When is a C$25-billion exposure to a faltering economy good news? When you are Canadian Imperial Bank of Commerce (NYSE:CM), and your stock price apparently has already factored in just about everything short of financial Armageddon.
CIBC eventually came clean on its book of non-subprime credit derivatives linked to the U.S. economy Wednesday, and the reaction on Bay Street has been largely a cautious positive. For at least two months, there have been rumors the bank had tens of billions invested in a mixed bag of assets including commercial mortgages and loans to non-investment grade borrowers, all hedged with monoline insurers.
Now the bank has bared its book of non-subprime investments, revealing that, yes, it is worth C$25-billion. The bank says the underlying assets are good quality — much better than those in its book of subprime investments, which has been written down by more than C$4-billion.
On January 31, 2008, the market value of the underlying assets in the non-subprime book had declined by less than 4% in the case of most of the investments. Some analysts say things could have been worse.
In a note, TD Newcrest analyst Jason Bilodeau said:
In our view, the disclosure favorably resolves the remaining uncertainty around the bank’s risks and exposures and the positions are likely to generate write-offs of only a few hundred million.
The bank could take a hit of about C$1.5-billion to C$2-billion in the second quarter of 2008, he said. For anyone who is shell-shocked by all the bad news from the banking sector, a C$2-billion write off at CIBC in the second quarter passes for good news these days. Mr. Bilodeau rates CIBC a “Buy” with an C$80.00 target price.
His view is somewhat echoed by Genuity Capital Markets analyst Mario Mendonca, despite “a few lingering questions” about the sectors the investments are tied to and the monolines with which they are hedged. “CIBC’s risk of [realized] losses appears lower than we originally perceived,” says Mr. Mendonca, who rates CIBC’s stock a “Hold,” with a C$74.00 target price.