(The following statement was released by the rating agency)
NEW YORK, January 25 (Fitch) Fitch Ratings has affirmed Canadian Imperial Bank
of Canada's (CIBC) long- and short-term Issuer Default Ratings (IDRs) at 'AA-'
and 'F1+' respectively. The Rating Outlook remains Stable.
This rating action follows Fitch's periodic review of the Canadian Banks Peer
Group, which includes Bank of Montreal (BMO), Bank of Nova Scotia (BNS),
Canadian Imperial Bank of Commerce (CIBC), Caisse Centrale DesJardins (CCD),
National Bank of Canada (NBC), Royal Bank of Canada (RBC) and Toronto-Dominion
Bank (TD).
For further discussion of the Canadian Bank Peer Review, refer to the special
report to be published shortly.
KEY RATING DRIVERS
IDRS, Viability Ratings (VRs) AND SENIOR DEBT
CIBC's ratings are supported by the company's solid franchise in Canada, sound
capital levels, strong asset quality, continued earnings stability, strong
funding and liquidity position and favorable metrics relative to international
peers. Furthermore, similarly to peers, ratings benefit from Canadian's strong
regulatory environment and the concentrated banking sector with high barriers to
entry, which has supported performance over a long history and various banking
crises. Additionally, the Canadian Mortgage and Housing Corporation (CMHC)
insurance plays an important role in supporting the balance sheets of all
Canadian Banks.
That said, Fitch believes that all Canadian Banks, including CIBC, are
vulnerable to credit deterioration in their domestic loan portfolios given
pressures on the economy, particularly at a time when consumer indebtedness is
at record high levels, combined with Fitch's view that the Canadian housing
market is overvalued by about 20%. Should the rapid decline in global oil prices
cause an economic slowdown in Canada that impacts employment levels it could
hasten potential credit deterioration. For 2016, Fitch believes most Canadian
banks' earnings will be challenged given that provision expenses will likely
increase, the persistent low-rate environment, and potentially weaker economic
activity in their home market.
CIBC's residential mortgage portfolio includes 64% insured, which is higher than
its peers. For its uninsured mortgages, the company reported a low loan-to-value
ratio of 59%. Given the characteristics of CIBC's residential portfolio, Fitch
believes the bank is in a better position than some of its peers should a
material housing correction occur. However, should pressures in the economy
drive a sharp increase in unemployment, CIBC has the largest exposure to the
Canadian consumer at 76.9%% of total loans at year-end 2015 (YE15) compared to a
peer average of 68.3%.
CIBC continues its focus on growing its wealth management business and
management has successfully increased contribution rate from the segment to 14%
of net income, which is line with management target. Several acquisitions, such
as Atlantic Trust Private Wealth Management and MFS McLean Budden, have all
supported earnings growth in recent years. Fitch believes CIBC will continue to
evaluate acquisition opportunities, particularly in the U.S, which continue to
be in-line with strategic goals. That said, CIBC recently announced its 41%
minority stake in American Century. In Fitch's view, the sale seems to be in
contrast to CIBC's desire to grow wealth management business although the
company noted that its decision to sell was driven by the fact it would be
unable to gain full control of the company over the long term.
CIBC's capital position is solid for the rating category and compares well to
other similarly rated global financial institutions, in Fitch's opinion. Fitch
notes that Canadian Banks in general have risk-weighted assets (RWA) that may be
lower given the 0% risk-weight assigned to mortgage loans that are insured by
CMHC. However, OSFI has announced it plans to enhance its regulatory capital
framework of residential real estate loans including risk sensitive floors to
ensure capital requirements reflect underlying risks, which will likely take
effect by the end of 2017.
SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
The affirmation of BMO's SR of '2' and SRF of 'BBB-' reflect Fitch's view that
the likelihood of support remains relatively high for Canadian Banks due to
their systemic importance in the country, significant concentration overall of
Canadian banking assets amongst the institutions noted above (which account for
over 90% of total banking assets), the large size of the banking sector with
banking assets at 2.1x Canada's GDP, and the Canadian banks' position as key
providers of financial services to the domestic economy.
In Fitch's view, Canadian banking authorities through the CDIC Act, have wide
latitude to resolve a troubled bank including re-capitalizing an institution,
creating a bridge bank, or imposing losses on creditors.
Fitch recognizes that the government's willingness to provide support for
D-SIFIs in Canada has been reduced as seen by the Department of Finance
consultation paper which outlines the proposed bail-in regime as Canadian
banking regulators seek to protect taxpayers from the risk of a large financial
institution failing. This is evidenced by the issuance of non-viability
contingent capital (NVCC) instruments, resolution powers given regulatory
authorities under the CDIC Act, and other initiatives that demonstrate the
Canadian government's progress to reduce the propensity of state support for
banks going forward.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by CIBC and its subsidiaries
are all notched down from the common VR in accordance with Fitch's assessment of
each instrument's respective non-performance and relative loss severity risk
profiles, which vary considerably.
CIBC's subordinated debt is notched one level below its VR of 'aa-' for loss
severity in accordance with Fitch's assessment of each instrument's respective
non-performance and relative loss severity risk profiles.
CIBC's preferred stock is five notches below the VR, made up of two notches down
for non-performance and three notches down for loss severity.
SUBSIDIARY AND AFFILIATED COMPANY
All of the subsidiaries and affiliated companies as part of the Canadian Bank
peer review factor in a high probability of support from parent institutions to
the subsidiaries. This reflects that performing parent banks have very rarely
allowed subsidiaries to default. It also considers the high level of
integration, brand, management, and financial and reputational incentives to
avoid subsidiary defaults.
RATING SENSITIVITIES
ISSUER DEFAULT RATINGS, NATIONAL RATINGS AND SENIOR DEBT
Given its already high rating level, Fitch does not expect any upside to CIBC's
ratings over a medium-term time horizon.
However, negative rating actions could be driven by significant deterioration in
earnings and/or credit performance, triggered by risks to the consumer, whose
leverage profiles are at record highs. Fitch believes CIBC may be more exposed
to consumer-specific trends than the peer average, given the relative size of
its credit card book and overall consumer loan portfolio. As a result, material
credit deterioration in those assets could have an outsized impact on overall
results, and could drive negative rating actions.
While some credit normalization is expected, Fitch notes that this could be
hastened or more severe due largely to exogenous macroeconomic risks, such as
continued pressure in the global oil and gas markets, which impact consumers'
ability to service debt obligations.
A change to CIBC's risk appetite, an inability to integrate accretive wealth
management acquisitions, a weakening liquidity profile, and/or reduced buffers
on new and updated regulatory capital minimums could also lead to negative
rating momentum. Further, CIBC's future deployment of capital for acquisitions
should continue to make strategic sense. The company has signaled its
acquisition targets as private banking or commercial banking in the U.S., which
ties in well with its existing wealth management business.
SUPPORT RATING AND SUPPORT RATING FLOOR
SR of '2' incorporates Fitch's expectation that there could be some level of
support for the Canadian Banks going forward, although it has been weakened
given bail-in legislation. Although Canadian authorities have taken steps to
improve resolution powers and tools, they intend to maintain a flexible approach
to bank resolution.
Fitch's assessment of continuing support for Canadian D-SIFIs has to some extent
relied upon resolution powers granted regulators under the CDIC ACT as well as
the potential size, structure, and feasibility of NVCC implementation. In
addition, continued regulatory action to ensure sufficient contingent capital
has been implemented for all Canadian banks.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The subordinated debt ratings are primarily sensitive to any change in the VRs
of the banks (or bank subsidiaries).
The preferred securities ratings of CIBC and CIBC Capital Trust reflect the
ability of management and regulatory authorities to suspend dividends, which
results in the rating being five notches from CIBC's VR.
SUBSIDIARY AND AFFILIATED COMPANIES
The subsidiary and affiliated company ratings including CIBC are primarily
sensitive to any change in the VRs of the banks.
LONG- AND SHORT-TERM DEPOSIT RATINGS
The ratings of long- and short-term deposits issued by CIBC and its subsidiaries
are primarily sensitive to any change in CIBC's IDR.
Fitch has affirmed the following ratings:
Canadian Imperial Bank of Commerce
--Long-term IDR at 'AA-'; Stable Outlook;
--Short-term IDR at 'F1+';
--Viability Rating at 'aa-'
--Short-term debt at 'F1+';
--Senior unsecured debt at 'AA-';
--Senior market-linked securities at 'AA-emr';
--Subordinated debt at 'A+';
--Preferred stock at 'BBB';
--Support Rating at '2';
--Support Rating Floor at 'BBB-'.
Canadian Imperial Holdings, Inc.
--Short-term debt at 'F1+'.
CIBC World Markets Plc
--Long-term IDR 'AA-'; Stable Outlook;
--Short-term IDR 'F1+';
--Support Rating '1'.
CIBC Capital Trust
--Preferred stock at 'BBB'.
Contact:
Primary Analyst
Doriana Gamboa
Senior Director
+1-212-908-0865
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
Secondary Analyst
Justin Fuller, CFA
Senior Director
+1-212-368-5472
Committee Chairperson
Christopher Wolfe
Managing Director
+1-212 908-0771
Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email:
hannah.james@fitchratings.com.
Additional information is available on www.fitchratings.com
Applicable Criteria
Global Bank Rating Criteria (pub. 20 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501
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