Why Canadian Imperial Failed to Cheer with Q3 Earnings


Canadian Imperial Bank of Commerce (CM) dropped 1.5% on the NYSE since the bank reported its third-quarter fiscal 2014 earnings (ended Jul 31) on Aug 28, before the opening bell. Adjusted earnings per share came in at C$2.23, declining 1.3% year over year.

Though the quarter witnessed a rise in non-interest income and lower provisions, the results suffered owing to escalating expenses and lower net interest income (NII.TO). Other earnings drivers including loans and acceptances, and deposits were also active during the quarter, but surrendered to the expense rise. Perhaps the concerns over rising expenses led to this share price decline.   

Canadian Imperial’s adjusted net income fell 2.5% year over year to C$908 million ($835.4 million).

Performance in Detail

Total revenue grew 3% year over year to C$3.4 billion ($3.1 billion). Moreover, adjusted revenues came in at C$3.4 billion ($3.1 billion), rising 2% year over year.

NII summed C$1.9 billion ($1.7 billion), decreasing slightly from the year-ago quarter. The fall was mainly driven by reduced card-related revenue due to the Aeroplan deal with Aimia Canada Inc. and The Toronto-Dominion Bank (TD) in the first quarter of 2014. Additionally, the decline was triggered by lower treasury-related income, mostly mitigated by volume growth across most retail products as well as higher trading income.

Non-interest income climbed 9% year over year to C$1.5 billion ($1.4 billion). The increase was primarily attributable to growth in mutual fund, investment management, underwriting and advisory fees and custodial fees. However, this was partially offset by trading losses and lower card fee related to the aforementioned Aeroplan deal.

Non-interest expenses totaled C$2.0 billion ($1.9 billion), up 9% year over year. The rise was mainly due to elevated employee compensation as well as higher computer, software and office equipment expenditure.

Adjusted efficiency ratio stood at 59.5%, up from 56.0% as of Jul 31, 2013. A rise in efficiency ratio indicates lower profitability.

Total provision for credit losses declined 39% year over year to C$195 million ($179.4 million). Loan loss ratio was 0.33% compared with 0.45% in the year-ago quarter.

Total assets came in at C$405.4 billion ($373.0 billion) as of Jul 31, 2014, up 2.1% from the prior-year period. Loans and acceptances (net of allowance) increased 3.2% year over year to C$262.5 billion ($241.5 billion) while deposits rose 2.9% year over year to C$322.3 billion ($296.6 billion).

Adjusted return on common shareholders’ equity stood at 20.7%, down from 23.7% in the year-ago quarter.

As of Jul 31, 2014, Basel III Common Equity Tier 1 ratio came in at 10.1% compared with 9.3% as of Jul 31, 2013. Further, Tier 1 capital ratio was 12.2% compared with 11.6% in the year-ago quarter while total capital ratio was 14.8% compared with 14.7%.

Capital Deployment Activities

Concurrent with the earnings release, Canadian Imperial announced its plan to get approval for a new normal course issuer bid to purchase for cancellation of around 2% of outstanding shares (maximum 8 million shares) in the coming 12 months.

Moreover, during the reported quarter, the bank purchased and cancelled 759,500 common shares at an average price of C$97.58 for a total amount of C$74 million ($68.1 million).

Also, the bank declared a quarterly cash dividend of C$1.00 per share. The dividend will be paid on Oct 28 to shareholders of record on Sep 29.

Our Viewpoint

In spite of top line growth over the last few quarters, we remain apprehensive regarding the sustainability of the same given the low interest rate scenario and limited fee income earning avenues. Moreover, the rising expenses and struggling NII are bound to worsen the situation going forward.

However, Canadian Imperial’s strong business model, diversified product mix and sound capital position should continue to boost its bottom line.

Canadian Imperial currently carries a Zacks Rank #3 (Hold).

Performance of Other Foreign Banks

Royal Bank of Canada (RY) reported strong fiscal third-quarter results on the back of sustained growth in the top line, partially offset by elevated non-interest expenses as well as provisions

Also, Itau Unibanco Holding S.A.’s (ITUB) second-quarter 2014 recurring earnings increased on a year-over-year basis. Results benefited from reduced expenses for provision of loan and lease losses and higher managerial financial margin, partly mitigated by rising non-interest expenses.

Read the Full Research Report on TD
Read the Full Research Report on ITUB
Read the Full Research Report on CM
Read the Full Research Report on RY

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