Fitch Ratings has affirmed its ratings on CIBC, citing its sound overall financial fundamentals.
The ratings agency affirmed the long- and short-term issuer default ratings of CIBC at ‘AA-/F1+’. The rating outlook remains stable.
The rating agency notes that CIBC’s ratings also benefit from Canada’s comparatively favourable economic environment and a currently stable domestic banking market.
Fitch says that profitability has maintained an upward trend in 2011, although it notes that the sequential results of CIBC, and all the other major Canadian banks, “indicate that revenue and earnings growth is showing signs of a slowdown as retail credit growth has started to shift to a lower gear while lending margins continue to shrink.” Additionally, it says that decreases in provisioning expenses have ebbed as loan loss provisions are approaching normal levels.
The establishment of the wealth management business unit and the recent acquisition of a 41% stake in American Century Investments, a U.S. investment management firm, provides earnings diversity and is consistent with the firm’s risk appetite and strategic direction, Fitch says.
Additionally, it says that the bank’s asset quality indicators have remained consistent and continue to compare well globally. “Having substantially repositioned its wholesale and investment banking business, CIBC’s performance is now more closely tied to its domestic customer base than in the past,” it says, although this also means that CIBC is relatively more exposed to credit deterioration that could result from the rising trend in Canadian household debt.
CIBC has additional risk in foreign portfolios, including the European and U.S. leveraged finance run-off portfolios and the active U.S. real estate business, it says, although outstandings in these portfolios are contained at approximately 1% of total assets. And, Fitch notes that CIBC holds its structured credit run-off portfolio at a substantially reduced valuation, and has taken meaningful steps to largely neutralize the remaining potential downside risk.
The bank’s liquidity profile benefits from a stable core deposit base and proactive management of its wholesale funding, the vast majority of which is domestic, Fitch says. It has also maintained access to equity markets and funding without central bank support since the onset of the financial crisis.
Finally, Fitch says that CIBC’s capital ratios have steadily improved and compare well with domestic and global peers.
“Looking ahead, record levels of consumer indebtedness leave Canadian households much more exposed to an adverse shock than in previous periods. If delinquencies in the domestic retail loan book, including CIBC’s sizeable credit card portfolio, increase beyond expectations, the ratings could come under pressure,” Fitch cautions. “Further, erosion of key franchise strengths would likely result in downward pressure on ratings or a ratings downgrade.”