Canadian Imperial Bank of Commerce Earnings: Expenses in Line While Provisioning Builds

Narrow-moat-rated Canadian Imperial Bank of Commerce CM, or CIBC, reported OK fiscal second-quarter earnings. Adjusted earnings per share were CAD 1.70, representing a decline of 4% year over year and a decline of 12% quarter over quarter. Results generally fit within the overall pattern we expect for the Canadian banks this year, as we looked for slowing loan growth, an increase in credit strain, and some pressure on net interest income, or NII, growth.

Indeed, net interest income declined sequentially and provisioning for loan losses ticked up during the quarter as the banks in Canada prepare for the possibility of a recession by the end of the year. The second half of the year will be a key moment for CIBC as management expects NII growth and net interest margin, or NIM, expansion will accelerate, which would be a change of pace from the current trends. Adjusted expenses were able to decline 1% sequentially, and management reiterated its target for mid-single-digit percentage expense growth for full-year results. Finally, fees are tracking a bit ahead of where we expected as trading income has not come back down as much as we anticipated, but we wouldn’t read too much into this as the trading environment remains volatile and closer to cyclical highs than lows.

Based on these results, we do not expect a material change to our current fair value estimate of CAD 69/USD 50, although we may lower it by a low-single-digit percentage as we incorporate a potentially lower net interest income outlook. We continue to expect the bank will have to prove it can return to margin expansion before investors start to believe in the bank’s longer-term targets.