CIBC Tops Estimates as Rates Boost Lending Profit Margins

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(Bloomberg) -- Canadian Imperial Bank of Commerce reported an increase in its profit margin from loans in the fiscal second quarter as the company benefits from rising interest rates.

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The bank said its net interest margin — the difference between what it earns from loans and how much it pays depositors — expanded to 1.54% in the three months through April from 1.49% in the previous quarter while lower than analysts’ estimates of 1.59%. Excluding some items, profit totaled C$1.70 share, beating the C$1.63 average estimate of 13 analysts in a Bloomberg survey.

“In a more fluid economic environment we remain well-capitalized and our well-diversified business provides resilience,” CIBC Chief Executive Officer Victor Dodig said in a statement Thursday.

Banks have been benefiting from interest-rate hikes by central banks in the US, Canada and elsewhere as regulators attempt to tame soaring inflation. While that’s helped bolster revenue from lending at banks, it’s also led to an increased chance that borrowers won’t be able to make their payments.

Like other Canadian banks, CIBC’s provisions for potentially souring loans grew to C$438 million ($322 million) in the three months through April from C$295 million in the previous quarter. That was lower than the C$383.8 million that analysts expected.

The Toronto-based bank reported that C$44.2 billion of its Canadian mortgage portfolio was made up of variable-rate mortgages, where the borrower’s fixed monthly payments are no longer covering interest for the period through April.

More Canadian consumers have variable-rate mortgages than do US consumers, and banks like CIBC have allowed alternate arrangements such as interest-only payments or negative amortization to delay the pain of rate increases and push off potential defaults. Negative amortization occurs when a borrower can’t afford to make their full monthly interest payments and so the loan grows instead of shrinking as the unpaid interest is tacked on to the principle.

“That’s a sign that clients have the ability to make payments, and that our efforts are working,” CIBC Chief Financial Officer Hratch Panossian said in a Thursday interview. He said the bank has reached out to hundreds of thousands of clients with variable-rate mortgages. “We’re helping them manage through the situation.”

CIBC shares rose as much as 2.5% to C$56.85 at 2:21 p.m. in Toronto. They’ve gained 3.8% this year, compared with a 4.7% decline for the S&P/TSX Commercial Banks Index.

The bank also announced it will increase its quarterly dividend this quarter to 87 cents from 85 cents.

(Updates with CFO’s comment in the eighth paragraph.)

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