Canadian banks continue to hemorrhage from ill conceived investments in U.S. sub-prime debt instruments. Canadian Imperial Bank of Commerce lost $1.11 billion in the second quarter, down from profits of $807 in the same period last year, the bank announced today.

This loss was due, in part, to a $2.48 billion pre-tax hit the bank took on structured credit activities related its exposure to the subprime mortgage crisis in the U.S.

Meanwhile, The Royal Bank of Canada (TSX:RY) has reported second-quarter net income of $928 million, down by 27 per cent from a year ago, as writedowns caused by credit-market turmoil continued to hamper earnings.

Canada's largest bank said Thursday its revenue declined 13 per cent from a year earlier to $4.95 billion.

Earnings per share fell to 70 cents from 98 cents, as return on equity tumbled to 15.6 per cent from last year's rich 23.5 per cent.

The bank reported writedowns that knocked down revenue by $854 million and reduced net income by $436 million or 33 cents per share.

"We are not happy about these writedowns and continue to be impacted by higher provisions for credit losses in our U.S. banking business," stated CEO Gordon Nixon.

"We have a large and diversified capital markets platform, and our confidence in long term growth remains strong," said Nixon.

The bank acknowledged that it has not met its financial objectives set late last year, saying that while it expected turbulence in the first months of 2008, "we did not anticipate these conditions to persist for as long as they have nor the impact to be as broad."

For the year so far, the bank's earnings per share have shrunk 23 per cent, far off the growth between seven and 10 per cent it had targeted. Over the first six months of 2008, it also came under its target of a return on equity of 20 per cent or more, logging an ROE of 18.5 per cent.

But some bankers think the worst is over, and expressed optimism for the immediate future.

Bank of Montreal and Bank of Nova Scotia kicked off the sector's second-quarter financial reporting season yesterday, posting profits that have softened from a year ago as the banks sock more money away to offset loans that might turn sour.

In fact, they hinted it's possible the worst just might be over for their investment banking operations.

Equity and debt underwriting, and merger and acquisition activity, were slow for the market as a whole this quarter, but the outlook is getting better, BMO chief executive officer Bill Downe said on a conference call.

"Investor sentiment has improved significantly since the Bear Stearns rescue in mid-March, though some credit spreads remain wider than usual," he said.

"And while we're not ready to say the worst of the credit turmoil is behind the industry, we are encouraged that the downsides are very clearly defined now."

Scotiabank chief executive officer Rick Waugh similarly said that "capital market conditions should further stabilize and show improvement."

The global markets that banks tap for funds have improved in recent weeks, BMO said. Yesterday, the Bank of Canada said improvements in market conditions since the end of April will allow it to cut in half the amount of cash it has been lending commercial banks. The central bank will make $1-billion available in the next 28-day purchase and resale agreement auction when the previous $2-billion injection matures on May 29.

But clearly pessimism is the driving force still.

"CIBC's quarter was disappointing in that core businesses were less profitable than we expected and writeoffs were larger than we expected, partially offset by a benign quarter from a credit perspective," wrote RBC Capital Markets banking analyst Andre-Philippe Hardy.

Blackmont Capital analyst Brad Smith pointed out in a note to clients that CIBC could still be facing $1.4-billion in writedowns because of its exposure to troubled bond insurers. He believes the bank's "current problems suggest (an) extended and systematic general risk management breakdown."

The sale of the bulk of CIBC's U.S. investment banking operations, lower revenue from U.S. real estate finance, higher funding costs for consumer loans, and lower brokerage revenue, all dragged down results this quarter.

As it struggled to bounce back from its large exposure to risky securities, CIBC sold the bulk of its U.S. investment banking and trading operations to Oppenheimer Holdings Inc., transferring 600 employees in the deal, which closed Jan. 1. It also turned around the executive team at its Canadian investment banking business, and earlier this week, let go of 100 employees.

CIBC raised $2.9-billion of equity this year to shore up its balance sheet. "Our capital raise has enabled us to maintain a strong capital position despite the impact of deteriorating market conditions on our performance," stated chief executive Gerald McCaughey. The bank's Tier 1 capital ratio of 10.5 per cent, which measures the extent of its capital cushion, is well above the level that regulators require, which is seven per cent.