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Morningstar | OK 4Q Results for CIBC; Mortgage Growth Is Slowing, but Rest of Consumer Portfolio Grows

Narrow-moat-rated Canadian Imperial Bank of Commerce reported decent fiscal fourth-quarter results that came in a bit below our full-year projections. While these results do not alter our long-term thesis on the firm, after making some slight adjustments to our models, we are lowering our fair value estimate for Canadian shares to CAD 131 from CAD 132 and decreasing our fair value estimate for U.S. shares to $98 from $102, as exchange rates have changed since our last update.

Adjusted diluted EPS was up 7% year over year, coming in at CAD 3. The adjusted return on equity dipped below 17%, at 16.4% for the quarter, but adjusted full-year results were at 17.4%. These continue to be top-tier numbers for the bank compared with peers. Further, the credit quality of the mortgage portfolio remained excellent, as the percentage of gross impaired Canadian mortgages remained steady at 0.24%, the percentage of write-offs was unmoved at 0.01%, and delinquencies were range-bound at 0.24%. Canadian mortgage balances were down slightly quarter over quarter, and up less than 1% year over year, fitting well within our overall thesis of slowing mortgage and consumer loan growth for Canada, and for CIBC in particular as the bank pulls back from its prior outsize growth in the mortgage space. Encouragingly, though, the bank has grown faster than peers within its other personal lending portfolios, which gives some credence to the story that CIBC’s latest wave of mortgage growth has increased overall relationships with consumers. Credit card balances were up roughly 2% for the year. CIBC had been one of the most aggressive pursuers of growth, particularly within Canadian real estate, and now we see that year-over-year balances within mortgages have grown slower than all peers, ranked at number 6.

We think it is fear around this past growth, and questions about the bank’s ability to compete without outsize mortgage growth, that have led to a discount in the stock despite the current, much improved performance. With the bank currently generating between 30 and 40 basis points of internal capital per quarter, and a current common equity Tier 1 ratio of 11.4%, it would take quite a deterioration to cause serious issues for the bank.

Results were generally strong for all segments, with most reporting growing net income and operating leverage year over year. Canadian personal and small business banking saw some uplift in net interest margins, a growing asset base, and expense control leading to net income growth of just over 7% in the fourth quarter. Canadian commercial banking and wealth management also saw strong net income growth of 16%, with assets under management up just 2% year over year, but commercial deposit and loan balances growing by 15% and 10%, respectively. The U.S. segment continued to benefit from rising rates, and further cross-selling with cross-border clients. Finally, the capital markets segment also saw decent growth, with revenue up 3% for full-year results, a respectable result compared with peers.

The bank gave updated disclosures around its energy book, where Canadian heavy oil exposure makes up less than 0.2% of total loans. Further, uninsured retail exposure to the Alberta area makes up 3.7% of loans. While the proportion of the heavy oil book rated investment grade is a bit lower than some peers, we believe the recent shocks to the energy industry should be quite manageable.