A new report from Keefe, Bruyette & Wood is throwing cold water on CIBC’s (CM.TO) proposed cash and stock offer for PrivateBancorp (PVTB.O). KBW Analyst Christopher McGratty is arguing the Chicago merchant bank is worth closer to US$70 per share, well above the implied value of CIBC’s US$50.54 offer, and that Canada’s fifth-largest lender may have to either raise its bid or drop the deal entirely.

“Our call on [PrivateBancorp] is that the merger with CIBC as currently proposed is unlikely to be approved given that the environment has improved considerably and PVTB's potential earnings power is meaningfully higher compared to last June when the deal was originally announced and rate expectations were very low,” McGratty wrote. “As such, we believe either CIBC needs to significantly increase its bid for PVTB to around $70/share (generating 20 per cent + potential return for PVTB shareholders) or walk away.”

CIBC originally launched the bid nine months ago, before inflation expectations under a Donald Trump presidency boosted financial stocks. Expectations for further U.S. Federal Reserve rate hikes have also given the sector a bid up. McGratty wrote that this confluence of factors along with PrivateBancorp’s relative undervaluation compared to its peers are the main factor putting a tie-up at risk.

“We believe a combination of higher short-term rates, improved confidence in the economy, possible corporate tax and regulatory reform, and ultimately higher bank stock multiples are all contributing to investors' view that PVTB is worth [significantly] more today than when the deal was announced - and we agree on many of these points,” he wrote.

PrivateBancorp expects to hold a special meeting for shareholders to vote on CIBC’s offer “on or about” May 4. McGratty wrote that regardless of the outcome, he sees little downside risk for PrivateBancorp shares, upgrading the stock to Outperform.

“While many believe PVTB could temporarily sell off on a break, it's also possible that this could be a positive catalyst to send the shares higher,” he wrote. “As a result, we are comfortable being ‘early’ with our call especially since the valuation is at near-parity with the [KBW Nasdaq Regional Banking Index] and no other sell-side firm is yet recommending the shares.”