Battered by its exposure to the U.S. real estate market and attempting to rebuild its securities business, Canadian Imperial Bank of Commerce got a $1.05 billion (Canadian) investment from the U.S. private equity firm Cerberus Capital Management.
The investment will be in CIBC's U.S. residential real estate portfolio, which as of June 30 had a fair market value of $1.18 billion, according to the Toronto-based bank. Cerberus' investment will be made in amortizing senior notes, which will have a capped return. Under the terms of the deal, CIBC will retain control over the asset and get any future potential upside.
The Cerberus investment comes after the Financial Post reported regulatory concern about Canadian banks' capital positions was greater than previously reported. The newspaper pointed out that CIBC was offering Cerberus a high return - 20 percent - for what it hopes is a temporary partnership. Andrew Addison, a spokesman for the Canadian Bankers Association, said Canadian banks are among the best capitalized in the world. Sub-prime mortgages are less common in the Canada than the U.S..
Limiting U.S. Mortgage Risk
"This transaction sets a floor under CIBC's exposure to the U.S. residential mortgage market," said CIBC President and CEO Gerry McCaughey. "At the same time, retaining ownership of these securities, combined with the option regarding the timing of any redemption of this note, provides us with important flexibility to benefit from a future recovery in the cash flows of these securities."
McCaughey's move wasn't a surprise. For months, CIBC management has sought to reduce its exposure to U.S. sub-prime mortgages in, according to Robert Sedran, an analyst with National Bank Financial in Toronto. He rates CIBC a "sector perform."
"It's nice to have a little bit of downside taken away by this exposure," he tells eFinancialCareers News.
The investment underscores the challenges McCaughey faces in turning around CIBC. The company's recent quarterly results weren't as bad as analysts expected. However, CIBC is in the midst of rebuilding its CIBC World Markets securities business, which has shrunk following the company's departure from the U.S. market last year.
Employment Market Fairly Stable
Even though CIBC and other Canadian banks have been hurt by the turmoil on Wall Street, recruiters don't expect to see major layoffs, as has happened in the U.S.
"Our banking system here is very different than in the U.S.," says Grace Rivers, senior national account manager for Adecco Canada, in Toronto. The Canadian system "appears more stringent than appears to be in the U.S."
Wall Street's upheaval hasn't yet had much impact on the Toronto financial job market. Many Canadian banks are eager to expand into the U.S. and other countries with higher growth potential than Canada. Still, the Canadian economy is showing signs of cooling.
It may be something that's coming, but we have not seen any drastic change from people who are looking for jobs with our clients," Rivers says.