Canadian Imperial Bank of Commerce plans to set aside C$850 million ($628 million) to cover damages in a lawsuit with Cerberus Capital Management LP that it’s still fighting.
(Bloomberg) — Canadian Imperial Bank of Commerce plans to set aside C$850 million ($628 million) to cover damages in a lawsuit with Cerberus Capital Management LP that it’s still fighting.
The after-tax provision will reduce the bank’s Common Equity Tier 1 capital ratio by about 30 basis points, the Toronto-based bank said Wednesday. CIBC reiterated that it plans to appeal the court’s decision.
CIBC shares rose 1% to C$55.94 at 3:09 p.m. in Toronto. The stock slid 26% in 2022, including a 15% drop in December after the ruling was disclosed.
The judgment against CIBC threatens to push the bank’s capital levels closer to the minimum mandated by Canada’s banking regulator, which unexpectedly raised those requirements about a week after the ruling. CIBC’s CET1 ratio was 11.7% as of Oct. 31, and the minimum required is 11% as of Feb. 1.
Bank of Montreal raised C$2.6 billion in a stock sale to bolster its capital levels in the weeks after the regulator’s decision.
The lawsuit, which Cerberus filed in 2015, accuses CIBC of defaulting on payments related to a limited-recourse note that the bank issued to Cerberus to reduce its exposure to the US residential real estate market. CIBC issued the note in 2008 and sold a residual interest in the specified payment streams to Cerberus in 2011.
Cerberus has claimed damages of $1.07 billion in the case. CIBC said Wednesday that it expects the total amount of damages, including pre-judgment interest, to be about $848 million through Dec. 1, 2022. It will take the provision in its fiscal first quarter ending Jan. 31.
CIBC didn’t immediately provide comment Wednesday on whether it will seek to sell equity.
The provision is in line with what Mike Rizvanovic, an analyst at Keefe, Bruyette & Woods, had estimated the bank would set aside. It’s difficult to say whether CIBC will follow Bank of Montreal and sell shares to bolster its capital levels, though it’s the most likely big Canadian bank to do so in response to recent moves by the Office of the Superintendent of Financial Institutions, he said in an interview.
CIBC also has options for bolstering its capital ratio other than selling equity, such as slowing certain kinds of lending, and much of the measure is based on its assumptions about the economy and the potential for loan losses, Rizvanovic said.
“I wouldn’t suggest they’re imminently preparing to issue equity, but it certainly is a possibility,” he said. “They have a 40 basis-point buffer, which is not a huge buffer, but the closer they get to 11%, the more likely they would be to issue equity.”
(Updates with analyst’s comments starting in ninth paragraph.)
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