Is Now the Time to Be Ramping Up Mortgage Growth? Canadian Imperial Bank of Commerce Thinks So

Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) has seen robust growth in its residential mortgage book. Is this a good thing or a bad thing for investors?

| More on:
The Motley Fool

Investors pondering why Canada’s smallest of the Big Five banks, Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM), is continuously undervalued compared to its peers have often pointed to the attractiveness of fundamental valuation metrics. Indeed, the smaller Canadian bank appears more attractive than ever at current levels; however, the market has continued to price in a much higher risk premium for the Canadian lender, focusing on a number of potential headwinds for the bank.

I’m going to discuss one of the more prevalent headwinds for CIBC, one which corresponds to the bank’s current competitive situation in the Canadian mortgage market.

CIBC continuing to focus on Canadian market and growth

One of the key differences between CIBC and its larger Canadian peers is the amount of exposure CIBC has to the Canadian market and, in particular, the Canadian housing market in a time when interest rates are on the rise and talks of a Canadian housing bubble deflating are all the rage these days.

Rising interest rates are generally considered to be a positive for lenders, as top- and bottom-line margins and profitability tend to improve as rates rise. In general, rising interest rates also indicate an improving economy, which is good for both the Canadian consumer and CIBC overall. Canada continues to make up a much higher percentage of CIBC’s overall banking revenue when compared to its peers, despite recently announced acquisitions in the U.S. market of PrivateBancorp and Geneva Advisors.

The issue with rising interest rates is mainly centred on the discussion of how such interest rate hikes will affect the ability of mortgage holders to service their underlying debt. With some of the lowest mortgage rates in the developed world, with a very high percentage of such loans at adjustable rates (reset every five years, give or take), any meaningful increase in interest rates has the potential to affect a very high percentage of Canadians, affecting how much they can borrow and therefore cap housing prices, which have been increasing year over year in the double-digit range for some time now.

In the last quarter, CIBC reported residential mortgage growth of 13% year over year, noting that the lender has grown its Canadian mortgage book much faster than its peers in recent quarters, expecting the trend to continue. CIBC noted in its quarterly financial statement release that it does not expect a “hard landing” for the Canadian housing market, but rather a potential cooling off as interest rates rise and housing price increases slow.

Bottom line

The discount investors are able to get on CIBC shares comes with a price. For deep-value investors, now may be the time to jump in. In the long term, should CIBC continue to move in the right direction strategically and diversify a bit more, I believe the lender can be a great long-term holding. That said, medium-term risks relating to the company’s current lending strategy make this bank a difficult name to assess; I therefore remain on the sidelines.

Stay Foolish, my friends.

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.

Chris MacDonald has no position in any stocks mentioned in this article.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »