NA National Bank of Canada

TORONTO—National Bank of Canada on Sunday warned that its regulatory-capital level would take a hit after Germany's financial watchdog BaFin effectively shuttered one of its foreign investments, the German unit of Maple Financial Group.

Montreal-based National Bank, Canada's sixth-largest bank by assets, owns a 24.9% stake in Maple Financial Group Inc., which is the Canadian parent of Germany's Maple Bank GmbH. As a result of the regulatory action, Maple Bank is effectively closed to customer transactions.

Consequently, National Bank plans to set aside enough cash to take a "full reserve" of its equity investment which, at last check, had a carrying value of 165 million Canadian dollars ($119 million), the bank said.

That means National Bank's CET 1 capital ratio would take a 13-basis-point hit for its fiscal first quarter which ended on Jan 31. The bank's CET 1 capital ratio was 9.9 % at the end of its fiscal fourth quarter.

National Bank is scheduled to report its fiscal first-quarter results on Feb. 23.

Maple Bank is under investigation by German prosecutors over alleged tax irregularities. The focus of the prosecutors' probe, first disclosed in September 2015, is potential irregularities for the tax years 2006 to 2010.

For its part, BaFin on Sunday said it issued "a prohibition on transfer of ownership and payment, due to imminent over indebtedness. In addition BaFin has ordered the bank to be closed for dealings with customers."

A Maple spokeswoman in Germany said customer deposits would be protected in line with the deposit-insurance law. "We ask for your understanding that we at present can't make any comments about the further course of the measures," she said.

BaFin said Maple Bank "has no systemic relevance and thus doesn't pose a threat to financial stability." BaFin said the bank's balance sheet totaled about 5 billion euros ($5.58 billion).

National Bank noted that German authorities were focusing on "selected trading activities by Maple Bank, and certain of its current and former employees" during the specified tax years.

"The German authorities have alleged that these trading activities violated German tax laws," National Bank said in a news release on Sunday, adding none of its employees was believed to be under investigation.

Still, National Bank cautioned that it could be on the hook for future costs as a result of the tax probe.

"National Bank has advised the German authorities that if it is determined portions of dividends received from Maple Financial Group Inc. could be reasonably attributable to tax fraud by Maple Bank, arrangements will be made to repay those amounts to the relevant authority," the bank said, noting it didn't expect any required repayments would be material to its financial results.

In October, National Bank said Maple Financial contributed less than 1% to its annual net income in each of the last two years.

This isn't the first time, however, that National Bank has seen its regulatory capital level dented in recent months.

Last fall, National Bank announced fourth-quarter restructuring charges that were unrelated to its Maple investment, which dented its CET 1 capital ratio. As a result, the bank undertook a C$300 million common-share offering to plump up its capital base.

"I don't like raising equity," CEO Louis Vachon told investors at an industry conference last month. "So, I can assure you if we felt that we have to raise equity, it's really because we felt it was the right thing to do for the long term," he later added.

The German investigation of Maple Bank "was a surprise," he said, adding the bank felt compelled to disclose that a substantial part of its investment could be at risk.

A spokesman for National Bank didn't immediately respond to a message seeking further comment on Sunday.

Write to Rita Trichur at rita.trichur@wsj.com and Todd Buell at todd.buell@wsj.com

(END) Dow Jones Newswires

February 07, 2016 20:15 ET (01:15 GMT)

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