Sunday, October 1, 2023

Stocks of the week: CIBC

Among Canadian banks, CIBC has the largest share of the local real estate market. (Photo: Jade Trudelle)

Why is CIBC (CM, $55.22) bracing for real estate losses? And should investors worry?

Important Facts to Remember About CIBC Stock:

• CIBC is currently significantly increasing its provision for credit losses in real estate and construction, up to 150% and 68% in the second and third quarters, respectively.

• Among Canadian banks, CIBC has the largest share of the local real estate market.

• Losses should be manageable and investors should keep medium and long-term growth objectives in mind. In fact, once achieved, these can lead to an increase in CIBC shares.

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Earlier this year, the Morningstar team highlighted that Canada’s banking sector may be experiencing a transition period as lending slows.

Interest rates represent a burden for borrowers and it seems that CIBC can face some impasses, anticipating the real estate failures it may have to face.

We have noted an uptick in the funds CIBC reserves for losses related to its real estate lending activities.

The bank increased its provision for credit losses on real estate and construction loans by 68% last quarter, after increasing it 150% in the previous quarter.

Stocks Of The Week: Cibc

Eric Compton (Photo: Morningstar)

Equity strategist Eric Compton says the increase in provisions was due to a change in the bank’s macroeconomic outlook, as it saw pressure on debt service ratios in Canada and commercial real estate loan losses in the United States. Joined.

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Reserves reach 7.6% of US office loans at CIBC and investors are likely seeing red flags as well.

In fact, among its peers, CIBC has the largest share of the local real estate market.

Should CIBC Stock Investors Be Worried?

Priority to profits, while CIBC has the capital necessary to absorb losses.

The threat of a housing crisis is more of a risk to future growth than an existential risk for CIBC, says Eric Compton, as CIBC now has the capital and profits to absorb any potential credit losses.

Investors should perhaps focus on the bank’s profitability and medium-term growth objectives. If affected, they would generate an increase in CIBC shares.

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So, for now, let’s put sourcing into perspective before selling something hastily.

The opinion of Andrew Willis, editor-in-chief of Morningstar Canada

A piece by Andrew Willis, Editor-in-Chief of Morningstar Canada

A translation by Mélanie Pilon

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Stocks Of The Week: Cibc

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