TSX Commentary

CIBC (CM) – $70.00 – Q1/F10 Summary
Sell, Intrinsic Value Estimate: $69.00
Veritas states that Q1 results were a step in the right direction for CIBC, with the bank taking steps towards delivering on the operating and credit recovery that Veritas consideres already priced into the stock at $70. Reported earnings were $652M [compared to $644M in Q4-F09], and adjusted earnings of $654M were down 1.7% against adjusted earnings a year ago though up 13.5% against Q4. One-time items this quarter netted to between $2M and $20M, but the gross one-time items were material and necessarily complex – gains on improvements in sub-prime valuations and monoline spreads, further complicated by steps taken by the Commerce to unwind its nettlesome sub-prime and non-sub-prime exposures. The case for caution on this name is nevertheless compelling. Veritas remains concerned about the potential performance of the structured credit run off book during a[nother] downturn. Quarter-in, quarter-out through the recovery, the $13B CLO portfolio and its underlying components continue to migrate while the aftershocks of the credit crunch – such as potential litigation from the Lehman estate – and the aftershocks of Enron continue to reverberate at Commerce Court. Veritas concludes that CIBC’s first quarter was positive in the sense that it was the second positive loan loss quarter in a row, the retail business may have bottomed out, and CIBC World Markets continues to generate above expectation earnings. Investors must decide, however, whether CIBC’s P:E discount to peers compensates for the following risks: the structured credit overhang, potential for capital markets earnings normalization, credit risk on cards and a few high-risk, high yield loan portfolios, and a few sharp objects still in its path.