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Difficult deal behind it, CIBC faces even bigger challenges

Canadian Imperial Bank of Commerce, which was tested as it sought to buy PrivateBancorp, faces a new set of challenges.

A surge in U.S. bank stock prices and resistance from PrivateBancorp investors forced CIBC to twice increase its bid for the Chicago company, raising the stakes for the $5 billion acquisition, which closed Friday.

The Toronto company, which wants to more than double the U.S. market's contribution to its overall profit, must vie for market share in Chicago, a crowded market with intense competition. It will also mean more acquisitions, though deals could prove daunting if a wide gap remains between the $386 billion-asset company's stock and those of U.S. targets.

Chicago is "a very competitive market, so pricing for loans can be tough," said Jon Winick, CEO of Clark Street Capital. "But you could also say this presents a great opportunity, because [they] have scale, cheap funding, and the market is likely to become less competitive over time as banks continue to merge."

CIBC has room to grow, including an initial opportunity to offer deposits and loans to the roughly 80% of its top commercial clients that also do business with U.S. banks. The company also kept a number of PrivateBancorp officers, including former CEO Larry Richman.

“We have to earn the right to bank our clients in a fuller fashion,” said Victor Dodig, CIBC’s president and CEO. “It takes time to convince customers. We lead with relationship banking backed by a strong credit rating and … incredible bankers. Eventually our hope is our clients will deepen their relationships with us.”

With the $20 billion-asset PrivateBancorp in the fold, profit from U.S. operations will make up a tenth of CIBC’s profit, or roughly double the contribution that existed before the deal’s completion. Dodig wants to boost that share to 25%.

Organic growth will only get CIBC halfway to that goal, highlighting the need for “tuck-in” acquisitions over time in areas such as wealth management, Dodig said. (CIBC bought Atlantic Trust Private Wealth Management in 2014.)

Geographic expansion would take place in a “strong, steady, consistent way,” Richman said.

Bank acquisitions would make sense, said Jeff Davis, managing director of financial institutions at Mercer Capital. Institutions that would provide meaningful scale would include the $29 billion-asset Associated Banc-Corp in Green Bay, Wis., and the $17.6 billion-asset Chemical Financial in Midland, Mich.

A representative for Chemical, which recently announced plans to name a new CEO, declined to comment. Associated, which appeared on Keefe, Bruyette & Woods’ recent list of potential sellers, did not return a call seeking comment.

Florida could also make sense if CIBC wants to target vacationing Canadians, Davis said.

In Chicago, PrivateBancorp has longstanding commercial relationships and a good track record of making loans, Winick said. That should help CIBC reach its organic growth targets.

“We can build on that wealth management business,” Richman said. “It will be driven by our capabilities, the leadership team that we have and, importantly, it will be driven by where we have clients that we can expand to.”

CIBC’s struggles to gain shareholder approval could carry over to other Canadian banks that want to make more U.S. acquisitions. In addition to the surge in U.S. bank stocks after the presidential election, Canadian banks have been dealing with concerns about the housing market north of the border.

Canadian banks, which are flush with cash, still have the ability to make more acquisitions. Those institutions are “looking to buy value,” though they realize they may not be able to buy U.S. banks on the cheap, said Stephen Clark, co-chair of the financial institutions group at the Toronto law firm Fasken Martineau.

PrivateBancorp’s sale “demonstrates that Canadian banks are in it for the long haul and are willing to pay up for the right strategic fit,” Clark said.

Dodig and Richman said they were committed to their deal because it continued to make strategic sense. Higher interest rates — 96% of PrivateBancorp’s loans have variable rates — and an improved economy in the U.S. justified a higher price, Dodig added.

“We knew this was the right thing to do,” Richman said, adding that his relationship with Dodig became stronger in the face of challenges.

That is a remarkable feat, Davis said.

“I’m sure CIBC didn’t like having to get out their checkbook, but it was a business decision,” Davis at Mercer Capital said. “I’m sure there were some tense moments, but they couldn’t expect Private to just roll over.”

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