PrefBlog

The Office of the Superintendent of Financial Institutions Canada has announced:

In Principle 1 of the Appendix: Principles Governing Inclusion of Innovative Instruments in Tier 1 Capital, “common shareholder’s equity (i.e., common shares, retained earnings, and participating account surplus, as applicable) should be the predominant form of a FRFI’s tier 1 capital. A strongly capitalized FRFI should not have innovative instruments and perpetual non-cumulative preferred shares that, in aggregate, exceed 25% of its net tier 1 capital”.

After taking into account the fundamental characteristics of tier 1 capital and reviewing guidance in other jurisdictions, OSFI has decided to increase this limit to 30%. The maximum amount of innovative tier 1 instruments that can be included in the aggregate limit calculation continues to be 15% of net tier 1.

References to 25% in the April 2003 Advisory Tier 1 Capital Clarifications are amended to 30%. In addition, section 2(b) of the advisory is replaced by the following:

Tier 1 qualifying preferred shares and innovative instruments, at the time of issuance, should not normally exceed 30% of net tier 1 capital. A FRE that wishes to include excess preferred share amounts in tier 1 capital must obtain OSFI’s prior confirmation that this treatment is acceptable. The FRE must provide a supportable plan, acceptable to OSFI, outlining how it proposes to eliminate the excess.

This increase was briefly noted in the CIBC announcement of an equity issue.

When we look at the year-end summary of issuance capacity we see that this really only affects Royal Bank (RY) and, to a limited extent, Commerce (CM) … the others already had tons of unused capacity, and National Bank (NA) has announced a $400-million Innovative Tier 1 Capital issue, which will have soaked up their room.

This post will summarize the information previously given for the Big 6 Canadian Banks: RY, BNS, BMO, TD, CM, & NA

Some readers might be interested in comparing these figures to CitiBank’s 3Q07 Report: Tier 1 Capital was – after all the horrid writedowns, and before the $7.5-billion infusion – $92,370-million (USD). Total Tier 1 Capital for the Canadian Big 6 is $93,068-million (CAD). Citibank has no perpetual preferreds outstanding. They do have something in Tier 1 Capital called “Qualify mandatorily redeemable securities of subsidiary trusts” – frankly, I don’t know what those are.

It seems unlikely that we’ll see any RY issuance this year, but any of the others appear to be able to top things up, if conditions are right.  

We can now show the all important Risk-Weighted Asset Ratios!

TD’s figure needs to be taken with a grain of salt; their takeover of Commerce Bancorp is expected to reduce Tier 1 Capital to the 8.75%-9.00% range; presumably with a similar effect on the Equity Ratio and Total Capital Ratio.

Otherwise, it is interesting to note that CM has the best protected Preferreds (with “protection” defined solely in terms of the regulatory risk-weighted-assets and capital that is junior to preferreds) while RY has the least protected.

And again, for those interested, Citibank had (at the third quarter 2007) a Tier 1 Ratio of 7.32% and a Total Capital Ratio of 10.61%. It should be noted that regulatory ratios are not directly comparable between regulators, as the regulators have a certain amount of discretion in applying the internationally agreed guidelines.

The Bank of Nova Scotia has released its Fourth Quarter Supplementary Information; I will analyze this in the same format as was has been recently done for CM, RY, NA, TD and BMO.

Step One is to analyze their Tier 1 Capital, reproducing the summary prepared last year:

Next, the issuance capacity (from Part 3 of last year’s series):

We can now show the all important Risk-Weighted Asset Ratios!

Note that, as with all banks examined thus far, the Equity/RWA ratio and Tier 1 Ratio have both deteriorated over the year; for BNS, CM, NA and RY the Total Capital Ratio has also declined. BNS’s Subordinated Debt outstanding has increased slightly over the past year.

It is disappointing to see the deterioration in the Equity/RWA ratio over the year – I consider this to be a measure of the safety of the preferred shares, as it is the “total risk” of the bank’s assets (as defined by the regulators) divided by the value of capital junior to preferreds (which therefore takes the first loss). It is by no means anything to lose a lot of sleep over, as it still remains strong – the preferreds are better protected than the sub-debt of a lot of global banks – but … geez, the direction’s wrong!

I won’t discuss the annual results to any great extent – there will be innumerable reports over the next few months released by analysts with a great deal more time to spend on the matter than I have.

The Canadian Imperial Bank of Commerce has released its Fourth Quarter Supplementary Information; I will analyze this in the same format as was has been recently done for RY, NA, TD and BMO.

Step One is to analyze their Tier 1 Capital, reproducing the summary produced last year:

Next, the issuance capacity (from Part 3 of last year’s series):

We can now show the all important Risk-Weighted Asset Ratios!

Note that, as with all banks examined thus far, the Equity/RWA ratio and Tier 1 Ratio have both deteriorated over the year; for CM, NA and RY the Total Capital Ratio has also declined. CM’s Subordinated Debt outstanding has actually declined over the past year.

The acquisition of FirstCarribean in the first quarter complicates the task of tracing changes in capital; but I think it’s fair to say – as a ballpark approximation – that the change in Total Capital is due to retention of earnings rather than issuance of new capital instruments.

It is disappointing to see the deterioration in the Equity/RWA ratio over the year – I consider this to be a measure of the safety of the preferred shares, as it is the “total risk” of the bank’s assets (as defined by the regulators) divided by the value of capital junior to preferreds (which therefore takes the first loss). It is by no means anything to lose a lot of sleep over, as it still remains strong – the preferreds are better protected than the sub-debt of a lot of global banks – but … geez, the direction’s wrong!

I won’t discuss the annual results to any great extent – there will be innumerable reports over the next few months released by analysts with a great deal more time to spend on the matter than I have.

Royal Bank has released its Fourth Quarter, 2007, Report and Supplementary Information; I will analyze this in the same format as was has been recently done for NA, BMO and TD.

Step One is to analyze their Tier 1 Capital, reproducing the summary produced last year:

Next, the issuance capacity (from Part 3 of last year’s series):

We can now show the all important Risk-Weighted Asset Ratios!

Note that, as with all banks examined thus far, the Equity/RWA ratio and Tier 1 Ratio have both deteriorated over the year, but for NA and RY the Total Capital Ratio has also declined. RY’s Subordinated Debt outstanding has been fairly constant over the past year, although $1-billion-odd of direct subordinated debt has been replaced with “Trust Subordinated Notes”. These are described in RY’s Second Quarter 2007 Report – seems to me that RY was able to get away with an extraordinarily low rate of interest on them – about 5bp over 7.5 year deposit notes, as far as I can make out.

And, of course, RY has done quite a bit of opportunistic – and very well timed! – preferred share issuance in the past fiscal year: RY.PR.C (settled 2006-11-1), RY.PR.D, RY.PR.E, RY.PR.F & RY.PR.G

It is disappointing to see the deterioration in the Equity/RWA ratio over the year – I consider this to be a measure of the safety of the preferred shares, as it is the “total risk” of the bank’s assets (as defined by the regulators) divided by the value of capital junior to preferreds (which therefore takes the first loss). It is by no means anything to lose a lot of sleep over, as it still remains strong – the preferreds are better protected than the sub-debt of a lot of global banks – but … geez, the direction’s wrong!

I won’t discuss the annual results to any great extent – there will be innumerable reports over the next few months released by analysts with a great deal more time to spend on the matter than I have.

National Bank has released its Fourth Quarter, 2007, Report and Supplementary Information; I will analyze this in the same format as was has been recently done for BMO and TD.

Step One is to analyze their Tier 1 Capital, reproducing the summary produced last year (although NA was not included in last year’s round-up):

Next, the issuance capacity (from Part 3 of last year’s series):

We can now show the all important Risk-Weighted Asset Ratios!

Note that, as with BMO and TD, the Equity/RWA ratio and Tier 1 Ratio have both deteriorated over the year, but for NA the Total Capital Ratio has also declined. Subordinated Debt outstanding has declined over the past year.

It is disappointing to see the deterioration in the Equity/RWA ratio over the year – I consider this to be a measure of the safety of the preferred shares, as it is the “total risk” of the bank’s assets (as defined by the regulators) divided by the value of capital junior to preferreds (which therefore takes the first loss). It is by no means anything to lose a lot of sleep over, as it still remains strong – the preferreds are better protected than the sub-debt of a lot of global banks – but … geez, the direction’s wrong!

I won’t discuss the annual results to any great extent – there will be innumerable reports over the next few months released by analysts with a great deal more time to spend on the matter than I have.

Update: An Assiduous Reader pointed out, with great charm and delicacy, that I am a bonehead. My initial attempt to calculate “Equity Capital” in the “Issuance Capacity” table was incorrect, as I did not include non-controlling interest in my first go-round. This adjustment has now been made. The source data are in the table “Risk-Adjusted Capital Ratios”, page 16 of the Supplementary.

and

TD has released its Fourth Quarter Report and Supplementary Information; I will analyze this in the same format as was recently done for BMO. 

Step One is to analyze their Tier 1 Capital, reproducing the summary I prepared last year:

 The change in the “Non-Controlling Interests in Subsidiaries” bears review: TD’s Second Quarter Report advises:

The Bank’s non-controlling interests in subsidiaries as at April 30, 2007 declined $2.4 billion from October 31, 2006 due to the privatization of TD Banknorth in the current quarter.

Next, the issuance capacity (from Part 3 of last year’s series):

Items (E) and (F) need a little explanation. The decline in preferreds outstanding is due to the redemption of  $344-million worth of preferred shares issued by TD Mortgage Investment Corporation, mentioned in Note 12 of the 2006 Annual Report. The post-Y/E issuance is TD.PR.P, which settled November 1, subsequent to year-end.

Of the $974-million outstanding, $350-million is TD.PR.M and $200-million is TD.PR.N. Both are retractibles, but have been grandfathered by OSFI such that they count towards Tier 1 Capital. I do not have the details of the grandfathering, but given that they both carry coupons less than the TD.PR.P retractible – which is in turn less than what a new issue would carry – we can expect the two retractibles to stay on TD’s books for quite a while.

We can now show the all important Risk-Weighted Asset Ratios!

Note that, as with BMO, the Equity/RWA ratio and Tier 1 Ratio have both deteriorated over the year, while the Total Capital Ratio has remained constant. This is largely due to an increase in the amount of Subordinated Debt, which is junior to deposits, but senior to Tier 1 Capital.

It is disappointing to see the deterioration in the Equity/RWA ratio over the year – I consider this to be a measure of the safety of the preferred shares, as it is the “total risk” of the bank’s assets (as defined by the regulators) divided by the value of capital junior to preferreds (which therefore takes the first loss). It is by no means anything to lose a lot of sleep over, as it still remains strong – the preferreds are better protected than the sub-debt of a lot of global banks – but … geez, the direction’s wrong!

I won’t discuss the annual results to any great extent – there will be innumerable reports over the next few months released by analysts with a great deal more time to spend on the matter than I have.

I am advised that the bank expects the Tier 1 Capital Ratio to be 8.75-9.00% after the deal with Commerce Bancorp closes next spring, but I am unable to verify this claim. During an analyst call on October 2, the question was asked and not answered:

Andre Hardy – RBC Capital Markets – Analyst Just a few numbers questions, Colleen, to start with. You usually provide us with a tangible equity ratio as well in your presentation, so could you please update us on that? And as well, where would that Tier 1 capital ratio be under Basel II?
…
Colleen Johnston – TD Bank Financial Group – CFO So you had a number of questions, Andre. Why don’t I start with the Basel II scenario? I think it’s probably a little premature at this time to comment on Basel II. We’re still going through the process around with OSFI in terms of risk-weighted assets in the new regime which will obviously take effect in Q1 of 2008. And you’re well aware of then the deferral that we have in terms of the TDA deduction from Tier 1. So we’re not going to talk about Basel II today.

Update: The expected Tier 1 Capital Ratio is announced in the October 2 Presentation, page 5, slide 10. Oops!

BMO has released its Fourth Quarter 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 summary I prepared last year:

Next, the issuance capacity (from Part 3 of last year’s series):

and the all important Risk-Weighted Asset Ratios!

Note that while the Equity/RWA ratio and Tier 1 Ratio have both deteriorated over the year, BMO’s Total Capital Ratio has remained constant. This is due to issuance of about $1-billion in Subordinated Debt, which is junior to deposits, but senior to Tier 1 Capital.

It is disappointing to see the deterioration in the Equity/RWA ratio over the year – I consider this to be a measure of the safety of the preferred shares, as it is the “total risk” of the bank’s assets (as defined by the regulators) divided by the value of capital junior to preferreds (which therefore takes the first loss). It is by no means anything to lose a lot of sleep over, as it still remains strong – the preferreds are better protected than the sub-debt of a lot of global banks – but … geez, the direction’s wrong!

I won’t discuss the annual results to any great extent – there will be innumerable reports over the next few months released by analysts with a great deal more time to spend on the matter than I have (although their focus will not be the prospects for the preferred shares), but there is one snippet from the fourth quarter report that bears highlighting:

In the fourth quarter, BMO recorded $318 million ($211 million after tax) of charges for certain trading activities and valuation adjustments related to deterioration in capital markets. The charges included $160 million in respect of trading and structured-credit related positions and preferred shares; $134 million related to Canadian asset-backed commercial paper (ABCP); and $15 million related to capital notes in the Links Finance Corporation (Links) and Parkland Finance Corporation (Parkland) structured investment vehicles.

Well! It isn’t often that preferred share trading & underwriting have enough influence on profit to be worth a mention! It’s a pity they didn’t break out this amount; but investors who have sufferred through a horrendous time for the past six months in the preferred share market may at least take comfort that BMO took a good hit as well!