WINNIPEG, May 28 /PRNewswire-FirstCall/ — Today Artis Real Estate Investment Trust (”Artis” or “the REIT”) issued its financial results and achievements for the three month period ended March 31, 2008.
FINANCIAL AND OPERATIONAL HIGHLIGHTS
- Q1-08 revenue increased 94.9% ($16.7 million) over Q1-07 to reach a
total of $34.3 million.
- Q1-08 property net operating income (”Property NOI”) increased 104.6%
($12.2 million) over Q1-07 to reach a total of $23.8 million.
- Q1-08 distributable income (”DI”) increased 123.8% ($7.3 million)
over Q1-07 to $13.2 million ($0.41 per unit).
- Q1-08 funds from operations (”FFO”) increased 140.1% ($7.6 million)
over Q1-07 to $13.0 million.
- In Q1-08, Artis recorded its fourth consecutive quarterly increase in
FFO per unit results. Q1-08 FFO per unit increased 42.9% over Q1-07
to reach a new high of $0.40 per unit.
- Q1-08 same Property NOI (excluding non-cash revenue adjustments)
increased 5.4% over Q1-07 as a result of positive absorption of space
in the properties and rate increases achieved on lease rollovers,
particularly in Alberta.
- $41.1 million of accretive acquisitions in western Canada were
completed in Q1-08.
- At March 31, 2008, mortgage debt-to-gross book value (”GBV”) was
50.1% compared to 49.2% at December 31, 2007 and 51.6% at March 31,
2007.
- At March 31, 2008, the interest coverage ratio was 2.4.
- At March 31, 2008, portfolio occupancy increased to 97.5% (98.0%
including committed space) from 97.4% at December 31, 2007.
SELECTED FINANCIAL INFORMATION
————————————————————————-
$000’s, except per unit amounts
Three month period ended March 31 2008 2007
————————————————————————-
Revenue $ 34,319 $ 17,609
Property NOI 23,789 11,629
DI 13,223 5,908
FFO 12,972 5,403
DI per unit (basic) 0.41 0.31
FFO per unit (basic) 0.40 0.28
Distributions 0.26 0.26
FFO payout ratio 65.0% 92.9%
————————————————————————-
$000’s March 31, December 31,
2008 2007
————————————————————————-
Total assets $ 1,201,864 $ 1,176,448
GBV 1,288,304 1,247,047
Mortgages, loans and bank indebtedness 644,904 612,996
Debt-to-GBV 50.1% 49.2%
————————————————————————-
“In Q1-08, Artis REIT continued its strong performance. Selective acquisition activity continued as planned, while our leverage remained in the 50% range,” said Armin Martens, President and Chief Executive Officer of Artis. “We are particularly pleased to report that our FFO per unit results were $0.40 this quarter; our best results to date. We also have an excellent mortgage maturity profile and continue to enjoy a strong embedded growth profile.”
2008 Acquisition Highlights:
In Q1-08, Artis acquired four commercial properties in western Canada, adding approximately 211,000 square feet of leasable area to the portfolio, as follows:
————————————————————————-
Square Feet
Acquisition of Leasable
Property Location Date Type Area (000’s)
————————————————————————-
King Edward Coquitlam, January 15,
Centre BC 2008 Retail 81
————————————————————————-
Leon’s Nanaimo, February 1,
Building BC 2008 Retail 54
————————————————————————-
Estevan Estevan, March 20,
Sobeys SK 2008 Retail 38
————————————————————————-
Moose Jaw Moose Jaw, March 20,
Sobeys SK 2008 Retail 38
————————————————————————-
Total 211
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Readers are invited to view more details on these properties on our web site at .
Operational Improvements and Internal Growth:
As a result of strong on-going leasing and renewal activity, Artis achieved overall portfolio occupancy of 97.5% (98.0% including committed space) at March 31, 2008, up from 97.4% at December 31, 2007. On a same property basis, occupancy increased from 96.4% at March 31, 2007 to 96.8% at March 31, 2008.
Quarterly growth in same Property NOI (excluding GAAP adjustments for straight-line rent and above- and below-market rent adjustments) was 5.4%. The same property growth was driven primarily by increases in base rental rates achieved on lease turnovers. In Q1, the weighted average rental rates achieved on leases renewed in the period were approximately 30% higher than the rates in-place at expiry.
More details on lease expiries and average in-place rents can be found in the REIT’s March 31, 2008 supplemental information package. The supplemental information package, as well as the audited annual consolidated financial statements for the years ended December 31, 2007 and 2006, the unaudited interim consolidated financial statements for the periods ended March 31, 2008 and 2007, management’s discussion and analysis for March 31, 2008, and the 2007 annual information form can be accessed from the REIT’s web site at .
2008 Outlook
Management anticipates that there will be additional growth in revenues, Property NOI, DI and FFO as the full impact of Q1-08 acquisitions are realized in later periods.
On April 15, 2008 Artis acquired Edson Shoppers, located in Edson, Alberta and Raleigh Shopping Centre, located in Winnipeg, Manitoba in two separate transactions for a total of $7.35 million. At the existing level of debt to GBV and with funds available on its credit facility, Artis has sufficient capacity to pursue further acquisition opportunities in its target markets in 2008.
“In 2008, Artis will continue to focus primarily on executing its internal growth plan”, said Martens. “Indeed approximately 70% of our 2008 leasing program is already committed.”
Artis continues to have a very strong embedded growth profile. At March 31, 2008, Artis estimates that the gap between in-place rental rates and current market rental rates on the 662,000 square feet of leases expiring in the balance of 2008 is over $7 per square foot on average; in-place rents are approximately 38% below market rates. As these leases expire and are renewed at current market rates, this will be an additional source of growth in revenues, property NOI, DI and FFO.
Artis has minimal exposure to financing risk in the near term, with 2% of its mortgage debt maturing late in 2008 and 4% maturing in 2009. The REIT does not anticipate difficulty in renewing or replacing these mortgages.
Upcoming Webcast and Conference Call:
Interested parties are invited to participate in a conference call with management at 1:00 p.m. EST today. In order to participate, please dial 1-416-641-6135 or 1-866-542-4262. You will be required to identify yourself and the organization on whose behalf you are participating.
Alternatively, you may access the simultaneous webcast by following the link from our website at . Prior to the webcast, you may follow the link to confirm you have the right software and system requirements.
If you cannot participate on May 15, 2008, a replay of the conference call will be available by dialing 1-416-695-5800 or 1-800-408-3053 and entering passcode # 3257804. The replay will be available until May 22, 2008. The webcast will be archived 24 hours after the end of the conference call and will be accessible for 90 days.
Artis is a growth oriented real estate investment trust focused exclusively on commercial properties located in primary and growing secondary markets in western Canada, particularly in Alberta. The REIT’s goal is to provide unitholders the opportunity to invest in high quality western Canadian office, retail and industrial properties, as well as to provide monthly cash distributions that are stable, tax efficient, and growing over time.
Artis owns approximately $1.3 billion of commercial property, comprising approximately 6.4 million square feet of leasable area in 86 properties. Leasable area is approximately 30.7% in Manitoba, 7.8% in Saskatchewan, 55.9% in Alberta, and 5.6% in B.C.; by asset class the portfolio is 33.0% retail, 41.6% office and 25.4% industrial.
The REIT’s Distribution Reinvestment Plan (”DRIP”) allows unitholders to have their monthly cash distributions used to purchase trust units without incurring commission or brokerage fees, and receive bonus units equal to 4% of their monthly cash distributions. More information can be obtained at .
Non-GAAP Performance Measures
DI, Property NOI and FFO are non GAAP measures commonly used by Canadian income trusts as an indicator of financial performance. Management uses DI, Property NOI and FFO to analyze operating performance. DI, Property NOI and FFO may not be comparable to similar measures presented by other issuers. DI, Property NOI and FFO are not intended to represent operating profits for the period or from a property nor should any such measure be viewed as an alternative to net income, cash flow from operating activities or other measures of financial performance calculated in accordance with GAAP.
Cautionary Statements
The comments and highlights herein should be read in conjunction with the consolidated financial statements and management’s discussion and analysis for the same period. These documents are available on the SEDAR website at . They are also posted on the Artis web site at .
This press release contains forward looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward looking statements. Without limiting the foregoing, the words “expects”, “anticipates”, “intends”, “estimates”, “projects”, and similar expressions are intended to identify forward looking statements.
Artis is subject to significant risks and uncertainties which may cause the actual results, performance or achievements of the REIT to be materially different from any future results, performance or achievements expressed or implied in these forward looking statements. Such risk factors include, but are not limited to, risks associated with real property ownership, availability of cash flow, general uninsured losses, future property acquisitions, environmental matters, tax related matters, debt financing, unitholder liability, potential conflicts of interest, potential dilution, reliance on key personnel, changes in legislation and proposed changes in the tax treatment of trusts. Artis cannot assure investors that actual results will be consistent with any forward looking statements and Artis assumes no obligation to update or revise such forward looking statements to reflect actual events or new circumstances. All forward looking statements contained in this press release are qualified by this cautionary statement.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Income
For the three months ended
————————————————————————-
January 31 October 31 January 31
(Unaudited) ($ millions) 2008 2007 2007
————————————————————————-
Interest income
loans $ 3,825 $ 3,668 $ 3,377
Securities 1,168 1,071 1,131
Securities purchased
under resale agreements 229 320 330
Deposits with banks 319 303 251
————————————————————————-
5,541 5,362 5,089
————————————————————————-
Interest expense
Deposits 3,078 2,968 2,526
Subordinated debentures 24 23 33
Capital instrument liabilities 9 13 13
Other 616 642 741
————————————————————————-
3,727 3,646 3,313
————————————————————————-
Net interest income 1,814 1,716 1,776
Provision for credit losses (Note 3) 111 95 63
————————————————————————-
Net interest income after
provision for credit losses 1,703 1,621 1,713
————————————————————————-
Other income
Card revenues 95 92 93
Deposit and payment services 207 204 206
Mutual funds 78 78 68
Investment management,
brokerage and trust services 186 185 188
Credit fees 133 126 132
Trading revenues (44) (67) 149
Investment banking 164 164 194
Net gain on securities, other than trading 20 148 127
Other 186 432 176
————————————————————————-
1,025 1,362 1,333
————————————————————————-
Net interest and other income 2,728 2,983 3,046
————————————————————————-
Non-interest expenses
Salaries and employee benefits 978 963 1,003
Premises and technology 327 362 327
Communications 75 76 73
Advertising and business development 69 94 76
Professional 45 81 45
Business and capital taxes 14 33 39
Other 161 183 161
————————————————————————-
1,669 1,792 1,724
————————————————————————-
Income before the undernoted 1,059 1,191 1,322
Provision for income taxes 193 204 277
Non-controlling interest in
net income of subsidiaries 31 33 25
————————————————————————-
Net income $ 835 $ 954 $ 1,020
————————————————————————-
————————————————————————-
Preferred dividends paid 21 16 8
————————————————————————-
Net income available
to common shareholders $ 814 $ 938 $ 1,012
————————————————————————-
————————————————————————-
Average number of common
shares outstanding (millions):
Basic 985 983 991
Diluted 992 991 1,001
————————————————————————-
Earnings per common share (in dollars):
Basic $ 0.83 $ 0.95 $ 1.02
Diluted $ 0.82 $ 0.95 $ 1.01
————————————————————————-
Dividends per common share (in dollars) $ 0.47 $ 0.45 $ 0.42
————————————————————————-
————————————————————————-
Certain comparative amounts have been reclassified to conform with
current period presentation.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Consolidated Balance Sheet
As at
————————————————————————-
January 31 October 31 January 31
(Unaudited) ($ millions) 2008 2007 2007
————————————————————————-
Assets
Cash resources
Cash and non-interest-bearing
deposits with banks $ 2,816 $ 2,138 $ 2,508
Interest-bearing deposits with banks 29,431 23,011 20,277
Precious metals 4,164 4,046 3,599
————————————————————————-
36,411 29,195 26,384
————————————————————————-
Securities
Trading 60,702 59,685 64,307
Available-for-sale 32,992 28,426 36,037
Equity accounted investments 788 724 171
————————————————————————-
94,482 88,835 100,515
————————————————————————-
Securities purchased
under resale agreements 20,362 22,542 24,129
————————————————————————-
Loans
Residential mortgages 105,532 102,154 92,055
Personal and credit cards 43,513 41,734 39,757
Business and government 101,389 85,500 83,067
————————————————————————-
250,434 229,388 214,879
Allowance for credit losses (Note 3) 2,451 2,241 2,620
————————————————————————-
247,983 227,147 212,259
————————————————————————-
Other
Customers’ liability under acceptances 12,518 11,538 10,431
Derivative instruments 25,217 21,960 12,529
Land, buildings and equipment 2,460 2,271 2,344
Goodwill 1,266 1,134 1,121
Other intangible assets 273 273 317
Other assets 8,450 6,615 6,441
————————————————————————-
50,184 43,791 33,183
————————————————————————-
$449,422 $411,510 $396,470
————————————————————————-
————————————————————————-
Liabilities and shareholders’ equity
Deposits
Personal $108,219 $100,823 $ 96,823
Business and government 175,772 161,229 148,995
Banks 32,806 26,406 31,201
————————————————————————-
316,797 288,458 277,019
————————————————————————-
Other
Acceptances 12,518 11,538 10,431
Obligations related to securities
sold under repurchase agreements 32,967 28,137 29,612
Obligations related
to securities sold short 13,570 16,039 18,201
Derivative instruments 25,046 24,689 12,106
Other liabilities 25,333 21,138 25,725
Non-controlling interest in subsidiaries 548 497 491
————————————————————————-
109,982 102,038 96,566
————————————————————————-
Subordinated debentures (Note 4) 2,150 1,710 2,340
————————————————————————-
Capital instrument liabilities 500 500 750
————————————————————————-
Shareholders’ equity
Capital stock
Preferred shares (Note 5) 1,865 1,635 945
Common shares and contributed surplus 3,614 3,566 3,520
Retained earnings 17,809 17,460 16,376
Accumulated other
comprehensive income (loss) (Note 6) (3,295) (3,857) (1,046)
————————————————————————-
19,993 18,804 19,795
————————————————————————-
$449,422 $411,510 $396,470
————————————————————————-
————————————————————————-
Certain comparative amounts have been reclassified to conform with
current period presentation.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Consolidated Statement of Changes in Shareholders’ Equity
For the three months ended
————————————————————————-
January 31 January 31
(Unaudited) ($ millions) 2008 2007
————————————————————————-
Preferred shares
Balance at beginning of period $ 1,635 $ 600
Issued 230 345
————————————————————————-
Balance at end of period 1,865 945
————————————————————————-
————————————————————————-
Common shares and contributed surplus
Common shares
Balance at beginning of period 3,566 3,425
Issued 48 95
————————————————————————-
Balance at end of period 3,614 3,520
————————————————————————-
————————————————————————-
Retained earnings
Balance at beginning of period 17,460 15,843
Cumulative effect of adopting
new accounting policies - (61)(1)
————————————————————————-
17,460 15,782
Net income 835 1,020
Dividends:
Preferred (21) (8)
Common (463) (416)
Other (2) (2)
————————————————————————-
Balance at end of period 17,809 16,376
————————————————————————-
————————————————————————-
Accumulated other comprehensive income (loss)
Balance at beginning of period (3,857) (2,321)
Cumulative effect of adopting
new accounting policies - 683(1)
Other comprehensive income 562 592
————————————————————————-
Balance at end of period (3,295) (1,046)
————————————————————————-
————————————————————————-
Total shareholders’ equity at end of period $ 19,993 $ 19,795
————————————————————————-
————————————————————————-
Consolidated Statement of Comprehensive Income
For the three months ended
————————————————————————-
January 31 January 31
(Unaudited) ($ millions) 2008 2007
————————————————————————-
Comprehensive income
Net income $ 835 $ 1,020
————————————————————————-
Other comprehensive income (loss),
net of income taxes (Note 6):
Net change in unrealized
foreign currency translation losses 885 522
Net change in unrealized gains
on available-for-sale securities (60) 48
Net change in gains (losses) on derivative
instruments designated as cash flow hedges (263) 22
————————————————————————-
Other comprehensive income 562 592
————————————————————————-
Comprehensive income $ 1,397 $ 1,612
————————————————————————-
————————————————————————-
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) Refer to Note 1 for discussion of new accounting policies related to
financial instruments adopted in the first quarter of 2007.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Condensed Consolidated Statement of Cash Flows
For the three months ended
————————————————————————-
Sources (uses) of cash flows January 31 January 31
(Unaudited) ($ millions) 2008 2007
————————————————————————-
Cash flows from operating activities
Net income $ 835 $ 1,020
Adjustments to determine net cash flows
from (used in) operating activities 239 (49)
Net accrued interest receivable and payable 244 118
Trading securities (331) (1,192)
Derivative assets (1,127) 181
Derivative liabilities (1,742) (1,178)
Other, net 854 (162)
————————————————————————-
(1,028) (1,262)
————————————————————————-
Cash flows from financing activities
Deposits 17,330 7,407
Obligations related to securities
sold under repurchase agreements 4,229 (4,636)
Obligations related to securities sold short (2,766) 4,650
Preferred shares issued 230 345
Common shares issued 36 65
Subordinated debentures issued 394 -
Cash dividends paid (484) (424)
Other, net 1,426 923
————————————————————————-
20,395 8,330
————————————————————————-
Cash flows from investing activities
Interest-bearing deposits with banks (5,179) (1,537)
Securities purchased under resale agreements 2,537 1,576
Loans, excluding securitizations (13,510) (7,749)
Loan securitizations 550 848
Securities, other than trading, net (2,035) 166
Land, buildings and equipment, net of disposals (95) (120)
Other, net(1) (1,046) (82)
————————————————————————-
(18,778) (6,898)
————————————————————————-
Effect of exchange rate changes
on cash and cash equivalents 89 58
————————————————————————-
Net change in cash and cash equivalents 678 228
Cash and cash equivalents at beginning of period 2,138 2,280
————————————————————————-
Cash and cash equivalents at end of period(2) $ 2,816 $ 2,508
————————————————————————-
————————————————————————-
Cash disbursements made for:
Interest $ 3,653 $ 3,794
Income taxes $ 331 $ 283
————————————————————————-
————————————————————————-
Certain comparative amounts have been reclassified to conform with
current period presentation.
(1) For the three months ended January 31, 2008, comprises investments
in subsidiaries, net of cash and cash equivalents at the date of
acquisition of $35 (January 31, 2007 - $3), and net of non-cash
consideration of common shares issued from treasury of nil
(January 31, 2007 - $4).
(2) Represents cash and non-interest-bearing deposits with banks.
The accompanying notes are an integral part of these interim consolidated
financial statements.
Notes to the Interim Consolidated Financial Statements (Unaudited)
These interim consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). They should be read in conjunction with the consolidated financial statements for the year ended October 31, 2007. The significant accounting policies used in the preparation of these interim consolidated financial statements are consistent with those used in the Bank’s year-end audited consolidated financial statements.
1. Changes in accounting policies
There were no new accounting policies adopted in the current fiscal
year. Note 1 to the Bank’s 2007 annual audited consolidated financial
statements describes accounting policy changes.
2. Sales of loans through securitizations
The Bank securitizes residential mortgages through the creation of
mortgage-backed securities. No credit losses are expected, as the
mortgages are insured. For the quarter ended January 31, 2008, the
key weighted-average assumptions used to measure the fair value at
the dates of securitization were a prepayment rate of 20%, an excess
spread of 1.1% and a discount rate of 4.3%. The following table
summarizes the Bank’s sales.
For the three months ended
———————————————————————
January 31 October 31 January 31
($ millions) 2008 2007 2007
———————————————————————
Net cash proceeds(1) $ 550 $ 992 $ 848
Retained interest 16 21 32
Retained servicing liability (4) (7) (7)
———————————————————————
562 1,006 873
Residential mortgages securitized 555 1,010 861
———————————————————————
Net gain (loss) on sale $ 7 $ (4) $ 12
———————————————————————
———————————————————————
(1) Excludes insured mortgages which were securitized and retained by
the Bank of $1,351 for the three months ended January 31, 2008
(October 31, 2007 - $1,267; January 31, 2007 - $526). As at
January 31, 2008, the outstanding balance of mortgage-backed
securities was $5,523, and these assets have been classified as
available-for-sale securities.
3. Impaired loans and allowance for credit losses
(a) Impaired loans
As at
———————————————————————
January 31 October 31
2008 2007
———————————————————————
Specific
($ millions) Gross allowance(1) Net Net
———————————————————————
By loan type:
Residential mortgages $ 457 $ 157 $ 300 $ 203
Personal and
credit cards 524 503 21 51
Business and
government 861 493 368 347
———————————————————————
Total $ 1,842 $ 1,153 $ 689 $ 601
———————————————————————
———————————————————————
By geography:
Canada $ 280 $ 231
United States 10 4
Other International 399 366
———————————————————————
Total $ 689 $ 601
———————————————————————
———————————————————————
(1) The specific allowance for impaired loans evaluated on an
individual basis totalled $494 (October 31, 2007 - $383).
(b) Allowance for credit losses
The following table summarizes the change in the allowance for
credit losses.
For the three months ended
———————————————————————
January 31 October 31 January 31
($ millions) 2008 2007 2007
———————————————————————
Balance at beginning of period $ 2,252 $ 2,433 $ 2,618
Write-offs (194) (215) (168)
Recoveries 51 49 34
Provision for credit losses 111 95 63
Other, including foreign
exchange adjustment 242 (110) 84
———————————————————————
Balance at the end
of period(1)(2)(3) $ 2,462 $ 2,252 $ 2,631
———————————————————————
(1) As at January 31, 2008, includes $177 of specific allowance
relating to acquisitions of new subsidiaries (October 31, 2007 -
$54; January 31, 2007 - $26), which may change as the valuation
of the acquired loan assets is finalized.
(2) As at January 31, 2008, $11 has been recorded in other
liabilities (October 31, 2007 - $11; January 31, 2007 - $11).
(3) As at January 31, 2008, the general allowance for credit losses
was $1,298 (October 31, 2007 - $1,298; January 31, 2007 -
$1,323).
4. Subordinated debentures
Subordinated debentures totaling $300 million were issued on
January 31, 2008, and will mature on January 31, 2018. Interest is
payable semi-annually in arrears, commencing on July 31, 2008, at
5.30% per annum until January 31, 2013. From January 31, 2013, until
maturity, interest is payable at an annual rate equal to the 90-day
Bankers’ Acceptance Rate plus 1.90%, payable quarterly commencing
April 30, 2013. The subordinated debentures are redeemable by the
Bank, at any time subject to written approval of the Superintendent
of Financial Institutions Canada.
The subordinated debentures qualify as Tier 2B capital.
Subordinated debentures totaling (Yen)10 billion were issued on
November 20, 2007, and will mature on November 20, 2037. Interest is
payable semi-annually in arrears, commencing on May 20, 2008, at an
annual rate of 3.015%. The subordinated debentures are redeemable by
the Bank on November 20, 2017, with the prior written approval of the
Superintendent of Financial Institutions Canada. The subordinated
debentures qualify as Tier 2B capital.
5. Capital management
The Bank has a capital management process in place to measure, deploy
and monitor its available capital and assess its adequacy. This
capital management process aims to achieve three major objectives:
exceed regulatory thresholds and meet longer-term internal capital
targets, maintain strong credit ratings and provide the Bank’s
shareholders with acceptable returns.
Capital is managed in accordance with the Board-approved Capital
Management Policy. Senior executive management develop the capital
strategy and oversee the capital management processes of the Bank.
The Bank’s Finance, Group Treasury and Global Risk Management (GRM)
groups are key in implementing the Bank’s capital strategy and
managing capital. Capital is managed using both regulatory capital
measures and internal metrics.
Although the Bank is subject to several capital regulations in the
different business lines and countries in which the Bank operates,
capital adequacy is managed on a consolidated Bank basis. The Bank
also takes measures to ensure its subsidiaries meet or exceed local
regulatory capital requirements. The primary regulator of its
consolidated capital adequacy is the Office of the Superintendent
of Financial Institutions Canada (OSFI). The capital adequacy
regulations in Canada are largely consistent with international
standards set by the Bank for International Settlements. A revised
Basel Capital Framework (Basel II) was adopted by the Bank and other
Canadian banks effective this fiscal year.
Effective November 1, 2007, regulatory capital ratios are determined
in accordance with the revised capital framework, based on the
International Convergence of Capital Measurement and Capital
Standards: A Revised Framework, commonly known as Basel II. Changes
to the computation of regulatory capital from the previous framework
(Basel I) are primarily the amount and categorization of prescribed
inclusions and deductions from capital, such as the calculation of
the eligible allowance deduction and the deduction for specified
corporations (such as insurance entities and associated
corporations), which is now split between two categories of capital.
In addition, the computation of risk-weighted assets was revised to
more closely align risk weight parameters with the individual risk
profile of banks by introducing substantive changes to prescribed
risk weights for credit risk exposures, including the use of
internally derived credit risk parameters, and introducing an
explicit new risk weight for operational risk. Capital requirements
for market risk were generally unchanged.
Once banks demonstrate full compliance with the AIRB requirements,
and OSFI has approved its use, they may proceed to apply the AIRB
approach in computing capital requirements. However, in order to
limit sudden declines in the capital levels for the industry in
aggregate, capital floors were introduced for the first two years
after full implementation of AIRB. A capital floor of 90% of the
Basel I calculation will apply in the first year of full approval and
80% in the second year, if required.
The Bank received approval, with conditions, from OSFI to use AIRB
for material Canadian, U.S. and European portfolios effective
November 1, 2007. The remaining credit portfolios are targeted to
implement AIRB in November 2010. In the interim period, the Bank will
use the standardized approach for these portfolios. As well, the Bank
is using the standardized approach to calculate the operational risk
capital requirements.
Total regulatory capital is composed of Tier 1 and Tier 2 capital
as follows:
As at
———————————————————————
January 31 October 31
(unaudited) ($ millions) 2008(1) 2007(1)
———————————————————————
Shareholders’ equity per
Consolidated Balance Sheet $ 19,993 $ 18,804
Add: Capital instrument liabilities
- trust securities 2,750 2,750
Non-controlling interest in subsidiaries 548 497
Less: Goodwill (1,266) (1,134)
Components of Accumulated other
comprehensive income excluded
from Tier 1 capital (369) (692)
Other capital deductions(2) (490) -
———————————————————————
Tier 1 capital $ 21,166 $ 20,225
———————————————————————
Qualifying subordinated debentures,
net of amortization 1,859 1,452
Capital instrument liabilities - trust
subordinated notes 1,000 1,000
Other net capital items(3) (151) 304
———————————————————————
Tier 2 capital $ 2,708 $ 2,756
———————————————————————
Total regulatory capital $ 23,874 $ 22,981
———————————————————————
———————————————————————
(1) Effective November 1, 2007, regulatory capital is determined in
accordance with Basel II. The comparative amounts as at
October 31, 2007, were determined in accordance with Basel I.
(2) Comprised primarily of 50% of investments in certain specified
corporations acquired after January 1, 2007. Prior to November 1,
2007, 100% of investments in certain specified corporations was
deducted from Tier 2 capital; commencing November 1, 2007, those
acquired after January 1, 2007, are now split 50:50 between
Tier 1 and Tier 2.
(3) Comprised mainly of eligible allowance for credit losses and net
after-tax unrealized gain on available-for-sale securities less
prescribed deductions including investments in specified
corporations.
The two primary regulatory capital ratios used to assess capital
adequacy are Tier 1 and Total capital ratios, which are determined by
dividing those capital components by risk-weighted assets. Risk-
weighted assets are computed by applying a combination of the Bank’s
internal credit risk parameters and OSFI prescribed risk weights to
on-and off-balance sheet exposures.
The regulatory minimum ratios prescribed by OSFI are 7% for Tier 1
capital and 10% for Total capital. The Bank exceeded these minimum
ratio thresholds as at January 31, 2008. OSFI has also prescribed an
asset-to-capital leverage maximum of 20:1. The Bank was in compliance
with this threshold as at January 31, 2008.
Significant capital transactions
In the first quarter of 2007, the Bank initiated a normal course
issuer bid to purchase up to 20 million of the Bank’s common shares.
This represented approximately 2% of the Bank’s common shares
outstanding as at December 31, 2007. The bid terminated on
January 11, 2008. The Bank did not purchase any common shares
pursuant to this bid during the quarter.
Series 17 non-cumulative preferred shares totaling $230 million were
issued on January 31, 2008 and are entitled to non-cumulative
preferential cash dividends payable quarterly, if and when declared,
in an amount per share of $0.35. The initial dividend, if and when
declared, will be payable on April 28, 2008, and will be $0.33753 per
share. With regulatory approval, the shares may be redeemed by the
Bank on or after April 26, 2013, at $26.00 per share, together with
declared and unpaid dividends to the date then fixed for redemption,
and thereafter at annually declining premiums until April 26, 2017,
following which no redemption premium is payable. These preferred
shares qualify as Tier 1 capital.
6. Accumulated other comprehensive income (loss)
The components of accumulated other comprehensive income (loss) as at
January 31, 2008, and other comprehensive income (loss) for the three
months then ended were as follows:
Accumulated other comprehensive income (loss)
As at and for the three months ended
———————————————————————
Opening Net Ending
balance change balance
———————————————————————
October 31 January 31
($ millions) 2007 2008
———————————————————————
Unrealized foreign
currency translation
gains (losses),
net of hedging
activities $ (4,549) $ 885 $(3,664)(1)
Unrealized gains
(losses) on
available-for-sale
securities, net of
hedging activities 639 (60) 579(2)
Gains (losses)
on derivative
instruments
designated as
cash flow hedges 53 (263) (210)(3)
———————————————————————
Accumulated other
comprehensive
income (loss) $ (3,857) $ 562 $ (3,295)
———————————————————————
———————————————————————
As at and for the three months ended
———————————————————————
Opening Transition Net Ending
balance amount change balance
———————————————————————
October 31 November 1 January 31
($ millions) 2006 2006 2007
———————————————————————
Unrealized foreign
currency translation
gains (losses),
net of hedging
activities $ (2,321) $ - $ 522 $(1,799)(1)
Unrealized gains
(losses) on
available-for-sale
securities, net of
hedging activities - 706 48 754(2)
Gains (losses)
on derivative
instruments
designated as
cash flow hedges - (23) 22 (1)(3)
———————————————————————
Accumulated other
comprehensive
income (loss) $ (2,321) $ 683 $ 592 $ (1,046)
———————————————————————
———————————————————————
(1) Net of income tax expense of $333 (January 31, 2007 - nil).
(2) Net of income tax expense of $276 (January 31, 2007 - $414).
Also, the balance as at January 31, 2008 includes unrealized
losses of $277 (January 31, 2007 - $150) after tax on the
available-for-sale securities.
(3) Net of income tax benefit of $100 (January 31, 2007 - $1).
Other comprehensive income (loss)
The following table summarizes the changes in the components of other
comprehensive income (loss).
For the three months ended
———————————————————————
January 31 January 31
($ millions) 2008 2007
———————————————————————
Net change in unrealized foreign currency
translation losses
Net unrealized foreign currency
translation gains(1) $ 1,141 $ 892
Net losses on hedges of net investments in
self-sustaining foreign operations(2) (256) (370)
———————————————————————
885 522
———————————————————————
———————————————————————
Net change in unrealized gains on
available-for-sale securities
Net unrealized gains on available-for-sale
securities(3) 8 124
Reclassification of net gains to net income(4) (68) (76)
———————————————————————
(60) 48
———————————————————————
———————————————————————
Net change in gains (losses) on derivative
instruments designated as cash flow hedges
Net gains on derivative instruments designated
as cash flow hedges(5) 278 247
Reclassification of net gains to net income(6) (541) (225)
———————————————————————
(263) 22
———————————————————————
———————————————————————
Other comprehensive income $ 562 $ 592
———————————————————————
———————————————————————
(1) Net of income tax expense of nil (January 31, 2007 - nil).
(2) Net of income tax benefit of $94 (January 31, 2007 - nil).
(3) Net of income tax benefit of $46 (January 31, 2007 -
expense of $73).
(4) Net of income tax benefit of $16 (January 31, 2007 - $41).
(5) Net of income tax expense of $126 (January 31, 2007 - $125).
(6) Net of income tax benefit of $251 (January 31, 2007 - $113).
7. Financial instruments
Financial risk management
The Bank’s principal business activities result in a balance sheet
that consists primarily of financial instruments. In addition, the
Bank uses derivative financial instruments for both trading and
asset/liability management purposes. The Bank has a comprehensive
risk management framework to monitor, evaluate and manage the
principal risks assumed in conducting its activities. The risks that
arise from transacting financial instruments include credit risk,
liquidity risk, operational risk and market risk. The Bank manages
these risks using extensive risk management policies and practices,
including various Board-approved risk management limits and
techniques.
The Bank’s risk management framework has four main components, as
follows:
- Policies are defined for the Bank’s risk tolerance and set the
limits and controls within which the Bank and its subsidiaries can
operate. These policies also reflect the requirements of
regulatory authorities and are approved by the Bank’s Board of
Directors, either directly or through the Executive and Risk
Committee.
- Guidelines are developed to clarify risk limits and conditions
under which the Bank’s risk policies are implemented.
- Processes are implemented to identify, evaluate, document, report
and control risk. Standards define the breadth and quality of
information required to make a decision.
- Compliance with risk policies, limits and guidelines is measured,
monitored and reported to ensure consistency against defined
goals.
Credit risk
Credit risk is the risk of loss resulting from the failure of a
borrower or counterparty to honour its financial or contractual
obligations to the Bank. The Board of Directors, either directly or
through the Executive and Risk Committee, reviews and approves the
Bank’s credit risk strategy and credit risk policy on an annual
basis. The credit risk strategy defines target markets and risk
tolerances that are developed at an all-Bank level, and then further
refined at the business line level. The objectives of the credit risk
strategy are to ensure that, for the Bank, including the individual
business lines:
- target markets and product offerings are well defined,
- the risk parameters for new underwritings and for the portfolios
as a whole are clearly specified, and
- transactions, including origination, syndication, loan sales and
hedging, are managed in a manner to ensure the goals for the
overall portfolio are met.
Credit risk management policies are developed by Global Risk
Management (GRM) and detail, among other things, the credit rating
systems and associated parameter estimates, the delegation of
authority for granting credit, calculating the allowance for credit
losses and authorizing writeoffs. These form an integral part of
enterprise-wide policies and procedures that encompass governance,
risk management and control structure.
The Bank’s credit risk rating systems are designed to support the
determination of key credit risk parameter estimates which measure
credit and transaction risk. For non-retail exposures, parameters are
associated with each credit facility through the assignment of
borrower and transaction ratings. Borrower risk is evaluated using
methodologies that are specific to particular industry sectors and/or
business lines. The risk associated with facilities of a given
borrower is assessed by considering the facilities’ structural and
collateral-related elements. For retail portfolios, each exposure has
been assigned to a particular pool (real estate secured, other retail
- term lending, unsecured revolving) and within each pool to a risk
grade. This process provides for a meaningful differentiation of
risk, and allows for appropriate and consistent estimation of loss
characteristics at the pool and risk grade level.
Credit quality of financial assets
The Bank’s portfolio is well diversified by industry, and there has
not been a significant change in concentrations of credit risk since
October 31, 2007.
(a) Corporate and commercial
Credit decisions are made based upon an assessment of the credit risk
of the individual borrower or counterparty.
Key factors considered in the assessment include: the borrower’s
current and projected financial results and credit statistics; the
industry in which the borrower operates; economic trends;
geopolitical risk; and the borrower’s management. Banking units and
GRM also review the credit quality of the credit portfolio across the
organization on a regular basis to assess whether economic trends or
specific events may affect the performance of the portfolio.
As at January 31, 2008, a significant portion of the authorized
corporate and commercial lending portfolio was internally rated at a
rating that would generally equate to an investment grade rating by
external rating agencies.
(b) Retail
The Bank’s credit underwriting methodology and risk modeling in
Canada is customer rather than product focused. Generally, decisions
on consumer loans are based on risk ratings, which are generated
using predictive scoring models. Individual credit requests are
processed by proprietary adjudication software designed to calculate
the maximum debt for which a customer qualifies.
As at January 31, 2008, the amount of retail loans that were past due
but not impaired was not significant.
Derivative instruments
The Bank uses credit derivatives in its investment and loan
portfolios. Credit protection is sold as an alternative to acquire
exposure to bond or loan assets, while credit protection is bought to
manage credit exposures.
To control credit risk associated with derivatives, the Bank uses the
same credit risk management activities and procedures that are used
in the lending business in assessing and adjudicating potential
credit exposure. The Bank applies limits to each counterparty,
measures exposure as the current fair value plus potential future
exposure, and uses credit mitigation techniques, such as netting and
collateralization. Investment grade counterparties account for a
significant portion of the credit risk amount arising from the Bank’s
derivative transactions.
Collateral
(a) Collateral held
In the normal course of business, the Bank receives collateral on
certain transactions to reduce its exposure to counterparty credit
risk. The Bank is normally permitted to sell or repledge the
collateral it receives on securities borrowing and lending and
derivative transactions, under terms that are common and customary to
standard lending, and stock borrowing and lending activities.
(b) Collateral pledged
In the normal course of business, securities and other assets are
pledged to secure an obligation, participate in clearing or
settlement systems, or operate in a foreign jurisdiction. As at
January 31, 2008, total assets pledged were $40 billion (October 31,
2007 - $40 billion). Asset pledging transactions are conducted under
terms that are common and customary to standard lending, and stock
borrowing and lending activities. Standard risk management controls
are applied with respect to asset pledging.
Liquidity risk
Liquidity risk is the risk that the Bank is unable to meet its
financial obligations in a timely manner at reasonable prices. The
Bank’s liquidity risk is managed within the framework of policies and
limits approved by the Board of Directors. The Board receives reports
on risk exposures and performance against approved limits. The
Liability Committee (LCO) provides senior management oversight of
liquidity risk and meets weekly to review the Bank’s liquidity
profile.
The key elements of the Bank’s liquidity risk framework include: (i)
liquidity risk measurement and modeling, including limits on maximum
net cash outflow by currency over specified short-term horizons; (ii)
diversification of the Bank’s funding sources; (iii) maintaining a
pool of highly liquid, unencumbered assets that can be readily sold
or pledged to secure borrowings; (iv) liquidity stress testing; and
(v) liquidity contingency planning.
Liquidity profile
The Bank maintains large holdings of liquid assets to s