BNS Capitalization: 1Q09

BNS has released its 1Q09 Report to Shareholders and Supplementary Package, so it’s time to recalculate how much room they have to issue new preferred shares – assuming they want to!

Step One is to analyze their Tier 1 Capital, reproducing the prior format:

BNS Capital Structure
October, 2008
& January 2009
  4Q08 1Q09
Total Tier 1 Capital 23,263 22,839
Common Shareholders’ Equity 86.8% 90.8%
Preferred Shares 12.3% 16.2%
Innovative Tier 1 Capital Instruments 11.8% 12.0%
Non-Controlling Interests in Subsidiaries 2.2% 2.4%
Goodwill -9.8% -12.3%
Miscellaneous -3.3% -9.1%
‘Common Equity’ includes ‘Accumulated Foreign Currency Translation Losses’ and ‘Unrealized losses on AFS Equities’.
‘Misc’ is ‘Other Capital Deductions’

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

Tier 1 Issuance Capacity
October 2008
& January 2009
  4Q08 1Q09
Equity Capital (A) 17,653 16,379
Non-Equity Tier 1 Limit B=0.666*A 11,757 10,908
Innovative Tier 1 Capital (C) 2,750 2,750
Preferred Limit (D=B-C) 9,007 8,158
Preferred Actual (E) 2,860 3,710
New Issuance Capacity (F=D-E) 6,147 4,448
Items A, C & E are taken from the table
“Regulatory Capital”
of the supplementary information;
Note that Item A includes Goodwill, FX losses, “Other Capital Deductions” and ‘non-controlling interest’ and ‘Other Deduction’; it is equal to Net Tier 1 Capital less preferred shares and Innovative Capital Instruments

Item B is as per OSFI Guidelines; the limit was recently increased.
Items D & F are my calculations

It is noteworthy that the increases in Goodwill (about $550-million) and Other Capital Deductions (about $1,500-million) have been met largely through the issuance of Preferred Shares. Scotia’s note on Other Capital Deductions states:

Comprised of net after-tax gains on sale of securitized assets, and 50% of all investments in certain specified corporations, and other items.

TD was also affected by the rule change, which requires a 50/50 deduction from Tier 1 and Tier 2 instead of the old 0/100 split. Additionally, Scotia’s purchase of CI Investments closed and this will have affected Goodwill as well.

and the all important Risk-Weighted Asset Ratios!

Risk-Weighted Asset Ratios
October 2008
& January 2009
  Note 4Q08 1Q09
Equity Capital A 17,653 16,379
Risk-Weighted Assets B 250,600 239,700
Equity/RWA C=A/B 7.04% 6.83%
Tier 1 Ratio D 9.3% 9.5%
Capital Ratio E 11.1% 11.4%
Assets to Capital Multiple F 18.23x 18.62x
A is taken from the table “Issuance Capacity”, above
B, D & E are taken from BNS’s Supplementary Report
C is my calculation.
F is my estimate from the 4Q08 review (OSFI has not yet seen fit to publish the numbers) and BNS’s Supplementary Report (1Q09) of total assets ($509.8-billion) divided by total capital ($27.378-billion)
(see below)

Scotia reports a “Tangible Common Equity” Ratio of 7.8%; I suspect that this is the same as my “Equity / RWA” ratio without accounting for the Miscellaneous Deductions. As I stated when reviewing TD, I am comfortable with my figure; in times of stress the bank might find it difficult to remove or realize capital from non-consolidated subsidiaries.

The bank does not disclose its 1Q09 Assets-to-Capital multiple, stating only:

OSFI has also prescribed an asset-tocapital leverage multiple; the Bank was in compliance with this threshold as at January 31, 2009.

Scotia as $43,526-million exposure to derivatives on the balance sheet; but notes on page 30 of the supplementary report that the effect of Master Netting Agreements and Collateral is to reduce this to $16,757-million – an entirely manageable amount.

One Response to “BNS Capitalization: 1Q09”

Leave a Reply

You must be logged in to post a comment.