In the most recent quarter, this Canadian bank’s U.S. earnings soared by 425%.
The acquisition of a Chicago-based bank a year ago has steadily boosted profits and helped offset slowing demand for mortgages in Canada. The bank recently raised its dividend, which yields a high 4.6%. And the shares trade at a very low 9.8 times forecast earnings for 2018.
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CANADIAN IMPERIAL BANK OF COMMERCE (Toronto symbol CM; www.cibc.com) is Canada’s fifth-largest bank with assets of $590.5 billion.
CIBC paid $6.6 billion in cash and stock to acquire Chicago-based PrivateBancorp Inc. in June 2017. That firm mainly lends to small and mid-sized businesses. It also provides wealth management services. The additional revenue from PrivateBancorp has helped CIBC offset slowing demand for new mortgages in Canada.
If you exclude costs to integrate the acquisition, the bank’s overall earnings for the three months ended April 30, 2018, rose 25.7%, to $1.35 billion from $1.07 billion a year earlier. Due to more shares outstanding, earnings per share increased at a slower rate of 11.7%, to $2.95 from $2.64. That beat the consensus estimate of $2.81.
Earnings from Canadian retail banking (46% of the total) rose 16.3% in the quarter due to higher interest rates. The Canadian commercial banking and wealth management business (24%) reported 9.2% higher earnings. The gain is due to an increase in its assets under management. CIBC’s U.S. operations (11%) saw earnings soar 425.9% due to the PrivateBancorp acquisition. However, earnings at the securities trading unit (19%) fell 7.4% on higher non-interest costs and taxes.
Overall revenue in the quarter increased 18.3%, to $4.4 billion from $3.7 billion a year earlier. Loan-loss provisions rose 18.4%, to $212 million from $179 million. That’s partly due to the loans the bank assumed through its acquisition of PrivateBancorp.
CIBC also owns 91.5% of FirstCaribbean International Bank, which operates branches in Barbados and other parts of the Caribbean. It has over $12 billion U.S. in assets.
The newly elected government of Barbados recently stopped paying interest on government bonds held by foreign investors. It has also asked the International Monetary Fund for help.
Due to a weakening economy and growing deficits, Barbados has forced local banks to hold more of their reserves in government bonds. As of January 31, 2018, FirstCaribbean held $506 million U.S. of Barbadian government debt.
So far, the government has only stopped interest payments to external debtholders, not domestic investors. That has let FirstCaribbean avoid a writedown. Even if it eventually has to write off the full amount, that would have little impact on CIBC’s prospects.
In April, CIBC abandoned plans to sell shares of FirstCaribbean International Bank to the public through an initial public offering (IPO).
Earlier this year, CIBC raised its quarterly dividend by 2.3%. Starting with the April 2018 payment, investors receive $1.33 a share instead of $1.30. The new annual rate of $5.32 currently yields 4.6%, highest among the big five Canadian banks.
CIBC will probably earn $11.76 a share in fiscal 2018. The stock trades at just 9.8 times that forecast.
Recommendation in The Successful Investor: CIBC is a buy.
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