NA Capitalization: 3Q08

NA 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:

NA Capital Structure
October, 2007
& July, 2008
  4Q07 3Q08
Total Tier 1 Capital 4,442 5,534
Common Shareholders’ Equity 95.0% 84.3%
Preferred Shares 9.0% 14.0%
Innovative Tier 1 Capital Instruments 11.4% 15.0%
Non-Controlling Interests in Subsidiaries 0.4% 0.5%
Goodwill -15.8% -13.0%
Miscellaneous NA -0.7%
‘Miscellaneous’ includes ‘short positions of own shares’ and ‘securitization related deductions’

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

Tier 1 Issuance Capacity
October 2007
& July 2008
  4Q07 3Q08
Equity Capital (A) 3,534 3,930
Non-Equity Tier 1 Limit (B=A/3), 4Q07
(B=0.428*A), 2Q08
1,178 1,682
Innovative Tier 1 Capital (C) 508 830
Preferred Limit (D=B-C) 670 852
Preferred Actual (E) 400 774
New Issuance Capacity (F=D-E) 270 78
Items A, C & E are taken from the table
“Risk Adjusted Capital Ratiosl”
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 3,534 3,930
Risk-Weighted Assets B 49,336 55,557
Equity/RWA C=A/B 7.16% 7.07%
Tier 1 Ratio D 9.0% 10.0%
Capital Ratio E 12.4% 13.9%
Assets to Capital Multiple F 18.6x 15.7x
A is taken from the table “Issuance Capacity”, above
B, D & E are taken from RY’s Supplementary Report
C is my calculation
F is taken from the OSFI site for 4Q07. The 2Q08 figure is approximated by subtracting goodwill of 707 from total assets of 123,608 to obtain adjusted assets of 122,901 and dividing by 7,353 total capital. The result of 16.7x was in agreement with the figure ultimately reported by OSFI. The 3Q08 figure subtracts goodwill of 722 from total assets of 121,931 [Page 1 of Sup] to obtain adjusted assets of 121,209 and dividing by 7,730 total capital.

National Bank does not disclose its Assets-to-Capital Multiple. Their Report to Shareholders simply states (Note 4):

In addition to regulatory capital ratios, banks are expected to meet an assets-to-capital multiple test. The assets-to-capital multiple is calculated by dividing a bank’s total assets, including specified off-balance sheet items, by its total capital. Under this test, total assets should not be greater than 23 times the total capital. The Bank met the assets-to-capital multiple test in the third quarter of 2008.

Well … at least they’re delevering! It is also interesting to note that they have – basically – maxed out on their expanded allowance of non-equity Tier 1 Capital.

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