Displaying continual top-line growth, Canadian Imperial Bank of Commerce (CM) reported its second-quarter fiscal 2014 earnings (ended Apr 30) on May 29, before the opening bell. Adjusted earnings per share came in at C$2.17 per share, increasing 3.8% year over year
Nevertheless, results benefited from a rise in non-interest income partially offset by a fall in net interest income (NII.TO), higher expenses and an increased provision for credit losses. Moreover, growth in deposits, loans and acceptances were the tailwinds of the quarter. Further, while credit quality deteriorated, capital ratios were mixed bag.
Canadian Imperial’s adjusted net income climbed 2.9% year over year to C$887 million ($802.1 million)
Performance in Detail
Total revenue came in at $3.2 billion ($2.9 billion), up 1.4% from the prior-year quarter. Additionally, adjusted revenues stood at C$3.3 billion ($3.0 billion), rising 3.4% year over year.
NII was C$1.8 billion ($1.6 billion), decreasing 1.3% from the year-ago quarter. The primary reasons behind the fall were a decline in card-related net interest income due to the Aeroplan deal with Aimia Canada Inc. and The Toronto-Dominion Bank (TD) in the prior quarter, a decrease in treasury-related income and lower revenue from FirstLine mortgage broker business. These negatives were partially offset by volume growth across most retail products and higher revenues from corporate banking.
Non-interest income grew 5.1% from the year-ago quarter to C$1.4 billion ($1.3 billion). The increase was driven by growth in mutual fund, investment management and custodial fees, partially mitigated by lower card fee related to the aforementioned Aeroplan deal.
Non-interest expenses were C$2.4 billion ($2.2 billion), up 32.2% year over year. The year over year rise was mainly due to goodwill impairment charge relating to CIBC FirstCaribbean, increase in employee compensation, software and office equipment expenditure, cost related to travel rewards program and the Aeroplan deal.
Adjusted efficiency ratio was 59.6%, up from 56.9% as of Apr 30, 2013. A rise in efficiency ratio indicates decline in profitability.
Total provision for credit losses were C$330 million ($298.4 million), up 24.5% from the prior-year quarter. Loan loss ratio was 0.51% compared with 0.47% in the year-ago quarter.
Total assets came in at C$397.1 billion ($361.2 billion) as of Apr 30, 2014, nearly stable compared with the prior-year period. Loans and acceptances (net of allowance) climbed 2.5% year over year to C$258.7 billion ($233.9 billion) while deposits rose 1.6% year over year to C$314.0 billion ($284.0 billion).
Adjusted return on common shareholders’ equity was 20.6%, down from 23.0% in the year-ago quarter.
As of Apr 30, 2014, Basel III Common Equity Tier 1 ratio was10.0% compared with 9.7% as of Apr 30, 2013. Tier 1 capital ratio was 12.1% compared with 12.2% in the prior-year quarter. Further, total capital ratio was 14.9% compared with 15.5% in year-ago quarter.
Along with its earnings release, Canadian Imperial declared a 2.0% hike in its quarterly cash dividend to C$1.00 per share. The dividend will be paid on Jul 28 to shareholders of record on Jun 27.
In spite of top-line growth over the last few quarters, we remain skeptical about the sustainability of the same. The pressure on the top line remains given the low interest rate scenario and limited fee income earning avenues. Moreover, rise in expenses will tend to worsen the overall scenario.
Nevertheless, Canadian Imperial’s strong business model, diversified product mix and sound capital position will continue to boost its bottom line.
Canadian Imperial currently carries a Zacks Rank #3 (Hold).
Performance of Other Foreign Banks
The Toronto-Dominion Bank and Royal Bank of Canada (RY) reported strong fiscal second-quarter results driven by top-line growth and lower provision for credit losses partially offset by higher expenses.
Itau Unibanco Holding S.A.’s (ITUB) first-quarter 2014 recurring earnings increased on a year over year basis. Results benefited from reduced expenses for provision of loan and lease losses and increased managerial financial margin, along with higher banking service fees and income from banking charges. However, elevated non-interest expenses acted as the headwind.