04 December 2009

CIBC Q4 2009 Earnings

TD Securities, 4 December 2009

Yesterday, the bank reported core cash FD-EPS of C$1.41 vs. TD Newcrest at C$1.25 and consensus at C$1.33.


Positive. The bank turned in a solid quarter as credit trends improved, which helped to deliver strong retail profits. One quarter is not a trend, but it is consistent with our suspicion that operating trends could start to build through 2010 as credit eases. We raised our 2010 estimates, but more importantly our standing C$6.90 number for 2011 looks more achievable. Our Target Price increases to C$75. The stock has already moved nicely, and we need to build a stronger fundamental case for 2010/2011 to argue that the stock is materially undervalued here. Maintain HOLD.


Card trends topping out. Following several quarters of material acceleration, losses in the cards portfolio turned down in Q4/09. This is consistent with 1) previous color from management 2) early delinquency trends and 3) our expectation that unsecured personal credit would be early to recover. It is too early to sound the all clear, but this underscores the potential for material earnings leverage from declining PCLs through 2010. Overall, commentary suggests that aggregate PCLs should be flat to down in 2010 (see below).

Retail still needs to accelerate. Reported NI was helped by the improvement in PCLs, and a modest lift in revenues. The expected decline in PCLs should help lift 2010. However, volume growth remains fairly modest at around 5%. We noted some slight lift quarter-on-quarter which is encouraging, and consistent with management commentary that they will accelerate businesses, but trends will need to strengthen further in 2010 to build the case that CM has a solid, competitive retail franchise; this will be difficult to do amid expected modest industry growth.

Structured products holding steady; may hold future promise. The bank's run-off portfolio of structured products turned in a modest net gain again this quarter and overall remain fairly steady (relative to the turmoil of 2008).

Over the coming 2-3 years, we see potential recoveries as these positions mature and/or credit markets continue to improve. Combined with the release of related RWAs, this dynamic can be materially favorable for the bank's capital position.

Results validate stock's recent move. The stock has recovered nicely in anticipation of a potential favorable turn in credit. We think it is warranted. We moved our estimates and Target Price up and we see some moderate upside, but we need a stronger case around the bank's core retail business to argue for materially higher levels.

Conference Call Highlights

• Acquisition strategy. The bank's primary opportunity at this time is to gain a top three standing in each of its core Canadian business lines. The bank continues to look at opportunities outside of Canada. The bank’s criteria include: 1) familiarity with the region potentially gained through an initial partnership 2) new pools of management talent 3) exposure to a different cycle/market. The bank has not, at this point in time, found any acquisitions that fit this criteria. This would appear to rule out the potential that they have identified and expressed an interest in AIB.

• PCL trends. U.S. CRE - PCLs expected to be below those of 2009 (C$102 million), U.S. leveraged finance - PCLs expected to be below those of 2009 (C$36 million), European leveraged finance - no material PCLs expected, Cards - PCLs are expected to be better than the elevated level of 2H09, Other Personal and Wholesale - should be better than 2009.

Quarterly Highlights (growth is year on year unless noted)

• Retail - better than expected bottom-line. Revenue was flat year-on-year, but improved sequentially on stronger Personal Banking volumes, flat margins and higher fees. Wealth Revenues also improved from Q3. NIE remain well controlled, but the biggest driver was the decline in PCLs related to improvements in the Cards book. NI was still down from Q4/08 on higher PCLs, but improved materially from Q3 levels. Volume trends remain relatively modest at +4.8%, but we note some lift from Q3 levels (+1.5%).

• Wholesale - moderating as expected. NI was down to C$124 million from C$179 million in Q3. Trading remained healthy, actually up slightly from Q3 on an adjusted basis, while advisory was down materially.

Operating Outlook. We have raised our 2010 estimates. The change reflects primarily a lower estimate for peak 1H10 credit costs consistent with the Q4 results and guidance. We continue to assume modest underlying volume growth, flat to slightly higher margins and moderating capital markets trends. Significant recovery/improvement in the bank's Retail and Wealth management revenues is likely the biggest potential upside relative to our numbers.
Financial Post, 4 December 2009

CIBC appears to be on an upswing coming out of a robust earnings week for Canada's big banks.

James Bantis, analyst with Credit Suisse, has upped his ratings and estimates for the bank, which has been one of the hardest hit during the recession.

"Assuming no further surprises, it appears that the worst has been largely priced into CIBC's valuation. Specific issues such as the oversized credit card portfolio, run-off loan portfolios, CRA tax dispute have been largely addressed and discounted by investors," Mr. Bantis said in a note to clients. "Turning around its struggling retail banking franchise (against larger and surging peers) remains management's number one priority and biggest challenge."

Retail Markets posted earnings of $474-million, an improvement after two quarters of disappointing results. Mr. Bantis also has concerns about the bank's "outsized" credit card portfolio of $14-billion and the fact that loan losses have risen 57% year-over-year.

"When the economy eventually recovers, it's not clear how easy it will be for CIBC to turn on the credit tap for growth as retail customers may have looked elsewhere during this cautious period," he said.

Still, loan loss provisions of $424-million were below Credit Suisse's forecasts ($475-million) Mr. Bantis noted the bank did see its gross impaired loans rise 15% sequentially to $1.91-billion.

Meanwhile, CIBC's operating EPS of $1.41 is also ahead of Mr. Bantis's forecast of $1.32.

Mr. Bantis has raised CIBC to Neutral from Underperform, while bumping his target price to $66 from $52. 2010 EPS estimates have also nudged higher, to $6 from $5.60.