Tuesday, July 10, 2007

CIBC Subprime Investments `Well Below' U$2.6 Billion

  
Bloomberg, Doug Alexander, 10 July 2007

Canadian Imperial Bank of Commerce, Canada's fifth-largest lender, said its investments in the U.S. subprime mortgage market are ``well below'' the $2.6 billion cited in some news reports.

``CIBC does not disclose individual securities positions but confirms its previous statement to the media that its unhedged exposure to this sector is well below $2.6 billion,'' the Toronto-based bank said today in a statement.

New York-based newsletter Grant's Interest Rate Observer reported on June 15 that CIBC may have as much as $2.6 billion in investments linked to subprime mortgage-backed securities. Barron's also cited CIBC in an article yesterday about mortgage- backed securities such as collateralized debt obligations.

Most of the securities held are rated AAA, and the lender has insurance to cover some of the investments, the bank said. Bank spokesman Rob McLeod declined to say how much CIBC has in these type of securities.

CIBC holds investments in mortgage-backed securities including a CDO called Tricadia, CIBC World Markets Chief Executive Officer Brian Shaw said on a May 31 earnings conference call. So-called CDOs package mortgage bonds into new securities. The Tricadia 2006-7A has a face value of $328.5 million, according to Bloomberg data.

``Our risk in this space is not at all major,'' Shaw said during the call. ``We don't view this as a major credit item at all for us.''

Banks, hedge funds and other investors may face losses of $52 billion from investments in bonds backed by U.S. subprime mortgages amid the fallout from rising mortgage delinquency rates, according to a Credit Suisse report. Bear Stearns Cos. in New York, the world's fifth-biggest securities firm, is providing $1.6 billion to rescue one of its hedge funds that invested in subprime debt.

Banks will probably lose between $5 billion and $15 billion from their investments in CDOs, said Credit Suisse analysts led by Ivan Vatchkov in London.

``It is scarcely surprising that a large fixed-income trading operation, as with all Canadian banks, has some exposure to subprime residential mortgage-backed securities in the U.S.,'' BMO Capital Markets analyst Ian de Verteuil said yesterday in a research note. ``While losses can and do occur in any trading operation, we believe the impact of the meltdown in the U.S. is limited for CIBC.''
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The Globe and Mail, Tavia Grant, 10 July 2007

Canadian Imperial Bank of Commerce's exposure to the U.S. subprime mortgage market continues to attract more attention, though the bank has not changed its position that the risk is much lower than the market speculates.

The latest attention came from a Barron's article this week, which noted that some observers are saying CIBC's exposure could be more than $2-billion (U.S.). Business Week and other financial publications have recently carried similar speculation.

The bank has acknowledged exposure of about $330-million, but told The Globe and Mail last month that its "direct exposure" is well below a figure of $2.6-billion that had been surmised by one industry newsletter. The bank has declined to quantify its exposure and declined to comment yesterday.

In a note to clients, Genuity Capital Markets analyst Mario Mendonca - who previously worked for CIBC World Markets - said he discussed the speculation with CIBC's senior management and "while management was not dismissive, we came away with the impression that the hypothesized potential loss of $2.6-billion is a gross overestimate of the bank's actual exposure.

"Management explained that absent a further, more significant, downturn in the value of subprime mortgages in the U.S., the bank does not anticipate reporting material losses on its U.S. [collateralized debt obligations]," he wrote.

Mr. Mendonca said he does expect marked-to-market losses to be reported in CIBC's fiscal third quarter, which ends this month. (Mark to market is a financial term for estimating a value for a derivative based on the current market price.) The analyst also noted that CIBC has bought back shares recently, "suggesting that management's perception of potential loss is well below the amounts recently hypothesized."

Bank of Montreal banking analyst Ian de Verteuil wrote yesterday that "management has been limited in its comments except to reiterate its previous media statements that exposure is 'well below' the $2.6-billion (U.S.) level mentioned."

He added that "it appears as if [CIBC] already took some charges in its second quarter for the deterioration in the subprime sector," but he believes that "CIBC has good processes to ensure that unhedged trading exposures are prudent and limited. While losses can and do occur in any trading operation, we believe the impact of the meltdown in subprime in the U.S. is limited for CIBC."

Barron's article, published over the weekend, said that banks, brokerages and other financial firms could be facing "financial Armageddon" because of subprime mortgages.

Wall Street has rolled out about a trillion dollars of securities in the past two years to fund the mortgages of borrowers who don't have good credit, and the article estimated that the losses on these securities could eventually exceed $100-billion.

Low interest rates and lending standards allowed many Americans to buy homes in the past few years despite not having the money to pay their debts. Mortgage rates are now rising, and the well-known troubles in U.S. subprime mortgages are beginning to spread.

To raise the trillion dollars needed to buy subprime mortgages from banks and other mortgage lenders, brokerage firms invented residential mortgage-backed securities, which they sold to institutional investors.

The securities are made up of different slices of bonds, with different levels of risk. To make it easier to sell the riskier slices - those rated triple-B - Wall Street repackaged many of them into new securities called mezzanine collateralized debt obligations, or CDOs. Debt rating agencies rated about 80 per cent of the principal amount of the triple-B slices, or tranches, as triple-A."Mezzanine subprime exposure is showing up in all sorts of surprising places," the article says. "The Canadian bank CIBC has acknowledged ownership of around $330-million, though some observers say the figure could be more than $2-billion. That estimate would constitute a substantial chunk of the bank's approximately $13-billion in shareholder equity."

The article makes an educated guess - based on conversations with brokerage firms, hedge funds, dealers and traders - that the total pool of mezzanine CDOs out there is somewhere between $150-billion and $200-billion. Last month, CIBC spokesperson Stephen Forbes told The Globe and Mail that an article in Grant's Interest Rate Observer, a New York-based financial newsletter, speculating that CIBC could have exposure of up to $2.6-billion (U.S.) was "simply not true."

"As we have commented previously, our exposure to the subprime market is indirect through our participation in structured credit transactions," he said. "The majority of this exposure is rated Triple-A. Our direct exposure is well below what the report suggests."

Bank of Nova Scotia spokesman Frank Switzer said yesterday that his bank does not have any exposure to similar investments. The other major banks would not immediately comment.

Toronto-Dominion Bank spokesman Nicholas Petter also said yesterday it "does not have any exposure to subprime mortgages via investments in CDOs."
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Reuters, 9 July 2007

Speculation about the size of Canadian Imperial Bank of Commerce's exposure to the troubled U.S. subprime mortgage market swirled once again on Monday as the bank's name was mentioned in another report in a U.S. publication.

"The Canadian bank CIBC has acknowledged ownership of around US$330-million, though some observers say the figure could be more than US$2-billion," Barron's newspaper said without identifying the "observers."

"That estimate would constitute a substantial chunk of the bank's approximately US$13-billion in shareholder equity."

Rob McLeod, a spokesman for CIBC, Canada's fifth biggest bank, said that a statement the bank made last month and published in the Globe and Mail newspaper still "reflects the situation."

Bank spokesman Stephen Forbes told the newspaper in June that an article in Grant's Interest Rate Observer, a New York-based financial newsletter, speculating that CIBC could have exposure to the subprime market of up to US$2.6-billion was "simply not true."

"As we have commented previously, our exposure to the subprime market is indirect through our participation in structured credit transactions," Forbes said at the time.

"The majority of this exposure is rated triple-A. Our direct exposure is well below what the report suggests."

Fueled by rising interest rates, defaults by less credit-worthy U.S. homebuyers on higher-risk, subprime mortgages have been rising in recent months, raising concerns about banks' and hedge funds' exposure to potential losses of billions of dollars.

BMO Capital Markets analyst Ian de Verteuil said he believed CIBC's "most material" exposure was to a US$330-million senior secured tranche of an underwriting that ran into problems in April with the decline in fixed income markets.

"It appears as if the bank already took some charges in its second quarter for the deterioration in the subprime sector," de Verteuil said in a note to clients.

He added that it was "scarcely surprising" that a large fixed-income trading operation has some exposure to the U.S. residential subprime market.

"We believe that CIBC has good processes to ensure that unhedged trading exposures are prudent and limited. While losses can and do occur in any trading operation, we believe the impact of the meltdown in subprime in the U.S. is limited for CIBC," he said.
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The Globe and Mail, Tara Perkins. 9 July 2007

The Canadian Imperial Bank of Commerce's exposure to the U.S. subprime mortgage market has attracted more attention, with a Barron's article noting that some observers say it could be more than $2-billion (U.S.).

It comes on the heels of a report in the Globe and Mail and a recent report in BusinessWeek, each of which cited observers who speculate that the Canadian bank might have significant exposure. The bank has acknowledged exposure of about $330-million (U.S.) and told the Globe and Mail last month that its “direct exposure” is well below a figure of $2.6-billion that had been surmised by one industry newsletter.

The bank has declined to quantify its exposure.

The Barron's article, published over the weekend, said that banks, brokerages and other financial firms could be facing “financial Armageddon” because of subprime mortgages.

Wall Street has rolled out a trillion dollars or so of securities in the past two years to fund the mortgages of borrowers who don't have good credit, the article said, and it estimated that the losses on these securities could eventually exceed $100-billion.

Low interest rates and lending standards allowed many Americans to buy homes in the past few years despite not having the money to pay their debts. Mortgage rates are now rising, and the well-known troubles in U.S. subprime mortgages are beginning to spread, the article suggested.

To raise the trillion dollars to buy subprime mortgages from banks and other mortgage lenders, brokerage firms invented residential-mortgage-backed securities, which they sold to institutional investors. The securities are made up of different slices of bonds, with different levels of risk. To make it easier to sell the riskier slices – those rated triple-B – Wall Street repackaged many of them into new securities called mezzanine collateralized debt obligations, or CDOs. Debt rating agencies rated about 80 per cent of the principal amount of the triple-B slices, or tranches, as triple-A, in a piece of Wall Street ingenuity that resembles alchemy, the Barron's article says.

“Mezzanine subprime CDOs are all the same junk,” the article quotes one dealer of mortgage backed securities. But the rating agencies allowed most of these highly speculative securities to be turned into gold, Barron's quotes the dealer as saying.

“Mezzanine subprime exposure is showing up in all sorts of surprising places,” the article says. “The Canadian bank CIBC has acknowledged ownership of around $330-million, though some observers say the figure could be more than $2-billion. That estimate would constitute a substantial chunk of the bank's approximately $13-billion in shareholder equity.”

The article makes an educated guess — based on conversations with brokerage firms, hedge funds, dealers and traders — that the total pool of mezzanine-CDOs out there is somewhere between $150-billion and $200-billion. “A goodly portion of these debt securities could lose all their value if current market projects turn out to be accurate,” it said.

Last month, CIBC spokesperson Stephen Forbes told the Globe and Mail that an article in Grant's Interest Rate Observer, a New York-based financial newsletter, speculating that CIBC could have exposure of up to $2.6-billion (U.S.) was “simply not true.”

“As we have commented previously, our exposure to the subprime market is indirect through our participation in structured credit transactions,” he said. “The majority of this exposure is rated Triple-A. Our direct exposure is well below what the report suggests."
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