In 15 years of managing money at Mawer Investment Management Ltd., Jim Hall has avoided one name among Canada’s five main banks: Canadian Imperial Bank of Commerce.
Now that the country’s cheapest bank stock is also expected to be the most profitable this year, Hall said CIBC is “absolutely” a stock he’d consider buying.
“The market is saying that CIBC’s higher risk than the others, but are we being overly harsh?” Hall said in a telephone interview from Calgary.
Hall, whose firm oversees C$10.5 billion ($10.5 billion) in assets, has had good reason to ignore CIBC, Canada’s fifth-biggest bank. The Toronto-based lender has written down billions in the past decade for bad bets on telecommunications firms, structured debt and failed energy trader Enron Corp.
CIBC’s share price relative to earnings was the lowest among Canada’s six-biggest banks for the first three weeks this month, the longest such streak since January 2008, according to data compiled by Bloomberg. Two years ago, the bank was the most expensive. CIBC will also have the highest profit growth among the group this year, according to analysts’ estimates.
CIBC’s trailing 12 months’ profit more than doubled over two years to Oct. 31, while shares gained 21 percent in that period. CIBC rose 27 cents to C$76.78 at 4:12 p.m. trading in Toronto.
“Investors may be concerned about paying up for the apparent strength in numbers without having a long enough series of quarters to rely on,” Juliette John, who helps manage C$13.3 billion including banks at Bissett Investment Management, said in a telephone interview from Calgary. Bissett bought CIBC shares in November, she said.
Canadian banks begin reporting fiscal first-quarter earnings tomorrow, starting with Bank of Montreal. The six biggest banks will collectively post a 3 percent decline in profit excluding items, John Reucassel, an analyst with BMO Capital Markets, said in a Feb. 14 note. This marks the first quarter the banks will report results under the International Financial Reporting Standards accounting rules.
CIBC is the most profitable of the six banks, with a return on equity of 21 percent, according to Bloomberg data. The other lenders range between 13 percent and 19 percent for the 12 months to October, the banks’ fiscal year end.
The bank will have the highest per-share profit growth this year, according to analysts’ forecasts. CIBC’s adjusted earnings will increase 6.8 percent for the year ending Oct. 31, compared with 4.3 percent for an Index of the six banks, according to Bloomberg surveys.
“If your earnings per share are growing and you do in fact have a very low valuation, eventually that corrects itself,” said Darko Mihelic, an analyst with Cormark Securities in Toronto, who rates the stock a “buy”. “To be this cheap with such a high dividend yield -- and knowing at some point CIBC will raise dividends again this year -- provides a lot of support.”
CIBC’s indicated dividend yield is 4.69 percent, second highest among Canada’s lenders after Bank of Montreal’s yield of 4.83 percent, according to data compiled by Bloomberg.
CIBC has been buying back preferred shares, which analysts factor in for earnings estimates, Mihelic said. Investors may be waiting to see more growth of assets and revenue, he said.
“Earnings per share growth isn’t necessarily coming from revenue growth or acquisitions, but instead it’s coming from a clean-up of its capital structure,” Mihelic said. “Investors prefer top-line growth, they prefer asset growth, and these are not promises CIBC has made.”
Eight analysts in a Bloomberg survey rate CIBC a “buy” and 11 rate it a “hold.” Among the six lenders, analysts are more optimistic on only Toronto-Dominion Bank and Bank of Nova Scotia.
Hall has avoided CIBC in the past because of concerns about management, even as he invested in Canada’s other top five banks. His Mawer Canadian Equity Fund returned 1.9 percent last year, compared with an 8.7 percent loss with dividends for Canada’s benchmark S&P/TSX Composite Index.
CIBC spent the past four years refocusing on Canadian banking, after being hit hardest by the financial crisis with about C$11 billion in writedowns between 2007 and 2009, more than any other bank in the country.
Chief Executive Officer Gerald McCaughey redoubled efforts to “de-risk” the bank since the crisis began, selling most of its New York-based investment bank, exiting risky businesses such as European leveraged finance and scaling back on debt securities that got the bank into trouble.
“CIBC has taken away a lot of the sharp knives,” said Tony Demarin, who oversees C$340 million including CIBC shares for BCV Asset Management in Winnipeg. “There are not a lot of operations they have that could cause those problems anymore. They’ve shrunk themselves down, they’ve de-risked the bank’s operations down to what I call a domestic core.”
Other investors and analysts including Craig Fehr say the shift toward Canadian consumer lending limits the potential for earnings growth.
“CIBC is a very profitable bank, and some of the decisions they’ve made over the last couple of years to get out of some of their capital markets businesses and shrink back into Canada a little bit more has made them very profitable,” Fehr, an analyst with Edward Jones & Co., said in a telephone interview from St. Louis. “However, we think this is offset by the fact that their growth platforms looking out over the long term are a little bit less compelling than some of their peers.”
Path Toward Growth
Other Canadian lenders such as Bank of Nova Scotia and Toronto-Dominion trade at higher multiples because they have a fairly clear path toward growth, Bissett’s John said.
“If we start to see a couple more periods where they have delivered decent earnings, then investors will become more comfortable with the story and be more comfortable in terms of awarding a higher valuation with the shares,” said John, whose Bissett Dividend Income Fund returned 5.2 percent in 2011. “It will require more evidence that they’re on the right track.”
Bank of Montreal, the fourth-biggest bank, will report profit excluding items of C$1.30 a share, down from C$1.32 a year ago, Reucassel said.
Royal Bank of Canada and Toronto-Dominion, the country’s two largest lenders, and National Bank of Canada, the sixth-biggest bank, report results March 1. Royal Bank, the largest lender, will report profit of C$1.14 a share, a 12 percent decline from a year ago, while Toronto-Dominion will report profit was unchanged at C$1.71 a share, according to Reucassel. Montreal-based National will report profit fell about 6 percent to C$1.74 a share, the analyst said.
Scotiabank, the third-largest lender, will say profit rose about 7 percent to C$1.16 a share when it reports March 6, according to Reucassel, while CIBC will say profit fell about 3 percent to C$1.95 a share when it reports March 8.