TORONTO - Canadian Imperial Bank of Commerce (TSX:CM) took a hit from provisions for bad credit card and personal loans in the third quarter, but said the trend in delinquencies seems to be reversing.

CIBC said Wednesday it set aside $547 million in provisions for loan losses in the quarter ended July 31, up significantly from $203 million a year earlier.

Loan losses were most pronounced in the retail banking sector, where weak economic conditions led to a spike in bankruptcies and delinquencies. CIBC Retail Markets recorded loan losses of $423 million, while net income totalled $416 million.

But Sonia Baxendale, president of CIBC Retail Markets, said credit card delinquencies appear to be on the decline.

"Delinquencies have improved both on a quarter-over-quarter basis and a consecutive month-over-month basis throughout the third quarter," Baxendale said Wednesday in a conference call.

Overall improvement in credit conditions should also help the bank slash its loan losses, said chief financial officer David Williamson.

"The improvement in credit conditions would indicate a better outlook for our Canadian corporate loan portfolio and should result in better loan-loss experience in the longer term," Williamson said.

However, Baxendale said personal bankruptcies are still on the rise and will continue to drive the bank's credit losses.

"Overall, the portfolio is performing in line with the market reality of higher levels of unemployment," Baxendale said.

Disappointed investors, whose expectations had been whetted by shrinking provisions for loan losses reported by BMO Financial Group (TSX:BMO) on Tuesday, sent CIBC shares down more five per cent in heavy trading Wednesday, losing $3.64 to close at $65.01.

Craig Fehr, bank analyst at Edward Jones in St. Louis, said consumer loans such as credit cards will continue to generate losses as long as the economy stays weak.

"I think that does create an outsized exposure for CIBC given the size of their credit card book," Fehr said.

CIBC's quarterly financial performance was also dragged down by $106 million in mark-to-market losses on credit derivatives from the bank's corporate loan-hedging program.

"We continue to see this litany of charges that continue to dribble out from CIBC's legacy exposure to structured products," Fehr said.

"I think that's becoming disappointing to the market, particularly in an environment where it feels like we're starting to make that transition from the credit crisis and these writedowns into a period where it's just good old-fashioned banking issues in terms of managing credit."

However, the narrowing credit spreads that caused the mark-to-market losses this quarter will help the bank down the road, said CIBC chief executive Gerald McCaughey.

"While (narrowing credit spreads) did have a negative impact this quarter, over the longer term it is very encouraging, as we do own the offsetting loans that these loans are hedging," McCaughey said.

In its financial results, the bank warned investors that it could face a huge tax hit in future quarters, as the Canada Revenue Agency has decided to fight a tax deduction on a 2005 settlement payment related to Enron.

The bank said it intends to legally defend its position and believes it will be successful "in sustaining at least the amount of the accounting tax benefit recognized to date."

If the bank successfully defends its tax filing position in its entirety, it would see a tax benefit of $214 million plus interest. If it fails to defend its position in its entirety, it could cost the bank $826 million plus interest.

CIBC reported net earnings of $434 million or $1.02 per share for the quarter ended July 31, up sharply from profits of $71 million or $1.02 per share booked during the corresponding quarter of 2008.

The bank booked cash-diluted earnings per share of $1.04, with adjusted earnings totalling $1.36 per share. The adjusted earnings figure, which excludes one-time items, fell short of forecasts from Thomson Reuters, which predicted earnings of $1.39 per share.

The bank reported an increase in consolidated quarterly revenue, which rose to $2.9 billion from $2.2 billion a year earlier.

The bank said its tier one capital ratio, a key metric measuring the amount of money set in reserve, improved to 12 per cent from 10.5 per cent recorded at the end of fiscal 2008.

Fehr said CIBC's high capital ratio is one of the major positives for the bank this quarter, although it could stunt returns and pressure share prices down the road.

CIBC also said it would hold its quarterly dividend steady at 87 cents per share.

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