2023-05-29 12:53:38 ET
Summary
- Canadian Imperial Bank of Commerce has seen growth in non-interest income year-on-year.
- However, a decline in trading revenues has led to a decline in overall net income.
- I do not take a bullish view on the stock at this time.
Investment Thesis: I take the view that Canada Imperial Bank of Commerce ( CM ) will continue to see pressure on growth in the current macroeconomic environment.
Canadian Imperial Bank of Commerce has seen downward pressure on its stock price since the beginning of 2022 as inflation and broader macroeconomic concerns have started to emerge.
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The purpose of this article is to assess whether Canadian Imperial Bank of Commerce could stand to see a rebound in the current macroeconomic environment.
Performance
When looking at the Canadian Imperial Bank of Commerce's performance for the most recent quarter , we can see that both net interest and non-interest income were down on that of the most previous quarter.
CIBC Second Quarter Financial Highlights
Additionally, we can also see that while these two metrics saw growth as compared to the six months ended last year, net income saw a drop due to higher income taxes and non-interest expenses. Provision for credit losses on a six months ended basis was also up from $378 million to $733 million.
Moreover, when excluding trading revenues - we see that net interest income and non-interest income were up by 6% and 10% year-on-year respectively for the second quarter of 2023.
CIBC Quarterly Results Presentation Second Quarter 2023
However, such growth was offset by a drop in trading revenues of 7% year-on-year and 19% quarter-on-quarter.
In this regard, while Canadian Imperial Bank of Commerce has seen higher net interest income from rising rates - this has been offset by lower trading revenue along with a higher provision for credit losses.
It is interesting to note that when comparing segments by revenue for Q2 2019 and Q2 2023 - Capital Markets now account for over 23% of revenue as compared to just over 16% previously, while that of Personal & Business Banking accounted for just under 40% in the most recent quarter as compared to nearly 47% in Q2 2019.
Q2 2019 - Segments by Revenue
Calculations made by author using figures sourced from CIBC Investor Presentation Q2 F19.
Q2 2023 - Segments by Revenue
Calculations made by author using figures sourced from CIBC Second Quarter 2023 Results.
From this standpoint, the fact that trading revenues have seen a decline is having a greater impact on overall revenue growth than would have previously been the case. In addition, while non-trading net interest income has been rising, a smaller Personal and Business Banking segment by revenue means that such growth is having a lesser impact on overall revenue.
With that being said, the loans to deposits ratio has remained at a similar level to that of last year - which is encouraging as it indicates that higher interest rates have not been affecting loan demand:
Apr 2022 | Apr 2023 | |
Loans and acceptances, net of allowance for credit losses | 502,430 | 538,273 |
Deposits | 665,487 | 705,917 |
Loans to deposits ratio | 75.50% | 76.25% |
Source: Figures sourced from CIBC Second Quarter 2023 Financial Highlights. Loans to deposits ratio calculated by author.
Risks and Looking Forward
Going forward, Canadian Imperial Bank of Commerce could continue to see pressure on overall revenue growth - given that macroeconomic concerns could stand to hinder equity market growth - and hence trading revenue. Moreover, it was notable that while non-trading net interest income was up by 10 percent year-on-year, the same had actually fallen by 3% quarter-on-quarter.
As such, a rising rate trajectory may not necessarily mean that net interest income growth can be sustained from here.
When comparing the bank to its peers - we can see that the price to book ratio is the second-lowest among the Big Five.
Price to Book
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However, return on equity also ranks the second-lowest among the Big Five:
Return on Equity
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In this regard, while the stock could have room for upside on a price to book basis - I take the view that investors would want to see a rebound in return on equity growth to justify upside from here.
With that being said, I do not see the macroeconomic concerns facing Canadian Imperial Bank of Commerce as being unique to the bank - as competitors such as Bank of Montreal ( BMO ) and Bank of Nova Scotia ( BNS ) have also needed to set aside a higher share of funds to cover bad loans. The pressure on non-interest revenue growth as result of a decline in trading revenues is affecting banks across the Canadian market more generally, and I expect that this will remain a risk factor for the Canadian Imperial Bank of Commerce as well.
Conclusion
To conclude, Canadian Imperial Bank of Commerce has seen revenue and net income growth come under pressure as a result of a decline in trading revenues. While the stock may have the potential for a longer-term rebound in upside owing to an attractive price-to-book ratio relative to some of its peers - I take the view that the bank will continue to see pressure on growth in the current macroeconomic environment.
For further details see:
Canadian Imperial Bank of Commerce: Pressure On Trading Revenues Continues Despite Rising Rates