*DJ Fitch Affirms Canadian Imperial Bank of Commerce at 'AA-'; Outlook Stable
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January 17, 2020 16:37 ET (21:37 GMT)
Press Release: Fitch Affirms Canadian Imperial Bank of Commerce at 'AA-'; Outlook Stable
The following is a press release from Fitch Ratings:
Fitch Ratings-New York-17 January 2020:
Fitch Ratings has today affirmed Canadian Imperial Bank of Commerce's (CIBC) Long-term and Short-term Issuer Default ratings at 'AA-' and 'F1+', respectively. The Rating Outlook is Stable.
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 are published separately. For further information about the Canadian banking sector, please refer to the special reports titled "Fitch Ratings 2020 Outlook: Canadian Banks" (Nov. 19, 2019) and "Canadian Banks Fiscal 2019 Results" (Dec. 18, 2019).
Canadian Imperial Bank of Commerce (CIBC); Long Term Issuer Default Rating; Affirmed; AA-; RO:Sta
; Short Term Issuer Default Rating; Affirmed; F1+
; Viability Rating; Affirmed; aa-
; Support Rating; Affirmed; 5
; Support Rating Floor; Affirmed; NF
; Derivative Counterparty Rating; Affirmed; AA-(dcr)
----senior unsecured; Long Term Rating; Affirmed; AA-
----subordinated; Long Term Rating; Affirmed; A+
----preferred; Long Term Rating; Affirmed; BBB
----long-term deposits; Long Term Rating; Affirmed; AA-
----Senior preferred; Long Term Rating; Affirmed; AA-
----short-term deposits; Short Term Rating; Affirmed; F1+
----Senior preferred; Short Term Rating; Affirmed; F1+
Canadian Imperial Holdings, Inc.
----senior unsecured; Short Term Rating; Affirmed; F1+
CIBC Capital Trust
----preferred; Long Term Rating; Affirmed; BBB
CIBC World Markets plc; Long Term Issuer Default Rating; Affirmed; AA-; RO:Sta
; Short Term Issuer Default Rating; Affirmed; F1+
; Support Rating; Affirmed; 1
CIBC Capital Markets (Europe) S.A.; Long Term Issuer Default Rating; New Rating; AA-; RO:Sta
; Short Term Issuer Default Rating; New Rating; F1+
; Support Rating; New Rating; 1
CIBC Bank USA; Long Term Issuer Default Rating; Affirmed; A+; RO:Sta
; Short Term Issuer Default Rating; Affirmed; F1
; Support Rating; Affirmed; 1
----long-term deposits; Long Term Rating; Affirmed; AA-
----short-term deposits; Short Term Rating; Affirmed; F1+
Key Rating Drivers
IDRS, VRS AND SENIOR DEBT
The Stable Outlook incorporates Fitch's recognition of persistent tail risks to the Canadian banking system. These include elevated levels of household and corporate indebtedness, vulnerability to global trade tensions and structural weaknesses in the Canadian oil sector. However, Fitch notes that risks stemming from the housing market have eased in light of successful macro-prudential measures. Moreover, trade tensions have materially moderated since the lifting of U.S. imposed aluminum and steel tariffs and progress toward ratification of the United States-Mexico-Canada Agreement. Downside risks in the operating environment are also mitigated by Canada's strong, proactive banking regulation.
CIBC's ratings are highly influenced by the company's solid franchise and diversified business model, occupying the fifth position in terms of assets, loans and deposits in its large Canadian bank peer group. CIBC's company profile also benefits from Canada's concentrated banking sector and high barriers to entry. Fitch views CIBC's asset quality as supportive of its rating while its earnings stability, sound capital and good liquidity position are generally commensurate with its rating level.
Fitch views CIBC's risk appetite as mixed relative to peers. Positively, CIBC's sustained moderation in its rate of loan growth (the lowest among peers at 4.8% for fiscal year ended October 2019, is viewed favorably compared with its relatively elevated mortgage growth during 2016-2017. However, notwithstanding a significant decline in originations, residential mortgages continued to represent 53% of the loan book at 4Q19, a higher share than most peers. One third of the mortgage portfolio, or approximately 17% of gross loans, was backed by insurance. In addition, CIBC disclosed an estimated potential sensitivity to a 100 bps decline in interest rates equivalent to approximately 2.1% of net interest income at 4Q19, a level that Fitch views as moderate and manageable in the context of solid non-interest income generation.
CIBC's long-term asset quality is a credit strength benefitting from a diversified business mix and high levels of security. CIBC's gross impaired loan (GIL) ratio increased slightly year-over-year by 4 basis points (bps) to 47 bps at 4Q19, compared to a peer average of 56 bps. The GIL ratio was affected by a large, single-client, fraud-related impairment in 4Q19 for which the bank has taken a CAD52 million provision. The bank views the fraud as an isolated event. Net charge-offs were 25 bps during FY2019, and has not exceeded 52 bps since 2011.
In the immediate future, Fitch expects asset quality measures to improve on the basis of CIBC's announced sale of its majority interest in Barbados-based subsidiary, CIBC FirstCaribbean, which contributed roughly one-quarter of loan impairments. Over the near-to-medium term, Fitch anticipates credit quality to normalize from current benign levels to a range more in line with historical averages. In Fitch's base case, this normalization would remain consistent with current rating levels.
CIBC's ratings are somewhat constrained by its earnings and funding metrics, which while highly stable over time, are merely adequate for this rating level. For FY2019, return on average assets declined to 80 bps from 88 bps in 2018, pressured by a moderate rise in provisions against both impaired and performing loans, in accordance with IFRS9. Net interest margin (NIM) was largely stable in 2019 however, CIBC's moderately higher potential sensitivity to a declining interest rate environment could pressure CIBC's net interest income relative to peers in the event of an accommodative change in monetary policy.
Fitch views CIBC's funding profile as good, with a loan to deposit ratio, adjusted for securitized mortgages on balance sheet, of 109.4% at 4Q19, which was moderately above the peer median. Its core deposit base is stable and granular, more than two-thirds of which are from personal and small business clients. Customer deposit growth has been strong and has outpaced loan growth for two consecutive years. The bank also reports adequate liquidity, with unencumbered liquid assets equivalent to approximately 31% of customer deposits and short term funding as of 4Q19.
CIBC's capital position has moderately improved since FYE2018, benefitting from solid internal capital generation that offset an incremental rise in risk weighted asset density. The bank's CET1 ratio improved by 20 bps year-over-year to 11.6% at FYE2019, and the bank estimated that completion of the announced CIBC FirstCaribbean sale would represent a further 40 bps improvement. CIBC reported a TLAC ratio equivalent to 18.5% and Fitch anticipates that it will comfortably meet its 23.75% TLAC requirement by the November 2021 deadline through the scheduled replacement of maturing debt instruments.
SUPPORT RATING AND SUPPORT RATING FLOOR
The bank's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF' (No Floor) reflect the implementation of bail-in rules for domestic systemically important banks (D-SIBs) in 2018. Bail-in rules empower relevant authorities to impose losses on creditors in the event of a D-SIB failure.
The Canadian bail-in regime adheres to the Financial Stability Board's principles. However, it differs from other resolution regimes in that Canadian authorities retain significant flexibility to resolve an insolvent financial institution. Conversion of bail-inable senior debt to common equity is not triggered automatically in Canada but is retained at the discretion of the relevant authorities, which have wide latitude, including re-capitalizing an institution, creating a bridge bank or imposing losses on creditors. Notwithstanding this flexibility, in Fitch's view, the government's propensity to support these institutions has diminished such that it can no longer be relied upon.
INSTITUTIONAL SUPPORT
The ratings of CIBC World Markets Plc, CIBC Bank USA (CIBCUS) and CIBC Capital Markets (Europe) S.A. are linked to that of their parent, CIBC. As such, these subsidiaries have a Support Rating of '1', indicating that there is a high likelihood of institutional support from CIBC, if required. Since the Support Rating is based on institutional rather than sovereign support, there is no Support Floor Rating assigned.
SENIOR PREFERRED DEBT
CIBC's legacy senior debt and short-term (less than 400 days) senior obligations are equalized with the Bank's Long-Term IDR and senior unsecured debt. Over time, however, Fitch will likely provide a one-notch rating uplift to these "senior preferred" obligations as these instruments are legally exempted from bail-in conversion under the Canadian bail-in regime and are supported by increasing levels of qualifying junior debt buffers, including TLAC which is required to reach 21.5% of risk-weighted assets by November 2021.
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. CIBC's Short-Term Deposit Rating of 'F1+' is at the highest possible level. Over time, Fitch will likely provide a one-notch uplift to CIBC's DCR and Long-Term deposit ratings as these instruments are legally exempted from bail-in conversion under the Canadian bail-in regime and are supported by an increase in qualifying junior debt buffers.
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January 17, 2020 16:38 ET (21:38 GMT)