Thursday, August 28, 2008

CIBC Q3 2008 Earnings

RBC Capital Markets, 28 August 2008

CIBC's GAAP EPS of $0.11 were much better than our $(0.81) estimate, but core cash EPS of $1.65 was short of our estimate of $1.77.

• Writedowns of $885 million pre-tax on structured credit-related activities were less than our $1.5 billion estimate.

• The 9.8% Tier 1 capital ratio was in line with our estimate, as smaller than expected writedowns were offset by higher risk weighted assets to reflect credit risk in the bank's trading book.

• The 25% increase in provisions for credit losses versus Q3/07 was as expected.

• The shortfall in core earnings versus our estimate was from both retail and wholesale businesses.

We have revised our forward earnings estimates down to reflect the Q3/08 core EPS miss, lower expected profitability in CIBC World Markets to reflect lower risk appetite, and lower retail profitability. We lowered our core cash EPS estimates to $6.90 in 2008E and $7.15 in 2009E (down from $7.22 and $7.40, respectively). Our 12-month target price remains $62 per share. It is based on a P/BV multiple of 1.9x versus the 2.1x current multiple.

We maintain our Underperform rating

CIBC's stock is cheap relative to bank peers on a forward P/E basis (8.6x versus 10.0x) and we do not expect CIBC to need to raise capital or cut its dividend, but we do not believe that the stock will necessarily perform well against bank peers in the next 6 months.

• CIBC's exposures to structured finance assets and financial guarantors remain material, with little visibility on ultimate mark to market valuations. The exposure to financial guarantors, for example, remains $2.9 billion, in spite of over $800 million in incremental valuation adjustments taken during Q3/08.

• We expect retail banking growth to continue to lag the peer group, as was the case again in Q3/08. The 1% YoY revenue decline was worst of the banks that have reported so far, and net income was down 3%.

• Visibility on wholesale earnings is even cloudier than for peers given risk reduction initiatives, exposure to merchant banking assets (which likely need more buoyant equity markets to realize material gains) and U.S. commercial real estate finance, which would be facing a difficult revenue outlook.
Scotia Capital, 28 August 2008

• CM reported a decline in underlying cash operating earnings of 33% to $1.65 per share, below our estimate of $1.72 per share. Year-over-year comparisons were extremely difficult versus record earnings of $2.45 per share a year earlier. Earnings were weaker than expected at CIBC Retail Markets and CIBC World Markets due to weaker revenue.

What It Means

• Reported earnings were $0.13 per share, due to net charges totalling $1.52 per share. Total charges included $885 million ($596 million after-tax or $1.56 per share) on structured credit run-off activities, in line with expectations, and additional net gains of $14 million after-tax or $0.04 per share.

• CIBC Retail Markets earnings declined 7% from a year earlier on a comparative basis (excluding Visa gain) with CIBC World Markets declining 67% from a record quarter a year earlier.

• Revenue declined 13.8% with expenses declining 10.4% from a year earlier for negative operating leverage of 3.4%.

• Maintain a 2-Sector Perform rating on shares of CM as the P/E discount is offset by expected lower near term and longer term growth prospects.
Reuters, Lynne Olver, 28 August 2008

More charges lie ahead for Canadian Imperial Bank of Commerce even as it cuts exposure to risky U.S. securities and hedges that prompted multibillion-dollar writedowns in the past year, analysts say.

CIBC shares had rallied 5 percent on Wednesday after reporting less severe third-quarter charges than expected, and its stock gained a further 4.7 percent Thursday, closing at C$62.90 a share, after other Canadian banks reported strong quarterly profits.

CIBC, the No. 5 Canadian bank, posted a profit of C$71 million, the lowest among Canada's large banks.

It took a pre-tax hit of C$855 million on structured credit, mostly related to U.S. bond insurers, adding to a string of writedowns in previous quarters for the sliding value of sub-prime mortgage securities.

"We are reducing our estimates for the fourth quarter to include an assumption of another C$1 billion charge," BMO Capital Markets analyst Ian de Verteuil said in a research note on Thursday.

Mario Mendonca, analyst at Genuity Capital Markets, said he still sees downside risk in CIBC stock, if investors are pricing in belief that structured credit writedowns are over.

Settlements between U.S. bond insurers and their various counterparties "are likely to result in still further charges -- likely over C$1 billion," Mendonca said in a research note.

Gerry McCaughey, CIBC's president and chief executive, said on a conference call late Wednesday that recent settlements involving U.S. bond insurers -- also known as financial guarantors or monolines because they specialize in a single type of insurance -- were positive.

"Developments within the financial guarantor industry over the past few weeks have generally been encouraging and positive, with several corporations announcing results in terms of restructurings and/or tariffs," McCaughey said.

He also said rating agencies have generally been positive.

"We are actively managing our structured credit positions and continue to assess all opportunities to reduce contingent risk in this portfolio," McCaughey said.

In early August, CIBC and other institutions reached a deal with ACA Capital Holdings, parent of bond insurer ACA Financial Guaranty, to terminate contracts in exchange for cash.

ACA was the first bond insurer to run into trouble when its credit ratings were cut to junk status in December.

CIBC has contracts with other bond insurers as well.

"We expect further write-downs if credit markets remain under pressure ... but the bank remains well capitalized to handle further material hits," TD Securities analyst Jason Bilodeau said in a report.

Even if most of CIBC's writedowns are behind it, many analysts wonder where the bank's growth prospects will come from, particularly with Canadian economic growth slowing.

CIBC's per-share profit excluding its big charges fell short of market expectations for C$1.75.

The latest results "provided ample evidence of the continuing struggle facing management in their effort to manage down their legacy credit derivative exposures while defending their domestic retail market share," Blackmont Capital analyst Brad Smith said in a research note.
Financial Post, John Greenwood, 28 August 2008

Bay Street breathed a sigh of relief after Canadian Imperial Bank of Commerce yesterday reported lower-than-expected writedowns on money-losing credit investments, fuelling expectations that the storm in credit markets is finally abating.

Compared with its Canadian peers, CIBC has taken the worst pummelling from exposure to risky derivative debt securities, announcing nearly $7-billion in charges over the past nine months. Analysts had predicted the country's fourth-largest bank would follow suit with further charges of up to $2-billion. Instead, the number was a comparatively modest $885-million.

And after two consecutive quarterly losses, CIBC moved into the black. For the three-month period ended July 31, it had net income of $71-million or 11¢ a share, a drop of 91% from the same period last year.

The earnings were slightly below consensus estimates "but clearly people think it could have been much worse, and the consensus view is that things are improving for CIBC," said John Stephenson, a portfolio manager at First Asset Funds Inc., which has about $1.5-billion under management. Mr. Stephenson doesn't own any CIBC stock.

"I think, generally speaking, for the Canadian banks [problems from subprime-related investments] are pretty much passed," he said.

Shares in the bank had their best day in nearly five months, surging $3.04 to $60.10 and sparked buying in the other big Canadian banking stocks.

Still, some analysts warned it may be far too soon to declare that the credit crunch is waning.

According to Genuity Capital Markets analyst Mario Mendonca, CIBC still has a distance to go before it resolves its problems with so-called structured credit derivatives.

"I don't think everyone appreciates they are not done with their settlements," said Mr. Mendonca, who anticipates a further $1-billion in writedowns in the next few quarters.

On the retail side, CIBC had a profit of $572-million, down 4% from last year, mainly because of lower treasury revenue allocations and higher loan losses.

On the wholesale and corporate banking side, CIBC World Markets reported a loss of $538-million, including a loss of $596-million associated with structured credit investments.

"While the current environment continues to be challenging, CIBC's franchise is solid," Gerald Mc-Caughey, the chief executive, said in a statement. "CIBC's capital position is strong and our core businesses are well-positioned for better performance and growth."

On a conference call with analysts, bank executives said several times that despite the ongoing difficulties with structured credit products, the bank's tier 1 capital ratio remains strong at 9.8%.

Like many of its U. S. and European competitors, CIBC is paying the price for bets on risky credit products that it made during the credit bubble. The bank attempted to hedge that exposure by taking out insurance with bond insurers called monolines, but in the wake of the credit crunch many of those monolines are struggling and expected to fail, leading many to question their ability to fulfill their contracts.

"There's certainly a lot more room for writedowns," said one analyst, adding that the question hinges mostly on what happens to the U. S. housing market.

In recent months CIBC has been cutting back its credit-derivatives operations and selling off assets underlying its structured investment trusts.
The Globe and Mail, Tara Perkins, 27 August 2008

Canadian Imperial Bank of Commerce sparked a rally in its shares Wednesday by managing to eke out its first profit of the year, raising hopes the bank had finally put the bulk of its troubles with risky investments to bed.

The domestic bank most battered by the U.S. subprime mortgage crisis posted a $71-million third-quarter profit that missed analysts' expectations and were a 91-per-cent tumble from earnings of $835-million one year earlier. The results included an $885-million writedown on risky U.S. exposures.

But CIBC's stock popped because the writedown was less severe than many analysts had expected, increasing expectations CIBC is turning a corner and won't need to raise equity.

The stock closed up 5.33 per cent on the Toronto Stock Exchange, and traded as high as $61.19 during the day.

Gerald McCaughey, who stepped in as chief executive officer three years ago with a mandate to extract risk in the wake of CIBC's embarrassing Enron losses, said Wednesday that the quarter's results were hurt by the difficult environment and the bank's continuing efforts to exit risky areas in favour of concentrating on consumer banking.

“Our capital position is strong and prudent and will remain an area of focus during this period of uncertain market conditions,” he said, adding that the bank made progress in “getting back on track to deliver consistent and sustainable performance.”

CIBC has taken $6.8-billion in writedowns over the last three quarters.

Many analysts had been expecting a higher degree of pain for the bank this quarter. Dundee Securities Corp. analyst John Aiken upgraded his rating on CIBC's stock to “neutral” Wednesday, noting that he had expected a writedown of more than $1.5-billion.

Merrill Lynch analyst Sumit Malhotra said: “To the extent that this diminishes the probability of another equity raise, this will be seen as a positive.”

CIBC tapped the market for $2.9-billion earlier this year to shore up its balance sheet.

Only a tiny proportion of this quarter's writedown came from the obvious culprit, U.S. subprime mortgage exposure, the issue that's caused CIBC massive headaches in recent quarters and was expected to do so again this quarter.

Rather, more than 85 per cent of the $885-million hit came from collateralized loan obligations and corporate debt securities that are not directly tied to subprime, but are guaranteed by bond insurers.

That had a couple analysts fearing that some writedowns have been effectively delayed by market events but are still likely.

Near the close of the quarter, Security Capital Assurance Ltd. (SCA) – one of the bond insurers that guarantees a significant portion of CIBC's risky investments settled with another bank, Merrill Lynch in a deal that gave the bank about 20 cents on the dollar to cancel its contracts.

That gave bond insurers a lift by raising hopes they would be able to convince more banks to take steep discounts to settle their exposure.

CIBC is in discussions with some bond insurers, and when it strikes deals, “the subprime charges will be large, and we suspect that's next quarter,” Genuity Capital Markets analyst Mario Mendonca said.

Bond insurers still owe CIBC about $2.9-billion. The bank would only lose the full amount if all of the bond insurers it is exposed to fail and it receives nothing for its contracts.

Mr. McCaughey said developments with respect to bond insurers in recent weeks have generally been positive.
Financial Post, John Sturgeon, 27 August 2008

Canadian Imperial Bank of Commerce reported its first profit in three quarters on Wednesday, but still took a massive charge from the bank's exposure to securities tied to the reeling U.S. subprime residential mortgage market.

CIBC said earnings fell 91% year-over-year to $71-million (11 cents a share), compared with $835-million ($2.31) in the same period of 2007.

Profit was squeezed by an $885-million before-tax loss from its structured credit business. "Problems originating in the U.S. subprime mortgage market last year continued to impact the conditions for credit and liquidity globally," the bank said.

But the pre-tax loss was much lower than expected, according to Dundee Capital Markets analyst John Aiken, who had called for writedowns to range between $1.5-billion and $1.9-billion.

The news lifted CIBC shares almost 5%, or $2.74 to $59.80 in early trading on the Toronto Stock Exchange on Wednesday.

"This should relieve much of the near-term concerns regarding its balance sheet and shift valuation more towards its earnings outlook," said Mr. Aikens in a morning note to clients. He raised his rating on CIBC shares from 'sell' to 'neutral.'

Mr. Aikens added a caution, however: "We have not waded all the way through [CIBC's] various counterparty and structured credit related disclosures yet, but note that the bank does remain exposed to additional potential writedowns."

Excluding the structured credit charge and other one-time items, diluted earnings came in at $1.63 per share, still below Dundee's estimate of $1.72. The consensus view among analysts was slightly higher, at $1.74 earnings per share.

"Our results this quarter were affected by the volatile, and generally difficult, environment that persisted over much of the third quarter, as well as by the impact of our ongoing run-off activities and the refocusing of our core businesses, particularly in CIBC World Markets," said Gerald McCaughey, CIBC's chief executive.

CIBC is by far the worst afflicted among Canada's big banks by the collapse of the U.S. subprime mortgage business in the past year, taking a total of $7.58-billion in writedowns related to the bank's exposure in the market. The bank took $2.48-billion in writedowns in the last quarter.

A $1.75-billion lawsuit filed by Canadian shareholders in late July asserts that the bank invested as much as $11-billion in hedged and unhedged investments in the market.

CIBC World Markets reported a net loss of $538-million tied to structured investments, the bank said.

On the plus side, CIBC said it further reduced notional exposure to deteriorating financial guarantors and bond insurers by about $3-billion "through a combination of the termination and amortization of credit derivative contracts."

Still, market and economic conditions relating to the financial guarantors may change in the future, "which could result in significant future losses," the bank said.

In a move to further de-leverage itself of U.S. exposure, CIBC has sold most of its American investment banking and trading businesses to Oppenheimer Inc. over the three quarters, it said, prompting an $80-million charge. Further asset sales located in the U.K. and Asia to Oppenheimer will close in the fourth quarter, CIBC said.

Difficult market conditions also hurt the bank's retail business, historically its strongest component. CIBC Retail Markets reported net income of $572-million, down 4% from a year ago. Retail loan losses totalling $196-million were partly to blame, CIBC said.

"Overall, CIBC's retail business remains well positioned. CIBC achieved strong volume growth and has maintained market share ... though CIBC is taking a measured approach to credit given the current environment," the bank said.