Canadian Imperial Bank of Commerce (TSX:CM) (NYSE:CM) reported fiscal Q4 2018 earnings that missed analyst estimates for the first time in four years.
The numbers, as a whole, were very good, but the market sent the stock sharply lower as a result, and investors are wondering if the pullback might be overdone.
Let’s take a look at the current situation to see if this is a good opportunity to buy the bank for your portfolio.
Earnings results
CIBC reported adjusted fiscal Q4 net income of $1.36 billion, compared to $1.26 billion in Q4 2017, which is a solid 8% gain.
The Canadian personal and small business banking operations generated a 14% increase in adjusted net income. Canadian commercial banking and wealth management operations net income improved 15%. Capital markets profits slipped 2%, and the U.S. division saw adjusted net income rise 167%.
For the full fiscal year CIBC delivered a 10% increase in adjusted earnings per share, compared to 2017. Return on equity was 17.4%. Overall, these are decent numbers.
Diversification
CIBC spent US$5 billion in 2017 to acquire Chicago-based PrivateBancorp in a move that helped diversify the bank’s revenue and earnings stream. The knock against CIBC is that the company is heavily reliant on the Canadian housing market, so management is focused on balancing out the exposure.
The U.S. group now generates about 17% of earnings, which is still lower than U.S. or international contributions for the other big Canadian banks, but it indicates that the company is moving in the right direction.
CIBC’s CEO has said further deals in the United States could be in the cards, especially in the wealth management sector.
Dividends
CIBC pays a quarterly dividend of $1.36 per share. At the time of writing, that’s good for an annualized yield of 4.8%.
Risks
CIBC has a large oil and gas lending portfolio when you look at the combined business and retail exposure. The latest woes in the energy sector might be having a negative impact on investor sentiment. If things get a lot worse in Alberta, CIBC could see defaults increase.
Across the country, CIBC finished fiscal Q4 with $202 billion in mortgage loans and $22 billion in home equity lines of credit. This is high on a relative basis compared to the larger Canadian banks. Rising interest rates are expected to put pressure on Canadian mortgage holders, so investors have to decide whether or not they think the Canadian housing market is headed for trouble.
CIBC finished the latest quarter with a CET1 ratio of 11.4%, which means the company is well capitalized and should be able to ride out a rough spell in house prices.
Should you buy?
At the time of writing the stock trades at $112 per share. That’s less than 10 times 12-month earnings. At this multiple, the stock appears very cheap, given the ongoing strength of the Canadian and U.S. economies, and the diversification of the revenue stream through the PrivateBancorp acquisition.
If you have some cash sitting on the sidelines, it might be worthwhile to start nibbling on CIBC on any further downside.
