Moody’s Investors Service has affirmed its ratings on Canadian Imperial Bank of Commerce, following the bank’s release of its third quarter earnings, but maintains its negative outlook, citing credit quality concerns.

“The affirmation of CIBC’s ratings is based on strong risk-adjusted profitability within the bank’s core Canadian franchise and excellent capitalization. Moody’s has maintained the negative rating outlook due to its concerns with CIBC’s weakening asset quality relative to peers and continuing concerns with respect to its strategic risk management,” noted Moody’s senior vice president, Peter Routledge.

CIBC reported net income of $434 million, which was its highest level since the fourth quarter of 2007, after excluding an unusual gain in the fourth quarter of 2008, Moody’s noted. It also reported better than peer risk-adjusted profitability, the ratings agency said.

However, Moody’s said a concern in the most recent quarter is “a pronounced deterioration in credit quality”. It reports that non-performing assets rose 32% over the last quarter, and new formations of impaired loans nearly doubled from the prior quarter. “CIBC indicated that the majority of this quarter’s credit deterioration was attributable to its U.S. commercial real estate and discontinued European leveraged finance portfolios,” it said. “In addition, the bank continues to report above-average charge-offs for its credit card and unsecured consumer lending books.” Moody’s said that CIBC’s asset quality weakened during a quarter when the performance of most of its domestic peers on this indicator improved.

“Strategic risk management weakness is another factor weighing on CIBC’s rating,” Moody’s added. “Put simply, the bank has made several strategic missteps that have cost it billions in write-offs over the past several years. Its run-off structured credit business alone has produced over $9 billion in pre-tax charges since the start of 2008.”

Moody’s notes that the bank’s asset quality performance this quarter “could be an aberration and ultimately tied to a legacy strategy since abandoned by the bank. If this is not the case, and CIBC’s asset quality continues to weaken at a rate in excess of its domestic peers, then this could indicate that risk management weaknesses have endured, intensifying negative rating pressure.”

The rating agency says that CIBC’s Tier 1 ratio rose to 12% in the quarter, which places it above most of its global banking peers; “particularly impressive in light of the fact that the bank has received no government infusions of capital.”

IE