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 analyze their Tier 1 Capital, reproducing the prior format:
| RY Capital Structure October, 2007 & October, 2008 |
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| 4Q07 | 4Q08 | |
| Total Tier 1 Capital | 23,383 | 25,173 |
| Common Shareholders’ Equity | 95.2% | 115.0% |
| Preferred Shares | 10.0% | 10.6% |
| Innovative Tier 1 Capital Instruments | 14.9% | 15.4% |
| Non-Controlling Interests in Subsidiaries | 0.1% | 1.4% |
| Goodwill | -20.3% | -39.6% |
| Miscellaneous | NA | -2.7% |
| ‘Miscellaneous’ includes ‘Substantial Investments’, ‘Securitization-related deductions’, ‘Expected loss in excess of allowance’ and ‘Other’ | ||
Next, the issuance capacity (from Part 3 of the introductory series):
| RY Tier 1 Issuance Capacity October 2007 & October 2008 |
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| 4Q07 | 4Q08 | ||
| Equity Capital | (A) | 17,545 | 18,637 |
| Non-Equity Tier 1 Limit | (B=A/3), 4Q07 (B=0.666*A), 4Q08 |
5,848 | 12,425 |
| Innovative Tier 1 Capital | (C) | 3,494 | 3,879 |
| Preferred Limit | (D=B-C) | 2,354 | 8,546 |
| Preferred Actual | (E) | 2,344 | 2,657 |
| New Issuance Capacity | (F=D-E) | 10 | 5,889 |
| Items A, C & E are taken from the table “Regulatory Capital” of the supplementary information; Note that Item A includes everything except preferred shares and innovative capital instruments 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!
| RY Risk-Weighted Asset Ratios October 2007 & October 2008 |
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| Note | 2007 | 4Q08 | |
| Equity Capital | A | 17,545 | 18,637 |
| Risk-Weighted Assets | B | 247,635 | 278,579 |
| Equity/RWA | C=A/B | 7.09% | 6.69% |
| Tier 1 Ratio | D | 9.4% | 9.0% |
| Capital Ratio | E | 11.5% | 11.1% |
| Assets to Capital Multiple | F | 19.8x | 20.1x |
| A is taken from the table “Issuance Capacity”, above B, D, E & F are taken from RY’s Supplementary Report C is my calculation. |
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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). If we follow international practice and retain the EL/ALLL deductions, the ratio is higher:
| RY Adjusted Assets-to-Capital Multiple | |
| Item | Value |
| Total Regulatory Capital | 30,830 |
| EL/ALLL Deductions | 630 |
| Adjusted Capital | 31,460 |
| Reported ACM | 20.1x |
| Implied Assets | 632,346 |
| Unadjusted ACM | 20.5x |
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:
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.
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.
Additionally, Total Lending has risen $43-billion; from $437-billion to $480-billion.
The Earnings Release comments:
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.
Additionally:
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.
Royal Bank needs to do some delevering – an equity issue is indicated, since the Equity / RWA ratio is below that of its peers.
[…] reviewing RY’s 4Q08 Capitalization, I commented: Royal Bank needs to do some delevering – an equity issue is indicated, since the […]