Canadian Imperial Bank of Commerce

Canadian Imperial Bank of Commerce (TSX: CM) is a Canadian 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

• Strong earnings across diversified businesses:The bank witnessed strong gains 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.

• An Income Play: The bank has reported consistent dividend distribution, backed by a stable financial performance. 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 4.04%, 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 the economic outlook.

• Steady net interest income: Net interest income reported was down by CAD 15 million or 1% to CAD 2,747 million, against CAD 2,762 million in the previous corresponding quarter, primarily due to narrower margins, the impact of foreign exchange translation and interest income related to the settlement of certain income tax matters in the same quarter last year, partially offset by volume growth across our businesses and higher trading income.

• 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 of 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 are likely to 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 to Book Value 

Stock recommendation

An advantaged business mix, diversified across businesses and geographies, operating momentum in each business, and improved efficiency empowered the bank to report strong Q1 2021 results with solid revenue growth of 7.7% and net income at CAD 1,666 million. The bank's capital position continues to strengthen with a CET1 ratio of 12.4%, positions the bank well for growth. Moreover, the bank has a proven track record of dividend distribution and offering a decent dividend yield amid a low interest rate environment. Therefore, based on the rationales discussed above and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 144.40 on June 09, 2021. We have considered Bank of Nova Scotia, Royal Bank of Canada, Bank of Montreal, etc., as the peer group for the comparison.

One-Year Technical Price Chart (as on June 09, 2021). Analysis by Kalkine Group

First National Financial Corporation

First National Financial Corporation (TSX: FN) is a leading Canada based mortgage originator, underwriter, and servicer of prime residential and commercial mortgages. 

Key Highlights:

• An Income Play: The group has a solid history of stable dividend payment, backed by consistent profitability. Moreover, FN has 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 ~4.7%, which looks decent considering the current interest rate scenario.           

Dividend History

• Growth in Mortgage under Administration (MUA): The group reported impressive growth in its Mortgage under administration (MUA) by leveraging the company’s origination platform. Notably, MUA stood higher at CAD 119.6 billion, as compared to CAD 113.5 billion in pcp. The platform is fixed cost in nature, and hence an increase in the mortgage origination subsequently reduces the costs of underwriting. 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.
  

Q1FY21 Financial Highlights:

• FN announced its first quarter result, wherein the company posted revenue of CAD 336.492 million, higher than CAD 274.650 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 71.475 million, as compared to a loss of CAD 3.255 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,

Q1FY21 Financial Highlights (Source: Company Report)

Risks: The Company derives its major revenue from mortgage origination activities and are funded either by placement with institutional investors or through securitization conduits. 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:

The Management indicated that it expects strong residential origination in Q2FY21, as compared to the previous corresponding period, supported by growing traction from the commercial segment in mortgage origination. The group remains confident that its strong relationships with mortgage brokers and diversified funding sources will continue to benefit the company’s operation even in the sluggish economic scenario and would help them to stay ahead of its competition. We have valued the stock using the P/E-based relative valuation method and have arrived at single-digit (in percentage terms) upside. For the said purposes, we have considered peers like Home Capital Group Inc, IGM Financial Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock of FN at the closing price of CAD 50.22 on June 09, 2021.

One-Year Technical Price Chart (as on June 09, 2021). 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.