CM on Credit Review Negative

DBRS placed the Canadian Imperial Bank of Commerce under Credit Review Negative today:

DBRS has today placed all ratings of Canadian Imperial Bank of Commerce (CIBC or the Bank) Under Review with Negative Implications including its long-term, short-term and preferred ratings. This rating action is a result of concentration risk to some hedge counterparties that have and continue to experience credit weakness. With the meaningful downgrade action today of ACA Financial Guarantee Corporation, CIBC would be expected to take a pre-tax charge in Q1 2008. As of November 30, 2007 the mark was USD2.0 billion. If the charge were to be USD2.0 billion (USD1.3 billion after tax), CIBC expects its Tier 1 capital ratio will remain above 9% at the end of Q1 2008.

The Under Review with Negative Implications action considers:

(1) A higher than expected concentration risk of counterparty exposure, which does not reflect positively on the overall risk management ability of the Bank.
(2) With ongoing deterioration in the U.S. subprime market, the long-term viability of some of CIBC’s other hedge counterparties will remain uncertain. As such capital ratios will be under pressure if further negative events were to occur.
(3) The reputational related damage could have negative implications on CIBC’s business activities.

Fitch does not rate the preferreds, but has put the debt on Rating Watch Negative:

Fitch Ratings-New York-19 December 2007: Fitch Ratings has placed Canadian Imperial Bank of Commerce’s (CIBC) ‘AA-/F1+’ long- and short-term Issuer Default Ratings (IDRs) on Rating Watch Negative. CIBC has significant exposure to U.S. CDOs comprised of largely subprime RMBS. This portfolio had been hedged with credit default swaps (CDS) from either highly rated banks or financial guarantors. However, a significant portion of the CDS protection ($3.5 billion) was written by a now weak financial guarantor. As disclosed today, CIBC’s mark against this exposure was $2 billion at Nov. 30, 2007. This means CIBC will most likely take a significant charge in the current quarter (first quarter-2008) against this exposure. CIBC has previously taken significant marks ($777 million, net of ABX hedge gains), in fiscal 2007, against its unhedged CDO/RMBS exposures.

Aside from this exposure, CIBC’s recent earnings have exhibited improving trends, with a strong performance from the Retail Markets business. Traditional asset quality measures remain quite good and liquidity is prudently managed. CIBC’s Tier I risk adjusted capital ratio was comfortably in excess of regulatory requirements at 9.7% at fiscal year-end.

Fitch expects CIBC to be able to manage through this situation, despite the potentially significant earnings charges. With a good capital cushion at the present time, to the extent that any charges erode capital, Fitch expects that capital would be rebuilt quickly. In fact, this management team has already established a track record in this regard. Nevertheless, the capital markets have been challenging since the summer. CIBC previously expressed its intent to build capital, starting with the cessation of share repurchases. However, CIBC continues to rely heavily on hybrid forms of capital. Tangible common equity represented 2.74% of tangible assets (down from 2.96% at Oct. 31, 2006) and 7.31% of risk-weighted assets as of Oct. 31, 2007.

It hasn’t been too long since the bank was on Credit Watch Positive! What a difference nine months makes, as the Bishop said to the actress. 

The bank has the following series of preferred shares: CM.PR.A, CM.PR.D, CM.PR.E, CM.PR.G, CM.PR.H, CM.PR.I, CM.PR.J, CM.PR.P and CM.PR.R.

3 Responses to “CM on Credit Review Negative”

  1. […] These are very strong numbers compared with Year-end levels; with the entry of new equity holders kindly offering to take the first loss, the credit watch should probably be cancelled. Now, if only we could be sure that the bank can avoid shooting itself in the foot for another little while! […]

  2. […] Well, I’m not going to say this news is meaningless to preferred shareholders. Credit Ratings Agencies are annoyed; due, I think, both the loss itself and the revelation that so many eggs were placed in the ACA basket. But. But! The loss will be borne by the common shareholders. That’s what common shareholders are good for, taking the first loss. While this is indeed meaningful to preferred shareholders, the market grossly over-reacted, and MAPF was able to scoop up a good position in two of CM’s perpetual issues – some of which was unwound prior to month end with both a chunky capital gain and a dividend. […]

  3. […] DBRS credit review was noted on PrefBlog in […]

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