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Morningstar | CIBC Will Have to Prove the Doubters Wrong During the Next Downturn in Canada

Canadian Imperial Bank of Commerce is the fifth-largest bank in Canada by assets and one of six that collectively hold almost 90% of the nation's banking deposits. CIBC is more Canadian-focused than some of its more international peers, but the bank plans to eventually have up to 25% of revenue coming from the U.S. Despite having one of the larger domestic branch networks, CIBC’s products haven’t typically had top share in Canada, though the bank has made significant strides in multiple categories since 2011. Overall, we believe that with increasing share in multiple categories and increasing product numbers per customer, CIBC has improved its core operating performance.While CIBC has encountered its own issues over the years, including multibillion-dollar write-downs in the aftermath of the global financial crisis, the bank has hit its stride since 2011. The bank has significantly improved consumer satisfaction ratings, focused on reoptimizing branches and improving internal processes, and has had decent success expanding its wealth operations. As a result, over the past five years, returns on equity have generally been near 20%, generally top two within Canada, and the bank’s operating efficiency appears poised to reach levels not seen for over a decade.Despite these improvements, several items give us pause. CIBC has some of the highest concentration in Canadian retail loan exposures, particularly to uninsured Canadian mortgages. While we don’t think the Canadian housing market is the same as the U.S. was in 2007, we estimate a downturn in Canada could affect CIBC more than other Canadian banks, both on the credit side, as well as on the overall growth side. As such, we are more conservative with our estimates for CIBC than with peers.CIBC remains focused on expanding in the U.S., and gains from the Private Bancorp acquisition are already playing out, exceeding expectations, and bringing some much-needed core banking capabilities for its cross-border clients. An expanding U.S. presence and potential pressures within Canada lead us to believe that return on equity is likely to be flat to down over the medium term for CIBC.