Canadian Imperial Bank of Commerce is edging back into the United States as the bank hunts for growth, having retreated to Canada several years ago following a series of costly missteps south of the border.
CIBC chief executive officer Gerry McCaughey told shareholders at the bank’s annual meeting that the recent purchase of a wealth management firm based in Atlanta serves as a blueprint for CIBC’s revamped U.S. strategy.
Two weeks ago, the bank spent $210-million to buy Atlantic Trust Private Wealth Management, a company that manages about $20-billion (U.S.) of assets and caters to the investment needs of high-end clients. Though small in size and dollar value, the deal represents the kind of acquisitions the bank is looking for in the United States.
Rather than make big bets in the U.S. that come with sizable risk, the bank is looking for smaller deals that focus on wealth management and asset management, which are less volatile than investment banking.
The Atlantic Trust deal came after the bank purchased a 41-per-cent equity interest in U.S. asset manager American Century Investments for $848-million in 2011.
“These acquisitions are aligned with our strategy and risk appetite and are indicative of the type of investments we look forward to making in the future,” Mr. McCaughey said.
The bank’s entry into the U.S. private wealth market comes after CIBC retreated to Canada in recent years, in a bid to return to its core operations and to leave behind several costly mistakes south of the border. Among them, CIBC took a $2.4-billion hit to settle a lawsuit over its dealings with failed energy trader Enron Corp. It also sold off the bulk of its capital markets business to Oppenheimer Holdings Inc. after suffering deep losses from subprime lending during the U.S. credit crisis.
Mr. McCaughey has spent the past several years shifting CIBC’s strategy, moving it away from riskier assets such as structured debt and investment banking, and toward lower-risk areas such as fee-based businesses. Wealth management is considered one of those areas, since it makes money by charging clients fees, but doesn’t tie up the bank’s own capital.
Even though CIBC has worked hard to strip risk out of its operations, some analysts believe CIBC’s new strategy of being so heavily weighted to Canada alone may itself prove to be a risky play, leaving the bank little choice but to expand outside the country.
CIBC “has the highest exposure to the domestic Canadian market among the Big Five banks,” Stefan Nedialkov, an analyst with Citigroup said in a recent research note.
In particular, the bank has the most exposure to the Canadian mortgage market, with 70 per cent of its loan book coming from residential real estate, he said. “Such a high exposure could become a liability should Canada’s housing market cool down more than expected, or if unemployment rises meaningfully.”
Several Canadian banks have been looking to expand in wealth management through acquisitions in recent years, including Royal Bank of Canada and Bank of Montreal. CIBC has been among the most aggressive, also buying the banking assets of McLean Budden Ltd., a Canadian firm that also caters to high-end clients, in August.
Mr. McCaughey said the Atlantic Trust deal in the U.S. gives CIBC “a strong growth platform in the U.S. high-net-worth segment,” and signalled more deals of that size could be expected.
However, some analysts are concerned that the bank’s expansion into the asset management business in the U.S. will result in it returning to investment banking activities in the U.S., which were at the root of the bank’s previous problems.
“This is likely to raise some concern surrounding a broader foray into the U.S.,” Barclays Capital analysts John Aiken said in a research note after the Atlantic Trust deal. “We like the high net worth wealth management segment, but questions may arise about whether or not this could lead to a back-door re-entry into a broader full service brokerage at some point down the road, which got CIBC into trouble in the past.”
Mr. McCaughey told the annual meeting the bank is not deviating from its goal of being a low-risk financial institution. “We have the right strategy for our time,” he told the annual meeting. “It is a strategy that will guide us to growth and success, even in an uncertain world.”
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