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The Bottom for Canadian Banks?

I had an interesting conversation with an investing peer Thursday evening about the unexpected change in activity this week in the preferred share and debt markets.

Experienced investors will often make a reference to the fact that, “The Debt Market Knows All.”

What is suprising is not the fact that TD Bank (TD), Royal Bank (RY) and CIBC (CM) chose to issue new series of 5-Year Rate Reset preferred shares, but instead the terms of those issues. While many companies have struggled to raise cost effective capital in this difficult economic environment the Canadian banks have been able to raise preferred equity with relative ease.

If you took the time to examine the preferred issues over the past 10 months or so there are a few interesting observations:

  • TD and RY have each raised over $1B in equity
  • RY has continuously issued preferreds at a discount to its peers
  • Each 5-Year Rate Reset issue has progressively increased either the initial yield or subsequent reset yield as the cost of capital has increased

The trend, of progressively rising reset yields appeared to have stopped with the most recent three issues with TD, RY and CM’s reset yields dropping dramatically from their previous issues.
These “less lucrative terms” as my friend Scott pointed out might be marking the bottom for Canadian banks as they report quarterly earnings and could be raising capital not because they need to, but because they choose to. All of them touched new 52-week lows and quarterly earnings, as of yet, haven’t been disastrous.

Only time will tell if this is the bottom, but with valuations tumbling and yields near the historically high end for many of the banks I took the opportunity to increase my positions in RY and Bank of Nova Scotia (BNS) on Tuesday.

Disclosure: I hold shares in BNS, TD & RY

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{ 4 comments… add one }
  • Thicken My Wallet March 3, 2009, 10:29 am

    So the question becomes with the recent quarterly results and money getting cheaper, will the banks be seeking to raise any more capital?

  • Nurseb911 March 3, 2009, 1:26 pm

    I think the established trend by RY and TD answers that question. Since both have been able to raise equity at a discount to their peers (significant for RY) and have large US operations I think that they continue to raise more equity through preferred shares as a conservative approach to maintaining their capital ratios. They’re issuing $200-250M per capital raise so they’re ensuring a good fill by not seeming desperate or trying to fill a deep pot. At some point we might see some difficulty filling those preferred issues, but for the moment retail investors seem eager to buy them up without hesitation.

  • Anonymous March 10, 2009, 10:06 am

    Would we be able to see a full
    page access re the google documents.
    excellent article

  • Nurseb911 March 10, 2009, 11:48 am

    Anon – I’ve updated the post to include a full screen link so that you can view all the information. See the link directly beneath the imbedded table.
    Thanks for your comment/suggestion

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