Monday, September 25, 2006

CIBC Investor Forum

  
BMO Capital Markets, 25 September 2006

Overview

On Friday, CIBC held an analyst day (September 22) to review its retail businesses. Overall, the presentation was well attended by buy and sell side analysts. There was little new with the exception of FirstCaribbean (FCIB), which presented for the first time to the Canadian investment community. We have long been fans of Canadian banks operating in the Caribbean.

Clearly, senior management is focused on delivering on a limited number of high-impact initiatives. Nevertheless, it was apparent from the line of questioning that there is still some degree of concern that the bank is too short-term focused and not positioning itself well for the longer term.

We have a different perspective. CIBC has been through material changes over the past couple of years. There has been significant turnover of people and an abundance of legacy issues including elevated loan losses, an Enronweakened balance sheet and a somewhat demoralized workforce. A shorter term focus involving a limited number of high impact initiatives is crucial at this stage. It is also interesting that CIBC was able to capitalize on the FCIB opportunity during this challenging period.

Focus on Predictable, Sustainable Earnings

Senior executives presented a simple story of producing a more predictable and sustainable earnings stream that should result in better valuation of CIBC shares. It is clear that the bank’s senior management is intent on setting tangible, clearly defined goals and objectives that can be managed and evaluated. While a more “big picture” perspective may be warranted in the longer term, CIBC shares should benefit from delivering on a finite number of initiatives.

Domestic Retail Banking and Wealth Management

At the core of the changes, CIBC is attempting to shift its retail loan book towards secured lending and limited loan losses while maintaining the bank’s competitive position across most retail banking and wealth management product lines. This process is now well on its way with some positive signs that loan losses are well controlled and may even start to fall. Progress has also been made in stabilizing the credit card book following the Air Canada CCAA filing, and the attempts by various competitors (mainly Royal and TD) to challenge market share in the premium card market.

The next step appears to be that CIBC will focus on tangible (but material) levers to deliver earnings in the short and medium term. These involve additional attempts to cross sell and the continued leverage of existing customers to drive wealth products. There has also been an attempt to improve fund flows in the classic mutual fund business through a focus on additional global funds and continued streamlining. This process clearly takes time, but there does appear to be some moderation in market share losses.

The Caribbean Story Becomes Better Known

The FCIB story is not well known by Canadian investors. As ably demonstrated by CEO Charles Pink, the bank has a solid market position and a good track record. While the earnings momentum over the past few years has certainly been augmented by the rise in short-term U.S. rates, we believe that the bank has performed well in the face of extended consolidation in the period following the merger of Barclays and CIBC’s Caribbean footprints. Earnings in this publicly traded entity will likely be in the $180–200 million range this year, and management believes that a 10–20% growth rate is achievable longer term. CIBC will own over 85% of this entity when the deal to buy out Barclays closes later this year.

We believe there is much more for FCIB to do in the Caribbean and would bet that another deal is less than 12 months away.

Projections and Valuation

We maintain our Cash EPS forecast of $6.75 for 2006 ($6.48 excluding unusual items) and $7.15 for 2007. This is consistent with management’s goal of 10% EPS growth. We believe that the bank will continue to err on the side of caution on share buybacks and dividend increases. If there is anything that has been learned over the past five years, it is that having some excess capital can be beneficial during periods of stress.

We continue to believe that CIBC shares are attractive. The shares trade at below average P/E’s despite a higher retail mix and a reasonable growth opportunity in the Caribbean.
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