Doubts about the fate of Canadian Imperial Bank of Commerce's bid to buy PrivateBancorp Inc. cast a shadow over encouraging first-quarter results that included a healthy bump in profit.
CIBC kicked off earnings season for Canada's major banks with strong results across its key divisions, and hiked its quarterly dividend. The bank also paved the way to buy back shares, creating a safety valve to soothe shareholders whether or not its $3.8-billion (U.S.) offer to buy the Chicago-based bank goes through.
The acquisition is the cornerstone of CIBC's efforts to expand its U.S. footprint, as growth prospects have slowed in Canada. But the deal has been in limbo since the U.S. bank postponed a shareholder vote first scheduled for December, 2016. A trio of advisory firms recommended voting against the terms on offer after PrivateBancorp's share price soared amid a broader run-up in U.S. bank stocks.
No new date has been set for the vote, and with a hard deadline to seal or scrap the deal on June 29, the clock is ticking. Chief executive officer Victor Dodig stressed that the bank is still committed to its U.S. growth strategy, but with each passing month, the exuberance in U.S. markets after the presidential election is passing CIBC by.
"We will be disciplined. We will be patient. We have plenty of organic growth to deliver from our existing footprint as well," Mr. Dodig told analysts on a conference call.
"The PrivateBank is a very good bank. It's a good standalone bank. It's better under CIBC ownership, much stronger, much broader ability to grow across its platform," he added. "So we think we bring a lot to the party."
So far in 2017, PrivateBancorp's share price has remained stubbornly high, finishing Thursday down 0.3 per cent to $57.21. Last June, CIBC offered a mix of cash and stock worth $47 a share at the time.
Until shareholders get their chance to vote, the news of a possible share buyback of up to eight million common shares – about 2 per cent of outstanding shares – gives CIBC a backup plan. That measure, combined with Thursday's quarterly dividend hike of 3 cents a share to $1.27, are intended to bolster investor confidence.
"If it doesn't go through, we have the [normal course issuer bid] as an option to return capital to shareholders," chief financial officer Kevin Glass said in an interview.
CIBC has some room to manoeuvre. Its common equity Tier 1 capital ratio, a measure of financial health monitored by regulators, rose to a plump 11.9 per cent, from 11.3 per cent in the prior quarter. "It appears to be positioning itself to withstand the current acquisition and, potentially, the next one as well," said John Aiken, an analyst at Barclays Capital Canada Inc., in a note.
Profit for CIBC's first fiscal quarter was $1.4-billion, or $3.50 a share, up from $982-million, or $2.43 a share, in the same quarter in 2016 – pushed higher by a $245-million after-tax gain from sales of some retail real estate. Adjusted to exclude certain items, profit was up 13 per cent to nearly $1.2-billion, or $2.89 a share, well ahead of expectations of $2.57 a share, according to Bloomberg.
Revenue for the quarter was $4.2-billion, up from $3.6-billion a year ago. "We're off to a very good start in 2017," Mr. Dodig said.
Return on equity – a closely watched measure of profitability – improved sharply to 24.4 per cent from 18.1 per cent a year ago.
Growth in mortgages and deposits, as well as higher revenue from fees, helped drive profit in the retail and business banking division 39 per cent higher year-over-year, to $953-million. Adjusted to exclude certain items, profit rose 3 per cent to $709-million.
As expected, CIBC set aside more money to cover bad loans in its retail arm, recording larger writeoffs on credit cards and personal loans, though losses from the troubled oil and gas sector eased. Provision for credit losses of $212-million were 10 per cent higher, excluding an adjustment recorded a year ago.
Even so, CIBC executives are more confident that unemployment in the hard-hit oil patch has peaked, and that oil prices hovering above $50 (U.S.) are a sign of stability.
"Even if it does slip a bit, if you look at where we're at on delinquencies, it's not going to have a material impact," Mr. Glass said.
The capital markets arm also surpassed expectations. Profit shot up 52 per cent to $371-million (Canadian), as volatile markets boosted trading volumes as well as debt and equity issuance.
The wealth management division grew average assets under management, boosting profit to $133-million, which was 12 per cent better than a year ago.
Watch the full recording of a business breakfast hosted by The Globe's Derek DeCloet and featuring comments from experts including Don Coxe, Dawn Desjardins from RBC, and CIBC's Benjamin Tal.