Monday, November 19, 2007

National Bank Takes $575 Million Charge

Financial Post, Jonathan Ratner, 19 November 2007

National Bank’s announcement that it will take a pre-tax charge of $575-million related to its asset backed commercial paper (ABCP) holdings comes on the heels of similar announcements recently by other members of Canada’s Big Six banks. All of them have now made pre-announcements, but National leads the way with the largest gross charge to date.

National also said it bought $2.1-billion of ABCP in the fourth quarter of 2007, primarily from its own funds, but also ABCP held by its retail clients. This is in addition to roughly $150-million of ABCP already on its balance sheet.

The bank’s provision represents more than 25% of its exposure, according to Dundee Securities analyst John Aiken, who noted that this is one of the highest levels seen so far. He said the provision is in line with expectations and actually below some of the more conservative estimates on the Street.

National did not have an offset like many other banks did with Visa gains, or the Bank of Montreal had with the sale of its Mastercard exposure.

“However... this is well within the level that is manageable for National from a capital perspective,” Mr. Aiken told clients in a note.

“We view NA’s announcement similarly to BMO’s: although charges are never a positive, the amount was not as negative as some had speculated and with an actual amount now in the public domain, it should relieve some valuation pressure,” he said.

The analyst also said the fact that National’s charge was well above the 15% level most other banks have taken is a good sign since it signals its reasonably conservative stance with regards to this exposure.

Mr. Aiken rates National shares at "market outperform" with a $61 price target.

With this announcement behind them, National should report a fourth quarter loss of 88¢ per share, according to Blackmont Capital analyst Brad Smith.

He said the bank’s ABCP holdings are 10% to 20% higher than previously estimated, while it will carry its ABCP investments at roughly $1.7-billion, or 39% of its estimated year-end book equity.

This continued exposure compels Mr. Smith to maintain his “hold” rating on National shares, he told clients in a note, adding that it could face additional write-downs as well as competitive strains and client losses if institutional customers are not offered a buyout at par value. His price target is $67.50.
The Globe and Mail, John Partridge, 19 November 2007

The smallest of Canada's Big Six banks is taking the biggest hit any of them has yet disclosed on its holdings of non-bank asset-backed commercial paper – and bigger than many Bay Street financial services analysts, including its own, were expecting.

National Bank of Canada said Monday that it will take a pre-tax charge of $575-million against profit in the recently ended fourth quarter related to its holdings of about $2.25-billion of this once obscure form of corporate debt.

This amounts to more than 25 per cent of the value of the holdings and compares with hits of about 15 per cent announced by other much larger banks, including $135-million by Bank of Montreal and $190-million for Bank of Nova Scotia.

National Bank said the hit will translate to about $365-million after tax and compensation adjustments.

That is $122-million more than the record profit of $243-million the bank reported for the third quarter.

What is more, unlike other banks that have already revealed the hits they have taken in the fourth quarter, which ended Oct. 31, National Bank did not announce any unusual gains with which to offset the ABCP charge.

The market for ABCP has been under a microscope since mid-August when it was frozen after the collapse of the U.S. subprime mortgage market.

“National Bank's ABCP charge is based upon its valuation estimate of its ABCP holdings, which considers the current market conditions affecting the underlying assets of the trusts and National Bank's expectation that it may be a long-term owner of this ABCP or the instruments which could replace these notes following the proposed restructuring contemplated by the Montreal Accord,” the bank said in a news release.

It also said that it expects its tier-one capital ratio to be above its target of 8.5 per cent at the end of the quarter, Oct. 31.

Analyst Brad Smith at Blackmont Capital estimated in a note to clients that this ratio will drop to 8.8 per cent from 9.4 per cent in the third quarter.

At the start of trading, investors appeared to have been expecting worse news than National Bank reported: its shares climbed as far as $52 on the Toronto Stock Exchange, up 97 cents from Friday's close, while all the other bank stocks were down, except Bank of Montreal.

“Maybe ... people [are] saying they're putting this behind them,” analyst Michael Goldberg at Desjardins Securities — who thinks there may in fact be more trouble in store — said in a telephone interview.

However, by mid-day, National Bank shares had been in and out of the red, falling as low as $50.48 before bouncing back to $51.36, up 33 cents or 0.65 per cent. The only other Canadian bank stock showing gains was BMO, which was up 15 cents or 0.26 per cent to $56.81.

The bank, which was the most active seller of third-party ABCP, bought $2.1-billion of the stuff back from its own sponsored mutual and pooled funds and from its retail clients during the fourth quarter. This was on top of about $150-million of the paper it already held on its own balance sheet.

Several analysts said the charge the Montreal-based bank is taking is higher than they expected.

Mr. Smith, for instance, said the hit exceeded his estimate by $75-million to $100-million and said he now figures the bank will report a fourth quarter loss of 88 cents when it reveals its year-end results, set for Nov. 29.

He said he is “compelled” to maintain the “hold” rating he has on the bank's shares because of its continuing exposure to ABCP. This exposure, he said in the note, could lead to additional writedowns and “competitive strains and loss of clients due to institutional customers not being offered a buyout at par value.”

Mr. Goldberg at Desjardins also cited uncertainty about the impact the entire ABCP episode will have on National Bank's reputation, adding in a note to clients that the charge the bank announced “contains no litigation provision.”

He estimated the bank will report a fourth quarter loss of $1 a share as a result of the charge.

The size of the hit was also much higher than the $330-million forecast by RBC Capital Markets analyst André-Philippe Hardy. However, Mr. Hardy, who has an “underperform” rating on the stock, told clients in a note that he had estimated the amount of ABCP the bank already had on its books at $200-million, $50-million more than it reported Monday.

Robert Sedran, bank analyst at National Bank Financial, who does not rate the parent's stock because of his affiliation, said in a note to clients that he had expected the charge to be in the $300-million to $350-million range.

He also said it is “an open question” as to whether the size of the hit is “conservative or realistic,” because there is still very little information available about the assets underlying the ABCP.

Despite investors' “initial positive reaction,” Mr. Sedran said he thinks the fact the charge was higher than the market was expecting “carries negative ramifications not just to NA's balance sheet but to other holders of the [ABCP] that have taken less conservative views (including those that may have purchased the paper from National Bank).”

By contrast, analyst John Aiken at Dundee Securities Corp. told clients in a note Monday that the National Bank hit is in line with his expectations, even though the “gross charge” is the largest disclosed by any Canadian bank so far.

As well, at 25 per cent of the bank's total exposure to ABCP, the level of provisioning is “one of the highest that we have seen to date,” he said, “well above the 15 per cent” taken by most other lenders.

However, Mr. Aiken, who rates National Bank shares as “market outperform,” also said that this should be “viewed as a positive and demonstrates a reasonably conservative stance that the bank is taking with its exposure.” As well, he argued that exposure is “well within the level that is manageable for National from a capital perspective.”

National Bank spokesman Denis Dubé confirmed that the $575-million charge does not include any provision for potential litigation costs but would not comment on the analysts' forecasts for a fourth-quarter loss.
Bloomberg, Doug Alexander, 19 November 2007

National Bank of Canada, the country's sixth-largest bank, plans to take a C$365 million ($374 million) writedown in the fourth quarter for its investments in Canadian asset-backed commercial paper.

The charge is about C$575 million pretax and before compensation adjustments, the Montreal-based lender said today in a statement. National Bank bought back C$2.1 billion of commercial paper in the quarter ended Oct. 31, mainly from its mutual fund clients.

National Bank's writedown is the largest for any Canadian bank, and is higher than the lender's net income last quarter. The other banks, including Royal Bank of Canada, had combined writedowns of C$807 million on commercial paper, and debt tied to the U.S. subprime mortgage market.

``It seems on the high side,'' said CIBC World Markets analyst Darko Mihelic, who expected a pretax charge of about C$300 million from National Bank. ``It either implies they're being conservative or they have a lot of really junky stuff, or a combo of the two.''

The bank's shares rose 77 cents, or 1.5 percent, to C$51.80 at 4:10 p.m. trading on the Toronto Stock Exchange. The stock is down 21 percent this year, the worst performer among Canadian banks.

The C$34 billion market for commercial paper sold by non- bank dealers in Canada ground to a halt in August after Coventree Inc. and other trusts failed to renew most of their maturing debt because investors were concerned about ties to U.S. subprime lending.

National Bank, which had C$150 million in commercial paper before the buyback, first became involved with non-bank asset- backed commercial paper in 2000.

Unlike other Canadian banks, which steered most of their clients to in-house funds, National advised customers to buy commercial paper offered by dealers including Toronto-based Coventree. The bank turned to outside firms because it didn't have a lot of asset-backed products of its own.

Canada's banks have said they'll have combined securities writedowns in the quarter of about C$1.17 billion. By comparison, the world's biggest banks and securities firms in the U.S. and Europe have recorded more than $45 billion of writedowns this year on asset-backed securities.

National Bank is scheduled to report fourth-quarter results on Nov. 29. The bank will probably post a net loss of about C$1 a share with the writedown, said Michael Goldberg, an analyst at Desjardins Securities. The bank had profit of C$220 million, or C$1.31 a share, a year earlier.

National Bank is among a group of investors led by the pension fund Caisse de Depot et Placement du Quebec that signed the so-called ``Montreal proposal'' on Aug. 16. The group agreed to restructure the commercial paper into floating-rate notes with longer maturities, and aims to finish the plan by Dec. 14.

National Bank's writedown is equal to more than 25 percent of its commercial paper holdings, one of the highest writedowns recorded by Canadian companies. DundeeWealth Inc., the Toronto- based owner of Dynamic Mutual Funds, wrote down the value of its asset-backed commercial paper by about 15 percent. Desjardins Group, the largest credit union in Canada, took an 8 percent writedown last week.