When times are good, banks are often valued based on their earnings. But when a crisis emerges, balance sheets become far more important, says Dundee Securities’ John Aiken.
As a result of recent developments at CIBC (CM) and expectations that concerns will continue to weigh on its shares, the analyst reduced his rating on the bank to “market underperform” from “market neutral,” and slashed his price target by C$25 to C$65 per share. CIBC closed down 1.59%, or C$1.15, to C$71.14 on Wednesday.
CIBC rallied briefly on speculation that a unit of ACA Capital Holdings Inc. [ACA] might survive thanks to support from a group of financial institutions, but a downgrade from Standard & Poor’s of the ACA Financial subsidiary sent shares in the Canadian bank lower.
ACA has been delisted on the New York Stock Exchange and may face bankruptcy as a result of the subprime mess. CIBC revealed that ACA was the single A-rated hedge counterparty that it had exposure to for its U.S. subprime real estate investments.
While CIBC said its exposure had grown to $2-billion by the end of November, Mr. Aiken estimates that number will ultimately be more than $2.4-billion. The underlying collateralized debt obligations (CDOs) are effectively valued at C$0.30 on the dollar, while the resulting charge is roughly C$4.75 per share, he said in a research note.
According to Blackmont Capital’s Brad Smith, the losses CIBC faces from its exposure to credit derivatives will depend on future credit actions, but they could be between C$2-billion and C$6-billion in 2008.
In a note to clients, the analyst said losses of more than C$3.5-billion should trigger substantial dilution as CIBC will need a capital injection.
Mr. Smith continues to rate the stock a “sell” with a C$76 price target.
