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). As a result of the SA2 designation, the Bank’s Long-Term Issuer Rating benefits from a one-notch uplift to the Bank’s IA.
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., and the U.S. Commercial Banking and Wealth Management segment contributed approximately 11% of total revenue in Q2 2023. Historically, CIBC has generated strong earnings and profitability metrics, which support 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 the challenging macroeconomic and geopolitical environment, which could lead to an adverse impact on profitability and asset quality. DBRS Morningstar remains concerned about the combination of highly leveraged Canadian consumers; elevated home prices, particularly in the greater Toronto and Vancouver areas; and materially higher borrowing costs and inflation levels that are eating into consumers’ disposable income. DBRS Morningstar believes that housing prices remain somewhat vulnerable and, as a result, views CIBC, like its Canadian bank peers, as susceptible to any significant adverse changes in the Canadian residential real estate market.
Over the longer term, DBRS Morningstar would upgrade the ratings if the Bank continues to build scale and diversifies its franchise further, resulting in a sustained improvement in financial performance, without a commensurate increase in risk. Conversely, DBRS Morningstar would downgrade the ratings if there are material deposit outflows or sustained deterioration in the Bank's asset quality, especially from deficiencies in risk management or a prolonged decline in profitability metrics.
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. Following the acquisition of the Canadian Costco credit card portfolio in March 2022, the Bank became the exclusive issuer of Costco-branded Mastercard credit cards in Canada. As part of its strategy announced on Investor Day in 2022, CIBC remains focused on growth in less capital intensive, higher-touch, higher-growth segments, including mass affluent and high-net-worth clients.
Earnings Combined Building Block (BB) Assessment: Strong/Good
Supported by its well-diversified franchise, CIBC generates solid earnings and profitability metrics, which contribute to the Bank’s ability to absorb credit losses. CIBC reported Q2 2023 net income of $1.7 billion, an increase of about 11% year over year (YOY), reflecting an increase in total revenue driven by loan volume growth and higher noninterest income, partially offset by higher provision for credit losses (PCL) on impaired loans. Meanwhile, noninterest expenses remain well managed with a steady efficiency ratio at 55% in Q2 2023. Overall, the Canadian Personal and Business Banking segment reported a solid performance of net earnings, which largely offset a decline in net earnings from Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets during the same period.
Risk Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views CIBC's risk profile as conservative, reflecting a strong risk culture. CIBC's credit quality remains solid, although total PCL reached $438 million in Q2 2023 compared with $303 million for the same period of 2022. The higher PCL on impaired loans was partially offset by a decrease in PCL on performing loans. As a result, CIBC's total PCL ratio stood at 34 basis points (bps) for the quarter, while the gross impaired loans ratio marginally deteriorated by 8 bps YOY to 0.43% in Q2 2023. DBRS Morningstar notes that, overall, the Canadian banking sector has reported asset quality metrics that are at unsustainably low levels, and modest deterioration is expected as credit conditions normalize while the macroeconomic outlook remains tilted toward the downside.
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 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 need for wholesale funding. Liquidity at CIBC remains strong, including a reported a Q2 2023 liquidity coverage ratio of 124% and a net stable funding ratio of 117%, both comfortably above the regulatory minimums.
Capitalization Combined Building Block (BB) Assessment: Strong
Capitalization remains strong and is viewed as sufficient to absorb stressed levels of loan losses. CIBC’s significant levels of internal capital generation also adds to capital strength. At period-end Q2 2023, CIBC’s CET1 ratio was 11.9%, above the regulatory minimum of 11.0% for Domestic Systemically Important Banks. Meanwhile, CIBC’s risk-based total loss-absorbing capacity ratio of 29.6%, was also well above the regulatory threshold of 24.0%. The Bank reported a leverage ratio of 4.2% that was above the regulatory minimum of 3.5%, including a leverage ratio buffer of 0.5% introduced recently as part of Basel III reforms, and in line with its Canadian bank peers. Nevertheless, 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/415277
ENVIRONMENTAL, SOCIAL, 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 (March 17, 2022) 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 (June 23, 2022; https://www.dbrsmorningstar.com/research/398692). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/ in its consideration of ESG factors.
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
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 rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the rating process for this rating action.
DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
This is a solicited credit rating.
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:
The last rating action on this issuer took place on June 2, 2022.
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.
For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
Lead Analyst: Shokhrukh Temurov, CFA, Vice President, North American Financial Institutions
Rating Committee Chair: Michael Driscoll, Managing Director, Head of North American Financial Institutions
Initial Rating Date: December 31, 1980
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