Canadian Imperial (CM) Q2 Earnings Rise, Stock Down 4.5%

Canadian Imperial Bank of Commerce (TO:CM) reported strong second-quarter fiscal 2019 (ended Apr 30) results. Adjusted earnings per share were C$2.97, up 1% from the prior-year quarter’ reported tally.

Results were driven by increase in non-interest income. Moreover, strong balance-sheet position acted as a tailwind. However, investors’ concerns escalated on significant rise in provisions, expenses and lower net interest income. Therefore, following the release, shares of Canadian Imperial Bank of Commerce declined 4.5% on the NYSE.

After considering several non-recurring items, net income was C$1.35 billion ($1.01 billion), reflecting a rise of 2% year over year.

Solid Adjusted Revenues Partly Offset Rise in Costs

Adjusted total revenues were up 3.9% year over year to C$4.58 billion ($3.44 billion). On a reported basis, total revenues came in at C$4.54 billion ($3.41 billion), indicating an increase of 3.7% from the prior-year quarter.

Net interest income was C$2.46 billion ($1.85 billion), down around 1% from the year-ago quarter. This downside reflected rise in interest expenses, partly offset by higher interest income.

Non-interest income increased 9.5% year over year to C$2.08 billion ($1.56 billion).

Adjusted non-interest expenses totaled C$2.57 billion ($1.93 billion), flaring up 4% from the year-ago quarter.

Adjusted efficiency ratio was 56.1% at the end of the reported quarter, up from 55.9% as of Apr 30, 2018. Rise in efficiency ratio indicates decline in profitability.

Total provision for credit losses grew 20.3% year over year to C$255 million ($191.4 million).

Improving Balance Sheet & Capital Ratios

Total assets were C$634.1 billion ($473.6 billion) as of Apr 30, 2019, up 3.2% from the prior quarter. Net loans and acceptances grew 2% sequentially to C$392.9 billion ($293.4 billion) and deposits climbed 2.8% sequentially to C$477.5 billion ($356.6 billion).

As of Apr 30, 2019, Common Equity Tier 1 ratio was 11.2%, in line with the prior-year quarter’s reported figure. Furthermore, Tier 1 capital ratio was 12.6% compared with 12.7% as of Apr 30, 2018. Total capital ratio was 14.5%, declining from 15.1% in the prior-year quarter.

Adjusted return on common shareholders’ equity was 15.9% at the end of the reported quarter, down from 17.4% a year ago.

Our Viewpoint

Given an improving economy and loan growth, Canadian Imperial is expected to witness steady improvement in revenues. However, elevated expenses and a challenging operating backdrop remain major concerns.