5 Responses to “March 4, 2020”

1. seanjays says:

   March 4, 2020 at 10:39 pm

   if interest rates go to zero woundn’t Canadian banks be in a world of hurt similar to the European banks. If there is any type of Gov’t support I’m concerned it will be a tigger event and allow the banks to convert all these NVCC preferred’s to stock, likely in the banks favour. Thoughts?

2. jiHymas says:

   March 4, 2020 at 11:50 pm

   if interest rates go to zero woundn’t Canadian banks be in a world of hurt similar to the European banks.

   Yes. There’s a fair bit of discussion about this nowadays … for example, Rate cuts are another headwind for Canadian banks:

   The problem: Lower interest rates generally depress the banks’ net interest margins – NIMs, or profit margins on loans – since they tend to compress the spread between the rate at which a bank borrows and the rate at which it lends.

   There are a lot of moving parts here, and different reporting of loan books can stand in the way of firm estimates of the impact of lower rates. Nonetheless, if rate cuts continue, compressed margins could reduce profit forecasts for 2020 by as much as 8.7 per cent in the case of Toronto-Dominion Bank, according to analysts at RBC Dominion Securities.

   If there is any type of Gov’t support I’m concerned it will be a tigger event and allow the banks to convert all these NVCC preferred’s to stock, likely in the banks favour.

   The trigger is “non-viability” as defined by the government’s own OSFI, so I don’t think modest support would be considered a trigger event. For instance, during the credit crunch the US government forced (well … strongly encouraged!) relatively healthy banks to sell it preferred shares; see Treasury Announces TARP Capital Purchase Program Description. This can be considered modest support; but it strains credulity to imagine that participation would be considered an NVCC trigger event.

   If we look at the prospectus for the most recent CIBC issue, we find:

   Upon the occurrence of a Trigger Event (as defined herein), each outstanding Series 51 Share and, if issued, each outstanding Series 52 Share will automatically and immediately be converted, on a full and permanent basis, without the consent of the holder thereof, into a number of fully-paid common shares of the Bank (“Common Shares”) equal to (Multiplier x Share Value) ÷ Conversion Price (as each are defined herein) … “Multiplier” means 1.0. … “Share Value” means $25.00 plus declared and unpaid dividends as at the date of the Trigger Event. … “Conversion Price” means the greater of (i) the Floor Price, and (ii) the Current Market Price of the Common Shares. … “Floor Price” means $5.00, subject to adjustment

   Given current market conditions, I think that most bank preferred shareholders would be thrilled to get $25-worth of common for every preferred share held!

   And, most importantly, there’s the question of government support that is not modest. Obviously, such a thing cannot be completely ruled out. Anything could happen and it could happen tomorrow. But interest rates are still a long way from zero and Canadian banks are still a long way from being unprofitable. At the moment, NVCC conversion triggers are a long way from the top of my list of things to worry about.

3. skeptical says:

   March 5, 2020 at 10:25 am

   Banks blowing up would be an unacceptable event in Canada. Our country just can’t handle the resultant turmoil. The bail outs are as much baked in the cake as the NVCCs, which may or may not be triggered.
   Remember 2017 Spring when Home Capital Group was in trouble? They had to bring in Warren Buffet to sort that out. If it’s a bigger entity like a Big6 bank, it would be beyond the capability of any private entity. CIBC alone has assets worth 600 billion.
   Get ready for tens of billions of extra federal debt should that happen.

4. baffled says:

   March 5, 2020 at 7:42 pm

   jiHymas , you say , “Given current market conditions, I think that most bank preferred shareholders would be thrilled to get $25-worth of common for every preferred share held! ” thats true for current market conditions , but in market conditions where conversion was triggered , odds are good nobody would want bank stock , or any stock .

5. skeptical says:

   March 6, 2020 at 8:31 am

   For those keeping track of bail in regimes at the global level, Yes Bank in India is undergoing painful times. This bank used to be worth about 15 billion dollars as late as 2018.

   AT1 bonds for the banks have been activated, which means they have been completely written off. It’s strange because the common equity still has some value, but the AT1 bonds are totally gone. Zero.

   Here’s some information from the Reserve Bank of India site:
   https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR20288F2B33ECF3474EF8A1CF7A44737F87A8.PDF

   
   The instruments qualifying as Additional Tier 1 capital, issued by the Yes Bank Ltd. under Basel III framework, shall stand written down permanently, in full, with effect from the Appointed date. This is in conformity with the extant regulations issued by Reserve Bank of India based on the Basel framework.

   The bank founders/current management made it like bandits over the years and have amassed hundreds of millions in personal fortune.