(Adds comments from portfolio manager)
By Lynne Olver
TORONTO, Nov 24 (Reuters) - Canada’s two largest banks announced equity financings on Monday that will increase their regulatory capital ratios.
After markets closed, Toronto-Dominion Bank TD.TO said it had sold common shares worth C$1.2 billion ($976 million) in order to reassure investors about its capital strength, after the bank’s key capital ratio had fallen to the lowest among its peers.
Toronto-Dominion, Canada’s second largest bank, said it had issued 30.4 million common shares at C$39.50 each.
A group of underwriters led by TD Securities can buy up to 4.56 million additional shares, which would put the maximum gross proceeds at C$1.38 billion.
TD Bank shares closed at C$42.90 on the Toronto Stock Exchange, up 3.9 percent. Most Canadian bank stocks got a lift from news of U.S. government support for Citigroup C.N.
In a separate announcement after the bell, Royal Bank of Canada RY.TO said it would issue C$225 million of five-year rate reset preferred shares. Earlier in the day, RBC had said its quarterly profit would be lower than analysts had expected because of C$670 million in pretax losses on various securities.
For its part, TD said that its new common equity issue, plus a preferred share issue earlier this month, would push up its Tier 1 capital ratio to about 9 percent, versus 8.3 percent as of Nov. 1.
“I think people were surprised at how low the Tier 1 ratio was,” said Darren Dansereau, a portfolio manager at QV Investors in Calgary, which owns TD shares.
Dansereau said he did not mind the “little bit of dilution” to existing shareholders because he would rather see the bank shore up its balance sheet when it can.
The market had expressed concern about the low capital ratio and TD would not have been able to issue a large amount of preferred shares quickly, TD President and CEO Ed Clark said in an interview.
“Part of the attraction of common shares is you can do that overnight,” Clark told Reuters.
“You hate to issue at this price, but in the end we can easily overcome the dilution involved with better growth,” he said.
Clark said the issuance was “going out the door right now” on strong retail investor interest, and the bank would have room to issue non-dilutive preferred shares in future as needed.
Moody’s Investor Service revised the ratings outlook on TD Bank and its subsidiaries to negative last week, after TD said credit-trading losses of C$350 million would hurt quarterly earnings. Moody’s noted that TD’s adjusted Tier 1 ratio at 8.3 percent was the lowest among Canadian banks.
The credit rating agency had warned that TD’s ratings could be downgraded if its Tier 1 ratio dropped below 8 percent, or if other events occurred.
Canada’s financial institutions regulator requires domestic banks to have a Tier 1 capital ratio of at least 7 percent, but the average is around 9.5 percent.
Moody’s also revised the outlook on RBC’s ratings on Monday to negative, citing the potential for further charges on RBC’s structured credit exposures and its off-balance sheet exposure to conduits.
RBC shares closed at C$39.00 on Monday, up 6.9 percent. ($1=$1.23 Canadian) (Reporting by Lynne Olver; editing by Rob Wilson)