CIBC outdoes peers at less risk
Bank delivered best risk-adjusted returns of top Canadian lenders
TORONTO Chief executive officer Gerald McCaughey’s mission to reduce risk at Canadian Imperial Bank of Commerce is rewarding shareholders with a less-volatile stock that’s beating its peers.
CIBC generated the best risk-adjusted returns among Canada’s six-largest lenders in the past 12 months, according to a Bloomberg Riskless Return ranking. That compares with the five-year period beginning with the financial crisis when the Toronto-based lender was the worst performer and most-volatile stock as debt writedowns caused investors to shun the shares.
CIBC has returned 1.18 per cent in the past year after accounting for price swings, ahead of Bank of Montreal’s 1.16 per cent risk-adjusted return and six times that of National Bank of Canada and Toronto-Dominion Bank, according to data compiled by Bloomberg through Friday. CIBC also outperformed Bank of Nova Scotia and Royal Bank of Canada, whose riskadjusted returns were both 0.72 per cent.
“Gerry McCaughey’s done a great job de-risking the bank,” Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, which manages about $4 billion including bank stocks, said in an April 22 interview. “He’s playing into the mantra of what bank investors want: relatively lowrisk situations.”
CIBC under McCaughey spent the past five years focusing on Canadian banking and wealth management. McCaughey has repeated a refrain since at least December 2011 that CIBC’s first principle is to be a lower-risk bank that delivers consistent and sustainable earnings.
“What we try to control is our operating framework, be it normal operations, incremental investment, capital levels,” McCaughey, 57, said Friday in an interview in Ottawa after the bank’s annual investor meeting. “We seek to adhere to our first principle, to be a lower-risk bank. That is our policy now and it will be our policy in the future.”
CIBC earned 68 per cent of its annual profit last year from retail and business banking, according to financial statements. Wealth management made up 10 per cent of earnings, with wholesale banking contributing 18 per cent of profit.
“An unintended consequence of the de-risking effort is an over-reliance on earnings generated by its Canadian personal and commercial-banking business, generally, and to the Canadian household specifically,” Peter Routledge, a National Bank Financial analyst who rates the stock the equivalent of hold, said in an April 24 interview from Toronto. “CIBC risks becoming a low-risk, low-growth bank.”
Nakamoto said he prefers the slower-growth, lower-risk approach than the alternative strategy. “I always view banks as an area where you don’t want anything too exciting to happen,” he said. “Most of the exciting stocks have been killed.”
McCaughey’s low-risk directive follows years of missteps on risky U.S. subprime mortgages, structured debt and Enron Corp. CIBC had more than $10.7 billion of pretax writedowns between 2007 and 2009, more than any other bank in the country during the financial crisis.