BNS Capitalization: 3Q08

BNS 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!

Step One is to analyze their Tier 1 Capital, reproducing the prior format:

BNS Capital Structure
October, 2007
& July, 2008
  4Q07 3Q08
Total Tier 1 Capital 20,225 22,075
Common Shareholders’ Equity 81.5% 85.9%
Preferred Shares 8.1% 11.6%
Innovative Tier 1 Capital Instruments 13.6% 12.5%
Non-Controlling Interests in Subsidiaries 2.5% 2.1%
Goodwill -5.6% -9.7%
Miscellaneous NA -2.3%

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

Tier 1 Issuance Capacity
October 2007
& July 2008
  4Q07 3Q08
Equity Capital (A) 15,840 16,310
Non-Equity Tier 1 Limit (B=A/3), 4Q07
(B=0.428*A), 2Q08
5,280 6,981
Innovative Tier 1 Capital (C) 2,750 2,750
Preferred Limit (D=B-C) 2,530 4,231
Preferred Actual (E) 1,635 2,560
New Issuance Capacity (F=D-E) 895 1,671
Items A, C & E are taken from the table
“Regulatory Capital”
of the supplementary information;
Note that Item A includes Goodwill, FX losses, “Other Capital Deductions” 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 15,840 16,310
Risk-Weighted Assets B 218,300 225,800
Equity/RWA C=A/B 7.26% 7.22%
Tier 1 Ratio D 9.3% 9.8%
Capital Ratio E 10.5% 11.5%
Assets to Capital Multiple F 18.22x 17.75x
A is taken from the table “Issuance Capacity”, above
B, D & E are taken from BNS’s Supplementary Report
C is my calculation.
F is from OSFI (4Q07) and BNS’s Supplementary Report (3Q08) of total assets ($462.4-billion) divided by total capital ($26.044-billion)
(see below)

The calculations for the Assets-to-Capital multiple are not comparable; the OSFI figure will include an allowance for off-balance-sheet exposure. It should be noted that, according to the Supplementary Report, The “Tangible Common Equity” ratio, calculated according to Basel I, has declined to 6.5% in 3Q08 from 7.2% in 4Q07.

The Basel I “Tier 1” and “Total Capital” ratios also show a declining trend for the year to date. As has been noted before, Scotia does not adequately disclose its “Expected Losses” under Basel II, as distinct from its “General Allowances”.

It is apparent from the Quarterly Trend in the Basel I data that Scotia has been bulking up on its Risk Weighted Assets big-time, largely through “Loans and Acceptances” (which includes Securities Purchased under Resale Agreements”. This has been financed largely through deposits. To some extent, this reflects Scotia’s acquisition of Banco del Desarrollo in 2Q08:

The Bank completed the acquisition of Chile’s Banco del Desarrollo on November 26, 2007, through the acquisition of 99.5 per cent of the outstanding shares for $1.0 billion Canadian dollar equivalent (CDE). Total assets at acquisition were approximately CDE $5.6 billion, mainly comprised of loans. The Bank will combine the operations of Banco del Desarrollo with its existing Scotiabank Sud Americano banking operations. Based on acquisition date fair values, approximately CDE $797 million has been allocated to the estimated value of goodwill acquired. The purchase price allocation may be refined as the Bank completes its valuation of the assets acquired and liabilities assumed.

According to the 3Q08 Report:

The Bank’s total assets at July 31, 2008, were $462 billion, up $50 billion or 12% from October 31, 2007, including a $16 billion positive impact from foreign currency translation and the acquisition of Banco del Desarrollo. Growth was widespread across most asset categories, including retail, commercial and corporate lending. Compared to the prior quarter, assets grew by $9 billion.

The Bank’s loan portfolio grew $45 billion or 20% from October 31, 2007, including $7 billion from foreign currency translation. On the retail lending side, domestic residential mortgage growth was $15 billion, before securitization of $3 billion. The International acquisition of Banco del Desarrollo in Chile contributed $1 billion to the increase in mortgages. Personal loans were up $7 billion, with all regions experiencing positive growth.

Business and government loans increased $26 billion from October 31, 2007, or $21 billion excluding the impact of foreign currency translation. Loans in Scotia Capital were up $11 billion on the corporate lending side as well as to support trading operations. In International Banking,
business and government loans increased $13 billion. The acquisition of Banco del Desarrollo contributed $3 billion, and loans in Asia and the Caribbean grew $5 billion and $2 billion, respectively.

Update: Right on cue, Scotia announced a new issue of Tier 1-eligible preferreds after releasing the results; this will help their Tier 1 and Total Capital ratios.

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