Canadian bank stocks continue to trail the broader market as investors remain cautious about rising interest rates, a sluggish global economy, and lower consumer spending. While elevated interest rates may help banks boost profit margins, the tailwind would be offset by tepid demand for loans across sectors.
One TSX bank stock that has underperformed the index since 2022 is Canadian Imperial Bank of Commerce (TSX:CM). Valued at a market cap of $61.3 billion, CIBC stock currently trades 21% from all-time highs, allowing you to buy the dip and benefit from a tasty dividend yield of almost 5.5%.
Let’s see if CIBC stock is a good buy right now.
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How did CIBC perform in fiscal Q1 of 2024?
In the fiscal first quarter (Q1) of 2024 (ended in January), CIBC reported net earnings of $1.8 billion, or $1.81 per share. Comparatively, analysts forecast CIBC’s adjusted earnings at $1.66 per share. CIBC emphasized it continues to execute on its client-centric strategy allowing it to add 700,000 net new clients in the last 12 months, despite an uncertain economic backdrop.
Its revenue grew by 5% year over year to $6.2 billion, reflecting the resiliency of CIBC’s diversified business model. CIBC attributed its strong Q1 performance to prudent expense management, which resulted in a pre-tax earnings growth of 8%, indicating a positive operating leverage of 2%.
It ended Q1 with a CET1 (common equity tier-one) ratio of 13%, above regulatory requirements and internal targets. The CET1 ratio measures a bank’s ability to withstand economic downturns, and a higher ratio is favourable.
CIBC is focused on expanding its digital capabilities to attract new-age customers. These improvements across digital channels should help the banking giant to cater to the evolving needs of customers. In Q1, it was among the first banks to leverage artificial intelligence and streamline the application process into a single digital application for newcomers to Canada.
CIBC’s personal banking platform enjoys a digital adoption rate of 86% while improvements in its retail offering has resulted in 38% of product sales originated digitally. Its digital bank, Simplii Financial continues to experience strong momentum, attracting 180,000 net new clients in the last 12 months.
Its focus on digitization allows CIBC to cross-sell products to the existing customer base. For example, 31% of CIBC’s commercial clients in Canada have a private wealth relationship, much higher than the 17% figure south of the border.
Going forward, CIBC expects its differentiated capital markets business to be a key driver of the top line. This segment delivered record revenue in Q1, and with mergers and acquisitions activity to normalize, the high-margin business should improve profitability numbers as well.
Is CIBC stock undervalued?
During its earnings call, CIBC chief financial officer Hratch Panossian stated, “We also continue to successfully balance ongoing investments in our business with efficiency gains to contain expense growth and generate positive operating leverage of over 2% resulting record pre-provision, pre-tax earnings of $2.9 billion increased 8% year over year aligned with our medium-term earnings growth target.”
Priced at 9.9 times forward earnings, CIBC stock is very cheap. It also offers shareholders an annual dividend of $3.60 per share, and these payouts have doubled in the last 12 years.
