Thursday, July 10, 2008

Genuity: RBC's Writedowns Could Double to > $3 Billion

Financial Post, Duncan Mavin, 10 July 2008

Royal Bank of Canada's writedowns could double to more than $3-billion as ongoing deterioration in U. S. credit markets takes its toll on Canada's largest bank, a report warned yesterday.

Worsening conditions in the United States may force RBC to take another $1.5-billion hit to add to the $1.6-billion in credit-crunch losses it has disclosed, said the report from Genuity Capital Markets analyst Mario Mendonca.

The potential losses would likely wipe out the entire quarterly profits at RBC, and would put a big dent in any hopes the worst of the credit crunch is behind Canada's banks.

Mr. Mendonca's warning comes a day after Mark Carney, the Bank of Canada governor, signalled a better outlook for credit markets here by saying he is closing an emergency fund set up to help the banking sector. But most of the recent trouble for the Canadian banks has come from their involvement in U. S. markets, where Ben Bernanke, chairman of the Federal Reserve, said this week he will keep the door open for emergency Fed funding into next year if market turmoil persists.

The announcement soothed the nerves of cash-strapped Wall Street banks but fuelled fears that the credit crunch is far from over.

Mr. Mendonca said his forecast of more writedowns at RBC is based on a further slide in the U. S. subprime mortgage market, plus weakening of mortgage-backed securities values and worsening conditions on a variety of structured products since late June. Another key driver is a recent fall in the credit rating of monoline insurer MBIA Inc., a counterparty to some of RBC's U. S. investments. "We re-examined RBC's exposures in this light and we estimate that [the bank] will take a third-quarter pre tax charge ranging from $900-million to $1.5-billion," Mr. Mendonca said.

The bank's stock fell almost 4% on the Toronto Stock Exchange yesterday, down $1.84 to close at $44.16. RBC's share price has fallen 28% in the past year, and is down 14% since the start of June.

Mr. Mendonca noted that the potential writedowns would not undermine RBC's strong capital position. But he also said the bank, which reports its third-quarter results on Aug. 28, is facing a variety of additional issues, including exposure to U. S. builder finance and tough conditions for generating profits from its significant capital-markets group.

A spokesman for RBC declined to comment on the analyst's report. However, Gord Nixon, chief executive of RBC, said in May that "a significant portion" of the $854-million writedown the bank took in the second quarter of 2008 "reflects liquidity pressures on assets that we continue to hold, rather than underlying credit quality."

Mr. Nixon has partly blamed the writedowns on new accounting rules that require banks to account for the investments based on their value in the market, which can result in fluctuating valuations.

RBC's total credit-crunch losses are the second-largest of any bank in Canada.

Canadian Imperial Bank of Commerce has recorded $6.7-billion in credit-crunch charges since last summer, and a number of bank-industry analysts say the bank could take another $1-billion to $1.5-billion in charges when it reports third-quarter results on Aug. 27. Bank of Montreal and Bank of Nova Scotia have recorded about $1.2-billion in writedowns between them, while Toronto-Dominion Bank has avoided similar writedowns.