The Motley Fool

5 Years After the Crash – CIBC is Emerging From the Ruins

With current total assets of $393.4 billion, CIBC (TSX:CM, NYSE:CM) is the Canadian bank that was hit the hardest during the financial crisis that is marking a dubious 5 year anniversary this very weekend.

In the years leading into the crisis, CIBC made relatively aggressive and risky business decisions that resulted in big financial losses.  These financial losses contributed to a significant loss of confidence by Canadian investors.

First the bank was stung by claims that it helped Enron hide losses.  For this, a $3 billion settlement was reached in 2005.  Then, in 2008 there was the bank’s participation in the US subprime mortgage market, which resulted in a staggering $10 billion in write-downs in 2008 and 2009.

But, the past is the past as they say so let’s fast forward to the present day.  For CIBC, the years that followed have been all about risk, risk, risk.

More specifically, lowering its risk profile in order to generate more sustainable and less volatile returns for shareholders. CIBC has become a well-capitalized bank that is focused on its Canadian operations.  The bank has shed its risk taking past, and seems determined to grow in a more prudent manner.

We can see evidence of this new culture at CIBC by looking at its Tier 1 Capital Ratio, which is a measure of financial strength.  It leads the pack, at 13.8%.   CIBC’s capital ratio has been improving and is now ahead of its peer group.  Its ROE of 22.3% is also ahead of its group.

Change is afoot

Let’s take a closer look at what CIBC has done to turn things around.  To do this, we can compre the business mix between now and then.  This comparison is tabled below:

Segmented Net Income

 

2012

2008

 

$ mlns

% of total

$ mlns

% of total

Retail   & Business Banking

3,015

74.6%

3,086

nm

Wealth   Management

442

10.9%

nm

Wholesale   Banking

803

19.9%

(7,287)

nm

Corp   & Other

(217)

-5.4%

(59)

nm

 

4,043

(4,260)

Source:  Capital IQ

In the Retail & Business Banking segment, CIBC is one of the banks that is more heavily focused on Canada.  This segment has remained relatively constant, and management is saying that going forward, growth here in Canada for this business will be slow.

CIBC is focusing on the Wealth Management segment going forward, which is forecast to increase nicely as baby boomers drive demand for services in this space.  To grow its wealth management segment, CIBC recently acquired Atlantic Trust Private Wealth Management for US$210 million, a deal that’s expected to close in early 2014.  This firm has US$20 billion in assets under management.

In the Wholesale Banking segment, as we can see from the segmented net income table, the key for the bank has been to recover from the serious trouble they were in back in 2008/2009.  In early 2009, the bank repositioned the wholesale banking business, exiting activities that do not meet CIBC’s new target risk profile, and focusing on seven risk-controlled businesses focusing on Capital Markets and Corporate & Investment Banking capabilities.  This has led to a huge turnaround by this group.

Bottom Line

CIBC has emerged from the crisis with the goal of getting its risk tolerance level more in line with the goal of sustainable and reliable returns.  Through it all, the bank has learned the right lessons and implemented changes relatively quickly.  All of this has led to some very significant gains for investors since the lows of February 2009.

None of the Canadian banks made the cut in our special FREE report “5 Companies to Replace Your Canadian Index Fund”.  Click here now to learn which 5 Canadian superstars did – one of which just got taken out at a huge premium.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Karen Thomas does not own shares in any of the companies mentioned above.  The Motley Fool does not own shares in any of the companies mentioned above. 

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.