Digital Banking Expansion And Capital Market Successes Will Strengthen Future Client Relationships

Key Takeaways

• Growth in mass affluent and private wealth sectors and digital banking expansion aim to improve high-margin revenue, client retention, and net interest margins.
  
• Strong operating leverage with cost management and record trading revenue promise earnings growth via deals and private economy focus.
  
• Economic tensions and macro uncertainties may disrupt CIBC's revenue, while increasing credit provisions and legal costs challenge earnings stability.

Catalysts

A diversified financial institution, provides various financial products and services to personal, business, public sector, and institutional clients in Canada, the United States, and internationally.

• The strategy to grow the mass affluent and private wealth franchise is expected to drive future growth by increasing high-margin revenue through deeper client relationships and increased assets under management. This could positively impact revenue and net margins.
  
• The expansion of digital-first personal banking capabilities is likely to enhance customer experience and operational efficiencies, potentially increasing future revenue and improving net interest margins due to better client acquisition and retention.
  
• The focus on delivering connectivity and differentiation through the entire bank has led to record high non-trading fee income, expected to continue generating incremental fee income and positively affect net revenue growth.
  
• Consistent positive operating leverage over six consecutive quarters indicates a focus on cost management, which is anticipated to enhance net margins by maintaining expense growth below revenue growth.
  
• Record trading revenue in capital markets, alongside healthy deal pipelines and a focus on the private economy, is expected to drive earnings growth as M&A activity recovers, positively impacting both revenue and earnings.

Canadian Imperial Bank of Commerce Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Canadian Imperial Bank of Commerce's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.5% today to 31.0% in 3 years time.
• Analysts expect earnings to reach CA$9.3 billion (and earnings per share of CA$9.83) by about March 2028, up from CA$7.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$11.1 billion in earnings, and the most bearish expecting CA$7.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 10.5x today. This future PE is lower than the current PE for the US Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

Canadian Imperial Bank of Commerce Future Earnings Per Share Growth

Risks

• Trade tensions between Canada and the United States could lead to economic disruptions, impacting CIBC’s revenue growth and potentially increasing credit losses.
  
• Increasing credit provisions indicate a cautious approach towards possible future credit deterioration, which could affect net earnings.
  
• The anticipation of credit normalization suggests CIBC expects credit costs to rise in the medium term, potentially impacting net margins.
  
• Legal provisions may pose unexpected financial costs, affecting the overall financial results and earnings.
  
• Macroeconomic uncertainties, including potential tariffs, could lead to increased economic volatility, impacting revenue stability and growth prospects.

Valuation

• The analysts have a consensus price target of CA$97.451 for Canadian Imperial Bank of Commerce based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$108.0, and the most bearish reporting a price target of just CA$77.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$29.9 billion, earnings will come to CA$9.3 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 7.1%.
• Given the current share price of CA$81.18, the analyst price target of CA$97.45 is 16.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.