Canadian Imperial Bank of Commerce

CM Details

A leading North American financial institution, Canadian Imperial Bank of Commerce (TO: CM) is involved in offering a wide range of financial products and services via its complete electronic banking network, offices and branches throughout Canada, United States and in other parts of the world. The company provides these services through two separate business lines namely, CIBC World Markets and CIBC Retail Markets. The later includes the group’s business banking, personal, and wealth businesses. The company has ~45,000 employees, who help in offering a wide range of financial services and products to over 10 million personal and business. The company has its head office in Toronto, Canada.

For the year ended 31 October 2019, adjusted total revenues for FY19 were up ~3.8% year over year to $18.5 billion. Net income on an adjusted basis came in at $5.4 billion in FY19, as compared to $5.5 billion. Adjusted non-interest expenses totalled to $10.4 billion, up from $10.1 billion recorded in FY18. Adjusted efficiency ratio was 55.5% at the end of the FY19, marginally down from 55.6% at the end of 2018. Fall in the efficiency ratio indicates an improvement in profitability. Total provision for the credit losses on an adjusted basis surged ~52.7% year over year to $1.3 billion year over year. The increase in credit losses was driven by a lower base in the previous year due to adoption of IFRS 9 along with one notable (a fraud-related incident) impairment in Canadian Commercial Banking and Wealth Segment.

The company witnessed a compound annual growth rate of ~7.7% in its revenue across FY15-FY19. During the same time period, the company’s net income witnessed a CAGR of ~9.3%. Further, the company’s adjusted EPS improved from $9.45 per share in FY15 to $11.92 per share in FY19. Adjusted dividend Pay-out ratio also came in at 46.9% in FY19, up from 45.4% in FY18. The Dividend yield in FY19 stood at ~5.0%. All these numbers indicate that the company is financially sound. Continuous focus on managing investments via the economic cycle along with initiatives to simplify and streamline operations to enhance cost structure has supported the growth of the company. Moreover, continued investment in strategic and infrastructure initiatives to drive future growth to deliver better end-user experience and operational competences is the key catalyst going forward.

EPS & Dividend Pay-out Ratio (Source: Company Reports)

Key Financial Takeaways from 4QFY19 Period Ended 31 October 2019:

The bank’s adjusted earnings per share during the quarter were $2.84, down 5% from the year-ago quarter. Results were led by a rise in revenues and continuous growth in loans. Nevertheless, a substantial increase in provisions and higher operating expenses were the weakening factors. Adjusted net income came in at $1.3 billion, depicting a fall of ~4.0% year over year. Adjusted total revenues for the reported quarter increased ~4.3% year over year to $4.7 billion.

The bank’s net interest income came in at $2.8 billion, an increase of 10.3% from the year-ago quarter. Non-interest income came in at $1.97 billion, up 3% year over year. Adjusted non-interest expenses totalled $2.7 billion, rising 4.2% from the year-ago quarter. Adjusted efficiency ratio at the end of the fourth quarter stood at 56.0% as compared to 56.2% as of October 31, 2018. Fall in efficiency ratio implies progress in profitability. Total provision for credit losses came in at $402 million, an increase of ~70.3% year over year on an adjusted basis.

4QFY19 Financial Highlights (Source: Company Reports)

Segmental Highlights for 4QFY19: Revenues from “Canadian Personal and Small Business Banking” segment came in at $2.3 billion in 4QFY19, as compared to $2.2 billion in the same quarter of the previous year. The segment benefitted primarily on the back of modest volume growth and margin expansion. Revenues from “Canadian Commercial Banking and Wealth Management” stood at $1.0 billion, an increase of ~4.3% year over year. The segment witnessed double-digit volume growth on the back of robust results in Commercial Banking. “US Commercial Banking and Wealth Management’s” revenues came in at $503 million, up from $457 million in the corresponding quarter of the previous year, primarily on the back of ongoing investment in people, new segments, and expanded product competencies. Revenues from Capital Markets and Corporate & Others stood at $735 million and $281 million, respectively.

Segmental Highlights (Source: Company Reports)

Robust Balance Sheet & Capital Ratios:  Total assets as of October 31, 2019, stood at $651.6 billion, up 1% from the previous quarter. Net loans and acceptances increased by approximately 1% sequentially to $398.1 billion, whereas deposits increased roughly 1% to $485.7 billion. As of October 31, 2019, Common Equity Tier 1 ratio came in at 11.6%, as compared to 11.4% in the previous-year quarter. Additionally, the Tier 1 capital ratio was 12.9%, in line with the October 31, 2018 level. The total capital ratio stood at 15.0%, as compared to 14.9%. Adjusted return on common shareholders’ equity came in at 14.2% at the end of the quarter, down from 16.4% a year ago.

 Recent Updates:

(a)    On January 20, 2020, the company stated that during the conversion notice period from January 1, 2020 to January 16, 2020, 70,730, the "Series 41 Shares" were offered for conversion, on a 1:1 basis, into the "Series 42 Shares".

(b) On January 10, 2020, the company announced the appointment of that the Honourable Lisa Raitt as the company’s Vice-Chair, Global Investment Banking, effective from January 27, 2020.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 22.44% of the total shareholding. TD Securities, Inc. is the entity holding maximum shares in the company at 3.23%. The Vanguard Group, Inc. is the second-largest shareholder, representing a holding of 2.87% in the company.

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: In FY19, net interest margin dipped slightly to 1.8%. The loan growth rate for FY19 stood at 4.7%, higher than 4.1% in FY18. The bank remains strongly capitalized as Tier 1 ratio stood at 12.9%.

Key Metrics (Source: Thomson Reuters)

Outlook: Interest rates in Canada are stable since October 2018 and the Bank of Canada maintained a status quo on the rates in its latest monetary policy decisions. The apex bank expects the economy to pick pace in 2020 and estimates GDP growth ~1.3% in 1QCY20.

We expect the interest rate environment to remain somewhat stable in the country which, in turn, is expected to stabilize the bank’s margins. Credit growth is expected to remain strong following the expectation of pickup in economic activity and a strong growth coming from the US business. The management is targeting to improve its efficiency by optimizing the cost structure and streamlining the operations. The bank is targeting its efficiency ratio to be in the range of 53% -54% by 2022. 4QFY19 saw a spike in provisioning charges which was the only bad aspect to otherwise decent results and marred the bank’s bottom-line. This seems to be a one-off the event as the management expect provision charges to remain flat in 2020 along with strong credit quality. The bank is targeting its RoE to be above 15% in the near term.

The bank is continuously focusing on tapping the potential of the US market and continuously expanding its footprints there. The contribution from the US region in adjusted earnings increased from ~5.5% in FY16 to ~17.3% in FY19. The assets under administration increased two-fold to $96 billion during the last four financial years. Going forward, we expect the contribution from the US segment to keep increasing as the bank is focusing on both organic and non-organic growth opportunities in the region.

Recent CBIC polls suggest that there is a huge potential for the bank to increase its wealth management business as only 46% Canadian turn to a financial advisor for money related matters.

The bank appears to be managing its growth plan, and the shareholders return in an appropriate manner as it is targeting a payout ratio in the range of 40-50%. Given the bank’s strong CET 1 position, maintaining a balance between growth and payout shouldn’t be an issue.

Key Valuation Metrics (Source: Thomson Reuters)

 Valuation Methodologies

Method 1: Price to Book Multiple Approach

Price to Book Based Valuation (Source: Thomson Reuters)

Method 2: Price to Earnings Multiple Approach

Price to Earnings Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of the company generated returns of 4.9% over a period of 6 months. In FY19, the company delivered stellar top-line results, driven by robust volume growth in Commercial Banking, strong performance in the U.S. despite the effect of Federal Reserve rate cuts coupled with better-than-expected results in Capital Markets, on the back of trading and underwriting activity. From the analysis standpoint, the company has recorded revenue CAGR of 7.7% over the last four years. As on 23 January 2020, the stock has a market cap of ~$48.54 billion with a PE multiple of ~9.74x and an annual dividend yield of ~5.3%, suggesting a decent opportunity for accumulation. we have valued the stock using two relative valuation methods, i.e., Price to book and Price to earnings, and for the said purpose, we have considered peers like Royal Bank of Canada (TO: RY), Bank of Montreal (TO: BMO) and Bank of Nova Scotia (TO: BNS), to name few. Therefore, we have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the above factors, we give a “Buy” recommendation on the stock at the current market price of CA$110.07 per share, up 0.22% on 10th February 2020.

CM Daily Technical Chart (Source: Thomson Reuters)