Canadian Imperial Bank of Commerce reported a lower-than-expected quarterly profit on Wednesday as it set aside more money to cover bad loans, sending its shares down more than 5 percent.

A day after Bank of Montreal surprised investors with stronger-than-expected earnings and a drop in credit losses, CIBC went in the opposite direction, posting a profit that was smaller than analysts had expected and loan-loss provisions that were bigger.

So which is it? Is credit improving or deteriorating? Dundee Securities analyst John Aiken asked in a research note, contrasting Tuesday's strong BMO results with CIBC's.

It appears at this stage that, after two banks reporting, we have already seen the book-ends for the quarter in terms of quarterly earnings, he said.

CIBC's net earnings rose to C$434 million ($398 million), or C$1.02 a share, in its third quarter, ended July 31, from C$71 million, or 11 Canadian cents a share, a year earlier.

As expected, the results included several writedowns, including C$155 million on mark-to-market losses through CIBC's loan hedging activities, which had been a source of previous credit gains.

When the one-time losses are excluded, noncash diluted earnings were C$1.34 a share. Analysts on average had expected earnings of C$1.39 a share after exceptional items, according to Reuters Estimates.

But while investors were unimpressed by CIBC's performance, sending its shares 5.3 percent lower to C$65.01 at Wednesday's close on the Toronto Stock Exchange, Chief Executive Gerry McCaughey hinted the bank was looking past the clouds for ways to boost market share.

While he declined to confirm a report last week that CIBC was in talks to take a minority interest in Ireland's second-largest lender, Allied Irish Banks, McCaughey said the bank was looking for ways to build capacity so it would have outlets for it massive capital in the future.

We are starting from a 12 percent Tier 1 (capital) ratio. Therefore we believe it is necessary for us to stay abreast of developments in the marketplace and to be looking at the markets where we are or may be able to be involved, he told analysts on a conference call.

The 12 percent capital ratio is among the highest of Canadian banks and well above capital levels held by international competitors.

Acquisition speculation has grown as Canada's well-capitalized banks emerge from the financial crisis in better shape than most of their global rivals, and many have said they will take advantage of growth opportunities if the right deal comes along.

CREDIT LOSSES

The amount of money CIBC set aside to cover bad loans more than doubled, rising to C$547 million from C$203 million in the same quarter a year ago -- and well above estimates.

We had estimated C$480 million in loan losses and the consensus estimate was C$373 million, RBC Dominion Securities analyst Andre-Philippe Hardy said in a research note.

Banks have been increasing their loan loss provisions as the economy slumps and consumers and businesses struggle to repay debts. CIBC executives told analysts they expect provisions to remain elevated for the next few quarters, before improving.

CIBC, which has more exposure to credit cards than its peers, said loan losses were higher in cards and personal lending, due to higher delinquencies and bankruptcies related to the weak economy.

Retail banking revenues -- which come from the plain vanilla lending and deposit-taking business of the bank -- were also lower than expected. Canadian retail revenues fell 1 percent from a year earlier, the bank said.

Bright spots included an improved net interest margin, and a drop in non-interest expenses -- evidence its cost-cutting efforts have begun to pay off.

With CIBC and BMO out of the way, Canada's biggest three banks are set to report profits later in the week. Royal Bank of Canada and Toronto-Dominion Bank are due out on Thursday, while Bank of Nova Scotia will report on Friday.

($1=$1.10 Canadian)

(Reporting by Andrea Hopkins; editing by Rob Wilson)

Canada