DBRS Confirms Canadian Imperial Bank of Commerce at AA; Trend Remains Negative

DBRS, Inc. (DBRS) has today confirmed the ratings of Canadian Imperial Bank of Commerce (CIBC or the Bank) and its related entities, including CIBC’s Issuer Rating at AA, Deposits & Senior Debt rating at AA and Short-Term Instruments rating at R-1 (high). The trends on the senior long-term debt, 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 (IA) continue to have Stable trends. Confirmation of the ratings follows a detailed review of the Bank’s operating results, financial fundamentals and future prospects.

CIBC’s ratings are supported by its focus on lower-risk retail and business banking, its broad footprint across Canada and its leading market position in domestic wealth management and capital markets. The Bank’s ratings are further supported by strong and resilient profitability, a diverse funding mix, strong liquidity and a well-capitalized balance sheet. Despite weakness in energy and other resource-based sectors of the economy, CIBC is well positioned to readily absorb credit costs arising from its loans in the oil and gas sector, as well as any knock-on effects that may eventually be passed on to the Canadian consumer in select regions. The ratings also consider the difficult operating environment highlighted by weak global growth, margin pressure and the ever-evolving regulatory burden that negatively affects expenses.

CIBC’s long-term Deposits & Senior Debt rating of AA with a Negative trend is composed of an IA of AA (low) and a support assessment of SA2, reflecting the expectation of timely, systemic support from the Government of Canada (rated AAA, Stable trend, by DBRS). The SA2 designation results in a one-notch benefit to the Deposits & Senior Debt rating. The maintenance of the Negative trend reflects DBRS’s view that ongoing changes in Canadian legislation and regulation still indicate that the potential for timely support for systemically important institutions is declining, leading to a likely change in DBRS’s support assessment to SA3 from SA2. The legislation enacting the bank recapitalization, or bail-in, regime is moving forward, but DBRS does not yet have sufficient clarity on the details of the implementation to remove the benefit of systemic support from the affected ratings.

On June 29, 2016, CIBC announced a definitive agreement to acquire PrivateBancorp, Inc. (PrivateBancorp), a middle-market commercial lender with private banking and wealth management capabilities in the United States. With USD 17.7 billion in assets, PrivateBancorp represents approximately 5% of CIBC’s total assets as at April 30, 2016, and will add 34 new offices in 12 states. Importantly, the acquisition gives CIBC the capability to provide U.S. banking services to clients, including the ability to accept deposits, which will strengthen ties with current Canadian customers who do business with, or spend time in, the United States. Moreover, CIBC will now be able to provide commercial and private banking services to Atlantic Trust Private Wealth Management, a U.S.-based private wealth management firm serving high-net-worth families, private foundations and endowments that was acquired in 2013. DBRS views this transaction as largely consistent with CIBC’s stated acquisition strategy, which has been communicated to the market over the past several years, especially in terms of size, geography and price.

The ability of CIBC to consistently generate strong and resilient earnings is a key rating consideration and one that solidifies the Bank’s high ratings. For H1 2016, CIBC reported net income of $1.92 billion, up 4.9% when compared to the same period last year, equating to the highest return on common equity of 18.6% in its peer group, as calculated by DBRS. The Bank’s high level of profitability is driven primarily by its strong domestic franchise with Canadian operations, which accounts for over 80% of earnings, with the remaining 20% coming from businesses in the United States and the Caribbean. Given the Bank’s reliance on its home market, DBRS views positively that CIBC’s income sources are well diversified across several business lines, all of which were profitable in 2015. It does, however, leave the Bank relatively more vulnerable to a downturn in the Canadian economy compared to its large bank peers.

The Bank’s overall asset quality remains strong with impaired loans and provisions remaining at very low levels. CIBC’s overall credit quality benefits from the performance of its large and low-risk residential mortgage portfolio, which is 61% insured. However, DBRS remains concerned about the significant appreciation in housing prices, particularly in and around Toronto and Vancouver. Meanwhile, CIBC’s outstanding loan balances to the troubled resource sector are very manageable, with oil and gas comprising approximately 2% of loans and mining comprising less than 1%.

CIBC maintains a strong funding and liquidity profile underpinned by its robust client-sourced deposit base, which is further supplemented by a wide range of wholesale funding options. Although the Bank relies relatively more on wholesale funding than its peers, DBRS views the level of utilization to be satisfactory. The Liquidity Coverage Ratio stood sufficiently above the minimum required by the regulator at 122% for the quarter ended April 30, 2016.

Capitalization at CIBC remains solid as the Bank continues to organically generate capital. At 10.4%, CIBC had the highest Common Equity Tier 1 (CET1) ratio in its peer group as of April 30, 2016. Additionally, management expects this ratio to remain at or above 10% once its pending acquisition of PrivateBancorp closes in Q1 2017. Moreover, management is committed to rebuilding CET1 toward the upper end of its large Canadian banking peer group.

RATING DRIVERS
If support is removed, CIBC’s long-term ratings would likely be downgraded. On an intrinsic basis, successfully executing the client-centric strategy and growing market share while maintaining strong underwriting disciplines will be viewed favourably. In addition, successfully integrating the PrivateBancorp acquisition and growing the U.S. franchise could be viewed favorably. Conversely, an elevated risk appetite or a material increase in impaired loans could have negative rating implications. Moreover, any reputational deterioration and disproportionate growth of the capital markets business could also put a damper the ratings.

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 on the issuer page at www.dbrs.com.

The applicable methodologies are the Global Methodology for Rating Banks and Banking Organisations (December 2015), Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial LC. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com.

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.

Lead Analyst: John Mackerey
Rating Committee Chair: Roger Lister
Initial Rating Date: December 31, 1980
Most Recent Rating Update: July 16, 2015