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:
| BNS Capital Structure October, 2007 & October 2006 |
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| 2007 | 2006 | |
| Total Tier 1 Capital | 20,225 | 20,109 |
| Common Shareholders’ Equity | 81.5% | 84.3% |
| Preferred Shares | 8.1% | 3.0% |
| Innovative Tier 1 Capital Instruments | 13.6% | 14.9% |
| Non-Controlling Interests in Subsidiaries | 2.5% | 2.2% |
| Goodwill | -5.6% | -4.3% |
Next, the issuance capacity (from Part 3 of last year’s series):
| BNS Tier 1 Issuance Capacity October 2007 & October 2006 |
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| 2007 | 2006 | ||
| Equity Capital | (A) | 15,840 | 16,509 |
| Non-Equity Tier 1 Limit | (B=A/3) | 5,280 | 5,503 |
| Innovative Tier 1 Capital | (C) | 2,750 | 3,000 |
| Preferred Limit | (D=B-C) | 2,530 | 2,503 |
| Preferred Y/E Actual | (E) | 1,635 | 600 |
| New Issuance Capacity | (F=D-E) | 895 | 1,903 |
| Items A, C & E are taken from the table “Regulatory Capital” of the supplementary information; Note that Item A includes Goodwill and non-controlling interest Item B is as per OSFI GuidelinesItems D & F are my calculations. |
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We can now show the all important Risk-Weighted Asset Ratios!
| BNS Risk-Weighted Asset Ratios October 2007 & October 2006 |
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| Note | 2007 | 2006 | |
| Equity Capital | A | 15,840 | 16,509 |
| Risk-Weighted Assets | B | 218,300 | 197,000 |
| Equity/RWA | C=A/B | 7.3% | 8.4% |
| Tier 1 Ratio | D | 9.3% | 10.2% |
| Capital Ratio | E | 10.5% | 11.7% |
| 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; 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.
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