Based on valuations and dividends alone, we see CIBC as the Canadian bank stock that offers the greatest total return potential over the next year.
Canada’s six big banks increased their earnings per share (EPS) by an average of 11.6 per cent in fiscal 2018 (the year ended Oct. 31). In fiscal 2019, however, this figure is expected to fall by more than half to 5.4 per cent as the economy slows down.
Below are the projected growth figures and other data for all the big six bank stocks. We believe all six of the major Canadian banks are currently undervalued.
Bank of Montreal (TSX—BMO; NYSE—BMO) is forecast to earn $9.54 a share in fiscal 2019. That’s up 6.1 per cent from $8.99 in fiscal 2018. These past five years, the bank’s average price/earnings (p/e) multiple was 11.9. Buy.
Bank of Nova Scotia (TSX—BNS; NYSE—BNS) is forecast to earn $7.43 a share this fiscal year. That’s up 4.5 per cent from the $7.11 a share the bank earned in fiscal 2018. The stock’s average price-to-earnings (P/E) ratio in recent years is 11.5. Buy.
Canadian Imperial Bank of Commerce (TSX—CM; NYSE—CM) is forecast to earn $12.55 a share this fiscal year. That’s up 2.8 per cent from the $12.21 a share the bank earned in fiscal 2018. The stock’s average P/E ratio is 10.3. Buy.
National Bank of Canada (TSX—NA) is forecast to earn $6.36 a share. That’s up 6.2 per cent from the $5.99 a share the bank earned in fiscal 2018. The stock’s average P/E ratio is 10.7. Buy.
Royal Bank of Canada (TSX—RY; NYSE—RY) is forecast to earn $9.05 a share. That’s up 5.0 per cent from the $8.62 a share the bank earned in fiscal 2018. The stock’s average P/E ratio is 12.0. Buy.
Toronto-Dominion Bank (TSX—TD; NYSE—TD) should earn $6.96 a share. That’s up 7.6 per cent from the $6.47 a share the bank earned in fiscal 2018. The stock’s average P/E ratio is 12.3. Buy.
Based on valuations and dividends alone, we see CIBC as the one that offers the greatest total return (capital appreciation plus dividend yield) potential over the next year. Keep in mind, though, that CIBC’s low valuation reflects its below-average growth potential this year.
CIBC is a buy for high income
One of CIBC’s strategies is to diversify its earnings growth. It’s attempting to do this by investing in its Canadian and US commercial banking and wealth management businesses. Plus, it wants to leverage its strength in capital markets to deliver advice and solutions across the bank.
CIBC considerably expanded its US commercial and wealth management segment in 2017 through the $5.0-billion acquisition of Chicago-based PrivateBank, a middle-market commercial bank. The acquisition helped the segment deliver strong results in fiscal 2018. Its net income rose 178 per cent for the year to $365 million, thanks mostly to the inclusion of $407 million from CIBC Bank USA (formerly PrivateBank).
Due to its US expansion, Canadian Imperial Bank of Commerce is now a leading North American financial institution with a market capitalization of $50 billion. Through its four strategic business units—Canadian personal and small business banking, Canadian commercial banking and wealth management, US commercial banking and wealth management, and capital markets—the bank provides a full range of financial products and services.
EPS increases nearly 10 per cent
The bank’s adjusted earnings per share increased 9.9 per cent in fiscal 2018. For the year ended Oct. 31, 2018, CIBC made an adjusted $5.4 billion (attributable to common shareholders), or $12.21 a share, compared with $4.6 billion, or $11.11 a share, in the same period of 2017.
Net interest income rose 12.1 per cent to $10.1 billion, primarily due to the inclusion of the results of CIBC Bank USA for the full year, volume growth and wider interest-rate spreads in Canadian personal and commercial products, and higher treasury revenue.
Non-interest income rose 6.4 per cent to $7.8 billion. Among the factors driving non-interest income growth were healthy gains in investment management and custodial fees, and gains from financial instruments.
However, provision for credit losses was up 4.9 per cent to $870 million. This was driven by a 14.8 per cent increase in the provision for impaired loans to $952 million, primarily due to higher loan losses in CIBC FirstCaribbean and CIBC Bank USA.
CIBC has targeted average annual EPS growth of five per cent to 10 per cent. The bank will likely fall well short of that goal this fiscal year, as it’s expected to increase its adjusted EPS by just about 2.8 per cent.
Its largest segment, Canadian personal and small business banking, is expected to see slow growth in consumer and mortgage lending, hindered by higher interest rates and soft price growth and regulatory tightening in the housing sector. Other segments should fare better.
CIBC trades at the lowest earnings multiple among the big banks, reflecting low expectations for CIBC’s EPS growth potential this year. If the bank exceeds these expectations, however, its earnings multiple would likely expand, giving its share price a boost.
CIBC has the highest yield among the big bank stocks, making CIBC attractive for investors seeking high current income as well as the potential for further dividend increases over time.
Canadian Imperial Bank of Commerce is a buy for growth and income.
This is an edited version of an article that was originally published for subscribers in the February 22, 2019, issue of Investor’s Digest of Canada . You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada. 
Investor’s Digest of Canada , MPL Communications Inc.
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