July 9 (Bloomberg) -- Royal Bank of Canada, the country's biggest bank, may record debt writedowns of as much as C$1.5 billion ($1.48 billion) in the third quarter, Genuity Capital Markets analyst Mario Mendonca said.

The Toronto-based bank will take pretax charges of C$900 million to C$1.5 billion on widening credit spreads and deteriorating subprime investments, Mendonca wrote today in a research note.

The writedown would add to C$1.64 billion in costs Royal Bank has taken in the last three quarters from investments in U.S. mortgages, securities backed by U.S. bond insurers and other debt holdings. Royal Bank has the second-highest writedowns among Canadian banks hurt by the U.S. subprime contagion, following Canadian Imperial Bank of Commerce's C$6.66 billion in costs.

``Royal Bank does have some material charges to eat through,'' Mendonca said in an interview. ``Royal shouldn't be thought of as one of those premium names, not in this environment.''

Royal Bank fell C$1.84, or 4 percent, to C$44.16 at 4:10 p.m. on the Toronto Stock Exchange, the biggest decline in almost four years. The stock has fallen 13 percent this year. Mendonca cut his price target to C$52 from C$55, and maintained his ``hold'' rating.

Financial institutions worldwide have taken more than $400 billion in writedowns and credit losses in the past year related to the collapse of the U.S. subprime market, according to Bloomberg data.

Bond Insurers

Royal Bank's biggest costs will be from securities guaranteed by bond insurer MBIA Inc., which lost its AAA rating last month from Standard & Poor's and Moody's Investors Service, according to Mendonca. Those writedowns could range from C$578 million to C$849 million, he wrote.

An eroding value of investments in other debt securities tied to U.S. subprime mortgages, auction-rate securities, municipal GICs, corporate loans and commercial mortgages will add to those costs. The bank is scheduled to report earnings on Aug. 28 for the third quarter ending July 31.

``There's a bunch of little things that add up to a big number, where MBIA is the big one,'' Mendonca said.

Even if Royal Bank were to take C$1.5 billion in charges, its Tier 1 capital ratio would still be above 9 percent and the bank wouldn't need to issue equity, he said.

``I don't see any major issue for Royal Bank from a capital perspective,'' he said.

Royal Bank spokeswoman Beja Rodeck declined to comment.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

Last Updated: July 9, 2008 16:19 EDT