CIBC: A Record Year From The Smallest Of The Big Five

It is well-documented that investors in smaller businesses are often rewarded by faster business growth.

The Canadian Imperial Bank of Commerce (CIBC) is the smallest of the Big 5 Canadian banks, a fantastic group of businesses with proven track records of delivering value to their shareholders.

The ‘Big 5’ Canadian Banks are:

The Royal Bank of Canada (RBC)

The Toronto-Dominon Bank (TD)

The Bank of Nova Scotia (BNS)

The Bank of Montreal (BMO)

The Canadian Imperial Bank of Commerce (CIBC)

For investors looking for more upside potential from a smaller company, CIBC may be the right choice from this peer group.

This post will analyze the investment prospects of CIBC.

On December 1, 2016, CIBC reported earnings for the 3-month and 1-year period ending October 31, 2016. This post will analyze their earnings report in detail.

Business Overview

CIBC is a diversified financial services provider with operations in retail banking, business banking, wealth management, and wholesale banking/capital markets.

The Bank divides their business into three main operating segments, as defined below.

Retail and Business Banking provides personal and business clients across Canada with financial advice, products and services.

Wealth Management provides integrated advice and investment solutions to meet the needs of institutional, retail and high net worth clients.

Capital Markets provides integrated credit and global markets products, investment banking advisory services and top-ranked research to corporate, government and institutional clients around the world.

Until recently, the major difference between CIBC and its peers was their lack of exposure to the U.S. retail banking sector. Fortunately, CIBC has recently made a sizeable acquisition in the United States that should rectify this concern. I will discuss this acquisition later in this article.

Fourth Quarter Financial Performance

On December 1, CIBC reported earnings for the quarter and year ending October 31, 2016. This section will outline their financial performance. I will begin with their GAAP financial results.

Reported net income of $931 million, compared with $778 million for the fourth quarter a year ago, and $1,441 million for the prior quarter (+20% YoY)

Reported diluted earnings per share (EPS) of $2.32, compared with $1.93 for the fourth quarter a year ago, and $3.61 for the prior quarter (+20% YoY)

Reported return on common shareholders’ equity (ROE) of 16.8%

Basel III Common Equity Tier 1 ratio on an all-in basis (CET1 ratio) of 11.3%, compared with 10.8% a year ago.

CIBC also increased their quarterly dividend by three cents to $1.24 per share.

The Bank’s GAAP financial results for 4Q2016 are fantastic. They’ve successfully grown earnings at a 20% clip on both a bank-wide and a per-share basis. They also improved their risk-weighted capital positioning as measured by the Basel III Common Equity Tier 1 ratio.

Next let’s consider their adjusted results for the quarter.

Adjusted net income of $1,041 million, compared with $952 million for the fourth quarter a year ago, and $1,072 million for the prior quarter. (+9% YoY)

Adjusted diluted EPS of $2.60, compared with $2.36 for the fourth quarter a year ago, and $2.67 for the prior quarter. (+10%)

Adjusted ROE of 18.8%.

The large discrepancy in adjusted and GAAP metrics are due to a significant restructuring charge that deducted $0.25 from the Bank’s per-share earnings.

On an adjusted basis, their quarterly results are more normalized but still impressive on an absolute basis. It’s been a great quarter for CIBC.

Since the fiscal year for the Canadian banks ends on October 31, CIBC was also able to report financial results for fiscal 2016. The results were very positive.

Revenues of $15.0 billion compared to $13.9 billion in the year prior (+8%)

Net income of $4.3 billion compared to $3.6 billion in the year prior (+20%)

Adjusted diluted earnings per share of $10.22 compared to $9.45 in the year prior (+5%)

It’s been a fantastic year for the smallest of the Big 5 Canadian banks.

Now that I’ve covered their recent earnings release, I will now evaluate CIBC’s investment prospects.

Penetrating the US Market