DBRS Ltd. Wednesday confirmed all ratings of CIBC, including the Bank’s Deposits & Senior Debt at AA and Short-Term Instruments at R-1 (high), but maintained the negative trend, as it waits to see whether the bank’s efforts to improve risk management are working.

“CIBC’s current ratings are supported by its lower-risk retail business mix and progress in improving its expense ratio, which should contribute to earnings stability, and improved capital levels, thereby better positioning CIBC for future downturns,” the rating agency says.

However, it adds that it is maintaining the negative trend in the belief that the “effectiveness of changes, including changing senior management at the bank, increasing the depth of its senior risk management team, and revamping risk management process and procedures, has yet to be tested, particularly to generate consistent and sustainable earnings.”

“Over the last decade, the bank has repeatedly tightened risk management as a result of negative events surfacing, followed by increased concentration risk developed through rapid expansion of select business lines. DBRS remains concerned the actions taken by CIBC over the past year could potentially be a repetition of this pattern,” it cautions.

The ratings agency allows that “CIBC has made some progress in reducing the complexity of the organization, including exiting non-core derivatives trading and non-bank sponsored asset-backed commercial paper conduits, and reducing proprietary trading activities, which should reduce the business risk of the bank.” It also stepped up its efforts to exit certain capital markets businesses that weren’t aligned with its overall strategy.

“With many of these changes put in place in fiscal 2008, DBRS will be evaluating CIBC’s ability to generate greater stability of earnings from core businesses, particularly as credit markets weaken in Canada,” it says.

DBRS says that efforts to improve risk management are nevertheless overshadowed by the bank’s exposures in the structured credit runoff business. At the end of the second quarter, the gross notional structured credit runoff business exposure was US$36.6 billion, it reports.

“During the last 12 months, CIBC has been positioning itself to absorb further charges and losses related to its structured credit runoff portfolio, including raising capital, entering into transactions to limit the risk on U.S. residential mortgage market exposures, and reducing the size of the non-U.S. residential mortgage market structured credit runoff portfolio, albeit slowly. Given the duration of the structured credit runoff portfolio, a significant amount of capital will be tied up which could otherwise be used to invest in building the franchise,” DBRS says.

IE