NA has released its Fourth 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 & October, 2008 |
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| 4Q07 | 4Q08 | |
| Total Tier 1 Capital | 4,442 | 5,480 |
| Common Shareholders’ Equity | 95.0% | 86.2% |
| Preferred Shares | 9.0% | 14.1% |
| Innovative Tier 1 Capital Instruments | 11.4% | 15.1% |
| Non-Controlling Interests in Subsidiaries | 0.4% | 0.3% |
| Goodwill | -15.8% | -13.5% |
| Miscellaneous | NA | -2.3% |
| Shareholders’ equity includes ‘Foreign Currency Translation Adjustment’ ‘Miscellaneous’ includes ‘unrealized gain of available for sale equity securities’ and ‘securitization related deductions’ |
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Next, the issuance capacity (from Part 3 of the introductory series):
| NA Tier 1 Issuance Capacity October 2007 & October 2008 |
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| 4Q07 | 4Q08 | ||
| Equity Capital | (A) | 3,534 | 3,878 |
| Non-Equity Tier 1 Limit | (B=A/3), 4Q07 (B=0.666*A), 4Q08 |
1,178 | 2,585 |
| Innovative Tier 1 Capital | (C) | 508 | 828 |
| Preferred Limit | (D=B-C) | 670 | 1,757 |
| Preferred Actual | (E) | 400 | 774 |
| New Issuance Capacity | (F=D-E) | 270 | 983 |
| 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 |
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and the all important Risk-Weighted Asset Ratios!
| NA Risk-Weighted Asset Ratios October 2007 & October 2008 |
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| Note | 2007 | 4Q08 | |
| Equity Capital | A | 3,534 | 3,878 |
| Risk-Weighted Assets | B | 49,336 | 58,069 |
| Equity/RWA | C=A/B | 7.16% | 6.67% |
| Tier 1 Ratio | D | 9.0% | 9.4% |
| Capital Ratio | E | 12.4% | 13.2% |
| Assets to Capital Multiple | F | 18.6x | 16.7x |
| 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 4Q08 figure is approximated by subtracting goodwill of 740 from total assets of 129,332 to obtain adjusted assets of 128,592 and dividing by 7,679 total capital. |
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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.
They’re reducing their leverage a little, but not by enough. Equity/RWA is now less than 7% (they report 6.43% on page 3 of the supplementary data; it’s not clear how that is calculated) … if they want to eliminated the (low) discount on their Pfd-1(low) preferred shares, they have to issue some equity. Which is not to say that their prefs are unduly risky, of course … but it does mean they have greater credit risk than their better capitalized competitors.