The Globe and Mail, James Bradshaw, 28 September 2018
It’s client appreciation day at Canadian Imperial Bank of Commerce in Montreal, and chief executive Victor Dodig is in his element.
Stepping into a wood-panelled boardroom one morning in March, the energetic Mr. Dodig is slightly behind schedule, and he apologizes to two dozen private-wealth managers and investment advisers who’ve gathered to meet the boss. Before the day is done, he’ll also visit three bank branches and a call centre. Wealth management, in particular, is near and dear to him – he led the division before he was named CEO in 2014.
In shirtsleeves, having shed the jacket of his grey suit, Mr. Dodig leans against a counter set with pastries. Cradling a paper coffee cup, he paints a picture of an institution that is picking up steam. “I think our bank is on the right track,” he says, while acknowledging there are things that still need fixing. "When you look at where we’ve come from, from the financial crisis nine years ago, I’m not so sure that anybody would have predicted that we’d be where we are today.”
The bank Mr. Dodig inherited was still picking itself up from that crisis. CIBC was the only Canadian bank to suffer such huge writedowns on soured U.S. debt that it fell into the red, losing $2.1-billion in 2008. That solidified its reputation as Bay Street’s most error-prone bank, and management grew ever more insular, risk averse and focused on its fortress in Canada. Once one of the largest of the Big Six banks, it was mired in fifth place without a clear plan to regain its momentum.
“We were the bank that ran into sharp objects, we were the bank that had all kinds of losses, we were the bank that seemed to make a lot of mistakes,” he reminds his Montreal audience.
It’s been Mr. Dodig’s job to change that perception, and it’s still an uphill battle. When he emerged as a dark-horse candidate to win the top job in 2014, Bay Street greeted him as a breath of fresh air. With a leadership shuffle that moved more than 40 executives to new roles, plans under way to build new Toronto headquarters and other initiatives, he’s put his stamp on the bank and revitalized its culture.
Early in his tenure, however, Mr. Dodig sent mixed messages about the bank’s strategy to re-establish itself in the United States. He then pursued a drawn-out acquisition of Chicago-based PrivateBancorp Inc. last year for US$5-billion – an ambitious gambit at a price that alarmed investors and analysts.
CIBC is still No. 5, trailing its peers on important measures such as its efficiency ratio and five-year total shareholder return. After four years under Mr. Dodig’s watch, a crucial question remains: When will his strategy move the needle for CIBC’s weary shareholders?
At the morning gathering in Montreal, one of the wealth managers soon zeroes in on a sore spot: Why does the bank’s price-to-earnings multiple – which has hovered around 10 times trailing 12-month earnings this year – still lag behind the other Big Five banks? “It’s the thing I lose the most sleep over!” Mr. Dodig replies, his voice instantly rising. "It really bugs me.”
He rattles off a list of accomplishments: CIBC has grown year-over-year earnings a share for 14 straight fiscal quarters (the streak is now at 16), closed the PrivateBancorp deal and maintained a strong capital buffer, with room to make more acquisitions and weather a downturn. "And the market’s like, well, that’s not good enough,” he says. "I don’t know what is good enough.”
"One of the things that an investor told me, he said, 'Victor, the real problem is you want to forget your past, but your past doesn’t want to forget you,’ ” Mr. Dodig says. "And I said, 'Okay, when does that stop?’ ”
It’s easy to forget that CIBC was briefly the biggest bank in Canada in the late 1990s.
For a fleeting moment in 1998, it had greater assets than Royal Bank of Canada (RBC), and an aggressive plan to consolidate its advantage. Under then-CEO Al Flood, CIBC engineered a proposed merger with Toronto-Dominion Bank (TD) in which TD would have been very much the junior partner. But the federal government blocked the deal, as well as RBC’s attempted tie-up with Bank of Montreal (BMO).
Over the next decade, CIBC suffered through several bouts of turmoil. After failing to secure a merger, Mr. Flood gave way in 1999 to John Hunkin, a star investment banker who embarked on a series of ill-considered gambits that included the launch of Amicus, a U.S. electronic bank that CIBC shuttered after just two years because of heavy losses, and a push into Wall Street investment banking.
In the early 2000s, the capital markets division was CIBC’s centre of power, led by hard-driving David Kassie. Under Mr. Hunkin and Mr. Kassie, the bank amassed more than $5-billion in loans to telecommunications and cable companies. But when the sector imploded in 2001 and 2002, banks around the world suffered heavy loan losses. Among Canadian lenders, only TD had greater exposure to bad loans.
The excesses didn’t end there. CIBC soon became ensnared in the Enron accounting scandal – accused of helping executives move billions of dollars off the energy company’s balance sheet using elaborate financial engineering.
By 2004, CIBC had squandered enough capital that one analyst memorably described it as the bank "most likely to walk into a sharp object.”
The following year, Mr. Hunkin sailed into the sunset – somewhat literally – spending part of his last summer as CEO steering his 48-foot-yacht up the Atlantic coast. Stepping into his shoes was Gerry McCaughey, a detail-oriented financial engineer whom Bay Street considered withdrawn and eccentric.
Mr. McCaughey set about trying to change the bank’s personality, ushering in an era of retrenchment and aggressive “derisking.” On his first day on the job, the bank agreed to pay US$2.4-billion to settle a class-action lawsuit brought on behalf of Enron investors – eclipsing CIBC’s entire 2004 profit of $2.2-billion.
The year 2005 was also when CIBC hired Mr. Dodig to lead its wealth management arm. He’d spent the previous three years as CEO of UBS Global Asset Management Inc.’s Canadian outpost, and had experience in the United States and the United Kingdom with Merrill Lynch & Co. Inc.
Under Mr. McCaughey’s derisking mantra, CIBC largely retreated from the United States back to the safe harbour of Canadian retail banking. But that didn’t save it from being hit hard by the U.S. subprime mortgage crisis in 2007.
Once again, CIBC had to book massive writedowns – more than $9-billion over two years – delivering another shock to investors who took Mr. McCaughey at his word that he had made the bank safer.
“We were not so pleased with it and Gerry was not so pleased with it,” says Charles Sirois, a telecom executive and long-time CIBC director who served as chair from 2009 to 2015. "That was something [that fell through] the cracks.” Through the bank, Mr. McCaughey declined an interview.
By 2014, CIBC was back on firmer footing, but still highly risk-averse. Board members wanted to see renewed growth, and pushed Mr. McCaughey to announce his impending retirement.
The board had been quietly scouting for candidates inside and outside the bank for years, Mr. Sirois says. Even so, there was no clear succession plan.
The most obvious internal candidate was Richard Nesbitt, who was then the bank’s chief operating officer and had been CEO of the Toronto Stock Exchange. But he was a polarizing figure, a disciple of Mr. McCaughey and his roots were in the high-flying investment banking arm that had landed CIBC in hot water. With no path to the CEO’s office, Mr. Nesbitt left the bank in 2014.
“We were looking for somebody that would change the direction,” says John Manley, who joined CIBC’s board in 2005, and succeeded Mr. Sirois as chair in 2014.
Mr. Dodig was not a leading contender early on, according to sources familiar with the process, but he emerged as a strong one to change the bank’s course. While running wealth management, he had a front-row seat during a difficult decade.
At the time, the risk management department’s role "was really to say no,” says Laura Dottori-Attanasio, CIBC’s current chief risk officer.
The rigour was necessary, but demoralizing. In some ways, it was “like applying chemotherapy,” Mr. Dodig recalls. "The bad cells get killed, but the normal cells get damaged.”
After he was named CEO and took charge in September, 2014, the bank’s stance started changing. “We worked on building up a high degree of trust,” says Ms. Dottori-Attanasio, restoring "a balance between risk and return.”
Somewhere between a plate of veal Parmesan and a digestive glass of chamomile grappa, Mr. Dodig, 53, expounds on his philosophy for building a team of bankers: "No mercenaries, just missionaries,” he says.
We’re eating dinner at an unfussy Italian restaurant in west-end Toronto, not far from where Mr. Dodig grew up. For the evening, he’s traded in his suit and tie for khakis and an open-necked shirt, and brought his wife, Maureen, who nibbles at a salad before excusing herself to take the couple’s youngest son to a soccer match.
The eatery is a regular haunt, and one of many lasting connections he has to Toronto’s west side.
Over three hours and three courses, Mr. Dodig espouses a low-profile, workmanlike ideal for banking. Missionaries, he says, want to build long-term value for the bank and its clients. Mercenaries, by contrast, are only “in for the transaction.” In his estimation, short-term decisions affect only about 10 per cent of a bank’s earnings, which is why Mr. Dodig eschews "star bankers,” who "want to basically have their name encrusted in diamonds.”
The seeds of his philosophy were planted in childhood. Mr. Dodig’s late father, Veselko "Bill” Dodig, was a refugee from Croatia who settled in west-end Toronto with his wife, Janja, in the early 1960s. Bill worked in factories that made gaskets, industrial wire and cable, even chocolate, while Janja cleaned houses. The couple rented out three floors in Mr. Dodig’s childhood home on MacDonnell Avenue for extra income.
The family’s Croatian heritage is at the core of Mr. Dodig’s identity. He visits the country often, and owns a vacation property there that produces lavender and olive oil.
But he describes his upbringing in Toronto most vividly. He remembers visiting the Canadian National Exhibition in summer, though he wasn’t always allowed to spend money on rides.
Other times, he’d line up for the public swimming pool at Sunnyside Beach on Toronto’s lakeshore and wonder who belonged to the upscale Boulevard Club next door, where he’s now a member.
When he suffered from high fevers, he was treated at St. Joseph’s Health Centre, where he was born, and where he’s now co-chair of a fundraising campaign that has raised $90-million.
After high school, Mr. Dodig studied commerce at the University of Toronto, and had a part-time job as a teller at a suburban CIBC branch, starting in 1985. Two years later, he interned at accounting firm Arthur Andersen, where a partner encouraged him to pursue an MBA at Harvard Business School. He did, and graduated in the top 5 per cent of his class in 1994. He also met Maureen while in Boston: The couple got engaged after eight months, married six months later and now have four children.
Friends and colleagues praise Mr. Dodig’s consistency of character. At work and in private, he’s animated and funny, with an encyclopedic memory for names, faces and personal details. He also has a formidable intellect and a deep curiosity about many subjects, including politics, technology and sport.
From time to time, he reveals an endearing, youthful streak. For a while, he was transfixed by HQ, an online trivia game, though he’s fallen out of the habit of playing daily. He’s also a self-described "Disney aficionado,” visiting its theme parks regularly. He spent part of March break with Maureen and two of their children in Florida, braving lineups to ride Space Mountain. He posted a family photo wearing Mickey Mouse ears on his blog, praising the park’s "client first attitude.”
CIBC’s client appreciation days, held at least three times yearly, play to Mr. Dodig’s people skills and preoccupation with the bank’s culture. Over two days in Montreal in March, he meets with investors, dines with small business clients and quizzes staff at every turn.
At a CIBC call centre, he strides through rows of cubicles, asking employees about their jobs and families. He also gently probes for problems: "What can we do better?” and "Any advice for me? C’monnn…”
At every turn, he snaps selfies, some of which appear on the bank’s internal blog. "What a good-looking group, excellent,” he says after one shot, then exclaims to a colleague with a similarly balding pate: "No shine off our two heads!”
If Mr. Dodig has an Achilles heel, it’s operations – the nuts-and-bolts processes that make banking work. Over his career, he’s rarely held intense operational roles with large staffs or the most complex moving parts.
His affinity for making connections is also strategic. Investments, deposit accounts and mortgages are commodities that can be copied by rivals, he says. "The only way you can differentiate yourself is by the relationships we can build with our clients.”
Any bank will say it puts clients first, and all CEOs meet with stakeholders. But Mr. Dodig devotes more effort to it than most. In his first year as CEO, Mr. Dodig met one-on-one with 165 CEOs and business owners, hosted 22,000 clients at 145 events and met more than half of the bank’s institutional investors.
He has also begun forging closer ties to the technology sector. Earlier this year, the bank acquired specialty-finance firm Wellington Financial LP for an undisclosed sum and made it the core of a new niche unit dubbed CIBC Innovation Banking, launched to finance early- and mid-stage technology firms.
But CIBC faces an uphill battle in trying to snatch business from sector rivals such as Silicon Valley Bank Inc. and Comerica Inc. And CIBC will have to be creative to keep pace with rival Canadian banks in upgrading its own technology. RBC and Scotiabank are each spending more than $3-billion annually – largesse that CIBC simply can’t match.
Still, the Wellington deal has helped revive a halo of innovation around CIBC, which has a history of being early to new technologies, such as ATMs and telephone banking.
John Ruffolo, adviser to OMERS Ventures, has known Mr. Dodig since they were summer students at Arthur Andersen in the late 1980s, and says his firm has moved business to CIBC. "They are all over us and all over our investments in trying to service them very aggressively,” Mr. Ruffolo says.
Mr. Dodig’s tireless bridge-building with clients made him a darling of Bay Street early in his tenure. But the honeymoon ended when he elected to spend top dollar to establish beachhead in the hyper-competitive U.S. banking market.
Chicago’s financial core is a monument to banking’s power and influence. To stroll through it is to wonder that there was enough stone, marble and steel left over to build the rest of the city.
The headquarters of the former PrivateBancorp on LaSalle Street, now adorned with CIBC logos after being renamed CIBC Bank USA, is no exception. Its opulent main level is ringed with marble columns reaching to an ornate ceiling, where commercial bankers sit at rows of dark-wood desks.
From here, Mr. Dodig intends to build out a U.S. bank that can work seamlessly across the U.S.-Canadian border. But directly across the street is a steel-beamed tower that houses the U.S. headquarters of BMO, which has been firmly established in the Midwest since 1984. CIBC has a lot of catching up to do.
With a backpack slung over his shoulder, Mr. Dodig arrives with Larry Richman, who was CEO of PrivateBancorp and has stayed on with his executive team since last year’s acquisition.
The two men sit on opposite sides of a table in a small boardroom adorned with Chicago sports memorabilia, including a football signed by legendary Bears running back Walter Payton. Mr. Richman, 66, is polished, with the swept-back hair and bright smile of a man whose handshake has sealed countless deals.
Mr. Richman says he and Mr. Dodig hit it off from the start of CIBC’s courtship: "If you don’t like each other, or if you don’t have the respect and the culture, life’s too short.”
But their alliance didn’t come easily, nor was it cheap.
PrivateBancorp wasn’t Mr. Dodig’s initial target. Early on, he had clearly telegraphed that he was hunting for a U.S. wealth manager, expecting to pay between US$1-billion and US$2-billion. But prices soon climbed too high for wealth management firms, which wouldn’t add deposits – a priority for CIBC. At a 2015 investor day, Mr. Dodig upped his price range to as much as US$4-billion.
Two months later, CIBC dumped the 41-per-cent stake in wealth manager American Century Investment Management Inc. that it acquired in 2011. When leading CIBC’s wealth-management unit, Mr. Dodig had nurtured American Century, but as CEO he saw no clear path to own the firm, and sold it for US$1-billion.
Even so, Bay Street was caught off guard in June, 2016, when CIBC offered US$3.8-billion for PrivateBancorp, which is primarily a commercial lender. The abrupt shift in direction confused investors and analysts.
At US$47 a share, the offer was 24-per-cent higher than PrivateBancorp’s average share price over the prior 10 days. Already there were concerns CIBC was overpaying, and those voices grew louder.
And then Donald Trump was elected President.
By late 2016, U.S. stock markets were soaring, fuelled by expectations of tax cuts and regulatory reform after Mr. Trump’s surprise win. By early December, the KBW Regional Bank index, a benchmark for PrivateBancorp shares, had risen by 44 per cent since the deal with CIBC was announced in June. CIBC’s offer suddenly looked cheap.
In the week before a scheduled Dec. 8 vote by PrivateBancorp shareholders, two influential proxy advisory firms, Institutional Shareholder Services Inc. and Glass Lewis & Co., recommended that they reject CIBC’s offer. PrivateBancorp had to postpone the vote, and CIBC set a new summer deadline. In the meantime, Mr. Dodig hoped U.S. bank valuations would come back down to earth.
They didn’t, but he was determined not to let the deal slip away.
PrivateBancorp rescheduled the vote for May, CIBC sweetened its bid in March, then tabled its "best and final offer” a week before shareholders met: US$60.43 a share. That won shareholders over, but the US$5.0-billion price tag made it one of the largest post-crisis acquisitions of an American bank.
Analysts and investors harboured serious concerns that CIBC had overpaid for a mid-market commercial bank that offered no real cost savings because it had little overlap with CIBC’s existing business.
“There’s still upside and we’re seeing that in the results. But the upside was nowhere near as significant as it would have been,” says John Aiken, an analyst at Barclays Capital Canada Inc. “They were a month away from timing it brilliantly.”
The Chicago-based bank’s rising profits since the acquisition – boosted by U.S. tax reform and interest-rate hikes – have quieted many doubters, at least for now.
"The valuation they paid was looking a bit expensive at the time, but I was wrong,” says Steve Belisle, senior portfolio manager for Canadian equities at Manulife Asset Management Ltd., which owns a large block of CIBC shares. "If you look at the [U.S. bank] transactions that happened after that, I don’t think it was unreasonable.”
But CIBC faced another nagging question: Had it landed the prize it truly wanted, or simply the best bank available in an expensive market?
“[It wasn’t] about, let's go find something to buy,” Mr. Dodig says. CIBC had a large base of Canadian commercial customers that do business in the United States. To them, he says, “we were the one-armed bank.” Rivals TD and BMO both had large U.S. networks.
Mr. Dodig is encouraged by CIBC Bank USA’s results so far. For the quarter ending July 31, the division chipped in $121-million, and U.S. operations accounted for nearly 16 per cent of CIBC’s total profit. "I think we’re on track and we’re ahead of track,” he says.
But Mr. Dodig has also moved the goalposts. The day the deal was announced, he set an “audacious” goal that U.S. operations would contribute 25 per cent of CIBC’s earnings in five to seven years. Analysts worried that meeting such a tight timeline would require another large acquisition too soon, and Mr. Dodig had to calm their nerves. He now cites a “five- to 10-year” horizon.
“It’s doing more with our existing clients. It’s growing new clients,” Mr. Richman says. “Plus, it’s such a big market. You can grow significantly and you don’t have to win every deal.”
For all the progress CIBC has made under Mr. Dodig, the bank has yet to close the valuation gap to its peers. That suggests that some investors still fear the next sharp object could be just around the corner.
One of the biggest worries is CIBC’s exposure to Canadian real estate. Residential mortgages and home-equity loans still make up about three fifths of CIBC’s loan book, compared with an industry average of 46 per cent. That’s a red flag for many investors, including U.S. short sellers who are bearish on Canada’s housing markets.
Since 2012, CIBC has wound down its FirstLine Mortgage business, which sold mortgages through outside brokers. In its place, the bank built a roster of in-house mobile mortgage advisers, and tasked them with adding mortgages at a rapid rate. As recently as last year, CIBC’s mortgage book was growing by 12 to 13 per cent annually, double the rate at the other Big Six banks.
“The real question is, if we end up in a situation where housing sales are flat to down, and the mortgage growth goes with it, is CIBC still going to be able to grow earnings in their Canadian business?” says Sumit Malhotra, an analyst at Scotia Capital Inc. "They’re clearly the most exposed from a lending perspective.”
Mr. Dodig sees mortgages as a tool to acquire new clients, then sell them other products to cement the bond. About 85 per cent of clients who had a mortgage with CIBC through the old broker business had no other link to the bank. By contrast, three quarters of newer mortgage clients acquired in-house have at least one other CIBC product, and 55 per cent have a deposit or investment account.
When investors fret about the bank’s mortgage exposure, Mr. Dodig tells them: "It’s a good exposure. Get enamoured with the fact that we can actually grow those relationships over time.”
This year, CIBC has hit the brakes on its mortgage growth amid tightening federal regulations on borrowers, and is trying to diversify its Canadian lending. Mr. Dodig is keen to expand the bank’s commercial lending – he often talks about "putting the commerce back in CIBC.”
The bank is also pushing to grab back market share in credit cards, where it was once a clear front-runner. It had a monopoly on the Aerogold Visa card tied to Air Canada’s Aeroplan loyalty program until 2013.
But the U.S. expansion plan is another question mark. To reach CIBC’s U.S. profit goals, Mr. Dodig will eventually need to make further deals. Analysts and investors are nervous about how CIBC allocates capital, given the mixed messages the bank has sent in the past and the hefty price PrivateBancorp commanded.
“Hopefully they don’t do any other big deals,” says Mr. Belisle of Manulife. "That’s another concern that’s impacting the stock: People assume they will blow their brains out and do another one.”
Mr. Dodig has tried to assuage those fears, repeatedly saying he would consider a smaller deal for $400-million or less, but that larger deals are off the table for now.
He also prefers not to judge CIBC’s progress by its size. “If I look at some of the best financial institutions in the world, they're not the biggest, they're highest performing on a number of different metrics.”
Those yardsticks include return on equity, efficiency and total shareholder return. On each, CIBC has made strides under Mr. Dodig and he’s brought the bank out of its shell. But it still needs to do more to outrun its past and can ill afford many setbacks.
All Mr. Dodig asks is for a little patience. “As [we] transform our bank, it’s a journey, right?” he says. "It’s not like it’s a straight line up.”
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