DBRS Comments on CIBC Announced Tri-party Agreement with Aimia and TD

DBRS today notes Canadian Imperial Bank of Commerce’s (CIBC or the Bank) announced tri-party agreement with Aimia Inc. (Aimia; rated BBB, Stable) and the Toronto-Dominion Bank (TD; rated AA, Stable), and believes this agreement will not have a material impact on the Bank’s credit risk profile. CIBC’s credit risk profile remains solid, notwithstanding the expected loss in earnings from the sale of $3 billion in credit card receivables. CIBC retains those credit card receivables for CIBC customers who have more than one product with the Bank. There are no rating implications for CIBC at this time.

Under the terms of a ten-year agreement, CIBC will continue to issue Aeroplan-related travel credit cards through its own bank channels. DBRS believes this outcome should strengthen the Bank’s ability to retain those Aeroplan VISA credit card customers that have broader banking relationships. Notwithstanding the tri-party agreement, CIBC is continuing with its previously announced plan to introduce an enhanced proprietary travel loyalty rewards credit card. This initiative should help CIBC with originations of new credit card customers. However, DBRS believes a challenge is presented in the length of time it will take to organically grow the new credit card portfolio to a material size.

The sale of the $3 billion in credit card receivables is expected to close in December 2013. At this time, CIBC will receive a cash payment from TD equal to the receivables sold, $200 million from TD and Aimia, and approximately $37.5 million per year from TD in each of the three years following the sale’s closing. CIBC will incur $55 million in costs from the sale of the portfolio. Additionally, the transaction is expected to release $2.5 billion in risk-weighted assets and $460 million of capital on closing ($180 million net after-tax gain and $280 million regulatory capital).

Within the agreement there is also the potential for payments related to migration of credit card customers from TD to CIBC, or vice versa, as well as a termination option between CIBC and Aimia.

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.

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

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (June 2012), DBRS Criteria: Rating Bank Preferred Shares and Equivalent Hybrids (June 2009) and DBRS Criteria: Intrinsic and Support Assessments (February 2009), which can be found on the DBRS website under methodologies.