Monday, January 28, 2008

Analysts' Outlook on CIBC

Financial Post, Duncan Mavin, 28 January 2008

Investors wondering when the steady stream of bad news out of Canadian Imperial Bank of Commerce will dry up should not expect to wait too much longer, according to TD Newcrest analyst Jason Bilodeau.

CIBC — which has revealed a stunning capacity to shock investors even when it seems the bank can sink no lower — has seen its stock price plummet of late.

The bank’s subprime-related writedowns have soared to $3.3-billion and it is likely there is more to come. Last week, it also emerged the bank has an additional exposure to the ill winds blowing through the U.S. economy in the form of as much as $25-billion in credit derivatives — this book of securities is not linked to subprime, but it has already suffered a decline in value of at least $750-million, and it is backed by guarantees from under-pressure monoline insurers.

But with so much negativity around the bank already, there is “limited room for additional disappointment,” said Mr. Bilodeau in a note to clients.

“Negative headlines are likely to be confined to confirmation of what is already largely expected; including BIG write-offs. Importantly, the bank’s capital strength appears sufficient to withstand our near worst case scenario.”

CIBC raised $2.9-billion in new equity to stiffen its balance sheet last week. The new capital includes $1.5-billion from sophisticated investors Manulife Financial Corp., Caisse de dépôt et placement du Québec, Cheung Kong (Holdings) Ltd. and OMERS Administration Corp., who all presumably took a long, hard look at the bank’s books before parting with their cash.

Looking forward, Mr. Bilodeau picks two important themes — “we believe management will put a choke hold on its risk culture,” while “CIBC is transforming into one of the purest plays on Canadian retail and wealth management.”

The TD analyst rates CIBC a “buy” with an $80 target price.

Financial Post, Duncan Mavin, 26 January 2008

Analysts are calling for yet more disclosure from Canadian Imperial Bank of Commerce about its book of credit derivatives, after it emerged yesterday the bank likely has as much as another $25-billion of securities that are partly tied to the uncertain U.S. economy.

The investments -- which the bank says are not subprime-related -- are already in the hole for $750-million, though CIBC has taken no writedown on this book so far.

The bank has not confirmed the size of its non-subprime book of credit derivatives, but it has said the securities are backed by 11 financial guarantors --a term that has recently been used in reference to the much-maligned monoline-insurance industry.

It is believed the underlying assets are mostly in North America and include collateralized loan obligations (CLOs), commercial mortgage-backed securities (CMBSs) and corporate loans.

There was frustration among analysts that more information about all of CIBC's credit derivatives has not been forthcoming, after CIBC provided details of its book of subprime derivatives in December and this month.

"We do not have a handle on exactly what CIBC owns," said Andre-Philippe Hardy, RBC Capital Markets analyst, in a note to clients. The "inability to estimate losses" will continue to weigh on CIBC's stock price, he said.

"We do not adequately understand the nature and extent of CIBC's credit derivative exposure," added Mario Mendonca, Genuity Capital Markets analyst, in a note. "Still not sure we have the whole story."

CIBC has taken $3.3-billion in writedowns from its portfolio of subprime investments -- that number is expected to rise by at least another $1-billion, possibly by the end of the current quarter -- and the latest revelations have raised fears of more writedowns to come.

"The good news is that the underlying assets are not subprime-related and the value, to Dec. 31, had only declined by 3.5%," Mr. Mendonca said. The bad news is that most of the decline in the underlying assets occurred in the last two months of 2007 and things may have worsened since then, he added. The Genuity analyst estimates the fall in the value of the non-subprime derivatives could have reached $1.4-billion.

The information about the CIBC's book of non-subprime credit derivatives also raised concerns about the bank's exposure to troubled monoline insurers.

Most observers agree monolines are key to the global financial crisis because they have provided insurance to many of the banks that are embroiled in the subprime mess, including CIBC.

The near-collapse of one of the monolines -- ACA Financial Guaranty Corp. -- has forced CIBC to writedown $2-billion this quarter related to its subprime investments.

A bailout plan for the monoline industry led by U.S. regulators is apparently in the works, but there are few signs of anything concrete so far.

RBC Capital Markets, 25 January 2008

• In our January 24th report on CIBC, we highlighted the health of the financial guarantors as a key driver for the bank's future stock price.

• The outlook for financial guarantors is deteriorating, with today's downgrade of Security Capital from AAA to A by Fitch as the latest illustration of this point. However, there were media reports on January 23 that New York State's insurance regulators met with US banks to discuss a plan to raise capital for the bond insurers. At this stage, we do not know whether a government led bailout would succeed.

• CIBC's exposure to financial guarantors via hedged CDOs of RMBS is well known. CIBC has US$3.9 billion hedged with four AAA-rated guarantors, and US$551 million hedged with Ambac. CIBC also has US$1.5 billion (after writedowns of US$2.0 billion pre-tax) hedged with ACA.

• CIBC also disclosed on January 14 that it "has exposure to 11 financial guarantors where the underlying assets are unrelated to US residential real estate. The fair value of this exposure is approximately $750 million as at December 31, 2007."

• The fair value of the hedge represents how much CIBC was theoretically owed by financial guarantors at that time. It does not represent how much notional exposure CIBC has to financial guarantors.

• Based on conversations with the bank, we believe that, when the hedge was fair valued at $750 million, it implied markdowns of 3-4%, which would mean the notional exposure is $18-25 billion.

• We understand that the assets that are hedged are mostly Collateralized Loan Obligations and baskets of investment grade loans, with some Commercial Mortgage Backed Securities as well.

• We do not have a handle on exactly what CIBC owns; we know that CLOs and CMBS have not seen the same price declines as CDOs of sub-prime RMBS but, we also know that spreads have widened further since December 31, 2007.

• We believe that the inability to estimate losses will keep CIBC's multiple low as risk to profitability and book value estimates are high, in our view. A successful resolution of financial guarantors' capital issues would be positive for CIBC, but the timing and chances of success is still uncertain.
Financial Post, David Pett, 25 January 2008

It seems even $2.9-billion of new equity can not dispel the clouds gathered around Canadian Imperial Bank of Commerce.

For now, the new capital boosts the bank’s key capital adequacy ratio — the regulated amount of capital the bank must set aside. But with more subprime-related losses to come at CIBC, the pressure is not off the bank’s balance sheet yet, says Blackmont Capital analyst Brad Smith in a note to clients.

“A distinct negative” for the bank was Thursday’s news that U.S. monoline insurer Security Capital Assurance has been downgraded by ratings agency Fitch. CIBC has hedged much of its exposure to subprime investments with monoline insurers, a number of which are struggling.

“Based on CIBC’s recently updated monoline hedge exposures and our thorough analysis of key monoline insurers, we believe there is an increased probability that the bank has a $2.6-billion subprime hedge exposure to SCA,” Mr. Smith said in his note.

“If this proves correct, the announced Fitch downgrade and rising probability of [other ratings agencies] following suit could strain CIBC’s Tier 1 ratio and accelerate loss emergence,” he added.

Blackmont has a “sell” rating on CIBC. Mr. Smith lowered his target price for the bank from $68 to $66.