Friday, September 28, 2007

CIBC World Markets Will Have Weaker Q4 2007 Results

The Toronto Star, Rita Trichur, 28 September 2007

Canadian Imperial Bank of Commerce says tough market conditions are weighing on its World Markets business and warned the division's fourth-quarter results will be weaker than levels achieved earlier this year prior to the full-scale meltdown in U.S. subprime residential mortgages.

CIBC World Markets, the bank's wholesale and corporate banking arm, has already taken $290 million in mark-to-market writedowns in securities related to the U.S. residential mortgage market during the third quarter.

Millions more in writedowns are expected in the current quarter as the bank continues its market-value assessment of its collateralized debt obligations and residential mortgage-backed securities, which are investments related to U.S. subprime mortgages.

That mark-to-market process determines the current market price for those securities versus their previously assigned book value.

CEO Gerald McCaughey said at an investor conference in Mont-Tremblant, Que., yesterday that "market and industry conditions are challenging and our fourth-quarter results are not likely to match the strength in the World Markets business that we have seen in the earlier parts of 2007."

CIBC has previously stated that its "target business mix" is to invest 25 to 35 per cent of its capital in its wholesale business. Last March, McCaughey told investors at the bank's annual meeting that CIBC had "room" to provide additional capital to its World Markets division and improve its productivity.

But yesterday, McCaughey cast a more sombre outlook vis-à-vis those previously stated scorecard objectives: "Currently, we are at 24 per cent and, given the more difficult market conditions, we do intend to remain near the low end of our range at this time."

Last month, CIBC revealed its exposure to troubled subprime mortgages though collateralized debt obligations and residential mortgage-backed securities was about $1 billion (U.S.).

Executives also estimated the bank would take another $90 million in markdowns for August based on preliminary data. Those further markdowns for August could reduce the bank's per share fourth-quarter earnings by an estimated 18 cents (Canadian), according to RBC Capital Markets.

Analysts have also warned that more fallout is possible if U.S. subprime securities continue to undergo price erosion. McCaughey gave no further hints yesterday about the expected value of CIBC's investments in subprime-related securities for the fourth quarter. He conceded, however, the securities have ended up being "riskier" than originally thought despite their high credit ratings.

"The volatility that we've experienced and the fact that we ended up with large holdings and a large writedown is not something that we would like to have on an ongoing basis," McCaughey said. "We're trying to dampen volatility and so we are examining how we can look through this type of thing in the future."

CIBC is not the only bank re-evaluating its risk exposure. The Bank of Montreal, too, has learned lessons from its mounting commodity-trading losses, which have already had an impact of $829 million before taxes so far this year.

The losses mostly occurred from natural gas trading involving New York-based brokerage Optionable Inc. and are now being scrutinized by regulators and law enforcement officials.

Karen Maidment, BMO's chief financial and administrative officer, said at the same conference the bank is continuing its enterprise-wide review of risk management practices: "We're changing a lot of monitoring and limits and measures and things like that to ensure that we stay within the risk profile."

BMO's exposure on its commodity book is about $11 billion and it plans to work it down over the next two quarters. And while analysts have warned of more trading losses, Maidment said the bulk of the losses have already been incurred.