Why Canadian Imperial Fell Despite Y/Y Earnings Rise? - Analyst Blog

Canadian Imperial Bank of Commerce (CM) declined 3.6% on the NYSE following the release of its fourth-quarter and fiscal 2014 earnings (ended Oct 31) on Dec 4, before the opening bell. Adjusted earnings per share came in at C$2.24, up 2.3% year over year.

Despite benefiting from a rise in non-interest income and lower provision for credit losses, results suffered due to mounting expenses and a fall in net interest income. Notably, although other earnings drivers including loans and acceptances, and deposits were active during the quarter, these ultimately surrendered to the expense rise. Perhaps concerns over rising expenses led to the fall in share price.   

After considering several non-recurring items, reported net income in the quarter fell 1.7% year over year to C$811 million ($734.1 million). For fiscal 2014, reported net income amounted to C$3.2 billion ($2.9 billion), down 5.9% from the prior year.

Performance in Detail

In the reported quarter, total revenue increased 1.2% year over year to C$3.2 billion ($2.9 billion). Further, adjusted total revenue came in at C$3.4 billion ($3.1 billion), rising 4.3% from the prior-year quarter.

For fiscal 2014, total revenue came in at C$13.4 billion ($12.3 billion), up 5.2% from the prior year.

Net interest income was C$1.9 billion ($1.7 billion), decreasing nearly 1% from the year-ago quarter. The fall was due to a lower interest income, partly offset by a decline in interest expenses.

Non-interest income climbed 3.8% year over year to C$1.3 billion ($1.2 billion). The rise was mainly driven by growth in mutual fund fees, investment management and custodial fees, and underwriting and advisory fees. However, this was partially offset by higher trading losses and a fall in card fees.

Non-interest expenses totaled C$2.1 billion ($1.9 billion), up 8.1% from the year-ago quarter. The rise was primarily due to an elevated employee compensation as well as higher computer, software and office equipment expenditure.

Adjusted efficiency ratio stood at 60.4%, up from 56.7% as of Oct 31, 2013. A rise in efficiency ratio indicates lower profitability.

Total provision for credit losses declined 28.4% year over year to C$194 million ($175.6 million). Loan loss ratio was 0.30%, down 11 basis points from the year-ago quarter.

Balance Sheet and Ratios

Total assets came in at C$414.9 billion ($370.6 billion) as of Oct 31, 2014, up 4.2% from the prior year. Loans and acceptances (net of allowance) increased 4.6% year over year to C$268.2 billion ($239.6 billion), while deposits grew 3.2% year over year to C$325.4 billion ($290.7 billion).

Adjusted return on common shareholders' equity stood at 20.1%, down from 21.9% in the year-ago period.

As of Oct 31, 2014, Basel III Common Equity Tier 1 ratio came in at 10.3% compared with 9.4% as of Oct 31, 2013. Further, Tier 1 capital ratio was 12.2% compared with 11.6% in the year-ago period while total capital ratio was 15.5%, up from 14.6%.

Dividend

Concurrent with the earnings release, Canadian Imperial announced a quarterly cash dividend of C$1.03 per share, representing a 3% hike from the prior payout. The dividend will be paid on Jan 28, 2015 to shareholders of record on Dec 29, 2014.

Our Viewpoint

In spite of top-line growth over the last few quarters, we remain apprehensive regarding the sustainability of the same, given the low interest rate scenario and limited fee income earning avenues. Moreover, rising expenses and pressure on interest income are bound to worsen the situation, going forward.

However, Canadian Imperial's strong business model, diversified product mix and sound capital position should continue to boost its bottom line.

Canadian Imperial currently carries a Zacks Rank #3 (Hold).

Among other foreign banks, both The Royal Bank of Scotland Group plc (RBS) and ItauUnibanco Holding S.A. (ITUB) reported impressive third-quarter 2014 results. Further, Royal Bank of Canada (RY) reported solid fourth-quarter and fiscal 2014 (ended Oct 31) results.