CIBC Extends Canada Push Into U.S. With PrivateBancorp Deal

  • Stock-and-cash deal for Chicago bank valued at $3.8 billion
  • CEO says deal expands CIBC’s options ‘south of the border’

Canadian Imperial Bank of Commerce agreed to buy Chicago-based PrivateBancorp Inc. for $3.8 billion, joining the list of Canadian lenders looking to the U.S. to diversify beyond their home turf.

The cash-and-stock deal will give CIBC, the country’s fifth-largest lender, a presence in 12 U.S. markets, and leverage its existing wealth-management platform in the country, the Toronto-based bank said Wednesday in a statement. PrivateBancorp, with about $17.7 billion in assets, serves largely middle-market companies, business owners and wealthy families.

“PrivateBancorp will allow CIBC to expand our U.S. commercial and private banking business and give us the deposit-taking capability we need south of the border," CIBC Chief Executive Officer Victor Dodig said on a conference call. “We will also extend our U.S. wealth-management footprint in new markets."

Canadian banks have turned to U.S. acquisitions as earnings growth from domestic lending slows amid a sluggish economy. Bank of Montreal, owner of Chicago-based BMO Harris Bank, acquired a U.S.-based finance business from General Electric Co. in December, while Toronto-Dominion Bank, which spent $17 billion building a U.S. retail banking network, has shifted in the last three years to buying U.S. credit-card portfolios. Last year, Royal Bank of Canada’s spent $5 billion to acquire California-based City National Bank to bolster its wealth-management operations.

‘Big Price’

“This is City National 2.0, meaning a very highly rate-sensitive bank decided that it’s better to take a bid from another buyer than to wait for higher rates," Christopher McGratty, an analyst with Keefe Bruyette & Woods Inc., said in an interview. PrivateBancorp “got a big price, City National got a big price," he added.

CIBC agreed to pay $18.80 in cash and 0.3657 of a CIBC common share for each PrivateBancorp share, according to the statement. The offer is worth about $47 a share for PrivateBancorp, a 31 percent premium based on the Tuesday closing prices of each bank. CIBC said it’s paying 18 times estimated diluted earnings per share for the next 12 months, with a price 2.2 times PrivateBancorp’s tangible book value.

CIBC shares slid 2.9 percent to C$97.61 at 11:43 a.m. in Toronto, paring this year’s advance to 7.1 percent. PrivateBancorp climbed 23 percent to $44.15 in New York.

Capital Advantages

The deal may be unattractive to investors because it could “eliminate CIBC’s capital advantage” and slow growth in dividend payments, said Steve Belisle, a portfolio manager for Manulife Financial Corp.

“We like banks that have exposure outside Canada because it allows them to grow faster than the domestic market,” said Belisle, who manages about C$3 billion ($2.3 billion). ‘‘However, if you do it by acquisitions in this matter, paying 18 times earnings, it doesn’t help you in the near term. It’s going to take a couple years before that deal contributes to earnings per share."

‘Strategic Fit’

Dodig said in April that he was looking to buy a deposit-taking commercial lender or private bank for C$2 billion to C$4 billion, while reiterating his goal of seeking U.S. acquisitions to complement the lender’s Atlantic Trust Private Wealth Management business.

“We get an incredible leadership team,” Dodig, 51, said in a telephone interview. “We feel absolutely confident that we’ve paid the right price."

PrivateBancorp, founded in 1989 and led by Larry Richman, has 35 commercial offices and 24 branches across the U.S., about 1,200 employees and posted net income of $185 million in 2015, CIBC said in a presentation on its website. Richman, who called the deal “a great cultural and strategic fit,” will continue as CEO and add the role of CIBC’s U.S. region head.

“With the strength of a broad North American operation behind our U.S. growth strategy, we will be in a great position to expand relationships with our existing clients and to win new client business,” Richman said on the conference call.

Reduces EPS

CIBC said the acquisition will reduce per-share cash earnings by 12 cents in the first year and add to earnings by the third year. PrivateBancorp is expected to add about C$400 million to CIBC’s net income after taxes by 2020, the bank said. CIBC said it expects one-time and ongoing pretax merger and integration costs of $130 million to $150 million. The Common Equity Tier 1 ratio is expected to be at least 10 percent and the leverage ratio more than 3.8 percent at the close.

“The acquisition is sizable, but the bank has been quite clear with its intentions and, despite being somewhat pricey and likely near-term dilutive to earnings, it should not be shocking to the market,” Barclays Plc analyst John Aiken said of the deal in a note to clients. “While PrivateBancorp fits the criteria that CIBC had been looking for, the personal banking operations could raise the specter of future growth or acquisition in retail banking.”

JPMorgan Chase & Co. and CIBC World Markets served as CIBC’s financial advisers, while Goldman Sachs Group Inc. was PrivateBancorp’s exclusive financial adviser.

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