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).

KEY RATING CONSIDERATIONS
The ratings and Stable trends reflect CIBC’s diversified franchise, which ranks as the fifth-largest bank in Canada by total assets. The Bank also has an expanding presence in the U.S., which contributed approximately 20% of earnings in Q2 2021, building towards CIBC’s medium-term goal of earning 25% of net income from the U.S. Historically, CIBC has generated strong earnings and profitability metrics, which contribute 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 consider the economic environment, which remains challenging because of the Coronavirus Disease (COVID-19) pandemic. Nevertheless, DBRS Morningstar notes that there has been unprecedented support measures put in place by governments and regulators around the globe, which has mitigated much of the negative impact of this crisis. Despite the impact the pandemic has had on the broader economy, housing activity in Canada has been robust, which has resulted in recent home price appreciation following a period where prices had stabilized, reflecting actions taken over the last several years by regulators to tighten mortgage rules. DBRS Morningstar remains concerned about the combination of highly leveraged consumers and elevated home prices. Positively, DBRS Morningstar views CIBC’s loan portfolio as conservatively underwritten, reflective of the Bank's strong risk culture.

RATING DRIVERS
DBRS Morningstar views CIBC’s ratings as well placed. However, over the longer term, DBRS Morningstar would upgrade the ratings if the Bank continues building the scale and diversity of its franchise, resulting in a sustained improvement in financial performance, without a commensurate increase in risk. Conversely, DBRS Morningstar would downgrade the ratings if there is a material deterioration in the Bank's asset quality, especially from deficiencies in risk management or if the Bank’s level of profitability falls below the peer group.

RATING RATIONALE
CIBC generates strong earnings and profitability metrics, which are supported by its well-diversified franchise and contribute to the Bank’s ability to absorb credit losses. CIBC reported Q2 2021 net income of $1.7 billion, up 2% quarter over quarter, primarily reflecting a substantial decline in provision for credit losses (PCL). However, the Bank continues to show strong momentum in a number of businesses, including an increase in investment management and mutual fund fees due to strong market activity and higher issuance and advisory activity in the Capital Markets business. Expenses remain well managed.

Overall, DBRS Morningstar views CIBC's risk profile as conservative, reflecting a strong risk culture. CIBC's credit quality remains robust, with total PCL decreasing 78% to $32 million, which is well below pre-pandemic levels. The Bank recorded a reversal of PCL on performing loans of $214 million, reflecting an improved economic outlook. Accordingly, CIBC's total PCL ratio improved 11 basis points (bps) while the PCL on impaired loan ratio increased 2 bps sequentially. As of April 30, 2021, the remaining balance of loans under deferral remains modest at $0.5 billion. The Bank has experienced a high rate of payments resumption on accounts where the deferral period has ended. Positively, CIBC’s exposure to sectors directly affected by the pandemic represented a manageable 2% of total loans, while exposures to the oil and gas sector represented a modest 1.8% 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, including a liquidity coverage ratio in Q2 2021 of 134%, which is well above the regulatory minimum. Additionally, CIBC's net stable funding ratio (NSFR), which looks at funding resilience over the medium to longer term horizon, remains comfortably above the regulatory limit of 100%, standing at 118% in Q2 2021.

Capitalization remains strong at CIBC, reflecting significant levels of internal capital generation, which remains sufficient to support balance sheet and business growth initiatives. At period-end Q2 2021, CIBC's Common Equity Tier 1 (CET1) capital ratio and leverage ratio were 12.4% and 4.7%, respectively, with both metrics above regulatory minimums and also in line with the Canadian bank peers average. At this level, the Bank holds a sizeable capital buffer of $8.8 billion above regulatory minimums. DBRS Morningstar expects capital levels will continue to build until the Office of the Superintendent of Financial Institutions (OSFI) relaxes its restrictions on capital management activities for the Domestic Systemically Important Banks. Moreover, CIBC's total loss-absorbing capacity as a percentage of risk weighted assets increased 90 bps to 25.4%, which is above the current minimum of 22.5% (21.5% plus a 1.0% Domestic Stability Buffer) set by OSFI, with compliance required by November 1, 2021.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 8, 2020; https://www.dbrsmorningstar.com/research/362170). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020) was used to evaluate the issuer, and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021) was used to assess ESG factors.

The last rating action on this issuer took place on June 3, 2020, 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

Lead Analyst: Maria-Gabriella Khoury, Senior Vice President
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: December 31, 1980

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

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