March 8, 2012 / 11:49 AM / 6 years ago

UPDATE 3-CIBC tops estimates; may sell broker mortgage unit

* Adj EPS C$1.97 vs est C$1.93

* Canada’s No. 5 bank may sell FirstLine unit

* Last of Canada’s big banks to report

* Shares down 1 pct in Toronto

By Cameron French

March 8 (Reuters) - Canadian Imperial Bank of Commerce plans to sell its FirstLine discount mortgage unit in an effort to earn higher margins from its loans, the banks said as it reported a 9 percent year-over-year jump in first-quarter profit.

The result - CIBC is the final Canadian bank to report this quarter - came in slightly ahead of analyst estimates, but CIBC shares eased in early Toronto trading.

The decision to put FirstLine on the block comes as Canada’s banks have dealt with steadily decreasing margins on consumer loans, due to low central bank interest rates and price competition.

The FirstLine business sells mortgages through brokers, which reduces margins further and means the bank earns less per loan. CIBC plans to retain the loans if it sells the businesses.

Speaking on a conference call, bank executives said a sale of FirstLine will reduce the overall size of the bank’s mortgage portfolio, but said that would be partly offset by growth from the bank’s CIBC-branded mortgages, which have been growing at 10 percent annually, above the industry average of 7 percent.

“It’s a strategic choice we’re making. We believe it’s aligned with our corporate goal of being a lower risk bank,” said David Williamson, head of retail and business banking at CIBC.

While loan margins have been thin, the industry has also been bracing for slower loan growth due to high consumer debt levels in Canada.

With signs of slower growth starting to emerge - credit card balances are coming down, the bank said - the bank’s target of C$3 billion in profit from its retail and wealth management arms by 2013 is becoming more difficult, said CEO Gerry McCaughey.

“While the C$3 billion is intact, it is with a different mix and under more difficult conditions,” said McCaughey, adding that reaching the target would also depend on making more acquisitions in the wealth management business.

The bank’s retail and wealth management units earned just under C$2.5 billion last year.


While the outlook is murky for the sector, first-quarter results from the banks have largely topped analysts’ estimates, as strong loan growth and better than expected trading revenue have offset narrower margins.

CIBC, Canada’s fifth-biggest bank, earned C$835 million ($843 million), or C$1.93 a share, up from C$763 million, or C$1.80 a share, a year ago.

Excluding one-time items, the bank earned C$1.97 a share. Analysts, on average, had expected a profit of C$1.93 a share, according to Thomson Reuters I/B/E/S.

“In many ways, people are always looking for a reason for the banks not to do well, but they’re diversified enough along business lines and their credit controls are very strong,” said Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier.

Wealth management profit, which includes results from the bank’s 41 percent interest in U.S.-based American Century Investments, rose more than 52 percent to C$100 million.

Profit at its Canadian retail and business banking division was up 5 percent at C$567 million, helped by higher loan volumes but offset by narrower margins.

Wholesale banking saw a profit rise of 9 percent to C$133 million in the quarter, helped by stronger than expected trading revenues.

“Broadly, earnings were very similar to its peers this quarter as the beat was aided by stronger than anticipated trading revenues. However, we do view the impressive operating leverage generated in the quarter as a distinct positive,” Barclays Capital analyst John Aiken said in a note.

Operating leverage benefits from controlling costs, which has been a focus at Canada’s banks over the past year.

CIBC’s shares were down 1 percent at C$75.52.

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