Friday, October 17, 2008

S&P Says Banks Well Positioned to Manage Downturn

Financial Post, David Pett, 17 October 2008

Standard & Poors has combed over Canada's top six Canadian banks, and it appears to like what it sees.

"In general, we believe that the Canadian banks are well positioned to manage through a cyclical downturn," Lidia Pareniuk, S&P's primary credit analyst, said in a research note.

She said that while the risk in Canadian bank's U.S. businesses is increasing and investing banking revenues remain "shaky," Ms. Pareniuk was quick to recognize the significant strength in their domestic retail and commercial banking businesses, saying retail franchises will continue to be the backbone to their overall financial performance.

Canadian banks also benefit from healthy capital positions and stronger and more conservative balance sheets than their U.S. counterparts, the analyst added. which has resulted in superior credit quality to many global banks. That in turn, should provide stability despite some undoubtedly tough times ahead.

"There is no doubt that the Canadian banks are facing a more challenging business cycle with a slowing Canadian economy in concert with rising credit costs, costly funding, fewer loan originations, and sharply lower capital markets-related revenues to pressure profitability growth," Ms. Pareniuk wrote.

"Nevertheless, with what we view as substantially more robust balance sheets and capital positions and lower risk profiles, the banks' foundation appears stronger than that of U.S. and European peers."
The Globe and Mail, Tara Perkins, 17 October 2008

Canada's banks have been tossed an accounting lifeline that will give them more leeway when it comes to dealing with the complicated securities that have caused large writedowns.

Canada's Accounting Standards Board said yesterday it is speeding through new rules that will permit banks to reclassify financial assets in rare circumstances so that they don't have to be marked to market.

The changes mean banks can move some assets into an accounting bucket where they don't have to take writedowns until the assets have been permanently impaired. That means they might delay writedowns but won't avoid them, said Ian Hague, a principal with the Canadian board.

Shares of Canadian Imperial Bank of Commerce rose and Bank of Montreal rose sharply. The two banks have significant exposure to hard-to-value assets and are expected to be the largest beneficiaries of the new accounting rules.

The move follows a similar decision earlier this week by the International Accounting Standards Board (IASB). Standard setters say they are levelling the international playing field and giving banks flexibility during the financial crisis.

Many bank executives blame mark-to-market, or fair value accounting, for exacerbating the crisis. The rules require them to regularly value complicated securities, even if they plan to hold on to them. Over the past year the market for many of the securities has dried up due to lack of demand, causing massive writedowns that have walloped profits. Some bankers argue that a portion of the securities might recover in value if the markets come back to life.

The IASB brought its rules closer to U.S. generally accepted accounting principles, which have long said banks could reclassify some assets in “rare” circumstances.

But Sarah Deans and Dane Mott, accounting analysts at JPMorgan Chase & Co., said that weak accounting enforcement in European Union countries could leave the definition of “rare” circumstances open to abuse.

They also argue the new rules reduce transparency, and the hasty change “establishes an unfortunate precedent of political considerations overriding the need for high quality accounting standards, and of suspension of due process.”

Mr. Hague said the Canadian moves were made because the country is trying to harmonize its rules with those in other jurisdictions.

“What's happened here is that the current credit environment has caused some in the U.S. to say ‘whoops, we've now got some real rare circumstances and under our U.S. standards we can start to do some things under that trigger,' and the rest of the world to look at it,” he said.

Citigroup reported a loss this week of $2.8-billion (U.S.). But its results also included an unusually large increase of almost $6-billion in accumulated comprehensive loss, which would include potential mark-to-market writedowns not included in the earnings because the firm believes they might be reversed.

The standards board is now looking at requiring enhanced disclosure on liquidity risks and how the value of complex assets has been determined.
Bloomberg, Sean B. Pasternak, 17 October 2008

Canadian banks and insurers will have more flexibility to delay potential debt writedowns under new accounting rules that bring Canada in line with the U.S. and Europe. Financial stocks soared, led by Canadian Imperial Bank of Commerce.

The changes allow companies to reclassify assets such as bonds and stocks so that they aren't subject to "fair value" accounting, Canada's Accounting Standards Board said in a statement on its Web site today. The changes don't apply to derivatives, although investments such as collateralized-debt obligations may be considered, the board said.

The revision follows changes made by the International Accounting Standards Board that let companies avoid booking immediate losses as asset values plunge. Firms such as Manulife Financial Corp. have said the so-called ``fair-value'' rule exacerbates the credit crisis by forcing companies to write down assets that are hard to value and which they have no intention of selling.

"It's all about maintaining global comparability," Ian Hague, a principal with the Toronto-based Accounting Standards Board, said in a telephone interview. "We decided that we needed to level our playing field."

The new rules, effective July 1, may give Canadian banks relief as they prepare results for the fiscal year ending Oct. 31. The lenders have reported about C$11.6 billion ($9.8 billion) in pretax writedowns in the past 12 months.

"While accounting treatment has zero impact on economic reality, the move should ease concerns around prospects for further writedowns," TD Newcrest analyst Jason Bilodeau wrote in a note to investors.

Canadian banks and insurers climbed in trading on the Toronto Stock Exchange, with the nine-member Standard & Poor's/TSX Banks Index rising 2.5 percent as of 4:10 p.m. The gains were led by Canadian Imperial Bank of Commerce and Bank of Montreal, two of the banks with the most writedowns this year.

``Though further detail is required as to the type of assets that are eligible, at first glance this is clearly most beneficial to CIBC,'' said Sumit Malhotra, an analyst at Merrill Lynch & Co. in Toronto.

CIBC has written down C$7.55 billion in debt investments since the third quarter of 2007, the most of any Canadian bank. The stock surged C$3.60, or 6.6 percent, to C$58.

The U.S. Securities and Exchange Commission agreed this week to let banks in some cases delay writedowns for so-called perpetual preferred securities, which have declined in value during the collapse of the credit markets.

Canadian insurers such as Manulife and Sun Life Financial Inc. are expected to record losses this quarter on investments linked to American International Group Inc. and Lehman Brothers Holdings Inc.

Royal Bank of Canada, Bank of Montreal and Canadian Imperial are among the lenders expected to announce further writedowns on structured products, Standard & Poor's analyst Lidia Parfeniuk wrote in a research note yesterday.

"You may get a little bit of a delay" in writing down assets, said Hague, 47. "But if things stay bad, or it looks like things are going to stay bad for a long time in the future, you're going to have to take a writedown."

Companies will also be required to give investors "comprehensive disclosure," on the impact writedowns would have on earnings, Hague said. The rule changes are permanent, and can be used in the current quarter, he said.

Manulife Chief Executive Officer Dominic D'Alessandro has criticized fair-value accounting, saying it "confuses" the market.

"I think these kind of accounting practices are wrong theoretically, they're wrong operationally, they make no sense for anybody," D'Alessandro told investors last month. "It's absolutely nuts."