May 14, 2008 / 1:08 PM / 10 years ago

UPDATE 3-Royal Bank of Canada to take C$855 mln writedown

(Adds background, quotes, updates stock price)

By Leah Schnurr

TORONTO, May 14 (Reuters) - Royal Bank of Canada (RY.TO) said on Wednesday it will see pretax writedowns of about C$855 million ($855 million) in the second quarter, its largest charge since the credit crisis began last summer.

The bank, Canada’s biggest, said that after taxes and compensation adjustments, the charge to earnings is about C$420 million. It will report its results on May 29.

Royal said a “significant portion” of the writedowns reflect liquidity pressures on assets that it continues to hold, rather than underlying credit quality.

“We are not happy about taking any writedowns and certainly do not take them lightly,” Gordon Nixon, Royal’s chief executive, said in a statement. “That said, these writedowns are manageable and our risk profile continues to remain within our risk appetite.”

The writedowns are widely distributed across a variety of corporate and capital market portfolios, Blackmont Capital analyst Brad Smith wrote in a research note.

Smith told Reuters the writedowns were “no big surprise”.

“There’s still lots of scope for both Royal and other domestic banks to be recording future valuation adjustments as well,” he said.

Five of Canada’s six major banks have been forced to take writedowns amid troubles in financial and credit markets. Royal took a pretax charge of C$430 million in the first quarter on U.S. subprime mortgage-related assets, among other items.

This is still well off the massive subprime-related writedowns that have been taken by larger international banks. In Canada, Canadian Imperial Bank of Commerce (CM.TO) took pretax charges of C$3.38 billion in the first quarter.

The fresh writedowns from Royal include about C$200 million on credit default swaps tied to a subsidiary of MBIA, the world’s largest bond insurer, and C$90 million related to retained positions in U.S. subprime collateralized debt obligations.

Genuity Capital Markets analyst Mario Mendonca wrote in a research note that the total value before writedowns of securities hedged with MBIA is C$4.4 billion, “suggesting that a downgrade of MBIA and further deterioration in the underlying (value) would result in further charges.”

However, Mendonca added: “We do not believe that Royal’s capital strength will be impaired by this exposure.”

Shares of Royal were up C$1.15, or 2.4 percent, at C$49.77 at midday on the Toronto Stock Exchange on investor relief that the size of the loss was not larger.

Recently, Citigroup analyst Shannon Cowherd suggested that Royal could take writedowns of about C$5 billion, but she later cut her estimate in half after the bank disputed that view.

Other market-watchers had anticipated charges could be in the C$300 million to C$700 million range. ($1=$1.00 Canadian) (Additional reporting by Frank Pingue; editing by Rob Wilson)

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