{"id":4330,"date":"2008-12-05T12:25:30","date_gmt":"2008-12-05T16:25:30","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=4330"},"modified":"2008-12-05T12:25:30","modified_gmt":"2008-12-05T16:25:30","slug":"ry-capitalization-4q08","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=4330","title":{"rendered":"RY Capitalization: 4Q08"},"content":{"rendered":"

RY has released<\/a> its Fourth Quarter 2008 Earnings<\/a> and Supplementary Package<\/a>, so it’s time to recalculate how much room they have to issue new preferred shares – assuming they want to!<\/p>\n

Step One is to analyze their Tier 1 Capital, reproducing the prior format<\/a>:<\/p>\n

\n\n\n\n\n\n\n\n\n\n\n\n
RY Capital Structure
\nOctober, 2007
\n& October, 2008<\/td>\n<\/tr>\n
 <\/td>\n4Q07<\/td>\n4Q08<\/td>\n<\/tr>\n
Total Tier 1 Capital<\/td>\n23,383<\/td>\n25,173<\/td>\n<\/tr>\n
Common Shareholders’ Equity<\/td>\n95.2%<\/td>\n115.0%<\/td>\n<\/tr>\n
Preferred Shares<\/td>\n10.0%<\/td>\n10.6%<\/td>\n<\/tr>\n
Innovative Tier 1 Capital Instruments<\/td>\n14.9%<\/td>\n15.4%<\/td>\n<\/tr>\n
Non-Controlling Interests in Subsidiaries<\/td>\n0.1%<\/td>\n1.4%<\/td>\n<\/tr>\n
Goodwill<\/td>\n-20.3%<\/td>\n-39.6%<\/td>\n<\/tr>\n
Miscellaneous<\/td>\nNA<\/td>\n-2.7%<\/td>\n<\/tr>\n
‘Miscellaneous’ includes ‘Substantial Investments’, ‘Securitization-related deductions’, ‘Expected loss in excess of allowance’ and ‘Other’<\/td>\n<\/tr>\n<\/table>\n<\/div>\n

Next, the issuance capacity (from Part 3 of the introductory series<\/a>):<\/p>\n

\n\n\n\n\n\n\n\n\n\n\n
RY
\nTier 1 Issuance Capacity
\nOctober 2007
\n& October 2008<\/td>\n<\/tr>\n
 <\/td>\n4Q07<\/td>\n4Q08<\/td>\n<\/tr>\n
Equity Capital<\/td>\n(A)<\/td>\n17,545<\/td>\n18,637<\/td>\n<\/tr>\n
Non-Equity Tier 1 Limit<\/td>\n(B=A\/3), 4Q07
(B=0.666*A), 4Q08<\/td>\n		5,848<\/td>\n12,425<\/td>\n<\/tr>\n
Innovative Tier 1 Capital<\/td>\n(C)<\/td>\n3,494<\/td>\n3,879<\/td>\n<\/tr>\n
Preferred Limit<\/td>\n(D=B-C)<\/td>\n2,354<\/td>\n8,546<\/td>\n<\/tr>\n
Preferred Actual<\/td>\n(E)<\/td>\n2,344<\/td>\n2,657<\/td>\n<\/tr>\n
New Issuance Capacity<\/td>\n(F=D-E)<\/td>\n10<\/td>\n5,889<\/td>\n<\/tr>\n
Items A, C & E are taken from the table
\n“Regulatory Capital”
\nof the supplementary information;
\nNote that Item A includes everything except preferred shares and innovative capital instruments<\/em>

\nItem B is as per OSFI Guidelines; the limit was recently increased<\/a>.
Items D & F are my calculations<\/em><\/td>\n<\/tr>\n<\/table>\n<\/div>\n

and the all important Risk-Weighted Asset Ratios!<\/p>\n

\n\n\n\n\n\n\n\n\n\n\n
RY
\nRisk-Weighted Asset Ratios
\nOctober 2007
\n& October 2008<\/td>\n<\/tr>\n
 <\/td>\nNote<\/td>\n2007<\/td>\n4Q08<\/td>\n<\/tr>\n
Equity Capital<\/td>\nA<\/td>\n17,545<\/td>\n18,637<\/td>\n<\/tr>\n
Risk-Weighted Assets<\/td>\nB<\/td>\n247,635<\/td>\n278,579<\/td>\n<\/tr>\n
Equity\/RWA<\/td>\nC=A\/B<\/td>\n7.09%<\/td>\n6.69%<\/td>\n<\/tr>\n
Tier 1 Ratio<\/td>\nD<\/td>\n9.4% <\/td>\n9.0% <\/td>\n<\/tr>\n
Capital Ratio<\/td>\nE<\/td>\n11.5%<\/td>\n11.1%<\/td>\n<\/tr>\n
Assets to Capital Multiple<\/td>\nF<\/td>\n19.8x<\/td>\n20.1x<\/td>\n<\/tr>\n
A is taken from the table “Issuance Capacity”, above
\nB, D, E & F are taken from RY’s Supplementary Report
\nC is my calculation.<\/em><\/td>\n<\/tr>\n<\/table>\n<\/div>\n

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<\/a>). If we follow international practice<\/a> and retain the EL\/ALLL deductions, the ratio is higher:<\/p>\n

\n\n\n\n\n\n\n\n\n\n
RY Adjusted Assets-to-Capital Multiple<\/td>\n<\/tr>\n
Item<\/td>\nValue<\/td>\n<\/tr>\n
Total Regulatory Capital<\/td>\n30,830<\/td>\n<\/tr>\n
EL\/ALLL Deductions<\/td>\n630<\/td>\n<\/tr>\n
Adjusted Capital<\/td>\n31,460<\/td>\n<\/tr>\n
Reported ACM<\/td>\n20.1x<\/td>\n<\/tr>\n
Implied Assets<\/td>\n632,346<\/td>\n<\/tr>\n
Unadjusted ACM<\/td>\n20.5x<\/td>\n<\/tr>\n<\/table>\n<\/div>\n

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:<\/p>\n

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.<\/p><\/blockquote>\n

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.<\/p>\n

Additionally, Total Lending has risen $43-billion; from $437-billion to $480-billion.<\/p>\n

The Earnings Release comments:<\/p>\n

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.<\/p><\/blockquote>\n

Additionally:<\/p>\n

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.<\/p><\/blockquote>\n

Royal Bank needs to do some delevering – an equity issue is indicated, since the Equity \/ RWA ratio is below that of its peers.<\/p>\n","protected":false},"excerpt":{"rendered":"

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 …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25],"tags":[],"class_list":["post-4330","post","type-post","status-publish","format-standard","hentry","category-regulatory-capital"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/4330","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4330"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/4330\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4330"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4330"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4330"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}