PrefBlog

BMO has released its First Quarter 2009 Report and Supplementary Package. Their earnings were at least able to cover their dividend!

There has been a lot of punditry recently exhorting BMO to cut its common dividend. While this may make all kinds of business sense it’s a risky thing to do – there is an army of pseudo-quants out there applying stock screens with the purpose of investing only in companies with a steadily rising (or at least constant) dividend. The investment industry being what it is, these guys are also being pandered to by index preparers and the ETF industry with things like “Dividend Aristocrats” indices and such.

What this means is that if the common dividend were to be cut, then not only will there be an immediate rush to the exists in a classic “crowded trade”, but the common will be left off all these lists for the next ten years. There is a very powerful market disincentive to cut the common dividend.

Anyway 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:

Next, the issuance capacity (from Part 3 of the introductory series):

and the all important Risk-Weighted Asset Ratios!

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 7.77%; it is not immediately clear to me how this figure is calculated, but it’s pretty close!

Capital ratios improved

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.

In the 4Q08 review, I noted:

Update, 2008-11-28 The following query …

I note that there has been a significant gross-up in your balance sheet with respect to derivatives.

Do you have a table available showing the degree to which your derivative-based assets are collateralized or backed up by the credit strength of your counterparties? Or other information that would allow an assessment of the quality of these assets?

… has been met with the following response:

Thank you for your question.

Unfortunately we do not disclose information regarding the strength of our counterparties.

However, in Q4 the increase in derivatives is due mainly to the impact of the stronger U.S. Dollar. Page 29 of the Q4 supplemental package shows the exposure by risk weight and comparing quarter over quarter the actual risk weighting has not largely changed.

Our supplemental package is available at:

http://www2.bmo.com/ir/qtrinfo/1/2008-q4/Suppq408.pdfhttp://www2.bmo.com
/ir/qtrinfo/1/2008-q4/Suppq408.pdf.

Their earnings release discloses that they have now taken a charge of $214-million ($146-million after tax) on counterparty credit exposures on derivative contracts, largely as a result of corporate counterparties’ credit spreads widening relative to BMO.

But there’s still not enough disclosure on these agreements. BMO has assets of $82.0-billion in derivatives (more than half of this is in Interest Rate Swaps, by the way) compared to, for instance, $50.1-billion in residential mortgages, and better disclosure is needed.

This entry was posted on Thursday, March 5th, 2009 at 2:59 pm and is filed under Regulatory Capital. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.