Sept. 15 (Bloomberg) -- The failure of Lehman Brothers Holdings Inc. shows that investment banks need the backing of a consumer bank to survive, said CIBC World Markets Chief Executive Officer Richard Nesbitt.

``I don't think around the world there's any place for a large investment bank unless they're part of a commercial bank,'' Nesbitt told investors at a conference in Toronto today. ``I don't think they'll exist, except for the very, very tiny investment dealers.''

In the biggest reshaping of the financial industry since the Great Depression, two of Wall Street's most storied firms, Merrill Lynch & Co. and Lehman Brothers, headed toward extinction today. Lehman filed for bankruptcy protection and Merrill Lynch was bought by Bank of America Corp., the largest consumer bank in the U.S.

``It's an actual evolution of the business,'' Nesbitt said. Investment banks will continue to shrink, and focus more on their domestic market, while trying to provide services to their consumer-banking clients, he said.

``There are a number of activities that won't make sense for banks to do anymore,'' said Nesbitt, who heads the investment- banking unit at Canada's No. 5 bank. ``The profit margin is not going to be there unless the pricing goes up or the funding costs come down.''

Canadian Imperial Bank of Commerce is paring back CIBC World Markets after taking C$7.55 billion ($7 billion) in pretax writedowns in the past five quarters tied to U.S. subprime mortgages. The bank sold most of its U.S. investment banking business, exited debt-related activities, cut jobs and recruited Nesbitt in January from the Toronto Stock Exchange to oversee the changes.

``I think you're going to see dramatic change in investment banks around the world,'' Nesbitt said in his speech. ``They're going to be smaller.''

Profit Target

Nesbitt said he's set an earnings target of C$300 million to C$500 million a year for CIBC World Markets, using C$1.5 billion in economic capital. The firm earned C$438 million in fiscal 2007 and C$498 million in fiscal 2006.

CIBC World Markets had a loss of C$4.33 billion in the first nine months of the fiscal year ending Oct. 31, after the writedowns tied to U.S. subprime securities.

Nesbitt said CIBC World Markets may have losses of about C$25 million from securities tied to Lehman Brothers.

``Lehman Brothers, in position to CIBC, was a collateral posting counterparty and we do not have large exposures,'' Canadian Imperial CEO Gerald McCaughey, 52, said at the conference.

CIBC World Markets will be hiring more analysts, sales people and traders as it focuses on its primary businesses, Nesbitt said.

``We do need to add to our bench strength,'' Nesbitt said. ``It was substantially depleted by a couple of the rounds of departures that we've seen over the last few years.''

The bank reduced its investment-banking staff by about 14 percent this year, he said.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

Last Updated: September 15, 2008 12:44 EDT