Skip to main content

A Canadian Imperial Bank of Commerce sign is seen outside of a branch in Ottawa.© Chris Wattie / Reuters

At first blush, no one should be all that surprised. Victor Dodig, chief executive officer of Canadian Imperial Bank of Commerce, has long stressed that a cross-border deal was in the cards.

Yet CIBC's purchase of Chicago-based PrivateBancorp Inc. is not precisely what investors and analysts expected. Although Mr. Dodig has talked about making an American purchase, his focus was always wealth management. What he bought, for $4.9-billion to boot, is largely a commercial lender. Non-interest income made up only 20 per cent of the target's revenue last quarter.

Asked about that dissonance, Mr. Dodig took pains on Wednesday to stress that this deal is in line with his strategy.

The wealth-management potential

Asked why he was branching away from wealth management, Mr. Dodig turned defensive. "We've always said that whatever we want to invest in will be in the business and wealth-management space," he argued. "This is consistent with what we've communicated."

Broadly speaking, that is true. The CEO wants to build a sturdy North American bank, and the prospect of a cross-border acquisition was always on the table. But he has certainly stressed the wealth-management focus.

What we might be missing about this acquisition, he argued, is that business lending is linked to wealth. "Commercial banking and wealth management really go hand in hand," he said. "We see it in our Atlantic Trust client base," he added, referring to the small U.S. private bank CIBC already owns. "Many of them are entrepreneurs that want to be banked."

His vision, in a nutshell: Lend money to growing mid-market companies, form deep relationships with the management teams, start managing the leaders' money.

Still, there is an element of surprise, although CIBC is not alone in that boat. Before Royal Bank of Canada bought City National for $5.4-billion (U.S.) in 2015, CEO Dave McKay had stressed that he did not want to acquire a U.S. personal and commercial bank.

When asked to justify his change of heart, he, like Mr. Dodig, said the purchase was actually in line with previous comments. He argued that he previously said he was not interested in "mass-market banking through a bricks and mortar model" – City National, a private bank, was in a different class.

Shareholders did not seem to mind the nuance, which is promising for CIBC.

The size is significant. CIBC's CEO promises it will be worth it

When RBC shelled out $5.4-billion, the deal sent a rifle shot through Canadian banking because it was the largest purchase by a Big Six bank since Toronto-Dominion Bank went shopping in the United States precrisis.

CIBC's deal is even bigger than RBC's – relatively speaking. Right before Royal Bank announced its acquisition, its assets totalled $940-billion (Canadian). CIBC's purchase price amounts to $3.8-billion (U.S.), or 70 per cent of RBC's purchase price, but its assets are roughly half of what RBC's were. The acquisition also marks a notable shift in strategy after shying away from major deals under previous CEO Gerry McCaughey. His largest acquisitions were worth about $1-billion.

Mr. Dodig argued that such a splash is necessary. He said he has met with copious CIBC customers since he took over as CEO and "there's a not-insignificant number that are doing more business in the U.S. … If we ignored that fact, we would atrophy over time."

Many are corporate clients who want more than straightforward loans south of the border, but retail clients can also be banked – particularly Canadian snowbirds who need somewhere to store their deposits while spending six months a year in Florida or Arizona or Palm Springs, Calif. "Our ability to now bank our clients on both sides of the border fills a notable gap," Mr. Dodig said.

The big picture also matters. CIBC currently makes 69 per cent of its total profit from Canadian personal and commercial banking. That's a scary statistic, should the domestic market slow. Mr. Dodig flat out said the bank could not rely on dividend growth to win over investors. CIBC "needed to make an investment" to build "a business with a more diversified earnings stream than just relying on the Canadian market," he said.

The outlook for U.S. interest rates is crucial

Ninety-six per cent of PrivateBancorp's loans charge variable rates. Thirty per cent of its deposits are not interest-bearing. Should the Federal Reserve hike rates, the PrivateBank, as it is known, will immediately earn better loan margins, because it has a cheap funding source (deposits) and its lending rate will automatically jump. A hike of one percentage point boosts profit by $37-million. (Both RBC, through City National, and TD will benefit in a similar fashion.)

The trouble is, no one knows how the Fed will act, especially after Britain's vote to leave the European Union. After mentioning how beneficial the rate sensitivity could be, Mr. Dodig tried to tame his optimism by noting that PrivateBancorp has already been successful in a low-rate environment. "We are not building for what the Fed is going to do," he said.

Report an error

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 18/03/24 3:49pm EDT.

SymbolName% changeLast
CM-N
Canadian Imperial Bank of Commerce
+0.73%49.6
CM-T
Canadian Imperial Bank of Commerce
+0.72%67.17
M-N
Macy's Inc
+0.24%21.24
RY-N
Royal Bank of Canada
-0.07%99.27
RY-T
Royal Bank of Canada
-0.22%134.34
Y-T
Yellow Pages Ltd
0%10

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe