorrhaging market share across many product categories,'' said TD Newcrest analyst Steve Cawley, in a research note yesterday. ``What will the bank do once expense reductions run out?''

Profit from its CIBC World Markets investment bank was C$190 million, compared with a C$2.29 billion loss last year from the Enron provisions. Revenue at the unit fell 27 percent on declines in merchant and investment banking. Gains a year ago in the merchant bank investment portfolio lowered revenue by two thirds, to C$90 million. The bank cut the book value of the portfolio to C$1.3 billion, from C$2.7 billion in 2002.

Trading revenue fell by half to C$152 million, in contrast to most of CIBC's bigger rivals, as equity trading plunged 72 percent to C$54 million.

CIBC World Markets ranks first for advising on Canadian mergers this year, according to data compiled by Bloomberg. The value of mergers has soared to a seven-year high in 2006, led by the mining and oil and gas industries. CIBC ranks first for managing new stock sales for Canadian companies this year.

Non-interest expenses fell 61 percent to C$1.89 billion during the quarter because of the Enron costs a year ago. CIBC set aside C$152 million for bad loans, down from C$199 million a year ago. The bank said bad loan provisions would probably rise this quarter.

Separately, National Bank of Canada, the country's sixth- biggest bank, said profit rose 6.3 percent to C$220 million, or C$1.30 a share, from C$207 million, or C$1.18, a year ago. The Montreal-based bank cited increased profit at its asset management, consumer banking and investment banking groups.

Profit from asset management rose 17 percent to C$34 million led by mutual funds. Investing banking rose 11 percent to C$60 million and consumer lending rose 12 percent C$130 million. Revenue rose 5 percent to C$933 million.

Excluding one-time items, National Bank earned C$1.25 a share, matching the median estimate of seven analysts polled by Bloomberg News. National Bank shares fell C$1.84, or 3 percent, to C$59.97, the biggest decline in almost four years.

CIBC and National Bank were the last of Canada's six main banks to report results. Bank of Nova Scotia, the country's third-biggest lender, said earnings rose 19 percent to a record C$936 million, or 93 cents a share, bolstered by higher earnings from its Latin American businesses.

Bank of Montreal, the fourth-biggest bank by assets, said on Aug. 22 that profit rose 30 percent to a record C$710 million on higher trading income. Toronto-Dominion, the second-biggest, said that profit almost doubled to C$796 million on higher trading fees and increased earnings from its U.S. brokerage.

Royal Bank, the country's biggest bank, said that profit climbed 20 percent to a record C$1.18 billion because of its U.S. and international consumer bank.