BMO Capitalization: 3Q08

BMO has released its Third Quarter 2008 Report and Supplementary Package, so 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:

BMO Capital Structure
October, 2007
& July, 2008
  4Q07 3Q08
Total Tier 1 Capital 16,994 18,047
Common Shareholders’ Equity 83.8% 83.8%
Preferred Shares 8.5% 11.1%
Innovative Tier 1 Capital Instruments 14.3% 13.5%
Non-Controlling Interests in Subsidiaries 0.2% 0.2%
Goodwill -6.7% -8.0%
Miscellaneous NA -0.5%

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

Tier 1 Issuance Capacity
October 2007
& July 2008
  4Q07 3Q08
Equity Capital (A) 13,126 13,609
Non-Equity Tier 1 Limit (B=A/3), 4Q07
(B=0.428*A), 2Q08
4,375 5,824
Innovative Tier 1 Capital (C) 2,422 2,442
Preferred Limit (D=B-C) 1,953 3,382
Preferred Actual (E) 1,446 1,996
New Issuance Capacity (F=D-E) 507 1,386
Items A, C & E are taken from the table
“Capital and Risk Weighted Assets”
of the supplementary information;
Note that Item A includes Goodwill and non-controlling interest

Item B is as per OSFI Guidelines; the limit was recently increased.
Items D & F are my calculations

and the all important Risk-Weighted Asset Ratios!

Risk-Weighted Asset Ratios
October 2007
& July 2008
  Note 2007 3Q08
Equity Capital A 13,126 13,609
Risk-Weighted Assets B 178,687 182,258
Equity/RWA C=A/B 7.35% 7.47%
Tier 1 Ratio D 9.51% 9.90%
Capital Ratio E 11.74% 12.29%
Assets to Capital Multiple F 17.17x 15.87x
A is taken from the table “Issuance Capacity”, above
B, D & E are taken from BMO’s Supplementary Report
C is my calculation.
F is from OSFI (4Q07) and BMO’s Supplementary Report (2Q08)

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 7.44%; it is not immediately clear to me how this figure is calculated.

Of interest is the improvement in their capital ratios, including the Assets-to-Capital multiple. It appears that their earnings are being used to displace borrowings, rather than being levered up.

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.

2 Responses to “BMO Capitalization: 3Q08”

  1. […] reviewing the 3Q08 BMO Financials, I noted that they were keeping assets constant while beefing up their capital – thus engaging in […]

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