Take Profit at Canadian Imperial Bank (NYSE:CM)

Canadian Imperial Bank of Commerce Overview

It’s been a little over six months since I wrote that I would buy the Canadian Imperial Bank of Commerce (New York Stock Exchange: CME), referred to below as “CIBC” before their next earnings announcement. The stocks returned about 34.7% versus a gain of about 15% for the S&P 500, so I’m very happy with the results. I thought I’d check the name again after the recent earnings announcement to see if the elements that attracted me to this investment still hold. Additionally, a stock trading at $50.60 is, by definition, much riskier than the same stock when it’s trading at $38.60, so I think a review is warranted. It may be a great investment at $38 but a terrible investment at $51.

I’m going to get straight to the point because I know my writing can be a bit daunting. Obviously the rising stock price has been good for me, but I think someone with new capital to deploy should avoid this stock compared to risk-free alternatives. Granted, the shareholder will receive a little more cash than the Treasury note holder, but the risk they take on in doing so is too great in my view. For example, Canada’s financial regulator seems intent on pushing Canadian banks to adopt Basel IV much sooner than peer countries, and if implemented, lending should decline dramatically. There are also a myriad of risks associated with a debt-laden economy such as the Great White North heading toward a recession. I may be getting a little less money for my troubles, but I like my sleep, and I think the “sleep at night” trade here is to sell CIBC and buy 10-year Treasuries.

Financial snapshot from CIBC

In my previous article on this name, I pointed out the fact that revenues were trending higher, and were likely to continue to do so until acted upon by a more impactful trend, like the massive Canadian recession, for example. Fortunately, the recession has not yet set in, and we see that in the just-reported quarter, revenue was up almost 8%, and net income of $1.7 billion was up 6%. I thought the dividend was well covered, and nothing in the latest report changed my view on that score. I would be happy to purchase more of this work at the right price.

It’s not all moving bluebirds and lemon drops in CIBC land, though, as the provision for credit losses is up nearly 17% from a year ago. This may be a harbinger of the recession I mentioned earlier.

Risks to the bullish thesis

I believe there are two main risks associated with this business, one regulatory and one economic.

In my previous article, I mentioned OSFI, which in my opinion is the only institution that Canadian banks really fear. It is the Office of the Superintendent of Financial Institutions, with a mandate to regulate banks in order to protect consumers, often from themselves. In my previous work with CIBC Bank, I reported on a conversation I had with a representative of the regulator, who told me that OSFI would not allow mortgages to be amortized for an extended period.

The regulator has become relevant again, because it appears to be pushing Canadian banks to follow the accelerated Basel IV schedule. If this is implemented it will significantly impact the level of lending that Canadian banks can engage in. If implemented according to this timetable, banks will need to reduce lending by the equivalent of about 9% of Canadian nominal GDP, which, as Young says, is “extremely difficult.” meat balls.”

Nothing has been finalized yet, but if it does, CIBC’s loan growth will inevitably slow. Finally, I wouldn’t be able to look myself in the mirror if I didn’t point out that zero of the analysts covering this company mentioned this on the last conference call. I think that’s why you guys are reading Seeking Alpha.

The second risk relates to the Canadian economy, which affects the mortgage book for obvious reasons. I’m not optimistic about the health of the economy in the frozen wastelands, and I remain concerned by the fact that “total household credit liabilities” have grown at a compound annual growth rate of about 5% over the past decade, while the value of “residential mortgage” debt has risen. At a compound annual growth rate of approximately 6.27%. Canada is a debt-fueled economy, and this cannot continue forever for obvious reasons.

Additionally, I think it’s worth pointing out that residential real estate prices in Canada peaked in early 2022 and have generally been declining since then. This is worrying because falling residential property prices may keep buyers on the sidelines. In addition, it has put many Canadian mortgage holders in a position where they face negative equity, which in my opinion will have detrimental effects on the overall economy. Finally, the Bank of Canada has been more hawkish than expected just a few months ago, and even if interest rates fall by 25 basis points on June 5th, the impact will be minimal in my view.

CM Stock vs Treasury

I’ve written it before, and I’ll no doubt write it again. In my view, we are not seeking “returns,” we are seeing “risk-adjusted returns.” Given this perspective, I want to measure all of my investments against the lowest-risk investment available to me: 10-year Treasury bonds. I want to compare the benefits of a CIBC investment to the cash I would receive from a 10-year bond. The reason I wanted to do this was to see if CIBC was paying me enough of a premium on the 10-year Treasury bond to compensate for the risk I just wrote about. Before getting into the discussion, I’ll point out that the dividend yield is currently 5.63%, or about 15% lower than it was when I last reviewed this name. In comparison, the 10-year Treasury note is currently yielding 4.47%, 116 basis points, or 20% below CIBC’s current dividend yield. Is this profit return sufficient to compensate for the risks of investing in this project?

Typically, to answer this question, I make two comparisons: a no-growth review, and a review based on the idea that the company continues to grow its earnings at the same rate it did over the past decade. The problem here, of course, is that profits today are actually lower than they were a decade ago. This suggests to me that the no-growth scenario is more plausible. Feel free to disagree and leave balanced and reasonable suggestions in the comments section below.

So, if we assume that dividends remain flat over the next decade, shareholders would receive an additional 26% cash from owning the stock, or about $60 per year for every 100 shares of stock.

In my view, that’s not enough compensation for people who are just coming into this investment today. I believe the risks far outweigh the cash flows, and I believe there is a good opportunity for superior capital gains from the treasury.