CIBCFernando Morales/The Globe and Mail
Having worked to strip out the risk-taking culture from Canadian Imperial Bank of Commerce operations over the past several years, chief executive officer Gerry McGaughy missed out on much of the bullish trading revenues his rivals enjoyed over the past year.
But in a quarter that has seen those same trading revenues plummet, CIBC hasn't been hit as hard on the way down. Canada's fifth-largest bank reported a 47-per-cent increase in third-quarter profit on Wednesday to $640-million, exceeding analysts' expectations.
Not immune to the slumping quarter for capital markets, CIBC's trading revenue fell as well. But the drop to $84-million from $178-million in the three months prior was still a profit, compared with the $1-million loss on trading that rival Bank of Montreal reported the previous day, causing its shares to slump.
Lower revenue from bonds and derivatives in the quarter were to blame, CIBC told analysts. But the bank used considerably better credit loss provisions to notch the boost in profits.
Provisions for credit losses, or the amount of money banks set aside to cover bad loans, were $221-million, compared with $547-million a year ago. Those numbers improve as the economy strengthens and consumers are better able to keep up with loan payments.
When Royal Bank of Canada and National Bank report their earnings Thursday, analysts will be watching closely to see how much of a toll the slumping quarter for capital markets took on their profits. Like BMO, RBC and National are more exposed to trading revenues than CIBC was.
"After a disappointing start to earnings season, CIBC countered with a reasonably strong quarter," Barclays Capital analyst John Aiken said in a research note to clients, referring to the drop in trading revenue that BMO reported on Tuesday.
The $640-million profit at CIBC in the quarter was equal to $1.53 a share, compared with $434-million or $1.02 a year ago. Once one-time items are removed, profit came in at $1.64 a share, which beat the average analyst expectation of $1.53.
"We feel this was a solid quarter across the board for CIBC and are pleased that our results fit well with our strategic imperative of consistent and sustainable earnings," Mr. McCaughey said in an interview.
Profit in CIBC's retail banking also rose, climbing 44 per cent to $599-million from $416-million a year ago, boosted by an improving economy. However, CIBC's head of consumer banking, Sonia Baxendale, told analysts on a conference call that the mortgage loan business was soft in the summer and is not expect to make great improvements in the fall.
Mr. McCaughey figures the economy will be in for a slower climb than most people expect, but the longer road to recovery will pay off in the end.
"On a broad economic and industry basis, there have been some indications in recent months that the economic recovery will be more gradual than the consensus originally assumed," he said. "I believe that this scenario may over the longer term be a positive since it will lay a stronger foundation for the later expansion in the economy."
CIBC plans to look at boosting its dividend in 2011, but is in no hurry to make that decision. Banks are conserving cash in anticipation of new global banking rules that will require them to hold more capital to backstop their lending, so any dividend increases before next year are unlikely.