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Will CIBC’s pricey PrivateBancorp deal have a happy ending?

Will CIBC's pricey PrivateBancorp deal have a happy ending?

The bank's U.S. operations blew up spectacularly in the early 2000s.


Top 1000 rank #22 | 2016 Revenue $18.8 billion | 2016 Profit $4.3 billion

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For the second summer in a row, there will be little rest for the weary at Canadian Imperial Bank of Commerce. Executives will be rolling up their sleeves to complete a long-delayed $4.9-billion (U.S.) acquisition of PrivateBancorp, Chicago's third-largest bank. CIBC tabled its first offer in June of last year, but U.S. bank stocks surged last fall and winter, and CIBC had to sweeten its bid twice before PrivateBancorp shareholders voted to accept it in May. CIBC CEO Victor Dodig was clearly relieved. "This merger is a major milestone for us," he said in a statement. "The transaction creates a strong platform for us to serve our clients' needs throughout North America."

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In many ways, however, CIBC has just cleared a first hurdle. The deal marks a return to territory that was a minefield for the bank: the United States. Starting in the late 1990s, John Hunkin, who was CIBC's head of investment banking before he was appointed CEO in 1999, tried gambits that included a push into Wall Street investment banking and the U.S. launch of the Amicus electronic banking network, which operated mini-banks for U.S. grocery store chains.

None of them worked, and when Gerry McCaughey succeeded Hunkin in 2005, he reversed course and ushered in a new risk-averse era. CIBC agreed to pay $2.4 billion (U.S.) to settle a class-action lawsuit with Enron investors, and the bank retreated from the U.S. market. When CIBC later swallowed billions of dollars in writedowns on exposure to U.S. subprime mortgages during the financial crisis, that pullback seemed eminently sensible.

But since then, caution has been costly. CIBC's share price growth has lagged behind the other Big Six banks over the past decade. When Dodig assumed the top job in 2014, prospects for expansion in Canada were limited. He needed to look abroad.

On its face, Dodig has reasons to be bullish about the PrivateBancorp deal. Larry Richman, who became PrivateBancorp CEO in 2007, has cleaned up troubled assets and built a solid Midwestern lender with operations in 13 states. He is a respected relationship banker, and the deal gives him access to CIBC's much larger balance sheet—PrivateBancorp has just $28 billion in assets, compared to CIBC's $529 billion.

But history is littered with examples of Canadian banks' missteps in the U.S. market. Any boost to CIBC's earnings will likely take years to materialize. Darko Mihelic, an analyst at RBC Capital Markets, is taking a wait-and-see approach. "How exactly does [CIBC] stitch together its U.S. businesses to form a coherent brand presence in the U.S.?" he wrote in a research note. That's a key question that remains.

The Big Six Canadian banks’ profits by geography. Royal Bank has operations in about 40 countries around the world and often wins headlines for its overseas expansion plans. But RBC, like the other Big Six banks, still generates an overwhelming majority of its profits here in Canada. The portion from foreign operations is slowly growing at RBC, but surprisingly, when you look at the Big Six as a group, it’s the domestic portion that has climbed.

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