Canadian Imperial Bank of Commerce posted an 8 percent increase in fourth-quarter earnings on Thursday as various one-time charges in its wholesale unit were largely offset by a gain in its retail business, and taxes were lower.

But the bank noted that conditions in the troubled U.S. residential mortgage market have worsened since the end of its financial year, and it projected C$225 million in additional writedowns for the month of November.

The bank also said that it could face significant future losses in U.S. mortgage-related derivative contracts that are hedged with counterparties, depending on changes in market and economic conditions.

After rising in early trade on the Toronto Stock Exchange on Thursday, CIBC's stock reversed course and fell almost 5 percent to C$82.91.

CIBC, Canada's fifth-largest bank, has the largest exposure among Canadian banks to the subprime sector of the U.S. real estate market, which made home loans to customers with poor credit records.

It said earnings were C$884 million ($867 million), or C$2.53 a share, for the three months to Oct. 31. That was up from C$819 million, or C$2.32 a share, earned in the same period a year earlier.

On a cash basis, the bank said it earned C$2.55 a share.

Analysts expected CIBC to earn C$2.07 a share before exceptional items, according to Reuters Estimates.

CIBC took some of the surprise out of its results by warning last month that it would write down C$463 million before tax on securities tied to the skidding U.S. subprime mortgage market.

It provided more details on Thursday, saying that as of Oct. 31, its net unhedged exposure to collateralized debt obligations and U.S. residential mortgage-backed securities was about C$741 million. That exposure is mitigated by subprime index hedges with a notional value of C$283 million, and a fair value of C$119 million, it said.

Conditions in the U.S. residential mortgage market have continued to deteriorate since year-end, the bank said.

It estimated that mark-to-market writedowns will be about C$225 million (C$150 million after-tax) for November. Partially offsetting this will be gains on credit derivative hedges of about C$45 million (C$30 million after-tax), it said.

In addition, we have exposures to the U.S. subprime residential mortgage market through derivative contracts which are hedged with investment-grade counterparties, CIBC said.

As of Oct. 31, the notional amount of these hedged contracts was C$9.3 billion. The related on-balance sheet fair value was C$4.0 billion, the bank said.

CIBC said its management had assessed the counterparty credit exposure in determining fair value.

Market and economic conditions relating to the counterparties may change, which could result in significant future losses, the bank said.

CIBC is providing more disclosure on its gross exposure to subprime mortgage securities and related derivatives, after previously referring to C$1.7 billion in net exposure, said Blackmont Capital analyst Brad Smith.

We've been suggesting for some time that the gross exposure would be a more relevant number, particularly since a number of global credit insurers have been under a lot of market pressure because of concerns about their ability to honor their counterparty contracts, Smith said.

That's confirming a lot of speculation that has been swirling around the markets about the extent of the gross exposure, he added.

Without knowing who the counterparties are, and the size of the bank's exposure to each one, it is difficult to do further analysis, Smith said.

Brenda Lum, a credit analyst at DBRS in Toronto, agreed that there is some concern that certain counterparties to hedge contracts may not be able to make good on the hedges, given that conditions in the U.S. subprime mortgage market remain weak, and this could lead to losses.

Currently the ratings on CIBC remain intact, she said.

Retail markets continue to do well, and that is core to their business, Lum added. ($1=$1.02 Canadian) (Reporting by Lynne Olver; Editing by Peter Galloway)

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