24 August 2017

CIBC Q3 2017 Earnings

The Globe and Mail, James Bradshaw, 24 August 2017

Canadian Imperial Bank of Commerce is reaping the early fruits of efforts to reshape its business as its newly minted U.S. arm contributed to higher third-quarter profit.

The Toronto-based bank, which is Canada's fifth-largest by assets, emerged from its fiscal third quarter transformed, having shuffled its executive ranks just as it closed a drawn-out deal to acquire Chicago-based PrivateBancorp Inc. for $5-billion (U.S.) in late June.

The American bank chipped in $23-million (Canadian) in profit in its first 39 days under CIBC's control, while solid results across the Canadian bank's business lines and lower loan losses drove better-than-expected results. The bank also hiked its dividend by three cents to $1.30 a share – an increase of about 2.4 per cent.

With a platform in place to rebuild its U.S. presence, CIBC is expecting new growth as cross-border business picks up. That would be a welcome addition as Canada's housing market shows signs of slowing, even as CIBC continues to grow its mortgage book faster than its peers. But the outlook for U.S. banks is still cloudy, with high-stakes free-trade negotiations under way and promised American tax reform measures in limbo.

As CIBC merges PrivateBancorp with its existing business and redraws its reporting lines, chief executive officer Victor Dodig told analysts the bank's "integration efforts are proceeding very well.

"We've seen lots of early referral activity across our expanded team of private bankers," Mr. Dodig said during a Thursday conference call.

The PrivateBank, as it is commonly known, also grew its loan book by 15 per cent and its deposits by 7 per cent, compared with a year earlier. But its early contribution to overall profit "is lower than we anticipated," Gabriel Dechaine, an analyst at National Bank Financial Inc., said in a research note.

CIBC is hopeful it will see benefits from anticipated interest-rate hikes this year and next, but that's "assuming U.S. trade policy does not prove to be a major barrier to Canadian economic growth," Mr. Dodig said.

Chief financial officer Kevin Glass is "optimistic" a good update to the North American free-trade agreement can be hashed out, even after recent sabre-rattling that included U.S. President Donald Trump musing about terminating the agreement. "It is an opening salvo in a negotiation," Mr. Glass said.

CIBC has also been transforming its mortgage business, and recorded a 13-per-cent spike in its mortgage balances in the third quarter – a much faster rate of growth than at other banks.

That growth has been driven partly by CIBC's decision to build up its roster of mobile mortgage advisers. With that team now intact, and with new housing regulations dampening sales in some hot markets, the bank expects the pace of its mortgage growth to begin reverting closer to its peers. By comparison, Royal Bank of Canada's mortgage portfolio grew 6 per cent in the quarter.

"It'll be a gradual and, I would say, orderly change, an orderly convergence," Mr. Glass said.

Possible changes to the so-called B-20 guideline on mortgage underwriting, proposed by Canada's banking regulator in July, could further cool housing markets by requiring tougher stress tests on uninsured mortgages. CIBC said as many as 10 per cent of its new loans would be unlikely to qualify under the draft rules, but Mr. Dodig declined to give his opinion on the wisdom of such changes. "I'm not going to go there," he said.

CIBC earned $1.1-billion in profit in the quarter that ended July 31, or $2.60 a share. That was down from $1.44-billion, or $3.61 a share, a year ago, when the bank recorded a one-time gain of $383-million on the sale of a minority stake in American Century Investments.

Adjusting to exclude the gain and other items, CIBC earned $2.77 a share. Analysts surveyed by Bloomberg expected earnings a share of $2.65.

Even so, CIBC's share price retreated nearly 1.9 per cent to $105.57 at Thursday's close on the Toronto Stock Exchange. Analysts noted that two less reliable factors propelled earnings above expectations – lower loan losses and unusually robust profit in the small "corporate and other" division.

Revenue of $4.1-billion was flat compared with the same quarter last year. But the bank's common equity tier 1 ratio – a key measure of its health – settled at an acceptable 10.4 per cent after the PrivateBank transaction.

Provisions for credit losses, or money the bank sets aside to cover soured loans, edged up 3 per cent to $209-million, thanks to larger losses in its U.S. real estate finance portfolio.

The core Canadian retail and business banking division delivered $719-million in profit, an 8-per-cent increase from the prior year, on the strength of higher volume and fees.

Profit from Canadian wealth management fell 73 per cent year over year. But adjusting to exclude certain items such as last year's gain on sale, CIBC earned $136-million, up 10 per cent. The PrivateBank acquisition also boosted U.S. wealth management and commercial banking profit 74 per cent to $40-million.

Capital markets profit fell 10 per cent to $252-million, largely due to lower equity derivatives and interest rate trading. But that "is arguably a solid result," according to Barclays Capital Canada Inc. analyst John Aiken, in a quarter characterized by low volatility and slower trading that has been hard on capital markets activity at banks across North America.

"We're very pleased with our results," Mr. Dodig said. "And we're very pleased with the consistency of our performance."