The Canadian Imperial Bank of Commerce set the tone for banks' earnings season with a dividend hike and better-than-expected first-quarter net income, helped by a boost in earnings in its U.S. division as it looks to expand south of the border amidst slowing mortgage growth at home.
Canada's fifth-largest lender said this week it continues to see benefits from the purchase of Chicago-based The PrivateBank, which CIBC acquired in June 2017 and rebranded in September as CIBC Bank USA. As part of its strategy to ramp up its U.S. presence, it also purchased Chicago-based wealth management firm Geneva Advisors for roughly US$200 million last year.
"With a second full quarter's contribution from CIBC Bank USA, we continue to perform well and deliver against our commitment to build client relationships north and south of the border," CIBC chief executive Victor Dodig told analysts on a conference call.
In the latest quarter, CIBC's U.S. commercial banking and wealth management division reported net income of $134 million in the latest quarter, up $105 million from the same period in 2017, contributing to a more than 22 per cent increase in adjusted net income year-over-year despite slowing mortgage growth.
It's a welcome sign for the bank, which has a larger domestic exposure than its peers and mortgages – demand for which is expected to slow under new tighter rules – also represent a bigger chunk of its loan book, said Shannon Stemm, an analyst with Edward Jones in St. Louis.
"They're working to try to diversify themselves away from their domestic banking, and seeing some good early results with growth in the U.S. business that they recently acquired. ... It's going to take some time before the U.S. is going to be a meaningful offset to potential slowdown in Canada," she said.
CIBC was the first of Canada's big lenders to report results for the quarter ended Jan. 31, kicking off the season by raising its quarterly payment to common shareholders by three cents to $1.33 per share, even as it reported a decline in profit attributable to shareholders, which amounted to nearly $1.31 billion, down from $1.39 billion a year ago.
However on an adjusted basis, the bank said it earned a record $1.41 billion or $3.18 per diluted share for the quarter, up from $1.15 billion or $2.89 per share a year earlier. Analysts had expected an adjusted profit of $2.83 per share, according to Thomson Reuters.
Industry watchers were also eyeing CIBC's results for early signs of the impact of recent changes to the banking landscape, such as stricter rules surrounding uninsured mortgages as of Jan. 1. Canada's biggest banks have cautioned that the federal financial services regulator's revised qualifying rules – requiring would-be homebuyers with a down payment larger than 20 per cent to prove they can continue to service their mortgage if interest rates rise – could present a headwind to loan originations.
Demand for mortgages in December saw an uptick, with national sales up 4.5 per cent according to the Canadian Real Estate Association, as buyers scrambled to snap up homes before Jan. 1.
CIBC's mortgage balances for the fiscal first quarter were $203 billion, up 9.1 per cent from $186 billion a year earlier. In comparison, the bank saw a more than 12 per cent jump in mortgage growth from $166 billion in the first quarter of 2016. Originations of Canadian uninsured residential mortgages for the quarter were $9 billion, down from $12 billion a year ago.
Christina Kramer, CIBC's group head of personal and small business banking for Canada, said it is too early to gauge the extent of the impact of the mortgage underwriting rules, as well as the January interest rate hike.
"We saw some pull forward in November and December, so January itself is not a good indication alone," she told analysts. "So early days, we're not seeing any big change to customer behaviour."
The lender's Canadian personal and small banking arm reported net income of $656 million for the period, down $149 million or 19 per cent compared with a year ago. However, on an adjusted basis, net income was $658 million, up $97 million or 17 per cent from a year ago.
Net income for the domestic commercial banking and wealth management division was $314 million, up 14 per cent compared with a year earlier. Its capital markets net income was $322 million for the quarter, down $25 million or seven per cent from a year earlier.
Dodig has estimated that CIBC's U.S. business will account for 17 per cent of its earnings by 2020, up from nine per cent for the four-month period it owned PrivateBancorp in fiscal 2017. The bank's results included charges totalling 23 cents per share, including an $88-million net tax adjustment due to a cut to the U.S. corporate tax rate from 35 per cent to 21 per cent that took effect this year.
Several of Canada's biggest lenders have indicated they expect to record a write down to reduce the value of deferred tax assets already held on company balance sheets as a result of tax changes under U.S. President Donald Trump, but expect a lift to earnings in the long term.
CIBC was also the first of the Canadian banks to report its earnings after the introduction of a new accounting standard known as IFRS 9 that puts more emphasis over expected losses over the life of a loan compared to previous guidelines. In turn, provisions for credit losses, or the amount of money set aside for bad loans, may be more volatile – and will also make it difficult to make year-over-year comparisons in this and coming quarters, analysts say.
John Aiken, an analyst with Barclays in Toronto, said the new standard helped CIBC in the latest quarter, with provisions for credit losses dropping to $153 million from $212 million a year ago.
"(This volatility) was evidenced with the first bank out of the gates, but actually benefited CIBC with recoveries reported in the quarter," Aiken wrote in a note to clients.