DBRS Confirms Ratings of CIBC, Negative Trend

DBRS Limited (DBRS) has today confirmed the ratings of Canadian Imperial Bank of Commerce (CIBC or the Bank) and its related entities, including the Bank’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high). Trends on senior long-term debt ratings, short-term instruments and older-style subordinated debt remain Negative, while other capital instruments whose ratings are notched down from the Bank’s intrinsic assessment continue to have a Stable trend. DBRS has also discontinued the ratings for the Bank’s Preferred Shares Series 26, 27 and 29 due to the recent repayment of these three series. The Bank’s ratings are supported by CIBC’s low-risk retail business mix, the result of a well-developed Canadian consumer distribution network, substantial presence in domestic wealth management and continued improvements in expense metrics.

CIBC’s long-term Deposits & Senior Debt rating at AA is composed of its assigned 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 ratings. The Negative trend reflects DBRS’s view that anticipated changes in Canadian legislation and regulation mean that the potential for timely systemic support for these systemically important institutions is declining and is likely to eventually result in a change in DBRS’s support assessment to SA3 from SA2 for this institution. At the same time, DBRS notes that additional protection for non-bail-in-able debt and deposits may eventually be provided by bail-in-able senior debt under the anticipated bail-in debt regime. DBRS will assess the impact of the Taxpayer Protection and Bank Recapitalization Regime rules as more details are made available by the authorities.

CIBC is Canada’s fifth-largest financial institution by market capitalization, deposits and assets under management. The Bank has the strong Common Equity Tier 1 (CET1) and Tier 1 ratios. Asset quality at CIBC remains quite strong, with continuously improving trends from the past five years. CIBC benefits in this regard from having a large portion of its loan portfolio in low-risk residential mortgages. However, any slowdown in this market may slow earnings generation, while a downturn in the residential mortgage market would certainly deteriorate asset quality from current levels.

In July 2014, Victor G. Dodig, previously the Bank’s Group Head for Wealth Management, assumed the role of CEO. No changes in strategy or culture are anticipated. Mr. Dodig has laid out some of his initial plans to take CIBC beyond its Canadian base, with a target to double the Bank’s wealth management earnings from sources outside of Canada. CIBC plans to make strategic investments, to expand wealth management and private banking, preferably in the United States. All activities thus far remain consistent with the Bank’s stated long-term strategy.

As with other Canadian banks, CIBC has a notable exposure to the Canadian residential mortgage market. Any slowdown in this market may slow earnings generation, while a downturn in the residential mortgage market could hurt asset quality indicators and ultimately have an impact on provisioning levels. Direct Exposure to oil and gas (O&G) is manageable within a well-diversified portfolio. Asset quality within the Canadian market will be determined by the extent to which any deteriorating consumer credit quality trends materialize in the Canadian market, including potentially as an indirect result of volatility in O&G. At this point, there are no material observable problems.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations (June 2015), Rating Bank Capital Securities - Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015), and DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015), which can be found on DBRS’s website at www.dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.