PrefBlog

NA has released its First Quarter 2009 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!

Prior Reports to Shareholders have included statements such as:

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.

… but they can no longer be bothered to note that they can’t be bothered to disclose this critical figure.

Earnings in the quarter were affected by a charge due to ABCP:

National Bank reported net income of $69 million for the first quarter of fiscal 2009, compared to net income of $255 million in the first quarter of 2008. Diluted earnings per share stood at $0.36, as against diluted earnings per share of $1.58 for the corresponding quarter of 2008. The results for the quarter included charges attributable to the impact of asset backed commercial paper (ABCP). These charges comprise the after-tax cost of holding ABCP of $98 million, which consisted of a net loss on available for sale securities related to ABCP of $129 million, financing costs, professional fees and the cost of economic hedge transactions totalling $10 million and interest income on ABCP further to the restructuring of $41 million. In addition, an after-tax loss related to commitments to extend credit to clients holding ABCP of $86 million was recorded in the first quarter of 2009. In the first quarter of 2008, the Bank had recorded after-tax charges related
to holding ABCP of $14 million, as well as a gain of $32 million on the sale of its subsidiary in Nassau.

Readers will remember that National Bank had an ownership interest in ABCP packagers, and their branded Money Market Fund was a major investor in these assets.

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!

Derivatives exposure, which was an issue last quarter as their long-term FX contracts grossed up the balance sheet, declined in notional terms but the risk-weighting increased to leave the risk-weighted exposure flat on the quarter. The notional decline was due to a reduction in short-term exposures; values for terms extending beyond one year were flat. It is possible – though not discussed! – that Royal is using its counterparty strength to go after the more profitable long-term business. Additionally, there appears (page 37 of the supplementary PDF) to be a shift from Foreign Exchange to Interest Rate derivatives.

It was a good solid quarter with nothing particularly exciting happening … just the way we like it! Very nice to see the delevering indicated by the Assets to Capital Multiple and improved Preferred Share subordination shown by the the Equity/RWA ratio.

CIBC (Stock symbol CM … I can never quite decide how to present it!) has released its 1Q09 Earnings Report and 1Q09 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 Shareholders’ Report comments:

The Tier 1 ratio was down by 0.7% from the year end mainly due to structured credit charges in the quarter and higher credit risk weighted assets in the trading book resulting primarily from financial guarantor downgrades. The Tier 1 ratio was also adversely impacted by the expiry of OSFI’s transition rules related to the grandfathering of substantial investments pre-December 31, 2006, which were deducted entirely from Tier 2 capital at year end. The Tier 1 ratio benefited from lower risk weighted assets on residential mortgages resulting from higher insured mortgages.
The total capital ratio was down 0.6% from year end mainly due to structured credit charges in the quarter and higher credit risk weighted assets in the trading book, resulting primarily from financial guarantor downgrades. The ratio benefited from lower risk weighted assets on residential mortgages resulting from higher insured mortgages.

The big news in the reports was:

$708 million ($483 million after-tax, or $1.27 per share) loss on structured credit run-off activities

… which meant they didn’t make much money this quarter – only $147-million. They warn:

As at January 31, 2009, the fair value, net of valuation adjustments, of purchased protection from financial guarantor counterparties was $2.4 billion (US$1.9 billion). Market and economic conditions relating to these financial guarantors may change in the future, which could result in significant future losses.

In addition, it should be noted (page 9 of the report) that they still have $38.8-billion of actual ($10.2-billion) and notional ($28.6-billion) exposure in their “run-off portfolio”, offset by notional protection of $36.1-billion. It is the creditworthiness of the notional protection that is an issue.

Roughly half the notional exposure is derivatives written on Corporate Debt, while another quarter is writes on Collaterallized Loan Obligates; protection has been bought within these two sub-classes to basically offset. On Page 13 of the report, they do a very good job of breaking down these exposures by counterparty credit rating. About $8.7-billion of the notional exposure is to counterparties rated below investment grade; they do not disclose collateralization agreements that would give some comfort if they existed.