15 June 2007

RBC's U$40 Million Exposure in NC Real Estate

The Globe and Mail, Tara Perkins, 15 June 2007

The Royal Bank of Canada indirectly has $40-million (U.S.) in exposure to a North Carolina real estate development that has been under attack from the state's Attorney-General, a Citigroup Global Markets analyst said in a note Friday.

Last week, Attorney-General Roy Cooper announced that he won a court order to stop the venture, which he alleges sold overpriced lots in the North Carolina mountains by promising consumers they could make a profit without having to invest any of their own money.

“These developers squandered more than $100-million in financing, leaving consumers stuck with property that isn't worth what they owe on it,” Mr. Cooper said in a release.

The project allegedly used inflated appraisals and phony second mortgages as down payments to entice consumers to borrow millions of dollars to buy property.

Citigroup analyst Shannon Cowherd's $40-million figure for Royal Bank's indirect exposure comes from the regulatory filings of a company that is not named in the Attorney-General's allegations, but which she said is affiliated with the development and the developers.

Royal Bank Friday that it does not comment on analyst speculation.

Three other local banks have reported a potential combined total of $57.8-million in losses as a result, Ms. Cowherd wrote in a note to clients. On Friday, Capital Bank announced that it has “limited exposure” to the project, and said that “multiple community, regional and super-regional banks, in and out of North Carolina, are connected to the project in a wide range of investments.”

Ms. Cowherd is keeping her forecast of Royal Bank's earnings this year 2 per cent below consensus, or at $4.16 (Canadian) per share, to reflect anticipated losses from this type of exposure.