The CIBC logo in Toronto.Fred Lum/the Globe and Mail
Canadian Imperial Bank of Commerce’s profit slumped in its fiscal third quarter as the lender set aside more money for bad loans and booked impairments in its U.S. office-loan portfolio.
Most of Canada’s largest banks missed analysts’ expectations in reporting earnings over the past week, as sour-loan provisions and costs spiked. The mounting pressures amid concerns of a worsening economic outlook have weighed on bank earnings broadly, with CIBC taking the brunt of the impact in its U.S. division.
Even as revenue at the bank’s U.S. commercial banking and wealth management business rose 5 per cent, its net income plunged 64 per cent year-over-year, to $73-million. CIBC CM-T booked $255-million in provisions, largely on impairments in its office space portfolio in commercial real estate.
Demand for office space has cooled as workers continue to clock in remotely, and many of Canada’s banks have signalled concerns with some loans for that segment of real estate. CIBC’s U.S. region group head, Shawn Beber, said the bank is lowering its exposure to office lending.
Offices comprise less than 1 per cent of the U.S. division’s total loan book and 20 per cent of its overall commercial real estate portfolio – double the proportion it accounts for in its Canadian business.
“It’s a part of the business we’re de-emphasizing, and as that transition continues, you’ll see [commercial real estate] wind up being a smaller percentage of the overall U.S. portfolio as our commercial, industrial and wealth businesses continue to grow,” Mr. Beber said during a conference call with analysts.
CIBC profit fell 14 per cent year-over-year, to $1.43-billion, in the three months ended July 31. Adjusted to exclude certain items, the bank said it earned $1.52 per share, less than the $1.69 per share analysts expected, according to Refinitiv.
Lenders have been hiking provisions across their businesses, increasing them to levels seen before the pandemic. After COVID-19 arrived, banks built up reserves quickly but ultimately released them when anticipated defaults never materialized.
This year, defaults have continued to hover at low levels, and provisions in previous quarters were boosted by loans that were performing or still being repaid. In the third quarter, much of the increase in reserves that the banks set aside was pegged for loans that are impaired – at greater risk of not being paid on time.
In the quarter, CIBC set aside $736-million in provisions for credit losses – the funds banks set aside to cover loans that may default. That was higher than analysts anticipated and included $478-million against loans that may not be repaid, based on models that use economic forecasting to predict future losses. In the same quarter last year, CIBC set aside $243-million in provisions.
“A larger-than-expected impaired PCLs this quarter is somewhat understood, but the outlook also makes CIBC stand out negatively,” RBC analyst Darko Mihelic said in a note to clients.
The bank’s shares sunk 3.2 per cent Thursday in Toronto, stumbling further than the S&P/TSX Composite Banks Index’s 1.1-per-cent decline.
The bank has also been increasing its common equity tier 1 (CET1) ratio, a measure of a lender’s ability to absorb losses. Canada’s banking regulator has been raising bank capital requirements, prompting banks to reserve billions of dollars in excess funds in anticipation of an economic downturn. In recent quarters, CIBC’s capital level has been among the lowest of its peers, hovering close to the Office of the Superintendent of Financial Institution’s minimum level.
This quarter, CIBC raised its CET1 ratio to 12.2 per cent from 11.9 per cent in the previous quarter, putting it comfortably above its requirements in case the regulator decides to increase levels again this year.
CIBC chief financial officer Hratch Panossian said that while the bank plans to continue increasing its capital buffer, that will not affect its ability to invest in its business and continue to grow.
“We’re not necessarily conserving capital, but we’re prudently allocating our capital. Where we are now, we can continue growing our business,” Mr. Panossian said during the call.
One business that posted a rise in profit was capital markets, a unit in which bank earnings have been muted in recent quarters. Profit climbed 11 per cent to $494-million on higher revenue in its global markets and direct financial services businesses.
CIBC is the final major bank to report earnings for the fiscal third quarter. It joins Toronto-Dominion Bank TD-T, Bank of Montreal BMO-T and National Bank of Canada NA-T in missing analysts’ estimates. Bank of Nova Scotia BNS-T met expectations, while Royal Bank of Canada RY-T surpassed estimates.