DBRS Confirms Canadian Imperial Bank of Commerce at AA with a Stable Trend

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). The trend on all ratings is Stable. CIBC’s Long-Term Issuer Rating is composed of an Intrinsic Assessment of AA (low) and a Support Assessment (SA) of SA2, which reflects 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 uplift to the Long-Term Issuer Rating. Under the new Canadian Bank Recapitalization Regime, DBRS expects to eventually remove the uplift from systemic support once the Bank has issued a sufficient level of bail-inable senior debt, which would provide an adequate buffer for non-bail-inable obligations and is expected to offset the removal of systemic support.

KEY RATING CONSIDERATIONS
The ratings reflect CIBC’s strong and resilient profitability as well as its position as one of the largest banks in Canada. CIBC also has an expanding presence in the United States boosted by its 2017 acquisition of PrivateBancorp, Inc. (now CIBC Bank USA). In addition, the Bank’s ratings are supported by its conservative risk profile with sound asset quality, strong funding and liquidity as well as solid capital levels that have supported balance-sheet growth. The ratings also consider the challenging operating environment that is constrained by moderating global growth, low interest rates, weakness in energy prices and the potential for a housing downturn in Canada.

RATING DRIVERS
DBRS views CIBC as well placed in its current rating category. Over the longer term, DBRS sees positive rating pressure if the Bank successfully executes its client-centric strategy, resulting in a sustained improvement in financial performance while maintaining its conservative risk profile.

Negative rating pressure could arise if there is a perceived increase in CIBC’s risk appetite or a shift toward a more volatile earnings mix, including a material increase in the contribution from the Bank’s capital markets business. Moreover, a sustained deterioration in asset quality, especially as a result of deficiencies in risk management, could pressure the ratings.

RATING RATIONALE
CIBC provides diverse banking and financial services through a wide distribution network. The Bank’s franchise strength is underpinned by its position as one of the largest banks in Canada with total assets of $634 billion as at April 30, 2019. CIBC has an expanding U.S. banking franchise and a sizable banking presence in the Caribbean through its 91.7% ownership in CIBC FirstCaribbean International Bank.

The Bank has continued to generate strong earnings and profitability metrics, which is supported by its well-diversified franchise and contributes to its ability to absorb credit losses. Overall, net income in F2018 was $5.3 billion, an increase of 12% compared with the prior year (up 19% on an adjusted basis). This earnings growth largely reflected strong performances across the Bank’s retail and commercial banking and wealth management business in both Canada and the United States. Overall, CIBC reported a strong return on average common equity ratio of 16.6% in F2018. While geographic earnings diversity has improved, CIBC is the most Canadian-centric of the large Canadian banks. For F2018, over three-quarters of earnings (78%) were generated in Canada with contributions of 15% from the United States and 7% from other international locations, including the Caribbean.

Overall, CIBC has a conservative risk profile reflecting its strong risk culture and the current benign credit environment. This is evidenced by strong asset-quality metrics, including low provisions for credit losses (PCLs) and gross impaired loans (GILs). While the current credit environment remains strong, DBRS expects that the Bank’s PCL and GIL ratios will likely to revert to higher levels over time, but remain manageable.

DBRS remains concerned about the combination of highly leveraged consumers and elevated home prices in the Greater Toronto Area (GTA) and the Greater Vancouver Area (GVA). Currently, revised underwriting requirements and higher interest rates are having manageable impacts in both of these markets. DBRS notes that home sales in both the GTA and GVA declined in 2018 and housing prices remain vulnerable to a correction. As a result, DBRS views CIBC, like its Canadian bank peers, as susceptible to any adverse changes in the Canadian housing market. At 57% of total loans and acceptances as at April 30, 2019, the Bank’s exposure to real estate-secured lending in Canada, comprising residential mortgages and home equity lines of credit, is the highest among the large Canadian banks. This compares with the peer average of 44%. Similar to all large Canadian banks, however, CIBC’s real estate-secured portfolio appears to be conservatively underwritten with 36% of the Bank’s Canadian real estate-secured lending portfolio insured. Moreover, the uninsured portfolio has a loan-to-value ratio of 54%, providing a substantial buffer for a decline in housing prices.

CIBC maintains a strong funding and liquidity profile, primarily through client-sourced deposits, and supplements this with a wide range of wholesale funding sources. DBRS notes that the Bank’s use of wholesale funding is modestly above the Canadian bank peer average; however, DBRS views CIBC’s level of utilization as acceptable and remains comfortable with the scale, scope, proportion and breadth of wholesale funding employed by the Bank. CIBC is strategically focused on raising deposits to reduce its reliance on wholesale funding. In addition, the Bank’s liquidity remains strong with a Q2 2019 liquidity coverage ratio of 134%, which was well above the regulatory minimum of 100%.

Capitalization remains strong as CIBC continues to organically generate significant levels of capital, which supports its balance-sheet growth and provides a cushion to absorb potential losses. As at April 30, 2019, CIBC’s CET1 ratio was 11.2%, which is comfortably above the minimum of 9.75% required by the Office of the Superintendent of Financial Institutions (OSFI) for domestic systemically important banks (D-SIBs). This OSFI minimum includes the Domestic Stability Buffer (DSB) of 1.75%, which OSFI will revisit in June 2019 as per its semi-annual review schedule. Effective November 1, 2021, CIBC and the other D-SIBs will need to meet total loss absorbing capacity (TLAC) requirements. In F2019, CIBC began reporting these requirements and, in Q2 2019, the Bank reported a risk-based TLAC and TLAC leverage ratio of 15.8% and 5.3%, respectively. DBRS expects CIBC to be comfortably above these TLAC requirements in advance of the required compliance date of November 1, 2021. In addition, the Bank’s Q2 2019 Basel III Leverage Ratio was 4.3%, which was above the regulatory minimum of 3.0%.

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

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

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018), which can be found on our website under Methodologies & Criteria.

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 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this issuer took place on June 1, 2018, when DBRS confirmed the Bank’s ratings.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Robert Colangelo, Senior Vice President, Canadian Banking Financial Institutions - Global Financial Institutions Group
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG, Global Financial Institutions Group
Initial Rating Date: December 31, 1980

For more information on this credit or on this industry, visit www.dbrs.com.

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