CIBC: Does The Value Outweigh The Acquisition Risk?

Jonathan Wheeler profile picture
Jonathan Wheeler


  • The housing market has weighed on the Canadian banks recently.
  • Acquisition risk is an important factor to consider for CM going forward.
  • If investors can look past the acquisition, CM is trading at a P/E of only 10, with a yield close to 5%

The Canadian Imperial Bank of Commerce (NYSE:NYSE:CM) is the smallest of the big 5 banks in Canada. It has consistently driven the strongest returns on equity, but its lack of international growth prospects and fears over the Canadian housing market have weighed on the valuation. Management hopes to fix its growth prospects through the Private Bancorp (NYSE:PVTB) acquisition, but the bank is likely overpaying, which may be dilutive to shareholders. Housing fears are likely overblown, offering long-term dividend growth investors a good spot to initiate a position in the Canadian banks, with Toronto-Dominion Bank (NYSE:TD), Bank of Nova Scotia (NYSE:BNS), and Bank of Montreal (NYSE:BMO) all trading well off of their highs. However, CM may not be the best choice at this juncture, despite the highest yield and lowest valuation.

The bank's recent earnings report looked solid, with adjusted earnings rising 10% YOY, a return on equity of 18% and a CET1 ratio of 12.2%. The CET1 ratio is a mandated stress test by the Basel III accords, with a minimum of 6%. CM has maintained its ratio very high over time, and the upcoming acquisition will be dilutive but likely won't drop it below 10%.

CM continues to shift its retail banking in order to drive strong customer growth. The bank transformed 30 of its banking centers, with the goal of shifting away from tellers and routine transactions. This shift in focus is based on customers using the mobile app and website to open accounts and shift money, leaving the banking footprint for investment and loan advice. The bank's mobile banking functionality received the highest score of the big 5 for the fourth year in a row from Forrester Research, which should continue to drive growth for the company's retail segment, as well. Residential mortgages grew 12%, and personal deposits grew 7% YOY. Business deposits were up 11%, as well. This level

This article was written by

Jonathan Wheeler profile picture
I have been writing here since 2016.  My goal is to highlight the highest quality companies in the market, value or growth.  I buy with a long-term time horizon, and am typically looking for companies with strong competitive advantages, solid management, and a history of creating shareholder value.My portfolio consists of both stalwart long-term dividend payers and high-growth, high quality names.  I think of it as a barbell approach to investing, where the value/dividend-paying companies shield the rest of the portfolio in a downswing.

Disclosure: I am/we are long CM, TD, BNS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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