Bank earnings are on tap this week with CIBC (TSX: CM)(NYSE: CM) slated to pull the curtain on its third-quarter results on Thursday. After suffering three consecutive bottom-line misses, analysts now have pretty muted Q3 expectations with the expectation that EPS numbers will be down by the slightest of margins on a year-over-year basis.
The bar is pretty low here, but that doesn’t mean CIBC can’t continue to fall further.
CIBC is arguably the most feared Canadian bank going into the latest round of bank earnings. Short-sellers, including Steve Eisman, have targeted the number five Canadian bank, which already has a poor track record when times get tough.
Memories of the 2007-08 implosion are fresh in the minds of investors, but while provisions are likely to rise further, I think most investors are too bearish on the Canadian banks, especially CIBC, which is close to the cheapest it’s been in recent memory.
No, CIBC probably won’t pull a rabbit out of the hat with results that’ll make up for lost time in the first half. But given today’s rock-bottom valuations, I see a scenario where CIBC could surge on better-than-feared results.
How’s the risk/reward trade-off at this juncture?
Going into Thursday, the stock looks technically strong with shares hovering around a healthy level of support at around $100. The ailing bank saw some relief from improvements to the capital markets in the second quarter, but both expenses and impaired commercial loans continued to swell, confirming the fears of many.
Although it looks like CIBC has a book of loans that’s rotten to the core, it’s worth noting that a single bad loan was the primary culprit that weighed CIBC down in the last quarter. In a previous conference call, CIBC’s chief risk officer noted that it has since disposed of the problem loan that reported came from a utility company that we don’t know the name of.
Yes, Q2’s staggering rise in provisions was a cause for concern, but many investors are in the belief that CIBC’s whole loan book is in serious trouble, when in reality, the one bad apple, which CIBC has rid itself of, wasn’t enough to spoil the bunch.
Mortgage growth has been in free fall since late 2017, and at this juncture, anything deemed as flat on a year-over-year basis, I believe, will be enough to cause investors to breathe a collective sigh of relief, as shares recover some ground it’s lost to its peers in recent months.
Foolish decision
Expectations could set the stage for better-than-feared results in Q3, and given rock-bottom valuations (the stock trades at just 7.9 forward earnings), I think the risk/reward trade-off is highly favourable going into earnings.
I’d buy half a position now and half after CIBC reports its numbers on Thursday. Although I find the bar to be set low, given the decreased appetite for banks as a whole, CIBC may not correct to the upside until further down the road.
Stay hungry. Stay Foolish.
