RY Capitalization: 3Q08

RY 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:

RY Capital Structure
October, 2007
& July, 2008
  4Q07 3Q08
Total Tier 1 Capital 23,383 24,150
Common Shareholders’ Equity 95.2% 111.6%
Preferred Shares 10.0% 10.6%
Innovative Tier 1 Capital Instruments 14.9% 15.3%
Non-Controlling Interests in Subsidiaries 0.1% 1.5%
Goodwill -20.3% -36.7%
Miscellaneous NA -2.3%
‘Miscellaneous’ includes ‘Substantial Investments’, ‘Securitization-related deductions’, ‘Expected loss in excess of allowance’ and ‘Other’

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

Tier 1 Issuance Capacity
October 2007
& July 2008
  4Q07 3Q08
Equity Capital (A) 17,545 17,892
Non-Equity Tier 1 Limit (B=A/3), 4Q07
(B=0.428*A), 2Q08
5,848 7,658
Innovative Tier 1 Capital (C) 3,494 3,706
Preferred Limit (D=B-C) 2,354 3,952
Preferred Actual (E) 2,344 2,552
New Issuance Capacity (F=D-E) 10 1,400
Items A, C & E are taken from the table
“Regulatory Capital”
of the supplementary information;
Note that Item A includes everything except preferred shares and innovative capital instruments

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 17,545 17,892
Risk-Weighted Assets B 247,635 254,189
Equity/RWA C=A/B 7.09% 7.04%
Tier 1 Ratio D 9.4% 9.5%
Capital Ratio E 11.5% 11.7%
Assets to Capital Multiple F 19.8x 19.4x
A is taken from the table “Issuance Capacity”, above
B, D, E & F are taken from RY’s Supplementary Report
C is my calculation.

It’s good to see that RY has reduced its Assets-to-Capital multiple to within normal bounds (this has not always been the case) – even if we follow international practice and retain the EL/ALLL deductions, the ratio is 19.8x.

We see from the supplementary data that the average credit risk weight of their assets has increased from 23% in 2Q08 to 25% in 3Q08, which ties in with the minimal change in their capital ratios. This, in turn, is due to a decline in their “Trading-Related” exposure, in which “Repo-Style Transactions”, with a risk-weight of 2%, has declined to total exposure of $151-billion from $168-billion.

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