Canadian Imperial Bank of Commerce executives must be exasperated.
Despite trouncing rival Canadian lenders on everything from core earnings growth to return on equity since the end of the credit crisis, CIBC's shares still trade at a lower price-earnings multiple relative to other bank stocks.
This may seem like a petty issue. Who cares about a simple P/E multiple when your stock's gained 22 per cent in the past year? But in the banking world, a fat multiple is a sign of sheer strength.
Think of it this way: if someone makes $750,000 in one year and worked harder than someone who made $1-million over the same period, you would probably tell them to stop whining because they're both rich. But that doesn't make the inequity much easier to swallow. So it goes with multiples.
When dissecting why CIBC doesn't earn the same respect as it peers, people tend to rely on the old trope: It's the bank most likely to run into blunt objects.
However, Rob Wessel of Hamilton Capital Partners emphasizes another core issue in this era. "Perhaps more relevant to CIBC's ongoing valuation," he wrote in a note to clients, "is the fact that the bank lacks a visible capital allocation strategy. Alone among its peers, CIBC lacks an identifiable 'use' for the significant excess capital it generates."
That may sound a bit technical. In simpler terms, he's arguing that CIBC doesn't do a good job articulating where it will devote resources to grow.
To prove his point, Mr. Wessel compares CIBC to Toronto-Dominion Bank, which has embarked on an "incredibly ambitious and expensive expansion strategy over the last decade," including spending $20-billion building out its commercial banking platform and bulking up in the U.S. Everyone know what will drive TD's growth. CIBC, meanwhile, has taken the safe route and implemented a stay-at-home approach.
Even though that strategy is currently working out for CIBC – it as better core cash earnings growth and a better return on equity than TD – the bank still trades at a multiple discount of 1.0 times.
"In our view, there is effectively a 'tax' to a passive capital deployment strategy," Mr. Wessel wrote. "We believe the longer-term risks to initiating a more active deployment strategy are considerably less than a continued passive approach."
CIBC seems to be getting the message. In the past few months the bank has telegraphed that it wants to devote more resources to wealth management and the bank is also revealing more details about its retail banking revamp – under which it did away with brokered mortgages and relaunched its loyalty rewards credit card.
Yet Mr. Wessel worries that investors still can't see what, or where, CIBC will be in the future. And that's a problem.
"For good reason, the market clearly favours Canadian bank capital allocation strategies it believes can generate rates of return in excess of the bank's cost of equity over the long term, and that the absence of a credible strategy will translate into slower growth," he wrote.