BMO: Strong BeatFebruary 24, 2023 | 07:33 ET
~ CIBC CM-TSX CM-NYSE Rating Outperform Price: Feb-23 $61.23 Target $70.00 Total Rtn 20%
First Look at Q1/23 Results Bottom Line: Strong Beat.
CM's adjusted cash EPS of $1.94 beat our/consensus estimates of $1.70/ $1.71 by about 14%. The beat to us was driven by Capital Markets (strong trading of $672MM vs $435MM BMOe). Other major segments were generally as expected with some 'puts and takes' as there always are. PCLs in line at 22bps (but better than consensus expectations).
CET1 ratio of 11.6% (above 11% regulatory minimum; reduced likelihood of equity issuance near-term, in our view).
Key Points • Beat Driven by Strong Capital Markets Performance. CP&SB was down 15% y/ y, better than our expectations, as the strong volume growth (loan balances up 8% y/y) was offset by higher compensation, strategic investments, and PCLs. Canadian Commercial and Wealth displayed mild growth, up 2% y/y and in line with our expectations, with strong volume growth (commercial loan balances up 14% y/y; commercial deposit balances up 7% y/y) and lower expenses (lower variable comp), partly offset by higher PCLs and lower NII.
Capital Markets came in much stronger than expected, up 13% y/y to $612MM (vs. $405MM BMOe), with momentum in trading (notably interest rates) and business lending offsetting higher employee-related expenses and lower underwriting/advisory revenue.
• PTPP income up 6% y/y with top-line revenue growth of ~8% y/y; negative operating leverage due to ~9% growth in expenses (strategic investments and inflationary impacts; rate of investment has peaked, as previously communicated). Adj. NIX was 55.0% vs. 54.2% in Q1/22. Trading revenue demonstrated higher than expected strength this quarter (up 17% y/y to $672MM vs our $435MM expectation; trailing 8- quarter average of $465MM), with growth supported by FX/interest/commodities trading. Total bank non-trading NIM was 245bps (up 9bps q/q).
• Higher PCLs from Impaired Provisions. PCLs in the quarter were $295MM/22bps (Stage 1&2: 3bps; Stage 3: 19bps), up 16bps y/y, but down 11bps q/q. Total allowances (specifics + collectives) now stand at ~$3.4B or ~124bps of credit RWA (vs. "through the cycle" average of 153bps). •
Comfortable Capital Levels. CET1 ratio of 11.6% was down 10bps q/q as internal capital generation (30bps) and DRIP share issuances (11bps) were offset by the 46bps cumulative hit for the Canada Recovery Dividend and legal reserves (Cerberus settlement), as well as 4bps from RWA growth (stable q/q). LCR was 134% (5-year average of ~131%).