Tuesday, November 18, 2008

CIBC Expected to See $1-billion Loss as SCA's Future in Doubt

Financial Post, Jonathan Ratner, 18 November 2008

Syncora Holdings Ltd.’s, which changed its name from Security Capital Assurance Ltd. in August, reported a third quarter net loss of US$29.28 per share as it took a US$1-billion writedown on its collateralized debt obligations. SCA, whose management is now expressing doubts about its ability to continue as a going concern, is one of a number of monolines that have provided financial guarantees to CIBC’s book of credit derivatives.

CIBC has a net fair value exposure of US$1.2-billion to the bond insurer and a net notional exposure (excluding subprime) of US$2.6-billion, according to Blackmont Capital analyst Brad Smith.

He is not surprised by the recent developments at SCA despite the US$1.8-billion capital injection it got from Bermuda-based insurance firm XL Capital Ltd. in July. Mr. Smith said management’s concession that the future of SCA is in doubt will likely pressure other monoline credit default swap spreads and increase writedowns at CIBC.

“SCA’s credit spreads have recently spiked to 42%, implying a very high probability of default,” the analyst said in a research note.

Based on this news, where credit spreads were at the end of October, and assuming the underlying assets don’t deteriorate further, he estimates CIBC will have an after-tax losses of $1-billion this quarter.

Mr. Smith maintained his “hold” rating and $62 price target given the higher-than-average credit and trading risks CIBC faces as the U.S. economy weakens.
Financial Post, Jonathan Ratner, 17 November 2008

Canadian banks are expected to be less affected than their global peers by the regulatory reforms that emerged from the G20 leaders meeting in Washington over the weekend.

Elements of the action plan include a call for weaknesses in accounting and disclosure of off-balance sheet vehicles to be recognized by accounting standards, for authorities to ensure that financial institutions maintain adequate capital, particularly in terms of requirements for structured credit and securitization, a revamping of compensation schemes, and the reduction of systemic risks linked to credit default swaps and over-the-counter derivatives.

While calling the plans an improvement, Desjardins Securities analyst Michael Goldberg said CIBC and Bank of Montreal will see the most adverse effects. This is due to their greater involvement in structured credit and off-balance sheet vehicles.

“We also expect these measures to have a negative impact on trading revenue, leading banks to retreat from more exotic trading activities,” he told clients.