Analysis: CIBC's Canada focus raises concerns as growth slows

By Cameron French

TORONTO (Reuters) - Canadian Imperial Bank of Commerce's remake from swashbuckling Wall Street player to low-risk Canada-focused lender has stabilized its earnings, but some shareholders now worry that the bank faces outsized exposure to an uncertain housing market.

The bank's homebound approach - which CIBC trumpets as a road to reduced risk - is a direct result of previous U.S. forays that cost the bank billions following the 2001 tech meltdown and the 2008 subprime crisis.

But with Canadians dealing with record personal debt levels, and with a slowdown in the once-booming housing market fueling talk of a crash, CIBC's lack of international exposure has gone from being seen as an advantage to being viewed as a burden.

"They have the highest exposure to Canada and their lack of growth platforms outside of Canada really exposes them to the Canadian consumer," said Jeff Bradacs, a portfolio manager at Manulife Asset Management.

The bank is not completely averse to international exposure, having made modest acquisitions in U.S. wealth management, most notably its C$848 million ($841.14 million) acquisition of 41 percent of American Century Investments in 2011.

But that business pales in comparison with the large foreign investments made in recent years by rivals such as Toronto-Dominion Bank and Bank of Nova Scotia, and some say this gives CIBC few growth options outside of the already crowded Canadian market.

"What the market is struggling with is that we don't have any strong map as to where they're going," said John Aiken, an analyst at Barclays Capital.

CIBC's lack of international growth has not hit its profits as yet, as its retail earnings have flourished due to mortgage lending in a fast-growing housing market.

But that growth appears to be a thing of the past, with Canadians' debt-to-income levels at record levels and economists debating the severity of a housing pullback that has already begun in certain markets.

COMFORTABLE WITH POSITION

CIBC executives are more bullish. While the days of annual double-digit housing growth may be over, predictions of a major Canadian growth decline are premature, says CIBC Chief Executive Gerry McCaughey.

"We are very comfortable with our Canadian position," he said in an interview after the bank's annual shareholder meeting.

"We think the Canadian fiscal framework - what we see now and what we would expect to see in the future, given the numbers that underpin that framework - is excellent."

He said that while consumer debt is high, Canadians appear to be paying down their higher-cost debt and are not acting "irrationally".

"On a globally competitive basis, this environment should be one that is as good or better than almost any mature economy to operate in," he said.

Over the past year, CIBC has led its peers with a 7.2 percent return, and the lender also boasts a dividend yield well above Royal Bank of Canada, TD, and Scotiabank, and comparable with that of Bank of Montreal.

Still, in a sign that investors are skeptical about CIBC's growth prospects, its shares trade at just over nine times 12-month forward earnings, the lowest price/earnings ratio among Canada's five biggest banks, according to Thomson Reuters data.

"Clearly, the market does look at both profitability and earnings growth, and from an earnings growth side, CIBC trades at a discount due to the lack of growth platforms," Manulife's Bradacs said.

CLOISTERED MARKET

Turning a profit is rarely an issue for Canada's big five banks, which control around 85 percent of the country's banking market and are protected by legislation from foreign takeovers.

Critics often describe it as an oligopoly, and there's no doubt that it's been profitable, with the banks as a group notching record profits in 2012.

But the market's coziness offers few opportunities for long-term revenue growth. Four of the big banks have addressed this by jumping feet first into foreign markets.

RBC, the country's largest lender, has built a sizable wholesale bank in the United States and Europe, and also is a major wealth management player in Europe.

Scotiabank has retail and wholesale operations in Latin America and a growing footprint in Asia, while TD and Bank of Montreal have expansive U.S. retail bank networks.

By contrast, CIBC draws about 10 percent of its profit from wealth management, both domestic and foreign, and intends to raise that to 15 percent, which means more acquisitions are on the horizon.

But even if it buys abroad, CIBC's international profit contribution will pale in comparison with those of other banks. Scotiabank, for instance, draws about half of its income from foreign sources.

U.S. TROUBLES

Even if CIBC coveted a major foreign bank platform, it's unlikely shareholders would be on board, analysts say, as the bank's big bets in the past have had costly outcomes.

CIBC drove head-first into U.S. markets in the late 1990s, making a splash on Wall Street with its CIBC World Markets investment bank, and launched Amicus, a U.S. electronic bank positioned as a cutting-edge retail platform.

Amicus fizzled, while World Markets lost heavily in the dot-com bust and ended up paying $2.4 billion to Enron shareholders to settle a lawsuit surrounding its ties to CIBC.

The bank then took billions in writedowns to cover losses on securities backed by U.S. subprime mortgages. That forced CIBC to issue $2.9 billion in stock to rebuild its balance sheet.

"They don't have the credibility to do a large transaction south of the border," said Todd Johnson, a portfolio manager at BCV Asset Management in Winnipeg, which holds CIBC shares. "CIBC would likely attract a discount like 'here we go again'."

But CEO McCaughey says the domestic focus is very much a choice on the part of the bank, and suggested that shareholders should not expect a large splash in a foreign market.

"We still believe that the majority of our operations being in Canada is consistent with the overall strategy that we've laid out for our shareholders," he said.

($1=$1.01 Canadian)

(Editing by Jeffrey Hodgson; and Peter Galloway)

Source: http://news.yahoo.com/analysis-cibcs-canada-focus-raises-concerns-growth-slows-202519346.html

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