Moody’s Investors Service has dropped its outlook on CIBC from stable to negative, citing concerns over the quality of the bank’s risk management function.

The rating agency affirmed its ratings of CIBC but changed the rating outlook to negative, noting that this rating action follows CIBC’s earnings report for the fourth quarter of 2007 in which it disclosed details of a hedged portfolio of collateralized debt obligations. “The change in outlook is based on Moody’s view that this exposure highlights weaknesses in the firm’s strategic risk management,” it says.

Moody’s says its concern centers on the concentration of counterparty risks to which the bank has exposed itself via a rapid and recent build-up of its CDO activities. “Though Moody’s believes that any losses related to these particular exposures are manageable for CIBC, risk management weaknesses may expose the firm to further risks,” it warns. Moody’s adds that it is also concerned that it has cited
CIBC in the past for risk management weaknesses, and despite expected improvements, it now appears the bank has not fully addressed appropriate risk-taking at a senior, strategic level.

According to Peter Routledge, Moody’s senior credit officer, “The existence of concentrated risks in this portfolio points to weaknesses in strategic risk decision-making at the bank and indicate that improvements in the bank’s risk management discipline have not permeated the organization as fully as Moody’s had expected. As a result, CIBC is faced with an additional problem area at a time when other events, outside the bank’s control, could also impact its credit profile.”

Moody’s decision to affirm CIBC’s ratings is based on the bank’s strong credit fundamentals, including excellent risk-adjusted profitability, strong capitalization, and sound asset quality.