CIBC Q4FY14 Review: Wealth Creation

| About: Canadian Imperial (CM)
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Summary

CIBC reported a Q4 that slightly missed consensus.

Encouraging trend on retail banking and wealth management.

Neutral call given the sector-wide headwind. Prefer insurance MFC and SLF over the banks.

Event

CIBC (NYSE:CM) reported EPS of $2.24 (+1% y/y) that slightly missed consensus of $2.25. Results were largely in-line across all the segments. Dividend was increased by 3% to $1.03 with a payout of 46%. As expected, the bank introduced a new chairman, John Manley, to replace Charles Sioris. The domestic P&C is looking slightly better with growth of +4% excluding Aeroplan. Loan growth of 3% was a bit soft but excluding Firstline growth was actually +8%. Management was very clear on its intention of expanding its wealth management, thanks to the CEO's prior experience at UBS Global Asset Management, and the bank is looking for acquisition targets in the US that could potentially complement its existing business and open up new distribution channels. I expect an acquisition price of less than $2b to be the reasonable for CIBC to achieve its near-term expansion objectives. I am fairly neutral on CIBC given the expected deceleration in market growth and it still can be perceived as a recovery story.

Highlights

Canadian P&C hitting the reset button. While the headline Canadian earnings declined 3% y/y, growth excluding Aeroplan was actually up +4% y/y. Expense increased 3% but the -20% decline in PCL more than offset the elevated expense level. Earnings of +7% growth was encouraging when factoring out Aeroplan, suggesting that CM's retail banking continues to gain share. Loan growth of +3% may seem to suggest that CM could lag the overall peers heading into next year, but when we factor out Firstline growth was actually 8%. Again another encouraging sign on the state of the retail banking arm.

Wealth management the bright spot; look for additional upside here. Wealth Management earnings grew +18% y/y with AUA +12 ex-Atlantic Trust and AUM +45%, making it one of the best growth profiles among the Canadian banks. Revenue grew +24% y/y but expense was up +27% on slightly higher investment in this unit but all the investments are paying off with retail brokerage up +11% and private wealth more than doubled to $79m after factoring Atlantic Trust. I believe that wealth management will be a key segment for CIBC given that it has one of the smaller wealth management arms among the Canadian banks and that the solid growth prospect of the segment far outweighs that of units such as wholesale.

Conclusion

Neutral on CM along with the rest of the Canadian banks due to a softer than expected quarter. I would be putting my money in Manulife (NYSE:MFC) and Sunlife (NYSE:SLF) given the positive fund flow into insurance.

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