DBRS Confirms Canadian Imperial Bank of Commerce at AA, Trend Remains Stable

DBRS Limited (DBRS) confirmed the ratings of Canadian Imperial Bank of Commerce (CIBC or the Bank) and its related entities, including CIBC’s Long-Term Issuer Rating at AA and Short-Term Issuer Rating at R-1 (high). CIBC’s Long-Term Deposits and Long-Term Senior Debt ratings of AA are composed of an Intrinsic Assessment (IA) of AA (low) and a Support Assessment (SA) of SA2, reflecting the expectation of timely, systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS). The SA2 designation results in a one-notch benefit to the Long-Term Deposits and Long-Term Senior Debt ratings. The trend on all instruments remains Stable, reflecting the finalization of the Canadian Bank Recapitalization Regime (the Bail-In Regime) and DBRS’s view that a sufficient level of bail-inable senior debt will provide an adequate buffer for non-bail-inable obligations, which will offset the expected removal of systemic support (see press release “DBRS Takes Rating Actions on Six Canadian Banking Groups after Finalization of Bail-In Regime,” April 19, 2018).

KEY RATING CONSIDERATIONS
The rating confirmation reflects CIBC’s strong and resilient profitability and its broad footprint across Canada as well as its strong market position in domestic wealth management and capital markets. In addition, momentum has accelerated in its U.S. business following the acquisition of PrivateBancorp, Inc. CIBC’s ratings are further supported by its conservative risk profile, diverse funding mix, strong liquidity and well-capitalized balance sheet. DBRS remains concerned with rising housing prices, particularly in the greater Toronto and Vancouver areas (GTA and GVA), which could lead to a real estate market correction in Canada. As a result, CIBC may be susceptible to any adverse changes in the Canadian real estate market or the Canadian consumer. DBRS notes that CIBC had over the last few years increased its exposure to residential mortgages, especially in the GTA.

RATING DRIVERS
DBRS views CIBC as well-placed in its current rating category. Over the longer term, DBRS sees the potential for positive rating pressure if the Bank successfully executes on its client-centric strategy and achieves a marked increase in its market share. In addition, CIBC’s outperformance against Canadian bank peers, while maintaining sound underwriting standards, could lead to positive rating pressure.

Negative rating pressure could arise if there is an elevated increase in CIBC’s risk appetite or a shift towards a more volatile earnings mix, including a material increase in the contribution from CIBC’s capital markets business. Moreover, a severe downturn in the real estate market that leads to a sustained deterioration in asset quality as a result of deficiencies in risk management could pressure the ratings.

RATING RATIONALE
CIBC’s franchise strength is underpinned by its position as one of the largest banks in Canada, with total assets of $590.5 billion at April 30, 2018. The Bank has a broad footprint across Canada with a wide distribution network. The Bank also has a sizeable banking presence in the Caribbean. In addition, CIBC has expanded its presence in the United States through its 2017 acquisition of PrivateBancorp, Inc., which is consistent with its stated North American expansion strategy.

The Bank has consistently generated strong earnings and profitability metrics, which further underpins CIBC’s ratings. CIBC benefits from its diversified earnings base that contributes to overall earnings stability, as well as the ability of the Bank to absorb losses. In 2017, net income was up 10% compared with the prior year. In Q2 2018, CIBC reported net income of $1.3 billion, which was up 26% compared with the same quarter in the prior year, with all business segments providing a strong contribution to earnings growth. CIBC continues to progress on its targeted 55% efficiency ratio, with an efficiency ratio of 57.5% in Q2 2018.

Overall, CIBC maintains a conservative risk profile supported by a strong risk culture and prudent underwriting standards, which helps support the Bank’s rating. Asset quality remains strong with impaired loans and provisions for credit losses remaining at very low levels. This indicates the high credit quality of CIBC’s loan portfolio, which tends to have a higher portion of lower risk retail loans, including residential mortgages. As of April 30, 2018, retail loans comprised 70% of the Bank’s total loan and acceptances. DBRS remains concerned with elevated housing prices, particularly in the GTA and GVA, which could lead to a real estate market correction in Canada. As a result, CIBC may be susceptible to any adverse changes in the Canadian real estate market, given that CIBC had previously increased its exposure to residential mortgages, which comprise 55% of total loans and acceptances at April 30, 2018. This ratio is the highest among the large Canadian banks, where residential mortgages comprise on average 44% of their loan portfolios. DBRS notes that a sizable portion of these mortgages are insured. In addition, CIBC also has exposure to such deterioration through its real estate and construction loans, which comprise a manageable 8% of its loan portfolio, a similar level to Canadian peers.

CIBC maintains a strong funding and liquidity profile, which is underpinned by its robust client-sourced deposits. The Bank also utilizes a wide range of wholesale funding sources to manage its funding needs. Although CIBC relies marginally more on wholesale funding relative to its peers, DBRS views the Bank’s level of utilization as acceptable. CIBC’s liquidity coverage ratio of 124% in Q2 2018 was well above the regulatory minimum of 100%, and in line with Canadian bank peers.

Capitalization remains solid as the Bank continues to generate capital organically. This capital growth provides for CIBC’s balance sheet growth, acquisition opportunities and a cushion to absorb potential losses. As at Q2 2018, CIBC had a Common Equity Tier 1 (CET1) ratio of 11.2% on an all-in basis, exceeding the 8% minimum required by the Office of the Superintendent of Financial Institutions (OSFI) for a domestic systemically important bank (D-SIB). On April 18, 2018, the Minister of Finance issued the final rules related to the Bail-In Regime, which becomes effective on September 23, 2018. At the same time, OSFI also published its guidelines related to the amount of total loss absorbing capacity (TLAC) that D-SIBs are required to issue. DBRS expects CIBC to be comfortably above these TLAC requirements well in advance of the required compliance date of November 1, 2021.

The Grid Summary Scores for CIBC are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Very Strong/Strong; Risk Profile – Strong; Funding & Liquidity –Strong; Capitalisation – Strong.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrs.com.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Canadian Imperial Bank of Commerce and related entities:

Lead Analyst: Robert Colangelo, Senior Vice President, Canadian Banking Financial Institutions - Global Financial Institutions Group
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer - Global FIG and Sovereign Ratings
Initial Rating Date: December 31, 1980