By Cameron French
TORONTO (Reuters) - Canadian Imperial Bank of Commerce shares fell sharply on Wednesday after the bank said it would pay $2.4 billion to settle a lawsuit brought by investors in collapsed U.S. energy trader Enron Corp.
But CIBC, Canada's fifth-largest bank, insisted it would maintain its quarterly dividend at current levels and that its 10 percent earnings per share growth target was still intact.
The promise did nothing to sway investors, who quickly rid themselves of CIBC's stock and sent the shares to their biggest one-day drop since 1998 as analysts downgraded the stock and reduced their 12-month price targets.
Debt-rating service Standard & Poor's also lowered its outlook on the bank to "negative" from "stable," while Dominion Bond Rating Service downgraded the bank's debt ratings.
CIBC said late on Tuesday it will take a C$2.5 billion ($2.1 billion) third-quarter charge to pay for the settlement, the largest so far in the massive Enron class action suit, led by the University of California. The size of the charge eclipses the bank's total profit of C$2 billion last year.
"Obviously, it was a lot more than the market expected. It was more than Citi and JP Morgan, and they're much larger banks," said John Kinsey, a portfolio manager at Caldwell Securities in Toronto.
Citigroup and JP Morgan Chase both settled in June, agreeing to pay $2 billion and $2.2 billion respectively to plaintiffs.
CIBC's shares ended down C$6.09, or 7.6 percent at C$74.55 on the Toronto Stock Exchange, wiping more than C$2 billion off the bank's market value. In New York, the stock fell $5.11 to $61.25.
The charge will pull CIBC's Tier 1 capital ratio down to 7.5 percent, below its 8.5 percent objective, and prompted the bank to suspend its share buyback program until capital levels recover, expected in the middle of 2006.
When asked about the size of the settlement, chief executive Gerry McCaughey -- who only took the reins on Aug. 1 from outgoing head John Hunkin -- said a longer wait would have risked a larger payout.
"It is management's view and the view of the board that we needed to resolve these matters to reduce the uncertainties, burden and expense of further protracted litigation," he said on a conference call with analysts.
MORE ATTRACTIVE TARGET?
With Finance Minister Ralph Goodale promising he will soon produce new legislation covering rules for Canadian bank mergers, analysts noted the settlement and stock selloff could make CIBC a more attractive takeover target by reducing its selling price and removing uncertainty from its balance sheet.
"The risk of a larger-than-anticipated impact from Enron-related litigation has come to bear, but the bank can now put this matter to rest and move forward," Merrill Lynch analyst Andre-Phillipe Hardy said in an e-mailed note.
CIBC's involvement with Enron is a remnant of Hunkin's legacy. The former CEO led an aggressive expansion of CIBC's U.S. investment banking after he took over in 1999, before sinking markets and bad deals prompted CIBC to refocus on its branch-banking roots.
Enron filed for bankruptcy in 2001 after investors learned of its use of off-balance sheet deals to hide tens of billions of dollars of debt. Its meltdown sparked shareholder lawsuits against those alleged to have assisted it with deals, as well as criminal charges against the company and management.
In 2003, CIBC paid $80 million to settle U.S. regulatory allegations that it aided and abetted the accounting scandal.
The bank is still not completely out of the woods. It has yet to deal with its part of a lawsuit filed by Enron itself against several of its lenders. But CIBC said part of the third-quarter charge will be used to cover future Enron-related costs.
Those yet to settle in the class action include Royal Bank of Canada and Toronto-Dominion Bank, whose shares were dragged lower by news of the CIBC settlement.
RBC finished down C$1.62, or 2 percent, at C$77.76, while TD fell 98 Canadian cents, or 1.7 percent, to C$55.79. Neither bank is expected to have to pay anywhere close to the CIBC amount.
($1=$1.22 Canadian)
(Additional reporting by Ka Yan Ng)
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