Has CIBC Stock Bottomed Out?

CIBC’s share price plunged in 2022. Is the stock now oversold?

| More on:
TIMER SAYING TIME FOR ACTION

Image source: Getty Images

CIBC (TSX:CM) dropped 26% in 2022 and finished the year close to its 12-month low. Contrarian investors seeking high dividend yields and a shot at decent capital gains are wondering if CM stock is now undervalued and good to buy for a retirement portfolio focused on passive income and total returns.

CIBC overview

CIBC has a current market capitalization of roughly $50 billion. This makes the company Canada’s fifth-largest bank based on this metric.

The bank has historically traded at a discount to its larger peers. This is partly due to its size, but also as a result of some big blunders that previously hammered investors. CIBC took a big hit during the Great Recession due to bad bets on subprime mortgages. In the wake of the financial crisis, the management team refocused on the Canadian market with a big push in mortgage lending. That strategy proved to be very profitable over the past decade. CIBC also made good progress on diversifying the revenue stream in recent years with acquisitions in the United States focused on commercial banking and wealth management activities.

Risks

The sharp decline in the share price is likely due to investor concerns about the size of the Canadian residential mortgage portfolio. CIBC finished fiscal 2022 with $281 billion in mortgages and home equity lines of credit. This compares with $360 billion at TD Bank, but TD has a market capitalization that is more than triple that of CIBC’s.

The concern is that a deep and prolonged recession could trigger a wave of job losses and put thousands of property owners with too much debt in a position where they have to default on their payments. Or they could try to sell the homes and condos at prices that are below the amount owed on the properties. In a scenario wherein the housing market crashes, CIBC would likely take a larger hit than its peers.

For the moment, however, the jobs market remains robust and loan losses are in line with expectations. In addition, CIBC says that only $28 billion in mortgages will need to renew in the next 12 months. The average loan-to-value (LTV) ratio on its uninsured mortgages is 48%, so property prices would have to drop considerably before CIBC takes a meaningful hit.

That being said, some pain is likely on the way. CIBC increased its overall provisions for credit losses (PCL) in Canadian personal and commercial banking operations in Q4 2022 to $305 million compared to $200 million in the previous quarter.

Dividends

The board increased the dividend twice in 2022. This would suggest the management team is comfortable with the revenue and earnings outlook in 2023. The new quarterly payout of $0.85 per share provides an annualized yield of 6.1% at the time of writing.

Is CIBC stock a buy?

CIBC’s stock currently trades for close to $55.50 per share compared to more than $83.50 at the 2022 high. At a multiple of just 8.3 times trailing 12-month earnings, the shares now appear oversold considering the widespread expectations for a mild and short recession next year.

Additional downside in the stock is certainly possible in the near term, but contrarian investors might want to start nibbling at this level. You get paid well to wait for the rebound, and CIBC stock is likely close to its bottom in the current cycle.

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. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

More on Bank Stocks

Payday ringed on a calendar
Bank Stocks

How to Create $500 in Passive Income Each and Every Month

Combining your TFSA with a covered call ETF can create some very lucrative passive-income streams.

Read more »

woman data analyze
Bank Stocks

BNS Stock: Here’s What’s Coming in 2023

Here's what investors and market participants should look for in 2023 when it comes to Bank of Nova Scotia (TSX:BNS)…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

Royal Bank of Canada Stock: Here’s What’s Coming in 2023

Should you buy RY stock now?

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House
Bank Stocks

If I Could Only Buy 1 Stock in 2023, This Would Be it

This high-growth stock offers a healthy dividend yield and is trading at a discount.

Read more »

Business success with growing, rising charts and businessman in background
Bank Stocks

This Big Six Bank Is Actually a Growth Stock

Canada’s Big Six banks can overcome a potential downturn but the smallest in the group has plenty of upside and…

Read more »

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

The New Rules of Investing in 2023

Focusing more on the quality of stocks instead of broad sectors is the new rule of investing in 2023.

Read more »

Question marks in a pile
Bank Stocks

EQB Inc: Should You Buy the Stock?

EQB Inc (TSX:EQB) recently delivered a record-breaking quarter. Is it a good buy?

Read more »

Man data analyze
Bank Stocks

TD Stock: Here’s What’s Coming in 2023

Here's why long-term investors may want to take a good, hard look at Toronto-Dominion Bank (TSX:TD) stock right now.

Read more »