Some of Canada’s five biggest banks are expected to report headline-catching writedowns when they announce first-quarter earnings.
The banks have so far escaped with remarkably little damage from the credit market turmoil.
Collectively, the Canadian institutions have the highest capital ratio of any industrialized country’s banks, averaging 9.7 percent of assets compared with 8.1 percent in the US and 8.4 percent in the UK.
Credit ratings
The report by British business newspaper, the Financial Times said though their credit ratings remain intact, some agencies are reviewing Canadian Imperial Bank of Commerce, the smallest of the five, in view of its sizeable unhedged exposure to US subprime mortgage securities and the diminishing value of counterparty protection from ACA, the monoline insurer.
CIBC, which reports on Thursday, has announced writedowns totalling C$3.7 billion since last summer.
Bank of Montreal said last week it would provide up to $12.2 billion in liquidity support for two structured investment vehicles that it manages. It will also take C$490 million in pre-tax charges on its exposure to ACA and other soured investments, the newspaper said.
With the exception of accident-prone CIBC, the Canadian banks have kept busy with less risky businesses than structured finance.
Structured finance
Toronto-Dominion Bank withdrew entirely from the structured finance market.
Retail operations contributed 79 percent of the bank’s net income last year. TD is on the verge of becoming North America’s seventh-biggest retail bank through its acquisition of Commerce Bancorp of the US state of New Jersey.
Meanwhile, Royal Bank of Canada, the biggest of the five, has knitted together a retail network in the south-eastern US, while Bank of Nova Scotia has benefited from a drive into Latin America.
Acquisitions in El Salvador, the Dominican Republic, Jamaica, Costa Rica and Peru lifted its income from new subsidiaries to C$140 million in the fourth quarter of last year, from C$15 million two years earlier.
Average earnings
Peter Rozenberg, analyst at UBS in Toronto, predicts that they will continue to outperform their US counterparts thanks to their “superior economic backdrop and global leadership in asset quality, capital and risk-adjusted returns,” the FT said.
However, risks remain. Mr. Rozenberg predicts soft earnings in the first half of this year because of slim lending margins and weak capital markets activity.
He expects average earnings growth of just three percent, far short of the banks’ own estimates of five to ten percent.
February 25, 2008