Comparison of CIBC vs Royal Bank

As much as I try to hold a diversified portfolio or dividend growth stocks, I admit to having a fondness for Canadian banks. Owning shares in six of the largest seven banks in Canada, one might ask why I don't complete the collection and purchase shares in the Canadian Imperial Bank of Commerce ("CIBC"). For about 15 years before switching to Tangerine (a subsidiary of  the Bank of Nova Scotia) last June, I was a CIBC banking customer, and didn't feel comfortable owning shares given my impression that CIBC was poorly run.

The other major reason I decided not to invest in CIBC was their propensity to be attached to every major financial scandal that arose. There was a $2.5B settlement relating to Enron, a $290M write-off of US subprime mortgage-backed securities, and allegations of not treating clients with respect/ethically. Personally, I experienced changes to the minimum balance rising from $1000 to $3000 required in my CIBC account before they would waive certain banking fees. Lately, I found myself scratching my head at CIBC's decision to be the first Canadian bank to offer negative yield bonds, thus ensuring investors would lose money over the long-term. All of the above-noted behaviors seem to point to the bank's desire to make a quick buck instead of focusing strategically on the long-term.

It is important to balance the qualitative factors outlined above with quantitative figures. To provide some context, CIBC is the fifth largest Canadian bank with $494B of assets at July 31, 2016. The below table compares CIBC to Royal Bank ("RY") which is the largest Canadian bank with $1.2T of assets at July 31, 2016. I chose Royal Bank as a baseline given its leading market position. My other reason for choosing Royal Bank is that I recently sold my RY position in my RRSP as I established a similar position in my unregistered account in January 2016. I was completely comfortable holding an overweight position in Royal Bank for nine months, and would need to feel the same comfort before investing in CIBC.

The below table outlines some valuation, dividend, growth, return, profitability, asset quality, and capitalization metrics that are worth considering when reviewing banks. The ratios below serve as a starting point for my bank analysis.




I found it interesting that despite having pretty similar return, profitability, asset quality and capitalization metrics, CIBC is priced at a ~20% discount compared to Royal Bank. The cheaper price relative to its last 12-months of earnings leads to CIBC currently yielding 70 basis points more than Royal Bank. CIBC has also grown its dividend much more aggressively over the past 12 months, and still has a lower payout ratio than Royal Bank. Although a deeper dive is warranted before making a purchase decision, the price discount of CIBC might be worth the trade off of the risk associated with CIBC landing in future headlines. 

Would you invest in CIBC at its current price level?