Bank Earnings

CIBC’s Dodig pushes strategy as fear of recession hits banking sector

During his eight years as CEO of the Canadian Imperial Bank of Commerce, Victor Dodig transformed the lender into one of the fastest growing banks in the country. His next task is to convince investors that the change will last.
Under Dodig, CIBC moved into the United States with the purchase of wealth manager and commercial lender PrivateBancorp Inc. Its Canadian retail banking unit has seen strong growth, helped by huge investments in technology.
More recently, the company opened a new headquarters in downtown Toronto and refreshed its brand image with a more modern look.
The result is that CIBC posted the second-best increase in revenue and profit among Canada’s six largest banks during Dodig’s tenure. But stocks are in fifth place, due to a reputation for costly crashes in past recessions that have led to a lower stock multiple.
Dodig, in an interview that followed a five-hour presentation to sell investors on his strategy, said he remained convinced he was changing perceptions.
“Whenever you go through a transformation program that you’re investing in, sometimes the market likes to watch before it leans,” said Dodig, 57. “Our revenue growth, our market share growth is at the higher end of the market. So some people like to pause on that, but I see more and more investors leaning and invest in our business.
Right now the market is worried. Since Feb. 8, when the S&P/TSX Commercial Banks Index closed at a record low, CIBC has fallen almost 25%. No major Canadian bank has been hit harder by the sell-off.
Dodig first worked for CIBC as a teller while attending the University of Toronto. He then worked at McKinsey & Co, Merrill Lynch and UBS AG before returning to the Canadian bank in 2005 in its wealth management division. He rose through the ranks of this unit before being hired to become CEO in 2014.
His predecessor, Gerald McCaughey, had spent much of his term trying to de-risk the bank, which had been caught up in several notorious corporate blowouts, including the collapse of Enron Corp. During the financial crisis, CIBC made large write-downs on securities related to US subprime mortgages, cementing its reputation as “the bank most likely to come across a sharp object,” as a Bay joke put it. Street.
As part of McCaughey’s pullback, CIBC sold most of its U.S. investment banking business, largely relegating the business to its home market at a time when bigger rivals, including the Bank Royal Bank of Canada, the Toronto-Dominion Bank and the Bank of Montreal, were expanding south.
“The bank was in disarray” when Dodig took over, said Barclays Plc analyst John Aiken. “Operationally and strategically, CIBC was definitely falling behind the peer group. It was the bank with the most volatile earnings and no real discernible strategy as to where the growth came from.
Early work to improve CIBC’s customer service included speeding up responses to complaints, as well as recording and sharing customer feedback, Dodig said.
The bank has also invested heavily in technology, including cloud and customer relationship software.
Dodig brought the bank back to the U.S. in 2017, buying Chicago-based PrivateBancorp for $5 billion — its largest deal — giving CIBC access to middle-market U.S. businesses, business owners businesses and wealthy families. CIBC last year added a minority stake in Chicago-based Loop Capital for an undisclosed price.
Dodig argues that CIBC has carved out a niche for itself in what it calls the private economy in the United States, where its commercial banking, capital markets and wealth management units work together to serve the “entrepreneurial class where wealth is created,” he said.
Dodig cited an example: CIBC recently advised the owner of a closely held food company on selling half of his business to a private equity firm, helped finance the deal, and now has his division wealth management company that manages the proceeds for the seller’s family. “It doesn’t require us to compete with Wall Street,” Dodig said. “It forces us to make the most of our abilities and bring them to the United States with a winning proposition.” Last year, about a fifth of CIBC’s profits were generated in the United States, up from about 2% before the deal with PrivateBancorp.
By other measures, the US strategy appears less impressive. That’s decidedly less lucrative than most of what CIBC does in Canada: the U.S. business and wealth management unit’s return on equity was 10.3% in fiscal 2021 , and before the pandemic, it was between 7% and 8%.
“So the question for Victor is, why grow the US business aggressively by 10% if it’s not as profitable as Canada? RBC Capital Markets analyst Darko Mihelic posed the question to the CEO at Investor Day last week.
Dodig responded that CIBC would be “relentless” in its focus on organic growth and that any U.S. acquisition would focus on wealth management, where returns tend to be higher.
In Canada, the bank is working to funnel customers through its Imperial Service financial planning channels to sell them other products. And it bought Capital One Financial Corp’s Costco credit card business in Canada, which added more than 2 million cardholders, 75% of whom are new to CIBC.
Still, the shares are lagging behind those of competitors. Concerns about CIBC’s performance over past credit cycles are now amplified by rising interest rates, which threaten to dampen its faster-than-market loan growth, said Aiken, which rates the stock at equal weight, the equivalent of a hold.
The bank’s spending is growing at a faster rate than its competitors as it spends on technology and employees to fuel sales gains. Non-interest expense rose 13% from a year earlier in the quarter ended April, contributing to overall earnings that fell short of analysts’ forecasts.
Even though Dodig has righted the ship, the bank has struggled somewhat to show investors where its next stage of growth will come from, Aiken said.
It’s a weakness that CIBC tried to correct during its Investor Day last week. The bank raised its target range for growth in adjusted earnings per share to 7% to 10% a year from 5% to 10% previously. The lender also raised its return on equity target to 16% or more from at least 15%. On its current trajectory, CIBC doesn’t “need a big deal” to grow and is instead focused on executing its plans, Dodig said.
“You can’t obsess over a stock’s day-to-day price,” Dodig said. “You have to have a strategy where everyone is aligned. You need to find investors who believe in your long-term strategy. And there are investors who believe in it.