A modest 2-per-cent bump in the Canadian Imperial Bank of Commerce’s third-quarter profit came as a pleasant surprise to investors, underscoring the dim expectations placed on the country’s fifth-largest bank.
Toronto-based CIBC benefited from better margins in Canadian retail banking and impressive growth in U.S. commercial loans and deposits. That was an encouraging sign, after CIBC warned investors in May to expect little to no profit growth for the balance of the fiscal year. By midday Thursday, CIBC’s share price jumped 2.4 per cent higher to $101.60 on the Toronto Stock Exchange.
Yet CIBC’s third-quarter results were hampered by a sizable mortgage portfolio that isn’t growing, increases in expected loan losses increased and a weak quarter for capital markets. The bank’s overall growth still trails its Canadian peers by a wide margin, and its executives acknowledged on Thursday that all banks face an uncertain economic backdrop as CIBC looks to turn a corner.
“We all know we’re operating in a challenging macroeconomic environment with geopolitical tensions and global trade uncertainties," said Victor Dodig, CIBC’s chief executive officer, on a conference call with analysts. "But, having said that, we remain confident in our ability to manage through this environment.”
For the three months that ended on July 31, CIBC reported profit of $1.4-billion, or $3.06 a share, compared with $1.37-billion, or $3.01 a share a year ago.
Adjusted to exclude certain items, CIBC said it earned $3.10 a share. That surpassed expectations from analysts who had expected adjusted earnings of $3.06 a share, according to data from Refinitiv.
The bank also raised its quarterly dividend by four cents to $1.44.
Profit from Canadian personal and small business banking rose 3 per cent to $657-million, as promotional prices on deposits expired, improving the bank’s margins on loans. And CIBC continues to reap the benefits of a rapid expansion in its U.S. commercial banking and wealth management division, where profit rose 6 per cent to $172-million. CIBC has opened new offices in Tampa Bay, Miami and Dallas, and added staff in cities such as Boston, helping its CIBC Bank USA subsidiary improve its loan balances by 15 per cent and deposits by 20 per cent.
The U.S. arm’s performance has fuelled increasing speculation that CIBC may be considering acquiring another bank to bolster its U.S. presence. Two years ago, it bought Chicago-based PrivateBancorp Inc. for US$5-billion and made it the cornerstone of a revamped U.S. strategy. And last month, CIBC struck a smaller deal to buy boutique investment bank Cleary Gull Inc. for an undisclosed sum.
“We continue to believe that the likelihood of a U.S. deal is rising,” said Steve Theriault, an analyst at Eight Capital Corp., whose research notes that CIBC has gone three straight quarters without buying back shares, while its common equity Tier 1 ratio – the key measure of a bank’s capital reserves – rose to a robust 11.4 per cent.
Mr. Dodig said CIBC is open to making acquisitions, “but only if there is the right cultural fit ... and on financial terms that would make it accretive to our shareholders in a reasonable period of time." He later added: “We’re very patient. It’s going to take time.”
CIBC’s expenses rose nearly 4 per cent, due mostly to hiring new staff in commercial banking and capital markets, as well as heavy spending on technology and digital initiatives. In the near term, CIBC expects costs will continue rising by roughly 5 per cent.
Provisions for credit losses, or the money banks set aside to cover bad loans, increased 21 per cent to $291-million compared with a year ago. Most of that increase was due to higher provisioning for loans that are still performing but could go sour, according to the bank’s models – particularly in the energy sector as a result of lower natural gas prices. Provisions for impaired loans in commercial banking rose modestly, but chief risk officer Laura Dottori-Attanasio said there was “nothing unusual” in those losses.
“There’s nothing in particular right now that would mean that we would significantly change our outlook," chief financial officer Kevin Glass said in an interview.
The bank also announced that Mr. Glass and head of technology and operations Kevin Patterson will both retire next year. Mr. Glass will step down as CFO on Oct. 31, to be succeeded by Hratch Panossian, CIBC’s current executive vice-president, global controller and investor relations. Mr. Glass will stay on until January, and Mr. Patterson remains in his role until May 1, 2020.
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James Bradshaw