Scotia Capital, 16 September 2008
Strategic Overview
• CIBC held an Investor Day on September 15, 2008 to review the strategic priorities of the bank going forward. Presenting at the Investor Day were Gerry McCaughey, President and CEO; Sonia Baxendale, Senior Executive Vice-President, CIBC Retail Markets; Richard Nesbitt, Chairman and CEO, CIBC World Markets; Tom Woods, Senior Executive Vice-President and CRO; and David Williamson, Senior Executive Vice-President and CFO.
CIBC Retail Markets
• CIBC is reinvesting in the bank's retail platform by expanding the branch network (opening 70 new branches by 2011) and extending banking hours on Saturday and Sunday in order to provide better service to customers. The incremental revenue lift expected from these initiatives was not addressed however; management stated that costs in CIBC Retail Markets were not expected to increase noticeably from either initiative and would be funded through a change in mix of the businesses.
• Credit quality remains solid as evidenced by the bank's Q3/08 loss ratio of 46 bp, however CIBC's large credit card portfolio is a potential area of concern. Management indicated that the portfolio has been trending at a loss ratio of 4.0%, only slightly above the bank's historical average. Management is anticipating a modest up-tick in overall loan loss provisions in 2009 within its target of 50 bp-65 bp.
CIBC World Markets - Target Annual Earnings - $300M-$500M
• The bank's target earnings for the restructured core business are $300 million to $500 million annually based on $1.5 billion in economic capital. In Q3/08 CIBC World Markets earned $58 million (excluding writedowns from the structured credit business but including other one-time items) less than the low end of the stated target. The contributions from key businesses such as real estate finance and merchant banking were below long term run rates and significantly below record levels in 2007. Therefore, with the natural pick up in those businesses the bank should easily achieve the low end of the targeted range going forward.
• The focus for CIBC World Markets going forward will be on lower risk businesses within its wholesale platform. For example, the bank intends to focus on client facing businesses as opposed to proprietary businesses where exotic products were typically originated and/or held and businesses that support platforms in CIBC Retail Markets such as wealth management. CIBC has also established a risk management team within CIBC World Markets in order to more closely monitor wholesale activities and facilitate dialogue with the corporate risk management team.
Canadian Banks' Exposure to Lehman Brothers Immaterial
• CIBC's mark to market exposure to Lehman Brothers net of collateral is immaterial at $25 million. The various positions CIBC had with Lehman will need to be re-hedged. The bank believes it may have the right to claim against Lehman for the cost of re-hedging.
• In terms of the other banks, BMO, NA, and TD did not quantify their exposure to LEH but indicated that exposure was not significant or nominal. RY indicated that it has reduced its exposure to LEH over the last few months, is well collateralized and is within its single name exposure limits which it did not disclose. BNS had a US$93 million credit line to LEH which was undrawn and has since been terminated. We expect the bank group has modest derivative exposure with LEH. There was no meaningful disclosure on AIG.
Recommendation
• Our 2008 and 2009 earnings estimates remain unchanged at $7.00 per share and $7.50 per share, respectively. Our share price target is unchanged at $80 representing 10.7x our 2009 earnings estimate.
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Strategic Overview
• CIBC held an Investor Day on September 15, 2008 to review the strategic priorities of the bank going forward. Presenting at the Investor Day were Gerry McCaughey, President and CEO; Sonia Baxendale, Senior Executive Vice-President, CIBC Retail Markets; Richard Nesbitt, Chairman and CEO, CIBC World Markets; Tom Woods, Senior Executive Vice-President and CRO; and David Williamson, Senior Executive Vice-President and CFO.
CIBC Retail Markets
• CIBC is reinvesting in the bank's retail platform by expanding the branch network (opening 70 new branches by 2011) and extending banking hours on Saturday and Sunday in order to provide better service to customers. The incremental revenue lift expected from these initiatives was not addressed however; management stated that costs in CIBC Retail Markets were not expected to increase noticeably from either initiative and would be funded through a change in mix of the businesses.
• Credit quality remains solid as evidenced by the bank's Q3/08 loss ratio of 46 bp, however CIBC's large credit card portfolio is a potential area of concern. Management indicated that the portfolio has been trending at a loss ratio of 4.0%, only slightly above the bank's historical average. Management is anticipating a modest up-tick in overall loan loss provisions in 2009 within its target of 50 bp-65 bp.
CIBC World Markets - Target Annual Earnings - $300M-$500M
• The bank's target earnings for the restructured core business are $300 million to $500 million annually based on $1.5 billion in economic capital. In Q3/08 CIBC World Markets earned $58 million (excluding writedowns from the structured credit business but including other one-time items) less than the low end of the stated target. The contributions from key businesses such as real estate finance and merchant banking were below long term run rates and significantly below record levels in 2007. Therefore, with the natural pick up in those businesses the bank should easily achieve the low end of the targeted range going forward.
• The focus for CIBC World Markets going forward will be on lower risk businesses within its wholesale platform. For example, the bank intends to focus on client facing businesses as opposed to proprietary businesses where exotic products were typically originated and/or held and businesses that support platforms in CIBC Retail Markets such as wealth management. CIBC has also established a risk management team within CIBC World Markets in order to more closely monitor wholesale activities and facilitate dialogue with the corporate risk management team.
Canadian Banks' Exposure to Lehman Brothers Immaterial
• CIBC's mark to market exposure to Lehman Brothers net of collateral is immaterial at $25 million. The various positions CIBC had with Lehman will need to be re-hedged. The bank believes it may have the right to claim against Lehman for the cost of re-hedging.
• In terms of the other banks, BMO, NA, and TD did not quantify their exposure to LEH but indicated that exposure was not significant or nominal. RY indicated that it has reduced its exposure to LEH over the last few months, is well collateralized and is within its single name exposure limits which it did not disclose. BNS had a US$93 million credit line to LEH which was undrawn and has since been terminated. We expect the bank group has modest derivative exposure with LEH. There was no meaningful disclosure on AIG.
Recommendation
• Our 2008 and 2009 earnings estimates remain unchanged at $7.00 per share and $7.50 per share, respectively. Our share price target is unchanged at $80 representing 10.7x our 2009 earnings estimate.
