Tuesday, January 29, 2008

2008 Citi Financial Services Conference

Reuters, 29 January 2008

Royal Bank of Canada will write down its exposure to a troubled bond insurer in its first-quarter results, the bank's chief financial officer said on Tuesday.

Janice Fukakusa said Royal, Canada's biggest bank, has already revealed it is exposed to one A-rated monoline bond insurer and had taken a provision against this exposure.

"The current mark-to-market (value of that exposure) as of October 31 was C$104 million ($104 million)," Fukakusa told a Citi Financial Services Conference in New York.

"That monoline subsequently is in difficulty so we have written off the balance of our exposure in our first-quarter results," she said.

Royal's first quarter ends on January 31 and the results are due to be reported on February 29.

Fukakusa did not specify the exact writedown nor name the bond insurer, but Blackmont Capital analyst Brad Smith said the only such firm with a single A-rating at the end of October was ACA Capital Holdings .

ACA is the same insurer causing headaches for Canadian Imperial Bank of Commerce

Some businesses that invested in subprime securities hedged these instruments with counterparties like monoline bond insurer ACA in case their value dropped, which has happened along with surging defaults on subprime mortgages.

But several monolines, which are insurers that only operate in one business line, are now at risk of failing themselves, meaning investors who purchased protection from them may not get their money back.

Royal has already taken a hit from the subprime turmoil in the United States, although it is small compared to that felt by CIBC. In the fourth quarter, Royal took a C$360 million pre-tax writedown for its exposure to structured products with subprime content.
Canadian Press, David Friend, 29 January 2008

Royal Bank of Canada will write down the full amount of its exposure to a U.S. bond insurer that was valued at $104 million months ago, the bank's chief financial officer said Tuesday.

The blue-chip bank's exposure to the monoline bond insurer was disclosed in its last quarterly report on Nov. 30. At that time, the bank took a writedown of $357 million pre-tax, or $160 million after tax and employee bonus reductions.

Since then, the monoline – not formally identified but assumed to be ACA Capital Holdings – has run into further trouble which forced Royal Bank to write down the remainder of its insurance value, CFO Janice Fukakusa said in a financial services conference call.

Fukakusa said that the mark-to-market value of the exposure was $104 million when the bank's financial year closed at the end of October.

The problems at the monoline insurer, whose business is to guarantee payment of principal and interest when a debt-security issuer defaults, are not regarded as significant for Canada's largest bank, which has a stock-market valuation of almost $64 billion.

RBC shares were ahead 34 cents to $50.04 on the Toronto Stock Exchange at midafternoon.

"If it was $104 million at the end of October it may have grown somewhat since then, and the ultimate charge-off of that amount would be something less than 10 cents a share," said Brad Smith of Blackmont Capital.

"If it was a material amount they would be pre-releasing it. I suspect from the way it's coming out . . . you're not even going to see this in the results."

Royal Bank spokeswoman Beja Rodeck said the bank will not issue a news release on the matter because it's not considered material.

The bank will report its first-quarter results Feb. 29.

Investors have braced themselves for ongoing Canadian bank writedowns connected to the crumbling U.S. subprime mortgage market, and Royal Bank's stock is off about 20 per cent from its highs of the past year.

The monoline Wall Street bond insurers have become a major focus of anxiety in anticipation that they will be unable to pay claims.

ACA Capital has fallen in danger of going bankrupt, though it has extended a waiver from its counterparties until Feb. 19.

New York insurance regulators met with a dozen banks last week to discuss ways to shore up MBIA Inc. and Ambac Financial Group Inc., two other players in the monoline industry which is estimated to have promised coverage on $2.3 trillion in debt.
Reuters, 29 January 2008

Toronto-Dominion Bank may struggle to meet its baseline 7 percent earnings-per-share growth target in 2008 due to the deepening turmoil in financial markets and a weakening economic outlook, the bank's chief executive said on Tuesday.

Speaking at a financial services conference in New York, CEO Ed Clark said he was more pessimistic than he was late last year, when he said TD's 2008 growth would likely be at the low end of its 7-10 percent target.

He said the bank's securities wing has suffered from falling asset prices, while the weakening U.S. economy and strong Canadian dollar have combined to pinch growth in the Canadian province of Ontario, particularly among manufacturers.

"If the markets stay this flat and (Ontario's economy grows at) 1 percent, we're going to have to work hard to stay in that range," he said.

Clark, who has remodeled TD as a low-risk retail-focused bank, while at the same time establishing a growing U.S. presence, reiterated the bank has no exposure to the U.S. subprime mortgage market.

He also said he was not worried about the bank's role in helping finance a $34.8 billion leveraged buyout of Bell Canada owner BCE Inc., which some investors have worried may be re-priced or abandoned. TD is providing $3.8 billion in financing for the deal.

"I don't think that the fundamentals of Bell Canada have changed in the last six months. The only thing that has changed is the capital market," he said.

"Our view is that if you underwrite something, you ought to be prepared to hold it."
The Globe and Mail, Tara Perkins, 29 January 2008

Toronto-Dominion Bank chief executive Ed Clark says a significant slowdown is coming, and the Canadian economy will not decouple from the United States.

Speaking to a financial services conference in New York, Mr. Clark spoke positively of the domestic banking environment.

“I always say to people if you don't buy me, buy one of the Canadian banks,” he told the room of investors. “It's been a terrific story in Canada.”

But he added Canada's economy will not likely escape troubles south of the border.

“Our outlook is that Canada will not decouple itself from the United States,” he said, adding there will be an impact on the bank's business.

“We're sitting here, the guns of August, waiting for the war to begin and anticipating it,” he said. “... Over a year ago, I announced it was coming, and all I did was end up cutting expenses probably a year in advance. But I do think this time it really is coming, and we are going to have a significant slowdown.”