The Analysts Rate/Talk About CM Q3 National Bank Financial analyst Gabriel Dechaine said a spike in loan losses marred an “otherwise strong” third quarter for Canadian Imperial Bank of Commerce (CM-T).
Shares of CIBC slid 3.2 per cent on Thursday after it reported core cash earnings per share of $1.52, falling below the Street’s expectation of $1.68 as higher-than-expected provisions for credit losses ($736-million versus a $444-million consensus projection) weighed on results. That miss overshadowed a quarterly revenue beat ($5.850-billion versus $5.777-billion).
“PCLs that deviated nearly 70 per cent from consensus was a big surprise this quarter, emanating from two sources,” said Mr. Dechaine in a research note. “An impaired loss rate of 35 basis points was above CM’s full-year guidance range of 25-30 bps (though year-to-date of 28 bps is within the range). A nearly $300-million CRE impairment resulted in $152-million of provisions, or more than 30 per cent of the quarterly total. Management indicates that similarly-sized losses could be reported over the next few quarters. Separately, CM booked $258-million of performing provisions, of which 75 per cent was tied to consumer loans. On one hand, we believe the move is conservative. On the other, it is hard to reconcile this quarter’s result with the prior two that included releases from the same provision category. We expect more modest performing provisions in upcoming periods,”
The analyst emphasized net interest margin expansion of 2 basis points quarter-over-quarter came on both sides of the border, falling in line with the bank’s guidance and “stronger” than the peer average.
A breakdown of the big banks’ third-quarter earnings so far
“Both the Canadian P&C (up 7 basis points quarter-over-quarter excl. one-timers) and U.S. banking (+2bps) helped support this performance,” he said. “We expect flatter NIM in the upcoming quarter, as one-time items that boosted spreads fade. The bank’s NIM outlook has a positive slant, maintaining its all-bank NIM guidance range of 165-170bps (i.e., 167bps this quarter).”
“Another positive aspect of CM’s quarter was the delivery of mid-single digit expense growth. Comparatively, peers averaged double-digit cost inflation, prompting at least two banks (BMO & RY) to incur severance charges that have weighed on earnings. Given that CM’s heavy investment phase has passed, and that overall cost discipline is the mantra of the day, we believe the bank can maintain its current expense growth run-rate.”
Adjusting his forecast to account for higher PCLs, Mr. Dechaine trimmed his target for CIBC shares to $62 from $64, reiterating a “sector perform” rating. The average target is $61.72, according to Refinitiv data.
Other analysts making changes include:
* RBC Dominion Securities’ Darko Mihelic to $67 from $72 with a “sector perform” rating.
“Weaker-than-expected results this quarter were primarily reflective of a larger than expected build in performing PCLs coupled with continued losses from U.S. CRE,” he said. “Expense control was good relative to the group, but we believe that impaired PCLs may remain modestly elevated or could even increase further if interest rates remain high. We do not believe PCLs are high enough to be concerned about CM’s capital position and eventually expect CRE losses to subside. Nevertheless, shorter term, we expect its valuation to remain constrained on a relative basis.”
* Credit Suisse’s Joo Ho Kim to $56 from $57 with a “neutral” rating.
“CM’s Q3 results were impacted by higher-than-expected performing PCLs, the bulk of which reflected adverse changes to the bank’s forward-looking indicators (Canadian consumer leverage in particular),” said Mr. Kim. “While we acknowledge that such builds are not the worst thing given the macro challenges ahead, it does make us question whether the underlying assumptions tied to the bank’s allowances were sufficiently conservative to begin with. In our view, the bigger (and more near) concern on the credit front comes from elevated CRE (office) losses, especially given CM’s expectation for further similar impact in the next few quarters. The narrative on credit dominated our discussions on the earnings day and overshadowed the arguably better underlying performance. Moving forward, although earnings expectations at CM have been more muted for some time now, we find ourselves increasing our PCL estimates again on the back of these results, reflecting our expectation for elevated CRE losses.”
* BMO’s Sohrab Movahedi to $65 from $69 with an “outperform” rating.
“We see CM as a ‘self-help’ story over the next year given its focus on maximizing returns from organic operations. The total return potential is driven by momentum in domestic operations and lower inorganic growth focus; valuation offers downside protection,” said Mr. Movahedi.
* TD Securities’ Mario Mendonca to $57 from $60 with a “hold” rating.
* Cormark Securities’ Lemar Persaud to $61 from $62 with a “market perform” rating.
* Barclays’ John Aiken to $57 from $58 with an “equal weight” rating.