CIBC takes a conservative tack on PCLs

CIBC’s second-quarter results reflected a substantial increase in its provision for credit losses. But the higher provision reflects a conservative approach to dealing with the COVID-19 crisis.


CIBC usually raises its dividend year after year, but it will probably pause this year (as may all the big banks), due to the impact of COVID-19.

CIBC’s provision for credit losses (PCLs) in its second quarter was $1.4 billion, up 454 per cent from the same quarter last year. In total, by contrast, the Canadian banks’ PCLs rose just 282 per cent. CIBC’s PCLs were also above the Street consensus estimate of $1.1 billion. This suggests the bank has conservatively built reserves to deal with the effects of COVID-19, which has negatively impacted all its strategic business units.

The growth in total PCLs was mostly driven by a much higher provision for credit losses on performing loans, which rose to $1.1 billion from just $5 million last year. PCLs on impaired loans rose a much more modest 37 per cent, to $343 million from $250 million.

Canadian Imperial Bank of Commerce (TSX—CM; NYSE—CM) is Canada’s fifth-largest bank by market capitalization. It operates four strategic business units: Canadian personal and commercial banking, Canadian commercial banking and wealth management, US commercial banking and wealth management, and capital markets.

Profit drops at all business units

For the second quarter ended April 30, 2020, CIBC made $441 million (adjusted), or $0.94 a share, compared with $1.4 billion, or $2.97 a share, in the same period of 2019. Adjusted net income was down at all the bank’s business units, primarily due to higher PCLs.

CIBC’s capital base has remained steady. Its common equity tier 1 (CET1) ratio, a capital measure, was 11.3 per cent at the end of the second quarter, the same as it was at the end of the previous quarter. Regulations call for a CET1 ratio of at least 9.0 per cent. CIBC was the only bank that didn’t report a decline in CET1 in the second quarter.

CET1 is important for investors because it can affect a bank’s ability to pay dividends and buy back shares. But we expect CIBC will be able to sustain the current quarterly dividend, which was raised 1.4 per cent to $1.46 a share in February. The bank’s estimated payout ratio for fiscal 2020 is 71 per cent, so earnings should adequately cover the dividend.

Government support programs will help

COVID-19 should continue to affect all CIBC’s units. All the bank’s loan portfolios are expected to be negatively impacted by the decline in economic activity associated with social distancing policies. However, this should be mitigated to an extent by large-scale government support and relief programs targeting both individuals and businesses.

Nevertheless, the bank’s earnings per share are forecast to decline about 31 per cent this fiscal year (ends October 31). But earnings should start to rise again in fiscal 2021 as the economy benefits from easing government restrictions, including the re-opening of non-essential businesses.

CIBC is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the June 26, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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