Is CIBC a Takeover Candidate?

| About: Canadian Imperial (CM)

The possibility of more writedowns at CIBC (NYSE:CM) could force the bank into another's hands, says John Aiken, analyst at Dundee Securities.

Following on the heels of the U.S. Federal Reserve's Fannie Mae (FNM) and Freddie Mac (FRE) intervention and the U.S. bank failure of IndyMac (IMB), Mr. Aiken said CIBC may be forced to raise common equity once again as a result of continued write-downs on its credit and liquidity exposure.

Mr. Aiken said CIBC is safe for now from needing to raise additional capital, noting it can withstand pre-tax charges of up to C$2.5-billion. But with potential charges of roughly C$4-billion to come, he believes CIBC would need more capital before all is said and done.   

That won't be an easy task, he added, and could leave CIBC with possibly no other option than to be taken over by another bank.

He wrote:

We believe it would be very difficult for the bank to gather additional public funding, given that it is currently trading well below the offer price of the previous offering and the fact that there is no guarantee that the write-downs have come to an end.
Should the regulator become concerned with its capital position and the bank is unwilling or unable to tap the market for incremental equity, CIBC could be forced into the hands of another financial institution as the best solvency alternative.

Mr. Aiken admitted that the process would require significant changes to the Bank Act and a considerable amount of political will, but told clients the benefit of allowing bank mergers in Canada would far outweigh the cost of losing one of the country's "Big 6" banks.

The analyst said the most "politically-expedient method of salvaging CIBC," in the case that a common equity infusion was denied by the public market, would be a cross-pillar acquisition, most likely by Manulife Financial Corp. (NYSE:MFC).

However, should CIBC fall into the hands of another suitor, it would be next to impossible for the government to stop the consolidation at that step, given the outsized assets and market capitalization that the new entity would have. Further, it would have a very significant advantage should insurance be allowed to be sold through the branches (which would be a likely concession that Manulife would demand for 'saving' CIBC).