Canadian Imperial Bank of Commerce

CIBC reported OK third-quarter results, with adjusted EPS of CAD 2.73, up 26% year over year. Shares fell approximately 3%-4% intraday Aug. 27 following the bank's earnings release.

Why it matters: Capital markets segment earnings declined by 9% sequentially, worse than its larger Canadian peers, all of which saw growth during the quarter. While the third quarter is usually seasonally weaker for trading, high-profile US IPO filings and artificial intelligence-related trade were both strong drivers of higher equity trading volume in the industry during the quarter. Within the segment, CIBC's global markets revenue declined by 5% sequentially despite having around 47% exposure to equities trading.

The bottom line: Even with the weaker news on the capital markets front, we expect to increase our fair value estimates of CAD 135/USD 99 per share for narrow-moat CIBC by around a high-single-digit percentage. We continue to view shares as being overvalued. The valuation increase will be primarily driven by higher forecasts for net interest income and higher expectations for wealth management and capital markets fee income, partially offset by higher compensation cost assumptions.

Between the lines: CIBC's management did not give clear credit guidance for the final quarter of fiscal 2026. Prior guidance had called for the bank's loan loss ratio in the second half of fiscal 2026 to be in line with 36 basis points seen during the first half of the year. The bank's third-quarter loan loss ratio was 0.4%, implying that an 8-basis-point sequential improvement will be needed in the fourth quarter to hit the previous guidance. That said, the third quarter's sequentially higher impaired loan provisioning ratio was mostly driven by the Canadian commercial banking and capital markets segments, which the bank called idiosyncratic. Generally, these segments' credit results are more lumpy.

A prolonged and severe tariff situation would lead to higher credit costs and lower balance sheet growth for CIBC as well as the other Canadian banks. That said, government-supportive measures for the tariff-affected sectors and the labor force would help alleviate the negative impact on profitability and returns for the Canadian banks. CIBC also has excess capital to absorb potentially higher credit costs. After the Canadian bank regulator lowered regulatory capital requirements for the common equity Tier 1 ratio by 50 basis points in June, CIBC ended the July quarter with a 240-basis-point buffer against its 11.0% regulatory minimum CET1 ratio.

CIBC will host its investor day on Dec. 9, 2026, and we expect to receive more details about its strategy for deepening client relationships in both Canada and the US, as well as commentary around its artificial intelligence strategy. For the first nine months of fiscal 2026, the bank delivered an adjusted return on equity of 16.9%, well above its previous medium-term target of 15%, albeit in a very constructive environment for capital markets and the bank's wealth management businesses. We would not be surprised if CIBC lifts its ROE target back to 16% at the December investor day, since its original target of 16% introduced at its 2022 investor day was lowered to 15% in 2024 amid higher regulatory capital requirements.

We are increasing our fair value estimate for CIBC to $106 per share from $99 after incorporating the latest earnings results and foreign exchange rate updates. We now incorporate higher short-term earnings growth, with our revenue CAGR from 2025-30 now at 5.4%, 90 basis points higher in our previous forecast. Partially offsetting the higher revenue growth, we also raise our noninterest expense CAGR to 4.8% from 4.3% over the same time period. Our valuation is equivalent to 2.6 times tangible book value as of the end of July 2026 and 13.0 times our 2027 earnings per share estimate. We use an exchange rate of CAD 1/USD 0.72 in our valuation.

After expanding its net interest margin by 7 basis points in 2025, we expect the bank's net interest margin to further expand by 10 basis points to 1.63% in 2026, as its funding cost profile should improve from its progress in growing domestic demand deposits. We forecast its 2026 net interest income to grow by 12.3%. Our normalized net interest margin is now 1.63%. Turning to loan growth, we expect commercial lending to be the primary driver in 2026 as mortgage lending has been lackluster so far, and we forecast CIBC to increase its loans by 4.3% in 2026. Our loan growth CAGR over the next five years is 4.2%. Taken together, we expect CIBC’s net interest income to grow at a CAGR of 5.6 % over the same period.

We forecast a net charge-off ratio of 0.34% in 2026, 6 basis points higher than 2025's 0.28%, as we expect higher consumer loan credit costs given the softness in the Canadian labor market. CIBC is more exposed than its Canadian peers to the housing market, but we view this as a future risk to growth rather than an existential risk to the bank. We believe CIBC will have the earnings and capital to absorb any potential credit losses.

We have increased our trading fee income forecast for CIBC, and we currently expect its trading fees to grow at a five-year CAGR of 6.3%. For underwriting and advisory fees, we now expect CIBC to see a five-year CAGR of 5.3%. We admit that predicting capital markets revenue is inherently challenging, and we still think the capital markets business is highly volatile. We caution investors that a reduction in the revenue base will lead to a much larger decline in profitability, given the business' high operating leverage. Overall, we forecast CIBC to increase its fees at a five-year CAGR of 5.1% from 2025 to 2030.

We forecast 2026 expenses to grow at 11.2%, mostly driven by higher employee compensation and technology investments. We have also included a CAD 350 million pretax charge related to its planned divestiture of CIBC Caribbean in 2026.

We forecast its normalized efficiency ratio to be around 52.8%. Our forecasts lead to an average return on tangible common equity of 19.0% over the next five years, and our normalized ROE forecast for CIBC is now 16.3%, in line with its medium-term target of 15%-plus. We use a cost of equity of 8.6%, including a 50-basis-point country risk premium reflecting CIBC’s current Caribbean exposure.

We believe Canadian Imperial Bank of Commerce has a narrow Morningstar Economic Moat Rating because it possesses durable cost advantages and switching costs that are consistent with our bank moat framework. We assign a narrow moat rating instead of wide because the bank does not have dominant market shares in its domestic operations, limiting some of its funding cost advantages and operating efficiencies. CIBC also has a history of higher credit costs related to poor investment and lending decisions. Even so, the Canadian segment will continue to make up the vast majority of CIBC’s business mix, and we remain confident that CIBC will earn returns that are comfortably above its 8.6% cost of equity through the cycle.

Bank moats are derived primarily from cost advantages and switching costs, and we believe the Canadian banking environment offers systemic cost advantages and switching costs that lead to returns above the cost of capital, allowing the big banks operating under its jurisdiction to possess moats. In Canada, switching costs stem from a tightly regulated oligopolistic market structure (Big Six Canadian banks control more than 95% market share), which limits competition, stabilizes pricing, and reduces customer incentive to switch banks. Cost advantages stem from a low-cost deposit base, strong operating efficiency, and conservative underwriting, reinforced by a Canadian regulatory environment favorable to the big banks. This combination produces lower operating, credit, and regulatory costs, along with lower and better-diversified risk, supporting higher risk-adjusted returns for the big Canadian banks.

Canada's favorable banking environment stems from several factors. First, barriers to entry are very high. Nonresidents may not own more than 25% of a bank's shares without government approval, and foreign banks face operating restrictions. Domestic competition is also controlled, as exclusive federal chartering control has entrenched a few large banks. Second, a protective, efficient regulatory system also drives cost advantages through risk reduction. Regulators need only monitor the Big Six banks, far simpler than overseeing thousands of US banks, fostering collaboration and coordinated responses to strain. Regulators also help control mortgage pricing, limiting pricing wars that erode underwriting standards. Rules curb bad credit issuance through mandatory insurance on riskier mortgages, the absence of a GSE-like subsidized securitization market, and requirements that banks hold more risk on the balance sheet. A higher-tax, stronger safety-net model has fostered a more stable middle class, supporting political stability and further reducing systemic risk. Combined with government subsidies on deposits and mortgage insurance, and the implicit too-big-to-fail subsidy (all Big Six banks are domestic systemically important banks at a minimum), these factors create an environment where excess bank returns are highly likely in Canada.

Scale further reinforces these cost advantages. Larger scale spreads fixed costs, improving efficiency, as the five largest Canadian banks are all bigger than the largest US regional bank. Nationwide branch networks lower customer acquisition costs. The banks span nearly every major financial product, generating economies of scope on top of economies of scale.

We view CIBC’s Canadian banking segments (personal banking and commercial banking) as moaty, which accounted for 64% of its 2025 earnings. CIBC often ranks number three or four in its Canadian retail operations, and is particularly large in retail mortgage. While the bank has done a lot to improve the depth and quality of client relationships over the past, it’s usually not the number-one or -two player for its products, and we don’t expect this to change significantly. This leads us to believe that the bank’s deposit cost and general scale advantages are not as great as the more dominant players like Royal Bank of Canada and Toronto Dominion Bank.

Beyond Canadian banking and wealth management, CIBC derives 27% of its 2025 earnings from capital markets, and 11% of earnings from its US banking and wealth business.

We don’t view CIBC’s US commercial banking and wealth management segment as moaty. CIBC built out its current US commercial bank franchise through a series of acquisitions. We view its strategy as sound in commercial banking with a focus on cross-selling high-net-worth wealth management and private banking, but the bank has yet to carve out a moat here. With a loan-to-deposit ratio above 100%, we don’t view CIBC’s US franchise as advantaged in funding costs. CIBC’s credit costs were elevated in 2023 due to its exposure to US commercial real estate office loans.

The wealth management and asset management business' primary moat source is switching costs, and we view CIBC as moaty in both businesses. While not the most dominant asset manager among the Canadian banks, CIBC, through both organic growth and acquisitions, has managed to build up a respectable amount of assets under management among peers. In addition, Big Six banks and Big Three life insurers have taken shares from independent pure-play asset managers, a trend we expected to continue given their larger distribution networks and more fungible pricing across their broader product sets.

We think CIBC has brand recognition that provides a competitive advantage for garnering investment banking deals and recruiting top talent, but its size trails larger Canadian peers. Of its capital markets segment revenue in fiscal 2025, around 35% is from its investment banking business and 65% is from its market/trading business. While we don't view its trading business as favorably as its investment banking business, it's deeply intertwined with the latter and serves as a crucial part of the bank's value proposition to institutional clients.

CIBC has significantly improved multiple measures of core banking performance, such as customer perception surveys, promoter scores, and products per customer. The bank can improve its return profile through better cross-selling.

CIBC is more Canada-focused than most of its peers. Its consolidated returns on tangible equity remain on the high end of the industry.

CIBC is actively deploying artificial intelligence, and if it could significantly boost its revenue productivity per banker without incurring materially higher expenses, it could improve its profitability and return profile.

CIBC is the most exposed to a downturn in the Canadian housing market, which is under stress once again, increasing overall risks for the economy and the banking system.

CIBC has a target to increase its US segment earnings mix to 25% of the total bank, which is less profitable than its Canadian banking segment and can further dilute overall returns.

If the United States-Mexico-Canada Agreement renewal process gets significant delays or yields unfavorable tariff rates to Canada, the Canadian economy could enter a recession and make the bank see lower growth and higher credit costs.