CIBC (CM) released Q2 2019 results May 22, 2019 which fell short of analyst estimates.
Following the ~4.4% drop in CM's share price I view the current valuation and forward dividend yield as sufficiently attractive for me to increase my position within the FFJ Portfolio and in accounts for which I do not disclose details.
- CM’s Q2 2019 results released May 22nd fell short of analyst expectations.
- Results were negatively impacted by real estate market conditions in key urban areas (Toronto and Vancouver).
- YoY EPS growth will most likely be “relatively flat” for FY2019 due to mortgage market conditions to date and the bank’s plans to keep investing in its business.
- Senior management continues to be confident that it will be able to deliver on all of its financial targets, including the 5% - 10% medium-term EPS growth target.
- With a highly probable $0.03/share dividend increase in August 2019 and February 2020 I view CM’s forward dividend yield as being in excess of 5.3%.
- CM’s attractive valuation and appealing dividend yield has prompted me to acquire additional shares.
During the December / January market swoon I acquired shares in high quality companies where I was of the opinion valuation had reached attractive levels. One such company was The Canadian Imperial Bank of Commerce (CM).
Subsequent to publishing my December 3, 2018 article in which I provided a high level overview of the bank and looked at FY2018 results I initiated a position in the FFJ Portfolio; I have owned CM shares in undisclosed accounts for well over a decade.
In recent months I have passed on acquiring shares in just about every company I have analyzed because I have viewed valuation levels as being somewhat elevated. Just recently, however, I wrote this article in which I indicated that I would be increasing my stake in Becton, Dickinson and Company (BDX).
I can now add CM to the very brief list of companies whose valuation has become sufficiently appealing to warrant share purchases; I acquired CM shares for undisclosed accounts and the FFJ Portfolio on May 22nd.
Q2 and YTD2019 Results
Referring back to my December 3, 2018 CM article I wrote:
‘My primary concern with CM at this stage is that it has the highest concentration of the Big 5 in Canadian retail loan exposure and in particular uninsured Canadian mortgages. I do not envision a housing crisis in Canada like that in the US in 2007 but if Canada encounters an economic downturn I think CM might be harder hit than its peers. Despite this, I am confident CM will be able to effectively manage its domestic mortgage portfolio so it does not incur significant losses.’
Given CM’s heavy exposure to the Toronto and Vancouver real estate markets it does not surprise me that CM’s Q2 adjusted EPS of $2.97 came in a bit shy of analyst estimates.
Its Q2 2019 Investor fact Sheet can be found here.
The following provides some color to the recently released results.
CM’s head of personal and small business banking for Canada has indicated that a big part of the bank’s strategy over the past few years has been aimed at large urban centres, where booming housing and mortgage markets helped deliver considerable growth for the bank.
A real estate slowdown, however, was widely anticipated following interest-rate increases and new measures from governments and regulators, including stress tests for loans and foreign-buyer taxes. In addition, The Bank of Canada’s recent financial system review found that housing resales and price growth had “slowed significantly” in Toronto and Vancouver over the past two years.
Although the bank has witnessed some pick-up in mortgage activity across Canada, it has not been significant and its Canadian real estate secured lending portfolio declined 0.9% YoY to $223B as at the end of Q2.
While there has been an increase in activity through “third-party” channels, this is a channel through which CIBC no longer actively participates. In addition, there has been increased competition among lenders.
CM has specifically stated that it remains competitive but given its discipline on pricing it will not be pursuing mortgages at any cost. As such, if markets continue to perform as they have, CM has indicated it will likely take longer to converge to industry mortgage growth levels.
On the Q2 earnings call CM’s President and CEO indicated that given mortgage market conditions to date and the bank’s plans to keep investing in its business, YoY EPS growth will most likely be ‘relatively flat’ for FY2019. Over the long-term, however, the execution of CM’s strategy is expected to result in CM delivering on all of its financial targets, including the 5% - 10% medium-term EPS growth target.
In CM’s key Canadian personal and small business unit there was a ~2% drop in its earnings to $0.57B. Provision for credit losses for the unit rose $26 million from Q2 2018 to $0.229B. This was primarily due to an increase in allowance on performing loans, reflective of the impact of certain unfavourable changes to the bank’s economic outlook, as well as a model parameter update in the current quarter.
While CM’s Q2 results are disappointing and Canada certainly has its challenges, readers unfamiliar with the Canadian banking system need to consider that the major Canadian banks closely manage their risks and that they are extremely conservative relative to many of their international peers.
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Disclosure: I am long CM.
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