Shares of CIBC fell sharply Thursday after it outlined its exposure to the U.S. subprime mortgage market and warned that further writedowns were possible.

The stock tumbled by more than five per cent, or $4.69, to end at $82.40 on the TSX.

CIBC three-month chart

CIBC took a $463-million pre-tax charge on writedowns of collateralized debt obligations and residential mortgage-backed securities related to the U.S. residential mortgage market. That charge trimmed 89 cents a share from the company's bottom line in the fourth quarter.

CIBC said it has exposure to the U.S. subprime residential mortgage market through derivative contracts that are hedged with investment-grade counterparties. At the end of October, the notional amount of the contracts was $9.3 billion, with a balance sheet fair value of $4 billion.

"Market and economic conditions relating to these counterparties may change in the future, which could result in significant future losses," the bank said in its fourth-quarter earnings statement.

The bank said conditions in the U.S. residential mortgage market have continued to deteriorate since its fiscal year ended on Oct. 31. It estimated that its writedown for November would be approximately $225 million, or $150 million after-tax. That charge would be partially offset by gains on credit derivative hedges of approximately $45 million, or $30 million after-tax.

Ratings agency Moody's Investor Services lowered its outlook on the bank from "stable" to "negative," saying the "exposure highlights weaknesses in the firm's strategic risk management.

"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," Moody's said.

Writedowns 'not in line': CEO

In a statement that accompanied the bank's fourth-quarter earnings, CIBC chief executive Gerry McCaughey acknowledged that its risk management could have been better.

"The mark-to-market writedowns we recorded in our structured credit business were not in line with our strategic imperative of consistent and sustainable performance," he said.

The warning and writedowns overshadowed what was otherwise a solid quarter for CIBC.

Fourth-quarter earnings rose to a record $884 million ($2.53 a share), from $819 million ($2.32 a share) a year earlier.

Its retail banking profit rose 82 per cent. But its CIBC World Markets investment banking unit lost $64 million as the writedowns wiped out profits in that division.

Revenues rose two per cent to $2.95 billion. 

The bank's bottom line was helped by a $456-million pre-tax gain from the restructuring of Visa. That wound up adding $1.13 to CIBC's per-share profit.

CIBC's return on equity for the fourth quarter was 30.3 per cent, down from 32.5 per cent for the same period last year.