CIBC likely to face more writedowns as Canadian banks cleanup from subprime

David Friend, THE CANADIAN PRESS
TORONTO - Only one of Canada's biggest banks has forewarned it will post more credit crisis-related charges when reporting earnings next week, which some analysts say could mark the beginning of the end for big bank writedowns.

That doesn't mean the banks are completely in the clear, at least for the second quarter - the usual suspects are still on the radar for potential writedowns.

What remains to be seen is whether the charges they report have already been built into their flagging share prices.

So far, only Royal Bank (TSX:RY) has stepped forward to say that its earnings will be hit by $855 million in writedowns during the second quarter.

However, other banks could be facing even deeper charges tied to troubled credit markets, particularly the Canadian Imperial Bank of Commerce (TSX:CM).

"The pressure is mounting for CIBC to have a meaningful loss in the quarter," said Brad Smith of Blackmont Capital. "We would imagine a reserve loss in or around a billion (dollars) or greater."

CIBC has faced a rash of writedowns totalling around $3 billion since the credit crisis emerged last summer.

Last week, rating agency Moody's downgraded monoline CIFG by seven notches, potentially leaving the bank open for an additional writeoff worth $617 million before tax on its fair-value exposure, Smith said.

CIBC has said it has $628-million of notional subprime mortgage-related exposure to CIFG, and $1.5-billion of non-subprime insurance at the insurer.

Other analysts went with less conservative estimates for CIBC's potential writedown. Merrill Lynch's Sumit Malhotra expects a charge of up to $2 billion for the quarter.

He noted that investors will have a comparatively muted response to the earnings because writedown expectations have already been built into the stock price.

"While we certainly agree that there are additional charges to be taken, the 'surprise' factor of new disclosures appears to have lessened," Malhotra said in a note.

"On an individual bank basis, we expect that each of the six large-cap banks will produce results that are flat-to-down versus their performances in the second quarter 2007."

The banks start reporting results on Tuesday with a busy, but brief, earnings schedule. Both Scotiabank (TSX:BNS) and Bank of Montreal (TSX:BMO) kick off the season.

On Wednesday, TD Bank (TSX:TD) issues its results, and CIBC reports on Thursday alongside National Bank (TSX:NA) and Royal Bank.

BMO might emerge from earnings season the least scathed, because the bank is "arguably best positioned to deliver a better-than-expected second quarter earnings performance," Smith said.

The bank has endured a year of nasty writedowns that started last spring with gas trading losses, months before the credit crisis spread across the industry.

A trend that's likely to stretch across all of the Canadian banks is the reeling in of frequent dividend increases, said John Aiken of Dundee Securities.

"Given that capital is at a premium, any increase in dividends will not likely be large. Further, we would see more banks ignoring the pattern of increasing dividends at least every second quarter."

When the quarterly reports wrap-up, this bank earnings season could become known more for what the banks avoided, rather than what was on the books.

"I view this quarter as being the transition period, or inflection point, where we move from the writedown era more so into the credit quality era," said Craig Fehr, a financial services analyst with Edward Jones in St. Louis.

"The next big earnings story for the banks is going to be provisions and reserves for credit losses and how deep of an impact that has on earnings growth."

Fehr said banks with U.S. exposure are going to feel a deeper impact from credit losses because of the more difficult retail banking and mortgage climate south of the border.

Royal, BMO and TD Bank all have U.S.-based operations.

© The Canadian Press, 2008