BMO has released its Fourth Quarter 2008 Report and Supplementary Package. Their earnings were good, so maybe there will be a slight cessation of the agonizing over whether their preferred dividend will be eliminated! I expect that tomorrow I will receive my first eMail regarding 1Q09 … ‘Well, what if there’s a nuclear war and all their assets are destroyed? Maybe I should sell!’.
Anyway 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 prior format:
BMO Capital Structure October, 2007 & October, 2008 |
||
4Q07 | 4Q08 | |
Total Tier 1 Capital | 16,994 | 18,729 |
Common Shareholders’ Equity | 83.8% | 85.3% |
Preferred Shares | 8.5% | 10.7% |
Innovative Tier 1 Capital Instruments | 14.3% | 13.3% |
Non-Controlling Interests in Subsidiaries | 0.2% | 0.2% |
Goodwill | -6.7% | -8.7% |
Miscellaneous | NA | -0.7% |
Next, the issuance capacity (from Part 3 of the introductory series):
BMO Tier 1 Issuance Capacity October 2007 & October 2008 |
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4Q07 | 4Q08 | ||
Equity Capital | (A) | 13,126 | 14,363 |
Non-Equity Tier 1 Limit | (B=A/3), 4Q07 (B=0.666*A), 2Q08 |
4,375 | 9,566 |
Innovative Tier 1 Capital | (C) | 2,422 | 2,486 |
Preferred Limit | (D=B-C) | 1,953 | 7,080 |
Preferred Actual | (E) | 1,446 | 1,996 |
New Issuance Capacity | (F=D-E) | 507 | 5,084 |
Items A, C & E are taken from the table “Basel II Regulatory Capital and Risk Weighted Assets” of the supplementary information; Note that Item A includes Goodwill and non-controlling interest; it is equal to “Net Tier 1 Capital less preferred shares & Innovative 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!
BMO Risk-Weighted Asset Ratios October 2007 & October 2008 |
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Note | 2007 | 4Q08 | |
Equity Capital | A | 13,126 | 14,363 |
Risk-Weighted Assets | B | 178,687 | 191,608 |
Equity/RWA | C=A/B | 7.35% | 7.49% |
Tier 1 Ratio | D | 9.51% | 9.77% |
Capital Ratio | E | 11.74% | 12.71% |
Assets to Capital Multiple | F | 17.17x | 16.42x |
A is taken from the table “Issuance Capacity”, above B, D & E are taken from BMO’s Supplementary Report C is my calculation. F is from OSFI (4Q07) and BMO’s Supplementary Report (4Q08) |
BMO’s supplementary data discloses a “Tangible common equity-to-risk-weighted-assets” figure that sounds like it should be equal to my “Equity/RWA” in the table. Their figure is 7.47%; it is not immediately clear to me how this figure is calculated, but it’s pretty close!
Capital ratios deteriorated somewhat from 3Q08 due largely to an increase of Risk-Weighted $10-billion in “Corporate including specialized lending”. The increase in leverage (Q4 vs Q3) indicated by the Assets to Capital multiple was largely due to a $22-billion increase in Derivative Instrument Assets, $12-billion in Securities and $7-billion in loans, funded by a $9-billion increase in deposits, $24-billion in Derivative Instrument Liabilities. The gross-up in Derivatives appears (page 24 of the supplementary data) to be due to increases in OTC Interest Rate Swaps ($10-billion) and Foreign Exchange ($10-billion) [page 26 of the supplementary]. Unfortunately, there is no indication of the collateralization and/or counterparty strength of these exposures, so we’ll have to leave that as a question mark for now.
I note as well that there is no adjustment to capital for “Expected loss in excess of allowance”, indicating that their ALLL is again equal to the EL which is indicative of conservative approach to assessing credit write-offs. It is also noteworthy that their “Securities, Other Than Trading” includes $11-billion in Canadian Mortgage Backed Securities – which are eligible for the $50-billion buyback discussed on November 12 – this represents an increase of $2-billion from 3Q08.
All in all, it was a solid quarter. I would spend more time on earnings if I was an equity guy, but I’m not: I’m a fixed income guy focussing on whether or not they’ll go broke. Not very soon they won’t! The common dividend payout ratio remains high at 66.2%, but I agree with them that it’s “good overall performance in the context of current economic and market conditions”.
Update, 2008-11-28 The following query …
I note that there has been a significant gross-up in your balance sheet with respect to derivatives.
Do you have a table available showing the degree to which your derivative-based assets are collateralized or backed up by the credit strength of your counterparties? Or other information that would allow an assessment of the quality of these assets?
… has been met with the following response:
Thank you for your question.
Unfortunately we do not disclose information regarding the strength of our counterparties.
However, in Q4 the increase in derivatives is due mainly to the impact of the stronger U.S. Dollar. Page 29 of the Q4 supplemental package shows the exposure by risk weight and comparing quarter over quarter the actual risk weighting has not largely changed.
Our supplemental package is available at:
http://www2.bmo.com/ir/qtrinfo/1/2008-q4/Suppq408.pdfhttp://www2.bmo.com
/ir/qtrinfo/1/2008-q4/Suppq408.pdf.
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