(Adds DBRS rating confirmation)
By Lynne Olver
TORONTO, Nov 18 (Reuters) - Bank of Nova Scotia (BNS.TO) said on Tuesday it will take charges of C$595 million ($484 million) after tax in the fourth quarter due to sliding markets and “unprecedented volatility,” marking the first of what could be several bank pre-announcements ahead of reporting season.
Scotiabank, Canada’s third-largest bank, said the charges relate to the September bankruptcy of Lehman Brothers Holdings LEHMQ.PK, adjustments to the fair value of available-for-sale securities, mark-to-market losses on collateralized debt obligations (CDOs), and charges for other derivatives.
Based on about 992 million Scotiabank shares outstanding, the charges amount to 60 Canadian cents a share, which is a “manageable amount,” said Brad Smith, a bank analyst at Blackmont Capital.
Analysts expect Scotiabank to report a profit of 97 Canadian cents a share before items, according to Reuters Estimates.
“This is a pretty tough market, anybody that has an asset, whether it’s a house or a CDO, the chances are it’s going down in value,” Smith said.
“You never want to see losses, but they are commonplace today and it’s well understood how they develop.”
The bulk of the charges — which total C$890 million before tax — will be taken in the bank’s Scotia Capital unit.
“We are disappointed to announce these writedowns,” said Rick Waugh, Scotiabank’s president and chief executive.
“Both the equity and fixed income markets have experienced significant declines in value and extreme levels of volatility over the last several weeks, exacerbated by the Lehman bankruptcy,” Waugh said in a statement.
The bank’s three business lines are profitable and core earnings remain solid, he added.
Its Tier 1 capital ratio and tangible common equity ratio “will remain strong,” Waugh also said.
Scotiabank is the first Canadian bank to reveal charges for the fiscal fourth quarter, which ended Oct. 31.
It will report full quarterly results on Dec. 2.
Rating agency DBRS confirmed the bank’s AA credit rating and stable trends, saying that it views the writedowns as manageable, relative to the bank’s earnings ability and capital strength.
Scotiabank earned C$2.8 billion in the first nine months of 2008, and its Tier 1 capital ratio was 9.8 percent at the end of July, the Toronto-based rating agency said.
Blackmont Capital’s Smith said it is nearly impossible to estimate market-related losses that each of the banks might take.
“These valuation adjustments are arrived at in a variety of different ways,” he said.
Several analysts have said they expect Canadian Imperial Bank of Commerce (CM.TO) to take charges of up to C$2 billion in the fourth quarter, on top of about C$6.7 billion in charges that CIBC has already absorbed this year due to U.S. mortgages and a variety of derivatives and hedges.
Bank of Montreal (BMO.TO) will be the first Canadian bank to report fourth quarter results on Nov. 25. Its rivals are due to report results the following week. ($1=$1.23 Canadian) (Reporting by Lynne Olver; editing by Rob Wilson)