Morningstar DBRS Confirms Canadian Imperial Bank of Commerce’s Long-Term Issuer Rating at AA; Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the credit 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). The trend on all credit ratings is 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). As a result of the SA2 designation, CIBC's Long-Term Issuer Rating benefits from a one-notch uplift to the Bank's IA.

KEY CREDIT RATING CONSIDERATIONS
The credit 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., with the U.S. Commercial Banking and Wealth Management Segment contributing about 11% of total revenue in Q1 2024. CIBC generates strong earnings and profitability metrics that contribute to the Bank's ability to absorb credit losses. In addition, the Bank's credit ratings are supported by sound risk profile and solid balance sheet fundamentals, including a strong funding and liquidity profile and sufficient capital levels.

The credit ratings also consider the challenging macroeconomic and geopolitical environments, which could lead to an adverse impact on the Bank's profitability and asset quality. In addition, Morningstar DBRS remains concerned about the combination of highly leveraged Canadian consumers; elevated home prices, particularly in the greater Toronto and Vancouver areas; and materially higher borrowing costs and inflation levels that are eating into consumers' disposable income. Morningstar DBRS views housing prices as remaining somewhat vulnerable and, as a result, views CIBC, like its Canadian bank peers, as susceptible to any adverse changes in the Canadian real estate market. Further, Morningstar DBRS is closely monitoring the Bank's exposure to the commercial real estate and construction sector (CRE), in particularly in the U.S, including office real estate exposure where values have dropped significantly because of sector headwinds driving higher loan provisions relative to CIBC's peers in the recent quarters.

CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS would upgrade the credit ratings if the Bank continued to build scale and further diversified its franchise in the U.S., resulting in a sustained improvement in financial performance, without a commensurate increase in risk.

Conversely, a credit ratings downgrade would occur if the Bank failed to execute its strategic initiatives, leading to heightened operational risk or a weaker franchise. Additionally, a sustained deterioration in profitability or asset quality along with material deficiencies in risk management would also lead to a downgrade of the credit ratings.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
CIBC enjoys a large presence in Canada, offering personal and business banking, commercial banking, wealth management, and capital markets services with top market shares in certain segments. Additionally, the Bank has a growing presence in the U.S. through CIBC Bank USA, which focuses on relationship-oriented commercial, personal, and small-business banking as well as wealth management services to meet the needs of middle-market companies and their executives. As part of the strategy announced on its Investor Day in 2022, CIBC remains focused on growth in less capital-intensive, higher-touch, higher-growth segments, including mass affluent and high net-worth clients.

Earnings Combined Building Block (BB) Assessment: Strong/Good
Supported by its well-diversified franchise, CIBC generates solid earnings and profitability metrics that underpin the Bank's ability to absorb credit losses. In a challenging operating environment, CIBC's adjusted net income decreased about 1.7% year over year (YOY) to $6.5 billion in F2023, reflecting higher provisions for credit losses (PCLs) and noninterest expenses. Adjusted Q1 2024 earnings were about $1.8 billion, an increase of 16.3% quarter over quarter (QOQ) as a result of higher revenues and lower noninterest expenses. Net interest income expanded 1.6% QOQ in Q1 2024 while the net interest margin contracted marginally to 1.43%, driven by lower trading margins. Noninterest expenses remain well managed with the adjusted efficiency ratio at 54% in Q1 2024.

Risk Combined Building Block (BB) Assessment: Strong
Morningstar DBRS views CIBC's overall risk profile as sound, although the Bank has recently experienced higher provisions and impaired loans¿relative to its peers¿in its CRE portfolio. In addition, the Bank is undergoing remediation efforts to resolve deficiencies in underwriting and indebtedness rules identified by Office of the Superintendent of Financial Institutions. Total PCL increased 7.3% QOQ to $585 million in Q1 2024, driven by higher provisions on both performing loans and impaired loans. As a result, CIBC's total PCL ratio (as calculated by Morningstar DBRS) increased marginally by 44 basis points for Q1 2024, while the gross impaired loans (GIL) ratio remained stable at 0.56% for the same period. Morningstar DBRS also notes that, overall, the Canadian banking sector is reporting asset quality normalization from unsustainably low levels, and modest deterioration will continue as the macroeconomic outlook remains tilted toward the downside or if interest rates remain higher for longer than currently expected.

Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
CIBC has a solid funding and liquidity profile that benefits from substantial client-sourced deposits that are supplemented through a wide range of wholesale funding sources. Morningstar DBRS views the Bank's use of wholesale funding as being within an acceptable range and it remains in line with its peers. CIBC remains focused on mobilising more core deposit funding to help reduce its need for wholesale funding. As of Q1 2024, total deposits accounted for 78% of total funding. In the high interest rate environment, term deposits grew 12.4% YOY to $377.0 billion in Q1 2024 and accounted for 52% of total deposits, while demand deposits shrank 9.5% YOY to $123.6 billion. CIBC's liquidity is strong, including a reported Q1 2024 liquidity coverage ratio of 137% and a net stable funding ratio of 115%, both comfortably above the regulatory minimums.

Capitalization Combined Building Block (BB) Assessment: Strong
Capitalization remains strong and sufficient to absorb stressed levels of loan losses. CIBC's significant levels of internal capital generation also add to its capital strength. At period-end Q1 2024, CIBC's CET1 ratio was 13.0%, well above the regulatory minimum of 11.5% for Domestic Systemically Important Banks. Meanwhile, CIBC's risk-based, total loss-absorbing capacity ratio of 29.1% was also well above the regulatory threshold of 25.0%. The Bank reported a leverage ratio of 4.3% that was also above the regulatory minimum of 3.5%, including a leverage ratio buffer of 0.5% introduced recently as part of the Basel III reforms, and in line with its Canadian bank peers. Nevertheless, Morningstar DBRS notes that this metric remains somewhat weaker than many global peers.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/432820.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23 2024) at https://dbrs.morningstar.com/research/427030.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (April 15, 2024), https://dbrs.morningstar.com/research/431155. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030, in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

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
dbrs.morningstar.com

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

These credit ratings are 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 credit ratings:

The last credit rating action on this issuer took place on June 1, 2023, when Morningstar DBRS confirmed the Bank's credit ratings.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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

For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Shokhrukh Temurov, CFA, Vice President, North American Financial Institution Ratings
Rating Committee Chair: Michael Driscoll, Managing Director, North American Financial Institution Ratings
Initial Rating Date: December 31, 1980

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

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