CFRB Stock Report | December 31, 2022 | NYSE Symbol: CM Canadian Imperial Bank of Commerce 1
Analyst's Risk Assessment LOW MEDIUM HIGH Our risk assessment reflects CM’s robust earnings performance underpinned by its well-diversified domestic franchise coupled with an expanding U.S. banking franchise. The bank benefits from sound asset quality reflecting its conservative risk profile, solid capital levels, and strong funding and liquidity profile. While geographic earnings diversity has improved, CM is still the most reliant on domestic earnings among its Canadian peers. It is also the most exposed to domestic residential mortgages among its peers. This risk is mitigated by CM’s conservatively underwritten loan book.
Highlights u Following 9% revenue growth in FY22, we see 6%-8% revenue growth in FY23 as credit remains strong but begins to normalize. Loan growth should boost net interest income in FY23 although we expect slowing growth following above trend 15%-16% growth in each of the last three quarters.
In the fourth quarter, net interest income rose 7% Y/Y despite a falling net interest margin (NIM). Unlike other Canadian banks that saw NIM expansion, CM struggled as management highlighted a shift in client preference towards term deposits negatively impacting results.
u Adj. expenses jumped 12% Y/Y as inflation and higher investment initiatives led to negative operating margin in FY22. However, we expect this trend to be short lived and expect prudent expense management to lead to positive operating leverage in FY23 despite slowing revenue growth expectations. u
Despite fears over the housing market in Canada, credit risk quality remained excellent, with the gross impaired loans ratio falling 7 bps Y/Y to 0.33%.
With a healthy CET1 ratio of 11.7% and ample allowances for credit losses, we view CM as well positioned should economic conditions deteriorate further.
Investment Rationale/Risk u Our Buy opinion reflects robust loan growth expectations, steady deposit growth, and an attractive valuation. Further positives come from market share gains in mortgage origination, expansion in U.S. commercial operations, and improved efficiencies with sound cost controls.
Fee income momentum could continue from faster growth in the Wealth Management unit as CM continues to attract elevated net fund flows. Additionally, we see opportunity stemming from the recently acquired Costco portfolio (80% of acquired Costco cardholders are new to CM). However, a large real estate and construction portfolio (65% of loans) exposes CM to credit-quality tail risk. u Risks to our view include reversion to long-term average credit loss rates, a severe housing price correction in Canada, and an economic slowdown in CM’s operating footprint. u
On December 1, we lowered our 12-month target price by USD3 to USD55, 10.0x our FY24 (Oct.) EPS view (USD5.48 converted from CAD), a slight premium to the peer average of 9.5x.
We lowered our FY23 EPS to CAD7.39 from CAD7.79 and started FY24’s at CAD7.42.
CM recently offered a highly attractive dividend yield of 7.9% vs. the S&P 500’s 1.6%.