Actual finance blog

Royal Bank of Canada is bracing for deteriorating credit quality in fiscal 2009, predicting the economic malaise will trigger steeper job losses and more soured loans.

Canada’s largest bank said yesterday it is preparing to absorb more credit losses, after posting double-digit declines in both its fourth-quarter and full-year profits.

Credit quality, already a worry for its U.S. bank, is being carefully monitored because 77 per cent of its loans are in Canada.

"Looking forward, assuming slower economic growth and higher unemployment in Canada, we would expect credit quality in Canada to weaken moderately in fiscal 2009," said chief risk officer Morten Friis. "Based on this, we would anticipate modestly higher average provisions across consumer, business and corporate credit portfolios."

During the fourth quarter, provisions for credit losses jumped to $619 million from $263 million in the same period last year. While the United States was a key trouble spot, Canadian banking also saw bigger provisions, "primarily reflecting portfolio growth and higher loss rates in credit cards."

RBC is the second major bank to disclose higher credit card losses. Earlier this week, Canadian Imperial Bank of Commerce said it would continue tightening credit card lending in 2009 after losses accelerated in its latest quarter. CIBC administers Canada’s largest credit card portfolio, both in terms of balances and purchase volumes.

According to its annual report, RBC has a 20 per cent market share of Canada’s credit card purchase volume. However, it also claims to be the market leader in overall consumer lending, which also includes residential mortgages and personal loans online pay day loans.

Even with that No. 1 rank, RBC told investors it is pitching its annual performance targets, citing the "new realities of the business and economic environment." It is opting instead to outline "medium-term" goals that it hopes to achieve over three to five years, including diluted earnings per share growth in excess of 7 per cent.

RBC failed to meet most of its 2008 financial objectives after underestimating the severity and persistence of the credit crunch and market tumult. It now expects that elevated funding costs and bigger loan losses will continue to punctuate the deleveraging spiral that is sideswiping global banks. Bank of Montreal has also scrapped its annual performance targets because of the turmoil.

"We are maintaining our quarterly dividend at 50 cents in the first quarter of 2009, which we believe is prudent in this environment," said RBC chief executive Gordon Nixon. "Over time, our objective is to grow our dividend."

In the meantime, Nixon said the bank would intently focus on correcting the "underperformance" of its U.S. banking business.

RBC’s fourth-quarter profit fell 15 per cent to $1.12 billion from year-ago $1.32 billion. Diluted earnings per share were 81 cents, down from $1.01 last year. The bank had warned earnings would be hurt by about $670 million in pre-tax trading losses. Full-year profits fell 17 per cent to $4.56 billion.

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Swiss bank Credit Suisse (CSGN.VX: Quote, Profile, Research, Stock Buzz) said on Thursday it was cutting 11 percent of its workforce, or 5,300 jobs, as it revealed it made a net loss of about 3 billion Swiss francs ($2.5 billion) in October and November.

The bank said the loss, primarily in investment banking, where most of the job cuts will fall, was due to adverse market conditions and to the cost of reducing risk.

On the brighter side, Credit Suisse said that in November alone it was modestly profitable, and it also said its private banking segment was still seeing asset inflows and had hired 370 relationship managers this year, helping a rebound in shares.

The job cut announcement comes on the same day as Japan’s Nomura Holdings (8604.T: Quote, Profile, Research, Stock Buzz) said it was firing 1,000 bankers in London. More than 100,000 jobs have been lost in the financial industry since September.

“These actions will better position us to weather the continuing challenging market conditions, capture opportunities that arise amid the continuing disruption, and prosper when markets improve,” Chief Executive Brady Dougan said.

Dougan said the investment bank would be leaner as it would exit certain proprietary and principal trading activities as well as origination capacity in some complex businesses.

“Investment banking is going back to basics and to the boring business,” said Dirk Hoffmann-Becking, a senior analyst with Bernstein Research. “Quite a lot of the frills is going.”

The bank will take a restructuring charge of 900 million Swiss francs, mostly in the fourth quarter, pointing to a total quarterly loss of about 4 billion Swiss francs, analysts said cash advance in 1 hour.

Having fallen 9 percent on Wednesday, Credit Suisse shares reflected the positives, climbing nearly 7 percent to 29.60 Swiss francs by 1150 GMT, while the DJ Stoxx index of European banking stocks was up 1.44 percent.

“The good news is that the loss occurred in October, and in November the bank was already profitable,” said Georg Kanders, an analyst with WestLB.

“The company is not sitting still; they are carrying out a cost reduction. It is impressive how they have reduced risk, and they say they have quite good net new money.”

NO GOVERNMENT HELP NEEDED

Traders say investors have looked more critically at Credit Suisse since the Swiss state bailed out rival UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz), which has made more write-downs than any other European bank.

When the rescue package for UBS was announced in October, Credit Suisse said it did not need government help, and Dougan told a conference call he did not foresee any circumstances in which the bank would need such help.

Echoing a similar move at UBS, the bank also said that, given its performance to date, “it would not be appropriate” for its chairman, its chief executive officer and the head of its investment bank to receive bonuses for 2008. 

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The nation’s two largest coal producers and one of the largest coal-burning utilities agreed to give $12 million over five years to Washington University to help make St. Louis a national hub for clean coal research.

Peabody Energy Corp. and Arch Coal Inc. will contribute $5 million apiece and Ameren Corp. will provide $2 million to help establish the Consortium for Clean Coal Utilization, Washington University Chancellor Mark S. Wrighton announced at a news conference this morning.

"The knowledge and technology we will be able to create together will over time mean lower costs to customers and global environmental improvement," Wrighton said.

Coal is used to produce half of the nation’s electricity and provides fuel for 85 percent of Ameren’s electric generation. However, burning coal is also a major source of carbon dioxide, the primary heat-trapping gas associated with global warming free credit reports.

The use of coal is expected to grow significantly in coming years. At the same time, scientists are urging steep cuts in carbon emissions to avoid dire environmental consequences.

Wrighton and executives from the St. Louis area energy companies said the dual challenges of keeping the world energized and halting or reversing climate change necessitates research to help commercialize technologies that will help the United States and other nations meet those goals.

jtomich@post-dispatch.com | 314-340-8320

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China’s 3 trillion yuan ($440 billion) insurance industry was largely insulated from the U.S. subprime crisis that hit AIG (AIG.N: Quote, Profile, Research, Stock Buzz) and other foreign firms, but the fallout poses the toughest challenge in a decade as profits tumble and demand for insurance products slumps.

China’s cautious regulators reined in the overseas adventures of aggressive insurers, limiting direct damage from the global financial meltdown largely to Ping An Insurance’s (2318.HK: Quote, Profile, Research, Stock Buzz) (601318.SS: Quote, Profile, Research, Stock Buzz) 15.7 billion yuan loss on its investment in Dutch-Belgian financial group Fortis (FOR.BR: Quote, Profile, Research, Stock Buzz).

But as the financial turmoil evolves into a global recession that has chilled China’s red-hot economy, investment returns are shrinking and premium growth is slowing or even turning negative.

For industry giants China Life Insurance Co (2628.HK: Quote, Profile, Research, Stock Buzz) (601628.SS: Quote, Profile, Research, Stock Buzz), the world’s largest insurer by market capitalization, and Ping An, the second-largest, this means tumbling profits and share prices.

Smaller players, however, face graver dangers that have prompted even stricter government supervision.

“The risks in the insurance industry have just begun emerging,” said Xiao Chaohu, analyst at Everbright Securities Co.

“Small insurers may face liquidity problems if premium incomes keep falling while redemptions and claims rise.”

China’s insurance sector has more than 100 foreign and domestic players, although more than half of the market is controlled by China Life and Ping An payday loans.

About one-10th of insurers cannot meet capital adequacy standards required by regulators, Xiao said.

INDIRECT IMPACT

The official Shanghai Securities News reported on Friday that China’s insurance regulators had stepped up their monitoring of life insurers’ liquidity conditions, concerned that falling asset prices and rising redemptions could hurt their cash flow.

“In the long term, China’s insurance industry will mainly suffer from the indirect impact of the financial crisis,” China Life President Wan Feng said in an e-mailed comment to Reuters.

“If the economy slides into a deep, prolonged recession and capital markets remain sluggish, insurers’ investment returns will fall sharply … and demand for insurance products will weaken,” Wan said.

China Life’s Hong Kong-listed shares are down nearly 50 percent since the start of the year, in line with the benchmark Hang Seng Index .HSI, although Ping An, punished by investors for its overseas setbacks, has fallen by nearly two-thirds.

Ping An posted a $1.15 billion third-quarter loss due to its failed investment in Fortis but could well have found its survival under threat, analysts said, if it had proceeded with a $17 billion fund-raising plan to finance overseas acquisitions. 

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