RBC details writedowns

After months of speculation regarding its exposure to illiquid debt issues, RBC has announced it will take pre-tax writedowns totalling $855 million. On an after-tax basis, however, that amount falls to $420 million.

The market is clearly relieved by the news, as the stock was trading higher by 2.8% at 11 a.m.

The bank asserted that the paper losses were taken on assets which it will continue to hold. Of the total, about $715 million relates to its Capital Markets division, with the remainder related to corporate support.

“We are not happy about taking any writedowns and certainly do not take them lightly. That said, these writedowns are manageable and our risk profile continues to remain within our risk appetite,” said Gordon M. Nixon, president and CEO. “This is due to our disciplined risk management, our strong balance sheet and our business diversity.”

Valuation adjustments at the bank’s structured credit business accounted for $200 million in writedowns, while an additional $90 million came from its exposure to U.S. subprime collateralized debt obligations.

The bank also took a $185 million writedown on U.S. auction rate securities, but pointed out that “the vast majority” of these assets are government-insured student loans.

While writing down $855 million might sound like a significant loss of assets, the bank pointed out that it still had $633 billion in assets at the end of its first quarter. Its tier 1 capital ratio is expected to remain in excess of 9% for the second quarter, above OSFI’s regulatory target of 7%.

RBC will release its second quarter results on May 29, 2008.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com