RY Capitalization: 4Q08

RY has released its Fourth Quarter 2008 Earnings 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
& October, 2008
  4Q07 4Q08
Total Tier 1 Capital 23,383 25,173
Common Shareholders’ Equity 95.2% 115.0%
Preferred Shares 10.0% 10.6%
Innovative Tier 1 Capital Instruments 14.9% 15.4%
Non-Controlling Interests in Subsidiaries 0.1% 1.4%
Goodwill -20.3% -39.6%
Miscellaneous NA -2.7%
‘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):

RY
Tier 1 Issuance Capacity
October 2007
& October 2008
  4Q07 4Q08
Equity Capital (A) 17,545 18,637
Non-Equity Tier 1 Limit (B=A/3), 4Q07
(B=0.666*A), 4Q08
5,848 12,425
Innovative Tier 1 Capital (C) 3,494 3,879
Preferred Limit (D=B-C) 2,354 8,546
Preferred Actual (E) 2,344 2,657
New Issuance Capacity (F=D-E) 10 5,889
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!

RY
Risk-Weighted Asset Ratios
October 2007
& October 2008
  Note 2007 4Q08
Equity Capital A 17,545 18,637
Risk-Weighted Assets B 247,635 278,579
Equity/RWA C=A/B 7.09% 6.69%
Tier 1 Ratio D 9.4% 9.0%
Capital Ratio E 11.5% 11.1%
Assets to Capital Multiple F 19.8x 20.1x
A is taken from the table “Issuance Capacity”, above
B, D, E & F are taken from RY’s Supplementary Report
C is my calculation.

RY’s Assets-to-Capital multiple has again edged up over the normal limit (though not as high as it was in the first quarter). If we follow international practice and retain the EL/ALLL deductions, the ratio is higher:

RY Adjusted Assets-to-Capital Multiple
Item Value
Total Regulatory Capital 30,830
EL/ALLL Deductions 630
Adjusted Capital 31,460
Reported ACM 20.1x
Implied Assets 632,346
Unadjusted ACM 20.5x

We see from the supplementary data that the average credit risk weight of their assets has declined from 25% in 3Q08 to 24% in 4Q08, but their total exposure has risen dramatically, from $838-billion to $956-billion. This is largely due to a dramatic $72-billion increase in “Other Risk-Adjusted Assets”, from $115-billion in 3Q08 (at a 28% risk-weight) to $187-billion in 4Q08 (at a 19% risk-weight). A footnote gives a partial answer:

For credit risk, portfolios using the Standardized and AIRB Approach represents 27% and 58%, respectively, of RAA. The remaining 15% represents Balance Sheet assets not included in Standardized or AIRB Approaches.

The Balance sheet provides a clue. Assets classed as “Derivatives” are $136-billion in 4Q08, up from a mere $69-billion in 3Q08; the offsetting liability has increased to $129-billion from $67-billion. The $136-billion Derivatives asset may be compared to the disclosure of $86-billion in OTC derivatives disclosed in the calculation of Risk Weighted Assets. It seems likely that the “other” category includes Exchange Traded Derivatives.

Additionally, Total Lending has risen $43-billion; from $437-billion to $480-billion.

The Earnings Release comments:

The Tier 1 capital ratio was down 50 basis points from last quarter primarily due to the impact of a sharply weaker Canadian dollar at quarter-end on the translated value of foreign currency denominated assets, which resulted in higher risk-adjusted assets and a higher goodwill capital deduction. The Total capital ratio was down 60bps from last quarter largely due to factors noted above for Tier 1 capital.

Additionally:

At the end of the fourth quarter, the U.S./Canadian dollar exchange rate was $0.830 as compared to $0.977 at the end of the third quarter, reflecting a depreciation of 15% in the Canadian dollar. Total assets as of October 31, 2008 were up 14%, from the end of the third quarter, of which approximately one-third of the increase was due to the impact of the weaker Canadian dollar on the translation of mainly U.S. dollar-denominated assets. Risk-adjusted assets increased 10% from the end of the third quarter, of which approximately two-thirds was due to the impact of the weaker Canadian dollar on the translation of mainly U.S. dollar-denominated assets.

Royal Bank needs to do some delevering – an equity issue is indicated, since the Equity / RWA ratio is below that of its peers.

One Response to “RY Capitalization: 4Q08”

  1. […] reviewing RY’s 4Q08 Capitalization, I commented: Royal Bank needs to do some delevering – an equity issue is indicated, since the […]

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