CIBC (TSX:CM) is up 40% in the past 12 months. Investors who missed the rally are wondering if CM stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividend income and total returns.
CIBC stock price
CIBC trades near $90.50 per share at the time of writing. The stock was as high as $95 in the past month and doubled off the low it hit in late 2023.
CIBC’s share price has historically been more volatile than some of its large Canadian peers. The company earned a reputation 20 years ago for making big bets that sometimes turned into costly blunders. For example, CIBC had to take billions in charges due to bad bets on the subprime mortgage market before the financial crisis that caused the Great Recession.
Over the past decade, CIBC has focused much of its growth efforts on the Canadian housing market and expanded into the United States through acquisitions. High relative exposure to the Canadian residential housing market drove big gains for the stock but has also made CIBC more vulnerable to a market crash. Up until now, that hasn’t happened, even as interest rates soared in 2022 and 2023.
This is largely why the stock rebounded so much in the past year. Investors switched from fears of higher rates and a major recession in late 2023 to expectations for rate cuts in 2024 and a soft landing for the economy.
Risks
Rates are now falling, which should ease default pressures, especially on variable-rate loans where the drop in the bank rate immediately lowers borrowing costs.
Bond yields, however, remain elevated, even as interest rates decline, and bond prices could continue to move lower in 2025, putting additional upward pressure on yields. Fixed-rate mortgages in Canada are largely determined by bond yields, so this is important to watch.
In the worst-case scenario, new tariffs in the United States placed on Canadian goods would cause a downturn in the Canadian economy, forcing companies to cut staff to preserve cash flow. A sharp rise in unemployment would put pressure on households that are already struggling to cover the jump in the cost of living and the increase in their mortgage payments as fixed-rate loans taken out at low rates in 2020 and 2021 come up for renewal.
If a wave of defaults hits the Canadian housing market, CIBC would likely feel more pain than its large peers due to the size of its Canadian residential loan book.
Opportunity
Households have proven to be more resilient than expected, and that could continue to be the case, especially if there is a soft landing for the economy. CIBC has diversified its revenue stream through U.S. acquisitions, so the perceived risks in the market might not be warranted.
Is CIBC a buy?
CIBC pays a good dividend and should be a solid pick for a buy-and-hold portfolio, but near-term volatility is expected in the Canadian bank sector. Existing shareholders sitting on big gains might want to take some profits. New investors could see a better entry point in the coming months.
