DBRS Limited (DBRS Morningstar) confirmed its ratings of Canadian Imperial Bank of Commerce (CIBC or the Bank) and its related entities, including CIBC’s Long-Term Issuer Rating at AA and Short-Term Issuer Rating at R-1 (high). All trends remain Stable. The Bank’s Long-Term Issuer Rating is composed of an Intrinsic Assessment of AA (low) and a Support Assessment (SA) of SA2, which reflects the expectation of timely systemic support from the Government of Canada (rated AAA with a Stable trend by DBRS Morningstar).
KEY RATING CONSIDERATIONS
The ratings and Stable trends reflect CIBC’s diversified franchise, which ranks as the fifth-largest bank in Canada by total assets. The Bank also has an expanding presence in the U.S., which contributed approximately 21% of earnings in F2021, building toward CIBC’s medium-term goal of earning 25% of its net income from the U.S. Historically, CIBC has generated strong earnings and profitability metrics, which contribute to the Bank’s ability to absorb credit losses. In addition, the Bank’s ratings are supported by CIBC’s conservative risk profile with sound risk-management practices, a strong funding and liquidity profile that benefits from a stable deposit base, and strong capital levels.
The ratings also consider that government support measures have largely mitigated the negative economic impacts of the Coronavirus Disease (COVID-19) pandemic. Positively, economic performance has rebounded, and the labour market is essentially at full capacity; however, headwinds persist from a potential aggressive interest rate tightening cycle to combat inflation, geopolitical tensions related to the Russia-Ukraine conflict, supply chain disruptions, and the pandemic. Furthermore, DBRS Morningstar remains concerned about the combination of high Canadian household debt levels that have reached an all-time high and elevated home prices (particularly in the greater Toronto and Vancouver areas) that have been driven by housing market imbalances and robust demand during the pandemic. Housing prices remain vulnerable and, as a result, CIBC and its Canadian peers remain susceptible to adverse changes in the Canadian real estate market and the health of the Canadian consumer.
Over the longer term, DBRS Morningstar would upgrade the ratings if the Bank continues building the scale and diversity of its franchise, resulting in a sustained improvement in financial performance, without a commensurate increase in risk. Conversely, DBRS Morningstar would downgrade the ratings if there is a material deterioration in the Bank's asset quality, especially from deficiencies in risk management or if the Bank’s level of profitability falls below the peer group.
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
CIBC enjoys a large presence in Canada, offering personal and business banking, commercial banking, wealth management, and capital markets services with top market shares in certain segments. Additionally, the Bank has a growing presence in the U.S. through CIBC Bank USA, following the 2017 acquisition of Chicago-based PrivateBancorp. In the U.S., CIBC focuses on relationship-oriented commercial, personal, and small-business banking, as well as wealth management services to meet the needs of middle-market companies and their executives. The Bank also has a banking presence in the Caribbean through its majority ownership of CIBC FirstCaribbean International Bank. On March 4, 2022, CIBC completed the acquisition of the Canadian Costco credit card portfolio, which had an outstanding balance of $2.9 billion, for cash consideration of $3.1 billion. The Bank also became the exclusive issuer of Costco-branded Mastercard credit cards in Canada.
Earnings Combined Building Block (BB) Assessment: Strong/Good
CIBC generates strong earnings and profitability metrics, which are supported by its well-diversified franchise and contribute to the Bank’s ability to absorb credit losses. CIBC reported Q2 2022 net income of $1.5 billion, a decrease of 19% quarter over quarter (QOQ), reflecting higher provision for credit losses (PCL) and a modest decline in revenues and uptick in noninterest expenses. Adjusted net income, including adjustments for legal provisions and for the Costco credit card acquisition, was $1.7 billion for the quarter. Meanwhile, expenses remain well managed with a steady efficiency ratio at 56%.
Risk Combined Building Block (BB) Assessment: Strong
Overall, DBRS Morningstar views CIBC's risk profile as conservative, reflecting a strong risk culture. CIBC's credit quality remains robust, with total PCL reaching $303 million in Q2 2022, or $209 million excluding the additions for the Costco credit card portfolio, an increase of $228 million ($134 million excluding Costco) from the prior quarter. The Bank recorded an adjusted PCL on performing loans of $13 million, its first expense in six quarters, as a result of deterioration in the macroeconomic outlook. PCL on impaired loans also increased over the linked quarter, driven by higher impairments across all business lines. CIBC's total PCL ratio stood at 25 basis points (bps) for the quarter, or 17 bps on an adjusted basis, while the gross impaired loans (GIL) ratio continued its downward trend, standing at 0.35% as of April 30, 2022. DBRS Morningstar notes that overall the Canadian banking sector is reporting asset quality metrics that are at unsustainably low levels and modest deterioration is expected as credit conditions normalize.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong/Good
CIBC has a strong funding and liquidity profile that benefits from substantial client-sourced deposits, which is supplemented through a wide range of wholesale funding sources. DBRS Morningstar views the Bank's usage of wholesale funding sources as being within an acceptable range, and remains in line with the Canadian bank peers. Over the last few years, CIBC has remained focused on raising additional deposit funding to help reduce its reliance on wholesale funding. Liquidity at CIBC remains strong, as it reported a Q2 2022 liquidity coverage ratio of 125% and a net stable funding ratio of 117%, both comfortably above the regulatory minimums.
Capitalization Combined Building Block (BB) Assessment: Strong
Capitalization remains strong at CIBC, reflecting significant levels of internal capital generation, which remains sufficient to support balance sheet and business growth initiatives. At period-end Q2 2022, CIBC’s CET1 ratio was 11.7%. At this level, the Bank's CET1 ratio was well above the regulatory minimum of 10.5% for Domestic Systemically Important Banks (D-SIBs). In Q2 2022, CIBC’s risk-based total loss-absorbing capacity ratio was at 30.8%, well above the regulatory threshold of 24.0%. The Bank reported a leverage ratio of 4.24% in Q2 2022 that was above the regulatory minimum of 3% and in line with its Canadian bank peers; however, DBRS Morningstar notes that this metric remains somewhat weaker than many global peers.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/397905.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021; https://www.dbrsmorningstar.com/research/381742). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929/).
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:
Each of the principal methodologies/principal asset class methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision, Specifically, the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021) was used to evaluate the issuer, and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022) was used to assess ESG factors.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
Lead Analyst: Maria Gabriella-Khoury, Senior Vice President, Global FIG
Rating Committee Chair: John Mackerey, Senior Vice President, Global FIG
Initial Rating Date: December 31, 1980
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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