PVTB Privatebancorp, Inc.

By Ben Dummett 

Canadian Imperial Bank of Commerce, in the latest move by a big Canadian bank to bet on the U.S. market for growth, agreed Wednesday to acquire Chicago-based lender PrivateBancorp Inc. for about $3.8 billion in cash and stock.

In Canada, the five biggest banks already dominate the domestic banking and wealth management sectors, and are grappling with the prospect of rising credit losses from energy-sector lending and sluggish economic growth due to the commodities price rout. That is pushing the banks to expand into the U.S. to seek new customers and further diversify their lending activity.

The CIBC-PrivateBancorp deal comes about eight months after Royal Bank of Canada acquired Los Angeles-based City National Corp. for $5.4 billion as part of its expansion efforts.

CIBC, Canada's fifth-largest lender measured by assets, expects earnings from its U.S. operations to more than double to 10% following completion of the PrivateBankcorp deal.

"Over the medium term, our objective is to increase the [U.S.] contribution to 25%," Chief Executive Officer Victor Dodig said in a conference call.

The planned acquisition would be CIBC's largest, and is expected to close by the end of March, pending approvals from regulators and PrivateBancorp's shareholders.

For PrivateBankcorp, the deal brings added financial strength, the benefits of a bigger bank and the ability to provide banking services in Canada. CIBC has assets of $355.4 billion compared with about $17.7 billion for PrivateBancorp.

"We will be in a great position to expand relationships with...existing clients and to win new client business," Larry Richman, PrivateBancorp chief executive said. Mr. Richman will head up CIBC's U.S. banking operations after the deal's completion.

Founded in 1989, PrivateBankcorp. is a commercial and private bank servicing companies with up to $2 billion in annual revenue. The majority of its loans are in the manufacturing, health-care and finance and insurance sectors. The lender operates a total 59 branches and commercial offices from its Chicago base, and several other cities in the Midwest including Kansas City, St. Louis, Cleveland and Detroit. In 2015, the bank grew year-over-year earnings by 21% to $185.3 million.

Of Canada's big banks, CIBC's loan portfolio is the most domestically concentrated and almost 90% of the lender's earnings come from the local market. That is placed the lender under significant pressure to expand outside the country for new sources of growth.

The bank is counting on PrivateBankcorp to generate additional revenue by allowing CIBC to offer U.S. deposit-taking services for its Canadian busness clients and to Canadians that spend their winters in the U.S. The deal is also meant to help CIBC cross-sell deposit-taking and lending services to clients to Atlantic Trust, a U.S.-based private wealth-management firm that CIBC acquired in 2014.

"We are taking an important step in building a truly North American Bank, " Mr. Dodig said.

The deal comes as Mr. Dodig seeks to move beyond past missteps under previous CIBC management teams that included Canada's greatest exposure to the U.S. subprime-mortgage meltdown and a $2.4 billion legal settlement related to Enron.

Banks often rely on cost-cutting opportunities to justify the acquisition of a rival. CIBC won't generate those benefits because of a lack of overlap between its operations and those of PrivateBancorp. That means CIBC will need to rely heavily on growing revenue from the transaction to justify the acquisition cost.

CIBC hopes "that the revenue synergies will kick in, and I think investors will want to hold their breadth until they see that happen," Brian Klock, an analyst at Keefe, Bruyette & Woods said in an interview.

In New York, on Wednesday, CIBC is down 2.9% at $74.88. PrivateBancorp is up almost 23% at $44.14.

CIBC is offering $18.80 in cash plus 0.3657 CIBC shares in exchange for each PrivateBancorp share, valuing the deal at $47 a share, or a 31% premium over PrivateBancorp's closing price of $35.93 on Tuesday.

Brittney Laryea and Rachel Ensign contributed to this article

Write to Ben Dummett at ben.dummett@wsj.com

(END) Dow Jones Newswires

June 29, 2016 13:00 ET (17:00 GMT)

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