Canadian Imperial Bank of Commerce is finding ways to squeeze higher profit from its domestic banking business, calming concerns about sluggish mortgage growth as housing activity slows.
CIBC’s Canadian mortgage balances grew only 3 per cent in the third quarter, down sharply from an aggressive 12-per-cent growth rate a year ago. Even so, earnings from CIBC’s domestic retail bank rose 14 per cent in the fiscal third quarter, as the bank added loans and deposits that generated wider spreads thanks to rising interest rates in Canada and the United States.
Canada’s fifth-largest lender was the second bank to report better-than-expected profit in the three months that ended July 31, after Royal Bank of Canada kicked off earnings season with strong growth on Wednesday. All Canadian banks are affected by a slowdown in the country’s largest housing markets, where activity has been constrained by tougher regulations. But a solid economy with low unemployment rates set the table for another smooth quarter, and each of CIBC’s main business lines delivered, boosting total profit by 25 per cent year-over-year.
“We’re on a path to transform our bank,” said Victor Dodig, CIBC’s chief executive, on a conference call. “I think our results speak for themselves.”
CIBC is more heavily exposed to the Canadian economy – and to the mortgage market in particular – than its peers, and that has weighed on the bank’s share price as investors fret about a future downturn. For years, CIBC had added loans to its mortgage book much faster than other Canadian banks as it moved away from relying on third-party brokers, and replaced them with an in-house team of mobile advisers. But now, the pendulum has swung and CIBC’s mortgage balances are growing more slowly, compared with its rivals.
Facing stiff competition, the bank’s Canadian mortgage balances were essentially unchanged from the second quarter, although the bank’s executives see early signs that activity could pick up again as clients start to get more comfortable with higher interest rates and new stress tests on mortgages.
“What we had guided to was that over time, we would converge to market [rates of] growth,” said Kevin Glass, CIBC’s chief financial officer, in an interview. “These are very big operations that cannot be calibrated to the single mortgage origination. So I think that over time, you're going to see some pluses and minuses.”
CIBC reported third-quarter profit of nearly $1.4-billion, or $3.01 a share, compared with $1.1-billion, or $2.60, a year ago.
Adjusted for one-time items, which included costs related to last year’s US$5-billion acquisition of Chicago-based PrivateBancorp Inc., CIBC said it earned $3.08 a share. Analysts surveyed by Bloomberg LP were expecting $2.93 a share, on average.
The bank also raised its quarterly dividend by 3 cents to $1.36 a share, after buying back 1.75 million shares during the quarter.
In spite of continuing worries about free-trade negotiations and tariff wars, profit from Canadian commercial banking and wealth management climbed 20 per cent from the same quarter last year, while loan and deposit balances each increased 10 per cent. “We’re very conscious of the uncertainties and challenges related to trade protectionism that face us and face our clients,” Mr. Dodig said. “My own belief is that rational minds will prevail.”
CIBC also continued to build its U.S. arm faster than expected. Third-quarter profit from U.S. commercial banking and wealth management rose 295 per cent to $162-million – thanks to the inclusion of PrivateBancorp, which was acquired late in the third quarter of 2017. That unit, since rebranded as CIBC Bank USA, contributed $121-million in profit, up 29 per cent from the prior quarter, thanks to rapid growth in loans and deposits. In total, U.S. earnings accounted for nearly 16 per cent of CIBC’s total profit, putting the bank ahead of schedule as it pushes to generate 17 per cent of overall profit in the United States by 2020.
In the Caribbean, however, things didn’t go so smoothly for CIBC. In June, Barbados announced plans to restructure its sovereign debt, and CIBC subsidiary FirstCaribbean International Bank is heavily exposed to the government of Barbados through securities and loans, according to public filings. That prompted CIBC to increase provisions for credit losses – the money the bank sets aside to cover bad loans – by 15 per cent to $241-million.
Shaky Caribbean loans aside, CIBC’s credit portfolios showed few signs of stress: Net write-offs on residential mortgages, credit cards and personal lending in Canada remained low, despite speculation that Canada may be entering the later stages of a business cycle. “There’s nothing that we see that would indicate a cliff coming up,” Mr. Glass said. “The economy continues to be strong, the outlook continues to be solid.”
Bank of Nova Scotia, Bank of Montreal, National Bank of Canada and Toronto-Dominion Bank are all scheduled to report third-quarter earnings next week.
James Bradshaw