CIBC: Margins To Remain Healthy In Spite Of Economic Uncertainty

Mar.22.12 | About: Canadian Imperial (CM)

In spite of economic uncertainty in Europe, slower growth in China and domestic household debt levels, the Canadian Imperial Bank of Commerce (NYSE:CM) reported a growth in profits of 8.6%. Strength in CIBCs wealth management, retail and business banking segments supported the bank in Q1 in 2012.

For the three month period ending on January 31, CIBC reported significantly stronger profits, with an increase of 8.6%. The reported net income for Q1 2012 was $835 million, compared to $763 million for the same quarter last year. This increased profit margins from 24.66% to 26.44%. The increase in profit came from stronger results in the bank's wealth management and retail and business banking segments.

According to ProActive investors: CIBC president and chief executive officer Gerry McCaughey said: "The first quarter reflected broad-based performance across our core businesses in retail and business banking, wealth management and wholesale banking."

CIBC's wealth management segment reported net income of $100 million, which was an increase of $34 million, or 52% from the same quarter last year. This was primarily due to higher revenue from asset management and lower non-interest expenses, partially offset by lower revenue from retail brokerage.

CIBCs retail and business banking segment reported a net income of $567 million for Q1 2012. This was an increase of 4.8% over Q1 last year, when the bank reported net income of $540 million. In Q1 2012 the retail and business banking segment reported revenues of $2 billion which was an increase 1% from Q1 2011. This was primarily due to volume growth in both personal banking and business banking, as well as higher treasury allocations, partly offset by narrower spreads.

Overall the bank was satisfied with the results from Q1, with the Canadian Business Journal reporting: Gerry McCaughey, CIBC President and CEO. "Our financial results reflect our first principle and strategic imperative which is to be a lower risk bank targeting value creation for our shareholders by delivering consistent, sustainable earnings over the long term."

CIBC sees many challenges going forward on global and domestic levels. Economic growth and the significant uncertainty remaining in the market, particularly as it relates to Europe and slower growth in China, are key concerns for the bank. On a domestic level the increasing levels in Canadian household debt is also a concern for the bank.

CIBC states in the outlook for calendar year 2012: "Economic growth is likely to stay relatively modest in both Canada and the U.S. in 2012. Real GDP gains are likely to be in the vicinity of 2% in Canada and slightly above that pace in the U.S., in the face of fiscal restraint and a deceleration in economic activity overseas, including a likely recession in Europe and slower growth in China. We expect European governments will show further resolve in preventing sovereign debt troubles from spilling over into a larger eurozone banking crisis and a deeper recession."

On a domestic level, Canadian household debt is a large concern for the bank. Many Canadians spend approximately $1.50 for every dollar they earn. The Financial Post recently stated: "Canadians' growing household debt has been a high-profile concern, with officials such as Federal Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney warning of the reckoning to come when interest rates start rising from their record lows."

Canadian Banks such as CIBC are monitoring Canadian household debt levels. The Financial Post also states: "For now, the rise in asset values and low interest rates are insulating households from any negative fallout from the elevated debt levels and are allowing the bank to attend to the global risks to Canada's growth outlook."

In 2012 there is no predicted rise in the interest rates with Bank of Montreal, stating, "it does not expect interest rates to rise again until the early part of 2013" (The Canadian Free Press). This sustained low interest rate environment will continue to insulate the Canadian household debt concern.

Even with economic uncertainty in Europe, slower growth in China and domestic household debt levels being concerns for CIBC, the strength in CIBC's wealth management and retail and business banking segments supported the bank in Q1 2012, with profits increasing by 8.6%. President and CEO Gerry McCaughey's strategy of being a "lower risk bank targeting value creation" will help keep margins healthy going forward.

1) Estimated sales: $12 billion

2) Estimated profit margin: 26.44%

3) Profit of $3.17 billion

4) Estimated shares outstanding = 431.80 million

5) EPS = $7.34

6) Forward P/E = 11.72

CM - Canadian Imperial Bank of Commerce Stock Price Target for 2012 = $82.20 USD

Action Analyst Rating Price Date
Downgrade TD Securities Buy 03/13/12
Target KBW Market Perform $81.00 « $78.00 03/09/12
Maintain Scotia Capital Sector Outperform $93.00 03/09/12
Target, Downgrade TD Newcrest Buy « Action Buy List $92.00 « $93.00 03/09/12
Target CIBC World Markets $82.00 « $81.00 03/09/12
Target UBS Securities $79.00 « $76.00 02/27/12
Downgrade Credit Suisse Neutral « Outperform 02/23/12
Target Canaccord Genuity $85.00 « $86.00 01/30/12
Target Barclays Capital $87.00 « $90.00 12/14/11
Target National Bank Financial $82.00 « $85.00 12/02/11
Downgrade UBS Securities Neutral « Buy 12/02/11
Target CIBC World Markets Sector Outperform $81.00 « $84.00 12/02/11
Maintain Scotia Capital Sector Outperform $93.00 12/02/11
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.