Scotia Capital, 26 August 2010
Event
• CIBC (CM) reported an increase in cash operating earnings of 22% YOY to $1.66 per share beating expectations due to surprisingly strong trading revenue/wholesale earnings and slightly higher security gains. Operating ROE was 21.5% with RRWA of 2.39%.
Implications
• Wholesale Banking operating earnings declined 33% YOY to $123 million, but remained surprisingly strong against $134 million in the previous quarter due to resilient trading revenue (lower exposure to fixed income trading).
• CIBC Retail Markets earnings increased 40% YoY and 23% QoQ to $604 million. Retail earnings were boosted by treasury allocation and lower loan losses.
Recommendation
• We have increased our 2010 earnings estimate to $6.40 per share from $6.15 per share due to the beat this quarter and solid retail banking results. Our 2011 earnings estimate remains unchanged at $7.00 per share. Our one-year share price target is unchanged at $80 per share. We maintain our 2-Sector Perform rating.
Items of Note
• Reported cash earnings were $1.55 per share, including net one-time charges of $0.11 per share. One-time items included a loss of $138 million ($96 million after-tax or $0.25 per share) on structured credit run-off activities and a reversal of $76 million ($53 million after tax or $0.14 per share) of general provisions.
Retail Markets Earnings Improve
• Earnings at CIBC Retail Markets were $604 million, an increase of 40% year over year, which were boosted by treasury allocation and lower loan losses. Other Retail Markets revenue (assisted by treasury allocation) was $40 million versus a loss of $54 million the previous quarter, representing a positive $94 million sequential swing in revenue (after-tax $64 million or $0.16 per share).
• Specific LLPs declined to $304 million from $417 million a year earlier and from $334 million in the previous quarter.
• Retail Markets revenue increased 6.6% with non-interest expense increasing 3.2% for positive operating leverage of 3.4%. Wealth Management revenue increased 6%, with FirstCaribbean revenue declining 17%. Wealth Management and FirstCaribbean represented 14% and 6% of Retail Markets revenue, respectively.
• Average loans & acceptances increased 4% YOY and 2% QOQ to $215.2 billion.
• Deposit and payment fees declined 3% year over year to $194 million. Card fees were $72 million compared with $83 million in the previous quarter and $80 million a year earlier.
• Mutual fund revenue, which is contained in Wealth Management revenue, increased 13% from a year earlier to $188 million. Mutual fund assets (IFIC) increased 7.6% YOY to $46.2 billion. Investment management and custodian fees increased 14% from a year earlier to $117 million.
Canadian Retail NIM Declines Sequentially
• Retail net interest margin (NIM) declined 1 bp sequentially but increased 2 bp from a year earlier to 2.79% (as a percentage of average loans and acceptances).
Overall Net Interest Margin
• The overall bank net interest margin declined 7 bp sequentially but improved 7 bp from a year earlier to 2.05%.
CIBC Wholesale Banking
• CIBC Wholesale Banking operating earnings were surprisingly strong at $123 million (excluding structured credit run-off) due to resilient trading revenue. This compares to $185 million a year earlier and $134 million in the previous quarter. Corporate and investment banking revenue declined to $146 million from $232 million a year earlier but increased from $132 million the previous quarter.
Underlying Trading Revenue Surprisingly Resilient
• Trading revenue (excluding structured credit run-off) was very strong given the difficult trading environment particularly in fixed income. Trading revenue actually increased sequentially to $181 million versus $150 million in the previous quarter although declined from $219 million a year earlier. Interest rate trading was surprisingly resilient at $41 million versus $60 million in the previous quarter and $81 million a year earlier.
Capital Markets Revenue Stable
• Capital markets revenue was $216 million versus $207 million in the previous quarter and $254 million a year earlier.
• Underwriting and advisory fees were $108 million, increasing 24% from $87 million the previous quarter but declining 18% from $132 million a year earlier.
Security Gains High
• Security gains (AFS/FVO) included in operating earnings were $52 million or $0.09 per share versus $37 million or $0.06 per share in the previous quarter and $32 million or $0.05 per share a year earlier.
• The security surplus increased to $629 million from a surplus of $386 million in the previous quarter and a surplus of $270 million a year earlier.
Corporate and Other Business Segment
• The corporate and other segment recorded a loss of $37 million versus a loss of $16 million in the previous quarter and a loss of $52 million a year earlier.
Higher Securitization Net Income
• Securitization revenue increased in Q3/10 to $150 million from $120 million in the previous quarter and from $113 million a year earlier. The net income statement securitization impact was a gain of $48 million in Q3/10 versus a loss of $7 million in Q2/10, representing a positive swing of $0.09 per share sequentially.
Loan Loss Provisions Decline
• Specific LLPs declined to $297 million or 0.64% of loans versus $316 million or 0.71% of loans in the previous quarter and from $422 million or 0.97% of loans a year earlier. Retail LLPs were $304 million, with wholesale LLPs at $29 million, and the corporate segment recording a $36 million recovery (excluding $76 million release of general allowance).
• Our 2010 and 2011 LLP estimates are unchanged at $1,300 million or 0.70% of loans and $1,000 million or 0.52% of loans, respectively.
Impaired Loans Increase Slightly
• Gross impaired loans increased slightly to $2,042 million or 1.10% of loans in the quarter versus $1,968 million in the previous quarter and $1,668 million a year earlier. Net impaired loans were $5 million versus negative $102 million in the previous quarter and negative $312 million a year earlier.
• Gross impaired loan formations declined to $557 million this quarter from $566 million in the previous quarter and from $967 million a year earlier.
Tier 1 Ratio 14.2%
• Tier 1 ratio increased to 14.2% from 13.7% in the previous quarter and 12.0% a year earlier. The common equity to risk-weighted assets (CE/RWA) ratio was 11.4% compared with 10.8% in the previous quarter and 9.2% a year earlier.
• Total risk-weighted assets declined 1% sequentially and 7% YOY to $107.2 billion, while market-at-risk assets increased 5% sequentially and 18% YOY to $2.0 billion.
;
Event
• CIBC (CM) reported an increase in cash operating earnings of 22% YOY to $1.66 per share beating expectations due to surprisingly strong trading revenue/wholesale earnings and slightly higher security gains. Operating ROE was 21.5% with RRWA of 2.39%.
Implications
• Wholesale Banking operating earnings declined 33% YOY to $123 million, but remained surprisingly strong against $134 million in the previous quarter due to resilient trading revenue (lower exposure to fixed income trading).
• CIBC Retail Markets earnings increased 40% YoY and 23% QoQ to $604 million. Retail earnings were boosted by treasury allocation and lower loan losses.
Recommendation
• We have increased our 2010 earnings estimate to $6.40 per share from $6.15 per share due to the beat this quarter and solid retail banking results. Our 2011 earnings estimate remains unchanged at $7.00 per share. Our one-year share price target is unchanged at $80 per share. We maintain our 2-Sector Perform rating.
Items of Note
• Reported cash earnings were $1.55 per share, including net one-time charges of $0.11 per share. One-time items included a loss of $138 million ($96 million after-tax or $0.25 per share) on structured credit run-off activities and a reversal of $76 million ($53 million after tax or $0.14 per share) of general provisions.
Retail Markets Earnings Improve
• Earnings at CIBC Retail Markets were $604 million, an increase of 40% year over year, which were boosted by treasury allocation and lower loan losses. Other Retail Markets revenue (assisted by treasury allocation) was $40 million versus a loss of $54 million the previous quarter, representing a positive $94 million sequential swing in revenue (after-tax $64 million or $0.16 per share).
• Specific LLPs declined to $304 million from $417 million a year earlier and from $334 million in the previous quarter.
• Retail Markets revenue increased 6.6% with non-interest expense increasing 3.2% for positive operating leverage of 3.4%. Wealth Management revenue increased 6%, with FirstCaribbean revenue declining 17%. Wealth Management and FirstCaribbean represented 14% and 6% of Retail Markets revenue, respectively.
• Average loans & acceptances increased 4% YOY and 2% QOQ to $215.2 billion.
• Deposit and payment fees declined 3% year over year to $194 million. Card fees were $72 million compared with $83 million in the previous quarter and $80 million a year earlier.
• Mutual fund revenue, which is contained in Wealth Management revenue, increased 13% from a year earlier to $188 million. Mutual fund assets (IFIC) increased 7.6% YOY to $46.2 billion. Investment management and custodian fees increased 14% from a year earlier to $117 million.
Canadian Retail NIM Declines Sequentially
• Retail net interest margin (NIM) declined 1 bp sequentially but increased 2 bp from a year earlier to 2.79% (as a percentage of average loans and acceptances).
Overall Net Interest Margin
• The overall bank net interest margin declined 7 bp sequentially but improved 7 bp from a year earlier to 2.05%.
CIBC Wholesale Banking
• CIBC Wholesale Banking operating earnings were surprisingly strong at $123 million (excluding structured credit run-off) due to resilient trading revenue. This compares to $185 million a year earlier and $134 million in the previous quarter. Corporate and investment banking revenue declined to $146 million from $232 million a year earlier but increased from $132 million the previous quarter.
Underlying Trading Revenue Surprisingly Resilient
• Trading revenue (excluding structured credit run-off) was very strong given the difficult trading environment particularly in fixed income. Trading revenue actually increased sequentially to $181 million versus $150 million in the previous quarter although declined from $219 million a year earlier. Interest rate trading was surprisingly resilient at $41 million versus $60 million in the previous quarter and $81 million a year earlier.
Capital Markets Revenue Stable
• Capital markets revenue was $216 million versus $207 million in the previous quarter and $254 million a year earlier.
• Underwriting and advisory fees were $108 million, increasing 24% from $87 million the previous quarter but declining 18% from $132 million a year earlier.
Security Gains High
• Security gains (AFS/FVO) included in operating earnings were $52 million or $0.09 per share versus $37 million or $0.06 per share in the previous quarter and $32 million or $0.05 per share a year earlier.
• The security surplus increased to $629 million from a surplus of $386 million in the previous quarter and a surplus of $270 million a year earlier.
Corporate and Other Business Segment
• The corporate and other segment recorded a loss of $37 million versus a loss of $16 million in the previous quarter and a loss of $52 million a year earlier.
Higher Securitization Net Income
• Securitization revenue increased in Q3/10 to $150 million from $120 million in the previous quarter and from $113 million a year earlier. The net income statement securitization impact was a gain of $48 million in Q3/10 versus a loss of $7 million in Q2/10, representing a positive swing of $0.09 per share sequentially.
Loan Loss Provisions Decline
• Specific LLPs declined to $297 million or 0.64% of loans versus $316 million or 0.71% of loans in the previous quarter and from $422 million or 0.97% of loans a year earlier. Retail LLPs were $304 million, with wholesale LLPs at $29 million, and the corporate segment recording a $36 million recovery (excluding $76 million release of general allowance).
• Our 2010 and 2011 LLP estimates are unchanged at $1,300 million or 0.70% of loans and $1,000 million or 0.52% of loans, respectively.
Impaired Loans Increase Slightly
• Gross impaired loans increased slightly to $2,042 million or 1.10% of loans in the quarter versus $1,968 million in the previous quarter and $1,668 million a year earlier. Net impaired loans were $5 million versus negative $102 million in the previous quarter and negative $312 million a year earlier.
• Gross impaired loan formations declined to $557 million this quarter from $566 million in the previous quarter and from $967 million a year earlier.
Tier 1 Ratio 14.2%
• Tier 1 ratio increased to 14.2% from 13.7% in the previous quarter and 12.0% a year earlier. The common equity to risk-weighted assets (CE/RWA) ratio was 11.4% compared with 10.8% in the previous quarter and 9.2% a year earlier.
• Total risk-weighted assets declined 1% sequentially and 7% YOY to $107.2 billion, while market-at-risk assets increased 5% sequentially and 18% YOY to $2.0 billion.
