Issue Comments

Best & Worst Performing Issues : November, 2007

These are total returns, with dividends presumed to have been reinvested at the bid price on the ex-date. The list has been restricted to issues in the HIMIPref™ indices.

Issue Index DBRS Rating Monthly Performance Notes (“Now” means “November 30”)
ELF.PR.G PerpetualDiscount Pfd-2(low) -14.21% Now with a pre-tax bid-YTW of 7.16% based on a bid of 16.90 and a limitMaturity.
 
ELF.PR.F PerpetualDiscount Pfd-2(low) -11.20% Now with a pre-tax bid-YTW of 7.00% based on a bid of 19.27 and a limitMaturity.
BAM.PR.B Floater Pfd-2(low) -10.60%  
BAM.PR.K Floater Pfd-2(low) -9.68%  
BNA.PR.B SplitShare Pfd-2(low) -9.59% Asset coverage of just under 4.0:1 as of October 31, according to the company. Now with a pre-tax bid-YTW of 6.90% based on a bid of 22.00 and a hardMaturity 2016-3-25 at 25.00.
… … … … …
GWO.PR.E OpRet Pfd-1(low) +3.07% Now with a pre-tax bid-YTW of 3.74% based on a bid of 25.68 and a call 2011-4-30 at 25.00.
ENB.PR.A PerpetualDiscount Pfd-2(low) +3.47% Now with a pre-tax bid-YTW of 5.55% based on a bid of 24.86 and a limitMaturity.
PWF.PR.K PerpetualDiscount Pfd-1(low)  +3,83% Now with a pre-tax bid-YTW of 5.62% based on a bid of 22.25 and a limitMaturity.
CL.PR.B PerpetualPremium Pfd-1(low) +3.88% Now with a pre-tax bid-YTW of 1.82% based on a bid of 25.80 and a call 2008-1-30 at 25.75.
BSD.PR.A InterestBearing Pfd-2 +5.94% Asset coverage of 1.6+:1 as of November 30, according to Brookfield Funds. Now with a pre-tax bid-YTW of 6.21% (mostly as interest) based on a bid of 9.88 and a hardMaturity 2015-3-31 at 10.00.

The variance of returns was even more bizarre this month than it was in October! The underperformance of the E-L Financial issues, ELF.PR.F & ELF.PR.G is very surprising.

Market Action

November 30, 2007

An extremely busy day to finish the month!

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.86% 4.84% 112,447 15.75 2 +0.0614% 1,049.6
Fixed-Floater 4.91% 4.93% 98,259 15.62 8 -0.1617% 1,035.4
Floater 4.84% 4.91% 59,518 15.59 3 +0.0592% 970.9
Op. Retract 4.88% 2.47% 80,591 3.81 16 -0.0406% 1,031.8
Split-Share 5.34% 6.23% 92,352 4.09 15 +0.1093% 1,018.5
Interest Bearing 6.24% 6.52% 69,058 3.75 4 -0.1081% 1,065.7
Perpetual-Premium 5.86% 5.34% 91,238 8.05 11 -0.0066% 1,008.1
Perpetual-Discount 5.61% 5.65% 348,050 14.20 55 +0.2244% 904.3
Major Price Changes
Issue Index Change Notes
BNA.PR.B SplitShare -4.3478% Asset coverage of 4.0:1 according to the company. Pre-tax bid-YTW now 6.90% based on a bid of 22.00 and a hardMaturity 2016-3-25 at 25.00.
BAM.PR.G FixFloat -1.5748%  
LBS.PR.A SplitShare -1.1765% Asset coverage of 2.4+:1 as of November 29, according to Brompton. Now with a pre-tax bid-YTW of 5.26% based on a bid of 10.08 and a hardMaturity 2013-11-29 at 10.08.
ELF.PR.G PerpetualDiscount -1.1696% Now with a pre-tax bid-YTW of 7.16% based on a bid of 16.90 and a limitMaturity.
BNA.PR.C SplitShare -1.0932% Asset coverage of 4.0:1 according to the company. Now with a pre-tax bid-YTW of 7.62% based on a bid of 19.00 and a hardMaturity 2019-1-10 at 25.00.
WFS.PR.A SplitShare +1.1213% Asset coverage of 1.9+:1 as of November 22, according to Mulvihill. Now with a pre-tax bid-YTW of 5.82% based on a bid of 9.92 and a hardMaturity 2011-6-30 at 10.00.
FIG.PR.A InterestBearing +1.1518% Asset coverage of 2.1+:1 as of November 28, according to Faircourt. Now with a pre-tax bid-YTW of 7.11% (mostly as interest) based on a bid of 9.66 and a hardMaturity 2014-12-31 at 10.00.
POW.PR.D PerpetualDiscount +1.1526% Now with a pre-tax bid-YTW of 5.78% based on a bid of 21.94 and a limitMaturity.
BNS.PR.M PerpetualDiscount +1.2013% Now with a pre-tax bid-YTW of 5.41% based on a bid of 21.06 and a limitMaturity.
CIU.PR.A PerpetualDiscount +1.2195% Now with a pre-tax bid-YTW of 5.58% based on a bid of 20.75 and a limitMaturity.
NA.PR.L PerpetualDiscount +1.4829% Now with a pre-tax bid-YTW of 5.97% based on a bid of 20.53 and a limitMaturity.
IAG.PR.A PerpetualPremium +1.7632% Now with a pre-tax bid-YTW of 5.70% based on a bid of 20.20 and a limitMaturity.
NA.PR.K PerpetualDiscount +1.9311% Now with a pre-tax bid-YTW of 6.07% based on a bid of 24.28 and a limitMaturity.
HSB.PR.D PerpetualDiscount +2.1530% Now with a pre-tax bid-YTW of 5.70% based on a bid of 22.30 and a limitMaturity
BSD.PR.A InterestBearing +2.2774% Asset coverage of just under 1.7:1 as of November 23, 2007, according to Brookfield Funds. Now with a pre-tax bid-YTW of 6.21% based on a bid of 9.88 and a hardMaturity 2015-3-31.
FFN.PR.A SplitShare +2.5961% Asset coverage of 2.3:1 as of November 15, according to the company. Now with a pre-tax bid-YTW of 5.77% based on a bid of 22.50 and a limitMaturity.
FTU.PR.A SplitShare +2.6667% Asset coverage of 1.8+:1 as of November 15, according to . Now with a pre-tax bid-YTW of 7.12% based on a bid of 9.24 and a hardMaturity 2012-12-1 at 10.00.
Volume Highlights
Issue Index Volume Notes
IQW.PR.C Scraps (would be OpRet, but there are credit concerns) 456,020 Now with a pre-tax bid-YTW of 209.05% (annualized!) based on a bid of 17.80 and a softMaturity 2008-2-29 at 25.00. But don’t count on it!
NTL.PR.F Scraps (would be Ratchet, but there are credit concerns) 376,393  
PWF.PR.E PerpetualDiscount 221,500 Scotia crossed 200,000 at 24.71. Now with a pre-tax bid-YTW of 5.57% based on a bid of 24.62 and a limitMaturity.
TD.PR.P PerpetualDiscount 142,760 Now with a pre-tax bid-YTW of 5.43% based on a bid of 24.42 and a limitMaturity.
RY.PR.W PerpetualDiscount 69,809 Now with a pre-tax bid-YTW of 5.46% based on a bid of 22.58 and a limitMaturity.
GWO.PR.H PerpetualDiscount 54,830 Now with a pre-tax bid-YTW of 5.69% based on a bid of 21.35 and a limitMaturity.
RY.PR.D PerpetualDiscount 54,830 Now with a pre-tax bid-YTW of 5.45% based on a bid of 20.80 and a limitMaturity.

There were seventy-four other index-included $25.00-equivalent issues trading over 10,000 shares today.

HIMI Preferred Indices

HIMIPref™ Preferred Indices : May 2004

All indices were assigned a value of 1000.0 as of December 31, 1993.

HIMI Index Values 2004-05-31
Index Closing Value (Total Return) Issues Mean Credit Quality Median YTW Median DTW Median Daily Trading Mean Current Yield
Ratchet 1,352.5 1 2.00 2.50% 21.0 69M 2.52%
FixedFloater 2,151.8 8 2.00 2.45% 19.5 81M 5.32%
Floater 1,947.1 6 2.00 2.63% 20.0 65M 2.90%
OpRet 1,707.6 22 1.46 4.05% 3.9 136M 4.86%
SplitShare 1,734.1 16 1.81 4.58% 4.0 54M 5.44%
Interest-Bearing 2,089.1 10 2.00 6.08% 2.4 128M 7.32%
Perpetual-Premium 1,321.3 25 1.52 5.45% 6.1 173M 5.70%
Perpetual-Discount 1,523.0 7 2.00 5.64% 14.3 150M 5.55%

Index Constitution, 2004-05-31, Pre-rebalancing

Index Constitution, 2004-05-31, Post-rebalancing

Issue Comments

BIG.PR.A : Partial Call for Redemption

Big 8 Split Inc. has announced:

it has called 10,584 Preferred Shares for cash redemption on December 14, 2007 representing approximately 0.4% of the outstanding Preferred Shares as a result of holders of 10,584 Capital Shares exercising their special annual retraction rights. The Preferred Shares shall be redeemed on a pro rata basis, so that holders of record of Preferred Shares on the close of business on December 13, 2007 will have approximately 0.5% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $25.00 per share. Holders of Preferred Shares that have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to and including December 14, 2007.

In addition, holders of a further 91,096 Preferred and Capital Shares have deposited such shares concurrently for retraction on December 14, 2007. As a result, a total of 101,680 Preferred and Capital Shares, or approximately 4.3% of both classes of shares currently outstanding will be redeemed.

Payment of the amount due to retracting shareholders will be made by the Company on December 14, 2007. From and after December 15, 2007 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any right in respect of such shares except to receive the amount due on redemption.

BIG.PR.A is not tracked by HIMIPref™.

Issue Comments

FBS.PR.B : Partial Call for Redemption

5Banc Split Inc. has announced:

it has called 1,350,696 Preferred Shares for cash redemption on December 14, 2007 representing approximately 10% of the outstanding Preferred Shares as a result of holders of 1,350,696 Capital Shares exercising their special annual retraction rights. The Preferred Shares shall be redeemed on a pro rata basis, so that holders of record of Preferred Shares on the close of business on December 13, 2007 will have approximately 10% of their Preferred Shares redeemed. The redemption price for the Preferred Shares will be $10.00 per share. Holders of Preferred Shares that have been called for redemption will be entitled to receive dividends thereon which have been declared but remain unpaid up to and including December 14, 2007.

In addition, holders of a further 585,270 Preferred and Capital Shares have deposited such shares concurrently for retraction on December 14, 2007. As a result, a total of 1,935,966 Preferred and Capital Shares, or approximately 14% of both classes of shares currently outstanding will be redeemed.

Payment of the amount due to retracting shareholders will be made by the Company on December 14, 2007. From and after December 15, 2007 the holders of Preferred Shares that have been called for redemption will not be entitled to dividends or to exercise any right in respect of such shares except to receive the amount due on redemption.

FBS.PR.B is tracked by HIMIPref™ with the securityCode A29001. It is currently included in the HIMIPref™ SplitShare Index. It is also currently included in the S&P/TSX Preferred Share Index but will be removed in January.

Last January, the company very proudly announced the underwriters’ greenshoe had been exercised … sic transit gloria mundi.

Regulatory Capital

RY Tier 1 Capital : October 2007

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:

RY Capital Structure
October, 2007
& October 2006
  2007 2006
Total Tier 1 Capital 23,383 21,478
Common Shareholders’ Equity 95.2% 98.1%
Preferred Shares 10.0% 6.3%
Innovative Tier 1 Capital Instruments 14.9% 15.0%
Non-Controlling Interests in Subsidiaries 0.1% 0.1%
Goodwill -20.3% -19.5%

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

RY
Tier 1 Issuance Capacity
October 2007
& October 2006
  2007 2006
Equity Capital (A) 17,545 16,911
Non-Equity Tier 1 Limit (B=A/3) 5,848 5,637
Innovative Tier 1 Capital (C) 3,494 3,222
Preferred Limit (D=B-C) 2,354 2,415
Preferred Y/E Actual (E) 2,344 1,345
New Issuance Capacity (F=D-E) 10 1,070
Items A, C & E are taken from the table
“Capital”
of the supplementary information;
Note that Item A includes Goodwill and non-controlling interest
Item B is as per OSFI Guidelines
Items D & F are my calculations.

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

RY
Risk-Weighted Asset Ratios
October 2007
& October 2007
  Note 2007 2006
Equity Capital A 17,545 16,911
Risk-Weighted Assets B 247,635 223,709
Equity/RWA C=A/B 7.09% 7.56%
Tier 1 Ratio D 9.4% 9.6%
Capital Ratio E 11.5% 11.9%
A is taken from the table “Issuance Capacity”, above
B, D & E are taken from the Supplementary Report
C is my calculation.

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.

Market Action

November 29, 2007

Well … today the TD Bank and National Bank financials were analyzed … and, in addition, month-end is a-coming and duty calls with a shrill, unpleasant voice.

So there won’t be much colour today.

American ABCP outstanding was down another $11-billion this week, continuing its decline as the overleveraged economy continues to unwind. Domestic Financial CP outstanding was up $25-billion; although this figure has not picked up all the slack since the peak, this illustrates the Banks Advantage in Cushioning Liquidity Shocks.

The Florida State-sponsored Money Market Fund mentioned yesterday has suspended redemptions:

Florida officials voted to suspend withdrawals from an investment fund for schools and local governments after redemptions sparked by downgrades of debt held in the portfolio reduced assets by 44 percent.
…
It wasn’t decided how long the suspension would last. The trustees meet again on Dec. 4.

“We’re getting a lot of calls,” said Mike McCauley, the spokesman for the State Board of Administration.

The Florida pool crisis is a sign of poor risk management by state officials, said Harvey Pitt, former chairman of the Securities and Exchange Commission.

“In the longer-term, it’s unlikely that those whose funds have been frozen will leave their money in the investment fund once the freeze lifts,” Pitt said. “All of this could, and should, have been avoided by careful due diligence, constant reassessment of risk, and paying close attention to market trends.”

Mr. Pitt did not disclose his own track-record as a money manager. His criticisms are the kind that really drive me wild – post-hoc criticisms of fund managers by guys who’ve never done it. It’s very easy to be wise after the fact.

The big danger is that such public funds will eventually migrate to nothing riskier than three-month T-Bills; why would a trustee allow anything else if he’s going to be vilified whenever he’s wrong on something?

One can only applaud Henri-Paul Rousseau in his testimony to the Quebec legislature’s public finance committee:

Executives of Canada’s biggest pension fund agreed after careful study that what constituted a crisis was open to interpretation, but believed the financial institutions would honour their commitments, he said under questioning at the provincial legislature’s public finance committee.

“There was some thinking out there that this was very risky,” Mr. Rousseau said. “We thought it was not plausible and it happened. That’s it.”
…
“Were we prudent? Yes. Did we miscalculate in terms of the probability that this would happen? Yes,” he said. “Unfortunately, that happens in our business.”

Way to go, M. Rousseau! I have no idea whether you’re a good or bad manager, either of people or of money, but at least you know the right things to say – and on this occasion, when things have gone wrong, you’re willing to wear it. My own question is, regardless of whether or not it was prudent to have $13-billion out of total Caisse assets of $207-billion in Canadian ABCP, was it prudent to have $13-billion in a $35-billion asset class? M. Rousseau’s full remarks have been published by the Caisse. He points out that while liquidity is a problem, the credit quality is entirely acceptable. I will confess that I haven’t even checked to see what proportion of the entire Money Market portfolio was comprised of ABCP, or what the investment rationale behind the MM allocation might have been.

The US bond market is on fire, with a buying panic and lots of corporate issuance; Bernanke seems to be guiding the market to expect an ease.

Another day of good volume for preferreds, with some evidence of rationalization of prices, although overall performance wasn’t all that great. Split shares had a great day, but are still basically clobbered on the month, while floaters are getting hit … trouble is, it’s hard to separate the company specifics (BAM & BCE) from the asset types. Still, that’s what makes it fun, right?

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.85% 4.83% 115,784 15.78 2 +0.0205% 1,048.9
Fixed-Floater 4.91% 4.91% 92,665 15.64 8 -0.0607% 1,037.1
Floater 4.85% 4.91% 58,963 15.59 3 -0.7731% 970.3
Op. Retract 4.88% 3.67% 76,988 3.81 16 -0.0594% 1,032.2
Split-Share 5.35% 6.10% 92,427 4.10 15 +0.9467% 1,017.4
Interest Bearing 6.29% 6.63% 67,207 3.73 4 -0.2882% 1,057.2
Perpetual-Premium 5.86% 5.11% 85,981 7.07 11 +0.5354% 1,008.2
Perpetual-Discount 5.62% 5.66% 343,498 13.99 55 +0.0703% 902.3
Major Price Changes
Issue Index Change Notes
FTU.PR.A SplitShare -2.7027% Asset coverage of 1.8+:1 as of November 15, according to the company. Pre-tax bid-YTW now 7.74% based on a bid of 9.00 and a hardMaturity 2012-12-1 at 10.00.
MST.PR.A InterestBearing -2.2287% Asset coverage of 2.1+:1 as of November 22, according to Sentry Select. Now with a pre-tax bid-YTW of 6.49% (as interest net of capital loss) based on a bid of 10.09 and a hardMaturity 2009-9-30 at 10.00.
CIU.PR.A PerpetualDiscount -1.4423% Now with a pre-tax bid-YTW of 5.65% based on a bid of 20.50 and a limitMaturity.
BAM.PR.K Floater -1.3364%  
BAM.PR.B Floater -1.1040%  
WFS.PR.A SplitShare +1.0299% Asset coverage of 1.9+:1 as of November 22, according to Mulvihill. Now with a pre-tax bid-YTW of 6.17% based on a bid of 9.81 and a hardMaturity 2011-6-30 at 10.00.
FIG.PR.A InterestBearing +1.0582% Asset coverage of 2.1+:1 as of November 28, according to Faircourt. Now with a pre-tax bid-YTW of 7.31% (mostly as interest) based on a bid of 9.55 and a hardMaturity 2014-12-31 at 10.00.
CM.PR.I PerpetualDiscount +1.1158% Now with a pre-tax bid-YTW of 5.46% based on a bid of 21.75 and a limitMaturity.
BNA.PR.A SplitShare +1.1779% Asset coverage of just under 4.0:1 according to the company. Now with a pre-tax bid-YTW of 6.38% based on a bid of 24.91 and a hardMaturity 2010-9-30 at 25.00.
SBN.PR.A SplitShare +1.2333% Asset coverage of just under 2.3:1 as of November 22, according to Mulvihill. Now with a pre-tax bid-YTW of 5.57% based on a bid of 9.85 and a hardMaturity 2014-12-1 at 10.00.
PWF.PR.K PerpetualDiscount +1.2785% Now with a pre-tax bid-YTW of 5.64% based on a bid of 22.18 and a limitMaturity.
GWO.PR.F PerpetualPremium +1.4293% Now with a pre-tax bid-YTW of 5.07% based on a bid of 25.80 and a limitMaturity.
LFE.PR.A SplitShare +1.4851% Asset coverage of 2.6+:1 as of November 15, according to the company. Now with a pre-tax bid-YTW of 4.70% based on a bid of 10.25 and a hardMaturity 2012-12-1 at 10.00.
CL.PR.B PerpetualPremium +1.5082% Now with a pre-tax bid-YTW of -0.49% based on a bid of 25.90 and a call 2007-12-31 at 25.75. A negative yield-to-worst! It’s been a while since we’ve seen that … will it be called soon, now that GWO has some money in hand?
NA.PR.K PerpetualDiscount +1.5345% Now with a pre-tax bid-YTW of 6.19% based on a bid of 23.82 and a limitMaturity.
HSB.PR.C PerpetualDiscount +2.2727% Now with a pre-tax bid-YTW of 5.77% based on a bid of 22.50 and a limitMaturity.
BNA.PR.C SplitShare +2.4533% Asset coverage of just under 4.0:1 as of October 31, according to the company. Now with a pre-tax bid-YTW of 7.48% based on a bid of 19.21 and a hardMaturity 2019-1-10 at 25.00. Another long awaited good day – but not as good as yesterday!
HSB.PR.D PerpetualDiscount +2.5846% Now with a pre-tax bid-YTW of 5.83% based on a bid of 21.83 and a limitMaturity.
BNA.PR.B SplitShare +8.4906% Whoosh! When it goes, it goes! Asset coverage of just under 4.0:1 as of October 31, according to the company. Now with a pre-tax bid-YTW of 6.22% based on a bid of 23.00 and a hardMaturity 2016-3-25 at 25.00. All three BNA issues had super days today; the yield on this one may be compared with BNA.PR.A (6.38% to 2010-9-30) and BNA.PR.C (7.48% to 2019-1-10).
Volume Highlights
Issue Index Volume Notes
BCE.PR.C FixFloat 69,400 Three Macs bought 50,000 from DS at 24.80.
BMO.PR.J PerpetualDiscount 68,715 Now with a pre-tax bid-YTW of 5.51% based on a bid of 20.55 and a limitMaturity.
BAM.PR.N PerpetualDiscount 65,710 Now with a pre-tax bid-YTW of 6.96% based on a bid of 17.45 and a limitMaturity.
RY.PR.B PerpetualDiscount 52,655 Now with a pre-tax bid-YTW of 5.44% based on a bid of 21.68 and a limitMaturity.
MFC.PR.C PerpetualDiscount 48,100 Now with a pre-tax bid-YTW of 5.37% based on a bid of 21.00 and a limitMaturity.

There were forty-one other index-included $25.00-equivalent issues trading over 10,000 shares today.

HIMI Preferred Indices

HIMIPref™ Preferred Indices : April 2004

All indices were assigned a value of 1000.0 as of December 31, 1993.

HIMI Index Values 2004-04-30
Index Closing Value (Total Return) Issues Mean Credit Quality Median YTW Median DTW Median Daily Trading Mean Current Yield
Ratchet 1,360.6 1 2.00 2.44% 21.2 65M 2.46%
FixedFloater 2,163.2 8 2.00 2.34% 19.7 77M 5.29%
Floater 1,952.8 7 1.85 0.00% 0.09 61M 3.24%
OpRet 1,700.7 23 1.44 4.03% 4.0 121M 4.95%
SplitShare 1,725.3 14 1.79 4.40% 3.3 61M 5.34%
Interest-Bearing 2,084.6 10 2.00 5.95% 2.4 135M 7.33%
Perpetual-Premium 1,318.9 25 1.52 5.51% 6.2 168M 5.69%
Perpetual-Discount 1,518.9 7 0 0 0 0 0

Index Constitution, 2004-04-30, Pre-rebalancing

Index Constitution, 2004-04-30, Post-rebalancing

Regulatory Capital

NA Tier 1 Capital : October 2007

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):

NA Capital Structure
October, 2007
& October 2006
  2007 2006
Total Tier 1 Capital 4,442 4,674
Common Shareholders’ Equity 95.0% 93.8%
Preferred Shares 9.0% 8.6%
Innovative Tier 1 Capital Instruments 11.4% 12.0%
Non-Controlling Interests in Subsidiaries 0.4% 0.2%
Goodwill -15.8% -14.6%

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

NA
Tier 1 Issuance Capacity
October 2007
& October 2006
  2007 2006
Equity Capital (A) 3,534 3,712
Non-Equity Tier 1 Limit (B=A/3) 1,178 1,237
Innovative Tier 1 Capital (C) 508 562
Preferred Limit (D=B-C) 670 675
Preferred Y/E Actual (E) 400 400
Post Y/E Issuance (F) 0 0
New Issuance Capacity (G=D-E-F) 270 275
Items A, C & E are taken from the table
“Risk-Adjusted Capital Ratios”
of the supplementary information;
Note that Item A includes Goodwill, non-controlling interest
and trading positions (SEE UPDATE, BELOW)
Item B is as per OSFI Guidelines
Items D, F & G are my calculations

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

NA
Risk-Weighted Asset Ratios
October 2007
& October 2007
  Note 2007 2006
Equity Capital A 3,534 3,712
Risk-Weighted Assets B 49,336 47,298
Equity/RWA C=A/B 7.16% 7.85%
Tier 1 Ratio D 9.0% 9.9%
Capital Ratio E 12.4% 14.0%
A is taken from the table “Issuance Capacity”, above
B, D & E are taken from the Supplementary Report
C is my calculation.

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.

NA
Equity Capital Calculation
2006
Source Description Source Value
Common Shareholders’ Equity 4,388
Non-Controlling Interest 9
Less: Goodwill 683
Less: Trading in short positions of own shares (gross) 2
PrefBlog Calculated Total 3,712

and

NA
Equity Capital Calculation
2007
Source Description Source Value
Common Shareholders’ Equity 4,220
Non-Controlling Interest 18
Less: Goodwill 703
Less: Trading in short positions of own shares (gross) 1
PrefBlog Calculated Total 3,534
Regulatory Capital

TD Tier 1 Capital : October 2007

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:

TD Capital Structure
October, 2007
& October 2006
  2007 2006
Total Tier 1 Capital 15,645 17,079
Common Shareholders’ Equity 131.5% 112.0%
Preferred Shares 6.2% 7.7%
Innovative Tier 1 Capital Instruments 11.1% 7.3%
Non-Controlling Interests in Subsidiaries 0.1% 14.0%
Goodwill -49.0% -41.1%

 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):

TD
Tier 1 Issuance Capacity
October 2007
& October 2006
  2007 2006
Equity Capital (A) 12,931 14,510
Non-Equity Tier 1 Limit (B=A/3) 4,310 4,837
Innovative Tier 1 Capital (C) 1,740 1,250
Preferred Limit (D=B-C) 2,570 3,587
Preferred Y/E Actual (E) 974 1,319
Post Y/E Issuance (F) 250 0
New Issuance Capacity (G=D-E-F) 1,346 2,268
Items A, C & E are taken from the table
“Risk Weighted Assets and Capital”
of the supplementary information;
Note that Item A includes Goodwill and non-controlling interest
Item B is as per OSFI Guidelines
Items D, F & G are my calculations

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!

TD
Risk-Weighted Asset Ratios
October 2007
& October 2007
  Note 2007 2006
Equity Capital A 12,931 14,510
Risk-Weighted Assets B 152,519 141,879
Equity/RWA C=A/B 8.48% 10.23%
Tier 1 Ratio D 10.3% 12.0%
Capital Ratio E 13.0% 13.1%
A is taken from the table “Issuance Capacity”, above
B, D & E are taken from the Supplementary Report
C is my calculation.

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!