Canadian Imperial Bank of Commerce

Canadian Imperial Bank of Commerce (TSX: CM) is Canada's fifth- largest bank which is operating via three business segments: retail and business banking, wealth management, and capital markets. It serves approximately 11 million personal banking and business customers, primarily in Canada and US. 

Key highlights 

• Strategic relationship with Microsoft: Recently the bank announced a strategic relationship with Microsoft, formalizing it as a primary cloud platform. We believe, this partnership would enable the bank to scale and modernize its banking platforms, while building in additional resiliency, efficiency and agility.

• Strong earnings across diversified businesses:The bank witnessed strong performance across its diversified businesses. Its Canadian Personal & business banking segment reported net income of CAD 603 million, up 270%, Canadian Commercial Banking and Wealth Management reported net income of CAD 399 million, up 94%, U.S. Commercial Banking and Wealth Management reported net income of CAD 216 million, up 1340% and Capital Markets reported net income of CAD 495 million, up 180% against Q2 2020, respectively, mainly due to lower provisions for credit losses.

• Steady dividend distribution: The bank has reported consistent dividend distribution, backed by stable financials. Recently, the bank declared a quarterly dividend of CAD 1.46 per share, payable on July 28, 2021. Moreover, at the last traded price, the stock was offering a dividend yield of 4.09%, which is decent, considering the current interest rate environment.

• Improved Credit quality: Provision for credit losses reported by the bank stood at CAD 32 million, down CAD 1,380 million or 98% compared to the previous corresponding period. Credit quality improved across all strategic business units (SBUs) mainly resulting from an improvement in our economic outlook.

• Improved Common Equity Tier 1 Ratio: Strong internal capital generation from retained earnings growth facilitated bank to improve its CET1 ratio to 12.4% on April 30, 2021, up from 12.3% at the end of the prior quarter.

Financial overview of Q2 2021

Source: Company

• In Q2 2021, the bank reported revenue at CAD 4,932 million, increased by 7.7% compared to CAD 4,578 million in Q2 2020. The increase in total revenue was mainly due to healthy performance from every business segment.

• The bank minimized its provision for credit losses to CAD 32 million in the reported quarter compared to CAD 1,412 million in the previous corresponding period.

• Income before income tax increased at CAD 2,144 million, compared to CAD 462 million in the previous corresponding period. The rise was mainly due to higher revenue and lower provision for credit losses.
• On the back of the above-discussed points, the bank’s net income enhanced to CAD 1,666 million, against CAD 441 million in pcp.

Risks associated with investment

The COVID-19 pandemic has heightened risks of higher non-performing assets for FY2021. Further, a low-interest-rate environment and increased chances of loan default may put pressure on the bank's performance, as the lower interest rate would drag NIM, and heightened uncertainties may lead to a rise in provisioning. 

Valuation Methodology Illustrative: Price by Book Value

Stock recommendation

An advantageous business mix, which is diversified across businesses and geographies that are positioned for resilience and growth, operating momentum in each business, and improved efficiency enabled the bank to report strong Q1 2021 results, with solid revenue growth of 7.7% and net income of CAD 1,666 million, compared to CAD 441 million in the previous corresponding period. The bank's capital position continues to strengthen with a CET1 ratio of 12.4%, which positions the bank well for growth. Therefore, based on the rationales discussed above and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 142.83 on July 16, 2021. We have considered Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, etc., as the peer group for the comparison.

One-Year Technical Price Chart (as on July 16, 2021). Source: REFINITIV, Analysis by Kalkine Group 

First National Financial Corporation

First National Financial Corporation (TSX: FN) is a Canada based originator, underwriter and servicer of predominantly prime residential and commercial mortgages with over CAD 119 billion in mortgages under administration. Additionally, it is Canada’s largest non-bank originator and underwriter of mortgages and is among the top three in market share in the mortgage broker distribution channel.

Key Highlights

• An Income Play: The group has a solid history of stable dividend payment, backed by consistent profitability. Moreover, it increased its regular monthly dividend for the month of May 2021 from CAD 2.10 to CAD 2.35 per common share on an annualized basis. Moreover, at the last closing price, the stock was offering a lucrative dividend yield of 4.75% amid low interest rate environment.

• Growth in Mortgage under Administration (MUA): By using the company's origination technology, the business achieved remarkable growth in its mortgage under administration (MUA). In comparison to CAD 113.5 billion in pcp, MUA was greater at CAD 119.6 billion. Because the platform has a fixed cost, an increase in mortgage origination lowers underwriting expenses, which is a key positive.
  

• Emphasizing on IT and technology: The company maintains a strong broker relationship and has utilized its IT and technology in a prudent manner, which has resulted in robust growth even during the pandemic. Additionally, the management believes this strategy would provide long-term profitability and sustainable brand recognition for the company.
  

• Event update: The company would be releasing its Q2 2021 financial numbers on July 27, 2021, after market close.
  

Financial overview of Q1 2021 (In thousands of Canadian dollars)

Source: Company

• The institution announced its first quarter result, wherein it posted revenue of CAD 336.4 million, higher than CAD 274.6 million in the previous corresponding period (pcp). The increase was driven by growth in mortgage originations, which resulted in an increase in mortgage placement fees and mortgage servicing.
• Income before income taxes stood at CAD 71.5 million, as compared to a loss of CAD 3.3 million in pcp. The growth was supported by changes in the fair market value of financial instruments related to interest rate movements as compared to previous quarters.
• The company reported its net income of CAD 52.6 million, as compared to a net loss of CAD 2.3 million in pcp.

Risks associated with investment

The company’s profitability is dependent on current bond markets rates, which affect the value of gains and losses on financial instruments arising from the Company’s interest rate hedging program. Thus, interest rate plays a vital role for the business, and volatility in the interest rate might dampen the company’s performance. 

Valuation Methodology (Illustrative): Price to Earnings

Stock recommendation

In comparison to the previous corresponding quarter, management forecasts robust residential origination in Q2FY21, backed by rising traction in mortgage origination from the commercial segment. Even in a sluggish economy, the corporation remains convinced that its excellent ties with mortgage brokers and diverse funding sources would benefit the company's operations and help it stay ahead of the competition. Furthermore, the Company's CAD 34 billion securitized mortgage portfolio and CAD 83 billion servicing portfolio would continue to generate revenue and cash flow, which is a significant plus. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 49.53 on July 16, 2021.

One-Year Technical Price Chart (as on July 16, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.