PrefBlog

The deductions from Tier 1 Capital for Securitization, Substantial Investments, etc., are deducted from Shareholders’ Equity as well; in other words, the equity reported here is equal to the Net Adjusted Tier 1 Capital less preferreds and less Innovative Tier 1 Capital.

RWA is Risk-Weighted-Assets.

Equity / RWA is … well, you figure it out.

Tier 1 Rat is the Tier 1 Capital Ratio, as reported.

CapRat is the Total Capital Ratio as reported

ACM is the Assets to Capital Multiple, usually as reported, but estimated for those banks who did not make this disclosure.

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:

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

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!

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.

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.

CIBC has announced:

that CIBC Capital Trust (the “Trust”), a trust wholly-owned by CIBC, and CIBC had entered into an agreement with a group of underwriters led by CIBC World Markets Inc. for an issue of $1.3 billion of CIBC Tier 1 Notes – Series A due June 30, 2108 (the “Tier 1 – Series A Notes”) and $300 million of CIBC Tier 1 Notes – Series B due June 30, 2108 (the “Tier 1 – Series B Notes”) (collectively, the “Tier 1 Notes”). The Trust intends to file a final prospectus with Canadian securities regulators today. The Tier 1 Notes are expected to qualify as Tier 1 capital of CIBC for regulatory purposes.

CIBC reported a Tier 1 capital ratio at January 31, 2009 of 9.8%. Giving effect to the $325 million Series 35 preferred share issue that closed on February 4, 2009, the $200 million Series 37 preferred share issue scheduled to close on March 6, 2009, and the $1.6 billion Tier 1 Notes issue announced today, CIBC’s pro-forma Tier 1 capital ratio at January 31, 2009, would be approximately 11.5%.

From the date of issue to, but excluding June 30, 2019, interest on the Tier 1 – Series A Notes is payable semi-annually at a rate of 9.976% per annum. Starting on June 30, 2019, and on every fifth anniversary thereafter until June 30, 2104, interest on the Tier 1 – Series A Notes will reset as described in the prospectus.

From the date of issue to, but excluding June 30, 2039, interest on the Tier 1 – Series B Notes is payable semi-annually at a rate of 10.25% per annum. Starting on June 30, 2039, and on every fifth anniversary thereafter until June 30, 2104, interest on the Tier 1 – Series B Notes 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 Tier 1 – Series A Notes or the Tier 1 – Series B Notes, in each case, in whole or in part.

In certain circumstances, the Tier 1 Notes may be automatically exchanged for, or interest thereon may be paid by, the issuance of non-cumulative Class A Preferred Shares of CIBC.

The expected closing date is March 13, 2009. The net proceeds of this offering will be used for general purposes of CIBC.

The prospectus is not yet available on SEDAR.

Cumulative Tier 1 Capital with a maturity date … sigh … this is being issued under OSFI’s ill-advised rule relaxation of December 2008.

Assiduous Readers will remember that Innovative Tier 1 Capital pays interest and may be loosely regarded as RSP-Friendly Preferred Shares for investment classification purposes.

It is noteworthy that this is – as far as I know – CIBC’s first foray into this kind of financing. Certainly they had none outstanding at 1Q09.

Update, 2009-3-11: DBRS rates A(high), trend negative.