This big bank taps cannabis industry growth

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Cannabis-Connected

While some of Canada’s banks were initially reluctant to participate in cannabis company financing, this institution has actively helped to facilitate large industry deals. At the same time, a key U.S. acquisition lets the bank benefit from the strong U.S. economy. In addition, rising interest rates and strong demand for business loans have boosted its revenue and earning. The stock trades at just 8.2 times the forecast earnings and offers a high 4.9% yield.


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CANADIAN IMPERIAL BANK OF COMMERCE, $112.03, symbol CM on Toronto (Shares outstanding: 442.9 million; Market cap: $49.1 billion; www.cibc.com) is the smallest of Canada’s big five banks, with assets of $597.1 billion as of October 31, 2018.

Most of Canada’s big banks have avoided lending funds to companies in the cannabis industry. That’s mainly due to fears that those loans could hurt their U.S. operations, where cannabis is still a prohibited substance at the federal level.

However, in September 2018, CIBC and other investment bankers helped Canopy Rivers Inc., symbol RIV on the Venture Exchange, become a public company. That firm is the investment division of Canadian marijuana grower Canopy Growth, symbol WEED on Toronto.

In January 2019, CIBC participated in a syndicate (including Bank of Montreal) that loaned $80 million to PharmHouse Inc., a joint venture 49% owned by Canopy Rivers.

PharmHouse will use the funds to buy a greenhouse facility in Leamington, Ontario, that it will use to grow cannabis.

To date, this is the largest debt financing transaction involving major Canadian banks in the cannabis industry. It’s likely CIBC will pursue more deals in the cannabis sector, but will cut its risk by focusing on well-established growers like Canopy.

Meantime, CIBC continues to benefit from its June 2017 acquisition of Chicago-based PrivateBancorp Inc. for $6.6 billion in cash and stock. That firm mainly lends to small and mid-sized businesses.

If you exclude costs to integrate the acquisition, the bank’s earnings for the three months ended October 31, 2018, rose 8.0%, to $1.36 billion from $1.26 billion a year earlier. Due to more shares outstanding, increased earnings per share increased 6.8%, to $3.00 from $2.81.

Earnings from Canadian retail banking (49% of the total) jumped 21.2% due to higher interest rates and fee income. The Canadian commercial banking and wealth management business (24%) reported 16.0% higher earnings. That gain is due to strong demand for business loans and an increase in the unit’s assets under management. CIBC’s U.S. business (10%) saw its earnings rise 22.4% due to the PrivateBancorp acquisition. As well, earnings from securities trading (17%) rose 5.0% on higher trading volumes.

Overall revenue in the quarter increased 4.3%, to $4.45 billion from $4.23 billion a year earlier. However, loan-loss provisions rose 15.3%, to $264 million from $229 million. That’s mainly due to additional provisions at CIBC’s Caribbean operations after the Barbados government said it would restructure its debt held by CIBC and other foreign lenders.

The bank now expects its earnings will rise about 5% in fiscal 2019, compared to its earlier forecast for a 5% to 10% gain. Based on its new estimate, CIBC will probably earn $12.82 a share in 2019. The stock trades at just 8.2 times that forecast. The $5.44 dividend yields a high 4.9%.

CIBC is a buy.

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