Monday, April 30, 2007

RBC CM Initiates Coverage of CIBC at Top Pick

RBC Capital Markets, 30 April 2007


We are initiating coverage of CIBC with a Top Pick, Average Risk rating on its shares.

Investment Opinion

• We believe that revenue growth will continue to lag the industry in the near term but that earnings will likely come in ahead of consensus estimates. We believe that the bank must deliver better relative revenue growth in order to sustain an industry valuation multiple over time.

• However, we do not believe this will be a dominant theme in 2007 given earnings drivers unique to the bank (declining retail credit losses, FirstCaribbean and improving revenue growth on flat expenses). The bank also has a lower credit risk profile and less exposure to potentially volatile wholesale revenue.

• Valuation. Our 12-month price target of $114 is a combination of our sum of the parts and price to book methodologies. It implies a multiple of 13.0x 2008E cash EPS, compared to the current 12.0x multiple on 2007E earnings and a 5-year average forward multiple of 11.9x. Our relatively high price to book target multiple of 3.2x reflects the bank's industry-leading ROE and low credit risk. Our sum of the parts target P/E of 12.4x is slightly below our target average for the banks of 12.6x, as lower exposure to low-multiple wholesale businesses is offset by slower than average revenue growth.