Tuesday, November 25, 2008

RBC & TD Bank New Equity Issue

Dow Jones Newswires, 2 December 2008

TD Ameritrade is looking to grow its business through its relationship with Toronto-Dominion , which has 45% stake in the company. In comments made at FBR Capital Markets fall investor conference, AMTD CFO Bill Gerber says the online broker is looking for different ways to get new clients and assets from TD branches, specifically in the US where the Canadian bank has recently rebranded its Commerce Bancorp, retail subsidiaries.
Financial Post, Zena Olijnyk, 25 November 2008

TD Bank’s announcement that it will issue common equity to enhance its capital position is a “pragmatic move,” says Credit Suisse analyst James Bantis, given the current market conditions.

By entering into an agreement with a syndicate of underwriters to issue 30.4 million common shares at $39.50 – for gross proceeds of $1.2-billion, TD’s pro-forma Tier-1 capital ratio has been boosted to about 9%, compared with 8.3% on Nov. 1, while the issuance will be about 4% dilutive to common shareholders.

Given the bank’s pre-announced fourth quarter credit trading losses, and the effects of Basel II on its investment in TD Ameritrade, TD Bank “was in an unfavourable position to deal with unexpected credit market or counterparty shocks going forward.” Now, however, Mr. Bantis says TD is “no longer a noticeable outlier to its Canadian banking peers.”

UBS analyst Peter Rozenberg said he expects the stock will respond favourably, due to reduced capital concerns which should narrow its current valuation discount.. “We think that a 9% Tier 1 is the new standard by which other banks will now be judged,” he said, maintaining his “buy” rating but lowering his target price to $65 from $67. The stock current trades at about $40.

Meanwhile, BMO Capital Markets analyst John Reucassel says that TD’s move to issue equity could “break the ice” for Manuife Financial Corp. “We believe that this could provide Manulife with an opportunity to also raise equity and strengthen its capital position in the face of volatile equity markets and a difficult credit environment in 2009,” he said in a note to clients. A $3-billion equity issue would be about 7% dilutive to earnings per share at Manulife.

A combination of new regulatory capital rules on segregated fund guarantees, a $3-billion bank loan, plus a $3-billion equity issue would provide Manulife with a strong capital position to meet anticipated challenges in 2009 and could help maintain valuation on the shares. He rates Manulife shares a “market perform” and a target price of $30. The stock now trades in the $20 range.
Bloomberg, Andrew Harris, 25 November 2008

A Royal Bank of Canada home-mortgage unit will pay $11 million to resolve U.S. government claims it gave false information about borrowers’ creditworthiness to the Department of Housing and Urban Development.

RBC Mortgage Co.’s accord avoids litigation in the case, said Randall Samborn, spokesman for Chicago U.S. Attorney Patrick Fitzgerald. The government alleged that from 2001 to 2004, RBC Mortgage, formerly known Prism Mortgage, made 219 loans based on false statements, all resulting in foreclosure.

“Mortgage lenders should know that they must maintain the integrity of the lending process so that federally insured mortgages will be available to worthy borrowers,” Fitzgerald said today in a statement. The questionable loans were made in the Rockford and Freeport, Illinois, areas, he said.

Royal Bank of Canada, the biggest Canadian bank, has denied liability, Fitzgerald said. The Toronto-based institution acquired RBC Mortgage in April 2000. RBC Mortgage stopped originating loans in September 2005, the prosecutor said.

RBC spokesman Kevin Foster didn’t immediately return calls seeking comment.

Twenty-five people, including three RBC Mortgage loan officers, have been convicted on criminal charges related to the government’s civil case, Fitzgerald said.
The Globe and Mail, Tara Perkins, 24 November 2008

Canada's two largest banks moved to boost their capital levels yesterday after revealing that they had dipped substantially.

The capital ratios at Toronto-Dominion Bank and Royal Bank of Canada remained well above the minimum amount required by regulators, but the market is demanding larger financial cushions because banks continue to take a pounding from the financial crisis.

TD chief executive officer Ed Clark said he thinks it's the wrong thing to do, but he decided to capitulate. The bank issued $1.2-billion of common equity late yesterday to increase its capital ratios.

High capital levels are the flavour of the day, Mr. Clark said in an interview.

“When the world settles down and people have more certainty, as they look out they will say ‘well, this is kind of ridiculous, we're trying to set too high a target, and frankly it would be better to have the industry lend out more money, even if that meant that the ratios came down,'” he said. “But that's not the current mood. And so, you can try to fight the market, but I would say in these times it's not a good idea to try fighting the market.

“So we said rather than fight, why don't we just do this so we can go back to running the company.”

The announcement came after Citigroup received a rescue package from the U.S. government that included a $20-billion (U.S.) capital injection.

Meanwhile, Bloomberg reported that Goldman Sachs Group plans to sell notes in the first offering of debt backed by the Federal Deposit Insurance Corp.

Handouts from the U.S. government to American financial institutions are inflating capital ratios and market expectations, Mr. Clark suggested.

TD's capital ratio fell significantly on Nov. 1 under global banking rules, Basel II, that require it to change the way it counts its stake in TD Ameritrade. The decision to issue equity is a dramatic about-face for Mr. Clark, who told analysts on a conference call just Thursday that “raising common equity would be extremely difficult” at the moment. He signalled that the bank would rather increase its capital levels using other methods, such as issuing preferred shares.

That's what RBC did yesterday, announcing a $225-million offering of five-year preferred shares. RBC issued $300-million of preferred shares earlier in the quarter, and the two offerings will add $525-million to its Tier 1 capital. The Tier 1 ratio measures a bank's capital against its assets, weighted by the risk they pose, and is the main capital measure used by analysts and regulators.

Canada's banking regulator requires that the ratio stay above 7 per cent, but investors have begun to demand more of a buffer. Capital ratios are a gauge of the financial cushion that banks have.

The new “well capitalized” cutoff point might well be 9 per cent as far as the market is concerned, CIBC World Markets analyst Darko Mihelic suggested in a note to clients.

Canada's regulator recently gave banks new leeway to count more preferred shares and other innovative securities as capital, raising the limit to 40 per cent from 30 per cent.

Earlier yesterday, RBC disclosed that its Tier 1 ratio had fallen to about 9 per cent from 9.5 per cent in the last quarter. The new level was “surprisingly low,” said Mario Mendonca of Genuity Capital Markets.

Rating agency DBRS said that while the level is reasonable for RBC, “it is prudent for the industry, as a whole, to maintain capital levels that are higher than historical levels, given the expectation of deteriorating credit quality and the potential for further writedowns to occur as capital markets remain uncertain.”

The other large banks have not yet disclosed their fourth-quarter Tier 1 ratios.

RBC's ratio for the period which ended Oct. 31 was affected by the sudden and extreme drop in the value of the Canadian dollar. Much of the bank's risk-weighted assets are denominated in U.S. dollars.

TD's capital ratio fell from 9.8 per cent on Oct. 31 to 8.3 per cent on Nov. 1 when new global banking rules that were issued long ago finally took effect. As a result, the bank had to count 50 per cent of its $4.6-billion stake in TD Ameritrade in its ratio. “That meant we immediately lost $2.3-billion of Tier 1 capital, and that's what brought our Tier 1 capital ratio down,” Mr. Clark said. TD had already raised $1.25-billion of Tier 1 capital during the quarter, Mr. Mihelic noted.

TD still has room to issue “more than a couple billion dollars of preferred shares under the rules,” Mr. Clark said.

The decision to issue common shares was made yesterday afternoon, because markets improved since Thursday and investors were signalling they wanted a higher capital ratio, he said.

TD last week disclosed a surprising $350-million after-tax writedown from credit losses and further investment declines that will not show up in results because of new accounting rules.