Press Release: Fitch: No Rating Impact on CIBC’s Ratings Following Acquisition Announcement
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Fitch Ratings-New York-07 July 2016: Fitch Ratings views the recent announcement that Canadian Imperial Bank of Commerce (CIBC) intends to acquire PrivateBancorp (PVTB) and its primary subsidiary PrivateBank as neutral to CIBC’s ‘AA-‘ Issuer Default Rating (IDR). The transaction is expected to close by the end of calendar 1Q17.
PVTB, a Chicago based commercial bank, reported $17.7 billion assets at 1Q16. On a pro forma basis, this acquisition represents less than 5% of CIBC’s assets, and CIBC’s projected Common Equity Tier 1 ratio to remain above 10%, both of which are considered manageable in the context of CIBC’s credit profile.
Given its relatively small size and CIBC’s previously stated intention to make acquisitions in the U.S., this transaction is consistent with the company’s stated strategy. Fitch does not anticipate that it will have any impact on CIBC’s ratings. Nonetheless, Fitch expects CIBC to successfully execute on the integration of PVTB and projected figures for the transaction to materialize, including estimated profitability measures and capital position in line with its forecasts.
On June 29, 2016, CIBC announced that it will acquire all of PVTB’s assets including 35 commercial offices, 24 branches, $9.6 billion in assets under administration (AUA) and $14.5 of deposits for $3.8 billion (24% premium of over PVTB’s implied stock price). CIBC will pay 2.2x PVTB’s tangible book value in a transaction that will be financed with roughly 60% stock and 40% cash.
In Fitch’s view the deal is in line with CIBC’s strategic plans and interest in entering the U.S. market, although larger than CIBC’s targeted range of CAD$2 billion – CAD$4 billion. The acquisition gives CIBC entry to the Chicago market, which has attractive demographics and creates good prospects for loan growth. CIBC’s U.S. corporate loan book totals $10.6 billion while PVTB total loan book totals $13.5 billion. Additionally, the acquisition potentially complements CIBC’s Atlantic Trust ($27.5 billion in AUA) business, giving clients access to banking capabilities in the U.S.
Fitch views the deal price as high considering that the PVTB franchise is in-line with other similarly sized institutions in the highly competitive and fragmented Chicago market. Further the transaction has limited cost-save opportunities given that there is no material overlap in footprint. Additionally, the relatively longer earn-back period may present challenges due to uncertainty around macro factors such as future interest rates and economic growth.
As with any merger or acquisition, there are operational and execution-related risks, particularly for CIBC that has a limited record of bank acquisitions. Nonetheless, Fitch believes related risks will be managed well within CIBC’s risk management infrastructure. Further, PVTB’s balance sheet is modest in complexity and therefore should minimize disruptions.
Fitch affirmed CIBC’s ratings at ‘AA-/F1+’ on Jan. 25, 2016 as part of its periodic review of Canadian banks. The affirmation is supported by the company’s solid franchise in Canada, sound capital levels, strong asset quality, continued earnings stability, strong funding and liquidity position and favorable metrics relative to international peers. Incorporated in the affirmation was the likelihood that CIBC would continue to evaluate acquisition opportunities, particularly in the U.S. Nonetheless, Fitch has noted for all Canadian banks that risk profiles may be changing over time as they continue to look for growth abroad given domestic growth challenges in Canada.
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