Fitch Affirms Canadian Imperial Bank of Commerce's Ratings at 'AA-/F1+'; Outlook Stable

Fitch Ratings has affirmed Canadian Imperial Bank of Commerce's (CIBC) long- and short-term Issuer Default Ratings (IDRs) at 'AA-' and 'F1+' respectively. The Rating Outlook is Stable.

This rating action follows a periodic review of the Canadian Banking sector. Fitch will publish the main findings of this review in a report 'Canadian Banks: Nearing a Tipping Point' available at www.fitchratings.com.

KEY RATING DRIVERS - IDRs, VRs, AND SENIOR DEBT

The affirmation is reflective of CIBC's solid franchise in Canada, sound capital levels, strong asset quality, continued earnings stability, strong funding and liquidity position and favorable metrics relative to international peers. These strengths help support CIBC's already high ratings, which are at the top of Fitch's global rating universe for financial institutions.

That said, Fitch believes that all Canadian Banks, including CIBC, are vulnerable to credit deterioration in their domestic loan portfolios given high levels of consumer indebtedness in Canada, combined with Fitch's view of some overvaluation in the Canadian housing market. This limits housing affordability and makes consumers particularly susceptible to negative shocks to their income levels. Should the rapid decline in global oil prices cause an economic slowdown in Canada that impacts employment levels this could hasten potential credit deterioration. Either way, Fitch believes provision expenses will be a growing headwind to earnings over the medium term.

Canadian Mortgage and Housing Corporation (CMHC) insurance plays an important role in supporting the balance sheets of all Canadian Banks, although the availability of mortgage insurance is expected to continue to decline. CIBC is currently at the high-end of the peer group, in terms of mortgage insurance, with 67% of its residential mortgage portfolio being insured at year-end 2014 (YE14) and uninsured mortgages had a loan-to-value ratio of 60%. Fitch believes this profile will help to insulate the bank from material disruptions in housing prices or marked deterioration in the consumer leverage profile, on a relative basis.

Additionally, Fitch continues to expect that earnings growth in consumer banking and lending in Canada will be challenged, given the maturity of the market and the increasingly strained consumer. Fitch believes CIBC's exposure to the consumer is larger than the peer average, with non-business and government loan representing 78.5% of the loan portfolio at YE14. As a result, banks will need to focus on growth in wealth management; an increasingly competitive business, and be keenly focused on cost controls in order to meet earnings targets over the medium term.

CIBC's wealth management business continues to contribute a growing proportion of overall earnings and management has been targeting a 15% contribution rate from the segment, which Fitch believes could be achieved in 2015. Several acquisitions, including the purchase of Atlantic Trust Private Wealth Management in 2014, the purchase of MFS McLean Budden in 2012, and the minority investment in American Century investments in 2011, have all supported earnings growth in recent years. Fitch believes CIBC will continue to evaluate acquisition opportunities, particularly in the U.S.

CIBC's adjusted efficiency ratio ticked-up in 2014, given investments in strategic initiatives and enhancements made to the bank's travel reward card and other card products. Fitch does not expect material efficiency improvements in 2015, as the bank continues to spend money on growth initiatives.

From a capital perspective, CIBC's position is solid for the rating category. At Oct. 31, 2014, the bank's Basel III Tier I common equity ratio (CET1) was 10.3%, on an all-in basis, which is slightly above the peer average and well-above minimum regulatory requirements. The CET1 ratio rose 90 basis points (bps) during 2014 as a 3.3% increase in risk-weighted assets, was more than offset by growth in retained earnings and a lower reduction for defined benefit pension fund net assets.

RATING SENSITIVITIES - IDRs, VRs, and SENIOR DEBT

Given its already high rating levels, Fitch does not expect any upside to CIBC's ratings over a medium-term time horizon.

However, negative rating actions could be driven by significant deterioration in earnings and/or credit performance, as the housing market eventually slows and consumer leverage profiles remain at high levels. While some credit normalization is expected, Fitch notes that this could be hastened or potentially more severe due largely to exogenous macroeconomic risks such as continued pressure in the global oil and gas markets, unexpected increases in interest rates, which impact consumers ability to service debt obligations, as well as macroeconomic weakness in China or Europe that flows through to adversely impact the Canadian economy. Fitch believes CIBC may be more exposed to consumer-specific trends than the peer average, given the relative size of its credit card book and overall consumer loan portfolio. As a result, material credit deterioration in those assets could have an outsized impact on overall results, which could drive negative rating actions.

An alteration of the bank's risk appetite, an inability to integrate accretive wealth management acquisitions, a weakening liquidity profile, and/or reduced buffers on new and updated regulatory capital minimums could also yield negative rating momentum.

KEY RATING DRIVERS - SUPPORT RATINGS AND SUPPORT RATING FLOORS

The affirmation of CIBC's SRs and SRFs reflect Fitch's expectation that there remains an extremely high probability of support from the Canadian government ('AAA', Rating Outlook Stable) if required. This expectation reflects Canada's extremely high ability to support its banks especially given its financial flexibility, though propensity is becoming less certain.

Specific to CIBC, Fitch's view of support likelihood is based mostly on their systemic importance in Canada, significant concentration overall Canadian banking assets amongst the institutions noted above, which account for over 90% of banking assets, the large size of the banking system with banking assets at 2.1 times Canada's GDP, and the Canadian Banks' position as key providers of financial services to the Canadian economy. CIBC's IDRs and senior debt ratings do not benefit from support because its VRs are all currently above their SRFs.

However, in Fitch's view, there is a clear intention to reduce support for D-SIFI's in Canada, as demonstrated by commentary and actions from Canadian banking regulators seeking to protect tax payers from the risk of a large financial institution failing. This is further supported by the proposed issuance of non-viability contingent capital (NVCC) instruments, resolution powers given regulatory authorities under the CDIC Act, and other initiatives that demonstrate the Canadian government's progress to reduce the propensity of state support for banks going forward. Fitch believes this increases the likelihood of NVCC and potential senior debt losses if one or more of the Canadian Banks run afoul of solvency assessments.

RATING SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

Fitch is classifying Canada as a Path 2 country as defined in its September 2013 report, 'Bank Support: Likely Rating Paths', and given the factors noted above, Fitch expects there to be some level of support for CIBC going forward, and as such does not expect the SR to be impacted.

The SRF ratings are more likely to be impacted and are sensitive to progress made in completing NVCC issuances and any additional regulatory initiatives that may be imposed on the Canadian D-SIFIs. Fitch's assessment of continuing support for Canadian D-SIFI's has to some extent relied upon resolution powers granted regulators under the CDIC ACT as well as the potential size, structure, and feasibility of NVCC implementation.

Fitch expects that the continued regulatory action to ensure sufficient contingent capital will be implemented for all Canadian banks in the near term, but regardless of its finalization, Fitch believes that sufficient regulatory progress continues to be made over the ratings time horizon. Therefore, Fitch expects to revise CIBC's SRFs to 'BBB-' at some point over the next 12 months.

Absent a material change in economic conditions or the companies' stand-alone credit profiles, a revision of the SRFs to 'BBB-' would mean no change to CIBC's long-term IDR and debt ratings because its VR is above the SRF.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by the banks and by various issuing vehicles are all notched down from the banks' (or bank subsidiaries') VRs in accordance with Fitch's assessment of each instrument's respective nonperformance and relative loss severity risk profiles. Their ratings are primarily sensitive to any change in the VR of CIBC.

KEY RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The subordinated debt ratings are primarily sensitive to any change in the VR of the parent bank.

The preferred securities ratings of CIBC and CIBC Capital Trust reflect the ability of management and regulatory authorities to suspend dividends, which results in the rating being five notches from CIBC's VR.

KEY RATING DRIVERS - SUBSIDIARY AND AFFILATED COMPANY RATINGS

All of the subsidiaries and affiliated companies reviewed as part of the Canadian bank peer review factor in a high probability of support from parent institutions to the subsidiaries. This reflects the fact that performing parent banks have very rarely allowed subsidiaries to default. It also considers the high level of integration, brand, management, financial and reputational incentives to avoid subsidiary defaults.

KEY RATING SENSITIVITES - SUBSIDIARY AND AFFILATED COMPANY RATINGS

The subsidiary and affiliated company ratings are primarily sensitive to any change in the VRs of the ultimate parent, Canadian Imperial Bank of Commerce.

Fitch has affirmed the following ratings:

Canadian Imperial Bank of Commerce

--Long-term IDR at 'AA-'; Stable Outlook;

--Short-term IDR at 'F1+';

--Viability Rating at 'aa-'

--Short-term debt at 'F1+';

--Senior unsecured debt at 'AA-';

--Senior market-linked securities at 'AA-emr';

--Subordinated debt at 'A+';

--Preferred stock at 'BBB';

--Support Rating at '1';

--Support Rating Floor at 'A-'.

Canadian Imperial Holdings, Inc.

--Short-term debt at 'F1+'.

CIBC World Markets Plc

--Long-term IDR 'AA-'; Stable Outlook;

--Short-term IDR 'F1+';

--Support Rating '1'.

CIBC Capital Trust

--Preferred stock at 'BBB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (January 2014);

--'Assessing and Rating Bank Subordinated and Hybrid Securities' (January 2014);

--'Rating FI Subsidiaries and Holding Companies' (August 2012);

--'The Evolving Dynamics of Support for Banks' (September2013);

--'Bank Support: Likely Rating Paths' (September2013);

--'2015 Outlook: Canadian Banks' (December 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

The Evolving Dynamics of Support for Banks

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715000

Bank Support: Likely Rating Paths

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715001

2015 Outlook: Canadian Banks (Stable RatingOutlook, Negative Sector OutlookRemains for 2015)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=810389

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978276

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