August 28, 2008 / 8:26 PM / in 9 years

Analysts see more charges at CIBC, but stock soars

TORONTO, Aug 28 (Reuters) - More charges lie ahead for Canadian Imperial Bank of Commerce (CM.TO) even as it cuts exposure to risky U.S. securities and hedges that prompted multibillion-dollar writedowns in the past year, analysts say.

CIBC shares rallied 5 percent on Wednesday after reporting less severe third-quarter charges than expected, and its stock was up a further 5 percent on Thursday, at C$63.29 a share, as other Canadian banks reported strong quarterly profits.

The bank's quarterly profit of C$71 million was the lowest among Canada's large banks.

CIBC, the No. 5 Canadian bank, took a pre-tax hit of C$855 million on structured credit, mostly related to U.S. bond insurers, adding to a string of writedowns in previous quarters for the sliding value of sub-prime mortgage securities.

"We are reducing our estimates for the fourth quarter to include an assumption of another C$1 billion charge," BMO Capital Markets analyst Ian de Verteuil said in a research note on Thursday.

Mario Mendonca, analyst at Genuity Capital Markets, said he still sees downside risk in CIBC stock, if investors are pricing in belief that structured credit writedowns are over.

Settlements between U.S. bond insurers and their various counterparties "are likely to result in still further charges -- likely over C$1 billion," Mendonca said in a research note.

Gerry McCaughey, CIBC's president and chief executive, said on a conference call late Wednesday that recent settlements involving U.S. bond insurers -- also known as financial guarantors or monolines because they specialize in a single type of insurance -- were positive.

"Developments within the financial guarantor industry over the past few weeks have generally been encouraging and positive, with several corporations announcing results in terms of restructurings and/or tariffs," McCaughey said.

He also said rating agencies have generally been positive.

"We are actively managing our structured credit positions and continue to assess all opportunities to reduce contingent risk in this portfolio," McCaughey said.

In early August, CIBC and other institutions reached a deal with ACA Capital Holdings, parent of bond insurer ACA Financial Guaranty, to terminate contracts in exchange for cash.

ACA was the first bond insurer to run into trouble when its credit ratings were cut to junk status in December.

CIBC has contracts with other bond insurers as well.

"We expect further write-downs if credit markets remain under pressure ... but the bank remains well capitalized to handle further material hits," TD Securities analyst Jason Bilodeau said in a report.

Even if most of CIBC's writedowns are behind it, many analysts wonder where the bank's growth prospects will come from, particularly with Canadian economic growth slowing.

CIBC's per-share profit excluding its big charges fell short of market expectations for C$1.75.

The latest results "provided ample evidence of the continuing struggle facing management in their effort to manage down their legacy credit derivative exposures while defending their domestic retail market share," Blackmont Capital analyst Brad Smith said in a research note.

$1=$1.05 Canadian Editing by Jeffrey Jones

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