CIBC (TSX:CM) took a beating in recent weeks, as investors bailed out of Canadian bank stocks amid growing fears that bank failures in the United States and Europe could spread to other countries. Contrarian investors seeking passive income and total returns for their retirement portfolios are wondering if CIBC stock is now oversold and good to buy for a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
CIBC overview
CIBC is Canada’s fifth-largest bank with a current market capitalization near $51 billion. The share price is down about 27% over the past year and is trending close to the 12-month low it touched in late December.
CM stock is often viewed as being a higher-risk investment than its larger Canadian peers. This is partly due to its smaller size, but there is also a legacy of big blunders at CIBC that have burned investors in the past. CIBC had to take billions of dollars in charges during the financial crisis as a result of bad bets on the U.S. subprime mortgage market.
Penalizing the stock for past mistakes might not make much sense, especially when the management team is different, but the recent turmoil in the banking sector has investors feeling a bit nervous. CIBC has a large Canadian residential mortgage portfolio relative to its size. The sharp increase in interest rates in Canada over the past year is putting some home and condo owners under pressure. Those with variable-rate mortgages are already feeling the pinch. Fixed-rate mortgage holders are hoping that rates will fall before they have to renew.
Sticky inflation could force the Bank of Canada to keep rates at the current level for longer than anticipated. If unemployment starts to creep up while rates are still high, there is a risk that a wave of mortgage defaults could hit the Canadian banks. If property prices start to slide in a meaningful way, panic selling could drive prices down to the point where the banks are stuck with homes that are worth less than the mortgages on the properties. In that scenario, CIBC would potentially take a larger hit than the other big Canadian banks.
CIBC remains very profitable and well capitalized. Adjusted net income for the fiscal first quarter (Q1) of 2023 came in at $1.84 billion compared to $1.89 billion in the same period last year. Return on equity (ROE) slipped from 17.4% in fiscal Q1 last year but is still robust at 15.5%. CIBC had a common equity tier-one (CET1) ratio of 11.6% at the end of fiscal Q1 2023. This is comfortably above the current 11% required by the government agency that oversees the Canadian banks.
As such, the pullback in the share price might be overdone.
High immigration and a very tight labour market should keep the property market balanced, even as some borrowers are forced to sell due to higher rates.
Should you buy CIBC stock today?
Ongoing volatility should be expected in the near term and more downside is certainly possible. That being said, investors with a buy-and-hold strategy might consider nibbling on CIBC stock at this level and look to add to the position on additional weakness. At the time of writing, the shares provide a 6% dividend yield, so you get paid well to wait for the rebound.
