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UPDATE 3-CIBC warns of "large charge" as subprime woes grow

(Adds Fitch, Moody’s statement, closing share prices. In U.S. dollars unless noted)

VANCOUVER, British Columbia, Dec 19 (Reuters) - There is a "reasonably high probability" that Canadian Imperial Bank of Commerce CM.TO will report a "large charge" in its first-quarter results, the bank warned on Wednesday, as pain from its exposure to the U.S. subprime mortgage market deepens.

CIBC, Canada’s fifth-biggest bank, did not give a firm figure for the charge but said the subprime hedge protection it bought from troubled bond insurer ACA Financial Guaranty Corp was valued at $2 billion as of Nov. 30.

That had risen from $1.7 billion at the end of October, showing a deterioration in the subprime housing market.

If the bond insurer -- whose credit rating was slashed by Standard & Poor’s on Wednesday to junk level “CCC” from “A” -- were to fail, CIBC could lose that amount or more.

Shares in CIBC, which were already down 26 percent this year before Wednesday’s developments, fell a further 1.6 percent, or C$1.15, after the announcement to close at C$71.14 on the Toronto Stock Exchange.

One analyst said a $2 billion charge likely isn’t enough to clear CIBC’s subprime exposure, which is held via complicated structured finance deals called collateralized debt obligations, most of which are hedged.

“There was a collective sigh across (financial centers) Toronto and Montreal, but it wasn’t a sigh of relief,” when CIBC’s statement came out, said Genuity Capital Markets analyst Mario Mendonca.

“It is unfortunate that the bank has decided to bleed that out. They should take a charge so that most investors will say it really can’t be any larger than that,” Mendonca told Reuters in an interview.

Rating agency DBRS placed all of CIBC’s debt ratings under review with negative implications on Wednesday after the ACA downgrade. Fitch Ratings said it may cut CIBC’s “AA-minus” rating, its fourth highest investment grade.

Moody’s Investors Service, however, said CIBC’s statement about a large first quarter charge was “within its expectations” when it changed the bank’s rating outlook to negative on Dec. 6 and no further action was needed right now.

The New York Times reported on Wednesday that Merrill Lynch & Co Inc MER.N, Bear Stearns Co Inc BSC.N and other large banks were in talks about bailing out ACA, citing two people briefed on the situation.

CIBC declined to comment on whether it was involved in the talks.

But Mendonca said that even if ACA is bailed out, those who it owed money would have to “suck up some loss”.

“To say a bailout would reduce the possibility that CIBC would lose money is very simplistic,” he said.

ACA’s parent company, ACA Capital Holdings, lost $1 billion in its most recent quarter and last week delisted from the New York Stock Exchange.

CIBC, with some $11 billion tied to subprime mortgages, has by far the largest exposure to this market of Canada’s banks.

Speculation doing the rounds on Wednesday was that CIBC might look for a capital injection, either through a share issue or through selling a stake in the bank -- akin to recent stake sales at global banks Citigroup Inc C.N and UBS AG UBSN.VX after they were hit by subprime charges.

Mendonca said the "best news" would be if Manulife Financial Corp MFC.TO, Canada's biggest life insurer, which has long expressed an interest in expanding in banking, were to buy into CIBC.

CIBC said on Wednesday that if it suffers a first-quarter charge of $2 billion before tax, its Tier 1 capital ratio, is expected to be above 9 percent at the end of January.

International capital adequacy standards require commercial banks to hold a certain amount of capital to support their operations. In Canada, the Tier 1, or core capital, ratio target is 7 percent.

$1=$1.00 Canadian Editing by Rob Wilson

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