Canadian banks quietly rebuilding capital
It doesn’t have any of the FRONT PAGE excitement of a large, multi-billion dollar common share offering, but several Canadian chartered banks are busy building their capital base, at whatever price the market will bear. It took the news release of a late night bank debt offering last evening to make me wonder: who has been up to what in this department? And what are they paying for the pleasure of replacing the capital that has just been written down due to the sundry natural gas/credit derivative/sub prime/SIV/increased PCL losses of recent months?
Here’s a smattering of examples.
$250 million of preferred shares yielding 5.60%
$2.5 billion of 10 year medium term notes yielding 5.382%
$1 billion of 10 year subordinated medium term notes yielding 4.84%
$1 billion of 10 year subordinated notes yielding 5.25%
Bank of Montreal
$250 million of perpetual preferred shares yielding 5.80%
$900 million of 15 year subordinated notes yielding 6.17%
Oddly, BMO announced on December 27, 2007 that it was repaying $150 million of 5.75% Series A MTN debentures that weren’t due to mature until 2013. BMO cited “the high relative yield to current market rates as the main reason for the redemption”. What a difference a few weeks makes, as BMO just issued new debt at 42 basis points higher than what they were paying on the recalled the 2013 debentures. Let’s do the math: 42 bps times $150 million times five years = $3.15 million of incremental interest.
As my Dad once said, “A few million? Banks spill that over lunch.” I guess times haven’t changed.
For those who are looking for reasons to support bank mergers in Canada (see prior posts “Matt Barrett the real winner in ABN Amro deal” April 23-07, “Is BofC Governor A Blog Reader” December 11-06 and “Mellon and BONY merge” December 4-06), you need look no further than the range of funding costs being accorded to the various banks. It should be no surprise that the largest banks have the lowest funding costs – a benefit that accrues to either that banks shareholders or its customers; perhaps both.
(disclosure – we own BMO, BNS, and TD in our household)
I see CIBC’s new equity isn’t included in your list(which would have the highest cost of all, no doubt?)
Right you are, of course. The post’s first sentence mentioned multi-billion $ equity offerings being front page news (read: CIBC). Sorry if it was too subtle.
I note that the day after this post a very similar post showed up on the Globe and Mail Streetwise Blog by Andrew Willis.