DBRS Morningstar Confirms Canadian Imperial Bank of Commerce at AA with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the ratings of Canadian Imperial Bank of Commerce (CIBC or the Bank) and its related entities, including CIBC’s Long-Term Issuer Rating at AA and Short-Term Issuer Rating at R-1 (high). All trends remain Stable. The Bank’s Long-Term Issuer Rating is composed of an Intrinsic Assessment of AA (low) and a Support Assessment (SA) of SA2, which reflects the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS Morningstar). This results in a one-notch lift to CIBC’s Long-Term Issuer Rating. Once the Bank has issued a sufficient level of Bail-inable Senior Debt to provide for an adequate buffer for other obligations under the Canadian Bank Recapitalization Regime, DBRS Morningstar expects to remove systemic support.

KEY RATING CONSIDERATIONS
The ratings are underpinned by CIBC’s well-diversified franchise, which ranks as the fifth-largest bank in Canada based on total assets. The Bank has an expanding presence in the U.S., which contributed approximately 17% of earnings in Q2 2020. Historically, CIBC has generated strong earnings and profitability metrics, which contributes to the Bank’s ability to absorb credit losses. In addition, the Bank’s ratings are supported by CIBC’s conservative risk profile with sound risk-management practices, a strong funding and liquidity profile that benefits from a stable deposit base, and strong capital levels. The ratings also reflect the likely impact of the wide and growing scale of the economic disruption caused by the Coronavirus Disease (COVID-19) pandemic. While CIBC has entered this downturn with a strong balance sheet, DBRS Morningstar will continue to monitor this situation and potential adverse impact on the Bank's revenue, earnings, and asset quality as the full impact of the pandemic will continue to materialize in the coming quarters. Nevertheless, DBRS Morningstar notes that there has been unprecedented support measures put in place by governments and regulators around the globe, which will mitigate some of the negative impacts of this crisis.

RATING DRIVERS
Given the current environment, DBRS Morningstar views an upgrade of CIBC as unlikely. Conversely, DBRS Morningstar would downgrade the ratings if there is a material deterioration in the Bank's asset quality or a prolonged adverse impact from the coronavirus pandemic, which would have a significant impact on CIBC's financial performance.

RATING RATIONALE
CIBC generates strong earnings and profitability metrics, which are supported by its well-diversified franchise and contributes to the Bank’s ability to absorb credit losses. In F2019, earnings were $5.1 billion, generating a solid return on average common equity of 14.5%. In Q2 2020, CIBC’s earnings declined 68% sequentially to $392 million largely given a significant increase in provision for credit losses (PCL). The Bank’s income before provisions and taxes (IBPT) grew 5% sequentially to $1.9 billion, but was down 12% when adjusting for the prior-quarter restructuring charge. DBRS Morningstar notes that the operating environment is now significantly more pressured, which will negatively affect CIBC's earnings at least for the remainder of F2020.

Overall, DBRS Morningstar views CIBC's risk profile as conservative, reflecting a strong risk culture. In Q2 2020, the Bank’s PCL rose substantially to $1.4 billion from $261 million in the prior quarter with PCL on performing loans rising to $1.1 billion. This increase was primarily driven by changes in forward-looking macroeconomic indicators related to the economic impact of the pandemic and lower oil prices. PCL on impaired loans grew 41% quarter over quarter (QOQ) to $343 million as a result of heightened provisions across all business segments. Positively, CIBC’s exposure to sectors directly affected by the pandemic represented a manageable 2.7% of total loans, while exposures to the oil and gas sector represented a modest 2.5% of total loans. Overall, uncertainty still exists as to whether these elevated levels of provisions will translate into higher loan losses, which will likely be driven by the duration of the economic downturn. DBRS Morningstar will continue to monitor the adverse impact of the coronavirus pandemic on the economies of both Canada and the United States as well as its future impact on the Bank’s credit fundamentals.

CIBC has a strong funding and liquidity profile that benefits from substantial client-sourced deposits and is supplemented through a wide range of wholesale funding sources. DBRS Morningstar views the Bank's usage of wholesale funding sources as being within an acceptable range, and remains in line with the Canadian bank peers average. Over the last few years, CIBC has remained focused on raising additional deposit funding to help reduce its reliance on wholesale funding. Liquidity at CIBC remains strong with a liquidity coverage ratio in Q2 2020 of 131%, which is well above the regulatory minimum. In addition, the Bank saw reported deposits increase to $543.8 billion, a 9% sequential rise, while high-quality liquid assets rose 11% QOQ to $137.9 billion.

Capitalization remains strong at CIBC, reflecting significant levels of internal capital generation, which remains sufficient in supporting its balance sheet and business growth initiatives. In Q2 2020, CIBC's Common Equity Tier 1 (CET1) capital ratio and leverage ratio were 11.3% and 4.5%, respectively, with both metrics above regulatory minimums and also in line with the Canadian bank peers average. Relative to regulatory minimums, the Bank’s CET1 ratio provides a capital cushion of approximately $6 billion. On March 13, 2020, the Office of the Superintendent of Financial Institutions (OSFI) lowered the Domestic Stability Buffer (DSB) requirement for Domestic Systemically Important Banks (D-SIBs) to 1.0%, which effectively reduces the CET1 regulatory minimum to 9.0% for D-SIBs. As the DSB was intended, OSFI is providing the D-SIBs with more flexibility to extend loans to their customers during the coronavirus pandemic. Simultaneously, OSFI announced that it expects all D-SIBs to halt any new dividend increases and common share buyback activity.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for Canadian Imperial Bank of Commerce are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile – Strong; Funding & Liquidity – Strong; Capitalization – Strong.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 11, 2019) https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.dbrsmorningstar.com.

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

This rating is endorsed by DBRS Ratings Limited (DBRS Morningstar) for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this issuer took place on May 28, 2019, when DBRS Morningstar confirmed the Bank’s ratings.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Robert Colangelo, Senior Vice President
Rating Committee Chair: Michael Driscoll, Managing Director
Initial Rating Date: December 31, 1980

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

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