Canadian Imperial Bank of Commerce is selling a minority interest in U.S. wealth manager American Century Investments to Nomura for about US$1 billion in a deal analyst said will hit earnings, but boost cash to fund further expansion into private banking.
CIBC purchased the stake in American Century in 2011 for about US$848 million and jettisoned the asset Monday after it was determined that gaining majority control was unlikely.
“Recognizing that a path to control was not going to be available over time, we made the decision to work with ACI to monetize our investment,” CIBC chief executive Victor Dodig said in a statement. “Through this divestiture we will further strengthen our strong capital position and we are moving forward with a clear set of strategic priorities to drive our long-term growth.”
At an investor day in October, CIBC executives said private banking and wealth management are key targets as of the country's fifth largest bank moves to expand its presence in the United States.
The bank has been shopping for a while, but demand for assets in the market segment where CIBC wants to buy has driven up prices.
The sale of the American Century stake will add about 50 basis points to CIBC's common equity tier one ratio, a key measure of the bank's capital cushion, which was last reported above regulatory requirements at 10.8 per cent.
CIBC World Markets bank analyst Rob Sedran said the bank would have around $2-billion in “excess capital,” which could be used to fund acquisitions, with a CET1 ratio of 10 per cent.
The cost of getting this excess capital, however, is the loss of about two per cent of net income from American Century, a “drag” that will persist “until that cash can be redeployed,” the analyst wrote in a note to clients.
In terms of acquisitions, Sedran said CIBC has been seeking to build a wealth management “franchise” in the United States, which was difficult with a minority position in American Century.
“Without that path to control, it was always going to be difficult to weave it into an integrated U.S. wealth management strategy even though the asset had been performing well,” Sedran wrote.
The minority stake also limited potential buyers, so “when this opportunity arose we decided to move now,” a CIBC spokesperson told the Financial Post.
The bank's management has stated a desire to focus on the ultra-high net worth wealth management segment, which could include some commercial or corporate business.
“If the goal is to help fund a pivot towards the private banking side, this sale is a longer-term positive since it reduces the need for fresh equity in a deal,” Sedran said. “However, in the short term, the market's reaction is likely more focused on at least the perception that acquisition risk is elevated.”
Barclays Capital Inc. analyst John Aiken said he views the divestiture of American Century, which provides an internal rate of return of 11 percent, as a “modest positive” for CIBC.
In a note to clients, Aiken said the sale represents a “fork in the road,” rather than a retreat from the United States or the wealth management segment.