Analyst Note| Eric Compton, CFA |
Capping off a strong quarter of earnings for the Canadian banks, narrow-moat-rated Canadian Imperial Bank of Commerce reported decent third-quarter earnings, with EPS down 13% year over year and an adjusted return on equity of 12.9%. The EPS decline was roughly middle of the pack for peers, as adjusted preprovision revenue was up 1% year over year and provisioning declined to CAD 525 million, from CAD 1.4 billion in the second quarter, although provisioning was still elevated compared with CAD 291 million in the third quarter of 2019. Net interest income was up 2% despite declining net interest margins, and fee income was down 3% year over year. The bank’s common equity Tier 1 ratio improved to 11.8% from 11.3% last quarter. Overall, the theme this quarter for the Canadian banks, CIBC included, is that credit costs are already receding, while revenue is generally holding up well. Pressure on retail and commercial banking revenue has been offset by strength within capital markets and wealth operations. While we don’t expect record capital market activity to continue indefinitely, depending on future economic developments, fee income could continue to recover, and provisioning could continue to recede. CIBC appears to have a manageable level of what we would consider higher-risk lending exposures, namely energy and industries most affected by COVID-19, at just under 5% of total loans, while the bank’s reserve levels are relatively in line with peers who have similar exposure levels. As we incorporate third-quarter results into our projections, we do not plan to materially change our fair value estimate of CAD 117 ($85).