DBRS Confirms CIBC at AA and R-1 (high), Negative Trend Unchanged

DBRS is today maintaining the Negative trend on Canadian Imperial Bank of Commerce (CIBC or the Bank) and related entities and confirming all ratings of CIBC, including the Bank’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high).

The trend remains Negative (where it was originally placed on April 2, 2008), reflecting DBRS’s view that the effectiveness of changes, including changing senior management at the Bank, increasing the depth of its senior risk management team, and revamping risk management process and procedures, has yet to be tested, particularly to generate consistent and sustainable earnings. Overshadowing these actions is CIBC’s exposures in the structured credit runoff business. With respect to the structured credit runoff portfolio, management believes it has taken actions to limit the losses on both earnings and capital. CIBC’s ability to improve business practices, reputational-related risk management, and the outcome from the run-off portfolio will have an impact on the trend.

CIBC’s current ratings are supported by its lower-risk retail business mix and progress in improving its expense ratio, which should contribute to earnings stability, and improved capital levels, thereby better positioning CIBC for future downturns.

Over the last decade, the Bank has repeatedly tightened risk management as a result of negative events surfacing, followed by increased concentration risk developed through rapid expansion of select business lines. DBRS remains concerned the actions taken by CIBC over the past year could potentially be a repetition of this pattern.

Admittedly, CIBC has made some progress in reducing the complexity of the organization, including exiting non-core derivatives trading and non-bank sponsored asset-backed commercial paper (ABCP) conduits, and reducing proprietary trading activities, which should reduce the business risk of the Bank. During the year, CIBC stepped up its efforts to exit certain capital markets businesses, including reducing the size of the equity and commodity structured products, and selling the U.K. leveraged lending business. These businesses were not aligned with its capital market strategy of being a client-focused investment bank based in Canada nor its overall Bank strategy of delivering consistent and sustainable performance.

With many of these changes put in place in fiscal 2008, DBRS will be evaluating CIBC’s ability to generate greater stability of earnings from core businesses, particularly as credit markets weaken in Canada.

At the end of Q2 2009, the gross notional structured credit runoff business exposure was US$36.6 billion of which US$5.9 billion was to U.S. residential mortgage market (USRMM) and the remainder of US$30.7 billion to other (Non-USRMM). During the last 12 months, CIBC has been positioning itself to absorb further charges and losses related to its structured credit runoff portfolio, including raising capital (preferred shares and its first ever innovative Tier 1 instrument – CIBC Tier 1 Notes (Please see the DBRS press release dated March 9, 2009 for further details)), entering into transactions to limit the risk on U.S. residential mortgage market exposures, and reducing the size of the non-U.S. residential mortgage market structured credit runoff portfolio, albeit slowly. Given the duration of the structured credit runoff portfolio, a significant amount of capital will be tied up which could otherwise be used to invest in building the franchise.

Since the beginning of Q1 2008, there have been more than $8.5 billion (pre-tax) in losses on structured credit runoff activities, valuation adjustments and charges. CIBC, like the rest of its Canadian banking peers, benefited from a significant accounting rule change, effective August 1, 2008, to allow certain trading assets to be designated into available for sale and held for trading categories; allowing the fluctuation of these asset values to no longer be recognized immediately in the income statement. This accounting action should contribute to reducing reported earnings volatility as global liquidity concerns continue to impact pricing.

CIBC’s long-term Deposits & Senior Debt rating, at AA, is composed of its intrinsic assessment at AA (low) and its support assessment at SA2 (reflecting the expectation of systemic and timely external support by the government of Canada). The SA2 results in a one-notch benefit to the senior debt and deposits and subordinated debt ratings, which benefit from this implied support.

On June 29, 2009, DBRS announced a change to the banking methodology, specifically to bank preferred shares and Tier 1 innovative instruments. The change resulted in a downgrade of these instruments by one notch. Please see the DBRS press release dated June 29, 2009, for further details.
Headquartered in Toronto, Canada, Canadian Imperial Bank of Commerce has full-service banking operations in retail and wholesale banking and wealth management in Canada, and a retail business in the Caribbean.

CIBC has three segments, two strategic business lines and Corporate & Other. The operating businesses are CIBC Retail Markets (personal and small business banking and wealth management), and Wholesale Banking, which earned operating net income (DBRS adjustments) of $2.3 billion and losses of $4.2 billion, in 2008, respectively. The Corporate & Other segment generated a net operating loss of $1 million.

CIBC Retail Markets has a sizeable Canadian retail banking operation, including the largest issuer of premium travel credit cards, one of the largest full-service brokerages and the third largest branch network in Canada. The Bank also has a large retail business in the Caribbean through its 91% ownership in FirstCaribbean International Bank. Wholesale Markets (previously known as CIBC World Markets) is a client-focused investment bank based in Canada. It has strengths in mergers and acquisitions and equity underwriting in Canada.

Canadian Imperial Bank of Commerce is the fifth-largest Schedule 1 bank in Canada as measured by assets ($347 billion) at the end of H1 2009.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Banks in Canada, Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessment and Rating Preferred Shares and Equivalent Hybrids, which can be found on the DBRS website under Methodologies.

This is a Corporate (Financial Institutions) rating.