Thursday, January 18, 2007

News from RBC CM Financial Services Conference

The Globe and Mail, Andrew Willis, 18 January 2007

Perennially frustrated in their attempts to do domestic mergers, the CEOs of Canada's banks are stressing their foreign expansion plans as they push to build profits.

In a presentation yesterday in Toronto, incoming Bank of Montreal chief executive officer Bill Downe said none of the banks expect to be allowed to marry up their domestic operations.

"The political reality has not changed much in the past decade," said Mr. Downe at a conference organized by RBC Dominion Securities Inc. "A lot of work would need to be done at the local level, where there are concerns about the potential loss of local services and loss of jobs."

BMO tried to merge with Royal Bank of Canada in 1998, but that deal and a proposed union of Toronto-Dominion and Canadian Imperial Bank of Commerce were blocked by former finance minister Paul Martin on the grounds they were not in the public interest.

Mr. Downe's perception of public hostility toward bank mergers is backed by polling of both retail and corporate customers done by The Gandalf Group, an Ottawa-based consulting company headed by David Herle, a former senior aide to Mr. Martin.

"The banks have never built a public constituency in favour of mergers," Mr. Herle said. Gandalf did research on the bank merger issue last year. Mr. Herle said there is widespread but discreet opposition to bank mergers among Canadian business executives, who fear fewer banks will mean fewer options for credit and other banking services.

With deals off the table in the domestic market, Mr. Downe said Bank of Montreal is focused on improving its market share in retail banking. He added the bank does expect to be a serial acquirer of U.S. Midwest regional banks over the next five years. Bank of Montreal has done 13 takeovers worth $2.1-billion in the Chicago area in the past two decades.

Canadian Imperial Bank of Commerce chief executive officer Gerry McCaughey predicted that his bank will add to its Caribbean network in the wake of this month's move from minority ownership to an 87-per-cent stake in Barbados-headquartered FirstCaribbean International Bank, a $989-million (U.S.) purchase. "From a FirstCaribbean viewpoint, we will continue to look at opportunities within the region, and we think growing within the region is of interest," Mr. McCaughey said.

CIBC may target the biggest Trinidadian bank as its first target, predicts BMO Nesbitt Burns analyst Ian de Verteuil. In a recent report, he said FirstCaribbean may be interested in taking a 14-per-cent stake in Royal Bank of Trinidad and Tobago, or RBTT, a move could set the stage for a merger that creates regional powerhouse with a $4-billion market capitalization.

"We believe that a second move in the Caribbean would highlight that CIBC is not too far behind its Canadian banking peers in developing non-Canadian platforms," Mr. de Verteuil said.

Bank of Nova Scotia makes no secret of its interest in South American and Asian acquisitions, while Royal Bank of Canada is expected to continue adding to its southeastern U.S. retail banking network.

The one bank that will remain on the sidelines for U.S. acquisitions is Toronto-Dominion Bank. Yesterday, CEO Ed Clark said his focus is boosting the profitability of recent acquisitions.

"It's very hard to both change an organization and do M&A (mergers and acquisitions) at the same time," Mr. Clark said. In November, TD offered $3.2-billion to buy all the shares it didn't already own in its TD Banknorth Inc. unit.

BMO's Mr. Downe also poured cold water on the idea of buying an insurance company, a strategy RBC has embraced.

"When you look at the size of the investment and the return that would be required, you would need to build a huge insurance business," said Mr. Downe.
Financial Post, Duncan Mavin, 18 January 2007

Figuring out what to spend their money on is one of the biggest problems for Canada's banks, but Canadian Imperial Bank of Commerce might have found somewhere to put its cash, said CIBC's chief executive Gerry McCaughey yesterday.

"Reinvestment of capital is the greatest long-term challenge for our industry," Mr. McCaughey said.

"It's challenging to find the opportunities [for acquisitions,]" he said at a banking industry conference in Toronto.
However, CIBC is interested in expanding its operations in the Caribbean, where the bank recently spent US$989-million to double its presence. "We think growing in that region is of interest," Mr. McCaughey said.

In December, CIBC bought an additional 43.7% stake in First- Caribbean International Bank (FCIB) based in Barbados. There has been speculation that FCIB -- a bank with a history of small acquisitions -- was also interested in a possible merger with Royal Bank of Trinidad and Tobago.

The CIBC chief said his bank had looked at expansion in the United States "for several years" but could not find target banks that offered a good fit at the right price. Other than Caribbean acquisitions, the bank is focused on dividend increases as a way to spend excess capital, Mr. McCaughey said.

CIBC's growing presence in the Caribbean will likely intensify competition there with its Canadian rivals. Expansion in the Caribbean was one of the top three stated priorities for Royal Bank of Canada's international division in 2006. And Bank of Nova Scotia has significant operations throughout the region.

Scotiabank chief executive Rick Waugh, speaking at the same conference as Mr. McCaughey, said there are positive opportunities for growth in the region.

Caribbean countries are economically stable, and liquidity is improving as local capital markets develop, says a new study of emerging markets from Merrill Lynch and Co., Inc.

The Caribbean falls within a group of Latin American countries where favourable demographics and credit conditions make for strong growth potential in mortgages and consumer loans in particular, the study indicates.

However, there are some challenges with expansion in the region, Mr. Waugh said.

"You've got to remember [the Caribbean] is 35 countries," he said. Each of those countries has its own culture, its own geography and its own regulations. "It's not like putting down $1-billion in a homogeneous country.
Reuters, 17 January 2007

Credit conditions for Canadian corporations are at a peak level, executives at some of Canada's largest banks said on Wednesday, adding that it is hard to predict when the environment will deteriorate.

At an investment conference in Toronto, Gerry McCaughey, president and chief executive of Canadian Imperial Bank of Commerce , said impaired loans have improved consistently across the banking industry for quite a few quarters, and net recoveries of loans that were previously written off have also been positive for an extended period.

"I believe that we're probably in the best credit conditions that we've ever seen, right now, from a large corporate credit viewpoint, and therefore we are peaking," McCaughey said.

In the case of an extended economic slowdown, one would expect to start seeing some credit losses in the large corporate loan books, McCaughey said. But he added that it's very hard to call the timing of such a turn, because his bank had not seen evidence of it so far.

"Regardless of whether or not you feel that there's going to be a downturn in corporate credit, the fact of the matter is there's a limited well that you can pump from to draw on recoveries of past credits that went under. That's something that is definitely going to run its course, whether or not the market turns down," McCaughey said.

Gord Nixon, president and chief executive of Royal Bank of Canada , the country's largest bank, said his view on the credit cycle is the same now as it's been for the past couple of years.

"We certainly anticipate there to be a bit of a turn in the credit cycle but we don't see anything in the short term that would indicate that we are there," Nixon said at the conference.

Bank of Montreal chief operating officer Bill Downe said credit markets move quickly when they finally do shift. He noted that fixed-income risk premiums are still very tight to U.S. government bonds, and investors are not being rewarded for taking additional risk in non-investment grade bonds.

"What you would expect to see is the pricing in the high-yield bond market to move out, the spreads over Treasuries to move out a little bit more than they have, if we were right on the cusp of a turn in the market," said Downe, who will take over as Bank of Montreal's chief executive on March 1.

At his bank, Downe noted, gross impaired loans were down in 2006 over 2005, and loan recoveries were higher in 2006.

"We're just not seeing that risk yet," Downe said of higher credit losses. "But ultimately it will come."
Reuters, 17 January 2007

Royal Bank of Canada has no plans to follow some of its competitors in expanding its lending activities to consumers with weak credit records, its chief executive said on Wednesday.

"We've been a little conservative in that area and we will continue to do so," Gord Nixon, president and CEO of Canada's largest bank, told an investment conference in Toronto.

Bank of Nova Scotia bought a "near-prime" lender in November that provides auto finance to car buyers with less than perfect credit records. That acquisition came on the heels of Toronto-Dominion Bank's purchase of higher-risk car finance lender VFC Inc.

"If the credit cycle does turn (negative), there's no question that you will start to see it in that area of the marketplace first," Nixon said.

He said Royal Bank was indirectly involved in higher-risk lending markets through a number of partners to whom it directed customers with "those sorts of needs."

"There is no plan in the short term to move off that strategy," Nixon said.
Reuters, 17 January 2007

Toronto-Dominion Bank is holding off making further acquisitions in the United States, the bank's chief executive said on Wednesday, while it works to improve the performance of its U.S. retail banking arm.

"It's very hard to both change an organization and do M&A (mergers and acquisitions) at the same time," Ed Clark, president and CEO of TD Bank told an investment conference in Toronto.

In November, TD offered $3.2 billion to buy all the shares it didn't already own in its TD Banknorth Inc. unit so that it could focus on "retooling" the Portland, Maine-based bank, which was battling slower loan growth in a tough U.S. environment.

Clark said U.S. banking conditions were more hostile than TD had expected, causing it to reverse its original plan for first making acquisitions until it had an asset of a certain size and then reworking those.

"The reality is that given its (TD Banknorth's) performance, given that environment, we can't do that. We have to now remake it and delay making acquisitions," he said.

By backing away from acquisitions, Clark said TD, Canada's third biggest bank by market value, ran the risk of missing out on purchase opportunities. But bank asset prices were so high in the United States at the moment that few operations were getting sold, he added.

Despite its setbacks south of the border, TD remained committed to a presence in the United States, Clark said.

"In the long run it will be a good thing for the TD Bank to have an ability to be in the United States. To not be in the United States is a very, very major strategic decision that I am not prepared to take," he said.
Dow Jones Newswires, Monica Gutschi, 17 January 2007

Canadian Imperial Bank of Commerce is interested in expanding in the Caribbean region after taking a majority stake in a large Barbados-based bank, its chief executive said Wednesday.

"We think growing in that region is of interest," Gerry McCaughey told a financial services conference. "We will continue to look at opportunities."

Last year, Canadian Imperial surprised the market by announcing it would take an additional 43.7% share of First Caribbean Bank, or FCIB, for US$989 million. It also extended an offer to purchase all remaining outstanding shares.

The buy came less than a year after Canadian Imperial had taken a C$2.8 billion charge to settle Enron litigation, carving a big hole in its capital base. Analysts had expected the bank to continue rebuilding capital as it cut risk and improved productivity under a comprehensive restructuring plan.

McCaughey said Wednesday that Canadian Imperial's priority for deploying its capital is to increase its dividends. The bank has lagged its peers in that regard, with most Canadian banks increasing their dividends twice a year over the past several years. As well, it is at the low end of its target payout ratio of 40%-50% of earnings.

He noted that, looking out over a three-to-five-year period, Canadian Imperial's excess cash will exceed "what we could deploy in that region."

BMO Capital Markets analyst Ian de Verteuil recently suggested that FCIB could take a small stake in Royal Bank of Trinidad and Tobago as a precursor to a potential merger of the two Caribbean banks. McCaughey made no reference to that possibility Wednesday, but did say that FCIB has a history of making small acquisitions, and that there are visible opportunities in the Caribbean region.

Canadian Imperial has had a presence in the Caribbean region for many decades, McCaughey noted.
Reuters, 17 January 2007

The incoming chief executive of Bank of Montreal said on Wednesday that he is more comfortable with the U.S. economic outlook than he was just a few months ago.

"The concern that I had about a soft landing in the United States was greater four or five months ago than it is today," Bill Downe, currently the bank's chief operating officer, told an investment conference.

The moderation of energy prices has eased pressure on U.S. consumers and household spending, and made him more optimistic about the U.S. economy in 2007, said Downe, who will become chief executive of the Toronto-based bank on March 1.

A slowdown in corporate earnings growth should also spell good news from a banking perspective, he said.

"Our clients in the U.S. have not been using their lines of credit in the last four or five years because their profits were so strong," he said. "One of the adjustments we expect to see is a shift there, and that's positive."

BMO, which operates Chicago-based Harris Bank, sees opportunities to "grow significantly" in the U.S. over the next five years at least, given the size of the banking market and its well-known brand, said Downe.

But in Canada, political attitudes against domestic bank mergers have not changed in recent years, so the focus of the company in its home market will be on "competing aggressively" with its peers, Downe said. A pair of attempted Canadian bank mergers were quashed in 1998.

"We're not viewing the likelihood of a positive merger environment as changing significantly...we don't expect it to get much better," Downe said. "

BMO has invested "significant dollars" over the last several years to improve its electronic infrastructure so retail staff can sell more banking products to each account holder, Downe noted.

But BMO will work harder on gathering new deposits, because starting new customer relationships can lead to the sale of higher-margin wealth-management products, he said.

"We haven't seen deposit growth at a level that I would be satisfied with," Downe said.

He was speaking at a Toronto financial services conference organized by RBC Capital Markets.