Wednesday, January 09, 2008

CIBC Executive Management Changes

Financial Post, Jonathan Ratner, 9 January 2008

Shares of U.S. monoline financial guarantors such as Ambac Financial Group Inc. and MBIA Inc., which guarantee that bond principal and interest are paid when an issuer defaults, continued their descent on Tuesday. CIBC followed as it has $8.1-billion in known subprime related monoline hedge exposure and investors feared more may emerge.

There has been no shortage of negative news surrounding the industry recently, Blackmont Capital analyst Brad Smith told clients in a note. Speculation regarding higher non-subprime collateralized debt obligations (CDOs) continues to climb, analysts are cutting their earnings estimates, more shareholder lawsuits are emerging, and news surfaced that regulators have urged Warren Buffett’s Berkshire Hathaway Inc. to get into the monoline market.

“While still grappling with assessing the subprime hedge exposure, investors may need to brace for additional stresses in the event CIBC has hedged other non-subprime credit exposures through the monoline insurers,” Mr. Smith told clients in a note.

The bank’s disclosed subprime credit exposures represented just 13% of the aggregate notional value of its written credit default options as of Oct. 31, 2007, and the active writing of non-subprime credit protection by monoline insurers means CIBC may face more stress if global credit markets deteriorate further, he added.

Investors need more disclosure from the bank so they can better assess the risks and rewards, Mr. Smith said. But until this is provided by the bank and the monoline situations gets clearer, he is keeping CIBC at a “sell” with a $65 price target.
The Globe and Mail, Tara Perkins & Sinclair Stewart, 8 January 2008

When bond insurer ACA Capital was put on watch for a possible rating downgrade by Standard & Poor's in early November, Canadian Imperial Bank of Commerce CEO Gerry McCaughey knew his problems had just become much worse.

He had already been caught off guard in May when it emerged his investment bank, the once-celebrated CIBC World Markets, had brought it more than $10-billion (U.S.) worth of exposure to the risky U.S. subprime real estate market. Worse yet, $3.5-billion of it was hedged with one single shaky bond insurer, ACA Capital, whose financial condition was deteriorating.

CIBC's investment bank had wandered so far off the course Mr. McCaughey knew he had to shake up senior management. Yesterday, he pulled the trigger, parting ways with two of his top lieutenants to clear the way for some new recruits with reputations for being staid and able to make tough decisions.

Leaving are chief risk officer Ken Kilgour and Brian Shaw, who has been running CIBC's investment banking division. CIBC's current chief financial officer, Tom Woods, is taking over as chief risk officer.

Coming in are Richard Nesbitt, the head of the TSX Group Inc. and one of Mr. McCaughey's best friends, and David Williamson. They will be made head of CIBC World Markets and chief financial officer respectively.

Mr. McCaughey will be staying in his role despite the pressure he's been facing. He took the top job at CIBC in 2005, just as it was cleaning the slate on its Enron exposure.

He has staked his reputation on making it a less risky bank and thought he'd largely accomplished the task before the subprime issue arose.

Analysts had previously decried the lack of internal candidates for the CEO's job at the bank, and some were speculating yesterday that Mr. Nesbitt might one day be a contender.

Reaction to the management reorganization was generally positive, although some analysts noted that it will not solve the bank's brewing subprime issues.

CIBC suggested in December that it might have to take a $2-billion writedown this quarter as a result of its exposure to the U.S. subprime mortgage market, in addition to $978-million (Canadian) in charges it has already announced.

"CIBC needed to bolster its management team following the bank's [subprime] calamity, and we believe the addition of material 'external' bench strength will allow the bank to move beyond its current trials," BMO Nesbitt Burns analyst Ian de Verteuil wrote in a note to clients.

The changes show that the board is not taking the current situation lightly, wrote Dundee Capital Markets analyst John Aiken, adding that they do little to change the current predicament the bank faces.

Yesterday's shakeup wasn't the first move Mr. McCaughey has made in recent months in an effort to prevent a recurrence of the bruising the bank is taking on subprime. He scaled back CIBC's structured credit operations, replaced the head of debt markets, began exiting European leveraged finance and sold CIBC's U.S. investment banking division.

Genuity Capital Markets analyst Mario Mendonca said the current problems won't dissipate until CIBC fences in its subprime exposure by either entirely hedging it or writing it down, and also stated that its future earnings power has not been significantly eroded.

In addition to the new executives, CIBC said yesterday that is nominating Nick Le Pan, the former head of Canada's banking regulator, and Bob Steacy, a retired chief financial officer of Torstar Corp., to its board.

Bob Astley, who was the CEO of Clarica Life Insurance when Mr. Williamson was its CFO, said yesterday that CIBC's new CFO is "one of the most straightforward and trustworthy people I've ever met.

"He has a very restrained ego, he's not a big ego kind of guy," Mr. Astley added.

Toronto securities lawyer and corporate governance specialist Peter Dey hired Mr. Williamson as chief executive of Atlas Cold Storage Income Trust after the company was hit by an accounting scandal.

"I think he's a terrific guy, and I think it's a terrific appointment [at CIBC]," Mr. Dey said. "David is a guy that, I think, responds to a challenge, and clearly CIBC has some challenges."

Mr. Dey added that these new additions to CIBC's team "will raise the tone at the top."

Stop the bleeding: CIBC witnessed big changes in its upper ranks a few years ago in the wake of the $ 2.4billion ( U. S.) Enron settlement. Now, facing an even larger writedown over U. S. subprime mortgage exposure, itís saying goodbye to the head of CIBC World Markets and its chief risk officer.

Richard Nesbitt, a friend and former colleague of CIBC chief Gerry McCaughey, was chief executive officer of TSX Group Inc. until yesterday morning. His new job? Steering the brokerage clear of the troubles that continually undermine the parent.

Accountant David Williamson, 47, is the new chief financial officer. Companies he turns his hand to ñ including Atlas Cold Storage and Clarica Life Insurance ñ tend to be coveted by others and taken over.

Nick Le Pan, 56, is the former head of the Office of the Superintendent of Financial Institutions, which regulates the banks. But he most recently made headlines as the author of a report highlighting the shortcomings of the RCMPís ability to investigate securities fraud cases

Rounding out CIBC's bid to keep an eye on the details is Robert Steacy. He is an accountant who toiled for 25 years at Torstar Corp. before retiring as CFO in 2005.
The Globe and Mail, Virginia Galt & Tara Perkins, 7 January 2008

Canadian Imperial Bank of Commerce president and chief executive officer Gerry McCaughey has shaken up the bank's executive ranks in the wake of recent problems related to CIBC's subprime exposure.

As part of the re-organization, Mr. McCaughey has recruited TSX Group chief executive officer Richard Nesbitt to take on a new role as CEO of CIBC World Markets.

Tom Woods, currently chief financial officer of CIBC, becomes chief risk officer, effective immediately.

And David Williamson, formerly president and CEO of Atlas Cold Storage and CFO of Clarica Life Insurance, will be joining CIBC as chief financial officer, effective this week, the bank said.

Mr. Nesbitt, who served as CEO of the TSX Group Inc. from 2004 to 2007, will join CIBC on Feb. 29.

As part of the reorganization, Brian Shaw, CEO of CIBC World Markets, and Ken Kilgour, chief risk officer, will be leaving CIBC.

"We are pleased to have Tom Woods leading our risk function," Mr. McCaughey, said in a statement.

"Tom is a seasoned professional with deep knowledge and understanding of our risk profile and our strategy of consistent and sustainable growth," he said.

"Richard Nesbitt and David Williamson are talented and respected executives who share CIBC's vision of creating shareholder value by delivering consistent, solid and sustainable growth over time. We are pleased that they will be joining CIBC."

In December, CIBC raised the possibility that it could take another $2-billion (U.S.) in charges this quarter as a result of its exposure to the U.S. subprime mortgage market. That's in addition to $978-million (Canadian) in charges that had previously been announced. Some analysts believe the future writedowns will surpass $2-billion.

In addition to shaking up the executive ranks, CIBC announced Monday that it will nominate Nicholas Le Pan, former superintendent of financial institutions, and Robert Steacy, retired CFO of Torstar Corp., for election as members of CIBC's board of directors.

CIBC's large exposure to subprime has caused some analysts and investors to question the credibility of the bank's executives and directors, and has been a particular problem for Mr. McCaughey, who took over as CEO in the summer of 2004 right as the bank took a multi-billion dollar hit as a result of Enron. One of Mr. McCaughey's top priorities became taking risk out of the bank.

Genuity Capital Markets analyst Mario Mendonca wrote in a note to clients that he sees the management changes as "a positive first step in the three-step process required to allow [CIBC] to trade on its future earnings power rather than solely on the subprime exposure."

The other steps are to put a fence around the exposure, and to provide comfort that future earnings power has not been significantly eroded, he wrote.

The most important change, he said, is the appointment of Mr. Williamson as CFO. Mr. Williamson joined Clarica 17 months before it was sold, and joined Canada Life nine months before it was sold. He joined Atlas Cold Storage two and a half years before it was sold, Mr. Mendonca said.

"In highlighting Mr. Williamson's track record for joining companies that are subsequently sold, we are not suggesting that [CIBC] is on the selling block," he wrote. "Instead, we are suggesting that Mr. Williamson's primary contribution to the bank may be one of selling any number of large business units within the bank, including World Markets. If on the other hand, cross-pillar mergers are permitted, Mr. Williamson's insurance background could prove very valuable in ther merger or [CIBC] and one of Canada's large insurers."

Edward Jones analyst Craig Fehr said Monday's announcements were "a necessary move" for the bank. "It's no secret that their risk management has been called into question," he said, adding that these changes signal to investors that CIBC is serious about managing risk.

He applauded the decision to bring some fresh blood to the bank. "I think replacing the head of the wholesale business with an outsider brings in a new perspective," he said.

"It's tough to say if it's sufficient at this point," he said. "It's a step in the right direction."

John Aiken, an analyst at Dundee Securities, said in a note to clients that he was "one of the many who believed that additional management changes at CIBC were necessary after the apparent disruption in CIBC's risk management policies that resulted in incremental, outsized exposure to U.S. subprime real estate.

"However, after already cleaning house not too long ago, CIBC must be very careful given that [it does] not necessarily have the same management depth as some of its peers," he added.

"We believe that these executive changes are a harbinger of additional changes, particularly in World Markets given Richard Nesbitt's background and history at both TSX Group and HSBC Securities Canada," he said. "While the management changes will likely be viewed positively by the market, as it demonstrates that the board is not taking the current situation lightly, we note that it does little to change the current predicament that CIBC faces."

Monday's moves are not the first Mr. McCaughey has made as a result of the subprime issue. He sold off the bulk of CIBC's U.S. investment banking business this fall, and made changes in the lower levels, including replacing the head of debt markets.

In announcing Mr. Nesbitt's resignation as CEO of TSX Group, TSX chairman Wayne Fox said Mr. Nesbitt had effectively led tremendous change at his organization.

"He leaves behind a strong management team that will continue to execute on the organization's growth strategy as it has in the past," Mr. Fox said in a statement.
Financial Post, Jonathan Ratner, 7 January 2008

CIBC’s announcement that it has lured TSX Group Inc. CEO Richard Nesbitt to head up its investment banking division, CIBC World Markets, accompanies several other senior management changes at the bank. As of Jan. 10, David Williamson, who has served as CEO of Atlas Cold Storage and Chief Financial Officer of Clarica Life Insurance, becomes CFO. CIBC’s new Chief Risk Officer, Tom Woods, previously served as the bank’s CFO.

Dundee Securities analyst John Aiken said he was one of many that believed more management changes were needed at CIBC after an apparent disruption in its risk management policies led to an “incremental, outsized exposure to U.S. subprime real estate.”

But given that the bank completed another house cleaning not so long ago, “CIBC must be very careful given that they do not necessarily have the same management depth as some of its peers,” he told clients in a note.

Given Mr. Nesbitt’s background and history at TSX Group and HSBC Securities Canada, more changes may be in the works at both World Markets and CIBC, he added.

And while the market may like the changes as a sign that CIBC’s board is serious about the company’s recent woes, the problems remain.

Mr. Aiken believes CIBC’s ultimate exposure to U.S. subprime real estate investments will likely be more than US$2.4-billion, which represents roughly $4.75 per share in charges.

“Consequently, we believe that CIBC’s valuation will continue to be driven by its balance sheet and any potential positives stemming from the executive changes will be overshadowed in the near term.”

He continues to rate the shares a “market underperform” with a $65 price target.