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Fitch Affirms Canadian Imperial Bank of Commerce at 'AA-/F1+'; Outlook Revised to Negative
October 27, 2017 / 5:39 PM / a month ago

Fitch Affirms Canadian Imperial Bank of Commerce at 'AA-/F1+'; Outlook Revised to Negative

(The following statement was released by the rating agency) NEW YORK, October 27 (Fitch) Fitch Ratings has affirmed Canadian Imperial Bank of Commerce (CIBC) Long- and Short-Term Issuer Default Ratings (IDRs) at 'AA-' and 'F1+', respectively. The Rating Outlook is revised to Negative from Stable. A full list of rating actions follows at the end of this release. This rating action follows Fitch's periodic review of the Canadian Banks Peer Group, which includes Bank of Montreal (BMO), Bank of Nova Scotia (BNS), Canadian Imperial Bank of Commerce (CIBC), Federation des caisses Desjardins Quebec's (FCDQ), National Bank of Canada (NBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD). Company-specific rating rationales for the other banks are published separately. For additional information, please see "Fitch Affirms Canadian Banks; Fundamentals Outweigh Persistent Housing Risks" at 'www.fitchratings.com'. For further discussion of the Canadian Banks sector, please refer to Fitch's special report '2018 Outlook: Canadian Banks' to be published in the near future. KEY RATING DRIVERS IDRS, VRs AND SENIOR DEBT CIBC's ratings are supported by the company's solid franchise in Canada, continued earnings stability, sound capital and asset quality measures, and a good liquidity position. Similarly to peers, CIBC's ratings also benefit from Canada's strong regulatory environment and the concentrated banking sector with high barriers to entry, which has supported performance over a long history and various banking crises. Additionally, Canadian Mortgage and Housing Corporation (CMHC) insurance plays an important role in supporting the balance sheets of all Canadian banks. The Negative Outlook reflects Fitch's view that CIBC is the most exposed to potential housing correction and the health of the Canadian consumer. Fitch has highlighted these two factors as the key risks to the banking sector. CIBC has a sizeable domestic mortgage (including HELOCs) portfolio relative to its loans which stood at 62.3% of gross loans compared to 49% average for the peer group. Further, CIBC's residential loan growth was 12% year-over-year exceeding peer group average of 5.41%, which is concerning at this point of the credit cycle. CIBC has the largest exposure to Canadian consumers at 76.9% of total Canadian loans compared to the "Big Six" Canadian banks' peer average of 66.8%. In June 2017, CIBC completed its acquisition of Chicago-based The PrivateBank and Trust Company (PVTBTC). As of September 2017, PVTBTC has been rebranded and name legally changed to CIBC Bank USA (CIBCUS). In Fitch's view the deal is in line with CIBC's strategic plans and interest in entering the U.S. market. The acquisition gives CIBC entry to the Chicago market, which has attractive demographics, creates good prospects for loan growth and should help diversify CIBC's franchise. Fitch expects CIBC to successfully execute on the integration of PVTBTC and projected figures for the transaction to materialize, including estimated profitability measures. Further, as CIBC grows in the U.S. through CIBCUS, Fitch will review the impact to CIBC's overall risk profile. As with any merger or acquisition, there are operational and execution-related risks, particularly for CIBC that has a limited record of bank acquisitions. Nonetheless, Fitch believes related risks will be managed well within CIBC's risk management infrastructure. Further, PVTBTC's balance sheet is modest in complexity and therefore should minimize disruptions. Although the company has a higher concentration to Canada and its consumers, credit performance is trending well. For the first nine months of 2017, CIBC's gross impaired loans (GIL) and loan impairment charge ratios have improved from 2016 and remain well within manageable levels at 38bps and 25bps, respectively. Similarly to its peers, CIBC's oil and gas credits have stabilized and GIL formation related to energy has declined. Although CIBC's capital position is in-line with expectations following its acquisition, further declines in capital that fall below peer averages would be viewed negatively. Following the closing of PVTBTC, CIBC's CET1 declined to 10.4%, which remains adequate, however ranks at the bottom of peer group. Further, CIBC benefits from its large residential mortgage portfolio, which includes 0% risk-weight assigned to mortgage loans that are insured by CMHC and the lower risk-weight assigned to uninsured mortgages compared to commercial loans. RWA measures help CIBC to optimize its capital and balance sheet position. As such, CIBC has lower risk-weight density measure versus its peers. CIBC's financial performance has been solid through 2017. For the first nine months of 2017, ROA stood at 89bos and ROCE at 19.3% supported by strong revenue growth, positive operating leverage, and 13% and 9% mortgage and business loan growth, respectively. The 3Q17 results were also boosted by the inclusion of The PrivateBank. With the recent increase in rates and impact to housing market activity due regulatory changes, CIBC may experience a slowdown in its domestic lending portfolio. SUPPORT RATING AND SUPPORT RATING FLOOR The affirmation of the CIBC's SR of '2' and SRF of 'BBB-' reflect Fitch's view that the likelihood of support remains high for Canadian Banks due to their systemic importance in the country, significant concentration overall in of Canadian banking assets amongst the institutions noted above, which account for over 93% of total banking assets, the large size of the banking sector with banking assets at 2.1 times Canada's GDP, and the Canadian Banks' position as key providers of financial services to its local economy. In Fitch's view, Canadian banking authorities through the CDIC Act, have wide latitude to resolve a troubled bank including re-capitalizing an institution, creating a bridge bank, or imposing losses on creditors. Nonetheless, bail-in initiatives demonstrate the Canadian government's progress to reduce the propensity of state support for banks going forward. Fitch recognizes that the Canadian government's willingness to provide support for D-SIFI's in Canada has been reduced demonstrated by Department of Finance recent Resolution Framework, which has received parliament approval. The proposal seeks protect tax payers from the risk of a large financial institution failing through the guidelines recently published by OSFI for issuing non-viability contingent capital (NVCC) instruments and defining securities that could be used for "bail-in". In Fitch's view, bail-in proposal enhances resolution powers given to regulatory authorities under the CDIC Act. INSTITUTIONAL SUPPORT CIBC World Markets Plc linked to its parent company, CIBC. As such, CIBC World Markets Plc has a Support Rating of '1', indicating that there is an extremely high probability of institutional support from CIBC, if needed. Since this support is based on institutional support, there is no Support Floor Rating assigned. CIBC Bank USA (CIBCUS) IDRs are linked to its parent company, CIBC. As such, CIBCUS has a Support Rating of '1', indicating that there is an extremely high probability of institutional support from CIBC, if needed. Since this support is based on institutional support, there is no Support Floor Rating assigned. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by CIBC and its subsidiaries are all notched down from the Viability Rating (VR) in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. CIBC's subordinated debt is notched one level below its VR of 'aa-' for loss severity in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. CIBC's preferred stock is five notches below the VR, made up of two notches down for non-performance and three notches down for loss severity. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR. SUBSIDIARY AND AFFILIATED COMPANY All of the subsidiaries and affiliated companies reviewed as part of the Canadian bank peer review factor in a high probability of support from parent institutions to the subsidiaries. This reflects that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults Consistent with Fitch's rating criteria, specifically regarding parent and subsidiary relationships, CIBCUS's 'A+/F1' ratings are one notch lower from its parent, CIBC. Fitch considers CIBCUS to be a "strategically important" subsidiary for CIBC reflecting its role within the CIBC group including, the level of integration, similar branding between the two entities, and full ownership stake. LONG- AND SHORT-TERM DEPOSIT RATINGS CIBCUS's uninsured long-term deposit ratings are rated one notch higher than the bank level IDR of 'A+' because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. RATING SENSITIVITIES IDRS, NATIONAL RATINGS AND SENIOR DEBT Given its already high rating level, Fitch does not expect any upside to CIBC's ratings over a medium-term time horizon. Today's rating action incorporates Fitch's view that uncertainties remain on what the impact of recent mortgage reform announcements will be to the broader mortgage market. As such, a faster price correction that is prolonged and/or a slowdown in the housing market will likely impact earnings growth for all the banks. Further, these changes would also affect the broader economy through the link between housing wealth and consumer consumption, and the real estate sector, which are important drivers of GDP growth. Fitch notes that the Canadian banks' ratings are sensitive to negative pressures in the housing market. Negative rating actions could be driven by significant deterioration in credit performance, triggered by risks to the consumer, whose leverage profiles are at record highs. As a result, pressured consumers could have an outsized impact on CIBC's overall results. While some credit normalization is expected, this could potentially become more severe should macroeconomic risks continue such as unexpected increases in interest rates, a severe housing price correction as well as macroeconomic weakness in the overall Canadian economy that leads to a material rise in unemployment. Fitch considers CIBC's ratings to be more sensitive than its peers due to its relatively lower capital position. As such, Fitch would any view further declines in capital ratios as outside of current ratings expectations. Incorporated in today's rating action is the view CIBC will successfully execute on the integration of PVTB and projected figures for the transaction to materialize, including estimated profitability measures and capital position in line with its forecasts. Further, CIBC's growth in the U.S. should be measured and in-line with conservative risk parameters. The Outlook return to Stable if CIBC's current loan growth rates for residential mortgages fall in line with peers while still maintaining solid credit performance. Further, CIBC's successful execution of its U.S. strategy and improved diversification should position the company better to withstand a potential downturn in the housing market. SUPPORT RATING AND SUPPORT RATING FLOOR SR of '2' incorporates Fitch's expectation that there could be some level of support for the Canadian Banks going forward, although it has been weakened given bail-in legislation. Canadian authorities have taken steps to improve resolution powers and tools but intend to maintain a flexible approach to bank resolution. Fitch's assessment of continuing support for Canadian D-SIFI's has to some extent relied upon resolution powers granted regulators under the CDIC ACT as well as the potential size, structure, and feasibility of NVCC and TLAC implementation. Further, continued regulatory action to ensure sufficient contingent capital has been implemented for all Canadian banks. Therefore, SRs and SRFs are sensitive to the implementation of TLAC requirements. To the extent that these are deemed more than sufficient to recapitalize a non-viable bank, SRs and SRFs may be lowered. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated debt and hybrid capital ratings are primarily sensitive to any change in the VRs of the banks (or bank subsidiaries). The preferred securities of CIBC's Capital Trust II are preferred securities, which Fitch gives five notches from CIBC's VR given management and regulatory authorities' powers to suspend dividends. LONG- AND SHORT-TERM DEPOSIT RATINGS The ratings of long- and short-term deposits issued by The PrivateBank and Trust Company are primarily sensitive to any change in CIBC's IDR. SUBSIDIARY AND AFFILIATED COMPANIES The IDRs and ratings of CIBC World Markets Plc and CIBCUS are sensitive to the same factors that might drive a change in CIBC's IDR Fitch has affirmed the following ratings: Canadian Imperial Bank of Commerce --Long-term IDR at 'AA-'; Outlook Negative --Short-term IDR at 'F1+'; --Viability Rating at 'aa-' --Short-term debt at 'F1+'; --Senior unsecured debt at 'AA-'; --Senior market-linked securities at 'AA-emr'; --Subordinated debt at 'A+'; --Preferred stock at 'BBB'; --Support Rating at '2'; --Support Rating Floor at 'BBB-'. Canadian Imperial Holdings, Inc. --Short-term debt at 'F1+'. CIBC World Markets Plc --Long-term IDR 'AA-'; Outlook Negative; --Short-term IDR 'F1+'; --Institutional Support Rating '1'. CIBC Capital Trust --Preferred stock at 'BBB' CIBC Bank USA --Long-Term IDR at 'A+'; Outlook Negative; --Short-term IDR at 'F1'; --Long-Term deposits at 'AA-'; --Short-term deposits at 'F1+'; --Institutional Support at '1'. Contact: Primary Analyst Doriana Gamboa Senior Director +1-212-908-0865 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Julie Solar Senior Director +1-312-368-5472 Committee Chairperson Sean Pattap Senior Director +1-212-908-0642 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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