DBRS Changes CIBC Trend to Stable from Negative; Confirms Ratings at AA and R-1 (high)

DBRS has today changed all the rating trends of Canadian Imperial Bank of Commerce (CIBC or the Bank) and related entities to Stable from Negative. All ratings of CIBC, including the Bank’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high), have been confirmed. The Negative trend was originally assigned on April 2, 2008.

The Stable trend reflects DBRS’s view that actions taken so far by CIBC to reduce its exposures in the structured credit runoff business should help to limit the losses on both earnings and capital. DBRS expects the Bank to continue to proactively reduce its structured credit runoff portfolio exposures going forward. Should significant losses occur in this runoff business without remedial action taken to increase capital, negative rating action could be warranted.

Since the Negative trend was placed on the ratings, the Bank’s total gross exposures in the structured credit runoff business have been decreasing, from a high of US$79.5 billion at January 31, 2008 to US$32.3 billion at October 31, 2009. Actions taken by the Bank to reduce exposure in the structured credit runoff portfolio include entering into an arrangement with Cerberus Capital Management LP to provide downside protection on U.S. residential mortgage market (US RMM) collateralized debt obligation exposures, and terminating some written credit derivatives. CIBC has no US RMM-related protection from financial guarantors as at April 30, 2010. The active recognition of credit valuation adjustments (CVAs) on credit derivate contracts with financial guarantors has also been instrumental in reducing the exposure. At October 31, 2009, CVAs totalled US$2 billion.

Although it is difficult for DBRS to assess the effectiveness of risk management changes at CIBC, so far earnings from core businesses remain within our expectations, given weak credit markets in Canada. Nevertheless, any material weaknesses in risk management that affect the consistency or sustainability of earnings will have a negative impact on CIBC’s ratings. Corrective actions that CIBC has taken to improve risk management include changing senior management at the Bank, increasing the depth of its senior risk management team and revamping the risk management process and procedures.

CIBC’s current ratings are supported by its lower-risk retail business mix and progress made in improving its expense ratio, which should contribute to earnings stability and improved capital levels, thereby better positioning CIBC to weather future downturns. The capital markets business, which is now more Canadian client-focused, should deliver more consistent and sustainable performance than it has done over the last several years.

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

Based in Toronto, 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: CIBC Retail Markets, Wholesale Banking and Corporate & Other. CIBC Retail Markets (personal and business banking, wealth management and FirstCaribbean International Bank (FirstCaribbean)) and Wholesale Banking (corporate and investment banking and capital markets) generated operating net income of $1,016 million and $373 million, respectively, in H1 2010. The Corporate & Other segment generated a net operating loss of $77 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. As of the end of fiscal 2009, CIBC has almost 3,000 accredited financial advisors in its full-service brokerage and branch system. The Bank also has a large retail business in the Caribbean through its 91% ownership in FirstCaribbean. Wholesale Banking is a client-focused investment bank based in Canada. It has strengths in mergers and acquisitions and equity underwriting in Canada and is expanding its debt underwriting capabilities in both government and corporate bonds.

Canadian Imperial Bank of Commerce is the fifth largest Schedule 1 bank in Canada as measured by assets ($336 billion) at the end of Q2 2010.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organizations (January 14, 2010), Ratings for Bank Subordinated Debt & Hybrid Capital Instruments with Contingent Risks (Apr 12, 2010), Methodology: Ratings for Bank Subordinated Debt & Hybrid Capital Instruments with Discretionary Payments (Apr 12, 2010), Rating Bank Preferred Shares and Equivalent Hybrids (June 29, 2009), and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments (February 11, 2009), which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.