CIBC (Stock symbol CM … I can never quite decide how to present it!) has released its 1Q09 Earnings Report and 1Q09 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:
| CM Capital Structure October, 2008 & January, 2009 |
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| 4Q08 | 1Q09 | |
| Total Tier 1 Capital | 12,365 | 12,017 |
| Common Shareholders’ Equity | 91.2% | 92.3% |
| Preferred Shares | 26.1% | 26.9% |
| Innovative Tier 1 Capital Instruments | 0% | 0% |
| Non-Controlling Interests in Subsidiaries | 1.4% | 1.5% |
| Goodwill | -17.0% | -17.7% |
| Misc. | -1.8% | -3.0% |
| Shareholders’ Equity includes “Common Shares”, “Contributed Surplus”, “Retained Earnings”, “Net after tax fair value losses arising from changes in institution’s own credit risk”, “Foreign Currency translation adjustments”, and “Net after tax undrealized holding loss on AFS equity securities in OCI”
‘Misc.’ is comprised of Basel II adjustments to Tier 1 Capital |
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Next, the issuance capacity (from Part 3 of the introductory series):
| CM Tier 1 Issuance Capacity October 2008 & January 2009 |
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| 4Q08 | 1Q09 | ||
| Equity Capital | (A) | 9,134 | 8,786 |
| Non-Equity Tier 1 Limit | B=0.666*A | 6,089 | 5,851 |
| Innovative Tier 1 Capital | (C) | 0 | 0 |
| Preferred Limit | (D=B-C) | 6,089 | 5,851 |
| Preferred Actual | (E) | 3,231 | 3,231 |
| New Issuance Capacity | (F=D-E) | 2,858 | 2,620 |
| Items A, C & E are taken from the table “Regulatory Capital” of the supplementary information; Note that Item A is defined as total Tier 1 Capital, less preferred shares. 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!
| CM Risk-Weighted Asset Ratios October 2008 & January 2009 |
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| Note | 4Q08 | 1Q09 | |
| Equity Capital | A | 9,134 | 8,786 |
| Risk-Weighted Assets | B | 117,900 | 122,400 |
| Equity/RWA | C=A/B | 7.75% | 7.18% |
| Tier 1 Ratio | D | 10.5% | 9.8% |
| Capital Ratio | E | 15.4% | 14.8% |
| Assets to Capital Multiple | F | 17.9x | 17.7x |
| A is taken from the table “Issuance Capacity”, above B, D & E are taken from CM’s Supplementary Report C is my calculation. F is taken the Shareholders’ Report |
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The Shareholders’ Report comments:
The Tier 1 ratio was down by 0.7% from the year end mainly due to structured credit charges in the quarter and higher credit risk weighted assets in the trading book resulting primarily from financial guarantor downgrades. The Tier 1 ratio was also adversely impacted by the expiry of OSFI’s transition rules related to the grandfathering of substantial investments pre-December 31, 2006, which were deducted entirely from Tier 2 capital at year end. The Tier 1 ratio benefited from lower risk weighted assets on residential mortgages resulting from higher insured mortgages.
The total capital ratio was down 0.6% from year end mainly due to structured credit charges in the quarter and higher credit risk weighted assets in the trading book, resulting primarily from financial guarantor downgrades. The ratio benefited from lower risk weighted assets on residential mortgages resulting from higher insured mortgages.
The big news in the reports was:
$708 million ($483 million after-tax, or $1.27 per share) loss on structured credit run-off activities
… which meant they didn’t make much money this quarter – only $147-million. They warn:
As at January 31, 2009, the fair value, net of valuation adjustments, of purchased protection from financial guarantor counterparties was $2.4 billion (US$1.9 billion). Market and economic conditions relating to these financial guarantors may change in the future, which could result in significant future losses.
In addition, it should be noted (page 9 of the report) that they still have $38.8-billion of actual ($10.2-billion) and notional ($28.6-billion) exposure in their “run-off portfolio”, offset by notional protection of $36.1-billion. It is the creditworthiness of the notional protection that is an issue.
Roughly half the notional exposure is derivatives written on Corporate Debt, while another quarter is writes on Collaterallized Loan Obligates; protection has been bought within these two sub-classes to basically offset. On Page 13 of the report, they do a very good job of breaking down these exposures by counterparty credit rating. About $8.7-billion of the notional exposure is to counterparties rated below investment grade; they do not disclose collateralization agreements that would give some comfort if they existed.
[…] It is noteworthy that this is – as far as I know – CIBC’s first foray into this kind of financing. Certainly they had none outstanding at 1Q09. […]