Canadian Imperial Bank of Commerce is tiptoeing back into the U.S. after losing billions of dollars in a botched stateside push a decade ago.
In agreeing to pay $848 million for a minority stake in a Kansas City, Mo., asset manager Friday, the Toronto company sent two messages to investors: CIBC has learned from its mistakes, and it has no designs on following in the footsteps of Toronto-Dominion Bank or Bank of Montreal.
Those other Canadian giants are ambitiously expanding their stateside retail banks via acquisitions. CIBC — Canada's fifth-largest bank — said it plans to take it slow and stick with a familiar niche as it looks to expand in the U.S. and other international markets.
CIBC's president and chief executive, Gerry McCaughey, described its deal to buy 41% of American Century Investments from JPMorgan Chase & Co. as a safe gamble.
It is a business that requires little capital and carries little credit risk, he said. It also gives CIBC's large, profitable asset management arm access to new customers and products in an important market.
"This is a lower-volatility business … that we know well," McCaughey said. "We're entering the U.S. in a low-risk exposure way."
He indicated that CIBC would not go shopping for other U.S. banking assets anytime soon. The agreement with American Century has no stipulations under which CIBC would acquire all of American Century or a bigger piece of it, he said.
Though "there are possibilities of further investments by us internationally, we are very satisfied with our U.S. position," McCaughey said.
In contrast,
CIBC's more cautious approach recognizes the mixed track record Canadian banks have had in the states, experts say. Royal Bank of Canada last month agreed to sell its money-losing, Raleigh, N.C.-based retail bank to PNC Financial Services Group Inc. after a decade-long struggle to thrive in the states.
CIBC's own aggressive expansion into the U.S. capital markets business in the early 2000s ended badly: It booked massive losses on toxic mortgage securities and paid more than $2 billion in fraud settlements as the bank for Enron Corp. It sold its U.S. investment bank in 2007 and still has about $800 million of U.S. leveraged loans and mortgage securities running off.
Why take another crack at the states after such a debacle?
Because it can: it is profitable and has the capital. And it generally has to look beyond Canada if it wants to grow. Canadian banks weathered the crisis relatively well thanks to the country's risk-averse regulatory culture and relatively steady economy. But in-country growth is almost impossible to come by because the market is evenly diced up between the five biggest banks: Toronto-Dominion, BMO, RBC, CIBC and the Bank of Nova Scotia. CIBC, like the others, generates excess capital, which it can either redeploy to investors or invest in growth.
CIBC's deal on Friday was a sign that it intends to invest in growth — but carefully.
There are precedents for what it is doing: Last year, CIBC took a minority stake in NT Butterfield & Son Ltd. of Bermuda with the intent of expanding in the Caribbean.
Bank of Nova Scotia has used the strategy to get its bearings in overseas growth markets, taking minority stakes in banks in China, Thailand and Barbados in recent years.
Peter Routledge, an analyst with National Bank Financial, said it makes sense for CIBC to take a similar watch-and-learn approach outside Canada.
He said CIBC executives are "not betting the farm" but "taking a calculated bet" that mitigates the risks of rushing into an unfamiliar region.
Routledge said it is unlikely that CIBC would or could buy a U.S. retail bank. Though it has a retail bank in Canada, its management competence is strongest in wealth management, he said. Retail banking is a riskier play than wealth management, he said, because it requires a bigger commitment of time and capital.
Routledge said CIBC is not "in a position" to "do a go big or go home strategy" in the states like TD and BMO are following.
U.S. retail banking is "too competitive to dabble" in, Routledge said.
The American Century deal requires regulatory approval and is expected to close within three months.
