After a massive legal settlement that effectively wiped out a year’s worth of earnings, CIBC’s new executive team is hitting the hustings to sell analysts and investors alike on a disciplined and lower-risk strategy.

The bank hosted an “investor day” on Sept. 7 that featured CEO Gerry McCaughey, chief financial officer Tom Woods and the new heads of its major divisions: retail banking, wealth management and investment banking. The tale they told was largely one of retrenchment. The team’s central goals are to rehabilitate the balance sheet and cut costs, while seeking steady growth in its core businesses.

It’s not the kind of story that will electrify investors, but a good dose of boring may be just what CIBC shareholders need after CIBC jolted the market with its $2.8-billion
Enron Corp. settlement in early August.

Some analysts are already sold on the strategy. After the meeting, BMO Nesbitt Burns Inc. analyst Ian de Verteuil in Toronto upgraded his recommendation on CIBC to “outperform.” In a later report, he wrote: “From our perspective, this is the right focus at the right time. Given the bank’s weakened position after the Enron settlement, we believe that CIBC needs less big-picture initiatives and more micro execution.”

Focusing on micromanagement is certainly safer than plotting a big strategic splash, but it’s not completely risk-free, either — particularly when success depends on a brand new executive lineup. McCaughey officially took the helm as CEO on August 1, even though his appointment was announced in February, and he started putting his mark on the bank in April by revamping its retail markets division.

In the reorganization, parts of the bank’s wealth-management division — including its 1,250-strong Imperial Service sales force, GICs, private banking and TAL Global Asset Management Inc. — are being moved into the retail markets division, under the leadership of senior executive vice president Sonia Baxendale. The rest of the wealth business has been turned over to Victor Dodig, who joined CIBC from UBS Global Asset Management (Canada) Co., at which he was serving as CEO. In an earlier move late last year, Brian Shaw was handed the reins to the wholesale business, CIBC World Markets Inc.

The new management team is certainly experienced. But it is something of an unknown quantity until it delivers the goods. For analysts, therefore, the bank’s investor day was as much about gauging management as it was about strategy and studying the bank’s numbers.

De Verteuil’s view is that the new team has what it takes to get the job done. His report notes that the team is the key reason he upgraded his recommendation, and that the move is based on the expectation that the team can execute the firm’s sober new strategy. “With new heads in wealth, retail banking and CIBC World Markets, we believe that the bank is better positioned than in the past to deliver on the operational front,” he writes. “In addition, we believe that the pressure for change from the incremental financial leverage and the fallout from the Enron charge will allow these executives to move quickly to reduce costs.”

The bank is seeking to take $250 million out of its expense line by its 2006 fiscal yearend of Oct. 31, and hints it could announce further cost reductions in the new year that would take effect the following fiscal year. About half of the reduction is expected to come from reduced project spending, due simply to the timing of ongoing initiatives. As projects are completed, heavier up-front spending naturally winds down. CFO Woods cites technology projects, governance initiatives and the move to the new Basel II capital regime as big spending projects that should shrink in the coming year.

The rest of the savings are expected to come from trimming off fat. Woods suggests such snips will include pushing outside suppliers harder on pricing, spending less on outside professional fees, and more targeted spending on items such as advertising. Efforts at streamlining and eliminating redundant management should also provide savings.

How well CIBC manages the planned cost cuts will be a strong indication of whether the new executive team is effective. CIBC doesn’t have a reputation among the banks for running the tightest ship, so a firm stance on costs would go some way to proving that a bank can indeed change.

@page_break@Woods indicates the new-found cost consciousness is permeating the bank at all levels, to an extent he hasn’t seen before. Reaching the $250-million target would bring CIBC’s costs in line with the median of the other Big Five banks, but it hopes that over time it will become above average in controlling costs.

Reduce expenses

Analysts appear confident the bank will meet its expense-reduction targets, yet some remain concerned CIBC’s past sins have painted it into a strategic corner, at least for the time being. Indeed, after the Enron charge, the big task facing the bank in the medium term is restoring its capital position. The Enron payout messed with its balance sheet. Its
Tier 1 capital ratio slipped to 7.5% in the third quarter ended July 31, and the bank is aiming to get it back to 8.5% in short order, by the first or second quarter of 2006.

Analysts seem to have little doubt CIBC will be able to repair its capital position within the time frame it contemplates, but they are worried about the impact of the chore on the bank’s ability to expand revenue. After the Enron settlement was announced, credit-rating agency Dominion Bond Rating Service Ltd. warned that the lower level of capital
“will challenge [CIBC’s] earnings growth objectives and severely limits its flexibility to make any opportunistic acquisitions or expansion moves for what is expected to be a meaningful length of time.”

CIBC is also concerned about its level of retail loan losses. In its latest quarter, the bank’s loan-loss provisions rose to $199 million from $159 million in the prior quarter. The bank had hoped that its retail loan-loss picture would start to look better next year, but at both its investor day and the financial services industry conference hosted by Scotia Capital Inc. in mid-September, McCaughey conceded that it’s now not expecting retail loan losses to improve in 2006.

He says the bank is continuing to address the issue by tightening its lending requirements, and shifting the mix of its loan portfolio away from unsecured credits (in which it has been a big player) and toward a higher proportion of secured credits. Obviously, it takes time for such changes to work their way through the system; stiffer lending requirements today don’t mean lower loan losses tomorrow but a year or two down the line. While CIBC waits for the changes to pay off, its market share will surely be under attack from all sides in the highly competitive retail banking market.

Fending off competitors while also cutting costs and rebuilding capital should present CIBC’s new executive team with a particularly tricky test.

For the retail markets business, Baxendale spells out a strategy to analysts that includes streamlining management to reduce overlap and improve accountability, and fully integrating the former wealth-management divisions into the traditional retail bank. The ultimate goal is the Holy Grail for many bankers: an effective cross-selling strategy.
CIBC is seeking to extend Imperial Service to more clients in more markets, including small-business clients and affluent clients in rural areas and smaller cities. She maintains the bank will cut costs in the division without reducing the number of front-line advisors or services available to them.

As for the remaining wealth-management businesses — its full-service brokerage, discount brokerage and asset managers (CIBC Asset Management and TAL Global Asset Management), Dodig maps out a strategy that focuses on delivering institutional-quality products and services for individual investors.

The goal is to move the CIBC Wood Gundy sales force further upmarket, allowing the retail markets side to handle so-called “mass affluent” clients, he says. For the higher-end clients, Dodig sees the bank offering more competitive pricing on managed assets, and it will focus on training advisors to deliver full-service solutions, not just send them off to sell more managed products. While he shied away from the term “hedge funds,” he indicates CIBC plans to offer more products that promise “absolute returns.”

As with retail markets, the challenge will be cutting costs without losing capacity. Dodig suggests the cost cuts will flow through to clients in the form of lower prices, and says the bank isn’t aiming to cut its brokers’ grid as it strives to make Wood Gundy the firm of choice for brokers and their clients.

Improving service while cutting costs sounds like an impossible task. Addition by subtraction only works if the cost cuts are focused on true fat — unnecessary bureaucracy that actually impedes service. A big bank surely can change, but it isn’t easy. And it remains to be seen whether CIBC’s new management team will be the one to pull off the trick. IE