CIBC chief executive officer Victor Dodig delivers a speech at the Canadian Club of Canada in Ottawa, Tuesday November 24, 2015.FRED CHARTRAND/The Canadian Press
Eventually, every chief executive officer puts his stamp on the company he runs. Sometimes, it takes years. At Canadian Imperial Bank of Commerce, it's happening apace.
Last June, less than a year after getting the top job, CEO Victor Dodig unveiled his strategic vision. He wanted CIBC to be a small and sturdy North American bank that would strike partnerships with technology giants when necessary – even Apple, the big banks' occasional enemy.
Next came a revamp of the Canadian banking division. Fast-forward eight months, we've got the blockbuster acquisition of PrivateBancorp Inc. for $3.8-billion (U.S.), a major move to cap his strategic pivot. Make no mistake: This is Mr. Dodig's bank now.
The size of the deal is meaningful. Royal Bank of Canada shelled out $5.4-billion to buy Los Angeles-based City National Bank last year, a price tag that sent a rifle shot through Canadian banking because it was the largest purchase by a Big Six bank since before the financial crisis. CIBC's deal, though smaller, is more substantial, relatively speaking, because the lender is less than half as large as RBC by assets.
The acquisition also answers the one question that has dogged Mr. Dodig: How in the world is CIBC going to grow?
Nearly 70 per cent of CIBC's total profit comes from Canadian personal and commercial banking. Last year, 85 per cent of its revenue came from the rip-roaring domestic market. For a bank, that is a frightening amount of exposure to one economy.
That crucial point is getting a little lost in the shock value. Some people on Bay Street felt a bit blindsided by the deal, and the stock fell 2.6 per cent in an otherwise buoyant day for bank stocks. Not that long ago, Mr. Dodig was talking about searching for wealth or asset management deals in the United States. What he finally acquired south of the border is largely a commercial lender – only 20 per cent of revenue at the PrivateBank, as the brand is known, was derived from non-interest income last quarter.
To Mr. Dodig's credit, though, he planted seeds for this transaction. You just had to read between the lines. At CIBC's investor day in October, he raised the value range for potential acquisitions to $2-billion to $4-billion from $1-billion to $2-billion. Then, in January, he suggested that such a deal for a wealth management firm was off the table. Prices were simply too high and those deals wouldn't add deposits. "You can all bring your spreadsheets here, we can run them, it won't make the math work. [Any deal] needs to have a banking orientation to it," he said at a conference.
The problem for Mr. Dodig was that no one knew how to follow his trail of breadcrumbs. If a wealth management deal was on the back burner, that didn't prove that he was about to buy a commercial bank instead. When the first question on a conference call Wednesday was about why he didn't buy a wealth manager, he got a little defensive. It only got more tense from there.
His saving grace is that CIBC appears to have bought a solid asset. There will be grumbling that it overpaid – CIBC acquired PrivateBancorp for 2.2 times its book value – and there are already complaints about adding a business with a lower return on equity. The Chicago bank's ROE is 11.4 per cent, compared with CIBC's at 18 per cent.
These are valid concerns, but Mr. Dodig was right not to feel constrained by them. To understand his decision, you have to go back to that central question: How will CIBC grow? At some point, Mr. Dodig would have to pay up in order to diversify the lender; he chose to do it for a business with built-in growth potential. PrivateBancorp's assets are highly sensitive to interest rates, with 96 per cent of its loans charging variable rates and 30 per cent of its deposits non-interest-bearing. Should the U.S. Federal Reserve Board raise interest rates, the bank will immediately earn better margins.
The alternative was a safer, but less ambitious path: raising dividends and repurchasing shares to boost the stock amid a slow-growth economy. He's already done that, bringing the payout ratio close to its maximum of 50 per cent of earnings – moves that arguably helped to juice the share price before a deal largely paid for in stock. Even after Wednesday's selloff, CIBC's shares are not far from their post-crisis highs.
What matters now is execution. Mr. Dodig promised there will be big cross-selling opportunities between the commercial bank and CIBC's wealth management arm. Whether he can deliver is the ultimate test.
Tim Kiladze