By Leah Schnurr
TORONTO (Reuters) - Canadian Imperial Bank of Commerce
CIBC, Canada's fifth-largest bank, said it will take a $2 billion before-tax writedown in its financial first quarter related to the subprime mortgage hedge protection it bought from ACA Financial Guaranty Corp.
As well, for the two months ended Dec 31 it will take a before-tax $462 million writedown for exposure to the U.S. residential real estate market.
After tax, the two writedowns amount to about $1.6 billion.
CIBC said it is possible that further writedowns may be required, but said it would not provide an update until it releases its first-quarter results on February 28.
It will revive its balance sheet through two stock sales, including one to a company controlled by Hong Kong billionaire Li Ka-shing, who was once a key CIBC shareholder.
CIBC said it has received written commitments from a group
of institutional investors, including Manulife Financial Corp
In addition, CIBC said it has entered into another agreement with a syndicate of underwriters jointly led by CIBC World Markets Inc and UBS Securities Canada Inc, in which they will buy C$1.25 billion in common shares at C$67.05 each for resale in a public offering.
The deal also has an over-allotment option, available for up to 30 days after closing, to buy an additional C$187.5 million in common shares at the same price. Both deals are expected to close on or about Jan 28.
"Today's action provides our shareholders with greater certainty that CIBC's capital levels will remain strong even in the event that additional write-downs related to the U.S. residential real estate market become necessary," Chief Executive Officer Gerry McCaughey said in a statement.
Gavin Graham, chief investment officer at Guardian Group of Funds, said the stock deals are positive for CIBC, and the firm commitments from investors will ensure CIBC will have enough capital regardless of any further writeoffs that may occur.
"The fact that they've got the Caisse, Li Ka-shing and Manulife willing to put in half a billion there and a quarter billion there is a pretty positive long-term sign, which I'm sure they'll do very well on, as indeed you would have done if you had bought CIBC after the Enron writeoffs a couple years ago," Graham said.
In 2005, Li, the chairman of Cheung Kong Holdings, sold his nearly 5 percent stake in CIBC at C$70 a share for about C$1.2 billion. Gains from the sale were donated to private charitable foundations established by Li.
Shares of CIBC had been trading at C$72.07, up 76 Canadian cents, before being halted on the Toronto Stock Exchange. The stock has tumbled more than 30 percent from its year high reached in May 2007.
In a research note, rating agency DBRS said it maintained its rating of "under review with negative implications," saying that the risk of counterparty and overall risk management processes remain a concern.
However, DBRS said the stock sale "will strengthen the bank's capital basis. The capital injection provides more flexibility should further negative events occur."
CIBC, which has the biggest exposure to the troubled U.S. subprime mortgage market of any Canadian bank, had previously warned of a "large charge" in its first-quarter results but had not given a specific number.
Earlier this month, it ousted its chief risk officer and the head of its corporate and wholesale banking unit in a management shakeup
The bank, whose subprime exposure is held through debt instruments such as collateralized debt obligations (CDOs), has already written down more than C$750 million linked to the U.S. real estate market.
($1=$1.02 Canadian)
(Reporting by Leah Schnurr; Editing by Rob Wilson)
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