-- We believe that the Canadian banking sector is
encountering incremental pressure from headwinds facing the
Canadian economy, which is heightening economic risk in the
-- We also believe that industry risk for the Canadian
banking sector is increasing. We expect that intensifying
competition for loans and deposits will lead to pressure on
profitability growth, especially in banks' retail businesses.
-- We are affirming our 'A+/A-1' long- and short-term
issuer credit ratings on CIBC, as well as the 'A+' issue rating
on CIBC's senior unsecured debt. We are lowering our issue
rating on CIBC's nondeferrable subordinated debt to 'BBB+' from
'A-', and our rating on its preferred shares and hybrids to
'BBB' from 'BBB+'.
-- The stable outlook reflects our expectation that the
bank's credit fundamentals will remain consistent with its
current ratings over the next 24 months.
On Dec. 13, 2012, Standard & Poor's Ratings Services
affirmed its 'A+/A-1' long- and short-term issuer credit ratings
on Canadian Imperial Bank of Commerce and its 'A+' issue rating
on CIBC's senior unsecured debt. In addition, we lowered our
issue rating on CIBC's nondeferrable subordinated debt to 'BBB+'
from 'A-', and our rating on its preferred shares and hybrid
securities to 'BBB' from 'BBB+'. The outlook is stable.
The rating action follows our review of banking sector
industry and economic risks in Canada, taking into account the
headwinds facing the Canadian economy, high debt levels of
Canadian consumers, expectations of decelerating loan demand and
continued pressure on margins, particularly in the Canadian
retail sector, and areas of continuing weakness in the global
economy and financial system.
We believe banks operating in Canada are vulnerable to an
expanding set of potential stresses arising from competitive
pressure on growth and margins, while asset quality is
potentially vulnerable--in light of high consumer
indebtedness--to developments that may trigger general economic
deterioration in Canada. Consequently, we lowered our anchor
stand-alone credit profile (SACP), which is the starting point
for our ratings on financial institutions operating primarily in
Canada, including CIBC, to 'a-' from 'a'.
This is reflected in our revision of the Banking Industry
Country Risk Assessment (BICRA) for Canada to group '2' from '1'
and our revision of the industry risk score, a component of the
BICRA, to '2' from '1' (see "Various Rating Actions Taken On
Canadian Financial Institutions Due To Rising Industry and
Economic Risks," published Dec. 13, 2012, on RatingsDirect on
the Global Credit Portal).
We believe that the banks and credit unions are under
incremental pressure from the headwinds facing the Canadian
economy. The acceleration of household debt to record levels has
increased Canadian households' vulnerability to sudden shocks in
incomes, employment, or a spike in interest rates.
Exposure to the consumer sector accounts for nearly
three-fifths of total bank loans, and losses on banks' uninsured
loan portfolios--although recent performance levels have
generally been strong--may be driven higher in the event of a
substantial shock to household creditworthiness, though we
expect effective regulatory supervision to remain a positive
influence on Canadian bank credit quality.
Although we expect ongoing intensification of competitive
dynamics in the Canadian banking sector, we note that overall
Canada still remains positioned favorably vis-a-vis most of its
global peers. However, a slowing economy risks exacerbating the
already-intense competition between banks for loan and deposit
share and puts further pressure on the margin and profitability
of the Canadian financial institutions' retail and commercial
lending businesses, the cornerstone of Canadian banking and
largest contributor to revenues.
We also believe that Canadian financial institutions' risk
tolerances may increase to compensate for lower profitability by
reaching for yield through investments, more aggressive lending
in higher yielding loans such as personal loans and credit
cards, or potentially a pick-up in mergers and acquisitions
Furthermore, we expect that continuing industry conditions
will test banks' operational capabilities. Relative performance
in areas such as service standards, cost control, operational
effectiveness, underwriting discipline, and ability to integrate
acquisitions will likely contribute to changes in market
position and financial performance, and will have an impact on
the relative credit standing among industry participants. Our
ratings on CIBC reflect a combination of factors including the
anchor SACP, company-specific factors, and our expectation for
extraordinary government support.
For CIBC we start at the anchor of 'a-'. We then adjust for
CIBC's "adequate" (as our criteria define it) business position
as CIBC is the smallest of the big five Canadian banks in terms
of total assets, but it holds significant market positions in
several business lines, including credit cards, mortgages, and
wealth management. CIBC has a stated aim of rebuilding market
share through a strategy emphasizing customer focus while taking
on generally lower risk credit exposures, although accentuating
CIBC's exposure to the Canadian consumer.
The challenge for the bank is to restore franchise momentum
primarily based on customer service while competitors also
maintain strong service offerings. Our view of CIBC's "adequate"
capital and earnings is based on a Standard & Poor's
risk-adjusted capital (RAC) ratio that we project will increase
to between 8% and 8.5% by 2014, as well as on CIBC's consistent
earnings. The "adequate" risk position takes into account the
good quality of CIBC's domestic portfolio, with a majority of
the bank's impaired loans arising from its more limited
Caribbean and U.S. loan portfolios.
We view CIBC's funding as "average" and liquidity as
"adequate". This is based on the bank's substantial base of core
deposits and a low-risk securities portfolio, while recognizing
a material wholesale funding component. It is our view that CIBC
is a "systemically important" bank and that it would likely
benefit from extraordinary government support in times of
Consequently, the SACP on CIBC benefits from a two-notch
uplift for government support relative to its stand-alone credit
profile of 'a-'. (This is an additional notch of support
compared to that applied previously when CIBC's SACP was 'a',
reflecting the applicable criteria for notching.) Outlook The
stable outlook reflects our belief that CIBC's revised business
strategy embraces a lower risk profile than in the past,
focusing on the domestic market while avoiding higher risk
activities unrelated to its core banking competencies.
Maintaining current ratings will depend on CIBC's success in
maintaining or building its profitability despite the potential
for more difficult industry conditions, as the bank focuses on
its core commercial banking strengths and executes its revised
strategy that emphasizes core-relationship banking.
Ratings retention would also be predicated upon the bank
maintaining a RAC ratio consistently above 7%. An upgrade would
depend on the establishment of sustained franchise growth
momentum relative to peers, with successful execution of its
strategy reflected in its business position and capital and
earnings. A one-notch improvement in the SACP would result in an
unchanged issuer credit rating, due to differences in notching
for support applied at different SACP levels.