CIBC's share price is now down 28 per cent from a high point in early February, making it the worst performer among its peers over this period.Evan Buhler/The Canadian Press
If you’re worried about the ability of Canadian Imperial Bank of Commerce CM-T to navigate through rising interest rates, a deteriorating housing market and an unstable economy, relax: The market is way ahead of you.
After reporting disappointing quarterly financial results on Thursday, CIBC’s share price fell 7.7 per cent, which is an unusually severe one-day decline for a big-bank stock.
The share price is now down 28 per cent from a high point in early February, making it the worst performer among its peers over this period.
But CIBC also stands out with an attractive dividend yield of 5.7 per cent and a valuation that is at the low end of its historical range. Does that make it a bargain worth betting on?
Canadian banks have been struggling this year as rising interest rates weigh on economic activity and raise concerns about the financial health of homeowners with large mortgages.
As a group, the Big Six banks are down by an average of 9 per cent. For a sector that outperforms the broader stock market over the long term, this year is a fail: The banks have lagged the S&P/TSX Composite Index by 5 percentage points in 2022 with one month left.
This week, the banks’ fiscal-fourth-quarter results shed some light on why the group has lost the affection of investors. As a group, the banks are setting aside more money to cover bad loans and reporting flat or even lower profits than a year ago.
CIBC offered a particularly uninspiring snapshot.
The bank’s net income declined 18 per cent from the same quarter last year, and 29 per cent from the previous quarter, largely because it set aside far more money to cover bad loans given the dimmer outlook for U.S. and Canadian economic activity.
These provisions for credit losses jumped to $436-million in the fourth quarter, up 459 per cent from the same quarter last year.
“This quarter doesn’t really reflect the earnings power of the bank,” Victor Dodig, CIBC’s chief executive officer, said during a conference call with analysts on Thursday.
Mr. Dodig said he preferred to focus on the full fiscal year, in which the bank acquired retailer Costco’s Canadian credit card portfolio, with two million cardholders. CIBC also added a net 350,000 clients to the bank, 38 per cent of them deemed highly desirable affluent bank customers with money to invest.
However, a number of analysts didn’t like what they saw in the fourth quarter, and responded by cutting their target prices, or where they expect CIBC shares to trade within 12 months.
Gabriel Dechaine, an analyst at National Bank of Canada, slashed his target price to $67 from $80 previously, which is a 16-per-cent haircut. He also changed his recommendation on the stock to “sector perform” from “outperform,” essentially removing the “buy” recommendation he had on the stock for the past two years.
One key concern of analysts: Margins on loans are being squeezed, particularly in the case of mortgage renewals – a serious hurdle for CIBC given the bank’s relatively high exposure to the Canadian housing market.
“This issue could persist over the next couple of quarters, which is reflected in management’s guidance for improved margins only by the second half of fiscal 2023,” Mr. Dechaine said in a note.
Still, long-term investors with an appetite for risk might see a few reasons to give the stock some consideration.
For one thing, Canadian bank stocks have gone in wildly different directions this year. At one extreme, top-performing Royal Bank of Canada – big, diversified and deemed a safer bet in an uncertain environment – has outperformed CIBC by more than 19 percentage points in 2022.
This wide dispersion suggests that the stock market is expecting an economic downturn that will disproportionately affect CIBC, yet the bank is already preparing for economic uncertainty with provisions for loan losses and a robust financial buffer.
For another, CIBC’s valuation is down. According to data from RBC Dominion Securities, released last week before the banks reported their fourth-quarter results, CIBC’s stock trades at just 8.6 times estimated 2023 earnings. That’s well below the 15-year average of 9.8 and it suggests the downside risk could be low.
And lastly, consider CIBC’s dividend yield. At 5.7 per cent, it offers investors a handsome reward for taking a chance on an unpopular stock – and a powerful incentive to wait out economic uncertainty.