Canadian Imperial Bank of Commerce Earnings: Provisioning Keeps Piling Up, Trend Could Continue

Narrow-moat-rated Canadian Imperial Bank of Commerce CM, or CIBC, reported OK fiscal third-quarter results. Adjusted earnings per share were CAD 1.52, representing an 18% decline year over year and 17% decline sequentially, largely driven by outsized provisioning. Results generally fit within the overall pattern we expected for the Canadian banks this year, as we envisioned slowing loan growth, an increase in credit strain, and some pressure on net interest income growth.

While revenue and expenses were roughly in line with our expectations, provisioning was a big disappointment. All Canadian banks are seeing some increases in credit strain; however, the increase in provisioning at CIBC was the largest among its peers this past quarter. The increase was driven by a change in the bank’s macro outlook (expecting more strain on Canadian debt service ratios) and increasing reserves and losses on commercial real estate loans, primarily within its U.S. portfolio.

Reserves on U.S. CRE office loans are now at 7.6% of loans, which we suspect could still go higher as we have seen some U.S. banks with ratios of 10% or more. Management also admitted that provisioning in 2024 could outpace levels seen in 2019, which would be slightly above what we were projecting for next year. Our main conclusion is that we wouldn’t be surprised if provisioning comes in ahead of peers for another quarter or two, with some underlying risk being exposed within CIBC portfolios.

We don’t want to run too far with this quarter’s results, and we do not think the U.S. office portfolio, comprising less than 1% of loans, will materially hurt CIBC’s capital ratios, but investors will likely be waiting to see less surprises on provisioning before they gain confidence in the bank’s shares again. As provisioning is likely to run a bit ahead of our previous expectations, we would view this quarter’s results as a slight negative in the context of our fair value estimate of CAD 68/USD 51 per share.