June 23, 2008 / 4:44 PM / in 9 years

CIBC likely to take big Q3 writedown: analysts

TORONTO (Reuters) - Canadian Imperial Bank of Commerce will have to write off at least C$1 billion ($984 million) in the current quarter, and perhaps twice that amount, because of its exposure to downgraded bond insurers, analysts predict.

<p>A Canadian Imperial Bank of Commerce (CIBC) branch is seen in Toronto November 9, 2007. REUTERS/Mark Blinch</p>

Shares of CIBC, the country’s fourth-largest bank by market value, fell C$1.03 or 1.7 percent to close at C$60.60 on the Toronto Stock Exchange on Monday, after slipping as low as C$60.41 in the session.

After news last Friday that Moody’s Investors Service had downgraded XL Capital Assurance, Blackmont Capital analyst Brad Smith said that CIBC could be looking at a C$1 billion pre-tax writedown. It also has notional exposure to XL Capital’s parent company, Security Capital Assurance Ltd, Smith noted.

The bond insurers provide CIBC 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,” 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.

Genuity Capital Markets analyst Mario Mendonca sees an even bigger hit looming for CIBC, because Moody’s downgraded a number of bond insurers last week, including SCA.

This caused credit default swap spreads to widen, and means that CIBC could take charges “approaching C$2.0 billion” related to both its subprime and non-subprime securities, Mendonca wrote. That’s a jump from his previous estimate of C$1.0 billion to C$1.5 billion in charges.

But CIBC could absorb pre-tax charges of C$3 billion in the third quarter, which ends July 31, and still keep its Tier 1 regulatory capital ratio above 9.0 percent, Mendonca noted.

CIBC posted a second-quarter loss of C$1.1 billion after taking additional charges of C$2.5 billion for U.S. structured credit securities and other positions hurt by the credit crunch.

The bank’s stock has fallen 14 percent year-to-date, after a 28 percent slide in 2007.

Smith has a “hold” recommendation on CIBC’s shares with a target price of C$74.00. Mendonca also rates the stock a “hold,” with a C$78.00 target.

($1=$1.02 Canadian)

Reporting by Frank Pingue and Lynne Olver; editing by Rob Wilson

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