What Investors Should Know About CIBC's Robust Q3

CIBC reported an earnings per share (EPS) of C$1.82, comfortably surpassing consensus expectations. This performance was largely attributed to a decrease in provisions for credit losses (PCL), which amounted to C$483 million in Q3—down from C$514 million in the previous quarter and significantly lower than the C$736 million reported in the same period last year. This reduction was mainly due to significantly lower provisioning charges in the U.S. commercial banking segment, helped by strategic dispositions in its U.S. office portfolio that led to a modest reduction in gross impaired loans.

Despite these improvements, concerns about the bank’s asset quality metrics persist. Notably, CIBC holds one of the highest proportions of uninsured domestic mortgages among its peers, at about 80%. In its core Canadian retail business, the 90+ days delinquency rate has increased by three basis points sequentially. Although influenced by COVID-related distortions, the current rate of 0.37% for 90+ days delinquent loans exceeds those seen in 2018-2019. Net write-offs in this segment have also seen a slight increase.

However, CIBC is well-prepared to manage these elevated credit costs, supported by a strong balance sheet and robust pre-provision earnings power, now exceeding C$11 billion. The bank has also significantly bolstered its capital position, with its CET1 ratio climbing to 13.3% from 11.6% at the start of the previous year.

The Group’s net interest income (NII) saw a healthy increase to C$3.53 billion, up 9.1% year-on-year and 7.6% sequentially, bolstered by rising net interest margins and asset balances. Additionally, non-interest income has been particularly strong, driven by a spike in market-related income, including mutual fund fees, investment management fees, and trading revenue, which collectively rose significantly. This growth helped offset softer transactional fees, pushing the total non-interest income up by 17.4% year-on-year and 6.5% sequentially to C$3.07 billion.

CIBC recently announced its intention to buy back up to 20 million of its common shares, representing approximately 2.1% of its shares outstanding as of July 31, 2024. Known for its stable dividends, the bank has sustained a dividend growth rate of around 5% annually over the past two decades, including during the Global Financial Crisis. Currently, dividends account for about half of CIBC's earnings, supported by robust equity returns.

With strategic initiatives and financial stability, CIBC is well-prepared to continue investing in mergers and acquisitions, as well as further stock buybacks. "CIBC is poised to deliver approximately 9-10% annualized returns, in line with investor expectations for blue-chip stock performance," noted Seeking Alpha analyst Mark Dockray. The bank’s strategic positioning and recent financial maneuvers indicate that it is precisely where management intends to be, setting the stage for sustained growth and strong returns for shareholders.

"After several quarters of strong results and improved operating profitability, it is our belief that investors can no longer deny that CIBC is a changed bank," said Aiken. “This realization should continue to support relative multiple expansion.”