Running without scissors at CIBC

After a spate of embarrassing setbacks in the U.S., CIBC is making a comeback.

Pity the bank dubbed “most likely to walk into a sharp object.” Since the Canadian Imperial Bank of Commerce’s role in the Enron debacle helped solidify the unfortunate designation several years ago, the notorious risk-taker has struggled to restore its credibility in an environment where prestige is king and prudence is the order of the day. But if the past few months are any indication, CIBC now appears poised to rebuild its international reputation. Despite being relegated to last place among Canada’s Big Five, the humbled bank is staging a hard-fought comeback, buoyed by better-than-expected first-quarter results and a string of high-profile hires.

To be sure, in recent years CIBC has made more than its share of costly missteps. After forking over a record $3 billion in 2005 to settle claims that it helped Enron hide losses, the bank found itself deep in the U.S. sub-prime mortgage mess. Its exposure to bad structured credit products resulted in $10 billion in writedowns—and provided additional fodder for insult. Even before the extent of the losses were known, The Globe and Mail noted that the blunder “merely cemented [CIBC’s] reputation as the bank most likely to accidentally maim itself while running with scissors.”

So damaged was the bank’s name that even steadily improving financials—under the guidance of fastidious CEO Gerry McCaughey, quarterly earnings often bested analyst expectations—did little to quell the doubt. “They went through such an enormous series of losses,” says National Bank analyst Peter Routledge. “The market was hesitant to put that in the past…and I admit, I was as imprisoned by this bias as anyone.”

But Routledge began to feel different last year, when it became clear just how successful CIBC’s plan to pull out of the U.S. and focus on the Canadian market had been. “They hold oligopoly positions in just about every product line or business in Canada,” he says. “They’re very stable in all of them, and they earn decent returns in all of them.” Meantime, he says CIBC’s move to raise $3 billion in equity in January 2008 paved the way for strong capitalization. “In hindsight, that was one of the best decisions in the middle of that crisis of any bank,” he says. Believing CIBC’s stock price was undervalued, in October National upgraded its rating to Outperform.

Citing a blackout period for reporting quarterly results, CIBC declined a request for an interview. But at the bank’s annual general meeting in late April, McCaughey delivered an optimistic address, telling shareholders, “I am pleased to report that our strategy is working, and we have made progress on all fronts.” Moving forward, he said, the bank would “generate further growth within our risk appetite” by “ensuring we have an appropriate presence in key international markets.” Meantime, CIBC has commenced something of a recruiting blitz. Recent acquisitions include 3D Currency Management’s Nick Mirtchev in London, VTB Bank’s Andy Yeoh in Hong Kong and noted Mackenzie Financial Corp. money manager Suzann Pennington.

But for now, aggressive international expansion appears unlikely. Says Canaccord Genuity analyst Mario Mendonca, who has a Hold rating on CIBC, “I think CIBC’s priority is to stabilize their earnings so they can regain a multiple that is closer to where their peers are.” For a bank desperate to break from its accident-prone past, blending in with the crowd is not a bad place to start.