Tuesday, July 15, 2008

Analyst Speculates on CIBC Takeover

  
Financal Post, David Pett, 15 July 2008

The possibility of more writedowns at CIBC could force the bank into another's hands, says John Aiken, analyst at Dundee Securities.

Following on the heels of the U.S. Federal Reserve's Fannie Mae and Freddie Mac intervention and the U.S. bank failure of IndyMac, Mr. Aiken said CIBC may be forced to raise common equity once again as a result of continued write-downs on its credit and liquidity exposure.

Mr. Aiken said CIBC is safe for now from needing to raise additional capital, noting it can withstand pre-tax charges of up to $2.5-billion. But with potential charges of roughly $4-billion to come, he believes CIBC would need more capital before all is said and done.

That won't be an easy task, he added, and could leave CIBC with possibly no other option than to be taken over by another bank.

"Should CIBC need to raise common equity, we believe it would be very difficult for the bank to gather additional public funding, given that it is currently trading well below the offer price of the previous offering and the fact that there is no guarantee that the write-downs have come to an end," he wrote.

"Should the regulator become concerned with its capital position and the bank is unwilling or unable to tap the market for incremental equity, CIBC could be forced into the hands of another financial institution as the best solvency alternative."

Mr. Aiken admitted that the process would require significant changes to the Bank Act and a considerable amount of political will, but told clients the benefit of allowing bank mergers in Canada would far outweigh the cost of losing one of the country's "Big 6" banks. .

The analyst said the most "politically-expedient method of salvaging CIBC", in the case that a common equity infusion was denied by the public market, would be a cross-pillar acquisition, most likely by Manulife Financial Corp.

"However, should CIBC fall into the hands of another suitor, it would be next to impossible for the government to stop the consolidation at that step, given the outsized assets and market capitalization that the new entity would have. Further, it would have a very significant advantage should insurance be allowed to be sold through the branches (which would be a likely concession that Manulife would demand for 'saving' CIBC)."
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The Globe and Mail, John Partridge, 15 July 2008 10:56 AM

Continuing woes at Canadian Imperial Bank of Commerce could trigger a new round of consolidation in Canadian financial services, a Bay Street analyst contends.

John Aiken at Dundee Securities Inc. said Tuesday that additional charges CIBC is facing as a result of its exposure to U.S. bond insurers and subprime mortgages could force the bank to try to raise additional common equity from an unwilling market.

“Should the regulator become concerned with [CIBC's] capital position, and the bank is unwilling or unable to tap the market for incremental equity, CIBC could be forced into the hands of another financial institution as the best solvency alternative,” Mr. Aiken said in a note to clients.

The most “politically expedient” solution would be for Ottawa to allow a so-called “cross-pillar” acquisition, with Manulife Financial Corp. as the most likely buyer, he said.

Manulife made an unsuccessful run at CIBC in 2002, when the bank's U.S. operations were in crisis, but was blocked by the federal government.

However, if CIBC was taken over by another rival, Mr. Aiken said, this would likely create such a large financial institution in terms of assets and market capitalization that it would be “next to impossible” for Ottawa.

“We freely admit that this is not as simple a process as we make it sound, requiring extensive changes to the Bank Act and a multitude of politically charged approvals, including the Minister of Finance, among many other hurdles,” he said. “However, we believe that allowing financial services consolidation would be much more beneficial to the Canadian financial services sector and economy as a whole than a losing one of the country's Schedule I banks outright.”

“Therefore, while not a probable event at present, we believe that the possibility of financial services consolidation is closer than most investors would allow and significantly closer than it was even three months ago.”

A CIBC spokesman declined to comment on Mr. Aiken's report.

CIBC has been hit much harder than other Canadian banks in the current credit crunch because of its exposure to the U.S. bond insurer and sub-prime mortgage crisis.

Mr. Aiken estimates CIBC will likely take $1.5-billion to $1.9-billion in additional charges related to the problems when it reports third-quarter results next month, on top of the $3.8-billion in after-tax hits it has taken in the past two quarters.

And there is no guarantee that the third-quarter hits will be the last of the charges, he added.

The charges over the past two quarters have “completely swamped” the $2.9-billion in common equity that CIBC raised in January in both a public stock offering at $67.05 a share and a private placement at $65.26, Mr. Aiken said.

Like other financial services stocks, CIBC has been hit hard over the past few months and was trading at $49.20 on the Toronto Stock Exchange Tuesday morning, down $1.95 from Monday's finish.

This would probably make it “very difficult for the bank to gather additional public funding,” Mr. Aiken said.
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