Gerry McCaughey, president and chief executive officer of CIBC, speaks during their annual general meeting in Montreal, April 24, 2014. Canadian Imperial Bank of Commerce said on Thursday that McCaughey will retire in two years, the latest in a series of leadership changes at Canada's top lenders.Christinne Muschi/Reuters
The next chief executive of Canadian Imperial Bank of Commerce will have to do something the departing Gerald McCaughey has not done: grow.
Mr. McCaughey has focused throughout his nine-year tenure on de-risking the bank, a reasonable goal given that the bank tended to find itself encountering the downside of risks its shareholders would rather have avoided (see Enron, or U.S. subprime, for the main examples.) But that strategy ran its course some time ago, and CIBC's shareholders are paying now for the lack of a plan to make CIBC into something more dynamic.
CIBC is now producing steady earnings, racking up capital and is able to raise its dividend steadily. It is low risk. Its trading and securities activities are curtailed. It is almost completely focused on Canada. And investors don't seem to want that.
It turns out investors are willing to give a higher valuation to banks with growth strategies, even if those growth strategies are expensive or even risky. Canadian banks produce heaps of excess capital, and investors want them to put that to work in the service of expansion. The clearest contrast comes from CIBC and Toronto-Dominion Bank, as Rob Wessel, a money manager specializing in banks, has spelled out.
CIBC trades at the lowest price-to-earnings multiple of any of Canada's big five banks. CIBC garners a 10.86 times multiple, while TD's is 13.72. The other three banks are in the middle. The low multiple speaks to investors' opinion of CIBC's prospects. It is more than just symbolic. It is also a potential hindrance when CIBC wants to buy something. Its cost to raise equity is higher than its rivals.
How little has the growth been? CIBC's revenue in the fiscal year that ended Oct. 31 2006 was $11.3-billion, and in fiscal 2013 it was $12.8-billion, a 1.8 per cent compound annual growth rate. By contrast, TD's revenue went from $13.1-billion to $27.2-billion in that time, a compound annual growth rate of 11 per cent.
So the first question the board will have to ask any applicant is, How would you grow the bank? The second would have to be, How would you communicate that to shareholders? If an aspirant has good answers, and the right CV, the board might do well to move sooner than waiting the full two years until the retirement date laid out in Mr. McCaughey's announcement of his departure.
In keeping with his low-risk demeanor, Mr. McCaughey has been a fan of the most incremental approach to expansion – joint ventures and minority stakes. His logic is that CIBC can learn businesses without committing too much capital, and then can later move to buy control.
However, it's a strategy that does not speak of conviction. As a result, it's been hard to tell from the outside looking in exactly what CIBC was aiming to be when it grew again.
The others have made it very clear what they will do as the money rolls in. Royal Bank of Canada has signalled loud and clear that it wants wealth management and investment banking in the U.S. TD wants U.S. retail branches. BMO, which for a time was hard to read, has of late laid out billions to buy a U.S. bank and a U.K. wealth manager. Bank of Nova Scotia continues its longtime focus on international banking.
And CIBC? The direction is much harder to gauge. The bank invested in the Caribbean close to a decade ago, ponying up about $1-billion (U.S.) to take majority control of a banking group based in Barbados. However, dreams of expansion there have been put on hold because of an economic mess in the region that has left much of that business needing . So that is not it.
The bank then spent close to $1-billion to buy a minority stake in a large U.S. asset manager in 2011, and has added some smaller wealth businesses since then. But the commitment to growing wealth management was not clear until recently, when the bank laid out a plan to bolster that aspect of the company. And now CIBC is in talks to buy Russell Investments in the U.S., a transaction that would likely cost in the neighborhood of $3-billion.
At last, there is a growth plan, and a big transaction that could move the ball forward. If a purchase of Russell does happen, it seems a fitting comment on Mr. McCaughey's style that by far the biggest transaction on his watch will come after he has announced his retirement.