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CIBC CEO Gerry McCaughey is seen here at the headquarters in Toronto. (Tim Fraser/Tim Fraser For The Globe and Mail)
CIBC CEO Gerry McCaughey is seen here at the headquarters in Toronto. (Tim Fraser/Tim Fraser For The Globe and Mail)

CIBC takes a cautious path to growth Add to ...

The bank that was once considered a minefield for investors is now starting to see the accolades roll in. This year, CIBC was ranked the third-strongest bank in the world, and the strongest of Canada’s big banks, on a list compiled by Bloomberg Markets that scrutinized the capital levels of each financial institution. Now, more than 15 years after CIBC drove a Hummer through Wall Street in a TV commercial, the bank now advertises how safe and responsible it is.

“It’s a very different bank; [McCaughey] has dramatically transformed the risk appetite,” Mr. Routledge says. But, he adds: “With every blessing comes a curse.”

CIBC’s decision to envelop itself in the relative safety of Canadian consumer banking has left it more exposed to highly leveraged consumers than most of Canada’s other major lenders. That means the bulk of CIBC’s business is focused on an area that isn’t going likely to grow any time soon. In the process of its dramatic makeover, CIBC may have traded one risk for another.

“The curse is that they are 50 per cent weighted towards the [Canadian] household, at a time when the household is at an all-time high of being levered,” Mr. Routledge says.

“So they are sitting there with a de-risked bank, with a very profitable model, but half their balance sheet is in a low-growth asset class – that’s their fundamental risk.”

It’s something that Mr. McCaughey knows all too well. So in the absence of other deals like the American Century acquisition, he must find other ways to position the bank for the future.

A HIGH-CLASS PROBLEM

When CIBC announced this week that it was preparing to shut down its mortgage broker business, FirstLine, after failing to find a buyer, the move was symptomatic of the bank’s new mindset.

For years, FirstLine was one of the largest mortgage broker operations in the country, channelling billions of dollars of new loans into CIBC from the army of salespeople it employed. But over time, McCaughey grew to dislike the business. The problem with using brokers to sell mortgages is that you had to pay them a hefty commission. So even though the bank was originating more new loans than some of its peers, it was making less money on each.

CIBC’s decision to shut down FirstLine on Wednesday, and move to selling mortgages entirely through its branches, was proof of how the bank was willing to walk away from a business, even if it hurts growth. Though losing FirstLine will most definitely lead to a drop in sales, each new mortgage done through a branch should command a better margin, while also allowing the bank to sell customers on other products, like credit cards or chequing accounts.

But that and other moves – such as the bank’s decision to spend billions buying back preferred shares – speak to another concern: Amid its ultra-conservative strategy, CIBC is now awash in capital and has few places to put it where it can reap a good return. It is an enviable position to be in, but the bank now faces a “high-class problem” of how to adequately deploy its funds, analyst John Reucassel at BMO Nesbitt Burns said in a research note to clients.

While lenders in Europe and the U.S. fret about bolstering their capital reserves to meet new global regulations under the Basel III agreement, CIBC is already comfortably above the new threshold. It can afford to expend and spend money on growth – but how?

The logical place to look is acquisitions. Though not known as a deal maker, Mr. McCaughey wants to do more transactions like the American Century purchase. Wealth management in particular is an area the bank would like to explore, since the assets – which involve managing money for high-net-worth clients – don’t present much risk to the bank’s own balance sheet.

But investors should not expect any blockbuster deals. Mr. McCaughey says he won’t tear up his low-risk strategy just to find growth.

“A large transformational transaction is not consistent with the first principle of being a lower-risk bank,” he says, thumping the table with his hand to press the point. “Therefore you should not expect one.”

That, Mr. McCaughey explains, is banking in today’s world. Sure it’s a lot less exciting, but look where risk-taking got CIBC. Boring is precisely the way he likes it.

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