An investment-grade-rated bank with an entrenched industry position offering a 5.5% dividend yield should sound fascinating to long-term dividend investors. However, many of Canadian Imperial Bank of Commerce's (CM -0.96%) peers have lower yields, which should make investors question why CIBC, as it is more commonly known, is being treated differently by Wall Street. Here are some key reasons.
CIBC has a solid core
There's a lot to like about CIBC beyond its fat dividend yield. For example, it is one of a small handful of large banks in Canada benefiting from, basically, a regulator-protected oligopoly.
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Simply put, the Canadian government prizes a strong financial system and won't allow mergers that might disrupt the financial security of the banking market. So CIBC's industry position in its home country is pretty entrenched, providing a solid foundation for the business.
Canadian regulators are also fairly keen on the industry leaders operating in a conservative fashion. So CIBC isn't likely to take on too much risk in its search for profits. As noted, the bank has an investment-grade-rated balance sheet, with all the major credit rating agencies basically agreeing on its high level of quality.
The problem is that similar things could be said of the major Canadian banks. So these facts don't actually differentiate CIBC in any major way. But there are a couple of things that do, and it helps explain why the stock's yield is higher than most of its peers. The sole exception on the yield front is Bank of Nova Scotia (BNS -1.27%), or Scotiabank. It has a unique, material amount of emerging market exposure, which is inherently higher risk in nature.
CIBC has lots of exposure
It might sound odd, but one of the key problems that CIBC has is its material exposure to Canada. This country makes up around 75% of the bank's earnings. On the one hand, that's good news because of the regulatory environment in the country, as previously highlighted. However, the downside is that growth opportunities in the Canadian banking industry are lower than in other countries, notably the United States.
Other than Scotiabank, most of CIBC's peers have chosen to expand in the U.S. market more aggressively. The U.S. accounts for around 18% of CIBC's earnings versus 30% or so for Toronto-Dominion Bank (TD -0.75%), or TD Bank, for example. So CIBC's growth prospects probably aren't as compelling as those of some of its closest peers. That's one reason to place a lower valuation on the stock, which pushes up the dividend yield.
The Canadian exposure, however, is even more important today because investors are worried about the risk of a recession in 2023. Canada's economy could be particularly hard hit because its housing market had been in a multiyear uptrend that has now started to turn downward because of central bank interest rate hikes.
Increasing rates tend to reduce demand for new mortgages and can result in an increase in customer defaults on existing loans. Consumer loans make up around 62% of CIBC's Canadian business, with mortgage loans accounting for a full 55% of the loan book.
If the Canadian economy falls into a recession, CIBC will likely be hit particularly hard by the fallout. Adding to the risk is the fact that around 37% of the mortgage loans it has issued are variable rate, which means that, eventually, rate resets will increase the costs that these borrowers face and, thus, their risk of financial distress.
With only a small amount of exposure to the United States, geographic diversification won't provide much of a potential offset. This is likely one of the more prominent reasons for investors favoring other Canadian banks over CIBC.
CIBC investors should expect gives and takes
None of this is meant to suggest that CIBC is a bad bank. If it were, it wouldn't have been able to survive for over 150 years. But investors do need to go in with open eyes and appreciate both the positives and negatives of the bank's heavy exposure to Canada in today's environment.
Conservative long-term dividend investors might prefer a more diversified name like TD Bank, even though its yield is roughly a percentage point lower, at around 4.5%. If you are looking to maximize the income you generate, meanwhile, Scotiabank's nearly 6.1% yield would probably be more interesting, as might the bank's growth prospects given its unique emerging market exposure.
All in, CIBC's risk/reward profile will probably lead you to look elsewhere for a better balance right now.
