Friday, May 1, 2009

Scotiabank bulks up balance sheet

Recent years saw Canada's banks work hard at establishing a number of different ways to raise Tier 1 capital.

At times it felt like overkill: Traditional common and preferred stock offerings were augmented with securities with exotic names, such as innovative Tier 1 capital, or covered bonds.

No one is talking about overkill these days. At a time when the ability to raise capital is critical to a financial institution's continued good health, Canada's banks can and are making use of multiple sources of funding.

Which brings us to Bank of Nova Scotia.

Scotiabank tapped that innovative Tier 1 capital market on Thursday by launching a $500-million offering of what's known as BaTS. (All the banks tried to put memorable names on this paper – RBC opted for TruCS, TD uses Cats and BMO went with BOaTS.)

This securities are sold to the income-seekers, and look like debt, but are treated as Tier 1 equity by regulators. The BaTS sport a 7.8 per cent yield, or 471 basis points over a comparable 10 year government bond. That premium rate garnered all sorts of interest, and Scotiabank was able to bump up the final size of the deal to $650-million. Scotia Capital led the offering.

Scotiabank was the only one of the five big banks that did not sell common stock last year to shore up its balance sheet. It did issue shares to Sun Life Financial as part of the payment for a stake in fund manager CI Financial, which helped bolster its capital ratios.

No comments: