CIBC gives investors reason for cheer and worry on small $71M profit in Q3

By David Friend, The Canadian Press

TORONTO - CIBC (TSX: CM.TO) posted a $71 million profit in the third quarter and managed to both disappoint and please analysts who had expected deeper writedowns but higher earnings.

The bank's earnings amounted to 11 cents per share in the quarter ended July 31, 2008, down from $835 million or $2.31 per share a year ago as both consumer and investment banking turned out weaker results.

The quarterly results included an $885 million charge from risky securities linked to the U.S. residential mortgage market, bad-debt protection purchased from ACA Financial Guaranty Corp. and other U.S. bond insurers who have since been hit by financial problems.

Cash earnings per share were 13 cents, compared with $2.34 a year ago.

After filtering out some one-time items the earnings came closer to $1.65 - still below the $1.78 averaged out in a poll of nine analysts by Thomson Financial.

The company's stock, however, ended the day five per cent higher, up $3.04 to $60.10 on the Toronto Stock Exchange - still well off a 52-week peak of $103.64. The spark in its stock left some analysts questioning whether this isn't just a temporary spurt of optimism.

"I think the view is that it seems less likely CIBC is going to have to issue equity," said Mario Mendonca an analyst at Genuity Capital Markets. CIBC has already raised $2.9 billion in equity this year.

"Where I disagree is the notion that the (subprime) charges are declining."

Mendonca noted that while the bank's writedowns didn't include any subprime charges this quarter, it doesn't mean further subprime writedowns aren't headed its way.

"The reason they're not taking subprime charges this quarter is because credit spreads declined - as in these monolines are a little bit better," he said.

"These monolines are in process of coming to agreements with them on ending the coverage. When CIBC comes to that agreement...they will be taking charges."

Higher than expected credit losses, linked to CIBC's credit card portfolio, also contributed to the miss of expectations by John Aiken of Dundee Capital Markets.

"This is troubling and could indicate additional pressure in future quarters," Aiken said.

However, he also said that the $885-million credit writedown was well below his estimate of between $1.5 billion and $1.9 billion. Aiken has raised the bank's rating to "neutral."

Provisions for credit losses were increased during the latest quarter to $203 million, up from $162 million a year earlier and up from $176 million in the second quarter.

Although all the major Canadian banks have been affected to some degree by problems in the U.S. housing and financial sectors, CIBC has been the worst-hit among the Big Five.

CIBC has now reported a $2.5-billion loss for the first three quarters of 2008, including $1.1 billion or $3 per share reported in the second quarter. That compares with a profit of $2.4 billion in the first three quarters of 2007.

Revenue in the third quarter of 2008 was $1.9 billion, down from $2.98 billion in 2007.

CIBC said the continued deterioration in securities with exposure to the U.S. residential mortgage market and bond-default insurance required the bank to record further writedowns in its structured credit run-off business, which recorded an after-tax loss of $596 million or $1.56 per share.

In addition, these market conditions had a negative impact on performance in other areas, particularly within CIBC's wholesale and retail brokerage operations, the bank said.

CIBC's personal banking reported net income of $572 million, down four per cent from the same quarter last year. Retail loan losses were $196 million, up $29 million from the same quarter last year.

CIBC World Markets, the bank's brokerage arm, had a net loss of $538 million, including the loss of $596 million related to CIBC's structured credit run-off activities and other items of note aggregating to a net loss of $20 million.

During the quarter, the bank launched a "bottom-up" review of its world markets operations, the division's chief executive Richard Nesbitt said in a conference call.

"We are terminating or reducing activities that are inconsistent with our mission and goals or where the rewards do not justify the risk," he told analysts.

"It is critical we complete the rebuilding work quickly so we're in the best possible position once industry conditions improve."

He said the division has made several changes including terminating some of its European based derivatives activities, reducing infrastructure in London, New York and Asia, and slashing about 100 jobs in Canada. Meanwhile, there were new hires in senior management.

All of these changes have raised questions about where CIBC can grow from there, according to Craig Fehr, a financial services analyst with Edward Jones in St. Louis.

"It's another quarter of CIBC focusing on the current risk, putting out these fires on their balance sheets, and not a lot of talk about the longer term growth strategy," he said.

"As we move through this credit crunch they've sold some of their businesses that didn't make sense in the current environment to reduce risk. What we're going to be left with... in my mind, is a smaller, less profitable bank."