Canadian Imperial (CM) Up As Q3 Earnings, Revenue Rise

Canadian Imperial Bank of Commerce (TO:CM) inched up more than 1% on the NYSE following the release of its third-quarter fiscal 2016 earnings (ended Jul 31). Adjusted earnings per share came in at C$2.67, up from C$2.45 in the prior-year quarter.

Results improved based on growth in net interest income and significant rise in fee income. However, an increase in provision for credit losses and expenses was an undermining factor.

After considering several non-recurring items, reported net income in the quarter surged 47% year over year to C$1.44 billion ($1.11 billion).

Rise in Revenues Offset Higher Costs

Adjusted total revenue grew 5% year over year to C$3.8 billion ($2.9 billion). On a reported basis, total revenue was C$4.1 billion ($3.2 billion), up 18% from the prior-year quarter.

Net interest income was C$2.1 billion ($1.6 billion), up 5% from the year-ago quarter. The improvement reflected a rise in interest income, partly offset by higher interest expenses.

Non-interest income climbed 35% year over year to C$2 billion ($1.5 billion). The upside was due to growth in all fee income components, except deposit and payment fees, commissions on securities transactions, trading losses and income from equity-accounted associates and joint ventures.

Adjusted non-interest expenses totaled C$2.2 billion ($1.7 billion), up 2% from the year-ago quarter. The rise was largely due to increase in almost all expense items.

Total provision for credit losses jumped 29% year over year to C$243 million ($187.5 million). Loan loss ratio was 0.32%, expanding 7 basis points from the year-ago quarter.

Stable Balance Sheet; Capital Ratios Deteriorate

Total assets came in at C$494.5 billion ($378.6 billion) as of Jul 31, 2016, up 3% from the prior quarter. Loans and acceptances (net of allowance) increased 3% sequentially to C$312.3 billion ($239.1 billion), while deposits grew 6% to C$389.6 billion ($298.3 billion).

Adjusted return on common shareholders’ equity was 19.8% at the end of the quarter, down from 20.6% in the year-ago quarter.

As of Jul 31, 2016, Basel III Common Equity Tier 1 ratio came in at 10.9% compared with 10.8% as of Jul 31, 2015. Further, Tier 1 capital ratio was 12.4% compared with 12.5% as of Jul 31, 2015. Total capital ratio was 14.4%, down from 15.0% in the prior-year quarter.

Our Viewpoint

Canadian Imperial delivered a decent performance at a time when banks in Canada are encountering a number of challenges, including a low rate environment, stressed energy sector and a weak economy. Further, the company’s deal to acquire PrivateBancorp, Inc. (NASDAQ:PVTB) is likely to expand its private banking and wealth management capabilities in the U.S.

Slow growth in interest income and limited avenues for earning fee income keep us apprehensive regarding the company’s near-term performance. Also, rising provision for credit losses is a major headwind.

CDN IMPL BK Price, Consensus and EPS Surprise

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Canadian Imperial currently carries a Zacks Rank #3 (Hold).

Performance of Other Canadian Banks

Bank of Montreal’s (TO:BMO) third-quarter fiscal 2016 (ended Jul 31) adjusted earnings of C$1.94 per share compared favorably with C$1.86 earned in the prior-year quarter. Results benefited primarily from robust top-line growth. However, rise in expenses and higher provisions continued to weigh on the results.

Royal Bank of Canada (NYSE:RY) reported third-quarter fiscal 2016 (ended Jul 31) net income of C$2.9 billion ($2.24 billion), up 17% from the prior-year quarter. Growth in net interest income and fee revenues benefited the results. On the downside, a rise in expenses and higher provisions remained major concerns.