Monday, January 14, 2008

CIBC in the eye of a storm on Tuesday

While stories of financial concerns over the sub prime mortgage mess in the USA are almost a daily occurrence now, Tuesday will bring a bit of the drama north of the border.

The National Post is reporting that CIBC will be receiving a $2.75-billion cash injection on Tuesday , designed to help it weather the storm of suffering that it, and for the most part it alone as a Canadian bank, shares with its friends and acquaintances in the US.

Most Canadian banks have managed to stay out of the money pit that the sub prime crisis has become, but CIBC which revealed its sub prime losses soared in the last two months of 2007 has been bleeding quite a bit since the crisis began to percolate.

CIBC's sub prime write downs are now at US$3.3-billion, up from under $1-billion at the end of October and the share price of the bank has fallen quite a bit as the money drain began, that share price is expected to drop even further when the business day begins on Tuesday, part of the rescue package if you will that has been agreed to, provides for the white knights of private investors to buy CIBC shares at a significant discount to Monday's closing stock price.

Last week CIBC fired a number of executives over the financial meltdown that they have suffered so far, a common enough situation in the US, but something relatively unheard of in Canada's rather small and close knit banking industry.

The troubles at CIBC come about, just as the topic of Canadian bank mergers return to the forefront, in what seems like an increasingly fragile economic order of late, the prospect of denying the banks the opportunity to solidify their positions may be hard to hold back again. The current troubles at CIBC, probably make them the leading candidate to be gobbled up by one of their more frugal competitors.

The 2.7 billion dollar cash injection is designed to give the bank some "flexibility" just in case "further negative events should occur." Events that no doubt will be of great interest to shareholders and customers alike.

Investors prop up CIBC with $2.75B injection
Duncan Mavin, Financial Post
Published: Monday, January 14, 2008
Peter J. Thompson/National Post

A team of investors is bailing out Canadian Imperial Bank of Commerce with a $2.75-billion cash injection. The money will be used to prop up the bank that has suffered more than any of its Canadian rivals from the global credit crunch.

For the most part, Canada's banks have avoided the worst of the multi-billion dollar sub prime mess hammering banks in the United States, where executive heads have rolled and banks have been forced to seek emergency cash from outside investors.

But CIBC -- which announced the bailout plan Monday and also revealed its subprime losses soared in the last two months of 2007 -- is suffering like the banks south of the border.

CIBC's subprime writedowns are now at US$3.3-billion, up from under $1-billion at the end of October. Last week, CIBC also fired a number of top executives including Brian Shaw, former chief executive of CIBC World Markets, and Ken Kilgour, CIBC's former chief risk officer.

The bank's stock price has also fallen sharply in recent months. The announced bailout deal sees a group of private investors buy CIBC shares at a significant discount to Monday's closing stock price and the bank's shares are likely to sink even lower when trading begins again this morning.
The turmoil at CIBC echoes massive problems that have engulfed banks around the world.

Citigroup, the world's largest bank, is facing writedowns as high as US$24-billion and may lay off tens of thousands of staff. The U.S. bank, which fired its chief executive Charles (Chuck) Prince, also sold a 4.9% stake to the Abu Dhabi Investment Authority to raise US$7.5-billion in emergency funding in November, and is reported to be in discussions with the China Development Bank and others to raise several billion dollars more.

Merrill Lynch & Co., Morgan Stanley and UBS AG of Switzerland have also recently sought massive capital infusions from overseas investors, as subprime-related losses in the global banking sector have escalated to tens of billions of dollars. Some analysts have predicted total losses in the sector could eventually be several hundred million dollars.

The CIBC deal includes $1.5-billion from a group of investors including Manulife Financial Corp., the Caisse de dépôt et placement du Québec, OMERS pension plan and Hong Kong billionaire Li Ka Shing. A further $1.25-billion will be raised by selling shares in a public offering.

CIBC chief Gerry McCaughey said the capital injection provides shareholders with greater certainty the bank's balance sheet will remain strong even in the event of additional writedowns.
"One of our priorities is to further strengthen CIBC's capital base for contingent risk given the challenging credit market conditions and the potential impact on CIBC," he said.
Dominion Bond Rating Service said the cash infusion will strengthen the bank's capital basis and provide some flexibility if "further negative events should occur."

However, CIBC's ratings remain under review with negative implications due in part to concerns about the bank's risk management processes, the bond rating service said.

In recent weeks, Mr. McCaughey has acted to shed risk at the accident prone bank, exiting business lines in New York and London that were more likely to produce volatile results.
Mr. McCaughey became CIBC chief in the wake of the bank's previous biggest snafu, an entanglement in the Enron debacle that ultimately cost CIBC a US$2.4-billion legal settlement in 2005. However, the bank's latest woes will eclipse its earlier problems.

National Post

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