Doug Alexander of Bloomberg reports:
Canadian Imperial Bank of Commerce plans to spend any extra capital to redeem C$3.16 billion ($3.32 billion) in preferred shares that won’t count as regulatory capital under new banking rules, Chief Executive Officer Gerald McCaughey said.
“We do have an excess of Tier 1 capital today and in the future,” McCaughey, 55, said in an interview today. “A first step in terms of our usage of excess resources will be to reduce instruments that we have that are ineffective in the new environment.”
Canada’s fifth-biggest bank had a so-called Tier 1 capital ratio of 14.3 percent as of Jan. 31, second only to National Bank of Canada. The Toronto-based bank sold more than C$2.4 billion in preferred shares and other notes since August 2008 to shore up its balance sheet during the financial crisis.
…
“We will be looking at our non-common Tier 1 instruments in the near future,” McCaughey said in Winnipeg, Manitoba, after the bank’s annual meeting. “That allows us to deploy a certain amount of excess resources in a fashion that does help earnings per share.”Share buybacks aren’t a priority for the Toronto-based bank, McCaughey said.
“We do not expect in the near term to be deploying that capital in activities such as buybacks,” he said.
This is fascinating. On the surface, it sounds as if they don’t intend any issuance of non-common Tier 1 at all – but I find that very hard to believe.
maybe i’m just being dense, but can you please clarify why you interpret this to suggest that cm won’t issue any non common tier1 that does comply with the new rules…it just sounds to me like they’re suggesting that they will buy back existing prefs a likely a quicker rate than is required by the new rules…thanks
Simply because he’s talking about funding the redemptions with his “excess resources”.
thanks, i see what you’re saying, but i agree with you concerning new issues. it seems unlikely that they’ll be simply content running a smaller balance sheet (particularly over the medium term)…is it your expectation that the banks are going to start issuing preferreds with the conversion language (allowing them to be counted as tier 1) at some point?
is it your expectation that the banks are going to start issuing preferreds with the conversion language (allowing them to be counted as tier 1) at some point?
Yes. They’re just too useful as a means of capitalization to be ignored forever.
[…] entirely of strongly performing bank DeemedRetractibles, almost certainly due to news that CM will prioritize preferred share redemptions as a use of its excess capital. Volume was […]
[…] strange day on the Canadian preferred share market – it appears that the announcement that CM will prioritize preferred share redemptions is having some effect. PerpetualDiscounts gained 20bp, FixedResets were down 4bp and […]
[…] The Implied Volatility for the PWF issues is 26%, while for the GWO issues it is 16%. Note that I consider a reasonable figure for Implied Volatility, in the absence of directional bias, to be in the 15-20% range; a figure outside this range implies some degree of directional bias in the market: lower means that the market believes that eventual redemption is less likely than would be predicted by random chance, a higher figure implies more likely redemption. When the calculation is performed for CM issues, a ludicrously high value is obtained, implying perceived virtual certainty of redemption – which is as it should be. […]