Is CIBC (TSX:CM) a Good Stock to Buy Now?

CIBC’s stock price doubled off the 2020 low. The recent pullback has investors wondering if this is a good time to buy.

| More on:
Bank sign on traditional europe building facade

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

CIBC (TSX:CM)(NYSE:CM) is up more than 30% this year. Investors who missed the rally are wondering if more gains are on the way for this top bank stock.

Earnings

CIBC reported strong fiscal Q2 2021 results. Canada’s fifth-largest bank generated an adjusted net income of $1.67 billion compared to $441 million in the same period last year. Adjusted return on equity came in at 17.3% and CIBC’s capital position remains strong with a CET1 ratio of 12.4%.

Provisions for credit losses (PCL) came in at just $32 million in the quarter. That compares to the $1.6 billion the company set aside for potential losses in Q2 2020. The sharp decline shows the positive impact the government’s aid programs have had on helping businesses and households get through the worst of the pandemic.

Some of CIBCs peers actually reported net PCL reversals in the most recent quarter.

Outlook

CIBC has a higher relative exposure to the Canadian housing market than the other large Canadian banks. The stock took a big hit at the start of the pandemic as investors feared a meltdown in house prices could be on the way.

Warnings from economists and Canada Mortgage and Housing (CMHC) stoked the fears. CMHC predicted house prices would plunge up to 18% due to the fallout of the pandemic on household income.

Things have actually gone the other way, with home sales and prices soaring over the past year, driven by record-low borrowing rates. CIBC’s stock price has been a big winner. The shares are up from around $73 during the market crash lows to a recent closing high of $147 per share. CIBC currently trades near $142.

The hot housing market should continue as long as mortgage rates remain low. Inflation concerns, however, could force the Bank of Canada to raise rates sooner than expected. A meaningful increase would immediately impact variable-rate borrowers and a sell-off in the bond market would likely occur as rates rise, which would drive up bond yields and cause fixed-rate mortgage costs to spike. Once homeowners start renewing at higher rates, the housing market could feel some pressure.

On the other side of the equation, rising interest rates are normally a net benefit for the banks as they boost net interest margins.

Opportunities

Canadian banks are required to maintain a CET1 ratio of at least 9%. This means CIBC is currently sitting on excess capital. The bank will remain cautious for some time until the pandemic threats are clearly in the rearview mirror. However, investors should see a generous dividend increase as soon as the government removes the temporary ban on bank distribution hikes. CIBC’s existing dividend provides a yield of 4.1%.

Share buybacks and acquisitions in the United States could also be on the way. CIBC started buying businesses in the U.S. a few years ago to diversify the revenue stream. That trend could continue now that the company is flush with cash and the Canadian dollar is at a multi-year high against the U.S. dollar.

The bottom line

CIBC stock isn’t cheap right now and there is a risk of a meaningful pullback if interest rates rise shortly after the government ends the pandemic aid programs. With this in mind, investors who like the stock might want to take a half position now to get the decent dividend yield and look to add to the holdings on a dip.

Overall, CIBC remains an attractive pick for a buy-and-hold Tax-Free Savings Account (TFSA) or RRSP portfolio.

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.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Andrew Walker has no position in any stock mentioned.

More on Bank Stocks

Bank sign on traditional europe building facade
Bank Stocks

Beginners: The Top Bank Stock to Buy Before it Rockets Higher

TD Bank (TSX:TD)(NYSE:TD) is making big moves in the M&A department following the recent slide in the financial scene.

Read more »

A plant grows from coins.
Dividend Stocks

4 Stocks That Could Turn $100,000 Into $500,000 by the Time You Retire

Building retirement wealth is a long process, but it’s possible for $100,000 to grow to half-a-million dollars over time.

Read more »

edit Colleagues chat over ketchup chips
Bank Stocks

My Favourite Bank Stock is a Top Buy in This Bear Market

Bank of Montreal (TSX:BMO)(NYSE:BMO) is a great Canadian bank stock that's becoming far cheaper than the pack.

Read more »

Businessperson's Hand Putting Coin In Piggybank
Bank Stocks

Own a TFSA for Better or for Worse

The TFSA is a financial partner for life, and users aren’t missing out, even if they’re unable to contribute or…

Read more »

You Should Know This
Bank Stocks

How to Prepare for Another Supersized Rate Hike

Another 100-basis-point rate hike could be coming, but don't worry! Use value stocks to fight off inflation and interest rates.

Read more »

Glass piggy bank
Bank Stocks

Passive Income: 3 Dividend Stocks That Put the Strong U.S. Dollar to Work!

TSX stocks like the Canadian National Railway offer considerable exposure to the strong U.S. dollar.

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Bank Stocks

1 Cheap TSX Dividend Stock to Buy for Passive Income and Total Returns

Retirement investors can buy great dividend stocks at cheap prices right now for TFSA portfolios focused on passive income and…

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Energy Stocks

Got $2,000? Here Are 3 Smart TSX Stocks to Buy Now

If you're a new investor with just $2,000 you're willing to invest, then these should be the top three TSX…

Read more »