Standard & Poor’s Ratings Services today said it revised its outlook on CIBC and its subsidiaries to negative from stable following the bank’s announcement that it was planning to take a $2.8 billion pre-tax charge to to settle its Enron class action suit and for its remaining Enron-related legal matters.

S&P affirmed all of its short- and long-term ratings on the bank, including the “A+” long-term counterparty credit rating. Together with the $300 million pre-tax reserve that was established in fourth-quarter 2004 and the bank’s existing insurance coverage for Enron-related legal matters, S&P says CIBC now appears adequately covered for the remaining Enron-related cases. Nevertheless, it says the settlement is surprisingly large.

S&P says it appears that the class action plaintiffs are exacting ever-increasing amounts for settlement, as the Citigroup and JPMorgan Chase & Co. settlements were for less than CIBC’s.

“CIBC’s settlement amounted to a year’s worth of pretax earnings, whereas for the previous settlements, the amounts were less than one quarter’s worth,” said Standard & Poor’s credit analyst Donald Chu, in a release.

“Fortunately, CIBC had maintained excess capital to cover a substantial portion of the charges. Nevertheless, its Tier 1 capital ratios will decline to levels below Canadian peers, and its financial flexibility will be diminished with respect to any strategic initiatives,” Chu said.

S&P says it is unclear what impact the charge will have on CIBC’s willingness to invest for future growth, especially as it pertains to its wholesale operations.

At a minimum, S&P says it would expect CIBC to increase its Tier I capital ratio to 8.5%, which is at the lower end of the bank’s targeted range by second-quarter 2006.

Dominion Bond Rating Service is joining S&P by downgrading all of its long-term ratings for CIBC, while maintaining its short-term rating. DBRS says that the downgrade is in response to CIBC’s deal to settle the Enron class action litigation. It notes that past DBRS reports noted that litigation risk remained an uncertainty but that settlement costs were not expected to be of a magnitude that would impact ratings. However, it says that this charge is much higher than expected and leads to several concerns.

DBRS is worried that: the bank’s capital ratios in the near term will be low both for the bank individually and relative to its peer group; the substantial decrease in capital will challenge its earnings growth objectives and severely limits its flexibility to make any opportunistic acquisitions or expansion moves for what is expected to be a meaningful length of time; and, that added to other litigation and regulatory missteps, “possible reputation-related issues could have negative implications on CIBC’s abilities to optimize its ongoing investment banking-related activities”.

That said, DBRS is confirming the short-term rating in recognition of several positives. Namely, that the deal largely eliminates the uncertainty related to the Enron settlement. CIBC’s remaining Enron-related legal issues are minor, it says. And, it adds that the bank’s core Canadian consumer, retail brokerage, and wholesale franchises remain sound and are expected to contribute to earnings stability in the future. Also, its corporate and investment banking segment has been taking actions which DBRS believes should lower earnings volatility and improve the overall credit quality in the long term.

Over at Fitch Ratings, CIBC’s ratings are being maintained. Fitch also notes the effect of the massive charge on CIBC’s capital, but says that the settlement eliminates, “the most significant financial uncertainty faced by CIBC, particularly following the late July resolution of the firm’s regulatory issues pertaining to past activities with hedge funds that engaged in improper mutual fund market timing”.

Fitch says it believes that CIBC is both committed to and well-positioned to rebuild capital to levels more appropriate for its business mix, risk profile and current rating levels. “Some action, such as suspension of share buybacks, has already been taken or initiated, although management will need to continue to execute on various initiatives to reach its stated goal of returning to a targeted capital level of 8.5% Tier I by mid 2006,” it adds. Fitch expects that CIBC’s current balance sheet composition, as well as its access to capital and securitization markets will provide sufficient opportunity and potential alternatives for CIBC to rebuild capital in a timely manner.

@page_break@The other major credit rating agency, Moody’s Investors Service, has yet to be heard from on the settlement.