CIBC Bonds: Starting to Make Analysts Nervous

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Includes: CM, RY, TD
by: Streetwise Blog

By Andrew Willis

Credit markets are signalling all is well at CIBC (NYSE:CM), a conclusion that makes fixed income analysts just a little nervous.

During the U.S. credit crunch that played out last year, CIBC’s well-documented exposure to the U.S. market translated into substantial losses at the bank. As a result, institutions charged premium rates to lend to the bank.

The most recent results from CIBC, released on Thursday, contained better-than-expected profits and lower-than-expected loan losses. That welcome combination, along with strong capital ratios, translated into guarded optimism on the bank’s prospects from fixed-income analysts, who follow bond markets.

“Overall, it was a good quarter for CIBC; however, we would like to see a couple more quarters of stable results before we become more comfortable on the credit,” said George Lazarevski, who follows the banks for BMO Nesbitt Burns.

But the market isn’t waiting a couple of quarters, as bond market prices show CIBC publicly traded debt is now changing hands in line with domestic peers that have less exposure to still-worrisome U.S. credit portfolios. For example, Mr. Lazarevski pointed out that CIBC five-year deposit notes are changing hands at a 10 to 11 basis-point discount to Royal Bank’s (NYSE:RY) five-year notes, compared to the 30 to 35 basis-point premium seen on these notes earlier this year.

“At these levels, we would prefer other bank alternatives such as Royal Bank and TD Bank (NYSE:TD),” said the BMO Nesbitt Burns credit analyst.

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