Tuesday, January 15, 2008

Sub-Prime Slime Dirties CIBC

One of Canada's five big banks, CIBC, announced on Monday that it would be re-capitalizing its balance sheet with the sale of $2.75 billion in new equity. The bank, which has a penchant for poking itself with a sharp stick every two to three years, has already written off $3.5 billion in sub-prime exposure, which handily exceeds the $2.5 billion write-offs from the Enron fiasco.

The shares will sell at a headline price to the main investor group at $65.26 for the well-heeled billionaire, pension funds, and life-insurers who'll soak up about half the issue, and $67.05 for the great unwashed masses. After an additional 4% commitment fee is further soaked up by the main investor group, this reduces the actual price to $62.65 off of the $65.26 headline price, which is a steep reduction from the $72 level which the shares were trading at prior to this announcement.

Reaction from analysts has been widely positive, who generally point out that it's better to go to the equity well once, and dip heavily and deeply in case of further trouble. Most analysts appear to think that a good portion of the new equity won't be entirely needed for further write-downs.

Canada's best business writer, Derek DeCloet, thinks however, that the remainder of the new equity will be useful as all banks head back to their core roots - making loans with their own capital, as investors continue to shun repackaged loans of all sorts.

CIBC shares have been trashed by the market over the sub-prime mess; the further $2 drop to $70 since the equity infusion announcement means that their shares have now lost some 35% since achieving their 12 month high in May 07.

While conservative CEO Gerry McCaughey has, in my opinion, done a good job since his appointment, one can only wonder what stick CIBC will pick up and play with next year.

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