PrefBlog

Scotia has announced:

that it has completed the domestic offering of $1 billion of 6.65% Subordinated Debentures due 2021 (the “Debentures”). The Debentures will qualify as Tier 2B capital of the Bank for regulatory purposes and are part of Scotiabank’s ongoing and proactive management of its capital structure.

The prospectus supplement is available on SEDAR, dated January 19:

The Debentures offered by this prospectus supplement will be dated January 22, 2009 and will mature on January 22, 2021. Interest on such Debentures at the rate of 6.65% per annum will be payable in equal semi-annual payments in arrears on January 22 and July 22 in each year, commencing July 22, 2009 and continuing until January 22, 2016.

The initial interest payment, payable on July 22, 2009, will be $33.25 per $1,000 principal amount of Debentures, based on an anticipated closing date of January 22, 2009. From January 22, 2016 until maturity on January 22, 2021, interest on such Debentures will be payable at an annual rate equal to the 90-day Bankers’ Acceptance Rate (as defined herein) plus 5.85% payable quarterly in arrears on the 22nd day of each of April, July, October and January in each year, commencing April 22, 2016.

A penalty rate of BAs+585! Note 12 of the Scotia 2008 Annual Report lists an issue with a pretend-maturity of 2009-5-12, real maturity in 2014, penalty rate of BAs+100bp.

Three month BAs are recorded by the Bank of Canada at 0.96% as of 1/21.

TD has announced:

that TD Capital Trust IV (the “Trust”), a subsidiary of TDBFG, and TDBFG have entered into an agreement with a syndicate of underwriters led by TD Securities Inc. for an issue of $550,000,000 TD Capital Trust IV Notes – Series 1 due June 30, 2108 (“TD CaTS IV – Series 1”) and $450,000,000 TD Capital Trust IV Notes – Series 2 due June 30, 2108 (“TD CaTS IV – Series 2”) (collectively, the “TD CaTS IV Notes”). The offering will raise aggregate gross proceeds of $1 billion. TD Capital Trust IV and TDBFG intend to file a final prospectus with the securities regulators in each of the provinces and territories of Canada with respect to the offering of the TD CaTS IV Notes.

TDBFG anticipates the TD CaTS IV Notes will qualify as Tier 1 Capital of TDBFG. Any Tier 1 Capital over the 15% regulatory limit will temporarily be counted as Tier 2B Capital. The expected closing date is January 26, 2009.

From the date of issue to, but excluding, June 30, 2019, interest on the TD CaTS IV – Series 1 is payable semi-annually at a rate of 9.523% per year. Starting on June 30, 2019, and on every fifth anniversary thereafter until June 30, 2104, the interest rate on the TD CaTS IV – Series 1 will reset as described in the prospectus.

From the date of issue to, but excluding June 30, 2039, interest on each TD CaTS IV – Series 2 is payable semi-annually at a rate of 10.00% per year. Starting on June 30, 2039, and on every fifth anniversary thereafter until June 30, 2104, the interest rate on the TD CaTS IV – Series 2 will reset as described in the prospectus.

On or after June 30, 2014, the Trust may, at its option and subject to certain conditions, redeem the TD CaTS IV – Series 1 or the TD CaTS IV – Series 2, in each case, in whole or in part.

In certain circumstances, the TD CaTS IV Notes or interest thereon may be automatically exchanged or paid by the issuance of non-cumulative Class A first preferred shares of the Bank.

The TD CaTS IV Notes will not be listed on any stock exchange.

Only the Preliminary Prospectus is available on SEDAR. The rate reset is off 5-Year Canadas, but the spread is not defined. These notes use the recently approved structure, whereby the notes are sold with a definite maturity and carry interest that can cumulate in preferred shares when cash is not paid.

The initial rate is fixed to 2019, as noted in the press release. At first blush, and subject to a look at the final prospectus, particularly with respect to the reset rate and issuer’s redemption options, these notes look superior to TD’s 6.25%+437 Fixed-Reset Preferreds.

BMO has announced:

that BMO Capital Trust II (the “Trust”), a closed-end trust wholly-owned by the Bank, will issue $450 million of BMO Tier 1 Notes – Series A due December 31, 2107 (the “Notes”). The Notes are expected to qualify as Tier 1 capital of the Bank for regulatory purposes. The Trust intends to file a final prospectus with the Canadian securities regulators today, and anticipates that a receipt for the prospectus will be issued on Monday, December 15, 2008.

Interest on the Notes is payable semi-annually. From the date of issue to but excluding December 31, 2018, the rate of interest on the Notes will be fixed at 10.221% per annum. Starting on December 31, 2018, and on every fifth anniversary after such date, the rate of interest on the Notes will be reset as described in the prospectus filed by the Trust and the Bank.

On or after December 31, 2013, the Trust may, at its option and subject to certain conditions, redeem the Notes, in whole or in part.

In certain circumstances, the Notes or interest thereon may be automatically exchanged or paid by the issuance of Class B non-cumulative preferred shares of the Bank.

The transaction is expected to close on December 18, 2008 and the net proceeds will be used by the Bank for general corporate purposes.

This is the first issue I know of that takes advantage of OSFI’s recent reckless rule change to allow Tier 1 Capital with a stated maturity and cumulative income payments.

Existence of these notes will not directly affect the critical Equity/RWA ratio that was most recent review of BMO’s capital on PrefBlog. They do, however, represent a method of bumping up the Tier 1 Capital ratio with issues effectively senior to the preferreds, which certainly shouldn’t give preferred shareholders any cause for celebration.

Update, 2008-12-15: Preferred shareholders can, however, take heart from a $1-billion equity issue:

Bank of Montreal (TSX, NYSE: BMO) today announced an offering of 33,340,000 common shares at CDN$30.00 per share for total gross proceeds of approximately CDN$1.0 billion. The offering will be underwritten on a bought deal basis by a syndicate of underwriters. The Bank has granted to the underwriters an over-allotment option to purchase, on the same terms, up to a further 3,334,000 common shares. The option is exercisable, in whole or in part, up to 30 days after closing. The maximum gross proceeds raised under the offering will be approximately CDN$1.1 billion if the option is exercised in full.

The anticipated closing date of the offering is December 24, 2008. The net proceeds from the offering will be used by the Bank for general corporate purposes. The issue will qualify as Tier 1 capital.

The Bank’s Tier 1 capital ratio was 9.77% as of October 31, 2008. On a pro-forma basis, adjusting for the issuance of CDN$1.0 billion of common equity, the issuance of the CDN$150MM Series 18 Preferred Shares, the issuance of the CDN$450MM BMO Tier 1 Notes – Series A, the redemption of the CDN$250MM Series 6 Preferred Shares and the November 1, 2008 implementation of a new Basel II requirement, the Tier 1 ratio would be approximately 10.4%.

Update, 2008-12-16: The prospectus is now available on SEDAR – Issuer is BMO Capital Trust II, date is December 12:

Starting on December 31, 2018 and on every fifth anniversary of such date thereafter until December 31, 2103 (each such date, an ‘‘Interest Reset Date’’), the interest rate on the BMO Tier 1 Notes—Series A will be reset at an interest rate per annum equal to the Government of Canada Yield (as defined herein) plus 10.50%.
…
Government of Canada Yield means, on any Interest Reset Date, the average of the annual yields as at 12:00 p.m. (Eastern time) on the third Business Day prior to the applicable Interest Reset Date as determined by two Canadian registered investment dealers, each of which will be selected by, and must be independent of, the Bank and the Trust, as being the annual yield to maturity on such date which a non-callable Government of Canada bond would carry, assuming semi-annual compounding, if issued in Canadian dollars in Canada at 100% of its principal amount on such date with a term to maturity of five years.
…
On or after December 31, 2013, the Trust may, at its option, with the prior approval of the Superintendent, on giving not more than 60 nor less than 30 days’ notice to the holders of the BMO Tier 1 Notes — Series A, redeem the BMO Tier 1 Notes — Series A, in whole or in part. The redemption price per $1,000 principal amount of BMO Tier 1 Notes — Series A redeemed on any day that is not an Interest Reset Date will be equal to the greater of par and the Canada Yield Price, and the redemption price per $1,000 principal amount of BMO Tier 1 Notes — Series A redeemed on any Interest Reset Date will be par, together in either case with accrued and unpaid interest to but excluding the date fixed for redemption, subject to any applicable withholding taxes.
…
The Class B Preferred Shares Series 20 will pay fixed quarterly Shares Series 20: non-cumulative preferential cash dividends, as and when declared by the Board of Directors, subject to the provisions of the Bank Act, at the applicable Perpetual Preferred Share Rate on each quarterly dividend payment date, subject to any applicable withholding taxes.
…
Perpetual Preferred Share Rate means the rate per annum equal to the Thirty Year Canada Yield prevailing: (i) in the case of the Class B Preferred Shares Series 20, at the time of the Automatic Exchange; or (ii) in the case of the Class B Deferral Preferred Shares, on the date of issuance of each series of Class B Deferral Preferred Shares, plus, in each case, 3.49%.

When reviewing RY’s 4Q08 Capitalization, I commented:

Royal Bank needs to do some delevering – an equity issue is indicated, since the Equity / RWA ratio is below that of its peers.

Royal Bank has announced:

it has entered into an underwriting agreement with a syndicate of underwriters for the sale of 56,750,000 common shares at $35.25 per share for total gross proceeds of $2.0 billion. The offering is expected to close on December 22, 2008.

The bank has also granted to the underwriters an over-allotment option to purchase, on the same terms, up to a further 8,512,500 common shares. The option is exercisable, in whole or in part, up to 30 days after the closing. The maximum gross proceeds raised under the offering will be $2.3 billion if the option is exercised in full.
…
As announced on December 5, 2008, the bank’s Tier 1 capital ratio was 9% as of October 31, 2008. Earlier this fiscal quarter, we issued $525 million of Series AL and Series AN Preferred Shares. On a pro forma basis, adjusting for the issue of Series AL and Series AN Preferred Shares and this issue of common shares, the bank expects its Tier 1 capital ratio will be approximately 9.9%, or 10.1% if the over-allotment option is exercised in full.

This is great news!

RY has released its Fourth Quarter 2008 Earnings 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:

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

and the all important Risk-Weighted Asset Ratios!

RY’s Assets-to-Capital multiple has again edged up over the normal limit (though not as high as it was in the first quarter). If we follow international practice and retain the EL/ALLL deductions, the ratio is higher:

We see from the supplementary data that the average credit risk weight of their assets has declined from 25% in 3Q08 to 24% in 4Q08, but their total exposure has risen dramatically, from $838-billion to $956-billion. This is largely due to a dramatic $72-billion increase in “Other Risk-Adjusted Assets”, from $115-billion in 3Q08 (at a 28% risk-weight) to $187-billion in 4Q08 (at a 19% risk-weight). A footnote gives a partial answer:

For credit risk, portfolios using the Standardized and AIRB Approach represents 27% and 58%, respectively, of RAA. The remaining 15% represents Balance Sheet assets not included in Standardized or AIRB Approaches.

The Balance sheet provides a clue. Assets classed as “Derivatives” are $136-billion in 4Q08, up from a mere $69-billion in 3Q08; the offsetting liability has increased to $129-billion from $67-billion. The $136-billion Derivatives asset may be compared to the disclosure of $86-billion in OTC derivatives disclosed in the calculation of Risk Weighted Assets. It seems likely that the “other” category includes Exchange Traded Derivatives.

Additionally, Total Lending has risen $43-billion; from $437-billion to $480-billion.

The Earnings Release comments:

The Tier 1 capital ratio was down 50 basis points from last quarter primarily due to the impact of a sharply weaker Canadian dollar at quarter-end on the translated value of foreign currency denominated assets, which resulted in higher risk-adjusted assets and a higher goodwill capital deduction. The Total capital ratio was down 60bps from last quarter largely due to factors noted above for Tier 1 capital.

Additionally:

At the end of the fourth quarter, the U.S./Canadian dollar exchange rate was $0.830 as compared to $0.977 at the end of the third quarter, reflecting a depreciation of 15% in the Canadian dollar. Total assets as of October 31, 2008 were up 14%, from the end of the third quarter, of which approximately one-third of the increase was due to the impact of the weaker Canadian dollar on the translation of mainly U.S. dollar-denominated assets. Risk-adjusted assets increased 10% from the end of the third quarter, of which approximately two-thirds was due to the impact of the weaker Canadian dollar on the translation of mainly U.S. dollar-denominated assets.

Royal Bank needs to do some delevering – an equity issue is indicated, since the Equity / RWA ratio is below that of its peers.

NA has released its Fourth 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!

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!

National Bank does not disclose its Assets-to-Capital Multiple. Their Report to Shareholders simply states (Note 4):

In addition to regulatory capital ratios, banks are expected to meet an assets-to-capital multiple test. The assets-to-capital multiple is calculated by dividing a bank’s total assets, including specified off-balance sheet items, by its total capital. Under this test, total assets should not be greater than 23 times the total capital. The Bank met the assets-to-capital multiple test in the third quarter of 2008.

They’re reducing their leverage a little, but not by enough. Equity/RWA is now less than 7% (they report 6.43% on page 3 of the supplementary data; it’s not clear how that is calculated) … if they want to eliminated the (low) discount on their Pfd-1(low) preferred shares, they have to issue some equity. Which is not to say that their prefs are unduly risky, of course … but it does mean they have greater credit risk than their better capitalized competitors.

TD has released its Fourth 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!

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!

The Assets-to-capital multiple has skyrocketted over the quarter:

It should be noted that my rough calculation above is not strictly accurate: as TD noted in their 3Q08 Shareholder Report:

The assets-to-capital multiple is calculated as total assets plus off-balance sheet credit instruments, such as certain letters of credit and guarantees less investments in associated corporations, goodwill and net intangibles, divided by Total adjusted capital.

… and they arrived at a figure of 17.9x for 4Q08. OSFI does not require the Assets-to-Capital multiple to be disclosed, let alone reconciled to other data.

Whatever the level, it is apparent that the multiple has increased, with assets up approximately $55-billion. “Securities” is pretty much a wash, with a $20-billion decline in “Trading” balanced largely by an increase in “Available for Sale” of $15-billion. “Loans” is a similar wash, with a $10-billion decline in “Residential Mortgages” offset by a $8-billion increase in “Business & Government”. The big balloon is a $42-billion increase in “Derivatives”, financed by a similar $35-billion “Derivatives” on the liability side.

This is probably due to the huge market move of the Canadian Dollar in the third quarter, as individual contracts in a matched book ballooned in value. BMO was also affected by this behaviour. However, TD does not address this asset/liability gross-up, nor does it provide a table showing counterparty strength.

CIBC (Stock symbol CM … I can never quite decide how to present it!) has released its 4Q08 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:

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

and the all important Risk-Weighted Asset Ratios!

Again, the 4Q07 figures are not directly comparable with the 4Q08 figures due to the change from Basel I to Basel II.

On a Basel I basis, the Tier I and Total Capital ratios got a big boost in the first quarter with the capital raise, but have since declined; the Tier 1 ratio is now the lowest it has been in the last two years, but held steady in the fourth quarter. The total capital ratio declined over the quarter as issuance of sub-debt did not keep pace with the increase in RWA.

Further, on a Basel I basis, Total Risk Weighted Assets have increased somewhat since 4Q07, due to increases in the risk-weight of “Other Loans” and “Other Assets”. From the breakdown of loans on page 22 of the supplementary data, it looks like a fairly even increase in business across the board, led by personal loans and Commercial real-estate/construction.

BNS has released its Fourth Quarter 2008 Investor Presentation and Supplementary Package, so it’s time to recalculate how much room they have to issue new preferred shares – assuming they want to! Note that it’s also time to update old installations of Adobe Acrobat … I had to update mine, because version 5.0 said the supplementary data file was damaged; verion 9.0 (has it been that long?) was fine.

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!

The calculations for the Assets-to-Capital multiple are not comparable; the OSFI figure will include an allowance for off-balance-sheet exposure.

It is apparent from the Quarterly Trend in the Basel I data that Scotia has been bulking up on its Risk Weighted Assets big-time, largely through “Loans and Acceptances” (which includes Securities Purchased under Resale Agreements”. This has been financed largely through deposits. To some extent, this reflects Scotia’s acquisition of Banco del Desarrollo in 2Q08:

The Bank completed the acquisition of Chile’s Banco del Desarrollo on November 26, 2007, through the acquisition of 99.5 per cent of the outstanding shares for $1.0 billion Canadian dollar equivalent (CDE). Total assets at acquisition were approximately CDE $5.6 billion, mainly comprised of loans. The Bank will combine the operations of Banco del Desarrollo with its existing Scotiabank Sud Americano banking operations. Based on acquisition date fair values, approximately CDE $797 million has been allocated to the estimated value of goodwill acquired. The purchase price allocation may be refined as the Bank completes its valuation of the assets acquired and liabilities assumed.

Risk-Weighted assets grew by $25-billion in the fourth quarter. On the Asset side of the average balance sheet (page 12), this was due to increases in Deposits with Other Banks ($4-billion), loans to retail & business ($15-billion) and the always popular “Other Assets” ($6-billion). This was financed by an increase in Business & Government Deposits ($10-billion), “Other Liabilities” ($12-billion) [which appear, via page 11, to be amounts owing on Derivatives]

Now let’s see if they announce another preferred share issue this afternoon!

BMO has released its Fourth Quarter 2008 Report and Supplementary Package. Their earnings were good, so maybe there will be a slight cessation of the agonizing over whether their preferred dividend will be eliminated! I expect that tomorrow I will receive my first eMail regarding 1Q09 … ‘Well, what if there’s a nuclear war and all their assets are destroyed? Maybe I should sell!’.

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 7.47%; it is not immediately clear to me how this figure is calculated, but it’s pretty close!

Capital ratios deteriorated somewhat from 3Q08 due largely to an increase of Risk-Weighted $10-billion in “Corporate including specialized lending”. The increase in leverage (Q4 vs Q3) indicated by the Assets to Capital multiple was largely due to a $22-billion increase in Derivative Instrument Assets, $12-billion in Securities and $7-billion in loans, funded by a $9-billion increase in deposits, $24-billion in Derivative Instrument Liabilities. The gross-up in Derivatives appears (page 24 of the supplementary data) to be due to increases in OTC Interest Rate Swaps ($10-billion) and Foreign Exchange ($10-billion) [page 26 of the supplementary]. Unfortunately, there is no indication of the collateralization and/or counterparty strength of these exposures, so we’ll have to leave that as a question mark for now.

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. It is also noteworthy that their “Securities, Other Than Trading” includes $11-billion in Canadian Mortgage Backed Securities – which are eligible for the $50-billion buyback discussed on November 12 – this represents an increase of $2-billion from 3Q08.

All in all, it was a solid quarter. I would spend more time on earnings if I was an equity guy, but I’m not: I’m a fixed income guy focussing on whether or not they’ll go broke. Not very soon they won’t! The common dividend payout ratio remains high at 66.2%, but I agree with them that it’s “good overall performance in the context of current economic and market conditions”.

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.