RBC Capital Analyst Expects More Write-Downs at CIBC

Jun.26.08 | About: Canadian Imperial (CM)

RBC Capital Markets’ Andre-Philippe Hardy added his name to the growing list of analysts expecting more large writedowns from CIBC (NYSE:CM). He increased his third-quarter writedown estimate for the Canadian bank from C$1-billion to C$1.5-billion due to recent downgrades by ratings agencies of financial guarantors CIBC has exposure to. He also maintained his “underperform” rating and lowered his target price from C$64 to C$62 per share.

Mr. Hardy’s decision is also a result of continued pressure on the value of collateralized debt obligations of residential mortgage-backed securities and widening spreads for credit default swaps. He told clients that CIBC has the largest exposure to financial guarantors among Canada’s banks and said he expects more pressure on the valued of hedged assets, which will increase this exposure.

Despite the bad news, Mr. Hardy believes CIBC’s Tier 1 ratios will remain above 9% and that it has enough capital even if its hedges with financial guarantors are worthless. He thinks the bank could withstand writedowns as high as C$4.5-billion in this scenario, although he considers it unlikely.