Opinions
Lorne Steinberg
Canadian Imperial Bank of Commerce
CM-T
HOLD
Jan 30, 2018
Stock price when the opinion was issued
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Taking less on credit provisions than other banks. Positive: credit situation better than others. Negative: taking more risk and, if wrong, stock would be penalized. Canada-centric. Exposed to residential mortgages and commercial real estate in Canada; two iffy sectors, but doing better than expected. Good earnings and good asset management.
Don't sell. Trading more cheaply than RY. RY commands a premium price for a premium asset.
Used to have a habit of running into sharp objects, but CEO has turned this around. Warrants consideration. Great domestic personal and commercial business, capital markets, and wealth management. Modest presence in US, and has stayed out of trouble there.
If you already own NA and RY, consider TD or BMO before this one. But if you're going to add 2 more banks to your portfolio, no quarrels with adding this one.
Premium contentWe've already recommended National Bank, so let's look at the second-cheapest bank, CIBC, with its 11.2.x PE and EPS growth over five years of 5.39%, better than RY's 5.16%. Commerce has beaten its last four quarters with room to spare, and pays a safe dividend of 4.49%. Its EPS growth is beating the sector, and its most recent EPS was 17.89% higher than a year ago. CIBC's margins outpace the sector. Unlike TD, CIBC has a small presence south of the border. Because of that, a lot of its business lies in Canada—residential mortgages and commercial business—which will slow down if the economy does. That would explain why the street has assigned CIBC a lower future PE of 11.09x. That said, CIBC offers a safe, generous dividend with reasonable room to grow, certainly better than TD.
Owns it in his firm's dividend model. Doesn't expect a stock split, as banks have abandoned the old rule of thumb to split once stock reaches $100.
We now have an understanding that tariffs will be 35%, which will cause some havoc importing our goods into the US. But can Mark Carney grow Canada by continuing to reduce barriers and by seeing some growth between provinces? If yes, then banks in general are primed to do quite well going forward. They'll be supplying the funding for companies, infrastructure, etc.
The chart shows a V-shaped recovery since April's tariff worries. In Canada, interest rates have been cut aggressively, so the Canadian banks have skated through. Wealth management divisions are strong. Loan loss provisions are down. NA and RY are the best, but CM and BMO are reporting much better earnings, which catches his attention.
All Canadian banks have been home runs since the financial crisis. They are all in slightly different businesses. Toronto Dominion (TD-T) is more in the US, Royal (RY-T) is more in capital markets, etc. This one is more of a domestic bank and focused on retail and wealth management, so they are a bit less dynamic. If you own, hang onto it and just leave it alone. The banks are in good shape, as long as the Canadian consumer credit situation holds up.