Friday, July 28, 2006

TD Banknorth Aims to Double Its Size

  
Reuters, Jonathan Stempel, 27 July 2006

TD Banknorth Inc., a Canadian-backed company expanding rapidly in the U.S. Northeast, may double in size in the next couple of years, helped by mergers and the end of "stupid rules" at the bank that repel customers, its chief executive said on Friday.

Chief Executive William Ryan said the bank, majority-owned by Toronto-Dominion Bank parent TD Bank Financial Group, plans to focus more on New Jersey, New York and Connecticut, where it is advertising heavily, rather than "slow growth" states such as Maine and Vermont. The bank is based in Portland, Maine.

TD Banknorth, which ended June with $40.3 billion of assets, expects to reach $60 billion to $80 billion with "one or two acquisitions a year, and maybe every 18 months a larger acquisition," Ryan said at an analyst conference monitored by Webcast. "Right now, the prices are fairly high."

The real issue is geography, and extending that geography, and we're focused on concentrating in the mid-Atlantic," he said. "Don't be surprised if you see us buy a little bank. Don't be surprised if you see us buy a big bank."

Still, he added: "Right now, the prices are fairly high."

The bank now operates 597 branches in eight states from Maine to Pennsylvania.

In January it added some 200 branches in New Jersey and Pennsylvania when it bought Mahwah, New Jersey's' Hudson United Bancorp. It will add 30 in early 2007 when it buys Saddle Brook, New Jersey's Interchange Financial Services Corp.

"We will be going to new geographies, but not in the next couple of years, I don't think," Ryan said.

While Ryan said the bank would consider expanding into the Baltimore and Washington, D.C. areas, it won't move into faraway areas, such as Chicago, while he is in charge.

Asked how long he'll stay, the 62-year-old, who has been chief executive since July 1989, said: "I have no plans to retire.... I like what I'm doing."

In the second quarter, profit excluding several items rose 18 percent to $128.3 million, or 56 cents per share, topping analysts' average forecasts by a penny per share. A balance sheet restructuring to reduce interest-rate risk helped lending margins expand, contrasting with declines at many banks.

A balance sheet restructuring to reduce interest-rate risk helped lending margins expand, contrasting with declines at many banks. Ryan said stock buybacks are unlikely in the next year as the bank builds capital and tries to cut costs.

Advertising expenses rose 24 percent as the bank, using the Andy Williams song "Born Free," began marketing a program waiving automated teller machine fees worldwide for New York, New Jersey, Connecticut and Pennsylvania customers.

The campaign may help TD Banknorth win market share from bigger banks in the region, such as JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., Wachovia Corp., Royal Bank of Scotland Plc's Citizens Bankand Commerce Bancorp Inc., New Jersey's largest bank.

Ryan acknowledged that TD Banknorth faces heavy competition, especially for deposits. "That seems to be the one we're really struggling with," he said.

Commerce, which often gets good marks for customer service, appears in particular to be in TD Banknorth's sights.

Ryan said he plans to launch a "no stupid rules" contest, in which he asks employees to identify TD Banknorth policies that get in the way of good service.

Commerce uses the same phrase in its marketing. A call to the Cherry Hill-based bank was not immediately returned.

Ryan hopes TD Banknorth can learn as it did a few years ago, when it last solicited employees for a list of stupid rules.

"You'd read it and say, 'That's not us, is it?'" Ryan said.
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Sun Life Q2 2006 Earnings

  
Scotia Capital, 28 July 2006

• Sun Life reported Q2/06 of $0.88 per share, $0.01 below our estimate and in-line with consensus - but with an additional $0.08 in one-time tax gains, offset to some extent by $0.05 in additional reserves/strain in the U.S. (half of which is sustainable in the near term) we peg this at a $0.05 miss. A mixed quarter. While sales results were strong in areas where we focused (ex f/x U.S. individual insurance sales nearly doubled, U.S. domestic variable annuity sales were up 23%), as well as in other areas (U.S. and Canadian group insurance sales up 20% and 233%, respectively, and Canadian individual sales were up 5%), profitability was not as transparent. A significant increase in new business strain owing to substantial increases in reinsurance rates in the U.S. individual insurance market, coupled with higher-than-average new business volumes, weighed heavily on the company's bottom line in this segment.

• U.S. individual insurance new business/reserve strain - is largely a 2006 issue and less likely a 2007 issue. The company claims that, rather than invoke multiple price changes in Q2/06, at a time when the company had just started selling through the M Group and National Financial Partners (two large and well-established distributors in the U.S.), it chose to take the "reinsurance hit" to earnings in Q2/06. Re-priced products will be launched in August, 2006, and with some of the previous product sales "still in the pipeline", it will take at least one more quarter, if not two, before the "strain issue" will go away. Whether or not Sun Life will lose traction in these channels when it re-prices next month remains to be seen. Also, the yet to be seen level of profitability in the re-priced products is another area of possible concern. In our opinion, the company will do its best to not jeopardize the momentum it currently has with its new distribution partners, and we remain somewhat cautious as to how quickly the profitability of its products will return to pre-2006 levels. That said, we are very impressed with the sales levels in Q2/06 (sales nearly doubled), and expect the company to post double digit sales growth, well above the industry level.

• Lowering EPS estimates to reflect the increased level of new business strain (i.e. lower profitability) in U.S. individual insurance, as well as negative impact of weaker equity markets. We decreased our EPS estimates by $0.05 for the remainder of 2006, and by $0.05 in 2007, to reflect lower-than-expected asset levels at Q2/06 (owing to weaker equity markets) as well as the negative impact of new business strain in the U.S. individual insurance segment in 2006 and into 2007.

• A couple of bright spots - MFS margins continue to improve and U.S. domestic variable annuity sales finally showing some solid double digit growth. MFS margins were up 22% to 27% YOY and up from 26% QOQ, as the company continues to focus on costs. In addition, we believe we are finally starting to see some traction in the U.S. variable annuity market, where a significant increase in the number of wholesalers, as well as an attractive product, contributed to 23% sales growth in the domestic market. However, MFS had negative net sales the second straight quarter (negative $US400,000) and U.S. variable annuity net sales continue to be negative (negative $US218,000), although domestic net sales, while negative, where the best level we've seen in the last five quarters.

• A little too much focus on micro-managing earnings growth by segment - all in we still see the company achieving its 10% EPS growth target through 2007. The company's segments naturally have volatility, but this is offset at the total company level, and we believe an aggregate view of the company provides the clearest picture. In the aggregate we still see the company achieving its 10% EPS growth objective through 2007, assuming equity markets increase in the 7% per annum range. We take some comfort with the company's 14.8% EPS growth (ex f/x) in Q2/06, despite the somewhat weaker equity markets. We take additional comfort in the company's ability to continue to buyback shares ($400 million YTD/06, with a strong likelihood the company could exceed its $500 million target), as well as continue to increase its dividend in the 15% range per annum.

• Canadian segment (50% of bottom line) steady 12% YOY growth - ex tax gains and 73% increase in earnings attributable to the CI funds, we estimate earnings were up 7%. With earnings up 4% YTD/06 (after poor claims experience resulted in a weak Q1/06, with tax gains significantly helping Q2/06) we expect 4% EPS growth in 2007, and 9% EPS growth in 2007. All in, the 6.5% earnings in this segment from 2005-2007 is consistent with the 8% earnings growth (7% ex the contribution form CI funds) in 2005. Group businesses continue to be the bright spot, with exceptional sales growth and increasing profitability. Individual insurance sales, up 5%, continue to pace ahead of the market.

• For the U.S. division we look for strain to continue to pose a drag on earnings growth, but expect a 14% rebound (ex f/x) in 2007, as the strain issue gradually goes away. We expect the August re-pricing to deal with the strain issue to some extent, and look for modestly appreciating equity markets (up 7% per annum) and continuation of the current high level of interest rates to help propel the bottom line, helped to some extent by continued strong individual sales and variable annuity sales.

• CMG Asia acquisition progressing well ($0.05 accretion in 2006, $0.07 accretion in 2007) and helps the company achieve its 10% EPS growth target in 2006 despite
currency/equity market headwinds. We look for 9% EPS growth in 2006 and 10% in 2007, which combined with aggressive buyback levels should add 100 bps to ROE over the next two years, just shy of the company's target of 75 bps per year.

• Asset quality remains strong. Net impaireds at 18 bps remain exceptionally low. With only 3% of bonds below investment grade, we believe Sun Life’s balance sheet is well protected should the credit environment become unfavourable.

• We expect the company to have concluded its search for a new CFO in early fall/2006. We see this as a necessary catalyst to the Sun Life story.
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Bloomberg, 27 July 2006

Sun Life Financial Inc., Canada's second-largest insurer, said profit rose 7.3 percent, led by U.S. asset management and life insurance sales in Canada. The stock had its biggest drop in more than two years after earnings missed some analysts' estimates.

Second-quarter net income climbed to a record C$512 million ($451 million) or 88 cents a share, from C$477 million, or 81 cents, a year earlier, the Toronto-based company said today. Revenue rose 4.1 percent to C$6.23 billion.

Profit missed some estimates because of tax gains and higher costs in the U.S. Earnings from the U.S. insurance business fell by almost a third to C$90 million. That included a $4 million loss in individual life because of costs related to new business.

"We're investing in the growth of the business," Chief Executive Officer Donald Stewart said today in a telephone interview. "By the time we get around to Q4, we'll be back on track."

Sun Life shares fell C$1.60, or 3.6 percent, to C$43.36 at the 4 p.m. close of trading on the Toronto Stock Exchange, the biggest one-day drop since May 7, 2004. The stock has fallen 7.2 percent this year, compared with a 1.2 percent gain in the Standard & Poor's/TSX Financials Index.

Robert Wessel, an analyst at National Bank Financial in Toronto, said Sun Life earned 84 cents a share after tax gains and other one-time items, below his estimate of 85 cents. The company was expected to earn 87 cents a share according to the average estimate of 12 analysts polled by Thomson Financial, which declined to elaborate on the estimates.

"We feel when we get the chance to explain some of the details (to investors), that should have a positive impact," on the stock, Stewart said. "I think there's some confusion about the tax rate."

Profit from Canadian insurance climbed 12 percent to C$264 million, led by increased sales of group benefits and individual policies. Earnings at the Boston-based Massachusetts Financial Services Co. mutual fund unit climbed 26 percent to C$53 million because of an increase in assets under management.

Earnings from Asia almost doubled to C$31 million after the company bought CMG Asia Ltd. and CommServe Financial Ltd. for C$560 million to expand its insurance and pension businesses. Sun Life wants to double the proportion of sales it gets from Asia in the next three to five years.

Asian sales, which accounted for about 3 percent of Sun Life's revenue last year, have grown by more than 45 percent a year since 2002.

Profit was reduced by C$28 million, or 5 cents a share, because of the Canadian dollar's appreciation against the U.S. currency. Sun Life said today that future "earnings will benefit from a reduction in the value of the Canadian dollar versus foreign currencies."

"We're not expecting a major shift in foreign exchange," Stewart, 59, said. "We're not expecting huge shifts over the balance of the year."

Return on equity increased to 13.6 percent from 13 percent in the year-earlier quarter.

The company raised its dividend 9.1 percent to 30 cents a share, the fourth increase in two years.

Sun Life is the first of Canada's three main life insurers to report results this quarter. Great-West Lifeco Inc., the third largest by assets, is scheduled to release earnings on Aug. 2, followed by Manulife Financial Corp. on Aug. 3.
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RBC Capital Markets, 27 July 2006

First Impression

• Core EPS Light. SLF posted 88¢ EPS versus 84¢ in Q106 and 81¢ in Q205, but the underlying EPS looks like ~80¢, excl. one-time tax items, indicating negligible EPS growth YoY; and ~8% below 87¢ consensus.

• Dividend Hiked More Than Expected. SLF raised its dividend by 2.5¢ or 9%, a penny more than we had expected.

• NILTax Rate Not Sustainable. SLF’s 1% tax rate compared to 21% in Q106, way below our expected sustainable of 23%. Sun realized 8¢ in retroactive accrued tax benefit triggered by the recent change in taxes.

• Key Factors in the “Miss”. Weak equity markets were estimated to cost 5¢ YoY, mostly owing to SLF’s large exposure to U.S. variable annuities and mutual funds. F/X translation dragged on EPS for 5¢ YoY, 1¢ worse than we had modeled. Sales strain cost ~7¢ ‘extra’ this quarter, owing to (i) a change in reinsurance pricing and (ii) higher life sales in the U.S.

• Sales Weak in “Remedial” Divisions. US mutual funds and annuities remained in redemption this quarter, and now we are concerned the volatile equity markets may exacerbate the turnaround challenge. US and Asian life sales moved up handsomely, as did most Group product sales across North America. Domestic life sales were disappointing: independent sales held in, but now Clarica sales declined YoY.

• Morbidity/Mortality Normalized. Last quarter EPS was adversely impacted ~3¢ due to poor morbidity and mortality experience, giving us added concern. It appears to have normalized this quarter, which is good.
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Thursday, July 27, 2006

Scotiabank Mexico Q2 Net Profit Rises 66% to Mxn1.50B

  
Dow Jones, 27 July 2006

Mexico's Grupo Scotiabank SA said Thursday that its second-quarter net profit rose by two-thirds on the year, on the back of credit growth and a one-time tax gain.

The local unit of Canada's Bank of Nova Scotia reported a profit of 1.50 billion pesos ($138 million), up from MXN905 million in the same period last year, the bank said in a release.

Scotiabank reported an extraordinary gain of MXN494 million due to a tax refund.

Revenue rose 37% to MXN3.34 billion, with the company's core banking accounting for 96% of that.

Scotiabank's net interest income - what it makes on loans minus what it pays on deposits - was MXN1.77 billion in the first quarter, up 16% from the year-ago period amid growth in consumer loans.

The bank's performing loan portfolio at the end of the quarter was MXN82.94 billion, up 13% on the year. Mortgages grew 30%, auto loans and credit cards expanded 38%, while lending to financial companies and the government was flat.

Scotiabank's loan-loss reserves fell to 174% of past-due loans from 195% a year earlier, while its past-due loan ratio declined to 2.0% from 2.3%.
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TD Banknorth Q2 2006 Earnings

  
Scotia Capital, 27 July 2006

• TD Banknorth reported Q2/06 operating earnings of US$0.56 per share, versus US$0.55 in the previous quarter and US$0.63 a year earlier, in line with consensus estimates of US$0.55 per share.

• Reported earnings were US$0.41 per share and included the following after-tax charges: US$0.11 per share for the amortization of intangible assets and US$0.04 per share for merger and restructuring costs.

• Operating EPS were negatively impacted by earnings dilution from the acquisition of HU. The bank issued 62 million shares in conjunction with the HU acquisition which closed on January 31, 2006 with weighted average diluted shares increasing 31% year over year at the end of the second quarter.

• Operating earnings declined 11% YOY, with operating revenue increasing 23% YOY, and operating expenses increasing 27% YOY.

• BNK issued approximately 62 million shares related to the acquisition of HU (including the sale of 29.6 million shares to TD). As a result of this share issuance, partly offset by the repurchase of 8.5 million shares, the number of weighted average shares outstanding on a diluted basis was 228.8 million in Q2/06 compared to 210.4 million in the previous quarter and 174.3 million a year earlier. Thus weighted average diluted shares outstanding increased 31% YOY and 9% QOQ.

• BNK's contribution to TD Bank is estimated at C$68 million or C$0.09 per share in Q3/06, compared with $59 million or C$0.08 per share in the previous quarter.

Margin Compression Easing?

• Net interest margin (NIM) for the quarter improved to 4.07% from 3.83% in the previous quarter but declined from 4.12% a year earlier. The increase in net interest margin from the first quarter reflected the impact of the Company's balance sheet deleveraging program.

• The bank expects margin compression to remain a challenge but perhaps not to the samedegree that it has been. Management stated on the conference call that if loan growth is healthy they may have to pay up a bit to get deposits in the third and fourth quarters. However, they said that they intend to maintain the net interest margin at 4%.

Solid Commercial Loan Growth; Consumer Loans and Deposits Flat

• Average loans increased 27% YOY mainly due mainly to the HU acquisition. Organic loan growth was approximately 8% YOY with strength in commercial loans and consumer loans relatively flat. On a QOQ basis, loan growth was a modest 1.2% (4.8% annualized) due to competitive pressures. Thus, loan growth appears to be slowing.

• Average deposits increased 34% YOY due to the HU acquisition. However, organic deposit growth was 2% YOY and deposits were unchanged QOQ, primarily due to continued competitive deposit pricing.

Total Revenues Increase 23% YOY; Expenses Increase 27% YOY

• Total operating revenues (excluding securities gains/losses, and losses on derivatives) increased 23% YOY to US$433.9 million versus US$353.6 million a year earlier.

• Total operating expenses (excluding amortization of intangibles, merger and restructuring costs, and prepayment penalties) increased 27% YOY to US$232 million from US$183.3 million.

Operating Expenses under Control?

• Non-interest revenues increased to US$127 million from US$101 million (excluding securities gains/losses, and losses on derivatives) a year earlier, primarily due to the HU acquisition. • Non-interest expenses increased 27% YOY (excluding amortization of intangibles, merger and restructuring costs, and prepayment penalties) to US$232 million due to increased Hudson United-related operating expenses.

• Organic non-interest expense (excluding amortization of intangibles, merger and restructuring costs, and prepayment penalties) increased by 6% or US$12.4 billion from the previous quarter. Advertising and marketing expenses increased $1.8 million or 22% QOQ.

• Management expects expenses to grow in the 0%-5% range and expects that in the next few quarters it will be closer to 0% than 5%. While management commented that there could be some additional cost saves associated with HU in the third quarter, they will probably be offset by increased marketing expenses.

Loan Loss Provisions

• Loan Loss provisions (LLPs) were US$8.7 million or 0.14% of loans compared to US$6.9 million or 0.11% of loans in the previous quarter and US$3.6 million or 0.07% of loans a year earlier.

• Total non-performing loans (NPLs) in the second quarter were US$86.9 million or 0.34% of total loans compared to US$78.6 million or 0.31% of total loans in the previous quarter and US$70.1 million or 0.35% of total loans a year earlier.

• Non-performing assets (NPAs) were US$89.1 million or 0.22% of total assets versus US$90.7 million or 0.22% in the previous quarter and US$73.9 millions or 0.23% a year earlier.

Tier 1 Capital Ratio at 7.9%

• Tier 1 risk-based capital ratio was 7.9% versus 7.7% in the previous quarter and 8.3% a year earlier. Total risk-based capital ratio was 11.0%, versus 11.7% in the previous quarter and 10.1% a year earlier.

Acquisition of Interchange Financial Services Corporation

• On April 13th, BNK announced its intention to acquire Interchange Financial Services Corporation (IFCJ-NASDAQ) of New Jersey for US$480.6 million cash.

• The cash for the transaction will be financed mainly through the sale of 13 million BNK common shares to TD at a price of US$31.17 per share.

• The transaction is expected to close early in the first quarter of 2007.

Recommendation

• Our 2006 and 2007 earnings estimates for TD are C$4.50 per share and C$5.00 per share, respectively.

• Our 12-month share price target on TD is $70 representing 15.6 x our 2006 cash earnings estimate.
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RBC Capital Markets, 27 July 2006

• Earnings Summary: 2Q06 operating cash earnings declined by 11% year-over-year, but improved 1.8% sequentially.

• Margin Improvement: BNK's margin jumped 24 basis points sequentially to 4.07% due to the positive impact of ongoing balance sheet de-leveraging. Modest margin pressure is still expected over the next couple of quarters.

• Loan Growth Trends: Commercial business and consumer loans increased 3.6% and 4.8% sequentially, which more than offset a planned reduction in residential mortgage loans of -1.4%. We expect strong commercial and consumer loan growth to continue over the near-term.

• Strong Core Fee Income Growth: Core fee income increased 6.9% sequentially, driven by strong deposit service, merchant banking and loan fees off a seasonally weak first quarter. We think 8-10% core fee income growth should continue.

• Asset Quality Held Steady: Non-performing assets declined by 1.7% sequentially to $89.1 million, and held steady sequentially at 0.22% of total assets. Reserves remained healthy at 1.07% of total loans vs. 1.08% at the end of the prior quarter. We expect asset quality to remain stable for the remainder of 2006.

• Adjustments: We increased our 2006 operating cash earnings estimate to $2.24 from $2.23 P/S, lowered our 2007 cash EPS estimate to $2.46 from $2.48, and upped our 12-month price target to $30 from $27 per share (now valuing on 2007E cash EPS instead of 2006E).

• Thoughts On The Stock: The second quarter earnings report was encouraging for those of us expecting BNK to return to more normalized double-digit EPS growth in 2007. But, at 12x our current 2007 cash EPS estimate, we view the stock as fairly valued, and we view the company as an ongoing acquirer. Therefore, we would continue to avoid the stock.

• Rating: TD Banknorth trades in-line with our revised fundamental price target of $30 per share, justifying our Sector Perform rating with Average risk, in our opinion.
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BMO Capital Markets, 26 July 2006

TD Banknorth reported earnings for the second quarter this morning. Cash EPS were US$0.56 versus street estimates of US$0.55. The modest upside surprise came from a combination of somewhat better revenues (due to margins) and tight expense control. A slightly lower tax rate offset a slightly high loan loss. Overall, these results are marginally ahead of forecast (see additional comments from Lana Chan in BMO Capital Markets U.S. Research). Management indicated that the Hudson United conversion (which occurred during the second quarter) went extremely well. Following the press release, TD disclosed this morning that this would translate into a contribution of $68 million for TD in its third quarter results, compared to $59 million in the second quarter. This was in line with our expectations. We believe that TD shares offer good value here. AMTD is in good shape while BNK continues to plod along. We also believe that the core franchises in Canada are in good shape and will produce solid results in the short term.
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Bloomberg, 26 July 2006

TD Banknorth Inc., the U.S. banking arm of Toronto-Dominion Bank, said second-quarter profit fell less than analysts expected as an increase in commercial loans countered higher merger costs. The stock had its biggest one-day jump in five months.

Net income fell 2.3 percent to $93.4 million, or 41 cents a share, from $95.6 million, or 55 cents a share a year earlier, the Portland, Maine-based bank said today. Revenue rose 17 percent to $433.9 million.

Loans increased 27 percent and deposits soared 34 percent after TD Banknorth completed its $1.9 billion purchase of Mahwah, New Jersey-based Hudson United Bancorp to expand in New York and New Jersey.

"Over the long term, they'll be able to leverage it better than the previous management" at Hudson, said Lee Calfo, director of bank research at Cohen Brothers & Co. in Philadelphia. "They're clearly much more visible than they used to be with the signage and with the advertising."

Chief Executive Officer William Ryan, 62, has been making acquisitions in the U.S. northeast with the help of Toronto-Dominion, which bought a controlling stake of TD Banknorth last year. TD Banknorth agreed in April to buy Interchange Financial Services Corp. of Saddle Brook, New Jersey, for $467.5 million.

Excluding one-time items, the bank earned 56 cents a share, topping the 55-cent-a-share average estimate of 12 analysts polled by Thomson Financial.

Shares of TD Banknorth rose 72 cents, or 2.5 percent, to $29.67 at 4:05 p.m. trading on the New York Stock Exchange, the biggest one-day jump since Feb. 1.

The U.S. Federal Reserve's 17 straight interest-rate boosts have forced TD Banknorth to pay higher rates on deposits, which lowered margins this quarter for banks including Wachovia Corp., BB&T Corp. and Fifth Third Bancorp. TD Banknorth's net interest margin fell to 4.07 percent from 4.12 percent a year ago. Margins rose from 3.83 percent in the first quarter.

"I think there is another rate increase out there, so the margin compression will continue for this year," Ryan said today in a telephone interview. "It's certainly going to be here for another quarter or two."

Ryan said that continued margin pressure will likely lead to acquisition opportunities this year for TD Banknorth.

"There are some smaller banks that will decide that competing against everybody else is just too hard to do," Ryan said. "We're ready to acquire another bank, if we thought there was one that was a good fit."

To support the Hudson United purchase, TD Banknorth will increase its advertising budget to between $10 million and $12 million a quarter, up from an average of $30 million to $33 million a year.

Most of the new advertising will take place in metropolitan New York and New Jersey, where the lender has combined advertising with Toronto-Dominion and TD Ameritrade, the third- biggest online brokerage.

"The first thing you have to do if you're new in a market is get your market share up to a level you're comfortable with," Ryan said. "You can't do that unless people know who you are."

TD Banknorth set aside $9 million for bad loans, up from $3.7 million a year ago. Merger costs almost tripled to C$9.6 million.

Toronto-Dominion, Canada's second-largest bank by assets, said today that its U.S. consumer banking profit will be C$68 million ($59.7 million) in the fiscal third quarter. The Toronto-based bank is scheduled to report earnings on Aug. 24.
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Tuesday, July 25, 2006

TD Ameritrade Chairman Boosts Stake to 19.76%

  
Barron's, Naureen S. Malik, 25 July 2006

TD Ameritrade founder and chairman, J. Joe Ricketts, has been taking advantage of depressed prices to build up his stake in the online brokerage firm.

Ricketts purchased nearly 7.3 million shares for $113.84 million late last week, based on Securities and Exchange Commission filings late Monday. The transactions took place last Thursday and Friday when the shares were priced from $15.16 to $15.87.

This is the second-largest transaction by an executive or director at any company in the last two years after Michael Dell's purchase in May, notes Ben Silverman, director of research at InsiderScore.com.

Ricketts increased his overall holdings to about 125.6 million shares, or a 19.76% stake. There were nearly 610 million outstanding shares of Ameritrade as of April 30.

"Obviously we can't speculate what Mr. Ricketts' intentions are," says TD Ameritrade spokeswoman Katrina Becker.

Seven months ago, TD Ameritrade closed its $2.9 billion acquisition of Toronto-Dominion Bank's TD Waterhouse unit to form TD Ameritrade, the largest online broker in terms of volume. The deal stipulated that Ricketts and his family must hold a 20.83% stake in Ameritrade by Jan. 24, 2007, but no more than 29% 10 years following the deal, in order to maintain three seats on the board of directors.

Ricketts' son Thomas has been a director since 2002 while his other son Peter stepped down from the board in May to run for the U.S. Senate after winning the Republican primary in Nebraska.

Last week's transactions were the first open-market purchases by Ricketts since September 2002, when the stock was trading at $4. InsiderScore.com data indicate that he has never sold shares in the open market, though he sold 2.7 million shares in a private offering in 2003 for $33.5 million.

"I think it's a real vote of confidence in terms of the TD Waterhouse integration," says InsiderScore.com's Silverman. "Ricketts saw an opportunity to increase his holdings at a time when the stock had sold off rather significantly."

TD Ameritrade shares have faltered this year amid heightened pricing competition from online brokers such as Charles Schwab and E*Trade. General market choppiness hasn't helped.

TD Ameritrade shares rallied 23% in the past week, closing at $16.76 Tuesday, since the company posted upside fiscal third-quarter earnings on July 18, along with record operating margins and revenues, thanks to an increase in asset-based revenues and cost control.

Still, TD Ameritrade shares, which hit a 52-week intraday low of $13.30 on July 14, are down 34% year-to-date, compared to a 7% gain in the Dow Jones U.S. Investment Services Index. So far in 2006, Charles Schwab is up 1.3% and E*Trade is up 10%.

In addition to Ricketts' purchase, Thomson Financial senior quantitative analyst Mark LoPresti says consensus purchasing has been improving.

In May, two Ameritrade directors -- William Edmund Clark and Fredric Tomczyk -- each purchased 6,000 shares for $102,600.

This offsets the spate of selling by Peter Ricketts several months ago, likely to help pay for his Senate campaign, says InsiderScore.com's Silverman. Peter Ricketts sold about 473,000 shares for $8.8 million in December and February, according to Thomson Financial data.

Peter Ricketts had served in various executive roles at TD Ameritrade from 1993 to 2005, including chief operating officer.

"[T]he fact that Joe Ricketts is buying should give investors increased comfort," wrote Sandler O'Neill & Partners analyst Richard Repetto in a research note issued Tuesday. "[T]here had been uncertainty whether the Ricketts family were buyers or sellers after Pete Ricketts, Joe's son, resigned from his position and board seat at TD Ameritrade."

Toronto-Dominion was given a 32% stake in the TD Ameritrade transaction and was granted permission to acquire up to 39.9% of the outstanding shares by 2010. The Canadian bank can then increase its holdings to 45% by 2016 with the option of submitting a nonpublic proposal to the board to gain control of the remaining shares, according to TD Ameritrade's January proxy filing.

Since the deal closed in January, Toronto-Dominion has purchased more than 14 million TD Ameritrade shares for about $241.8 million, increasing its stake to nearly 240.8 million shares, or 39.5% of the company. The transactions took place under a 10b5-1 trading plan.
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InsiderScore, 25 July 2006

The chairman of TD Ameritrade has made the largest purchase by any insider, at any company, in the past two years. Founder and Chairman J. Joe Ricketts bought approximately 7.3M shares at an average price of $15.59 on July 20th/21st, paying out more than $113.8M for the stock, and upping his holdings in the company to more than 120.55M shares, or about a 19.76% stake. Ricketts' last open market transaction came in November 2003, when he sold 2.7M shares at $12.38.

In June 2005, after spurning a takeover offer from E-Trade, AMTD announced a deal to acquire TD Waterhouse, the U.S. brokerage business of Toronto-Dominion Bank. Under the terms of agreement, TD received a 32% stake in AMTD, and the Canadian company agreed to immediately launch a tender offer to acquire an additional 7.9% stake in AMTD. TD also agreed to limit its ownership stake in AMTD to 39.9% for three years from the closing (January 24th, 2006), and 45% from years four through ten. Ricketts, meanwhile, agreed to limit his family's ownership to 29% for ten years from the closing. TD eventually completed most of the tender offer, via purchases sometimes well above the $16 price, through a trading plan, and the company currently holds a 39.5% stake in AMTD.

Ricketts founded what is now AMTD in 1971 as a local investment bank in Omaha, Nebraska. By 1975, he had launched a discount brokerage firm, and through a series of acquisitions, he eventually created an online brokerage giant, which he took public in 1997 at a split-adjusted price of $1.25 per share. Ricketts continued his acquisitive streak in the early part of this decade, taking over National Discount Brokers and Datek, among others. One son, Thomas, is currently a board member, while his other son, Peter, resigned from the board two months ago to pursue his candidacy for the U.S. Senate (he's a Republican running in Nebraska). The Ricketts family is #293 on the Forbes list of The World's Richest People, and #93 on the list of America's Richest People.

On July 14th, shares of AMTD fell to $13.30, a new 52-week low on an absolute basis, though not taking into consideration a $6.00 per share one-time dividend paid out to shareholders with the closing of the TD Waterhouse deal. Since the dividend was paid on January 25th, and based on today's price at 11:15 AM ET, the stock is down about -15%.

AMTD was able to move off its low thanks to a solid fiscal third-quarter (ended June 30th) earnings report, which also saw the company raise its fiscal 2007 guidance.

For Q3, AMTD reported earnings of $139.8M, or 23 cents per share, up from $83.6M, or 20 cents per share (the disparity in EPS is the result of dilution from the TD Waterhouse deal). Revenue rose sharply as a result of the acquisition, from $234.4M to $540.3M, though operating expenses more than tripled as well, from $97.5M to $307.3M. AMTD's top line was a few million shy of what analysts expected, but the company beat EPS forecasts by a penny. Looking forward, AMTD said it expects FY07 EPS of 99 cents to $1.21, compared to a consensus forecast of $1.20, and Q406 EPS of 87 cents to 93 cents, excluding a one-time gain, and compared to a consensus forecast of 92 cents.

"Despite a decline in investor activity in June, we realized a record quarter, thanks in part to an increase in asset-based revenues," said Joe Moglia, chief executive officer. "We continue to focus on completing the TD Waterhouse integration and positioning AMTD for growth in the long-term investor segment. Over the next year, we expect the investments we are making in our technology, value propositions, and brand to deliver results that will enhance our growth and strengthen our market position going into 2008."

Following AMTD's earnings report, Howard Chen, an analyst with CSFB, said that he believes AMTD will have "significant earnings power" once the Waterhouse integration is completed, although the short-term outlook for the stock "remains choppy."

Worth Noting: Ricketts' purchase trumps the $70M open market buy transacted by Dell Founder and Chairman Michael Dell in May, and is now the largest open market purchase by an insider, excluding institutional owners, in the past two years. Additionally, over the past year, only Aubrey McClendon, the CEO of Chesapeake Energy, has laid out more cash ($159M) for shares of his own company.
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Monday, July 24, 2006

RBC CM Preview of Insurance Co Q2 2006 Earnings

  
RBC Capital Markets, 24 July 2006

• IAG: We recommend investors accumulate IAG ahead of Q2 earnings to stay ahead of positive earnings revisions. IAG’s acquisitions will be just hitting the ‘sweet spot’ in terms of EPS accretion during the second half of 2006, and into early 2007. IAG reports Tuesday. We rate IAG O/P, with a $40 target and 68¢ Q2 EPS outlook, well above consensus.

• SLF: We are 1¢ above consensus for Sun Life’s Q2 as we think peer analysts underestimate sharply increased share repurchases. However, we have a 5¢ lower EPS outlook for both 2006, and 2007 on concerns Sun Life’s U.S. businesses will be hurt by rising retail wealth outflows (U.S. mutual fund industry reported redemptions in May for 1st time in 2 years). Sun Life’s U.S. annuity and MFS are having trouble reversing 3 years of outflows, and a weak equity market may exacerbate the trend.

• MFC: Manulife also cranked up share repurchases to 25MM or 1.5% of shares in Q2, well through our 5MM assumed Q2 level, let alone our 20MM full year assumptions, both ’06 and ’07. MFC’s total repurchases are at 39MM of the 100MM program to Nov ’06. This positive surprise could drive up street EPS estimates. Unlike for Sun Life, MFC’s U.S. equity exposure is low proportionate to MFC’s overall business (ie. negligible mutual fund exposure). MFC’s high-flying Japanese annuity business will slow near-term only, the issue is financially immaterial and will be fixed soon. We rate Manulife Top Pick ($43 target) and carry just-above consensus EPS estimates of $2.49/$2.88 for ‘06/’07.
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RBC Capital Markets, 24 July 2006

• Scotiabank Expanding in Mexico

Scotiabank plans to grow its market share in Mexico from 6% to 10% by 2010. As part of that strategy, Grupo Scotiabank will spend US$150MM to US$200MM on more than 300 branches. The Mexican branch count is slated to rise from the current 470 to 800 by the end of 2009, with each branch taking approximately 15-16 months to break even.

• TD Banknorth Analysts Estimate is U$0.55 EPS

By our calculation, the bellwether U.S. banks have reported Q2/06 earnings 4% above consensus expectations, driven by strong fee income and loan growth, partially offset by continued margin pressure. Credit quality remains benign. TD Banknorth is set to report on July 26, with the Thomson First Call mean estimate at US$0.55/share.
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Cdn Banks Rule List of Top Brands

  
The Globe and Mail, Keith McArthur, 24 July 2006

Hewers of wood, drawers of water -- and bankers.

Interbrand's list of Canada's top 25 brands is dominated by the financial services industry. Starting with RBC in the No. 1 spot, there are five other banks and three mutual fund companies on the list.

But their brands represent a relatively small percentage of their parent companies' overall value -- which could suggest that these companies aren't doing enough to leverage their brands, according to the authors of the Interbrand study.

The study concludes that brands like Canadian Tire, Tim Hortons and Shoppers Drug Mart account for roughly one-third of their company's value. But at financial services companies, brands represent just 2 to 7 per cent of a company's market capitalization.

The big five banks, in particular, face the challenge of differentiating themselves against four entities of similar size with similar histories offering similar services, according to Jim Torrance, Royal Bank of Canada's director of brand strategy.

"The banking industry is a difficult one [in which] to really differentiate brand positioning," he said.

RBC is at an advantage, Mr. Torrance said, because the bank has been using the same brand positioning for decades. Its position as the most blue-suited of the banks also helps because it can be applied to both retail and corporate banking, he said.

Jeff Swystun, global director for Interbrand, says Canada's top three banking brands -- RBC, TD (No. 2 on the list of Canada's top brands) and Bank of Montreal (No. 7) -- have become much more sophisticated in their branding over the last five years.

Bank of Nova Scotia and Canadian Imperial Bank of Commerce, on the other hand, are singled out for doing a poor job of defining their brands.

The authors take Scotiabank (No. 9) to task for spending too much of its branding effort on owning the colour red.

"That is fine and definitely an aspect of branding but they are missing a compelling message and suffer from no ownable service differentiators," the authors write.

But Rick White, Scotiabank's vice-president of brand and marketing programs, said the bank's "You're Richer Than You Think" platform has "generated solid awareness with a very tangible value proposition for Canadians."

CIBC (No. 13) appears not to possess as much personality as other financial institutions on the list, according to Interbrand.

"RBC is first for you, TD makes you feel comfortable, Scotiabank is desperate in having you as a friend, while CIBC remains inarticulate," the study states. The bank declined to comment on Interbrand's assessment.

Jeff Swystun, global director for Interbrand, said it's not surprising that consumers say they can't tell the difference between the various banks. All are fighting for a similar space, making it easy for up-and-comers like ING and credit unions to quickly establish themselves as rebel brands.

"At the end of the day, there's enough choice in Canada, and that is evidenced in branding by them all saying the same thing. If there's ever a marketing argument for allowing consolidation in the banking industry, it's because there's such a lack of differentiation within that industry," he said.
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Canada's Most Valuable Brand

• RBC: Key is trust, not roots
• Owner: Royal Bank of Canada
• Brand Custodian: Jim Torrance, director of brand strategy
• Brand value: $3.99-billion
• Rank by value: No. 1

• Brand philosophy: "We do see the brand as an important business-building asset. It helps to attract new clients to the bank; it helps set a positive expectation for our current clients. It is something that is an important factor in how our business performs."

• Interbrand's take: "RBC's broad but aligned product and service set has manifested itself in a message of trust that is the cornerstone of successful financial sector branding. This trust message has found itself in their recent communication of putting the customer first."

• Updating the brand: In 2001, Royal Bank changed its master brand to RBC Financial Group, playing down its Canadian roots in order to become a stronger brand outside Canada. The crown that had been visible in earlier versions of the logo also disappeared.

• On the dearth of global brands: "Canadian companies have tended to be less globally oriented . . ." Mr. Torrance says. "I think as a country, we're recognizing more the need to go outside our borders, and trade barriers are falling, and we're becoming more connected globally."
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Rank
Brand
Value C$ (millions)
1RBC 3,989.6
2Toronto-Dominion Bank3,167.9
3Petro-Canada3,064.0
4Bell Canada2,914.9
5Shoppers Drug Mart 2,830.6
6Tim Hortons 1,878.2
7Bank of Montreal1,854.6
8Canadian Tire 1,634.2
9Scotiabank1,378.7
10Telus1,079.3
11Molson860.9
12Husky831.0
13CIBC727.8
14Rona 668.9
15Investors Group313.2
16National Bank of Canada298.5
17CI Investments 289.0
18Rogers 288.4
19Mackenzie199.7
20Jean Coutu131.6
21Macs/ Couche-Tard 128.4
22Labatt107.4
23Loblaw107.0
24Sobeys 79.6
25Suncor51.3

Source: Interbrand

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Friday, July 21, 2006

Scotiabank's Expansion Overseas

  
Financial Post, Duncan Mavin, 21 July 2006

Bank of Nova Scotia's international division has turned in stellar results of late, but the cost of integrating the bank's expansion overseas could hold back the performance of foreign units in the short-term, says Genuity Capital Markets analyst Mario Mendonca.

In May, Scotiabank's international operations reported earnings of $268-million in the second quarter of 2006, up a whopping 44% from $186-million a year earlier. Investors flocked to the bank's global strategy and Scotiabank's stock got a boost.

But if the cost of integrating and expanding foreign operations puts a dent in the results of the bank's international division in future quarters, short-term investors might not look so kindly on the bank's international division as they have in the past.

Already in 2006, Scotiabank has bought or agreed to buy banks in Peru, Costa Rica and the Dominican Republic. Meanwhile, Scotiabank Mexico has committed to growing market share from 6% to 10%, and on Wednesday, the head of strategy at Scotiabank Mexico was reported to have revealed plans to spend between US$150-million and US$200-million to open more than 300 new branches by the end of 2009.

"We believe the costs associated with growing [Scotiabank's] presence in Mexico (and in its international segment in general) will keep the growth rate of expenses at the top-end of the industry," said Mr. Mendonca.

In fact, said Mr. Mendonca, the strong performance of Scotiabank's competitors in Mexico -- such as Citigroup Inc.'s Banamex unit which reported 13% year-on-year revenue growth and 40% loan growth on Monday -- could put more pressure on the Canadian bank to keep pace and incur integration costs there sooner than planned.
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Thursday, July 20, 2006

Judge Dismisses Barclays from Enron Shareholder Litigation

  
Bloomberg, 20 July 2006

Investors can't pursue securities fraud claims against Barclays Plc, Britain's third-biggest bank, over its role in Enron Corp.'s 2001 collapse, a federal judge ruled.

Investors claimed London-based Barclays and other banks helped Enron structure and finance off-the-books transactions used to hide debts and losses. A federal judge ruled today that because Enron, not Barclays, was primarily responsible for mischaracterizing the nature of these transactions in public filings and statements, the bank couldn't be deemed a primary violator of the securities fraud statute.

"The allegations at most portray Barclays as a culpable aider and abettor," U.S. District Judge Melinda Harmon of Houston said in a 67-page order issued today. The U.S. Supreme Court ruled in 1994 that, under federal securities laws, defendants can't be held liable for aiding and abetting.

Enron investors have sought more than $40 billion in damages, alleging the Houston-based company manipulated its finances before filing the second-biggest bankruptcy in U.S. history in 2001. Plaintiffs alleged that by helping Enron structure transactions used to hide debt and losses, Barclays participated in securities fraud.

Lawyers for Enron's former shareholders so far have reached settlements of securities-fraud claims against five former Enron lenders, including Citigroup Inc. and JPMorgan Chase & Co., recovering more than $7 billion.

Last month, Harmon dismissed Deutsche Bank AG from the case, saying the allegations in the suit were ``too general'' and lacked specific facts needed to prove fraud. On July 5 she ruled that the shareholders could combine their claims against the remaining defendants and proceed as a class.

The case is Newby v. Enron Corp., 01-cv-3624, U.S. District Court, Southern District of Texas (Houston).
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New US Management May Mean BMO's on the Prowl

  
Financial Post, Duncan Mavin, 20 July 2006

Bank of Montreal shuffled its leadership pack at Harris Bancorp yesterday, as the bank positions itself to pounce on potential acquisitions in the fragmented United States banking sector.

Harris Bank installed a new chief executive who will look for growth targets while a beefed-up senior management team will take responsibility for day-to-day operations. The Chicago-based bank's new CEO is Ellen Costello, a 23-year BMO veteran and an investment banker with years of merger and acquisitions experience.

Her appointment confirms that BMO is willing to spend some of its $3-billion in excess capital on the expansion of the Harris Bank network, said BMO's chief operating officer Bill Downe.

The bank is looking to double its branch network from 200 Harris Bank branches throughout the "Chicagoland" area and Northwest Indiana to about 400 branches, he said.

Ms. Costello moves from New York, where she headed up BMO Capital Markets. The bank also appointed a new president of community banking and a new head of business banking, among other changes.

"We have added to the team and signalled that our commitment is to grow the business," Mr. Downe said.

Some industry-watchers had questioned BMO's commitment to growth after the bank announced it was targeting the highest dividend-payout ratio on Bay Street of 45% to 55% in May.

However, Mr. Downe has since insisted that growth, including acquisitions, is still on the agenda, especially in the United States. He will be hoping the latest management shuffle will put the issue to rest.

"I think BMO was waiting for something to fall into their lap that wasn't overly expensive, but perhaps they're thinking that they haven't been aggressive enough," said Mario Mendonca, an analyst at Genuity Capital Markets.

Ms. Costello said the bank is already working on "a lot of prospects" for acquisitions. "It is a priority that's always in focus and I expect to be spending a good deal of my time on it," she said.

In fact, the U.S. banking industry is said by some observers to be ripe for consolidation because the intense competition among smaller banks means they are forced to offer low interest rates on mortgages while faced with pressure to increase the rates on deposits because of rate hikes by the Federal Reserve. Those pressures could force smaller banks to sell up to bigger banks, including Canadians.

Mr. Downe said comments from Federal Reserve chairman Ben Bernanke yesterday that rate increases could be put on hold do not necessarily mean there will be fewer potential targets. Instead, he said, Mr. Bernanke's comments indicate a cooling in the U.S. economy that could nevertheless lead to some consolidation in the banking sector.

Meanwhile, BMO's Harris Bank management shuffle looks remarkably similar to recent changes at TD Banknorth, the U.S. subsidiary of its Canadian rival, Toronto-Dominion Bank.

While BMO's Harris Bank has so far had little luck finding the right target, Banknorth has swallowed Interchange Financial Services and Hudson United Bancorp, bought earlier this year for a total of almost US$2.5-billion.

In June, TD appointed chief risk officer Bharat Masrani as president of Portland, Me.-based TD Banknorth. In his new role, Mr. Masrani is responsible for running Banknorth's everyday operations.

Although chief executive Bill Ryan has said it is unlikely Banknorth will make more significant purchases until 2007, the appointment of Mr. Masrani will enable him to spend more time looking for targets and integrating the purchases they have made.
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Wednesday, July 19, 2006

TD Ameritrade will Contribute $55 Million to TD Bank's Q3 2006 Earnings

  
Bloomberg, 19 July 2006

Toronto-Dominion Bank, the country's second-largest bank by assets, said that its stake in TD Ameritrade Holding Corp. will add C$55 million (U$48.3 million) to earnings in the fiscal third quarter.

The Toronto-based bank owns about a third of TD Ameritrade, which reported earnings yesterday. Toronto-Dominion's third- quarter results will be released Aug. 24, the lender said today in a Canada NewsWire release.
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RBC Capital Markets, 19 July 2006

Investment Opinion

• Ameritrade Beats Expectations. AMTD’s Q3/F06 result beat consensus and the stock traded up US$1.05/share or ~7.7%. We estimate that each US$1/share move in AMTD’s stock price is worth C$0.40/share in value to TD stock. Based on this result, we estimate AMTD will contribute ~$59MMor 6% to TD’s Q3/F06 result, up from our prior $49MM estimate – worth 1¢/share to TD cash EPS this quarter. Last quarter, AMTD added $39MM or 4.5% to TD earnings when TD picked up only 2 months at 32.5% ownership. In Q3/F06, TD picks up 36% of a full AMTD quarter (39.5% thereafter).

• Holding Estimates Steady. Factoring the AMTD EPS result into our TD model indicates potential upside of 2-3¢ in each of 2006/2007, though in the interest of conservatism, we will opt to hold our cash EPS estimates at $4.60/$5.20, retain our $70 price target and Outperform rating.

• Revenue Quality Improving. AMTD’s EPS sensitivity to trading activity is declining. Trade commissions now account for only 39% of revenue, down from 54% in 2005 before the Waterhouse deal. The beneficial flip side is that asset-based and money-market revenue is rising as a percent of the whole. This is fortuitous because the outlook for trading volumes is indicated down ~15%, worrisome in a high fixed-cost business. AMTD’s revenue is now more resilient in weak equity trading markets. For every 15% decline in trades/day, EPS would decline by 9%, less than the 14% sensitivity prior to the Waterhouse deal. The ‘comprehensive’ impact would be lower in our opinion, offset by a shift in client assets to cash balances.

• TD Waterhouse Integration To Beat Plan. The cost benefits of integrating the Waterhouse client base are substantial, including collapsing Waterhouse trading & clearing systems, and converting certain AMTD trading balances to asset management platforms. Management revised up its EPS guidance largely on better clarity around the Waterhouse integration –the plan factors minimal net account growth and conservative revenue growth – both comfortably beaten in this Q3/F06 result.

• Valuation. Our price target of $70 is set at ~13.5x our 2007 cash EPS estimate of $5.20. Our premium target P/E reflects TD’s leading domestic franchise, retail-oriented business mix, unique U.S. assets and excellent management. Our target P/E is set at a 3% premium to the group though TD has traded at an average 6% forward P/E premium to its Canadian bank peers since 1998.
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Scotia Capital, 19 July 2006

Event

• TD Ameritrade reported Q3/06 earnings of US$0.23 per share, versus IBES estimate of US$0.22 per share. At its current ownership level of 39.8%, the contribution to TD Bank is estimated at C$0.10 per share.

• AMTD reduced fiscal 2006 earnings guidance to the range of US$0.87 per share to US$0.93 per share from its previous midpoint of US$0.94 per share and increased fiscal 2007 earnings guidance to the range of US$0.99 per share to US$1.21 per share from its previous midpoint of US$1.06 per share.

What It Means

• Our 2006 and 2007 earnings estimates for TD are $4.50 per share and $5.00 per share, respectively.
• Our 12-month share price target is $70 per share.
• Maintain 2-Sector Perform on shares of TD Bank.
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Tuesday, July 18, 2006

TD Ameritrade Q3 2006 Earnings

  
BMO Capital Markets, 18 July 2006

TD Ameritrade (40% owned by TD Bank) reported strong EPS and raised guidance for 2007. EPS in the quarter were US$0.23 up 28% from a year ago and marginally ahead of forecasts. Solid fee revenues and better cost control offset somewhat weaker commission revenues. In addition, AMTD increased guidance for 2007 to reflect higher expected margins on balances and tight cost control. Overall, these were positive results and suggest that the benefits of the integration of Waterhouse and Ameritrade are larger than initially expected. This is despite the fact that trades per day in June and the start of July are 25% less than in April and May. We estimate that, when translated into TD’s cash earnings, AMTD will contribute about $60 million this quarter, ahead of the $39 million reported in TD’s second quarter (and $53 million if the second quarter was adjusted to include a full quarter of AMTD). It is noteworthy that TD’s share of AMTD and BNK now each contribute about $60 million to TD’s quarterly cash earnings, which are roughly $850 million. We believe that TD shares are very good value at current levels. Canadian operations are performing well and the balance sheet is strong. In the U.S., BNK is underachieving but AMTD is ahead of plan.
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Bloomberg, 18 July 2006

TD Ameritrade Holding Corp. was raised to outperform from market perform by analyst Matt Snowling at Friedman, Billings, Ramsey & Co. The price target is $21.00 per share.
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AP, Josh Funk, 18 July 2006

Online brokerage TD Ameritrade Holding Corp. said Tuesday its third-quarter profit soared 67 percent on higher fee-based revenue and its acquisition of TD Waterhouse. The company's shares zoomed more than 6 percent in response.

The company also tightened its guidance for fiscal 2006 and raised its forecast for the following year. Ameritrade shares rose 87 cents to $14.51 in late morning trading, but the stock remains near the low end of a 52-week range of $13.30 to $26.37.

Ameritrade reported earnings grew to $139.8 million, or 23 cents per share, during the quarter that ended June 30, from $83.6 million, or 20 cents per share, a year ago.

Total revenue more than doubled, to $540.3 million from $234.4 million a year earlier. At the same time, expenses ballooned to $307.3 million from $97.5 million. The company said revenue from managing accounts for clients was nearly 60 percent of total revenue.

"Despite a decline in investor activity in June, we realized a record quarter, thanks in part to an increase in asset-based revenues," said Joe Moglia, Ameritrade's chief executive.

The Omaha-based company's net earnings per share of about 23 cents also exceeded what Wall Street had forecast. Analysts surveyed by Thomson Financial on average expected earnings per share of 22 cents on $544 million of revenue.

Ameritrade's results this year have been helped by its acquisition of TD Waterhouse's U.S. retail securities business. The deal closed in January.

Last month, some TD Waterhouse customers had trouble accessing Ameritrade's online trading platform for several days after new security measures were added, but Moglia said those problems did not significantly affect earnings.

Moglia says the company continues to work on completing the integration of TD Waterhouse to help the company grow in the long-term investor segment.

Previously, the company said it planned to close two of its five call centers as part of the merger and keep centers in Omaha and in Fort Worth, Texas.

Moglia said Tuesday that Ameritrade has now decided to keep its Yorkview, Canada, call center open for at least the next two years to help ensure good customer service. But even with the additional call center, Moglia said, the company still expects to save about $378 million in annual expenses once the integration is completed.

"We're investing in (fiscal) '06 and '07 to make sure we are stronger in '08," Moglia said.

Lauren Bender, an analyst with Boston-based Celent, said this quarter's results show that Ameritrade is becoming more than an online brokerage.

"The April-June results show that the merger of TD Waterhouse and Ameritrade has created a brokerage firm that is well-positioned to compete head-on for retail investors' trading and investment activity," Bender said.

Analyst Howard Chen, with Credit Suisse First Boston, said in a research note that he believes Ameritrade will have significant earning power once the Waterhouse integration is completed even though the short-term market outlook "remains choppy." Chen's one-year price target for the stock is $23.

Moglia said it's too soon to tell how the company's new $9.99-per-trade pricing, announced in April, will affect the business long term, but the initial response has been positive.

Ameritrade reported handling 252,784 trades a day on average during the third quarter, which is down from the 254,382 trades a day it handled during the second quarter.

And average client margin balances grew from roughly $6.8 billion in the second quarter to $7.9 billion in the third quarter.

The company narrowed its guidance for fiscal 2006 earnings to a range of 94 cents to $1, or between 87 cents and 93 cents when a one-time gain from the sale of its investment in Knight Capital Group Inc. is excluded. Previously, the company had forecast earnings in a range of 85 cents to $1.03.

Ameritrade raised its earnings projections for fiscal 2007 to a range of 99 cents to $1.21 per share, up from an earlier estimate of 94 cents to $1.18.

Analysts are expecting a profit of 90 cents in fiscal 2006 and $1.20 in fiscal 2007.
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Bloomberg, 18 July 2006

TD Ameritrade Holding Corp., the third-biggest online brokerage, said profit jumped 67 percent in the first full quarter since its $1.3 billion purchase of TD Waterhouse USA.

Net income in the fiscal third quarter ended June 30 rose to $139.8 million, or 23 cents a share, from $83.6 million, or 20 cents, a year earlier, the Omaha, Nebraska-based company said today in a statement. Revenue more than doubled to a record $540.3 million.

Chief Executive Officer Joseph Moglia is relying on the 2.25 million customer accounts acquired with TD Waterhouse USA to help maintain profit growth after the stock market declined for the first time in five quarters. Average client trades per day jumped 82 percent from a year earlier.

"We continue to believe post-integration TD Ameritrade earnings power is significant," said Howard Chen, a New York- based analyst at Credit Suisse Group, in a note to investors today.

Ameritrade shares rose after the company raised its earnings forecast for next year to between 99 cents and $1.21 from an earlier target of 95 cents to $1.17. It lowered the top end of this year's forecast to $1 from $1.06. Shares of the company jumped 75 cents, or 5.5 percent, to $14.39 at 11:18 a.m. in composite trading on the Nasdaq Stock Market.

Market Drop

On a per-share basis, the results matched the 23-cent estimate of Sandler O'Neill & Partners analyst Richard Repetto, ranked the most-accurate forecaster of the company's earnings by StarMine Inc. Based on the average of 12 analysts' estimates, the company was expected to earn 22 cents, according to Thomson Financial.

Before today, concern that a prolonged drop in U.S. stocks would slow trading had pushed TD Ameritrade's stock price down 30 percent since Jan. 25, when the merger closed. The stock is the worst performer this year in the 12-member Amex Securities Broker/Dealer index. Competition with rivals including Charles Schwab Corp. and E*Trade Financial Corp. has forced the company, which now has about 6 million accounts, to slash commission rates to keep customers from defecting.

Ameritrade clients averaged 253,000 trades per day during the quarter, which while down from the second-quarter average of 254,000 was higher than the 139,000 average of the third quarter of 2005.

Computer Glitch

The company had computer problems that kept its clients from using its Web-based trading site for almost a week in June. The problems arose from the merging of login procedures for TD Waterhouse and Ameritrade customers.

Revenue from commissions and transaction fees almost doubled in the quarter to $213.2 million. Net interest revenue, or what the company earns from loaning cash and securities to clients to trade with, more than doubled to $199.4 million.

Earnings per share last quarter grew slower than total net income because the company, previously called Ameritrade Holding Corp., paid for the acquisition of TD Waterhouse USA by issuing 196.3 million of its own shares to the seller, Toronto-Dominion Bank.

The purchase, which helped diversify the company beyond its roots as a Web site for day-traders, increased a cost base that previously consisted mostly of computers and customer-service call centers. TD Waterhouse had a network of 143 brokerage branches, compared with Ameritrade's four, and 2,600 investment advisers, compared with 1,400.

Expenses

Total operating expenses last quarter more than tripled to $307.3 million. Employee compensation and benefits almost doubled to $213 million, a smaller increase than Sandler O'Neill's Repetto had expected.

Moglia has vowed to reduce fixed costs by an annual rate of $328 million, or more than 30 percent, by mid-2007. The company already has closed 44 branches and a call center in Jersey City, New Jersey. It chopped the number of employees to 4,100 as of March 31 from 4,500 when the acquisition closed.

TD Ameritrade has said it wants to reduce the workforce to 3,500.
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Sun Life Signs China Pension Deal

  
The Globe and Mail, Sinclair Stewart, 18 July 2006

Sun Life Financial Inc. has signed a deal to distribute pension products through one of China's largest state-owned banks, an arrangement that is believed to be the first of its kind for a foreign insurer.

The move will give Sun Life a head start in the race to cash in on "enterprise annuities," a fledgling market that is viewed as one of the fastest-growing opportunities in China's deregulating financial sector.

Enterprise annuities are essentially corporate pension policies, and resemble group retirement plans in Canada or 401K plans in the United States. The Chinese government handed out licences to about 15 fund managers last year enabling them to offer the product, and is hoping it will become sufficiently popular to stave off what some fear could be a retirement funding crisis for the country's aging population.

Currently, the entire market is only worth about $13-million, but that number is expected to boom to approximately $55-billion in the next four years, according to independent research cited by Sun Life.

That would far exceed China's $25-billion (U.S.) National Social Security Fund, which was created to help bridge pension shortfalls, and in the process provide another lucrative source of fees for fund managers.

"The government is very much encouraging corporations to form these programs to help support the pension reform," said Janet De Silva, president and CEO of Sun Life Everbright Life Insurance Co., the insurer's 50-50 joint venture with China Everbright Group Ltd.

The annuities will be sold through the group's banking arm, China Everbright Bank.

Ms. De Silva said the enterprise annuities business will be a "very significant" part of Sun Life's growth plans in the world's most populous country. In Canada, Sun Life has lobbied against allowing banks to sell insurance products through their branches, but has made use of these very channels to fuel its expansion in India and China. The insurer has maintained that these markets are different, since they don't have the same concentration of banking powers in only a few hands.

Sun Life is targeting a top-10 position among all life insurers in China -- right now it is in the top 15 -- and intends to have a presence in 50 cities by 2009. Right now it has offices in seven cities, including Beijing, Tianjin and Hangzhou.

Yet it is competing against larger, foreign-owned insurance rivals, as well as state-run financial colossuses that have hands in banking, insurance, asset management and brokerage services.

"In the Chinese market, the competition in the life insurance industry is very fierce," acknowledged Xu Bin, the chairman of Sun Life Everbright, and former head of China Everbright Bank. "In the future, I think, according to a Chinese saying, we should give full play to our strengths and avoid our weaknesses."

Mr. Xu Bin is spearheading a delegation of about 15 officials who are in Toronto for the joint venture's first board meeting on foreign soil, which will be held today. He maintained that one of Sun Life Everbright's advantages is that both partners are rooted in the financial sector, something that is not always the case when Western banks or insurers look to team up with Chinese enterprise.

China Everbright Group has assets of 550 billion yuan, or about $80-billion (Canadian), while China Everbright Bank is ranked as the 10th-largest player in the country.

Initially, Sun Life will push its pension products through the bank's network of 370 branches, and support the bank's annuity offerings. Eventually, the plan is for China Everbright Bank to distribute Sun Life's life and health insurance products as well.

Mr. Xu Bin, who is also a vice-chairman of the China Everbright Group parent company, said the bank is also preparing for an initial public offering of its shares.

Amid the gold rush to grab a piece of China's emerging financial sector, skeptics have voiced concerns about the quality of the banking industry's books and its corporate governance regime.

Mr. Xu Bin acknowledged that the joint venture is benefiting from Sun Life's greater breadth of experience, and said the board meeting in Toronto has provided a first-hand opportunity for some of his Chinese officials to see how the business functions in Canada.

"I think Canadian people are very easy-going," he said, insisting that he was not saying this for the benefit of Sun Life CEO Donald Stewart, who was seated beside him at a conference table.

"Sun Life has more than 100 years of history and have shown their financial strength . . . but in our corporation they treat us on an equal basis. They never say you should listen to me because I'm bigger and stronger than you."
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Monday, July 17, 2006

Scotia Capital Preview of Insurance Co Q2 2006 Earnings

  
Scotia Capital, 17 July 2006

• Valuations, after a modest “correction,” are certainly more reasonable – macro environment modestly favourable – sector’s defensive characteristics provide support in uncertain markets – we continue to recommend market weight, leaning toward overweight should the correction continue. As we approach the Q2/06 earnings season, we are much more comfortable with the Canadian lifeco group’s valuation, which, after a modest and somewhat overdue “correction,” is now in line with historical averages. The correction has brought the valuation for the group relative to U.S. lifecos back closer to historical averages, with the premium (forward P/E) versus the U.S. lifecos declining from 15% to 10%, now closer to its three-year mean of 5%. The premium versus the Canadian banks, at 8% (forward P/E), has not changed in the last three months and remains well above its 2% three-year average. While we certainly believe a premium above historical levels is justified in a rising interest rate environment, and would add that a flattening yield curve environment is much less punitive to the lifecos than the banks, we see little catalyst in the lifeco group that would force the multiple to significantly increase versus the banks going forward. However, in our opinion, the Canadian lifeco sector’s defensive characteristics, specifically a consistent track record of negligible earnings surprises and significant excess capital positions that allow for share buybacks and dividend increases, do warrant a valuation premium, especially in these uncertain markets.

• We are much more comfortable with Canadian lifeco valuations, which, after a modest and somewhat overdue “correction,” are now in line with historical averages. After a modest “correction” in the Canadian lifecos’ forward multiple in the last three months (from a lofty 14.2x to a more reasonable 13.0x), in part attributable to a correction in the S&P/TSX (down 4% in the last three months) as well as some profit-taking on what were indeed stretched Canadian lifeco valuations, and in part attributable to a flattening yield curve putting some pressure on all financials, we now find the Canadian lifecos trading at their long-term average multiple of 13.0x NTM EPS (average from January 2000 to June 2006). Coincidently, the U.S. lifeco group, at 11.8x, is trading in line with its 15-year average level of 11.9x NTM EPS. Relative to the S&P 500, the Canadian lifeco forward multiple has now declined from a lofty 90% level three months ago (the highest level we’ve seen) to 86% of the S&P 500 forward multiple. While we like the trend, we point out that we are still well ahead of the historical mean of 68%, suggesting to us there may be better value in other sectors. Even the U.S lifeco group, which, at 11.8x, is 80% of the S&P 500 forward multiple, while down slightly from three months ago, is just coming off four-year highs. However, with ample excess capital, an improving macro environment, especially with respect to long term interest rates (rising near the 5%-6% level we feel much more comfortable with), a diversified book of business that offers earnings stability, and reasonable growth prospects (we forecast 11%-12% CAGR through 2007), we see little risk to EPS growth going forward. In addition, we believe improved risk management techniques, developed from the fact that over the last four years there have been extremely volatile equity markets, credit markets, and interest rate environments, offer an additional element of earnings stability.

• Valuations contract relative to U.S. lifecos – now closer to historical average. The jump we saw in the group versus the U.S. lifecos in the first three months of 2006, when the premium to the U.S. lifecos (on a forward P/E basis) increased from 9% to 15%, essentially unwound in the past three months, declining from 15% to 10%, still modestly ahead of the 5% long-term average. We believe an increasing premium relative to the U.S. group is justified owing to faster increasing excess capital positions and better growth prospects. (While EPS growth was relatively the same from 2000-2005 for the two groups, Canadian lifecos are expected to grow in the 12% area through 2007, whereas consensus growth for the U.S. group is 10 %.) When you combine these valuation premiums to the U.S. lifecos with increasing levels of excess capital, and a more favourable Canadian currency, we have to believe the Canadian lifecos will look to the highly fragmented U.S. market to make what we consider to be reasonably accretive acquisitions. We expect acquisition activity to increase in 2006 and 2007, as we believe the players will continue to take advantage of low debt financing rates to acquire, and sub-scale players will look to rationalize or specialize.

• Valuation relative to Canadian banks – 8% premium versus 2% three-year mean – suggests banks may be slightly more attractive – unless long-term interest rates continue to rise and the yield curve continues to flatten. Rising long-term interest rates and a flattening yield curve have contributed to the expansion in the premium relative to the banks. We believe a modest premium over historical levels is justified, assuming long-term interest rates rise and the yield curve remains somewhat flat, which is traditionally an environment less punitive to lifecos than to banks. Furthermore, a modest premium to the group is perhaps somewhat warranted given the better growth prospects for the Canadian lifecos (12% through 2007) versus the Canadian banks (10% through 2007). However, we note that the premium the U.S. lifeco group enjoys versus its banks has in fact declined from 10% to 3% over the last six months (but still above its long-term average of 1%), despite rapidly rising long-term interest rates and a flattening yield curve, and despite the fact that consensus growth for the U.S. lifecos, at 10%-11%, is marginally better than the U.S. banks, at 10%.

• Fundamentals remain steady – improving macro environment as long-term interest rates continue to rise. Fundamentals remain steady for the group, with ROEs modestly climbing, excess capital positions growing, and targeted dividend payout ratios rising. Excellent risk-management techniques, in our opinion, help mitigate the risks to any potential unfavourable macro environments. As it stands now, we are comfortable with the risk profiles for the group, and see no apparent headwinds, especially as long-term interest rates continue to rise.

• Increasing long-term interest rates bode well for lifecos – U.S. long-terms well above our “5% threshold” is a positive for GWO, MFC, and SLF – Canada long-terms still well below 5% and not expected to move – negative for IAG. Long-term rates have risen in both the United States and Canada, mitigating our concerns, to some extent, over the negative impact of declining long-term interest rates. With liabilities longer than assets, a declining long-term interest rate scenario can pose significant reinvestment risk to the lifecos, as well as present spread compression issues for the fixed-rate products. We believe a continuation of a more moderate increase in long-term rates, to the 5%-6% range, would be a positive for the lifeco group. Since we are essentially at 5% in the United States (U.S. 10- year treasuries are 5.07%), we remain less concerned about interest rate risk for those companies with predominantly U.S. interest rate risk exposure, namely Great-West Lifeco, Manulife, and Sun Life. However, Industrial-Alliance is still the company most at risk; largely because the company’s business mix (more than half the business is very long tail individual insurance business) makes it the most sensitive to low levels of long-term interest rates, and Canadian long-term rates, currently at 4.45%, still have a way to go before they approach the 5%-6% range. Whether or not they get there remains less certain. Scotia Economics has recently trimmed its Canadian long-term (government) rate forecasts, and now expects the 10-year Canada yield to climb marginally to 4.80% by the end of 2006, and then fall to 4.40% by the end of 2007.

• Credit now is excellent – will the good times continue? Times are good now, but if credit spreads were to widen and the incidence of bond defaults increases, Canadian lifecos’ earnings could suffer. Manulife has the highest exposure of below-investment grade bonds for the group (6% of Manulife’s bond portfolio is below investment grade, as opposed to 3% for Sun Life, 1% for Great-West Lifeco, and 0% for Industrial-Alliance), albeit the entire group is still less exposed than most U.S. lifecos. Exposure to GM and Ford bonds is limited as well, with Sun Life at $0.37 per share, Great-West Lifeco at $0.36 per share, and Manulife at $0.22 per share. Manulife claims that 95% of its exposure to Ford and GM bonds is secured.

• If markets continue to be sluggish, 2007 EPS estimates could come under pressure. Manulife’s and Sun Life’s equity market exposure is largely U.S.-related, and with the S&P 500 up 3% in 2005, and up just 1% year-to-date 2006, the likelihood of average market levels in 2006 meeting or surpassing the expected 7%-8% may be slim, especially if markets remain flat for the rest of 2006. The likelihood of downward adjustments in 2006 for Great-West Lifeco or Industrial-Alliance is less, due to the better performance of the TSX and the FTSE over the last 12-18 months. Industrial-Alliance is 100% exposed to the TSX and Great-West Lifeco is about one-third exposed to each of the TSX, S&P 500, and FTSE. However, if markets continue to be sluggish, as they have been of late, we expect 2007 EPS estimates could come under pressure. Who’s the most sensitive to changes in equity markets? We put Industrial-Alliance first, with every 10% change in equity markets impacting EPS by 9%, followed by Sun Life at 6%, and then Manulife and Great-West Lifeco each at 5%.

• Strengthening Canadian dollar versus the U.S. dollar – Manulife the most at risk. Our EPS estimates assume an average exchange rate of $1.11 (CAD/USD) for 2006, with no currency hedging for Manulife and Sun Life, and a currency hedge for Great-West Lifeco in line with our average rate. Each 5% movement in our estimate is worth about $0.05 per share for Great-West Lifeco (or 2% of 2006E EPS), $0.17 per share for Manulife (or 4% of 2006E EPS), and $0.06 per share for Sun Life (or 2% of 2006E EPS). As Manulife’s U.S. owners (nearly 50% of the shareholder base) would obviously see their stock benefit from an appreciating Canadian dollar, we believe any perceived impact on Manulife’s share price due to an appreciating Canadian dollar may not be so dramatic.


Canadian P&C insurers – market remains rational - auto continues to pace ahead of industry norm, commercial becoming increasingly competitive.

• The profitability of Canadian auto insurance continues to pace well ahead of industry norms due to the sustained effectiveness of automobile reforms and continued low frequency levels. We get the impression from management at ING Canada that this trend will continue throughout 2006. The U.S. non-standard auto market (a significant portion of Kingsway’s business) remains very competitive and perhaps somewhat irrational, as niche players have gained market share. It remains to be seen whether the impact of more expensive reinsurance (in light of the hurricanes) in the July 2006 renewal season will introduce an element of rationality to the market, an obvious positive for Kingsway. However, should this market become more rational, we might expect large traditional players (State Farm, Geico, and Progressive) to no longer “hold back the reins” and possibly re-enter the non-standard market as well, thus increasing competition.

• While the 2005 hurricanes removed US$58 billion from the balance sheets of insurers/reinsurers worldwide (one-half of the impact was on U.S. domestic companies and one-half of the impact was on those outside of the United States, predominantly European and Bermuda domiciled companies), the perceived “hardening” of markets was a reality only for U.S. coastal coverages. Consequently, our Canadian P&C companies will likely see little impact, and we believe rate increases will continue to be flat. While the Canadian commercial market will continue to be increasingly competitive, we believe it will remain rational.


Great-West Lifeco Inc.
1-Sector Outperform – $33 one-year target, based on 2.9x 6/30/07E BV and 13.1x 2007E EPS
• We are looking for $0.52 per share for Q2/06, in line with consensus. Our 2006 EPS estimate of $2.13 is in line with consensus, and our 2007 EPS estimate of $2.43 is $0.03 ahead of consensus.
• Strong growth expected in 2007 when negative impact of hedge roll-off is mitigated.
• European segment (24% of bottom line), up 26% in 2005 (ex foreign exchange), should continue to show double-digit growth – with further support in 2006 from the recently announced acquisition.

Industrial-Alliance Insurance and Financial Services Inc.
3-Sector Underperform – $34 one-year target, based on 1.7x 6/30/07E BV and 11.7x 2007E EPS
• We are in line with consensus for Q2/06 and slightly below consensus for 2006E and 2007E.
• We expect product repricing in March 2006 may cause sales growth to begin to decelerate.
• Individual wealth management earnings growth expected to be strong as the company continues to bring Clarington Fund assets in-house.

Manulife Financial Corporation
1-Sector Outperform – $38.50 one-year target, based on 2.3x 6/30/07E BV and 13.8x 2007E EPS
• We are looking for $0.60 per share for Q2/06, $0.01 per share below consensus. Our 2006 EPS estimate of $2.43 is $0.03 below consensus and our 2007 EPS estimate of $2.76 is $0.04 below consensus.
• We expect the exceptional U.S. variable annuity sales growth will start to slow and return to more “normalized” levels.
• Flush with excess capital – but with this kind of organic growth company, who needs to make an acquisition?

Sun Life Financial Inc.
2-Sector Perform – $52 one-year target, based on 1.9x 6/30/07E BV and 12.8x 2007E EPS
• We are looking for $0.89 per share for Q2/06, $0.01 per share above consensus. Our 2006 EPS estimate of $3.59 is $0.04 above consensus and our 2007 EPS estimate of $3.95 is in line with consensus.
• A “show me” story – we will closely monitor much-needed progress U.S. variable annuity.
• Focus on margin improvement at MFS.
• Spread improvement in U.S. fixed annuity block should continue in Q2/06 as U.S. interest rates continue to rise.
• Little in the way of a catalyst until company announces CFO replacement - not likely until late 2006.

Fairfax Financial Holdings Limited
2-Sector Perform – US$172 one-year target, based on 1.0x 3/30/07E BV
• We expect another steady quarter ($5.00 EPS), not as good as the exceptional Q1/06 ($9.10 EPS), but one with good fundamentals in ongoing insurance operations, and close to break-even in runoff operations.
• Runoff segment remains under the radar screen.

ING Canada Inc.
1-Sector Perform – $61 one-year target, based on 2.3x 6/30/07E BV
• We are looking for $1.08 per share for Q2/06, $0.10 per share below consensus. Our 2006 EPS estimate of $4.53 is $0.09 below consensus and our 2007 EPS estimate of $4.19 is $0.07 below consensus.
• A good chance the company could exceed our estimate and consensus with another excellent quarter of underwriting profitability – we forecast a combined ratio of 89%, not as good as the exceptionally strong 81% in Q2/05, but Q2 and Q3 are typically strong quarters.

Kingsway Financial Services Inc.
2-Sector Perform – $27 one-year target, based on 1.35x 6/30/07E BV
• We are looking for C$0.78 per share for Q2/06; we believe this is in line with consensus.
• We look for a steady quarter in line with consensus, with no significant prior period reserve development and a combined ratio in the 97% range.
• Any catalyst for premium growth in the United States? Likely not in the near term.
• Company does not appear to be aggressively buying back stock as it continues to drift downward - why?

Northbridge Financial Corporation
3-Sector Underperform – $37 one-year target, based on 1.5x 6/30/07E BV
• We are looking for $0.86 per share for Q2/06, $0.03 per share above consensus. Our 2006 EPS estimate of $3.71 is $0.04 below consensus and our 2007E EPS estimate of $3.24 is $0.03 below consensus.
• We expect a steady quarter with nothing unusual.
• Valuation a little rich relative to U.S. commercial lines peers – we see little prospect for multiple growth.
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Thursday, July 13, 2006

Sun Life Unit to Pay U$3.8 Mln to Settle SEC Sales Allegations

  
Bloomberg, 13 July 2006

A U.S. brokerage unit of Sun Life Financial Inc., Canada's second-largest life insurer, agreed to pay $3.8 million to settle claims it failed to adequately tell customers how it was paid to sell investment products.

IFMG Securities sold mutual funds and variable annuities for as many as 17 companies through a ``preferred'' program, the U.S. Securities and Exchange Commission said in a statement today. The broker didn't properly inform clients those companies paid for special treatment and that its brokers received larger commissions for selling their products, the SEC said.

IFMG Securities didn't adequately disclose ``the potential conflicts of interest created by these payments,'' the SEC said in the statement.

Purchase, New York-based IFMG Securities, which proposed the settlement, neither admitted nor denied the claims.

The broker agreed to pay more than $2.8 million to cover improper gains and interest, as well as civil penalties of $1 million, the SEC said. Since 2003, the SEC and other regulators have imposed $400 million in penalties on brokers and fund firms for improper sales practices, including the failure to tell investors about so-called revenue sharing payments.

``We are pleased to bring this matter to a final resolution, and will continue to work to enhance our compliance practices and procedures so that they meet the highest possible standards,'' Michael Weiss, president of IFMG Securities, said in an e-mailed statement.
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Manulife Halts Japan VA Sales

  
RBC Capital Markets, 13 July 2006

Manulife Japan and its partner banks will suspend sales of certain variable annuity products pending tax clarification starting today.

Investment Opinion

• Certain VA Sales Suspended. Manulife Japan asked, and its partner banks complied, to suspend sales of certain Variable Annuity (VA) sales pending resolution of income tax treatment in the hands of annuitants. This impacts MFC’s recently imported Guaranteed Minimum Withdrawal Benefit VA product, so successful in the U.S. in recent years, but not yet a material product in Japan. Manulife is not pleased with the recent tax interpretation and potential for overtaxation of its customers. We think MFC is doing “the right thing”.

• Issue Highlights MFC’s EPS Diversity - Japan VA’s Not a Material EPS Contributor. First, Japan contributes only ~6% to MFC earnings, and most from insurance. Also, growing at 15-20% in USD terms (up 17% in Q106), Japan is an “in-line” EPS contributor, but no more, to Manulife’s 20%+ overall EPS growth. Further, the early-stage, high-growth VA business, in our view, is a not yet a material contributor to MFC Japan (actual is not disclosed). Second, the specific product suspension impacts an undisclosed, but we think, minority proportion of overall Japan VA sales, which were US$1.1B in Q1/06. The impact on in-force business is smaller still since the two new VA products impacted were only launched in November ‘05.

• Coveted Bancassurance Relationship? The real question is what impact, if any, will this have on Manulife’s coveted relationship with BOTM-UFJ – one of MFC’s three significant growth engines over the next 5-10 years (Hancock and China being the other larger two). Without background, this is difficult to assess; however, we would be concerned BOTM may choose to position Manulife as a scapegoat for this potentially embarrassing situation. We should also consider any potential for consumer liability if it turns out these products were sold without sufficient due diligence. Another outcome is that, as with the Portus hedge fund debacle and/or MFC’s Indonesian expropriation, Manulife is able to turn this in to a Public relations” coup.

• Valuation – No Changes to EPS estimates - Top Pick Reiterated. Our $43 target is based on 16.5x our forward EPS estimate, a 10% premium to our Canadian lifeco peer average of 15x, wider than the historical 3% premium to reflect the superior growth and capitalization as well as MFC’s enhanced global position. EPS risk centers on accelerated USD translation as nearly 2/3 of earnings are USD-based, and not hedged. Also, Manulife could be susceptible to a downturn in claims experience, unusually bad credit markets, or to an acquisition.
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RBC CM Best Equity Investment Ideas for 2006 H2

  
The Globe and Mail, Angela Barnes, 13 July 2006

RBC Dominion Securities Inc. has added a number of new names, including Focus Energy Trust, Canadian Natural Resources Ltd. and Nova Chemicals Corp. to its list of "best ideas" in stocks for the second half of 2006, while dropping another 14 names that were in the first half list. The best ideas list, which was first compiled at the beginning of last year, has substantially outperformed the market over the intervening period. It has delivered a total return of 29.3 per cent on an annualized basis since inception, compared with a 18.7-per-cent return in the S&P/TSX composite index over the same period.

Other additions to the list, which feature RBC Dominion analysts' top picks for the next six months in the sectors they follow, include AEterna Zentaris Inc., Anatolia Minerals Development Ltd., Atrium Biotechnologies Inc., Banro Corp., Calfrac Well Services Ltd., Chartwell Seniors Housing REIT, MacDonald Dettwiler & Associates Ltd., Murchison Metals Ltd., Shoppers Drug Mart Corp., Shore Gold Inc., Trimac Income Fund and West Fraser Timber Co. Ltd.

As some of the names suggest, the list is dominated by small- to mid-capitalization issues, but there are a number of larger issues there for balance, including Manulife Financial Corp. and Toronto-Dominion Bank that RBC Dominion believes offer a very attractive risk/return profile. The list as a whole is intended for more sophisticated and risk tolerant investors, said Richard Talbot, director of Canadian equity research. It is not designed for the "widows and orphans" type investors because of the higher risk and volatility entailed in some of the stocks. Higher risk can mean higher returns.

There are a number of stocks on the list that are not those of Canadian companies. Mvelaphanda Resources Ltd., a holdover from the first-half list, is one such example. The South African company has direct equity interests in gold, precious metal and diamond operations in South Africa and Angola. Zinifex Ltd., an Australian company that is a major producer of zinc and lead, is another. It too was a holdover from the earlier list.

Among the better-known stocks mentioned in the first half list but not the latest list were Petro-Canada and Mega Bloks Inc.
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Wednesday, July 12, 2006

Bank of America upgrades TD Ameritrade

  
Forbes, Mary Crane, 12 July 2006

Banc of America has upgraded TD Ameritrade to "buy" from "neutral" as the shock of the TD Waterhouse acquisition is absorbed and earnings per share rise.

Analyst Michael Hecht said the online broker's stock has been weak on seasonal concerns about retail activity, pricing and concerns over integrating the U.S. operations of TD Waterhouse, which Ameritrade bought in early 2006.

But despite concerns about low-single digit growth in retail stock trading, he said near-term concerns are overdone.

Ameritrade's earnings per share should grow by 25% each year for the next two years as TD Waterhouse's securities business is integrated, Hecht forecasted.

"Ameritrade [has] maintained the right cost structure to maintain a very profitable business model which has less variability in fact than most investors probably realize."

Hecht raised his price target on TD Ameritrade stock to $20 from $19 to reflect his new 2007 earnings estimate of $1.42, up 3% from $1.21.

The risk-to-reward ratio on the stock also looks favorable, the analyst added.

If activity rates remain at trough levels of 3.6%, the downside worst-case scenario stock price would be $13 versus the current $20 price target.
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MarketWatch, Greg Morcroft, 11 July 2006

Analysts at Bank of America Tuesday upgraded shares of online financial services firm TD Ameritrade to buy, saying short -term concerns about retail activity and pricing cuts are overblown. The analysts also raised their price target on the shares to $20 from $19. "Despite our secular concerns about low-single digit growth in retail stock trading given continued pricing pressures as well as cyclical and secular concerns about net interest profits, we expect AMTD to deliver 25% average annual EPS growth the next two years as expense saves from the TD Waterhouse acquisition flow through and de-leveraging (as AMTD uses its substantial free cash flow to reduce debt) justifies at least a mid-teens multiple for the stock" the researchers concluded.
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