The knock on Canadian Imperial Bank of Commerce over the years has been a lack of discipline that led to big missteps. Should Richard Nesbitt becomes chief executive officer one day, as the corner office shuffle Monday indicated that he is now the front-runner to do, that will be the least of the bank's problems.
For shareholders who have endured the ups and many downs of the past few years, that will be reassuring. But is it enough to get CIBC some respect?
Having spent the past few years shrinking its way to stability, CIBC has become so stable it risks putting investors to sleep, and the bank is paying for it. The bank trades at a discount to all its Big Five peers, and to fix that the company needs to find a way to inspire shareholders, not simply reassure them.
Mr. Nesbitt is known as a solid operator with an unstinting eye on costs and returns. As a corollary, he's not known for a warm and fuzzy management style, but then that has never been a prerequisite for running a bank. To be the CEO that CIBC will need when current boss Gerry McCaughey departs, Mr. Nesbitt will have to prove he can do more than keep expenses in line.
To be sure, Mr. McCaughey, 55, doesn't appear to be going anywhere any time soon. That means there's plenty of time for others, chiefly new retail head David Williamson, to build a track record and challenge the notion that Mr. Nesbitt is the dauphin.
Mr. Nesbitt, too, has an opportunity. Thanks to an expanded responsibility for corporate strategy, he can prove himself capable of more than just de-risking.
In the three years since Mr. McCaughey recruited Mr. Nesbitt from TMX Group to become head of CIBC's securities and investment banking arm, there have been no nasty surprises resulting from decisions on his watch. Before Mr. Nesbitt's arrival, there was the entanglement with Enron Corp. that cost the bank $2.4-billion in legal settlements, and the mess left by CIBC's foray into the U.S. credit derivatives market. Largely as a result of that disaster, CIBC's securities and wholesale business lost almost $4-billion in the first half of fiscal 2008.
Mr. Nesbitt's mandate was to find a way to return the investment banking and trading business to profitability, but more importantly to do it in a way that minimized the risks for the parent bank. What's more, he had to do it with the equivalent of one hand tied behind his back. He was given little of CIBC's capital to work with. Mr. McCaughey insisted that the capital tied up in securities left over from the subprime mess come out of the allocation to the investment banking and securities arm.
Not much capital plus not much risk generally equals not much in the way of returns, a conundrum Mr. Nesbitt had to find his way around. He focused on costs - head count has barely budged in his operations since he took over - and margins.
When lending margins widened, CIBC put a big push on reviving long-dormant relationships with many corporate clients. In businesses with margin challenges, such as trading equities, he has instituted a big push toward electronification. Bonds and foreign exchange are said to be next for that treatment.
He has also almost totally revamped management, tearing apart the securities and investment banking business and putting it back together with new leadership in almost all senior roles. The change has not always been to the liking of the rank and file at CIBC's wholesale arm.
But the numbers show it's working. The company is making the same money with a smaller footprint.
In the years before the crash and Mr. Nesbitt's arrival, CIBC's trading book was huge. It regularly had more than $50-billion of securities on its balance sheet. From that it would generate capital markets revenue of about $250-million per quarter. In recent quarters, the trading book has averaged less than half that size and revenues from capital markets have been in line with pre-crash levels. The bank's efficiency ratio is heading in the right direction: down.
It was a similar story of good numbers when Mr. Nesbitt ran TSX Group Inc. He took over as CEO at the end of 2004 and left in early 2008 to join CIBC. In that time, TSX Group's revenue rose 75 per cent. Admittedly, that was a golden age for the TSX, as trading volumes exploded and competition was not yet in full bloom. But to his credit, Mr. Nesbitt held expense gains to 19 per cent. The result was profit rose by almost 2.5 times in his short tenure at the top.
Just before he left, with TSX at a crossroads, he helped negotiate the deal to purchase the Montreal Exchange to create an integrated Canadian markets company, now known as TMX Group. It wasn't cheap, but there was no getting around the fact that without that deal TSX was going to be in trouble.
CIBC is at a similar crossroads. Simply avoiding surprises and cranking out solid numbers is no longer enough. Boring has gone from an attribute to an albatross. If Mr. Nesbitt can help fix that, he will cement his claim to the top job.