Friday, August 31, 2007

CIBC Q3 2007 Earnings

Analysts' ratings and target prices for CIBC:

• Blackmont Capital maintains "hold,"

• Credit Suisse maintains "neutral,"

• Desjardins Securities maintains "buy," 12 month target price raised to $108.00 from $106.00

• RBC Capital Markets maintains "outperform,"

• Scotia Capital maintains "sector perform," 12 month target price is $115.00
RBC Capital Markets, 31 August 2007

Maintain Outperform rating following Q3/07 results

CIBC's reported GAAP EPS of $2.31 were in line with the pre-release of August 13, 2007. There were many moving parts but key points were as follows:

• Retail earnings were 6% higher than our estimate, benefiting from weaker than average, but higher than expected, revenue growth of 4%.

• Wholesale earnings are likely to decline from the Q3/07 level on lower merchant banking gains and further mark downs of U.S. sub-prime CDOs and RMBS.

• The quarterly dividend was raised to $0.87 per share from $0.77 (we had an aggressive $0.90 estimate). The new dividend only represents 40% of our estimated earnings for the next 12 months; we expect another large increase in the quarterly dividend in Q1/08 (from $0.87 to $1.00) as the bank's target payout range is 40-50%.

• The bank again committed to maintaining 2008 expenses at Q4/06 levels, as it did in 2007. In the context of flat expenses, every 1% of revenue growth drives approximately $0.25 in incremental EPS.

Maintaining price target and Outperform rating

Our 2008E cash EPS are up from $8.60 to $8.75 on higher estimated retail profitability. Our 12-month target price of $108 is unchanged. We have an Outperform rating on CIBC shares because of (1) the potential for further material increases in dividends; (2) lower exposure to wholesale income and deteriorating business credit quality; (3) tight expense management, which leaves room for upside earnings surprises in our view; and (4) a current 0.5x P/E multiple discount against the industry average.

We remain concerned that Canadian banks could trade sideways or down in the near term on negative news flow out of world financials, as well as potential earnings disappointments in Q4/07. The increased risk aversion and tightening of liquidity, if it continues, could have a much larger impact on wholesale revenues in Q4/07 than it did Q3/07, in our view. The biggest risk to our positive 12-month outlook is that capital market issues become economic issues; a scenario that our economists do not envision at this time.
Scotia Capital, 31 August 2007

• CM reported cash earnings of $2.34 per share. Earnings after a number of unusual items were $2.45 per share, including the $290 million ($190 million after-tax or $0.56 per share) write-down on CDOs and RMBSs. Earnings excluding other unusuals and including the CDO write-down were $1.89 per share.

• CM increased its dividend 13% to $3.48 per share from $3.08 per share higher than expected.

What It Means

• Earnings were very strong with an estimated underlying run rate of $2.10 to $2.20 per share.

• CIBC World Markets reported an 80% increase in earnings excluding adjustments, the best of the bank group. CIBC Retail Markets earnings were also very strong increasing 23% assisted by FirstCaribbean.

• We are increasing our 2007 and 2008 earnings estimates to $8.45 per share from $8.15 per share and to $9.00 per share from $8.65 per share, respectively. Our Q4/07 earnings estimate of $1.98 per share includes $90 million ($60 million after-tax or $0.18 per share) of further writedowns to the bank's CDOs as announced. Maintain 2-Sector Perform.
The Globe and Mail, Tara Perkins, 31 August 2007

Canadian Imperial Bank of Commerce wrapped up third-quarter earnings season for Canada's big banks by announcing a 26-per-cent rise in earnings despite continuing troubles from investments related to the U.S. subprime mortgage market.

CIBC also said it would boost its dividend by 10 cents to 87 cents a share.

But the company also revealed that its investments in securities related to U.S. subprime mortgages appear to have dropped in value by about $90-million this month.

That's on top of the $290-million hit the bank took in the third quarter, which ended July 31, as a result of the securities.

CIBC said earlier this month that its total exposure to these subprime-related investments was about $1-billion (U.S.).

The announcement lifted the bank's share price at the time, partly because some investors were relieved the figure wasn't higher.

"What this quarter showed is that CIBC is getting better at managing its earnings when conditions are tough," BMO Nesbitt Burns Inc. analyst Ian de Verteuil wrote in a note to clients.

He titled his note about the bank's quarter, "A Sloppy Joe: Messy but Good."

CIBC is closing the gap between itself and the other big banks when it comes to increasing revenue from its core Canadian banking operations, Merrill Lynch analyst Sumit Malhotra wrote in a note to clients.

The bank increased the assets it has under management in its mutual funds and managed accounts by 15.7 per cent from a year ago to $62.4-billion (Canadian).

It also said it gained market share in credit card debts outstanding, mortgages and deposits.

It said revenue growth in its personal lending business should come up to industry levels as it continues to improve its risk profile.

Chief executive officer Gerald McCaughey said the bank's "first priority is to sustain and enhance the strength of our core businesses."

CIBC's profit was $835-million for the quarter, up from $662-million a year ago.

On a cash basis, its diluted share profit was $2.34, up from $1.87 a year ago.

Analysts had only been expecting the bank to make $1.91 a share this quarter, but it revealed earlier this month that it would exceed those expectations.

The profit was helped by a $75-million reversal of funds it had set aside to deal with lawsuits; a $77-million gain because changes in credit spreads mean the bank's corporate loan credit derivatives are worth more on paper; and a $48-million tax recovery after the favourable conclusion of an income tax audit.

On the flip side, the earnings were hurt by the $290-million pretax writedown of the value of the investments related to U.S. mortgages, and a $16-million premium paid on preferred share redemption.
Bloomberg, Sean B. Pasternak and Doug Alexander, 30 August 2007

Canadian Imperial Bank of Commerce and National Bank of Canada, the last of the country's six largest banks to report third-quarter earnings, said profits rose on higher fees from investment banking.

CIBC said net income for the period ended July 31 climbed 26 percent to a record C$835 million ($785.8 million), or C$2.31 a share. National Bank, the No. 6 lender, said profit rose 10 percent to C$243 million, or C$1.48 a share.

Earnings for the six banks topped analysts' estimates, rising 16 percent on average, as record mergers lifted advisory fees and a 30-year-low jobless rate boosted demand for credit cards and mutual funds. Profit growth may slump next year as the subprime-mortgage crisis slows the economy in the U.S., Canada's biggest trading partner.

``The banks are a good measure of the economy, and as long as the economy is doing well, the banks will do well,'' said David Cockfield, who helps manage C$2 billion in assets at Leon Frazer & Associates Inc. in Toronto, including CIBC and National Bank.

CIBC rose 95 cents, or 1 percent, to C$94.92 at 4:10 p.m. in trading on the Toronto Stock Exchange. National Bank shares fell 73 cents to C$55.96.

Analysts including Dundee Securities Corp.'s John Aiken have reduced profit and stock-price targets for most of the Canadian banks next year because of a ``greater level of risk'' from the subprime-mortgage fallout.

``We will likely see a somewhat slower economy in 2008, but I don't actually see a dramatic fall-off,'' Toronto-Dominion Bank Chief Executive Officer Edmund Clark told investors last week.

Canadian Imperial, Canada's fifth-biggest bank, said investment-banking profit rose 37 percent to C$261 million, driven by higher underwriting and advisory fees. That helped counter a C$190 million writedown from collateralized debt obligations and mortgage-backed securities, first announced on Aug. 13. CIBC said today it may have an additional C$60 million writedown for August, the first month of the fiscal fourth quarter.

CIBC's challenge is ``to continue to delever the risk profile of the bank,'' said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier Inc. in Toronto, which manages $4.3 billion in assets, including CIBC.

The additional writedowns may reduce fourth-quarter earnings by 18 cents a share, RBC Capital Markets analyst Andre-Philippe Hardy said today in a note.

Profit excluding one-time items such as the writedown and tax recoveries was C$2.45 a share, beating the C$1.94 median estimate of eight analysts polled by Bloomberg.

Consumer banking profit rose 14 percent to C$555 million from C$487 million a year ago, driven by higher revenue from credit cards, mortgages and personal lending. CIBC set aside C$162 million for bad loans, compared with C$152 million a year ago. Barbados-based FirstCaribbean Bank, which is now 91.4 percent owned by CIBC, added C$133 million to earnings.

CIBC raised its quarterly dividend by 13 percent to 87 cents a share, the second increase in three quarters.

``This big dividend increase is likely to be a confidence booster and lead to a positive reaction in the stock,'' Desjardins Securities analyst Michael Goldberg said today in a note.

Overall revenue rose 5.4 percent to C$2.98 billion, Toronto- based CIBC said.