Yesterday, Canada's two largest banks, Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD Bank Financial Group or TDBFG), each announced separate efforts to enhance their relative capital positions through issuances of more than C$1.4 billion in equity to the public.
RBC announced an underwritten public offering of C$225 million (C$325 million if the underwriters' overallotment option is exercised) of 6.25% non-cumulative, 5-year rate reset preferred shares. Subject to regulatory approval, on or after February 24, 2014, the bank may redeem the preferred shares at par. Thereafter, the dividend rate will reset every five years to a rate equal to 3.50% over the 5-year Government of Canada bond yield. Also, on February 24, 2014, and every five years thereafter, the holders of the preferred shares will, subject to certain conditions, have the right to convert all or any part of their shares to non-cumulative floating rate preferred shares. With this issuance, RBC will have issued a combined $525 million in preferred shares in the past quarter, all of which will be classified as Tier 1 capital.
Toronto-Dominion announced an underwritten public offering of C$1.2 billion of common stock (C$1.38 billion if the underwriters' overallotment option is exercised). The issuance will "build another layer of assurance" with respect to TDBFG's capital position. Ed Clark, President and CEO of TDBFG, stated that although TDBFG is "[v]ery comfortable with the stability and safety" of the bank's capital base, "[w]e recognize investor concern about the capital positions of financial institutions given today's uncertain markets. The extra common equity plus our significant preferred share issuing capacity and the other capital measures available to us puts TD in an exceptionally strong capital position." This common equity issuance coupled with the recent C$220 milllion preferred share issuance earlier this month, will boost TDBFG's Tier 1 capital ratio to approximately 9%.
The receptiveness of the Canadian public equity markets to banks that need to raise capital may indicate that Canadian banks are weathering the financial crisis a bit easier than other banks around the world. Although the Canadian Government has taken several actions to stabilize the financial sector, including implementing a Lenders Assurance Facility, purchasing insured mortgage pools from Canadian lenders, and increasing Tier 1 capital limits, the Government has not yet found it necessary to directly inject capital into banks, as has been done for U.S. banks under the Treasury's Capital Purchase Program or for several other banks and institutions around the world.