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CIBC's $2.4-billion-US settlement of an Enron shareholder class-action suit was the price that the big Canadian bank had to pay to make the troubling case go away, its new chief executive said Wednesday.

"We believe that we have optimized our situation by settling at this time," Gerry McCaughey said in a morning conference call.

"The uncertainties of protracted litigation were considerable and we wanted to avoid those uncertainties. And this was the price we had to pay to do so."

CIBC (TSX:CM) announced Tuesday after the market closed that it will settle the suit over the bankrupt U.S. energy trading firm to "focus our energies on our other priorities."

The settlement does not include any admission of wrongdoing by CIBC.

The bank's stock fell sharply in morning trading, dropping $5.95 or 7.38 per cent to $74.69, though that was well above its 52-week low of $64.05.

Smith Barney Citigroup analyst Rafael Bello said "the hit to shareholders' equity is, I think, taken into consideration in the stock price decline." He lowered his target price on CIBC stock to $76 Tuesday night.

He said the settlement is "a one-time hit that clearly lowers the value of the bank, but I think the growth prospects remain."

McCaughey, who succeeded John Hunkin as CEO just this month, said the amount - well above the $300 million the bank had set aside as a litigation reserve in the case - was somewhat unexpected.

"Through the negotiations, it became clear that the number that we are paying is the number required to reduce our risk by settling this case," McCaughey said.

The University of California, which is representing Enron shareholders who lost tens of billions of dollars as the company collapsed, alleged in its suit that CIBC and other financial firms were "key players in a series of fraudulent transactions that ultimately cost Enron investors an estimated $40 billion US to $45 billion in market losses."

Recovered funds are to be split among investors who bought Enron shares or debt securities in the four years before the company filed for bankruptcy in December 2001.

CIBC's was the largest settlement in the suit so far, bringing the total to more than $7 billion US.

New York-based securities lawyer Jake Zamansky said "the contribution of $2.4 billion is fairly substantial given what appeared to be a limited roll in Enron, compared to some of the other major investment banks, such as Citigroup, JPMorganChase and Merrill Lynch."

Citigroup settled for $2 billion US and JPMorgan for $2.2 billion. Merrill Lynch - along with six other banks including TD and the Royal Bank - has yet to settle.

"CIBC is paying more than what I think their fair share should be," said Zamansky, who has been following the case closely.

He said there are two probable reasons CIBC's payment was so large.

"There must have been some fairly incriminating evidence, perhaps e-mails, showing they were complicit in Enron's efforts to disguise their financial statements," he said. "Also, the strategy of the class-action lawyers is to increase the settlement amounts for banks that settle later."

The suit is still pending in a Texas court and the settlement requires approval by the Board of Regents at the University of California.

Zamansky said TD and the Royal Bank seem likely to have played "a more minor role. There's expectations that they will be required to pay something in the order of a couple hundred million dollars."

He added that "the pressure is now on the banks to try and settle early. If they wait until the eve of trial, they're going to pay a big number."

Spokesmen for both banks declined comment.

CIBC expects to take a charge to earnings of about $2.8 billion Cdn, or about $2.5 billion Cdn after-tax, in the quarter ending July 31. That's more than the bank made in all of 2004, and amounts to about $7.25 per share.

That figure includes a reserve of at least $150 million for other Enron-related cases still pending against it, the bank said Wednesday.

The settlement will be paid in three equal instalments at 90 days from the settlement date, 180 days and the final payment will come when the settlement receives final court approval.

After taking the charge into account, CIBC expects that its Tier 1 capital ratio of about 7.5 per cent will fall below its objective of 8.5 per cent or higher, although it will remain above the regulatory requirement of seven per cent for a well-capitalized financial institution.

It hopes to return to 8.5 per cent or higher by mid-2006.

"The bank is open for business, we want to conduct the clients' activities in an optimal fashion and we will manage our balance sheet judiciously in order to achieve that objective," said vice-chairman and chief risk officer Wayne Fox.

"Our earnings generation we believe is still intact," Fox said.

"We should be able to replenish the capital account quite nicely by the middle part of our fiscal '06 period and I think once the rating agencies have opined I think we will also have the opportunity issue sub-debt if and as required."

In an analyst note Wednesday, Merrill Lynch said it is downgrading its 2006 earnings per share target for the bank, from $6.30 to $6.17, because CIBC said it will temporarily halt its share buyback program until its financial situation improves.

"Despite the magnitude of the charge, we do not expect that the bank will need to raise capital," Merrill Lynch said, adding that the settlement gives "a clean slate" to incoming CEO McCaughey and removes a major risk factor for the bank.

"I think this is great for him, to put something behind," Bello said. "Clearly, he'd been a day on the job, so you cannot blame him for it."

Bello added that "in the short-term, there will be some pressure until investors feel comfortable that there are no more settlements going on."