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 |
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| 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 |
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| 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. |
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We can now show the all important Risk-Weighted Asset Ratios!
| RY Risk-Weighted Asset Ratios October 2007 & October 2007 |
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| 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. |
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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.
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