CIBC to write down another $1B: analyst

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This from the National Post.

The note from Blackmont analyst Brad Smith followed news late on Friday that Moody’s Investors Service had downgraded XL Capital Assurance. CIBC has exposure to XL Capital since the bond insurer provides it with guarantees on some investments.

“Based on this downgrade and XLCA’s credit default swap spreads … we expect CIBC will write off its remaining fair value exposure to XLCA in its Q3/08 results,” Mr. Smith wrote in the note.

According to Moody’s, the downgrade reflected XL Capital’s impaired financial flexibility and its proximity to minimum regulatory capital requirements.

CIBC took a big loss in the second quarter, after taking additional charges of $2.5-billion for U.S. structured credit securities and other positions hurt by the credit crunch.

National Post, 23 Jun 2008

To date, writedowns by Canadian banks have been rather limited. As a result, the likes of Royal Bank of Canada have been posited as suitors of struggling U.S. regional banks. However a blog entry from Calculated Risk makes me question this possibility:

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… regional banks which may find it difficult to find suitors since accounting rules require that a takeover target’s portfolio is marked to market at the time of acquisition …

And that might just leave FDIC receivership as the only option for many banks. From the WSJ:

There is often only one option left for a capital-starved U.S. bank that can’t attract a suitor — receivership under the auspices of the Federal Deposit Insurance Corp. While hardly ideal, that works fine as long as only a few banks stumble. But if the pressures of the credit crunch cause too many to fail, the FDIC could be overwhelmed. … No wonder FDIC Chairwoman Sheila Bair has said bank problems are giving her heartburn.

Calculated Risk, 23 Jun 2008

It will be quite interesting to see how the regionals fare as real economy effects in credit cards, commercial real estate and auto loans take hold. For now, the CIBC’s and RBC’s of the world may be a bit gun shy.

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See: Credit Crisis Timeline for a full list of writedowns and capital raising by institution and a timeline of the credit crunch.

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