November 19, 2008 / 4:55 PM / 10 years ago

Scotiabank's Q4 warning puts heat on Canadian banks

TORONTO, Nov 19 (Reuters) - Shares of Bank of Montreal (BMO.TO), Bank of Nova Scotia (BNS.TO) and Canadian Imperial Bank of Commerce (CM.TO) led Canadian banking stocks lower on Wednesday morning as analysts said big securities-related writedowns loom in their upcoming quarterly reports.

After markets closed on Tuesday, Bank of Nova Scotia said it would take a hit of C$890 million ($718 million) before tax in its fourth quarter on trading losses tied to bankrupt Lehman Brothers Holdings LEHMQ.PK, as well as lower securities and derivatives valuations. The charges are expected to be C$595 million after tax, or 60 Canadian cents a share.

Scotiabank stock was down 5.1 percent at C$35.28 by late morning on the Toronto Stock Exchange.

Scotiabank and Toronto-Dominion Bank (TD.TO) are viewed as having the least exposure among Canadian banks to troubled assets, prompting concern over potentially larger writedowns from the others when their fourth-quarter results come out in the next two weeks.

“We are inclined to believe that all of the banks will report charges of a similar nature,” Genuity Capital analyst Mario Mendonca said in a note, singling out Bank of Montreal, CIBC and Royal Bank of Canada (RY.TO) as having the greatest potential for large charges.

By 11:30 a.m. (1630 GMT), shares of Bank of Montreal were down 5.8 percent at C$38.13, while CIBC stock was off 4.6 percent at C$48.54. Royal Bank was down 3.8 percent at C$41.87.

The Toronto Stock Exchange’s S&P/TSX financials index of banks, insurers and asset management companies was down 4.1 percent.

No. 4 lender Bank of Montreal, which reports fourth-quarter results next Tuesday, and No. 5 lender CIBC, which reports on Dec. 4, have bigger exposures to certain structured debt products than their rivals.

“We believe near-term risks are particularly elevated at CIBC and BMO given the sizable notional exposures” to collateralized debt obligations, National Bank Financial analyst Rob Sedran said in a research note.

For the Canadian banking sector as a whole, “we continue to see heightened risk of Q4 surprises given the incredible volatility (in markets) and we look for writedowns across the group,” TD Securities analyst Jason Bilodeau wrote in a note.

The other Canadian banks will not be immune to similar “market disruption charges” in the fourth quarter, Credit Suisse analyst Jim Bantis said in a report. But he added, “it’s just difficult to predict how much.” ($1=$1.24 Canadian) (Reporting by Lynne Olver; Editing by Peter Galloway)

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