03 March 2006

CIBC Upgraded at RBC CM

RBC Capital Markets, 3 March 2006

We are upgrading our rating on CIBC to Sector Perform from Underperform, raising our price target to $84 from $81 and increasing estimates.

Investment Opinion

Raising Estimates and Price Target. We are raising our 2006 EPS estimate from $6.10 to $6.23, and for 2007 from $6.50 to $6.70. The estimate increases reflect lower expected cost and credit loss levels. We are holding our target P/E at 12.5x, a ½ multiple below our sector target P/E to reflect CIBC’s historical discount and its limited growth profile. Our new $84 target warrants the upgrade to a Sector Perform rating, on our analysis.

Expense Cuts Improve Operating Leverage. Although CIBC’s negligible revenue growth still lags the peers, expenses dropped 3.5% in Q106 to generate 4% positive operating leverage. CIBC’s credit loss was also below/better than estimates this quarter, and is poised to hold at or below consensus levels this year. Last, CIBC’s capital has returned to normal, and while no dividend increase is expected during Q2, we believe there is high probability both programs will re-commence in Q306.

Q106 Headline EPS 9% Above Consensus, Underlying ~3% Above. CIBC’s $1.63 cash EPS reported compared very favourably to our RBCCM estimate of $1.54 and consensus at $1.49. As with other banks in Q106, the beneficial, but cyclical, trading and loan losses assisted. Using the consensus loan loss and our trading estimate, underlying EPS was ~$1.53, 4¢ over consensus, in line with our run-rate expected for 2006.

Trading & Lower Loan Loss Helped by ~11¢. CIBC’s lower-than-expected loan loss at $166MM versus our $200MM estimate ($208MM consensus) was worth ~ 7¢/share. Another $0.04 versus our estimate is explained by CIBC’s higher-than-expected trading revenue at $246MM versus our $214MM estimate (no consensus available).

Valuation. Our new $84.00 price target is set at 12.5x our 2007 cash EPS estimate of $6.70 (up from $6.50). Our target P/E for CIBC indicates a 4% discount to our target P/E for the bank sector to reflect CIBC’s lower revenue growth profile. We have factored mid-single-digit earnings growth over the next two years, roughly in line with our estimated loan andrevenue growth for the bank. We expect that the $250 million in expense saves will be realized roughly half in 2006 ($0.25) and half in 2007. In our view, the primary risk remains revenue shortfall, as the bank will be focusing on cost cuts rather than revenue growth. Our price target is indicated at ~2.86x our estimated book value of $29.34 (as at Jan 31/07).