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CORRECTED: Canada banks, insurer face up to Lehman fallout

16/09/08

By Lynne Olver

TORONTO (Reuters) - Canada's big banks largely shrugged off the weekend bankruptcy filing of Lehman Brothers Holdings , but the third-largest Canadian life insurance company said on Monday it will take an unspecified hit to third-quarter earnings because of its Lehman bond holdings.

Canadian bank and insurance stocks fell after a dramatic weekend during which Lehman Brothers sought bankruptcy protection, Merrill Lynch agreed to be bought by Bank of America and insurance giant American International Group was waging a fight for survival.

The S&P/TSX financial index fell 1.9 percent on Monday, while the broader benchmark, the S&P/TSX composite, tumbled 4 percent as mining, energy and materials stocks were hammered.

Canadian banks are seen as relatively strong because they have solid deposit bases and the large Canadian investment banks are also part of the regulated commercial banking system, said Darren Dansereau, a portfolio manager at QV Investors in Calgary, Alberta, which owns shares in three Canadian banks.

But uncertainty about Canadian stocks lingers because of the unknown ripple effects from the woes of U.S. investment banks, he noted.

"The big underlying question is what sort of implications are there for credit derivative swaps, all these types of derivative instruments these guys have written?" Dansereau said.

Canadian insurer Sun Life Financial said on Monday it expects to take a quarterly charge on Lehman debt, but it said the amount will depend on a number of factors, including expected recoveries and actuarial cash flow testing that will not be done until after the quarter ends on September 30.

Sun Life said it holds C$334 million par value of Lehman bond securities and about C$15 million net value of Lehman derivative instruments.

Most of its Lehman exposure is held in segments backing liabilities, the company said, which means it will need to strengthen reserves and take a charge to income.

Shares of Sun Life fell 3 percent to close at C$39.31 on the Toronto Stock Exchange.

It was not known whether Canada's other large life insurance companies, Manulife Financial and Great-West Lifeco , expect to take similar charges. Calls to those companies were not immediately returned.

A spokeswoman for the country's biggest bank, Royal Bank of Canada , said that it had been working over the past several months to reduce risk related to Lehman.

Lehman is one of RBC's trading and transactional counterparties, particularly in securities financing activities and derivatives, RBC spokeswoman Beja Rodeck said in an e-mail.

"We are well within our single name limits and are well-collateralized," Rodeck said.

Shares of RBC fell 2.2 percent to C$48.10.

Toronto-Dominion Bank spokesman Simon Townsend said that the Lehman situation has "no material impact" on TD's overall operations.

Within its TD Securities unit, the risk involves replacing transactions in which Lehman acted as counterparty with acceptable counterparties, he said.

"Assuming markets remain liquid, we consider this risk to be manageable," Townsend said in an e-mail.

Shares of TD dropped 1.6 percent to close at C$61.30.

CIBC executives, speaking at an investor forum on their bank's operations, said that CIBC's mark-to-market loss on various Lehman-related positions was about $25 million as of Friday.

"We do not have large exposures," CIBC Chief Executive Gerry McCaughey said.

The positions in which Lehman is a counterparty are being re-hedged, and there could be a cost to that, said Richard Nesbitt, chairman and chief executive of CIBC World Markets, the bank's corporate and investment banking unit.

Shares of CIBC fell to C$61.11, down 4.8 percent.

Bank of Montreal spokesman Ralph Marranca said the bank's exposure to Lehman is "not significant." BMO shares slid 1.6 percent to C$48.34.

A Bank of Nova Scotia representative could not immediately be reached for comment. Scotiabank shares dropped 2.4 percent to close at C$46.60.

($1=$1.07 Canadian)

(Reporting by Lynne Olver; Editing by Peter Galloway)

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