Last July, a group of senior bankers were summoned to a meeting room on the fifth floor of Canadian Imperial Bank of Commerce’s headquarters in downtown Toronto to talk about one of its biggest deals in years.
The room lacked the usual accoutrements of high finance. Instead of polished wood and panoramic views, the walls seemed almost bare. But like many of the rooms where CIBC chief executive officer Gerry McCaughey liked to plot strategy, the emptiness was by design.
The blank walls were, in fact, oversized floor-to-ceiling whiteboards. They were handy tools, since Mr. McCaughey – a hyper-focused banker with a professorial bent – has been known to vault from his chair mid-sentence during a meeting to diagram ideas and scribble down notes.
By the time he called this meeting, though, the writing was already on the wall at CIBC. After years of transforming itself, pruning and culling businesses it considered too risky, the bank needed desperately to find a way to grow. And for its top executive, that really does require a new blueprint.
When Mr. McCaughey took the reins of Canada’s fifth-largest bank in 2005, he was brought in as a cleanup man whose job was to stabilize the business in a time of unprecedented turbulence. Up to that point, the bank had built itself into an ambitious financial giant under the watch of John Hunkin, an investment banker focused more on capital markets than traditional bread-and-butter retail lending. But after a string of costly and embarrassing missteps in the early 2000s – including, most notably, the $2.4-billion cost of a legal settlement concerning Enron Corp.’s massive accounting fraud – Mr. McCaughey was the man called upon to play fixer.
Two years into the job, he hit a major bump: CIBC found itself on the losing end of massive trades involving complicated securities tied to the U.S. housing market. The multibillion-dollar writeoffs hit the bank’s reputation – and the CEO’s. Mr. McCaughey responded by buckling down, systematically changing CIBC’s risk-taking ways and transforming it into a conservative lender fixated on safe, domestic banking.
Analysts have praised him for executing one of the biggest cleanup jobs in Canadian banking. But a new problem has arisen: As CEO, he now needs to find a way to push the bank forward, and keep CIBC from losing ground to its rivals.
“Nothing is free,” says Canaccord Genuity analyst Mario Mendonca. “You can’t reduce risk without there being some consequence. And one of the consequences is they’re not growing. Their revenue growth is below their peers.”
On the table at that meeting last July was a deal to address that weakness: CIBC was looking at buying a 41-per-cent stake in American Century Investments, an asset put up for sale by JPMorgan Chase & Co. It was an enticing deal, because even amid the economic upheaval ravaging the United States, the mutual fund company was a profitable business. The problem with good assets is they never come cheap.
The truth was, however, that CIBC needed a deal – needed to expand by stepping outside the comfort zone Mr. McCaughey has so carefully fenced off for the bank – and everyone in the room knew it. When the bank announced several weeks later that it was buying JPMorgan’s stake for $848-million, it was by no means a blockbuster price tag by industry standards. But for CIBC it was a significant step forward – an acquisition that would help grow the bank’s balance sheet almost immediately.
Now all Mr. McCaughey needs to do is duplicate that feat, several times over.
EXTREME BANK MAKEOVER
The CIBC of today is almost unrecognizable from the one that existed under the erstwhile boss Mr. Hunkin.
In 1996, the bank purchased television ads with a message aimed directly at Wall Street. The commercials, which ran in heavy rotation on CNBC, were a warning shot of sorts, depicting a group of ashen-faced bankers solemnly trudging up the steps of a stately New York financial institution when, out of nowhere, a Hummer speeds past them up the stairs, presumably in the direction of the stock exchange.
“Who are those guys?” one banker asks, admiring the Hummer, that emblem of 1990s excess. “CIBC World Markets,” exclaims the awestruck banker next to him.