Royal Bank of Canada announced today that it will take $855 million in pre-tax writedowns in the second quarter as the bank struggles with difficult credit market conditions.

The bank said the writedowns will amount to $420 million after tax, adding that it believes “a significant portion of the writedowns reflect liquidity pressures on assets that we continue to hold, rather than underlying credit quality.”

“We are not happy about taking any writedowns and certainly do not take them lightly,” stated bank president and CEO Gordon Nixon said in a release. “That said, these writedowns are manageable and our risk profile continues to remain within our risk appetite. This is due to our disciplined risk management, our strong balance sheet and our business diversity.”

The bank said the writedowns include:

> $200 million for credit default spreads on exposure to a subsidiary of insurer MBIA Inc;

> $90 million for positions in U.S. subprime collateralized debt obligations;

> $185 million on its holdings in U.S. auction rate securities;

> $140 million related to its U.S. GIC business;

> $175 million in trading portfolio writedowns, mainly because of market liquidity; and

> $65 million for other impaired assets.

The bank is is due to report its second-quarter results on May 29.

Analysts appear unconcerned with the latest writedowns reported today, saying that the anticipated losses are within expectations.

Moody’s Investors Service noted that the bank’s structured credit exposures produced most of these charges.

In a research note, Desjardins Securities Inc. observed that, “Management believes a significant portion of the writedowns reflect liquidity pressures on assets that it continues to hold, rather than the underlying credit quality related to those assets.”

While the charge is not inconsequential, it was not a surprise, analysts suggest. In previous credit research on RBC, Moody’s noted its expectation that the bank’s structured credit exposure would likely
produce further losses, but that those losses would be manageable, given the bank’s solid, predictable Canadian core earnings stream and its healthy level of capitalization.

“Today’s announced charges are within our previously stated expectations and are manageable within RBC’s current ratings level and outlook,” stated Moody’s senior credit officer, Peter Routledge. He added that RBC’s net income will still be in excess of its common and preferred share dividends, so it won’t hurt RBC’s capital base, and its Tier 1 ratio will remain above 9%. “Because this quarter’s charge does not diminish RBC’s capital cushion or its robust franchise,” said Routledge, “it does not materially alter our view of RBC’s credit profile.”

This position was echoed by DBRS, which also commented, “The writedowns are not expected to have a material impact on the overall credit profile of the bank given the strength of its earnings profile.”

“Earnings are well diversified and more levered to lower-risk business segments, with Canadian banking and wealth management representing 56% and 15%, respectively, of adjusted pre-tax earnings in 2007,” DBRS said. It also observed that the bank’s capital ratios remain strong, “and provide a further cushion should further writedowns occur.”

Desjardins said that the charge represents about one third of the bank’s expected earnings for the quarter. “The good news is that this is smaller than some observers have speculated, and the stock price could
initially strengthen on this news,” it said. “The bad news is that Royal’s warning says nothing about broader credit quality (NPL formations and loss provisions for the quarter), where we have been concerned that there could be additional weakness. This concern is likely to dampen performance until the credit picture becomes clearer.”