Thursday, October 25, 2007

Highlights of RBC Analyst' Meeting with Banks

RBC Capital Markets, 24 October 2007


We recently met with executives at each of the Big 6 Canadian banks.

The key takeaways from the meetings were:

• The liquidity and credit crisis may cause near-term pain but it should also create opportunities.

• Retail businesses continue to grow; credit appears fine for now.

• There are more opportunities to deploy capital outside of Canada than domestically.

We have a positive 12-month outlook for banks based on their growing and highly profitable retail businesses, and on our expectations for a relatively solid Canadian economy, but we are still cautious in the near term. World financials are at risk of negative surprises and we believe capital markets earnings will decline in the next 12 months. The health of the economy represents a bigger risk to bank earnings and valuation multiples than the health of capital markets; if capital markets issues become economic issues, credit losses could rise much higher.
Financial Post, David Pett, 25 October 2007

If its recent bid to acquire US-based Commerce Bancorp pans out as expected, The Toronto-Dominion Bank may have a tough time keeping pace with its Canadian peers in providing shareholder value, according to Blackmont analyst Brad Smith.

"The magnitude of capital required to gain traction in the mature US banking market, which (including Commerce Bancorp) accounts for 66% of TD pro forma common equity, is likely to limit TD's ability to keep pace with the future dividend growth and share buybacks of its domestic peer banks," the analyst said in a note to clients.

He also said the strategic benefits of TD's US$8.5-billion for Commerce Bancorp, including scale, efficiency and access to a huge deposit base, are offset by some potential risks such as declining core banking profitability, overreliance on yield curve arbitrage and over-sized U.S. real estate exposure.

Mr. Smith maintained his "hold" rating and left his $77 price target unchanged.
The Globe and Mail, Tara Perkins, 25 October 2007

The head of Canadian banking at the country's biggest financial institution is bullish about the economy here, despite the turmoil that continues to rumble through the U.S. market and the banks there.

"[Canada's] economy is good, and the mortgage business is good," Jim Westlake told reporters during a lengthy discussion yesterday at the top of Royal Bank of Canada's tower in downtown Toronto.

He gave little indication that he is fretting over any collateral damage from troubles in the United States, but acknowledged that certain geographic pockets and certain businesses are suffering.

"I was talking to a client in Atlantic Canada last night who has a business that heavily supplies into the U.S. housing market," Mr. Westlake said. "Well, [they're] not having a good month."

But over all, he said, the bank is encouraged by the resiliency it has seen among Canadian companies.

"I think if you'd asked us two or three years ago: 'How do you think Canadian companies in Canada would fare at a 90-cent dollar?' I think we would have been more negative than what we are today" when the dollar's above par with U.S. currency, he said.

While the strong loonie makes headlines for hammering Canada's export industry, many people forget it also has some benefits, Mr. Westlake said. "Our businesses actually buy a lot of goods as inputs that are lower priced today."

Even the dramatic fallout from the U.S. mortgage market isn't getting the RBC executive down. "If the U.S. economy settles down and they get the types of growth that are forecasted right now, and you don't see any more secondary effect, we think it's not going to have any huge consequences" here, he said.

"If it doesn't get any worse than it is, we don't think it will have much of a significant impact at the retail level in Canada."

Mr. Westlake suggested RBC is not making any significant changes to its conditions for handing out loans to consumers and businesses. In fact, tighter credit conditions were a topic of general discussion a few years back, he said, adding he's glad RBC didn't make dramatic moves.

"We've been in such a prolonged period of benign credit that it's quite remarkable, and there were people suggesting that two or three years ago and we're glad we didn't stop doing anything two or three years ago."

The margins that banks earn on products based on the prime interest rate are being squeezed somewhat, Mr. Westlake said, noting "it's still a good market."
Bloomberg, Doug Alexander, 24 October 2007

Royal Bank of Canada, the country's largest lender, may become the second Canadian bank to open on Sundays to win more customers, said James Westlake, head of domestic consumer banking.

``We think it's a fairly limited number of branches and it probably would be in certain cultural markets that Sundays would seem to have a better fit,'' Westlake told reporters today during a lunch meeting at the bank's Toronto office.

Canadian Imperial Bank of Commerce, the country's fifth- biggest bank, next month plans to become the first Canadian lender to offer full-service banking on Sundays starting with six of its branches. Royal Bank has talked about Sunday hours ``for some time'' though Westlake said he hasn't seen any ``great demand'' for opening on that day.

Royal Bank added 40 new branches in Canada this year and aims to add 65 to 70 branches next year. About 50 of the new branches are near Toronto, Canada's most populous city. Royal Bank had 1,132 branches across Canada as of July 31, according to corporate filings.

Royal Bank has also attracted more than C$3 billion ($3.1 billion) in deposits to its high-interest savings account for Internet customers since it was launched in May, Westlake said. Half of those deposits are from new customers. The bank has more than 3 million Internet banking clients, Westlake said.
Financial Post, Duncan Mavin, 24 October 2007

With Merrill Lynch & Co. the latest in a procession of big U.S. banks to record massive write-downs related to the global credit crunch — losses in Merrill’s global fixed income business totaled US$7.9-billion — Canada’s domestic banks could be feeling a little more conservative than they were a few months ago, says Blackmont Capital analyst Brad Smith.

Canada’s banking year end is just around the corner (the banks’ financial years end on October 31) and they are likely to adopt a more cautious approach to valuations, Mr.Smith says.

Based on his calculations, Canadian Imperial Bank of Commerce has the largest exposure to collateralized debt obligations (CDOs) — the same sort of of investments that have led to the losses at some U.S. Banks.

“We continue to believe the risk of larger than expected CDO loss emergence to be above average at CIBC at domestic banks,” Mr.Smith says.