Canada's CIBC under pressure to diversify as mortgage rules bite

By Matt Scuffham

TORONTO (Reuters) - Canadian Imperial Bank of Commerce (Toronto:CM.TO - News) saw a bigger impact than rivals from tougher new mortgage lending rules, third-quarter results from the country's biggest banks showed, increasing pressure on CIBC to ramp up U.S. expansion.

New mortgage sales by Canada's fifth-biggest bank fell by over 40 percent during the three months to July 31, not as bad as it had warned in May but around double the decline seen by other lenders.

Of Canada's biggest banks, CIBC relies most on domestic mortgage lending at a time the overall market is slowing due to new regulations and measures designed to cool housing markets in Toronto and Vancouver.

Canada introduced new rules at the start of the year requiring borrowers be tested on their ability to pay back loans at an interest rate 200 basis points higher than the actual rate on their mortgages.

The impact of the new measures was apparent in third-quarter results posted by banks over the past week.

Bank of Nova Scotia (Toronto:BNS.TO - News) said that in the latest quarter, its new mortgage sales fell 22 percent from a year ago. Analysts estimated declines of 20-30 percent at other banks.

CIBC had grown its domestic mortgage book aggressively since 2012, noting that a bigger mortgage portfolio helps it sell other financial services to borrowers.

Since last summer, the pace of growth has slowed, however, and CIBC has emphasized the need to diversify from domestic mortgage lending. A key to this was its $5 billion acquisition last year of Chicago-based PrivateBancorp.

Analysts say PrivateBancorp is critical to CIBC's growth prospects.

"They have a significant amount of capital and they can deploy a lot of that into the growth of PrivateBank," said Edward Lewis analyst James Shanahan. "This is not a particularly diversified business compared to the other (Canadian) banks so the only thing it can do is grow PrivateBank."

Chief Financial Officer Kevin Glass said CIBC may look at more U.S. deals.

"Right now our focus is on organic growth," he said in an interview last week. "I think at some point we may consider inorganic growth. We will think about that in the longer term."

The benefits of the PrivateBancorp acquisition came through in the last quarter, with a 295 percent rise in U.S. earnings helping it beat market expectations, but nearly half its earnings still come from domestic retail business.

"CIBC continues to be the most sensitive to domestic lending," said Barclays analyst John Aiken.

Shares in CIBC have risen by 0.2 percent in the year to date, underperforming the broader market for Canadian banks which has risen by 2.1 percent (.GSPTXBA).

(Reporting by Matt Scuffham; Editing by David Gregorio)