Analysts Weigh In Over CIBC’s Deal with Oppenheimer

Canadian Imperial Bank of Commerce’s (CM) deal to sell some of its capital markets operations to Oppenheimer Holdings Inc. (OPY) is an attempt to realize value from a business that was not reflected in its share price, according to RBC Capital Markets analyst Andre-Philippe Hardy.

While the transaction does not impact his “outperform” rating on CIBC shares, the payment structure is heavy on contingent payments based on the performance of Oppenheimer’s capital market division, he told clients in a note. CIBC also receives warrants to buy 1 million Oppenheimer shares exercisable five years after the deal closes.

Mr. Hardy noted that the businesses include U.S. domestic banking, equities, leveraged finance, CIBC’s Israeli investment banking and equities business, as well as some U.K. and Asian businesses. They account for an estimated $400-million in annualized revenues, or just over 3% of CIBC’s revenue base, but the analyst said the contribution they make to profits are likely marginal at best.

According to Dundee Securities analyst, John Aiken, the bank’s deal with Oppenheimer Holdings Inc. will boost CIBC’s stock valuation as the discount it is awarded for being “accident prone” should dissipate.

But the bank’s growth plans have been unclear at least since chief executive officer Gerry McCaughey took over in 2005, and began a cost and risk-trimming exercise.

After selling off the majority of its U.S. wholesale operations, “future growth now effectively relies on domestic,” with the capital markets franchise weakened because of its minimal presence in New York, Mr. Aiken said.

According to the Dundee analyst:

Outside of First Caribbean — CIBC’s retail bank in the islands — CIBC does not have any obvious high growth avenues for the mid- to longer term. Furthermore, CIBC’s investment banking operations will likely be at a bit of a disadvantage with its now lack of ability to provide integrated cross-border solutions.

He also notes that the bank may not even have got the best deal because it sold the operations at the bottom of the cycle.

Mr Aiken said that:

We believe that the subprime mortgage losses experienced in the third quarter were likely the final straw and Gerry McCaughey has determined that the only way to ensure that there will not be any more charges emanating from the U.S. wholesale is to sell its operations.

Despite hindering longer term growth however, the deal will likely have little near term impact on earnings. Consequently, Mr. Aiken has left his rating for CIBC at “market neutral,” with an unchanged target price of $105.