More Good Economic News: RBC Hit with $1.6 Billion Loss

More Good Economic News: RBC Hit with $1.6 Billion Loss

RBC takes $1.6-billion hit amid credit crisis

Eoin Callan, Canwest News Service
The Province, Monday, November 24, 2008

TORONTO - The Royal Bank of Canada warned it would be forced to take a $1.6-billion hit as market losses mounted and loans started to go sour.

The largest bank in the country cited "extreme volatility" as executives said they would write down $1 billion in investments and set aside $620 million to cover credit losses.

The heavy blow underlines the damage being inflicted on Canadian financial institutions by the worst financial crisis since the Great Depression, as market turmoil and an economic downturn take their toll.

Gord Nixon, the bank's chief executive, warned of an "uncertain outlook" as political leaders acknowledged the country was sliding into recession and U.S. banks fell back on the government to prevent collapse. The prospect of further losses and a slowdown in revenues has severely weakened bank shares in recent weeks, while RBC's peers have also registered write-downs, including Scotiabank and TD Bank Financial Group.

The investment losses and charges mean RBC's net income in the fourth quarter will fall 15 per cent to $1.1 billion, the bank said in a preliminary statement of results due out next week.

The charges will deplete reserves at RBC, which said its capital base would fall to a level of "approximately 9.0 per cent."

The bank said $645 million of losses were concentrated in its capital markets division, while a separate portfolio of securities saw a $355-million fall in value that was expected to be lasting.

Rob Sedran, any analyst at National Bank Financial, said RBC's "greater exposure to the capital markets" than its peers meant the months ahead were likely to prove particularly challenging for the country's largest bank.

John Aiken, an analyst at Dundee Capital, said: credit was "deteriorating faster than we had anticipated."

But he added that knowing the extent of the credit losses for RBC so far increased his confidence the bank would be able to sustain core earnings.

RBC said it was avoiding even bigger charges by taking advantage of new looser accounting standards to re-classify impaired assets so the losses would not have to be acknowledged.

RBC said it was retroactively shifting troubled portfolios of U.S. auction rate securities and mortgage-backed securities off its trading books, thereby avoiding bigger write-downs on these holdings.

The bank's shares closed up 6.9 per cent, or $2.52 to close at $39.00 on the Toronto Stock Exchange.

© Financial Post 2008

No2010 Note: RBC is one of the main national corporate sponsors for the 2010 Winter Olympics