Credit Crunch May Force BMO, Scotiabank and Royal Bank to Issue More Capital

Three more Canadian banks could be forced to issue more capital to tighten up straining balance sheets, says Citigroup analyst Shannon Cowherd. The banks — Bank of Montreal (BMO), Bank of Nova Scotia (BNS) and Royal Bank of Canada (RY) — are trying to avoid more credit crunch write-downs and have significant lending obligations to support too. As a result, this is putting pressure on their regulated capital ratios which could force them to seek more equity.

“Based on our analysis and likely obligations to extend various forms of lending obligations, we think BMO, Scotiabank and RBC are likely to issue some form of capital to shore up balance sheet and regulatory capital ratios,” Ms. Cowherd said in a note.

The banks have all been hit by subprime related write-downs. Their balance sheet capital ratios — regulated calculations of the proportion of capital the banks must have on their balance sheets — are also out of whack because of the implementation of new international rules, known as Basel II, which force them to calculate the ratios different to how they had done it in the past. The banks are well capitalized, Ms. Cowherd says, but they are inching closer to being in breach of the regulations.

It is not clear if Ms. Cowherd was factoring in BMO’s announcement that it has restructured two troubled trusts that had threatened to cost the bank C$1.5-billion, which is a coup that some analysts say reduces the likelihood BMO will need to raise more capital. But if the three banks do issue new equity, their actions will ease concerns about more writedowns but they will dilute the interests of existing shareholders. The banks will also join several other banks that have been forced to seek more capital to deal with the credit crunch.

Canadian Imperial Bank of Commerce (CM) got an emergency infusion of C$2.9-billion of new equity earlier this year to bolster its books after taking massive subprime writedowns. A number of U.S. banks too have issued new capital to help them deal with the impact of the credit crunch.

Comments

[crispos]

Ms. Cowherd is being the curve. The BMO problems have been rectified and the Royal and the Scotia never had a problem.