BMO has released its Third Quarter 2008 Report and Supplementary Package, so it’s time to recalculate how much room they have to issue new preferred shares – assuming they want to, in this environment!
Step One is to analyze their Tier 1 Capital, reproducing the prior format:
| BMO Capital Structure October, 2007 & July, 2008 |
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| 4Q07 | 3Q08 | |
| Total Tier 1 Capital | 16,994 | 18,047 |
| Common Shareholders’ Equity | 83.8% | 83.8% |
| Preferred Shares | 8.5% | 11.1% |
| Innovative Tier 1 Capital Instruments | 14.3% | 13.5% |
| Non-Controlling Interests in Subsidiaries | 0.2% | 0.2% |
| Goodwill | -6.7% | -8.0% |
| Miscellaneous | NA | -0.5% |
Next, the issuance capacity (from Part 3 of the introductory series):
| BMO Tier 1 Issuance Capacity October 2007 & July 2008 |
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| 4Q07 | 3Q08 | ||
| Equity Capital | (A) | 13,126 | 13,609 |
| Non-Equity Tier 1 Limit | (B=A/3), 4Q07 (B=0.428*A), 2Q08 |
4,375 | 5,824 |
| Innovative Tier 1 Capital | (C) | 2,422 | 2,442 |
| Preferred Limit | (D=B-C) | 1,953 | 3,382 |
| Preferred Actual | (E) | 1,446 | 1,996 |
| New Issuance Capacity | (F=D-E) | 507 | 1,386 |
| Items A, C & E are taken from the table “Capital and Risk Weighted Assets” of the supplementary information; Note that Item A includes Goodwill and non-controlling interest Item B is as per OSFI Guidelines; the limit was recently increased. Items D & F are my calculations |
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and the all important Risk-Weighted Asset Ratios!
| BMO Risk-Weighted Asset Ratios October 2007 & July 2008 |
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| Note | 2007 | 3Q08 | |
| Equity Capital | A | 13,126 | 13,609 |
| Risk-Weighted Assets | B | 178,687 | 182,258 |
| Equity/RWA | C=A/B | 7.35% | 7.47% |
| Tier 1 Ratio | D | 9.51% | 9.90% |
| Capital Ratio | E | 11.74% | 12.29% |
| Assets to Capital Multiple | F | 17.17x | 15.87x |
| A is taken from the table “Issuance Capacity”, above B, D & E are taken from BMO’s Supplementary Report C is my calculation. F is from OSFI (4Q07) and BMO’s Supplementary Report (2Q08) |
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BMO’s supplementary data discloses a “Tangible common equity-to-risk-weighted-assets” figure that sounds like it should be equal to my “Equity/RWA” in the table. Their figure is 7.44%; it is not immediately clear to me how this figure is calculated.
Of interest is the improvement in their capital ratios, including the Assets-to-Capital multiple. It appears that their earnings are being used to displace borrowings, rather than being levered up.
I note as well that there is no adjustment to capital for “Expected loss in excess of allowance”, indicating that their ALLL is again equal to the EL which is indicative of conservative approach to assessing credit write-offs.
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