CIBC reports jump in bad loans even as profit beats estimates

CIBC reports jump in bad loans even as profit beats estimates

Canadian Imperial Bank of Commerce is seeing an uptick in bad loans, providing validation to short-seller concerns that credit conditions are worsening.

Investors and analysts have been watching for signs of deteriorating loans since short sellers earlier this year said that CIBC and other banks are ill-prepared for worsening credit conditions. CIBC’s soured-loan provisions totalled $ 291 million (U.S. $ 219 million) in the fiscal third quarter, compared with $ 55 million in the previous three months and up 21 per cent from a year earlier.

Key insights

CIBC had an enviable record of defying expectations quarter after quarter, for almost four years, until missing estimates in the fourth quarter of 2018 — and subsequent periods since. CIBC broke that streak in the quarter ended July 31, beating analysts’ estimates. Chief executive officer Victor Dodig warned investors in May that earnings this year would be “relatively flat” after CIBC posted second-quarter results hampered by a contraction in domestic mortgages and net interest income. He appears to have been overly pessimistic, with per-share earnings for the third quarter rising 2.1 per cent to $ 1.4 billion. CIBC once had enviable mortgage growth, trouncing other banks with 12 per cent year-over-year gains through 2017 — until the pendulum started to swing the other way at the end of last year. CIBC’s domestic mortgage book contracted for the third straight quarter with $ 201 billion in balances, down 1 per cent from a year ago. Canadian banking is CIBC’s biggest division, with the Toronto-based company being more reliant on domestic personal-and-commercial banking than its larger peers. The division earned $ 657 million in the quarter, up 2.8 per cent, to account for 47 per cent of overall earnings. Canada’s fifth-biggest bank also announced that Chief financial officer Kevin Glass will step down Oct. 31, to be replaced by Hratch Panossian, currently executive vice president, global controller and investor relations.

Market reaction

CIBC has been the worst-performing Canadian bank this year, with its shares falling 2.1 per cent through Wednesday, lagging the 4.7 per cent increase for the eight-company S&P/TSX Commercial Banks Index.

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Third-quarter net income rose 2.1 per cent to $ 1.4 billion, or $ 3.06 a share, from $ 1.37 billion, or $ 3.01 a share, a year earlier. Adjusted per-share earnings totaled $ 3.10, beating the $ 3.06 average estimate of 14 analysts in a Bloomberg survey. CIBC raised its dividend 2.9 per cent to $ 1.44 a share.

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