Friday, March 02, 2007

CIBC Q1 2007 Earnings

TD Newcrest, 2 March 2007


CIBC reported operating EPS of $2.18 ahead of our estimate of $1.91 and consensus of $1.94, up from $1.96 in Q4/06 and $1.63 in Q1/06. Bottom line growth was driven by stronger than expected contribution from the World market’s operation, solid expense management, and revenue strength from the wealth division. We believe the operating earnings number was closer to $2.05.


Positive. We are increasing our 2007 EPS estimate to $7.75 (from $7.55), and our 2008 EPS estimate to $8.50 (from $8.25) largely to reflect lower credit losses, continued expense reductions and the likelihood of continued high security gains. As a result, we are increasing our 12-month target price to $106.00 (from $100.00), but are maintaining our Hold recommendation on the stock.


Retail Markets reported operating net income of $530 million, beating our estimate of $514 million, as the bank reported much improved year over year credit losses and expense efficiency, and revenue strength from the wealth management businesses. Market share losses in domestic banking persist, negatively impacting our relative target valuation multiples.

World Markets results were impressive, but unsustainable in our opinion. Earnings were driven by strong business growth, but also by what we view as unsustainably high credit recoveries and investment security gains. While the pool of merchant banking and investment securities unrealized gains is growing, we do not assign high valuation multiples to this stream of earnings. We highlight that once tax and operating expense affected, securities gains likely represented 10%+ of this quarter’s earnings.

Tier 1 capital was a respectable 9.6% following the closing of the First Caribbean deal. Management expected the Tier 1 ratio to fall to between 8.5% and 9.0%. As a result the bank raised it dividend $0.07 to $0.77. We expect the bank to now focus on returning capital back to shareholders at the rate that others in the group have been doing.

Justification of Target Price

Our fundamental target price of $106 is calculated by adding 50% of the $105.72 value derived from our 2007 P/E valuation of 13.5 times, to 50% of the $106.70 value derived from our 2007 price-to book valuation of 3.23 times. We no longer include a probability of acquisition in 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

Overall, CIBC reported a very good Q1/07. Positives during the quarter included excellent results from beta sensitive businesses, good expense control, lower yoy credit losses and a rise in the quarterly dividend. That said, we view the earnings stream emanating from CM to not be of the quality of our favorite Canadian bank stocks, and harbor concerns regarding the bank’s ability to grow domestic banking revenues. We reiterate our Hold recommendation on the stock.
The Globe and Mail, David Ebner & Sinclair Stewart, 1 March 2007

Canadian Imperial Bank of Commerce hosted a quiet annual general meeting in Calgary Thursday, a reversal of a year earlier when the bank's leadership faced critical queries about the billions spent on a legal settlement over Enron Corp.

“When we look back at 2006, we see it as a year of progress,” Gerry McCaughey, chief executive officer of CIBC, told a largely empty conference room in downtown Calgary. “Our focus in 2007 is to build on that progress.”

Last year's meeting was in Quebec City, where the company was blasted for the $2.4-billion (U.S.) it spent on its Enron settlement, leading to a rare annual loss for 2005. A shareholder activist challenged bank chairman Bill Etherington to name the people at CIBC that were responsible for Enron, a request that was denied.

On Thursday, only a few questions were asked, including one about the number of Aeroplan miles on a credit card promotion. In 2006, CIBC recorded a record profit of $2.6-billion (Canadian) or $7.43 a share.

Quiet was the theme of the day for CIBC, as strong day-to-day retail operations — the least flashy segment in the banking business — helped produce a strong first-quarter profit of $770-million or $2.11 a share for the three months ended Jan. 31. Profit was up by a third from $580-million or $1.62 a year earlier.

Mr. McCaughey, himself noted for being reserved, even for a banker, was also quiet on bank fees. Industry executives are expected to meet next week with federal Finance Minister Jim Flaherty, who wants to see fees for withdrawals from bank machines cut.

Asked three times about fees by reporters, Mr. McCaughey ignored the questions, saying CIBC's main goal is that its own machines — about 3,800 — are widely available to the bank's clients.

Customers that withdraw funds from their bank's own machines generally pay no fee. The issue Ottawa is pushing are fees of $1.50 and more that banks charge the customers of competitors to withdraw cash.

“Our priority is access,” Mr. McCaughey said, adding that CIBC spent more than $100-million improving its bank machines last year.

“The vast majority of our clients have the ability to access our very large network and pay very little,” he said.

CIBC increased its quarterly dividend to 77 cents, up 7 cents or 10 per cent. The company said it is looking to raise dividends further in the short term, rather than consider splitting its stock, which closed yesterday at $100.52 on the Toronto Stock Exchange, down 14 cents.

Stock of CIBC is up about 26 per cent in the past year, the best among the big banks, and almost double the No. 2 result of 13 per cent posted by Royal Bank of Canada over the past 12 months.

Under Mr. McCaughey, CIBC has attempted to dampen the volatility at its retail bank, largely by shifting assets away from risky unsecured lending products. The bank has acknowledged that this could affect revenue growth but insisted it would prefer to focus on secured lending, where there is less risk — particularly when the credit cycle finally turns.

The bank has always had high loan-loss provisions in its retail bank, relative to its peers, but these are starting to fall in line with the asset shift. In the first quarter, CIBC set aside $153-million for soured loans, compared with $180-million a year ago.

The efficiency rating of the retail bank — which tracks how much it costs the bank to earn a dollar of revenue — has also been coming down, thanks to a heavy focus on expense savings over the past year.
Bloomberg, Doug Alexander, 1 March 2007

Canadian Imperial Bank of Commerce, the country's fifth-largest lender, said first-quarter profit rose 33 percent, beating analysts' estimates, on higher fees from investing banking and mutual funds.

Net income for the period ended Jan. 31 was C$770 million ($657.3 million), or C$2.11 a share, compared with C$580 million, or C$1.62, a year earlier, the Toronto-based bank said today in a Canada NewsWire statement.

CIBC ranked first for mergers and second for new stock sales among Canadian banks in the quarter, according to data compiled by Bloomberg. The transactions included Xstrata Plc's $18 billion takeover of Falconbridge Ltd. and a $197 million stock sale by Calloway Real Estate Investment Trust.

``Their involvement in underwritings was quite strong in the quarter,'' Blackmont Capital analyst Brad Smith said in an interview before earnings. CIBC ``certainly got more than its fair share.''

CIBC raised its quarterly dividend by 7 cents to 77 cents a share, its second increase in a year.

Shares of Canadian Imperial fell 14 cents to C$100.52 at 4:10 p.m. trading on the Toronto Stock Exchange.

National Bank Financial analyst Robert Wessel, who rates the stock ``outperform'', said profit was C$2.18 a share excluding one-time items, higher than his estimate of C$1.88 a share on that basis. The median estimate of 10 analysts polled by Bloomberg News was C$1.96 a share.

Overall revenue rose 8.4 percent to C$3.09 billion, from C$2.85 billion a year earlier, CIBC said.

Investment banking profit rose 64 percent to C$210 million in the quarter, driven by trading revenue, underwriting and mergers. CIBC had C$132 million in securities gains in the quarter.

CIBC World Markets advised on 17 deals worth $34.5 billion that closed in the quarter, more than 10 times the year-earlier amount, according to Bloomberg data. CIBC led 18 equity transactions worth $1.8 billion, a 61 percent increase from a year earlier. Canadian mergers soared to a record in 2006, with 2,300 announced deals worth $290.5 billion, according to Bloomberg data.

Consumer banking profit rose 21 percent to C$530 million from C$438 million a year ago, driven by higher revenue from credit cards, personal banking and contributions from its FirstCaribbean International Bank.

CIBC spent $989 million to acquire a 44 percent stake in FirstCaribbean in December from Barclays Plc. The acquisition gives CIBC control of a regional bank that has 100 offices in 17 Caribbean countries. The bank set aside C$143 million for soured loans, compared with C$166 million a year ago.

Chief Executive Officer Gerald McCaughey told investors at the annual meeting in Calgary that the bank isn't considering a stock split this quarter, even with the share trading higher than C$100.