Fitch Ratings-New York-October 22: Fitch Ratings has today affirmed Canadian Imperial Bank of Commerce's (CIBC) Long- and Short-Term Issuer Default Ratings (IDRs) at 'AA-' and 'F1+', respectively.
The Rating Outlook has been revised to Stable from Negative. A full list of rating actions is at the end of this release.
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), Desjardins Group (DESJ), National Bank of Canada (NBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD). Company-specific rating rationales for the other banks will be published separately. For more information about the Canadian banking sector, please refer to the special report titled "2019 Outlook: Canadian Banks" to be published in the near future.
KEY RATING DRIVERS IDRs, VRS AND SENIOR DEBT
CIBC's ratings are supported by the company's solid franchise in Canada, occupying the fourth position in terms of deposit market share, improved earnings stability, sound capital and asset quality measures, and good liquidity position. Similar to peers, CIBC's ratings benefit from Canada's strong regulatory environment and concentrated banking sector with high barriers to entry. Additionally, Canadian Mortgage and Housing Corporation (CMHC) insurance plays an important role in supporting the balance sheets of all Canadian banks. The revision of the Outlook to Stable reflects CIBC's reduced growth in mortgages and home equity lines of credit (HELOC) after consecutive years of above-market growth (averaging 9.2% annually from FY2015 to FY2017). Relative to peers, CIBC continues to hold the highest proportion of uninsured mortgages (61% of total mortgages) and has one of the largest exposures to the Canadian consumer (at 68% of gross loans at 3Q18), which Fitch views negatively due to elevated household indebtedness in the context of rising interest rates. However, in the nine months ending July 2018, CIBC has demonstrated the slowest growth in its mortgage and HELOC books relative to peers (less than 1% annualized) and has maintained ratios of loan to value in line with the peer average. Fitch will continue to monitor CIBC's mortgage portfolio seasoning and changes in its risk appetite. Fitch views CIBC's long-term asset quality as a credit strength. Although it demonstrated the slowest rate of loan growth at 3Q18, CIBC's credit performance compared well to peers. CIBC's gross impaired loan (GIL) ratio was 0.5% compared to a peer average of 0.6%. Similarly, loan impairment charges and net charge offs were each less than 25 basis points of average loans during the nine month period at 3Q18. Similar to Canadian peers, CIBC has a long track record of consistent credit performance, with a peak impairment ratio over the last decade of less than 1%. CIBC's capital position declined in 2017 following its acquisition of Chicago-based PrivateBank and Trust Company, subsequently renamed CIBC Bank USA (CIBCUS). Solid internal capital generation and issuance of common shares helped increase CIBC's CET1 ratio to 11.3% at 3Q18 from 10.4% at 3Q17. While Fitch views CIBC's capital metrics as adequate, they rank on the low end of the peer range. In addition, CIBC reports the second lowest risk-weight density relative to peers, reflecting its relatively large mortgage portfolio, which is assigned a lower risk weight than commercial loans. In addition, mortgage loans insured by the Canada Mortgage and Housing Corporation have a risk weight of 0%. CIBC's financial performance remained solid through 3Q18. Although historically characterized by higher earnings volatility than peers, in recent years, CIBC has demonstrated better than average earnings stability. For the first nine months of 2018, return on average assets stood at 90 basis points (89 basis points at 3Q17), supported by a stable net interest margin, improving operating leverage and good revenue growth, with a growing contribution from commercial banking. In addition, CIBC reports higher than average asset sensitivity to rates, and is relatively well positioned to benefit from further expected policy rate hikes. CIBC reports solid funding and liquidity metrics, largely in line with peers. Customer deposits represent the majority of funding, with more than 90% deposit concentration in Canada. The loan-to-deposit ratio was 120.4% at 3Q18, higher than the peer average. Similarly, CIBC's liquidity coverage ratio was 126% at 3Q18, compared to a peer average of 130%.
SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating (SR) of '2' and Support Rating Floor (SRF) of 'BBB-' reflect Fitch's view on the continued potential for support for the largest Canadian banks in the near term given their systemic importance. Canadian banking authorities have wide latitude to resolve a troubled bank including re-capitalizing an institution, creating a bridge bank, or imposing losses on creditors. However, recently implemented bail-in rules for the Canadian domestic systemically important banks (D-SIBs) reflect the government's intent to reduce potential sovereign support. In addition, guidelines on total loss absorbing capital require D-SIBs to build up a minimum of 21.5% of total loss absorbing capital (TLAC) by November 2021, which would significantly lower sovereign propensity to provide support, in Fitch's view. Over time, Fitch will likely lower the SRs and SRFs of these institutions as bail-in eligible debt is issued.
INSTITUTIONAL SUPPORT CIBC
World Markets Plc is linked to its parent company, CIBC. As such, CIBC World Markets Plc has a Support Rating of '1', indicating that there is an extremely high probability of institutional support from CIBC, if needed. Since the Support Rating is based on institutional rather than sovereign support, there is no Support Floor Rating assigned. CIBC Bank USA's (CIBCUS) IDRs are linked to its parent company, CIBC. As such, CIBCUS has a Support Rating of '1', indicating that there is an extremely high probability of institutional support from CIBC, if needed. Since the Support Rating is based on institutional support, there is no Support Floor Rating assigned.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Subordinated debt and other hybrid capital issued by CIBC and its subsidiaries are all notched down from the Viability Rating (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. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR.
SUBSIDIARY AND AFFILIATED COMPANY
All of the subsidiaries and affiliated companies reviewed 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, financial and reputational incentives to avoid subsidiary defaults CIBCUS's 'A+'/'F1' ratings are one notch lower from its parent, CIBC. Fitch considers CIBCUS to be a "strategically important" subsidiary for CIBC reflecting its role within the CIBC group including, the level of integration, similar branding between the two entities, and full ownership stake.
DERIVATIVE COUNTERPARTY RATING, LONG- AND SHORT-TERM DEPOSIT RATINGS
CIBC's Derivative Counterparty Rating (DCR) and Long-Term deposit ratings are at the same level as the bank's Long-Term IDR and senior unsecured debt. Short-Term deposit ratings are similarly equalized with the bank's Short-Term IDR. Under recently finalized bail-in rules for Canadian D-SIBs, derivative counterparty obligations and deposits have preferential status over other senior obligations and are excluded from being written down under a bail-in, irrespective of the amount of bail-in eligible debt outstanding.
LONG- AND SHORT-TERM DEPOSIT RATINGS
(US Subsidiary) CIBCUS's uninsured long-term deposit ratings are rated one notch higher than the bank level IDR of 'A+' because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.
RATING SENSITIVITIES IDRs, VRS AND SENIOR DEBT
CIBC is rated near the top of Fitch's global bank universe; therefore, upside potential is low and would require sustained financial outperformance relative to peers without demonstrating a material change in risk appetite. Negative rating actions could be driven by sustained deterioration in asset quality metrics compared to long-term averages, driven by seasoning in its retail loan book originated during the interest rate trough of 2015 - 2017, or triggered by a broader economic downturn. While a slowdown in economic growth and some credit normalization is expected over the medium term, Fitch views CIBC as relatively exposed to a more severe housing price correction or material rise in unemployment. Given its lower than average capital position, CIBC's ratings are more sensitive to a sustained deterioration in its Fitch core capital ratio to below 11% could be negative for ratings. In addition, downward ratings pressure could develop from an alteration in the company's risk appetite, including renewed above-market consumer loan growth, or acquisition behaviour that Fitch views as adding volatility to the business model, particularly if accompanied by deterioration in credit performance. Further, given the Financial Action Task Force's identified weaknesses in Canada's anti-money laundering/anti-terrorism financing (AML/ATF) regime, ratings would be sensitive to material and systemic conduct risk findings, particularly as they relate to AML/ATF or sanctions compliance. While this is not currently expected, material findings that suggest broad-based weaknesses or failings in the risk management infrastructure could pressure CIBC's ratings.
SUPPORT RATING AND SUPPORT RATING FLOOR
The SR of '2' incorporates Fitch's expectation that there could be some level of support for the Canadian D-SIBs going forward, although it has been weakened given the implementation of bail-in legislation. Fitch recognizes that Canadian authorities have taken steps to improve resolution powers and tools but intend to maintain a flexible approach to bank resolution. However, SRs and SRFs would likely be lowered further as banks begin to issue bail-in eligible debt. While Fitch had viewed the reduction of support to occur closer to the time of compliance with bail-in requirements in 2021, Fitch may likely accelerate the lowering of the SR and SRF prior to banks' full compliance with the TLAC requirement. However, in Fitch's view, legacy senior debt excluded from bail would benefit from higher notching once sufficient qualifying junior debt buffers (QJD) is built up to recapitalize the bank.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
CIBC's subordinated debt ratings are broadly sensitive to the same considerations that might affect CIBC's VR
The preferred securities of CIBC's Capital Trust II are preferred securities, which Fitch gives five notches from CIBC's VR given management and regulatory authorities' powers to suspend dividends. SUBSIDIARY AND AFFILIATED COMPANIES The IDRs and ratings of CIBC World Markets Plc and CIBCUS are sensitive to the same factors that might drive a change in CIBC's IDR.
DERIVATIVE COUNTERPARTY RATING, LONG- AND SHORT-TERM DEPOSIT RATINGS
CIBC's DCR and deposit ratings are sensitive to changes in the bank's IDRs. DCR and deposit ratings may be upgraded by one notch above the bank's respective Long-Term and Short-Term IDRs as CIBC begins to issue bail-in eligible debt. LONG- AND SHORT-TERM DEPOSIT RATINGS (US Subsidiary) CIBCUS's uninsured long-term deposit ratings are sensitive to any change in the bank level IDR.
Fitch has affirmed the following ratings: Canadian Imperial Bank of Commerce --Long-Term IDR at 'AA-'; Outlook Stable --Short-Term IDR at 'F1+'; --Viability Rating at 'aa-' --Short-Term debt at 'F1+'; --Senior unsecured debt at 'AA-'; --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-'; Outlook Stable; --Short-Term IDR 'F1+'; --Institutional Support Rating '1'. CIBC Capital Trust --Preferred stock at 'BBB' CIBC Bank USA --Long-Term IDR at 'A+'; Outlook Stable; --Short-Term IDR at 'F1'; --Long-Term deposits at 'AA-'; --Short-Term deposits at 'F1+'; --Institutional Support at '1'. Fitch has assigned the following ratings: Canadian Imperial Bank of Commerce --Derivative Counterparty Rating at 'AA-(dcr)'; --Long-Term deposits at 'AA-'; --Short-Term deposits at 'F1+'. 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