Stock Up Sale
Canadian Imperial Bank of Commerce (TSX:CM) stock fell 10% after the U.S. banks raised the alarm. The risk of non-diversification caused the fallout. The last two banking crises have taught us that no matter how secure a company, an excess of anything can cause a bubble. And banks that have too much exposure take years to recover from a bubble. CIBC was significantly affected by the 2008 financial crisis, and it took the bank stock over nine years to return to the 2007 bubble peak. Should you be worried about your CIBC stock holdings?
Fundamentals of Canadian Imperial Bank of Commerce
Founded in 1961, CIBC is a relatively younger bank among the Big Six. But it climbed to the ranks and got its spot among the bank veterans with over 100 years of banking operations. This Canadian bank has personal and commercial banking operations in Canada and the United States (15% of the revenue). It also offers wealth management solutions.
The banking operations are of loans and deposits, where the source of income is net interest income and non-interest income from transactional and processing fees. Around 65% of CBIC’s loans have exposure to real estate, with 55% consumer and 10% commercial. CIBC’s higher exposure to real estate makes it relatively riskier than other big four banks with a well-diversified loan portfolio and customer base.
In the first quarter of 2023, CIBC’s non-interest expense ($3.02 billion) surpassed the non-interest income ($2.72 billion) due to an increase in the legal provision of $1.17 billion. The bank is in a legal battle with the Canada Revenue Agency over a $1.6 billion income tax liability on dividends received between 2011 and 2017. While the bank has not yet paid the charges, it has set aside the amount for the liability.
The legal provision is a one-off expense reported in the first quarter alone. But this expense is unlikely to affect the coming quarterly earnings. Hence, there is a significant gap between its reported and adjusted earnings.
CIBC’s risk-management efforts
CIBC’s mortgage loan portfolio has its advantages. At a time when other banks increased their provision for credit losses (PCL), CIBC reduced its PCL to $295 million in the first quarter of 2023 from $436 million in the fourth quarter of 2022. However, I would count the stock as risky, because of the fallout of the U.S. subprime mortgages in 2008.
Canada’s house prices have been falling since interest rate hikes began. CIBC has been keeping a close watch on its $31 billion mortgages renewing in the next 12 months, of which $9 billion have variable rates. The new interest rate will apply when variable-rate mortgages renew, increasing monthly payments for homeowners.
Around 71% of its $31 billion mortgages are uninsured, which makes CIBC vulnerable to a credit incident like the 2008 subprime mortgage bubble burst. The bank has maintained an 11% common equity tier-one ratio, which shows the percentage of equity capital set aside to absorb defaults from risky assets. The ratio is way above the 4.5% minimum set under Basel III. A higher ratio hints that the bank has a lower risk of a collapse.
CIBC also has a 134% liquidity coverage ratio, hinting it can fulfil its current obligations while keeping a 34% buffer for higher withdrawals.
Should you worry about your CIBC holdings?
| Bank name | Scotiabank | RBC | CIBC | TD Bank | Bank of Montreal |
| Stock price change (March 6-27) | -6.30% | -6.78% | -10.70% | -10.9% | -10.30% |
| 2022 revenue exposure to the U.S. | 6.86% | 24.18% | 14.88% | 37.61% | 50.37% |
| Common equity tier-one ratio | 11.50% | 12.70% | 11.60% | 15.50% | 18.20% |
| Liquidity ratio | 122% | 130% | 134% | 141% | 144% |
Among the Big Five banks, CIBC has a moderate risk because of its lower exposure to the United States but higher exposure to uninsured and variable-rate mortgages. If your portfolio has too much exposure to CIBC, diversify. If you are looking for bank stocks, Royal Bank of Canada has a diversified asset base and is better positioned for a faster recovery.
