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Analysts take a dimmer view of CIBC after profit falls shy

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Analysts downbeat on CIBC Analysts are taking a dimmer view of Canadian Imperial Bank of Commerce after the bank missed estimates on second-quarter results yesterday.

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UBS Securities Canada and National Bank of Canada, for example, cut their targets on CIBC shares after the bank posted a quarterly profit of $678-million or $1.60 a share, up from a year earlier but about 20 cents off what analysts had expected on earnings per share.

UBS analyst Peter Rozenberg cut his 12-month price target on the stock to $88 from $90, though maintained his "buy" rating, saying loan growth remains the biggest issue for the bank.

"Lower retail margins, and higher expenses, imply a more competitive environment," he said. "This is a key theme this quarter that implies a more moderate outlook. It also implies a preference for more international focused banks like BNS or TD."

National Bank analyst Peter Routledge trimmed his target to $89 from $91, and cut his rating to "sector perform" from "outperform."

"We continue to like [CIBC's]long-term risk/return profile - that is, reinvesting capital in domestic businesses that hold good competitive positions will ultimately produce rising dividends for shareholders," Mr. Routledge said.

"The bank has also held open the possibility of accretive preferred share redemptions in addition to the one announced [Thursday] In the nearer term, however, [CIBC's]overweight position toward the Canadian household combined with slowing credit demand and intensifying price competition in retail markets warrant a sector perform rating, in our view."

As Globe and Mail reporters Grant Robertson and Tim Kiladze note today, Canadian banks are feeling the squeeze of tighter competition on everything from mortgages and home equity lines of credit to interest rates on deposits.

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"Key themes evident in Canadian banks' 2Q FY11 results so far include: (1) slower growth and increased competition in Canada, and (2) loan quality that is even better than expected," said Desjardins analyst Michael Goldberg.

"With these themes in mind, we believe that the stance we have taken toward our favoured banks - TD, BNS and BMO - is validated. These stocks should continue to be superior performers among the banks. The key reason is that their international businesses provide them with more sources of growth and leave them less vulnerable to domestic competition."

Also, Mr. Rozenberg boosted his price target on National Bank of Canada to $82 from $78 after its strong results and dividend increase yesterday.

RBC boosts dividend Royal Bank of Canada also boosted its quarterly dividend today as it posted a stronger second quarter, though it fell shy of analysts estimates.

RBC hiked its dividend by 8 per cent, to 54 cents, the first increase in nearly four years, Grant Robertson reports.

Canada's largest bank earned $1.51-billion, or $1 a share in the quarter, compared to $1.33-billion, or 88 cents a year earlier. Revenue rose 2 per cent to $7.13-billion. Analysts, on average, expected $1.11 a share in the quarter.

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"Canadian banking continued to underpin our results, generating over half of our earnings," said chief executive officer Gordon Nixon.

"We continued to outperform and drove solid volume growth of 7 per cent by leveraging our strong branch network and alternative distribution capabilities."

Analyst Michael Goldberg of Desjardins said he hadn't expected a dividend hike until the fourth quarter.

"Royal's annual 2011 dividend is C$0.01 below the consensus annual dividend for 2011 of C$2.05," he said. "The payout of 46 per cent (based on our FY11 EPS forecast) is within [Royal's] 40-50 per cent payout range and implies sustainable quarterly EPS of C$1.08-1.35 to support the higher dividend."

Sharing the burden Europe's leaders are becoming increasingly adept at finding nice ways to say Greece may not be able to pay its debts.

The term heard most often is "restructuring," which means Greece would strike a deal with its debtholders to change the terms.

Earlier this month, Luxembourg's Prime Minister Jean-Claude Juncker suggested that EU finance officials would study the idea of "reprofiling," or a "soft restructuring" that would push out maturity dates.

Then today, French President Nicolas Sarkozy told reporters at the G8 summit in Deauville, France, that he doesn't like the word restructuring.

"If it means that we can think of ways for the private sector, private operators, to take on a share of the burden, it's not restructuring at all; then there are formulas, there is no problem, and we should then converge in that direction," Mr. Sarkozy said, according to Bloomberg News.

Greece, of course, says it won't default, restructure, soft restructure, reprofile or share the burden. But today, for example, its political elite couldn't strike a deal at an emergency meeting on solving the crisis.

Consumer prices rise in Japan Finally, there's inflation in Japan, though it's slight.

Consumer prices inched up 0.3 per cent in April from a year earlier in Japan, which has struggled through a deflationary period, and 0.6 per cent when fresh food is taken out of the measure. That latter measure marks the first increase in over two years, but the headline inflation rate has been positive, though barely, off and on.

"Granted, the 0.3-per-cent year-over-year rise in April consumer prices is still extremely modest and only comes about after the earthquake put pressure on supplies, but at least it looks like deflation, by definition, is over, for now, and strictly by definition (I like to stress that point)," said senior economist Jennifer Lee of BMO Nesbitt Burns.

Separately today, the Fitch ratings agency knocked down its outlook on Japan's debt to negative, saying the disaster that struck the country in mid-March will add pressure to its bloated debt.

RIM target of class action Research In Motion Ltd. says it's the target of a "purported" class action suit alleging "false and misleading statements" by certain of its officers on the BlackBerry maker's financial condition and outlook.

"RIM believes that the allegations are without merit," the technology giant said in a statement, adding it would defend itself "vigorously."

The lawsuit, filed in the U.S. District Court for the Southern District of New York, seeks damages for investors who bought stock between Dec. 16, 2010, and April 28, 2011.

April 28 was the day that RIM cut a quarterly profit outlook made just a month earlier, trimming its projection to between $1.30 (U.S.) a share and $1.37 for the first quarter, a 7- to 16-per-cent cut from an earlier forecast.

The suit cites "disappointing fourth quarter and fiscal 2011" results and guidance issued on March 24, which sparked a drop in the stock, and the April 28 profit warning.

"Specifically, the company failed to inform investors that its aging product line and inability to introduce new products to the market was negatively impacting the company's business and margins," the suit alleges.

"Contrary to defendants' statements, the company was unable to timely introduce new products, which were critical to the company's ability to maintain its market share in the extremely competitive smart phone market. RIM's inability to bring new products to the market was further impeded by the fact that the company had become resource limited as it simultaneously attempted to develop new smart phones, a new operating system, and a new tablet computing device."

The suit is filed on behalf of Mary T. Stabile of Plano, Texas. It names the company, co-chief executives Jim Balsillie and Mike Lazaridis, and chief financial officer Brian Bidulka.

UBS trims CP outlook UBS Securities Canada has trimmed its outlook on shares of Canadian Pacific Railway , reflecting "modest reductions" in the security firm's long-term projections for earnings per share.

Analyst Tasneem Azim cut her 12-month price target on the stock to $70.50 from $72, though she held her "buy" rating. She also trimmed her earnings per share estimate for the second quarter to 78 cents from $1.06.

"Notwithstanding these reductions, we maintain our constructive investment thesis on CP," she said.

"While investors have reason to be sceptical given the performance year-to-date, we believe there is some truth to the idea that CP was dealt a bad hand in [the first half of 2011] Further, with [the first half]nearly in the rear-view mirror, we believe investors' focus should return to the growth opportunity that lies ahead. In our view, there is scope for earnings and volumes to stage a meaningful recovery as operating conditions across the network normalize, and the company is able to focus on its long-term strategic goals rather than quarterly obstacles."

The railway has been hurt by harsh weather, though earlier this month boosted its quarterly dividend by 3 cents.

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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