The market seemed to like CIBC’s (NYSE:CM) third quarter resultsthat showed lower-than-expected writedowns on its credit investments, sending the stock up more than 5% on Wednesday. However, not everyone feels the positive reaction was justified.
Michael Goldberg at Desjardins Securities said the bank’s capital position is stretched by supporting its large exposure to “hard-to-value” Level 3 assets and liabilities. These are securities held on banks’ books for which there is no market value.
In a research note, the analyst said:
This leaves CIBC vulnerable and unable to take advantage of opportunities, unlike many of its Canadian peers.
He added that the rest of the bank is left with little support.
CIBC has $2.9-billion in remaining exposure of net receivables related to its subprime mortgage financial guarantor counterparties. With $12.9-billion in risk-weighted assets [RWA] allocated to this exposure, the bank noted that if the entire $2.9-billion in exposure were written down, the RWA would no longer be required, releasing the associated capital, Mr. Goldberg said.
However, he feels that CIBC’s interpretation misses some key elements in terms of its Tier 1 capital, which OSFI requires must be at least 7% of their RWA. If all the $2.9-billion in exposure is written off, roughly $840-million of tangible common equity would be released, but approximately $2-billion of tangible common equity (of $8.5-billion in total) would also be extinguished, the analyst noted.
And while CIBC’s dividend remains safe, Mr. Goldberg said the stocks is “dead money.” He maintained a “hold” recommendation but cut his price target from C$77.50 to C$71.50, which still represents upside of nearly 20% from Wednesday’s close of C$60.10.
RBC Capital Markets analyst Andre-Philippe Hardy, who has an “underperform” rating and C$62 price target, said CIBC shares won’t necessarily perform will against its peers in the next six months despite its relatively cheap price and the low likelihood of it needing to raise capital or cut its dividend.
He told clients:
CIBC’s exposures to structured finance assets and financial guarantors remains material, with little visibility on ultimate mark to market valuations.
Mr. Hardy also noted that visibility on the bank’s wholesale earnings are even clouder than other banks.