CIFG Downgrade Provides More Clarity on CIBC Writedown

Bank analysts have started up the latest round of ‘guess-the-writedown’ again, as second quarter earnings are right around the corner for the Canadian banks.

This time they already know the size of the charges at Royal Bank of Canada (RY) as the bank has pre-announced writedowns of C$885-million. Now they have a better idea about the losses that Canadian Imperial Bank of Commerce (CM) will also take after a monoline insurer that is a counterparty to the bank’s hedged investments in subprime investments was downgraded on Tuesday.

CIFG has provided CIBC protection on $628-million in notional value of investments in U.S. subprime assets, which means the bank will likely writedown at least that amount. TD Newcrest analyst Jason Bilodeau said his earlier estimate of a $1.5-billion to $2.5-billion total charge at CIBC included a 50% writedown on its exposure to CIFG. He said:

Assuming a 100% valuation adjustment based on CIFG’s junk status, this would add $314-million pre-tax in additional writedowns.

Outside of its book of U.S.-residential assets, CIBC has additional exposure to CIFG through hedge protection on another C$1.5-billion worth of U.S. Investments. The underlying assets in this book are in better shape than the subprime investments, so the writedown will be much smaller. Mr. Bilodeau has factored in another C$42-million of charges following the downgrade of CIFG.

The bank reports its earnings on May 29.