26 February 2010

CIBC Q1 2010 Earnings

Scotia Capital, 26 February 2010

• CM reported a decline in cash operating earnings of 1% to $1.65 per share above our estimate and consensus due to higher net interest margin and stronger-than-expected results from wholesale with trading revenue flat QOQ. ROE was 22.5% with RRWA of 2.21%.


• CIBC Retail Markets earnings declined 9% YOY to $529M due mainly to loan loss provisions increasing 31%, but increased 12% sequentially. CIBC World Markets earnings were surprisingly strong at $181M, increasing 23% from a year earlier and 37% from the previous quarter.


• We are increasing our 2010 and 2011 earnings estimates to $6.40 per share and $7.20 per share from $6.05 per share and $7.00 per share, respectively, due to the improvement in net interest margin and higher level of earnings from World Markets. We are increasing our 12-month share price target to $80 from $75 based on higher earnings.

• We are upgrading CM to a 2-Sector Perform from a 3-Sector Underperform due to stabilization of wholesale platform, continued run-off in the structured credit portfolio and slight improvement in revenue outlook in Retail Markets.
Veritas Investment Research, 26 February 2010

Q1 results were a step in the right direction for CIBC, with the bank taking steps towards delivering on the operating and credit recovery that Veritas considers already priced into the stock at $70. Reported earnings were $652M [compared to $644M in Q4-F09], and adjusted earnings of $654M were down 1.7% against adjusted earnings a year ago though up 13.5% against Q4. One-time items this quarter netted to between $2M and $20M, but the gross one-time items were material and necessarily complex – gains on improvements in sub-prime valuations and monoline spreads, further complicated by steps taken by CIBC to unwind its nettlesome sub-prime and non sub-prime exposures. The case for caution on CIBC is nevertheless compelling. Veritas remains concerned about the potential performance of the structured credit run-off book in another downturn. Quarter-in, quarter-out through the recovery, the $13B CLO portfolio and its underlying components continue to migrate while the aftershocks of the credit crunch – such as potential litigation from the Lehman estate – and the aftershocks of Enron continue to reverberate at CIBC. Veritas concludes that CIBC’s first quarter was positive in the sense that it was the second positive loan loss quarter in a row, the retail business may have bottomed out, and CIBC World Markets continues to generate above expectation earnings. Investors must decide, however, whether CIBC’s P/E discount to peers compensates for the following risks: the structured credit overhang, potential for capital markets earnings normalization, credit risk on cards and a few high-risk, high yield loan portfolios, and a few sharp objects still in its path.