It’s been a volatile week with fear of bank runs for the overall market, and it’s little surprise that the major market averages have found themselves sitting near their December lows given the wreckage witnessed in the Financial Sector (XLF) with the failure of Silicon Valley Bank and Signature Bank New York.
While this has led to forced and panic selling in smaller regional banks, the spillover has affected larger banks as well, with many more than 20% off their recent highs.
Although staying on the sidelines and not catching falling knives in the smaller regional banks that are riskier might make sense for most conservative investors, I don’t see nearly as much risk in large-cap banks, and especially banks in Canada that have weather recessions better than most of their global peers.
In fact, from a sentiment standpoint, there’s arguably no better time to be looking at buying banks than during fears of a bank run when the sector has fallen in a straight line and many investors are getting emotional and dumping positions.
Let’s take a closer look at one name that has become interesting during this sell-off.
Further Weakness Should Present Buying Opportunity
Canadian Imperial Bank Of Commerce (CM) is a $37 billion bank based out of Canada and is one of the top-5 big banks in the country.
The company has one of the best track records of returning capital to shareholders in the world, with a 13-year track record of dividend growth, and it was founded in 1875.
The company was created when the Canadian Bank of Commerce and Imperial Bank of Canada merged to form CIBC, and it has been steadily growing its business since and paying consistent dividends for over 100 years running, and not cutting during the Great Financial Crisis.
In FY2022, CM reported net income of $6.2 billion, a 14% return on equity, and reported that it had 13 million clients.
Annual EPS came in at $7.05 which represented a 3% decline year-over-year, but this was lapping difficult comparisons after annual EPS increased from $4.85 in FY2020 (50% growth).
Meanwhile, revenue hit a new record of $21.8 billion, as did its dividend, helped by a solid year from its Canadian Commercial Banking and Wealth Management segment which saw 10% revenue growth.
Looking back over the past several years, annual EPS has been below target at a 3.5% 5-year CAGR, but the company is confident in turning its results around.
In the company’s 2022 Investor Day, Canadian Imperial Bank highlighted three strategic pillars to grow. These three pillars included Commercial Banking, Private Wealth Management, and investments in Technology/Infrastructure to increase satisfaction for current and new clients.
On the first pillar, Canadian Imperial Bank noted that it has grown assets under management [AUM] considerably since 2018, $28.6 billion in new clients and $0.60 billion from tuck-in acquisitions and it plans to continue this incredible growth.
In fact, the company’s 2025 private wealth management target is a 15% AUM compound annual growth rate, slightly above its 14% compound annual growth rate in AUM since 2018.
Meanwhile, the company is also focused on implementing Salesforce to improve connectivity and deepen its client relationships while enhancing its technology skillset and improving client experience with a single Wealth Management platform.
To date, we’ve seen considerable progress with a much better experience for its Investors Edge platform and one of the better platforms among the Big Five banks.
Putting it all together, the company hopes to achieve 10-13% compound annual revenue growth in its 2025 target driven by 15% Private Wealth Management AUM growth and a 10% increase in annual client referrals.
Based on a share price of $41.40 and annual EPS estimates of $5.25, CM is trading at 7.9x forward earnings, a dirt-cheap valuation relative to its historical multiple and relative to peers.
In fact, large-cap banking peers in the United States trade at between 9.0 to 10.5x earnings, while Canadian bank peers trade at 11-12x earnings, a large premium to CM.
This suggests CM is quite attractively valued and for reference, the lowest the stock traded was 5.5x forward earnings in 2008/2009, 7.0x forward earnings in 2016, and 7.0x forward earnings in 2020, suggesting the recent pullback has left the stock close to where it historically bottoms out.
So, while negative sentiment is warranted on financials given recent developments, much looks priced into CM at current levels.
The Technical Picture
Canadian Imperial Bank has suffered a sharp correction over the past two weeks after being rejected by its declining 200-day moving average.
This 15% pullback has left the stock hovering just above key support at $39.80, an area where the stock has seen above-average volume buying and two 15-25% rallies within thirty trading days on previous tests of this level.
While triple bottoms or a third test of a key support level can be ominous and isn’t as favorable a setup as a double bottom, I see the $40.00 – $41.00 level as a strong value zone for CM where it trades at less than 8x earnings, and we’re also seeing some demand from insiders with a large insider purchase last week.
If the fears in the banking sector worsen, it’s certainly possible that CM could penetrate its support level at $39.80, but I believe there’s a good chance that this would be a bear trap, especially given that the stock would be offering a very attractive 6.5% yield at these levels.
So, with CM starting to become short-term oversold and with arguably the worst sentiment for banks since March 2020, I see this as an opportune time to start a small position in a stable bank with a 100+ year dividend track record that is being thrown out with the proverbial bathwater.
The Bottom Line
Canadian Imperial Bank has historically traded at 10.5x earnings, below that of the multiples enjoyed by its peers south of the border and below that of its larger peers like Royal Bank (RY).
I believe an earnings multiple of 10.5 is a conservative fair multiple for the stock and believe 11.5x is more suitable given its discount to peers, but given the worries of a recession, it’s best to value the stock using its long-term multiple to be safe.
Based on an earnings multiple of 10.5 and FY2024 annual EPS estimates of $5.25, I see a fair value for the stock of $55.10, translating to 34% upside from current levels.
However, this does not take into account the company’s industry-leading 6.1% dividend yield, boosting the total return to ~40% from current levels.
Some investors might disagree with this fair value estimate and believe a lower multiple is warranted.
However, at least when it comes to management, they appear to see considerable value here, with CM’s CEO, Victor Dodig, stepping up to buy over $2.2 million in shares last week at the equivalent of $42.00 per share.
So, for investors looking to take advantage of the extreme negative sentiment for banks, I see this pullback in CM below $41.00 as a buying opportunity.
Disclosure: I am long CM
The above analysis of Canadian Imperial Bank Of Commerce (CM) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is Canadian Imperial Bank Of Commerce (CM) A Buy or Sell?
Based on MarketClub’s technical analysis tools, Canadian Imperial Bank Of Commerce (CM) is in a strong downtrend that is likely to continue. While CM is showing intraday strength, it remains in the confines of a bearish trend. Traders should use caution and set stops.
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