RBC seen under pressure on auction-rate securities

TORONTO (Reuters) - Royal Bank of Canada (RY.TO) may take a C$100 million ($93 million) writedown for auction-rate securities, the illiquid U.S. debt securities that some U.S. and European banks have agreed to repurchase from clients, an analyst said on Monday.

RBC, Canada's largest bank, participated in the U.S. auction-rate securities market but the value of these long-term securities collapsed early this year, when investors stopped buying at the periodic auctions that set their short-term interest rates.

Andre-Philippe Hardy, an analyst at Royal Bank's RBC Capital Markets unit, said he expects a C$100 million writedown related to the bank's C$4.9 billion exposure to auction-rate securities, most of which is held on the bank's balance sheet.

RBC's retail clients also hold about C$1 billion of the securities, according to Hardy.

"We think pressure is building for the bank to buy back retail clients' holdings similar to agreements announced by Citigroup, UBS and Merrill Lynch," Hardy wrote in a report about Canadian banks' third-quarter results, which are due in late August.

The writedowns for auction-rate securities at Citigroup and UBS -- 7 percent and 9 percent of par value, respectively -- may not be relevant to RBC, as the securities are not all created equal and their visibility to outsiders is limited, Hardy wrote.

But if RBC repurchased securities from its retail clients and marked down its holdings by 7 percent, the writedown could be around $200 million, he stated.

"We think a writedown would be less because of the quality of the underlying assets," Hardy added.

In the second quarter, RBC wrote down the value of its student loan auction-rate securities by C$184 million, putting the fair value of this portfolio at C$3.5 billion on April 30. The bank also held a small amount of closed-end funds and municipal ARS.

Some observers have drawn parallels between the auction-rate market and Canada's market for nonbank asset-backed commercial paper, which seized up a year ago, leaving Canadian corporate, retail and institutional investors with ostensibly short-term commercial paper holdings of uncertain value.

RBC will report financial results for the May-July quarter on August 28.

Analysts predict that most of RBC's expected capital-markets writedowns in the quarter will come from the declining value of its hedges with U.S. bond insurers.

($1=$1.07 Canadian)

(Reporting by Lynne Olver; Editing by Peter Galloway)