CANADIAN IMPERIAL BANK OF COMMERCE $61 (Toronto symbol CM; Conservative Growth Portfolio, Finance sector; Shares outstanding: 382.7 million; Market cap: $23.3 billion; Price-to-sales ratio: 1.7; SI Rating: Above Average) is Canada’s fifth-largest bank, with total assets of $335.9 billion.
In August 2005, CIBC set aside roughly $3 billion to settle a class-action lawsuit related to its involvement with failed energy company Enron Corp. Last year, it recorded a $486-million tax benefit related to this. The Canada Revenue Agency is now challenging this deduction. If CIBC wins, it will recognize a further tax gain of $214 million. If it loses, it will have to pay $826 million.
To put these figures in context, CIBC’s earnings jumped to $434 million, or $1.02 a share in the three months ended July 31, 2009. That’s much higher than the $71 million, or $0.11 a share, it earned a year earlier. But if you exclude unusual items, such as writedowns of securities, earnings per share actually fell 21.9%, to $1.29 from $1.65.
The earnings drop was largely caused by higher credit losses, particularly in CIBC’s $11.1-billion credit-card portfolio. The bank set aside $547 million to cover bad loans during the quarter, up from $203 million.
Revenue rose 50.0%, to $2.9 billion from $1.9 billion, on gains from the trading of securities backed by U.S. mortgages and other risky loans. CIBC is winding down these activities as part of its plan to focus on its main retail-banking business.
CIBC will probably earn $5.81 a share this year, and the stock trades at 10.5 times that figure. The $3.48 dividend still seems safe, and yields 5.7%.
CIBC is a buy.
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