Wednesday, March 17, 2010

Canadian Imperial Bank of Commerce $CM [morningstar research] Morgan Stanley Research

[morningstar research]

Bulls Say
  • CIBC's powerful distribution network of branches, ATMs, and online capabilities should allow for continued market penetration and allow CIBC to remain a dominant fixture within the Canadian landscape.
  • Given CIBC's renewed focus on low-risk retail banking, the bank should be able to deliver more consistent operating performance in the future.
  • CIBC's scale and presence within the wealth management industry should provide a sustainable source of long-term revenue growth.
Bears Say
  • Larger-than-expected net losses could force CIBC to cut its dividend or raise additional equity.
  • Greater competition for retail clients within the Canadian market could lead to higher client attritionand slower growth in total revenues.
  • Given the expected slowdown within the Canadian economy, core retail banking earnings and profit margins will moderate as the bank's provisions for loan losses rise.
Morgan Stanley Research

Investment Case
Summary & Conclusions

We are raising our EPS estimates on better than expected credit trends, tighter expense management
and margin expansion in 1Q10 results. Improving trends in impaired loan formation, down 15% sequentially,
supports our view that provisions will peak in 2Q10. Additionally, we do not anticipate further reserve build.
We are raising 2010 Cash EPS to $6.15 and 2011 Cash EPS to $7.20. Price target increases to $72. Despite the
increase in price target, we see limited upside to our $72 target and remain underweight CIBC.

Earnings Recap

CIBC reported 1Q10 operating cash EPS of $1.65, excluding gains on the structured credit run-off business, future tax asset
write-downs, and the impact of changes in credit spreads. The beat was driven largely by lower than expected credit costs and
higher NIM in the Wholesale segment. Core trends in the Retail segment were flat (NIM down 2bps q/q and PCL ratio flat
at 69bps). Credit

Consolidated provisions decreased 15% q/q, on both lower charge-offs and lower reserve build. CIBC’s NCO ratio was
0.82% (vs. our estimate of 0.95%), down 5bps from 4Q09. Total gross impaired loans were roughly flat sequentially (up
1%), and importantly impaired loan formations were down 15% q/q. The decrease in impaired loan formations was driven
largely by the wholesale book, which saw formations decrease 43% q/q. Retail formations were up 10% sequentially.
We forecast 1Q10 as the peak for gross impaired loans, and expect PCLs will peak in 2Q10. We expect the NCO ratio will
increase by 8bps in 2Q to 90bps, before declining in the back half of the year. We forecast an NCO ratio of 80bps in 4Q10.
Along with our expectation that GILs peaked this quarter, we do not expect further net reserve build.

Canadian Imperial Bank

Canadian Imperial Bank of Commerce CM

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