CIBC bought its 41-per-cent stake in ACI from JPMorgan in 2011, and had hoped to take full control of the privately held company at a later date.Fred Lum/The Globe and Mail
Canadian Imperial Bank of Commerce has agreed to sell its minority stake in American Century Investments (ACI) for about $1-billion (U.S.), putting additional pressure on CIBC to make an acquisition in the U.S. wealth management sector.
The bank has said over the past year that it is interested in acquiring a U.S. asset manager, but has stressed that it is in no rush and would only strike a deal if the valuation made sense.
In selling its stake in ACI to Nomura Holdings Inc., Japan's biggest brokerage, analysts believe the Canadian lender may have to strike soon because it will lose the income associated with the Missouri-based equity and fixed-income investment manager.
"Capital and strategic flexibility improve for CIBC at the expense of near-term earnings power and a possible growing 'perception' that the bank may be looking for even larger U.S. wealth management target(s)," Darko Mihelic, an analyst at RBC Dominion Securities, said in a note.
CIBC has said repeatedly that it would like to spend about $2-billion (Canadian) on a U.S. acquisition to complement its investments in ACI and Atlantic Trust and increase the share of profit from wealth management to 15 per cent.
The U.S. market provides diversification and is particularly attractive because it taps into a stronger economy. The wealth management industry there is also relatively fragmented, making acquisitions more digestible.
CIBC bought its 41-per-cent stake in ACI from JPMorgan in 2011, and had hoped to take full control of the privately held company at a later date.
However, it was never clear that this would be possible: The founders of the company, the Stowers family, had given their controlling ownership to the Stowers Institute for Medical Research, which was unwilling to part with the stake because it provides steady income.
"Recognizing that a path to control was not going to be available over time, we made the decision to work with ACI to monetize our investment," Victor Dodig, CIBC's chief executive officer, said in a statement.
"Through this divestiture, we will further strengthen our strong capital position and we are moving forward with a clear set of strategic priorities to drive our long-term growth."
CIBC said the sale, which is subject to regulatory approval, will generate a gain of about $170-million (U.S.) after taxes.
The sale will raise CIBC's common equity Tier 1 ratio – a measure of financial health monitored by regulators – by about half a percentage point. Based on fourth-quarter numbers, the ratio would rise to 11.3 per cent, or well above regulatory requirements.
"The strong capital position should provide the bank with ample capital to pursue other strategic opportunities," John Aiken, an analyst at Barclays Capital, said in a note.
In the meantime, though, the bank will miss out on the income that ACI once provided – estimated at almost $100-million annually, according to Mr. Mihelic – making it difficult for CIBC to hit its growth targets for wealth.
"This math suggests an acquisition is now possibly mandatory and possibly on the larger side if CIBC is truly intent upon reaching/exceeding its 2018 earnings target," Mr. Mihelic said.
Meny Grauman, an analyst at Cormark Securities, believes that the proceeds from the sale of ACI will be earmarked for further expansion into the U.S.
"This then is a case of management taking one step back in order to hopefully take two forward," Mr. Grauman said in a note.
"However, until CIBC announces a deal to buy something in the U.S., this sale leaves it with less U.S. exposure than the limited exposure it had before. It also leaves the bank with less wealth exposure than it had before."
David Berman