Can CIBC keep up with the other Big Banks?

CM - CIBCWhen it comes to the banks, CIBC doesn’t come to mind first. In fact, CIBC is the 5th largest Canadian Bank by market capitalization. The Canadian dividend aristocrat is currently trading near its 52-week range like many of the top 5 Canadian Big Banks.

Finding the best Canadian bank to buy at any point in time is often the challenge of many investors. Let’s see how CM does and what we can expect.

CIBC Business Summary

The strategy at CIBCTSE:CMNYSE:CM is to build a strong, innovative, relationship-oriented bank. CIBC focuses on three primary business units:

  • Retail and Business Banking,
  • Wealth Management and
  • Capital Markets

The company employs more than 43,000 employees providing a full range of financial products and services to 11 million individual, small business, commercial, corporate and institutional clients in Canada, the U.S.and around the world.

CIBC Revenue

CIBC had excellent results for the fiscal year 2016 as you can judge from the below metrics.

CM - Summary
Source: CM FY16Q4 Financial Report

CET1 Ratio represents the Common Equity Tier 1 banking requirements for equity ownership as a way to measure the ability of the bank to absorb unexpected losses. It was established by the Basel Committee to monitor the capital equity of banks. By 2019, banks are expected to have a minimum of 4.50% ratio. CIBC is more than meeting the minimum requirements at the time of writing based on their most recent quarterly revenue update.

It’s nice to see the net income growth came from all three of the segments CIBC focuses on. The primary sector continues to grow while the other two smaller segments experience accelerated growth.

CM - Net Income
Source: CM FY16Q4 Financial Report

Mortgage Loan Exposure

As outlined below, CIBC is monitoring its risk exposure to mortgages through the use of the Beacon score managed by Equifax and the Load-to-Value (LTV) distribution. What it highlights is that if employment were to stay as is, their exposure would be minimal. However, only a stress test could assess how many mortgage holders would see a reduced score, and it’s not clear what impact it would have. It’s important to understand that a Beacon score only represents your historical loan payments based on your current employment and not your ability to make payments when in a dire situation.

CM - Mortgages
Source: CM FY16Q4 Financial Report

FinTech Investment

Their website is fresh and appealing. A young audience can connect with the website design and layout. With more users online, it’s important to keep an online presence fresh and up-to-date. RBC just did a refresh, and Scotia Bank’s refresh is now a few years old.

Their involvement in FinTech is behind from my point of view when I compare them with other banks. For example, CIBC’s Investor’s Edge discount broker barely registers in reports around best Canadian discount brokers. However, since their money is in loans, they made a partnerships with Borrowell to deliver ‘one-click” online loans. It takes time to stand up and integrate new financial technologies but it’s a step in the right direction. Time will tell if they can catchup. Businesses such as Questrade and Tangerine pioneered online financial services and continue to have good setup – especially when it comes to the friction of account creation.

CIBC Dividend Summary

CIBC is a Canadian Dividend Aristocrats with 5 consecutive years of dividend increases. Not that impressive but it’s a start and the minimum for the Canadian list. All big banks in Canada put their dividend increases on hold in 2009 after the financial crisis.

CM - Dividend History
Source: 2016 Q4 Fact Sheet

The growth over the past 10 years is as follow.

  • 3 year average of 5.33%
  • 5 year average of 4.32%
  • 10 year average of 4.80%

I like to look at the growth of dividends against the EPS has it shows if the earnings from the company are keeping up with the dividends. If it’s not, then it’s a warning sign to look further into that. CIBC appears to be diligent in their dividend increases as it keeps up with the earnings. Considering they increase their dividends multiple times a year, it highlights confidence in their forecasting abilities.

CM - Dividend vs EPS
Source: Financial Reports and Website

Aside from 2008 and 2009, the dividend payout ratio is pretty consistent. Earnings are feeding the dividend increases and that’s what we want to see as investors. Below is the average over a 3, 5 and 10 year span.

  • 3 year average of 44.84%
  • 5 year average of 45.48%
  • 10 year average of 49.01%

Investment Philosophy #1: BUSINESS QUALITY

It’s a Canadian bank – is there more to say on the business quality front? International exposure is minimal compared with the other big banks and its footprint is across Canada unlike National Bank (TSE:NA) with a heavy market in the province of Quebec.

Canadian banking regulation and its ability to compete with the big banks make CIBC a big player in the Canadian banking sector. There are a couple of headwinds with respect to oil and housing that could impact their earnings but they are preparing themselves and monitoring as you can see in the graph above on residential mortgage risks.

Here is what a strong business can do for your money. If you had invested $1,000 in CIBC 10 years ago, it would be worth $3,432 for a 13.57% compound annual growth rate.

CM - $1,000 Growth
Source: Dividends from Financial Reports and stock price from Google Finance.

Investing Opportunity Score: 65%

Based on my Opportunity Score formula, CIBCTSE:CMNYSE:CM   has a score of 65% (the higher the better) for being an investing opportunity. Above 60% is a good range to pay attention to an opportunity. Anything around 80% will have a short window of opportunity unless the stock got beaten down.

CIBC stock has lagged behind TD TSE:TDNYSE:TD   and RY TSE:RYNYSE:RY   and it’s not clear CIBC can keep up with the opportunities the top 2 banks have with their US exposure.

Do you want to find out where the competitors stack up against CIBC? There are 25 stocks in the financial sector to be compared. Subscribe to the Dividend Performance List over at Dividend Snapshot and easily compare many key stock data points before making your next investment.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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