February 28, 2008 / 1:45 PM / 10 years ago

More writedowns seen after CIBC's C$1.46 bln loss

TORONTO (Reuters) - Canadian Imperial Bank of Commerce posted a big first-quarter loss on Thursday after taking pretax charges of C$3.38 billion ($3.47 billion) and executives acknowledged that further writedowns may be needed.

The charges on U.S. mortgage-related securities and credit protection were higher than the US$2.5 billion figure the bank had warned of in January.

Market and economic conditions affecting U.S. bond insurers that are related to CIBC’s investments could change, and this could result in “significant future losses,” the bank said in its quarterly release.

The bank, which has been damaged by the U.S. mortgage crisis more than any of its Canadian rivals, said it lost C$1.46 billion, or C$4.39 per share, in the three months ended January 31. That compared with a profit of C$770 million, or C$2.11 a share, a year earlier.

At the bank’s annual meeting in Toronto, Chief Executive Gerry McCaughey said the writedowns were “a significant disappointment” to bank management, directors and shareholders alike.

The bank replaced several senior executives in January, and issued 45.3 million new shares worth C$2.9 billion to shore up its balance sheet in the wake of its structured-credit problems, which trace back to the U.S. subprime mortgage meltdown last summer.

With its recent equity issue, CIBC’s balance sheet should be able to absorb further writedowns, if necessary, executives stressed.

“We’ve given everyone a snapshot of where we are now, the U.S. economy of course is developing on a dynamic basis,” McCaughey told reporters after the meeting. “We believe that we’re actually positioned for it, if things did turn out to deteriorate.”

“Nobody is prepared to call a bottom right now,” Chief Risk Officer Tom Woods added.

CIBC Chairman Bill Etherington told shareholders that the board supported McCaughey’s “prudent and definitive responses” to the global credit turbulence.

Investors “obviously are not pleased” with the structured-credit writedowns, but they are not pushing to have McCaughey replaced as CEO, Etherington told reporters.

Analysts said that CIBC’s structured credit problems are bound to linger, as it still has securities hedged with bond insurers whose credit quality may yet worsen.

“Needless to say, there is potential for additional charges, though we believe the bank has dealt with most of its dirty laundry this quarter,” BMO Capital Markets analyst Ian de Verteuil said in a research note.

Brad Smith, an analyst at Blackmont Capital, said he expects “potentially severe” additional losses in the next 12 months because it appears that CIBC hedged its bets with some of the weaker U.S. bond insurers.

The face value of CIBC’s U.S. subprime real estate exposure hedged with monoline bond insurers was US$7.91 billion on January 31, bank risk officer Woods said later on a conference call. That amount is made up of US$2.91 billion in actual value and insurer protection of US$5 billion.

“To date we have taken reserves of US$2.8 billion, leaving remaining exposure of US$5.1 billion in the extreme event that all the underlying subprime exposure went to zero, and all the monoline insurers went bankrupt,” Woods said.

The bank’s quarterly results were hurt by a slew of pretax charges including C$2.28 billion on credit protection purchased from U.S. bond insurer ACA Financial Guaranty Corp, C$626 million for credit protection bought from other financial guarantors, and C$473 million in mark-to-market losses on securities tied to the U.S. residential mortgage market.

First-quarter results were also hurt by a C$108 million pretax loss on the sale of some U.S. businesses to Oppenheimer Holdings Inc., management changes and the exit of other businesses.

Edward Jones analyst Craig Fehr said that he had expected writedowns of between C$3 billion and C$3.5 billion, so the total size was not surprising.

“We weren’t seeing any material improvement in the credit markets and structured products markets,” Fehr said.

CIBC’s shares closed down C$1.05, or 1.5 percent, at C$67.95 on the Toronto Stock Exchange on Thursday. They have plunged about 33 percent in the past year.

The losses in wholesale unit CIBC World Markets overshadowed first-quarter profit in the bank’s Retail Markets unit, which rose 15 percent to C$657 million.

“Our largest business, Retail Markets, has performed well over the past two years,” McCaughey told shareholders.

($1=$0.97 Canadian)

Additional reporting by Nicole Mordant in Vancouver; Editing by Peter Galloway

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