Is This Canadian Bank Oversold?

Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) trades at a significant discount to its larger Canadian peers.

Let’s take a look at Canada’s fifth-largest bank to see if it deserves to be on your contrarian buy list today.


CIBC delivered steady fiscal 2017 results, and that trend should continue in 2018.

Adjusted 2017 net income came in at $4.67 billion, up from $4.1 billion the previous year. The company saw strong performances across the various business units as it celebrated its 150th anniversary.

Canadian personal and small business banking adjusted net income rose 5%. Canadian commercial banking and wealth management adjusted net income increased 15%, and the capital markets group saw adjusted net income rise 7%.


In an effort to diversify the revenue stream, CIBC made a large U.S. acquisition in 2017, spending $5 billion to acquire Chicago-based PrivateBancorp. The company had to boost its bid twice to get the deal done, but it now has a strong platform to grow its presence in the United States.

CIBC also spent US$200 million last year to buy wealth manager Geneva Advisors.

In early 2018, CIBC announce its purchase of Toronto-based specialty finance firm Wellington Financial. The move helps CIBC in its efforts to focus on opportunities in the tech sector.


CIBC is widely viewed as the riskiest of the Canadian banks due to its heavy exposure to the Canadian residential housing market. The company finished fiscal Q1 2018 with $203 billion in mortgages and an additional $21.6 billion in home equity lines of credit on the books.

If interest rates rise too quickly, and Canadian homeowners are forced to sell their properties in large numbers, house prices could fall, and a total meltdown would certainly be negative for the banks.

Most analysts, however, expect to see a gradual pullback across the market, and CIBC’s portfolio is capable of riding out a rough patch. The average loan-to-value ratio on the uninsured mortgages is 54%.


Management recently raised the quarterly dividend by $0.03 to $1.33 per share. On an annualized basis, that’s good for a 4.8% yield at the current stock price of $110.50 per share.

Should you buy?

If you think the Canadian housing market is going to crash in the next few years, CIBC is not the stock to buy today. However, if you are of the mind that house prices will simply level off or pull back slightly across the board, CIBC looks attractive.

The stock trades at just 10 times earnings compared to 11.5-13.5 times for its larger peers. Higher housing risk justifies some of the discount, but the difference looks a bit stretched right now, especially with the company’s moves in the past year to expand the U.S. presence.

If you have a contrarian style and are looking for a sustainable above-average yield, CIBC might be worthy of a small position in your portfolio right now.

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Fool contributor Andrew Walker has no position in any stock mentioned.

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