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Canadian Imperial Bank of Commerce CM-T signalled that an economic downturn could temper growth in 2023, after rising loan loss provisions weighed on first-quarter profit even as it beat analyst expectations.

CIBC launched bank earnings season on Friday, providing a glimpse into the trends that the rest of the Big Six lenders may face when they release first-quarter earnings next week. While the lender topped analyst estimates, it posted slightly lower profit from a year earlier as ballooning borrowing costs cooled loan growth and the bank set aside more money for loans that could turn sour during a downturn.

To cushion the blow of potential sour loans, CIBC raised its provisions for credit losses – the funds banks set aside to cover loans that may default – to $295-million from $75-million a year earlier, but the increase was lower than analysts anticipated.

“While pockets of strength exist, there are growing uncertainties driven by geopolitical tensions and persistent inflationary and interest rate pressures,” chief executive officer Victor Dodig said during a conference call with analysts. “This will have an impact on economic growth and on client activity in the near-term.”

Adjusted to exclude certain items, including a provision for a lawsuit with a New York hedge fund, the bank said profit fell 3 per cent from the same period a year earlier to $1.8-billion, or $1.94 per share. That beat the $1.73 per share analysts expected, according to Refinitiv.

Capital markets fuelled the earnings beat. Profit surged 13 per cent to $612-million as higher interest rates boosted bonds and other fixed-income trading in its global markets and direct financial services businesses. While the bank expects that growth to moderate slightly in the coming quarters as central banks pause hikes, it said that mergers and acquisitions activity should recover from its dip amid last year’s market volatility.

The bank also benefited from continued loan demand from businesses. The Canadian commercial and wealth management division generated $469-million of profit, up a slight 2 per cent as higher revenue and lower expenses were offset by bigger loan loss provisions. Commercial loan balances increased by 14 per cent from a year earlier, but that growth slowed from the previous quarter as rising costs weighed on businesses.

CIBC’s commercial loan book swelled last year as supply chain disruptions and strained inventory boosted demand. That growth edged lower this quarter as entrepreneurs become more tentative, according to CIBC’s head of Canadian banking Jon Hountalas. He added that amid a tighter business environment, CIBC will be more conservative when lending to businesses and expects loan growth to land in the mid-single-digit range.

“We’re going to support our clients, we know them well, they’ve been through our due diligence, and we know how they operate,” Mr. Hountalas said in a conference call with analysts.

“When we look at new clients, with the uncertainty out there, we’re just being a bit more careful.”

Profit in the Canadian personal and small business banking division dropped 14 per cent from a year earlier to $589-million as loan loss provisions increased and loan balances grew 8 per cent, but fell from a 10-per-cent bump in the fourth quarter. Analysts expect mortgage growth across the banks to edge down to low- to mid-single digit year-over-year growth.

Rising rates have been a double-edged sword for the banks over the past year. On one hand, higher borrowing costs boost net interest margins – the difference between the interest that banks pay on deposits and charge on loans. But higher rates also cause customers to rein in spending.

Even as fewer people reach for credit products this year, banks can charge wider spreads as loans come up for renewal, bolstering margins.

“While most or all of the interest rate increases maybe behind us, we are currently seeing significantly higher rates prevailing,” chief financial officer Hratch Panossian said in an interview.

Expenses ticked higher to $4.5-billion, which the bank said was driven by higher compensation for staff. CIBC also attributed much of its increased costs to investments in building its profile with the mass affluent market, as well as its direct financial services division, which includes digital bank Simplii Financial, do-it-yourself investing platform Investor’s Edge and a service that offers digital global money transfer, foreign currency conversion and international student payments. It expects these areas to continue to grow in the year ahead.

The bank’s earnings were affected by a large, one-time item that it removed from its adjusted results. CIBC’s net income before removing unusual costs fell 77 per cent to $432-million or 39 cents per share in the quarter, largely because of a previously announced legal provision of $1.17-billion after a U.S. court found the bank liable for losses incurred by a New York hedge fund in debt deals related to the 2008 U.S. housing crisis.

Last week, the lender said that it agreed to pay US$770-million to Cerberus Capital Management LP, less than the amount it had set aside. CIBC said that the difference will be reflected in the bank’s second-quarter financial results.

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