# CIBC (CM) drooling over US Bank



## Bury (Mar 10, 2017)

Is this bad timing or what? CIBC upping bid to get a foot hold in the US by more than a B.
Is this particular bank so special? Did initiate a small position today at 113.98 but now I wonder.
Any thoughts on what they trying to get so desperately? not used to see bankers sweating...


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## Eder (Feb 16, 2011)

If CIBC is to grow it needs to get outside of Canada...hopefully not at any cost.


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## doctrine (Sep 30, 2011)

It's a really good company they are buying. It will take 3 years to pay off, but there is a chance they could surprise to the upside and get it done sooner. CityNational has worked out spectacularly for Royal Bank, so if this team turns out to be as good then it will work out.


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## Bury (Mar 10, 2017)

Apparently the market agrees with you - it up by 1% at mid day


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## My Own Advisor (Sep 24, 2012)

The more CDN banks diversify....the better. Let's hope they close the deal.


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## redsgomarching (Mar 6, 2016)

My Own Advisor said:


> The more CDN banks diversify....the better. Let's hope they close the deal.


I do agree. The USA has 10 times our population. means 10x more potential customers. (not accounting for babies etc). the sheer volume of transactions in the USA is attractive.


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## mark0f0 (Oct 1, 2016)

My Own Advisor said:


> The more CDN banks diversify....the better. Let's hope they close the deal.


But the US is one of the most over-banked nations on the planet. Expanding into a country that already suffers severe over-capacity in banking can be like throwing money down the drain. Especially as rising interest rates tend to be profoundly damaging to the business prospects of US banks and force them into price wars.

I'm personally convinced, amongst all of the big-5, that a US presence is a liability, not an asset these days, and that Canada's deep multicultural talent pool would be better suited for expansion into the emerging markets where banking penetration is dramatically lower. Or CIBC would be better off just buying back its own stock and paying more dividends if it can't find appropriate emerging markets opportunities.


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## mordko (Jan 23, 2016)

While the rising rates are good for banking, the expectation is already priced in. A lot depends on which way banking regulations are going. If there is a reduction in the reaquirements, this could work out. Otherwise CIBC might have bought at the top.


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## mark0f0 (Oct 1, 2016)

mordko said:


> While the rising rates are good for banking


Rising rates are *not* good for banking. Where did you come up with that idea? Its been the falling rate environment, as seen over the past 35 years or so, that's created the best of times in the banking sector and allowed banks to heap extravagance onto their employees and shareholders. 

As rates rise, spreads compress as loans volumes fall. Gross margins fall dramatically as well. Notional values of loans fall as well (ie: a $1M house at 2%, may very well only be a $400k house at 5%). Its all absolutely horrible for the banks, especially the US banks that tend to offer longer-term financing.


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## doctrine (Sep 30, 2011)

The US has 10 times the population and economy, but 6000 banks (as opposed to ~31 in Canada). 

Many forays into the US for Canadian banks started with general banks, but a lot of these ended up in failure, including most recently for Royal Bank who had a $4 billion writedown in 2011 for their retail bank. However, their CityNational acquisition has been far better, targeting a very profitable niche of specialized lending to high net worth clients. 

Privatebancorp offers another niche to CIBC primarily in commercial lending in the mid-west; it boils down to an expensive acquisition of a really excellent company that is a very good strategic fit. They are hardly rushing into it, and had an extra 6 months to consider the acquisition and are proceeding with it despite having a relatively easy out if they wanted it. We'll all see how it pans out in a few years.


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## mordko (Jan 23, 2016)

Rates rising fast may indeed be a problem because of reevaluation and decrease in borrowing. A slow increase from zero rates would be a boon for banks as net interest margin should get back to more normal levels.


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## mark0f0 (Oct 1, 2016)

mordko said:


> Rates rising fast may indeed be a problem because of reevaluation and decrease in borrowing. A slow increase from zero rates would be a boon for banks as net interest margin should get back to more normal levels.


Good luck with that theory. The sell-side is narrowly focusing on NIM, and ignoring the big picture, ie: gross margins, which is abnormally large due to the low rates. Its pretty simple math, when a bank's cost of funds are low, practically any investment that has a yield greater than the cost of funds will produce a very nice return. Even more so if leverage expands. When rates rise, and the bank's cost of funds rise in lock-step, the margin decreases. Rates that are above the economy's potential growth mathematically must lead to an elevated rate of default as banks, in the aggregate, cannot sustainably extract a rate of return exceeding that of overall economic growth.


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## mordko (Jan 23, 2016)

Yes, it is simple math. When the interest rate is effectively zero, banks find it impossible to pay zero to savers. Even when interest rates are below zero, like in Denmark or Japan, banks still pay positive interest to savers. This drives profit levels down. Accordingly a rise in rates improves profits. There is a massive body of statistics proving it.

The devil, as always is in the detail. The equation changes if the rate rise is not aligned with economy at large and borrowers suffer. And different banks will benefit differently from a slow rate rise.

Here, FT explains it nicely: https://www.ft.com/content/f84dbae4-e713-11e6-967b-c88452263daf


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## humble_pie (Jun 7, 2009)

mordko said:


> When the interest rate is effectively zero, banks find it impossible to pay zero to savers. Even when interest rates are below zero, like in Denmark or Japan, banks still pay positive interest to savers.



swiss banks have never found it impossible to pay zero to savers 

in fact switzerland is famous for imposing negative interest rates on foreigners seeking stability in CHF

.


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## Eclectic12 (Oct 20, 2010)

redsgomarching said:


> My Own Advisor said:
> 
> 
> > The more CDN banks diversify....the better. Let's hope they close the deal.
> ...


It's been like that a long time where Canadian banks have messed up at times with their US purchases/strategies. 

For example, CIBC running Loblaws PCF is still going strong where the CIBC subsidiary Amicus FSB that was partnered with Safeway and Winn-Dixie in the US that lasted an underwhelming three years.


Bottom line is just because there's potential doesn't mean the current action or strategy is a good fit/viable.


Cheers


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## humble_pie (Jun 7, 2009)

mark0f0 said:


> I'm personally convinced, amongst all of the big-5, that a US presence is a liability, not an asset these days, and that Canada's deep multicultural talent pool would be better suited for expansion into the emerging markets where banking penetration is dramatically lower. Or CIBC would be better off just buying back its own stock and paying more dividends if it can't find appropriate emerging markets opportunities.




this is a really interesting point of view. Not saying i agree with it, but it's certainly refreshing to see an original thought clearing the air in the normally ponderous banking sector.

.


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## mark0f0 (Oct 1, 2016)

mordko said:


> Yes, it is simple math. When the interest rate is effectively zero, banks find it impossible to pay zero to savers. Even when interest rates are below zero, like in Denmark or Japan, banks still pay positive interest to savers. This drives profit levels down. Accordingly a rise in rates improves profits. There is a massive body of statistics proving it.


Banks pay zero or less than zero to 'savers' all the time. The whole point of a central bank raising rates is to slow down credit expansion. Banks profit through credit expansion and large balance sheets. The Fed (and the BoC) lowered rates, not raised them in 2009 in order to restore profitability and solvency to the banking sector. Bankers should fear higher rates as they will have to pay more to borrow, but the economy probably won't increase its growth rate significantly, if at all. At the end of a rate hiking cycle, of course, growth rates most likely have slowed down significantly, and that's how you get the classic yield curve inversion which is almost always terrible for banks as capital is actively destroyed in your typical borrow short/lend-long arrangement.





> The devil, as always is in the detail. The equation changes if the rate rise is not aligned with economy at large and borrowers suffer. And different banks will benefit differently from a slow rate rise.
> 
> Here, FT explains it nicely: https://www.ft.com/content/f84dbae4-e713-11e6-967b-c88452263daf


Sell-side propaganda that FT article is.


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## mordko (Jan 23, 2016)

mark0f0 said:


> Sell-side propaganda that FT article is.


Sure. In other news: house prices in Toronto and Vancouver have been falling for 10 years, no end in sight.


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## milhouse (Nov 16, 2016)

Looking for thoughts on CIBC. I bought in at around $106. 
With the dividend increase and share price slide over the last week to $104.54, it close to yielding 5%. 

Its P/E is only 9.5. Rates are slowly rising. The only downside risks I've been reading as that it's fairly exposed to the Canadian housing market and will likely take a big hit if the Canadian housing market tanks. Personally, I don't see the Canadian housing market on that shaky footing even though Vancouver and Toronto are likely very overvalued so I feel the urge to buy more shares. 

Any additional thoughts or comments? Am I missing something?


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## My Own Advisor (Sep 24, 2012)

I think CM is a decent buy now...

As for the housing market, some banks are in more trouble than others:
https://www.fool.ca/2017/08/28/canadian-banks-get-case-of-heloc-indigestion/


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