TORONTO — Canadian Imperial Bank of Commerce has moved to further reduce its risk profile, selling its volatile U.S. capital-markets business to Oppenheimer Holdings Inc.
But while the move bodes well for a more stable earnings profile, analysts also noted the bank shed a growth vehicle at a low point in the cycle. That may mean Canadian Imperial was eager to avoid further subprime-related problems, they noted.
"The fact that (Canadian Imperial) is scaling back in the U.S. at a time when Canadian banks are expected to step up the pace of acquisitions is not lost on us," Sumit Malhotra at Merrill Lynch said in a note, while John Aiken at Dundee Securities said the sale was likely prompted by subprime mortgage losses reported in the third quarter. Chief Executive Gerry McCaughey likely "determined that the only way to ensure that there will not be any charges emanating from U.S. wholesale is to sell the operations," Aiken wrote.
The sale is expected to have little earnings impact and only a minimal effect on Canadian Imperial's Tier 1 capital ratio. Most analysts said they viewed the move positively, given that the U.S. capital-markets business has given the bank numerous headaches in recent years.
"For minimal short-term pain, CIBC will have better visibility, and lower volatility," BMO Capital Markets said in a note.
In Toronto Monday, CIBC is off 8 Canadian cents to C$98.02 amid an overall decline in the market.
On Sunday, CIBC's World Markets division said it agreed to sell its U.S. domestic investment banking, equities-leveraged-finance and related debt-capital-markets businesses to Oppenheimer Holdings Inc.
The deal also includes CIBC's Israeli investment-banking and equities business, and certain parts of other U.S. capital markets-related businesses in the U.K. and Asia.
CIBC will retain its other U.S. wholesale businesses, which include real estate finance, equity and commodity structured products, merchant banking and oil and gas advisory, as well as the balance of its U.S. debt-capital-markets, Asia and U.K businesses.
Under the terms of the agreement, CIBC will receive a deferred payment on the fifth anniversary of closing, based on the performance of Oppenheimer's combined capital markets business over that five-year period. CIBC will also receive warrants exercisable for 1 million Oppenheimer shares at the end of the five-year period.
As part of the transaction, Oppenheimer will borrow $100 million from CIBC in the form of a subordinated loan. In addition, CIBC will provide a warehouse facility, initially up to $1.5 billion, to a newly formed Oppenheimer U.S. entity to finance and hold the syndicated loans for U.S. middle market companies. Underwriting of loans pursuant to the warehouse facility will be subject to joint credit approval by Oppenheimer and CIBC.
While at first glance it appears that CIBC gets "almost nothing up front," Desjardins Securities analyst Michael Goldberg said another view is that CIBC jettisoned a business "that never panned out" and has now insulated itself from downside while retaining the ability to participate in any upside. As well, he noted, "CIBC gains flexibility to deploy capital into something else that can potentially generate a higher return in the future."
But the move does mean CIBC is much more dependent on its Canadian retail business and its Caribbean operations.
BMO Capital Markets has an investment-banking relationship with CIBC but the analyst doesn't own the stock. It wasn't immediately clear whether any of the other firms have investment-banking conflicts with CIBC.
CIBC has scheduled a conference call on the sale for 2 p.m. EST Monday.
