BMO has released its Fourth Quarter Report and Supplementary Package, so it’s time to recalculate how much room they have to issue new preferred shares – assuming they want to, in this environment!
Step One is to analyze their Tier 1 Capital, reproducing the summary I prepared last year:
| BMO Capital Structure October, 2007 & October 2006 |
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| 2007 | 2006 | |
| Total Tier 1 Capital | 16,994 | 16,641 |
| Common Shareholders’ Equity | 83.8% | 86.9% |
| Preferred Shares | 8.5% | 6.3% |
| Innovative Tier 1 Capital Instruments | 14.3% | 13.2% |
| Non-Controlling Interests in Subsidiaries | 0.2% | 0.2% |
| Goodwill | -6.7% | -6.6% |
Next, the issuance capacity (from Part 3 of last year’s series):
| BMO Tier 1 Issuance Capacity October 2007 & October 2006 |
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| 2007 | 2006 | ||
| Equity Capital | (A) | 13,126 | 13,403 |
| Non-Equity Tier 1 Limit | (B=A/3) | 4,375 | 4,468 |
| Innovative Tier 1 Capital | (C) | 2,422 | 2,192 |
| Preferred Limit | (D=B-C) | 1,953 | 2,276 |
| Preferred Y/E Actual | (E) | 1,446 | 1,046 |
| New Issuance Capacity | (F=D-E) | 507 | 880 |
| Items A, C & E are taken from the table “Capital and Risk Weighted Assets” of the supplementary information; Note that Item A includes Goodwill and non-controlling interest Item B is as per OSFI Guidelines Items D & F are my calculations |
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and the all important Risk-Weighted Asset Ratios!
| BMO Risk-Weighted Asset Ratios October 2007 & October 2007 |
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| Note | 2007 | 2006 | |
| Equity Capital | A | 13,126 | 13,403 |
| Risk-Weighted Assets | B | 178,687 | 162,794 |
| Equity/RWA | C=A/B | 7.35% | 8.23% |
| Tier 1 Ratio | D | 9.51% | 10.22% |
| Capital Ratio | E | 11.74% | 11.76% |
| A is taken from the table “Issuance Capacity”, above B, D & E are taken from BMO’s Supplementary Report C is my calculation. |
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Note that while the Equity/RWA ratio and Tier 1 Ratio have both deteriorated over the year, BMO’s Total Capital Ratio has remained constant. This is due to issuance of about $1-billion in Subordinated Debt, which is junior to deposits, but senior to Tier 1 Capital.
It is disappointing to see the deterioration in the Equity/RWA ratio over the year – I consider this to be a measure of the safety of the preferred shares, as it is the “total risk” of the bank’s assets (as defined by the regulators) divided by the value of capital junior to preferreds (which therefore takes the first loss). It is by no means anything to lose a lot of sleep over, as it still remains strong – the preferreds are better protected than the sub-debt of a lot of global banks – but … geez, the direction’s wrong!
I won’t discuss the annual results to any great extent – there will be innumerable reports over the next few months released by analysts with a great deal more time to spend on the matter than I have (although their focus will not be the prospects for the preferred shares), but there is one snippet from the fourth quarter report that bears highlighting:
In the fourth quarter, BMO recorded $318 million ($211 million after tax) of charges for certain trading activities and valuation adjustments related to deterioration in capital markets. The charges included $160 million in respect of trading and structured-credit related positions and preferred shares; $134 million related to Canadian asset-backed commercial paper (ABCP); and $15 million related to capital notes in the Links Finance Corporation (Links) and Parkland Finance Corporation (Parkland) structured investment vehicles.
Well! It isn’t often that preferred share trading & underwriting have enough influence on profit to be worth a mention! It’s a pity they didn’t break out this amount; but investors who have sufferred through a horrendous time for the past six months in the preferred share market may at least take comfort that BMO took a good hit as well!
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