Canadian Imperial Bank of Commerce slashed its earnings forecast for the current fiscal year and now expects little-to-no profit growth in 2019, owing to the country’s cooling housing market and and the cost of technology investments.
The new profit outlook marks a reversal from the optimism expressed only six months ago. When the fiscal year started in November, CIBC projected annual earnings-per-share growth of 5 per cent to 10 per cent. Six months later, chief executive Victor Dodig has changed his tone and now expects the bank’s earnings-per-share growth to be flat this year over 2018.
The updated forecast was announced Wednesday when CIBC reported its second-quarter earnings. The bank made $1.3-billion from February to May, a 1.9-per-cent gain over the same period in 2018, but after adjusting for one-time items, CIBC’s profit has been flat for five straight quarters.
The new outlook presents a gut check for investors who have bought into Mr. Dodig’s vision to invest in technology that will modernize the bank and to stop chasing short-term profit growth. Instead, CIBC executives talk about deepening client relationships.
CIBC’s shares fell 4.9 per cent Wednesday to close at $107.21, representing more than $2-billion in lost market capitalization, while the share-price movements of rival banks slipped.
“The market conditions have changed. Housing is down. We’ve seen somewhat more muted growth generally on the consumer side,” chief financial officer Kevin Glass said in an interview.
While mortgage growth has been slowing for years across the Canadian banking sector after a decade of ultralow rates, CIBC is now experiencing a sudden pullback. Residential mortgage lending fell 0.9 per cent from the year prior, and the change has an outsized impact on CIBC because the vast majority of its earnings come from Canadian personal banking.
CIBC is also vulnerable in the current housing environment because it focused its residential real estate lending on large urban markets in recent years – particularly the Greater Toronto Area and Greater Vancouver. These two regions are some of the hardest hit now that there are stricter rules for borrowers trying to qualify for mortgages.
A clampdown on foreign buyers, through measures such as a foreign-buyers tax, has also hit these markets. Home sales in the Vancouver region fell to a 24-year low in April, according the Real Estate Board of Greater Vancouver, and prices are off 8.5 per cent over the past year.
Although there is still mortgage growth in other areas of the country, Christina Kramer, CIBC’s head of personal and small-business banking for Canada, said much of it comes from independent mortgage brokers who compete fiercely on price.
“We won’t change course to chase accelerated mortgage growth,” Ms. Kramer said on a conference call. “We’re not pursuing mortgages at any cost.”
Instead, the bank is focused on clients who have more than one of its products, such as a chequing account and a mortgage, because they tend to be more loyal.
To support its shift to deeper client relationships, CIBC is retooling its branches to turn them into advice centres, rather than having tellers focus on one-off transactions. The bank is also spending heavily to build out its mobile banking services, so that they can handle day-to-day transactions with ease.
At the same time, CIBC is spending to enhance its technology infrastructure, which serves as the plumbing for its banking business. This includes accelerating a shift to cloud-based data servers and automating back-office functions. And like all of its rivals, CIBC must continue to install increasing cybersecurity measures and anti-money-laundering controls.
Because of these costs, CIBC now expects expenses to increase by 3 per cent to 4 per cent for the foreseeable future. That the bank must spend to retool isn’t a surprise, Eight Capital analyst Steve Theriault wrote in a note to clients. “We are nonetheless surprised that the outlook has changed so quickly following a period where the bank did an excellent job repurposing its expense base.”
As part of its long-term plan, CIBC has tried to shift its earnings mix away from Canadian households, particularly by investing in wealth management and capital markets in the United States. Not long ago, the U.S. contributed 4 per cent of the bank’s profit. It now delivers between 15 per cent and 18 per cent of earnings.
Much of the recent growth comes from buying Chicago-based PrivateBancorp for US$4.9-billion in 2017. This business, now rebranded as CIBC Bank USA, is largely a commercial lender and it saw strong loan growth of 18 per cent last quarter over the previous year.
The bank’s capital markets business also recovered after a rough start to the year, when it was hit by a volatile market and uncertainty about the trade war between China and the U.S. Earnings from this division climbed 12 per cent year-over-year to $279-million.