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CIBC plans to stay in Caribbean despite second-quarter hit on weak economy

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TORONTO - Trouble in CIBC's Caribbean banking subsidiary left a mark on the bank's second-quarter results, but executives say despite the challenges they're not planning to exit the region.

"The business has historically been a good investment for us," chief operating officer Richard Nesbitt told analysts during a conference call, adding that he believes the division can return to past profitability levels.

". . . We continue to believe we can get there. Unfortunately, it's going to take us longer because the economic environment has not started to improve like we felt it would," Nesbitt said.

CIBC isn't the only Canadian bank to have suffered the effects of the weak Caribbean economy, but it has been hit the hardest in the quarter.

On Thursday, CIBC (TSX:CM) reported that its second-quarter profit dropped to $306 million, or 73 cents per share, due to losses from its CIBC First Caribbean subsidiary. That compared with a profit of $862 million or $2.09 per share in the same quarter last year.

The bank also boosted its quarterly dividend by two cents to $1 per common share.

Earlier this month, CIBC announced it would take a $420-million, non-cash goodwill impairment charge in the quarter related to the Caribbean, and another $123 million of after-tax of loan losses.

The Caribbean economy has been in a slump for several years, affected by the global financial crisis, which caused a slowdown in tourist visits to regions like the Cayman Islands, Barbados and the Bahamas.

Several Canadian banks have operated in the region, including Royal Bank (TSX:RY), which announced earlier this year it would sell its Jamaican banking operations. Scotiabank (TSX:BNS) also set aside more money for bad loans in the Caribbean in its second-quarter report.

CIBC has the biggest presence of the group, and calls itself the largest, regionally-listed bank in the Caribbean, with operations in 17 regional markets.

Despite the weakness in CIBC results, it was the sixth big bank to beat analysts' expectations on adjusted earnings per share in the quarter.

Along with CIBC, BMO (TSX:BMO) and National Bank (TSX:NB) also announced in the quarter that they're raising their dividends.

During the quarter, CIBC recorded $22 million in expenses related to its travel rewards program and from its Aeroplan transactions with Aimia (TSX:AIM) and TD Bank (TSX:TD). Travel rewards company Aimia Inc., which owns and operates the Aeroplan rewards program in Canada, now has TD Bank as its main partner as the issuer of Aeroplan credit cards.

Excluding such items, CIBC's adjusted net income was $887 million, or $2.17 cents per share, up three per cent year over year and ahead of analysts' expectations of $2.07 per share.

CIBC's wealth management business reported net income of $117 million for the second quarter, up $26 million or 29 per cent from the same period a year ago.

But its retail and business banking segment reported net income of $546 million for the second quarter, down $26 million or five per cent year over year.

CIBC said its provision for credit losses in quarter were $330 million compared with $265 million in the same quarter last year.

The bank's return on equity was seven per cent compared with 23 per cent in the same quarter last year.

Barclays analyst John Aiken said it was a solid quarter for CIBC, noting he had not been calling for an increase to the dividend.

"The beat against consensus and the dividend increase are positives. However, with CM (CIBC) performing reasonably strongly since reporting season began, the reported earnings may not be enough to sustain all of the relative outperformance," Aiken wrote in a research note.

"That said, we do not have any fundamental issues with the quarter and we would not necessarily anticipate a rush to the exit either."

Shares of CIBC closed down $1.36 at $97.68 on the Toronto Stock Exchange on Thursday.

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