Canadian Imperial Bank of Commerce

Canadian Imperial Bank of Commerce (TSX: CM) is a leading North America bank which offers a wide range of services such as Personal and Small Business Banking, Commercial Banking and Wealth Management, and Capital Markets businesses etc. The Company has more than 10 million personal banking, business, public sector and institutional clients.

The Board of Directors increased the dividend to CAD 1.46 per share on common shares from CAD 1.4 in pcp. The dividend will be payable on July 28, 2020.

Financial Highlights for Q2FY20: CM reported its quarterly results, wherein the company posted total revenue of CAD 4,578 million, as compared to CAD 4,542 million in Q2FY20. Adjusted Net Income stood significantly lower at CAD 441 million, as compared to CAD 1,357 million in the previous corresponding period. The decline was primarily attributable to a significantly higher provision for credit losses. Provisioning increased to CAD 1,412 million from CAD 255 million in the previous corresponding period. Canadian Personal and Business Banking reported a 64% annual decline in the net income to CAD 203 million, primarily due to a higher provision for credit losses on performing loans while Canadian Commercial Banking and Wealth Management reported a slump in net income by 37% on y-o-y basis to CAD 119 million. Common Equity Tier 1 ratio remained solid at 11.3%, unchanged from the previous quarter.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: A lot of business faced a temporary shutdown owing to the COVID-19 Pandemic, which is likely to result in a higher unemployment rate. Further, these businesses might take time to resume operations and generate profitability. Consequently, the bank might face a delay in receiving the repayment of loans, and the demand for new loans might be affected, which could dampen the bank’s performance. 

Valuation Methodology: Price to Book Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CM corrected ~12% so far this year, due to weak investors sentiment and stiff correction across the global equity markets. CM is one of the leading names within the banking sector, and historically, the bank maintained a solid financial position with adequate CET1 ratio, which is impressive. The bank has witnessed a growing usage within the digital banking segment during the month of April 2020, reflecting a growth of 250% on y-o-y basis. Growth in digital banking channel further creates an opportunity for higher banking activities with low operational costs, which would support the margin in the long run. Amid the challenging time, the bank has created provisioning against the performing loans as well, which is likely to provide a cushion if any performing assets turn bad. CM is an income investor-friendly stock. Investors should also note that the bank has increased its dividend, while most of the businesses are cutting the dividend payment. The stock is offering a dividend yield of 6.15%, which is lucrative, considering the current interest rate environment. At the last traded price, the stock has closed above the 75-days and 100-days simple moving average (SMA) of CAD 84.81 and CAD 90.82, respectively, indicating a medium-term bullish trend. We have valued the stock using the price to book based relative valuation approach and arrived at a target price offering lower double-digit upside potential (in % terms). For the said purpose, we have considered peers like Royal Bank of Canada (TSX: RY), Bank of Montreal (TSX: BMO), Bank of Nova Scotia (TSX: BNS). Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 94.91 as on June 16, 2020.

CM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Royal Bank of Canada

Royal Bank of Canada (TSX: RY) is Canada’s largest bank and serves 17 million customers across 36 countries. The bank operates through five segments that include Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services, and Capital Markets.

The Group has increased its quarterly dividend to CAD 1.08 per share from 1.02 in pcp. The dividend will be payable on and after August 24, 2020.

Q2FY20 Financial Highlights: RY declared its quarterly numbers and reported a slowdown due to the negative impact of the COVID 19 pandemic, which has resulted in a higher provisioning and lower profitability. Revenue decreased by 10% on y-o-y basis at CAD 10,333 million, while net income slump to CAD 1,481 million, down 54% on y-o-y basis. Provisions for Credit Losses (PCL) surged to CAD 2,830 million, reflecting a rise of CAD 2,404 million from last year. The bank reported its CET1 ratio at 11.7%, down 30 bps from q-o-q basis, which indicates a higher risk-weighted asset driven by drawdowns on credit facilities. For the quarter ended April 30, 2020, average Liquidity Coverage Ratio (LCR) stood at 130%, as compared to 129% in the previous quarter. The increase was driven by higher business and retail deposit growth partially offset by higher corporate lending due to drawdowns on credit facilities. Average loan growth stood at 7% while deposits grew by 11% from the previous corresponding quarter.

Q1FY20 Financial Snapshots (Source: Company Reports)

Risk: The banks is exposed to the interest rate risk. A further cut in the key rates by the regulator might affect the funding and margin of the bank. Further, any extension in lockdown measures is likely to hamper the repayment capacity of the borrowers, which in turn would increase the non-performing assets for the bank. 

Valuation Methodology: Price to Book Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of RY tumbled ~10% so far this year. The group's balance sheet remained solid amid a challenging environment with CET1 ratio stood at 11.7%, which is higher than the minimum regulatory requirement. LCR also remained healthy at 130%. The bank has taken a conservative approach and created a higher provision in the current quarter, which is likely to provide a cushion against the future setbacks if non-performing assets arise. We expect the bank's loan book to expand in the near to medium term owing to the twin effect of lower interest rate and businesses seeking loans to resume their operation post easing in lockdown restrictions. However, lower interest rates are likely to build on the net interest margin in the near term. The bank increased its dividend during the quarter despite a challenging operating environment, which is encouraging from the income investors' point of view. The stock is offering a dividend yield of 4.66%, which is attractive, considering the lower interest rate environment. We have valued the stock using price to book based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). For the said purpose, we have considered industry (Financials) average on NTM basis. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 92.75 as on June 16, 2020.

RY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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