TORONTO — Canadian Imperial Bank of Commerce reported a 47 per cent jump in profits to $640 million in the third quarter as retail operations surged and credit losses fell, but the bank’s CEO says economic and regulatory uncertainty are reasons for caution.
“The investments we are making in our retail and wholesale businesses, together with our capital strength, position CIBC well for the future,” CIBC chief executive Gerry McCaughey told analysts on a conference call.
“Given the uncertainty related to the economic recovery and the regulatory environment, we will continue to grow our businesses cautiously while maintaining balance sheet strength and expense discipline.”
The Toronto-based bank (TSX:CM) reported Wednesday that its profits were equal to $1.53 per share of net income, compared with $1.02 per share or $434 million in the same period of 2009.
Excluding one-time items, the bank’s earnings were equal to $1.66 per share, beating consensus analyst expectations of $1.53 per share, according to Thomson Reuters.
Revenue held steady at $2.85 billion versus $2.86 billion, said CIBC, a major retail bank focused on mortgages, credit cards and other financial services for consumers.
CIBC’s retail banking operations across Canada booked a $599-million profit in the quarter, up 44 per cent from $416 million a year earlier.
The bank’s provisions for credit losses fell 60 per cent to $221 million from $547 million last year as the economy performed better this summer than a year earlier. At that time, the recovery from the 2008-2009 recession was just beginning.
Provisions for credit losses are the amount of money banks set aside to cover bad loans and generally fall as the economy grows and consumers and businesses find it easier to pay back their loans and other debt.
CIBC’s results were better than those of rival Bank of Montreal, which failed to meet analyst expectations in its financial report Tuesday, due mostly to lower earnings from investment banking and wholesale lending.
Royal Bank of Canada and National Bank are slated to report results Thursday and they could also show signs on their balance sheets of a weakening Canadian economy. Canada’s largest bank, the Royal, is also a major retail bank in the U.S. southeast, and has been squeezed by the soft housing market and industry in that region.
“This quarter is really going to reset expectations in terms of what we can assume from performance for the Canadian banks,” said Craig Fehr, a financial services analyst with Edward Jones in St. Louis in a phone interview.
“They are tied to the economic cycle, and so while Canada seems to be doing reasonably well, there are some pockets of weakness in the (U.S.), and I think we’re starting to see some of those expectations get tempered in because of the results this quarter.”
Recent economic data from the United States and Canada have indicated important segments of their economies have slowed in recent months, raising fears that the economic recovery will not only slow but falter.
The banking sector is also grappling with international discussions by policymakers about what measures to take to prevent a repeat of the type of credit crisis that sparked the 2008-09 recession, forcing the United States and several European countries to bail out major banks and insurance companies.
Canada’s banking system was relatively unscathed by the turmoil, bolstered by a conservative regulatory regime and solid domestic operations. However, the banks’ earnings this year have shown a marked improvement over last year’s.
On the CIBC conference call one analyst asked McCaughey whether the bank’s strengthened results and better capital position would mean that investors could expect a boosted dividend in the near future. In the third quarter the bank held its dividend steady at 87 cents.
“We do not look at capital as the first . . . factor. We do look at the payout ratio as the first . . . factor,” he responded.
“I would say that it will be under consideration and discussion in 2011.”
In its financial report, CIBC said its wholesale banking division booked a $25 million profit, sliding from $90 million a year ago “against the backdrop of a challenging environment and low levels of client activity across the industry.”
Specifically, the bank cited losses in several areas, including its structured credit business and lower revenue from capital markets and its U.S. real estate finance portfolio.
Capital markets revenue alone was down $95 million to $241 million, primarily due to lower bond and global derivatives revenue, the bank said.
Analysts have anticipated weakness in capital markets trading revenues at the banks due to economic uncertainty in Europe which has eroded confidence in stock markets and ultimately hurt trading activity.
“The performance of wholesale banking has exhibited the consistency and risk control the business set out to achieve with its client-focused strategy,” McCaughey told analysts.
“Significant investments in technology combined with new and expanded client relationships are positioning our wholesale business for growth as markets stabilize and the global economic recovery takes hold.”
CIBC has more than 41,000 employees across its operations including its retail markets, wholesale banking and financial services divisions, which serve more than 11 million individual, small business, commercial and corporate customers.
Shares of CIBC gained 42 cents to $67.23 on the Toronto Stock Exchange.