Monday, December 03, 2007

RBC Q4 2007 Earnings

  
Scotia Capital, 3 December 2007

Q4/07 Earnings - High Quality - Solid - ROE 23%

• Royal Bank (RY) reported Q4/07 cash operating earnings of $1.01 per share and reported earnings of $1.03 per share, in line with expectations. Earnings increased 4% from $0.97 per share a year earlier. ROE was solid at 22.9%.

• RY earnings were solid with wholesale earnings growing at 15%, followed by Wealth Management earnings growth of 9%, and retail lagging at 5%, with U.S. Banking earnings disappointing declining 61%.

• Fiscal 2007 earnings increased 17% to $4.24 per share from $3.62 per share a year earlier.

ROE for fiscal 2007 was an impressive 24.9%

• Reported earnings were impacted by one-time items netting to positive $0.02 per share. The items included $326 million ($269 million after-tax or $0.21 per share) in VISA gains, $121 million ($79 million after-tax or $0.06 per share) in credit card liability adjustments and a $357 million ($160 million after-tax or $0.13 per share) write-down on CDOs and RMBSs. RY has provided additional disclosure on high risk assets reflecting nominal exposure.

• We remain optimistic about the earnings outlook for RY based on continued high revenue growth and expected normalization of expenses in retail and wealth management, recovery in fixed income trading, reduced earnings drag from U.S. business and currency and better results from Insurance.

High Operating Leverage

• Overall bank operating leverage was solid at 5%, with revenues and non-interest expenses adjusted for insurance and VIEs increasing 10% and 5%, respectively.

Canadian Banking Earnings

• Canadian Banking cash earnings (including Global Insurance) increased 5% to $711 million from $676 million a year earlier. Canadian Retail (excluding Global Insurance) earnings increased 7% to $609 million from $570 million a year earlier.

• RY Canadian Retail earnings growth at 7% compares favourably to BMO at 4% and NA growth of 5% but is well below TDCT earnings growth of 14%. RY management indicated it expects revenue growth in retail to accelerate in 2008 and at the same time, expense growth to slow, which would reaccelerate earnings growth in this very important segment.

• Revenues in the Canadian Retail segment increased 8.1% (excluding Global Insurance, VISA gain and credit card liability adjustment), with non-interest expenses increasing 5.7%, resulting in positive operating leverage of 2.4%.

• Global Insurance earnings declined 4% to $102 million from $106 million a year earlier. Business growth was offset by claims experience, less favourable than a year ago. Revenue growth from Insurance was negatively impacted by the bank's strategic reduction in exposure to the property catastrophe reinsurance business.

• Loan loss provisions (LLPs) increased 22% to $212 million versus $173 million a year earlier due to higher losses in personal and business loans and volume growth in the loan portfolio.

• Fiscal 2007 Canadian Banking (including Global Insurance) earnings increased 11% to $2,804 million versus $2,545 million in fiscal 2006. Canadian Retail (excluding Global Insurance) increased a modest 5% to $2,362 million from a year earlier. Global Insurance increased 48% to $442 million from $302 million a year earlier.

Canadian Retail NIM Declines 14 bp

• Retail net interest margin (NIM) declined 5 basis points (bp) sequentially and 14 bp from a year earlier to 3.10%.

Wealth Management Earnings Increase 9%

• Wealth Management cash earnings increased 9% to $185 million from $169 million a year earlier, reflecting strong net sales and growth in mutual fund assets.

• Revenue growth was an impressive 9.2% with operating expenses up 8.9% due to higher variable compensation, the J.B. Hanauer acquisition and heavy reinvestment.

• Both Canadian Wealth Management and U.S. Wealth Management revenue growth was strong at 10% and 7%, respectively.

• The appreciation of the Canadian dollar reduced wealth management earnings by 4% or $0.01 per share.

• Mutual fund revenue increased 11% from a year earlier to $373 million. Mutual Fund assets (IFIC) increased 19% from a year earlier to $81.9 billion.

• Wealth Management earnings in fiscal 2007 increased 26% to $784 million versus $624 million a year earlier.

U.S. & International P&B Earnings Decline Sharply

• The operating performance in the U.S. was disappointing as earnings declined sharply to $36 million from $101 million in the previous quarter and $92 million a year earlier, reducing earnings by $0.04 per share reflecting systematic deterioration in the U.S. housing market.

• LLPs increased sharply to $72 million from $17 million in the previous quarter and $5 million a year earlier relating to U.S. Residential Builder Finance. Although this is manageable within the context of RY, this abrupt change is not well received and causes concern about the U.S. business.

• Operating leverage was negative 10.2% with revenue growth of 6.1% and expenses growth high at 16.3%. The large increase in expenses was due to the acquisition of 56 branches and 10 de novo branches as the bank builds out its distribution platform.

• Net interest margin in the U.S. continues under pressure declining 18 bp sequentially and 26 bp year over year to 3.40%.

• Fiscal 2007 U.S. & International P&B earnings declined 2% to $299 million from $304 million a year earlier due mainly to weak earnings in the fourth quarter.

RBC Capital Markets Earnings Strong – 15% Growth

• RBC Capital Markets earnings were strong, increasing 15% to $346 million (excluding write-down on CDOs and RMBSs) from $300 million a year earlier. Including the writedown,

RBC Capital Markets earnings declined 38%.

• RBC Capital Markets earnings increased 11% in fiscal 2007 to $1,453 million from $1,306 million in fiscal 2006.

Trading Revenue Strong

• Trading revenue on a tax-equivalent basis was $630 million (excluding write-down on CDOs and RMBSs) versus $592 million in the previous quarter and $495 million a year earlier.

• Fiscal 2007 trading revenue was $2,551 million versus $2,240 million a year earlier.

Capital Markets Revenue Solid

• Capital markets revenue was $625 million versus $677 million in the previous quarter and $589 million a year earlier.

• Securities brokerage commissions increased 9% to $324 million from $296 million a year earlier, with underwriting and other advisory fees at $301 million, an increase of 3%.

• Fiscal 2007 Capital Markets revenue increased 13% to $2,570 billion versus $2,267 million in fiscal 2006.

Security Gains Negligible

• Security gains were a loss of $24 million or $0.01 per share versus $0.02 per share in the previous quarter and $0.01 per share a year earlier.

• Unrealized security surplus was $105 million at quarter-end (now contained in AOCI) versus the $89 million surplus at the end of the previous quarter and the $365 million surplus a year earlier.

Loan Loss Provisions Increase to 42 Bp

• Specific loan loss provisions (LLPs) increased to $263 million, or 0.42% of loans from $159 million or 0.29% of loans a year earlier. LLPs in Canadian Banking increased 22% to $212 million from $173 million a year earlier. The major increase was in the U.S. with LLPs increasing to $72 million versus $17 million in the previous quarter and $5 million a year earlier.

• Fiscal 2007 LLPs were $791 million or 0.32% of loans versus $479 million or 0.22% of loans in fiscal 2006.

• We are increasing our 2008 LLP estimates to $900 million or 0.37% of loans from $800 million or 0.34% based on higher loan volumes and higher loan losses from the U.S. We are introducing our 2009 LLP estimate at $1,000 million or 0.41% of loans.

Loan Formations Increase

• Gross impaired loan formations increased to $589 million from $383 million in the previous quarter and $309 million a year earlier. Net impaired loan formations increased to $435 million, up from $275 million in the previous quarter and $245 million a year earlier, the biggest increase was in U.S. wholesale (U.S. commercial real estate).

Tier 1 Ratio Stable at 9.4% – RWA Growth 11%

• Tier 1 capital was 9.4% versus 9.3% in the previous quarter, but declined from 9.6% a year earlier.

• Risk-weighted assets increased 11% to $247.6 billion. Market at risk assets also increased 11% to $16.3 billion.

• The common equity to risk-weighted assets (CE/RWA) ratio was 9.0%, unchanged from the previous quarter, but down from 9.4% a year earlier.

Exposure to High Risk Assets

Canadian Non Bank ABCP
• $4 million of direct holdings.
• Nominal participation as distributor or liquidity provider.
• No holdings in money market funds.

Exposure to SIVs (Structured Investment Vehicles)
• No direct sponsorship of SIVs.
• $1 million of direct holdings.
• $140 million of liquidity facilities (none drawn).
• $88 million of normal course interest rate derivatives (none impaired).
• Money market funds do not hold SIVs.

U.S. Sub-Prime CDO and RMBS Exposure
• $216 million of net exposure to U.S. sub-prime CDOs (held-for-trading).
o CDS protection of $240 million, recorded at fair market value of $104 million with counterparties rated less than AAA.
o Other CDSs provide additional $1,053 million in protection against gross exposure and are collateralized or with counterparties rated AAA.
• $388 million of exposure to U.S. sub-prime RMBS (available-for-sale, but intention to hold to maturity).
o No net exposure after $1,113 million in CDS protection with AAA rated counterparties or collateral.
• Total U.S. sub-prime CDO and RMBS exposure equates to 0.1% of assets.

Exposure to Monoline Insurance

• Credit derivative protection is predominantly from monoline insurers rated AAA by S&P and Moody's.

LBO Exposure
• $1 billion of underwriting commitments, with none over $250 million.
• Commitments represent less than 0.2% of assets.

Level 3 Securities (Unobservable)
• Level 3 securities are 2% of assets or $12 billion representing 54% of common equity.

Recent Events

• On September 6, 2007, RY announced its intention to acquire Alabama National BanCorporation (ALAB-O) through RBC Centura for US$1.6 billion or US$80 per ANB share. The deal price represents a P/E multiple of 19.8x on 2007 earnings estimates, 3.02x price to tangible book, and a 24.7% core deposit premium. The transaction is expected to close in early 2008 and be accretive to RY’s earnings in fiscal 2009.

• On October 2, 2007, Royal Bank announced plans to acquire Trinidad and Tobago’s RBTT for approximately US$2.2 billion or US$6.33 per share, 60% cash, and 40% common shares. The number of RY shares received by RBTT shareholders is subject to a 10% plus/minus collar based on a RY share price of US$54.42. The acquisition price is an 18% premium on RBTT’s closing price on September 28, 2007, and a 27% premium on RBTT’s average share price over the last 12 months. The transaction is expected to be accretive in fiscal 2008.

Recommendation

• Our 2008 earnings estimate is unchanged at $4.80 per share which is $0.20 per share above the high end of the bank's guidance of $4.50 per share to $4.60 per share. We are introducing our 2009 earnings estimate at $5.30 per share.

• Our 12-month share price target remains unchanged at $75, representing 15.6x our 2008 earnings estimate or 14.2x our 2009 earnings estimate.

• We maintain our 1-Sector Outperform rating on the shares of Royal Bank based on: strength of franchise and operating platforms, particularly retail banking and wealth management; higher than bank group ROE; and no valuation premium.
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Financial Post, Duncan Mavin, 3 December 2007

Analysts are watching RBC’s U.S. segment closely following signs the bank’s profits from its U.S. business are under pressure from the weakened credit environment and the rising Canadian dollar.

The bank turned in fourth quarter earnings broadly in line with expectations (the bank’s earnings per share of $1.01 compared to consensus among most analysts of about $1.03). But operating profit from the international and U.S. segment of $92-million was down 18% from last year, and loan loss provisions at RBC Centura — RBC’s U.S. retail bank — were on the rise.

“Results at Centura [RBC’s U.S. retail bank] must have been ugly,” says Desjardins Securities analyst Michael Goldberg, who notes that Centura’s results are not split out by the bank.

Blackmont Capital analyst Brad Smith also expressed concern.

“While appreciating the conservative approach to credit provisioning reflected in the U.S. segment results, we remain concerned that continued slowing of the U.S. economy may result in an acceleration of the credit deterioration already making itself apparent in the U.S. housing credit market,” Mr. Smith said.

Mr. Smith lowered his 12-month target price for RBC to $62.00 from $65.00.

Desjardins’ Mr. Goldberg maintains his $60.50 target price and “Hold–Average Risk” rating on RBC.

“We believe that further risk of trading markdowns is small, but RBC is vulnerable to increasing U.S. and Canadian economic uncertainty,” he said. “We see 2008 shaping up as a year of flat earnings and more moderate dividend growth.”
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The Globe and Mail, Janet McFarland, 1 December 2007

Royal Bank of Canada is not concerned about a "contagion" of U.S. subprime financial woes hitting other lending portfolios and reducing profit more broadly at its RBC Centura unit in the southern United States.

The bank retains confidence in its U.S. banking operations, despite recording a $357-million writedown in the fourth quarter for weakness in subprime mortgage securities, chief executive officer Gordon Nixon said yesterday.

"We certainly remain committed to our long-term strategy of building a strong retail banking operation in the U.S. Southeast," he said during a conference call with analysts.

Also during the call, which was dominated by questions about the bank's exposure to subprime mortgages and problematic commercial paper, chief risk officer Morten Friis said he is not worried by media reports that financial problems in U.S. real estate will soon spread to other loan portfolios in the consumer and business sectors.

"While we all read the press about the worries about contagion into other areas, it has yet to show up in any of those portfolios," he said.

"Current performance is strong and we don't anticipate the spread into these portfolios any time soon. ... I think to the extent you have contagion it will take a little longer until it hits portfolios of the type we have at Centura."

The bank reported yesterday a fourth-quarter profit of $1.32-billion and a profit of $5.49-billion for the full year, up 5 per cent and 16 per cent respectively over last year.

Although RBC took a $357-million pretax writedown on its holdings of securities related to the U.S. subprime real estate market and other collateralized debt obligations, the hit was offset by a one-time pretax gain of $326-million from its shares in Visa Inc., which is going public.

The bank warned, however, that it expects growth to slow next year, cutting its growth outlook for diluted earnings per share to between 7 per cent and 10 per cent, compared with 17 per cent in 2007.

Meanwhile, shares of Canadian Imperial Bank of Commerce gained ground yesterday despite a report in The Globe and Mail that the bank will reveal next week it could have as much as $10-billion worth of hedged exposure to the U.S. subprime mortgage sector, although only a fraction of that amount is believed to be at risk of a writedown. CIBC shares climbed $1.46 to $88.85.

RBC offered more detailed disclosure on its subprime exposure yesterday, reporting that it also has $216-million of net exposure to U.S. subprime collateralized debt obligations of asset-backed securities, and $388-million in U.S. subprime residential mortgage-backed securities that it intends to hold until maturity.

Analyst André-Philippe Hardy at RBC Dominion Securities Inc. said the disclosure was "extremely helpful," and is what the market is also looking for from CIBC next week so investors can do worst case scenario analysis without guessing on exposures.

Analyst John Aiken said RBC's fourth-quarter earnings were "disappointing" and the targets for next year may prove challenging.

"That said, Royal's domestic franchise remains as solid as ever and is still the true earnings engine for the bank," Mr. Aiken wrote in a research note.

RBC is one of the banks that causes the least concern about "unpleasant surprises," he said, but cautioned that its share price may fall due to slower growth in 2008, reiterating his "neutral" rating on the shares.
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Financial Post, Jonathan Ratner, 30 November 2007

Quarterly results from Canada’s biggest bank may have further calmed investor fears about the financial services sector. Shares of Royal Bank of Canada rose slightly in early trading, but had lost some ground as of 11 a.m. ET.

The bank reported fourth quarter operating cash earnings per share (EPS) of $1 on Friday morning, beating Blackmont Capital’s estimate of 97¢ but missing the consensus by a penny. Net revenue of $5.1-billion was in line with analyst Brad Smith’s forecast, as were loan loss provisions of $263-million.

Guidance for 2008 EPS growth from RBC was in the range of 7% to 10% – also in line with expectations, the analyst wrote in a note to clients.

“Overall, we view the Q4 results as being of good quality and modestly above expectations,” Mr. Smith said, maintaining his “buy” recommendation and $65 price target. RBC shares have risen roughly $4 so far this week, closing at $53.67 on Thursday.

Dundee Securities analyst John Aiken wasn’t as impressed. He said RBC’s results were disappointing given the relative strength in earnings from both Bank of Montreal and Toronto-Dominion Bank.

And while RBC’s targets for 2008 look good, he says meeting them could be challenging given higher than expected provisions for credit losses in both domestic and U.S. personal and commercial banking, “particularly if Royal is unable to receive some relief on net interest margins in the U.S.”

“With that said, RY’s domestic franchise remains as solid as ever and is still the true earnings engine for the bank,” Mr. Aiken wrote in a note to clients.

He added that RBC is one of the banks that yields the least concern in terms of negative surprises and is therefore a good long-term holding for most investors. Nonetheless, the analyst thinks its premium valuation could see some pressure and the stock could give up some of its recent gains.

Mr. Aiken continues to rate RBC at “neutral” with a $56 price target.
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Bloomberg, Doug Alexander, 30 November 2007

Royal Bank of Canada, the country's biggest bank, recorded its slowest quarterly profit growth in two years on a slump in U.S. lending and a writedown for debt linked to the subprime-mortgage market.

Net income for the quarter ended Oct. 31 rose 4.9 percent to C$1.32 billion ($1.33 billion), or C$1.01 a share, from C$1.26 billion, or 96 cents, a year earlier, the Toronto-based bank said today in a statement.

Royal Bank fell after the company reduced its profit growth target to between 7 percent and 10 percent for this fiscal year because of a slowing economy, the rising Canadian dollar and tightening credit conditions in the U.S. Per-share earnings rose 17 percent in fiscal 2007.

``There are some soft spots coming up,'' said John Kinsey, who helps manage $1.9 billion at Caldwell Securities Ltd. in Toronto, including Royal Bank stock. ``The disappointing thing about their report was the outlook for 2008. That will disappoint quite a few people.''

The shares fell 67 cents, or 1.3 percent, to C$53 at 4:10 p.m. on the Toronto Stock Exchange, the only Canadian bank stock to decline. The stock has fallen 4.5 percent this year, compared with a 2.4 percent drop for the nine-member Standard & Poor's/TSX Banks Index.

Merrill Lynch & Co. analyst Sumit Malhotra said Royal Bank earned C$1 a share excluding items, missing his per-share estimate of C$1.04.

The bank said it met four of its five financial targets this year, including earnings-per-share growth of at least 10 percent. Revenue rose 5 percent to C$5.62 billion, the bank said. Royal Bank set aside C$263 million for soured loans, compared with C$159 million a year ago.

``We do expect both the U.S. economy and the Canadian economy to slow from current growth rates,'' Chief Operating Officer Barbara Stymiest said in an interview. ``That is one of the fundamental reasons why we've lowered our outlook for earnings per share growth.''

Royal Bank is one of five Canadian lenders that announced combined writedowns of about C$1.9 billion this month after the value of their debt investments deteriorated amid a global credit crunch. For Royal Bank, the writedowns were offset by a C$269 million gain from its stake in the Visa Inc. credit-card company, and increased deposits and mortgages in Canada.

Investment-banking profit fell 38 percent to C$186 million from a year ago after the bank recorded a C$357 million pretax writedown for its investments in U.S. subprime mortgage securities.

Royal Bank has C$216 million of net exposure to U.S. subprime collateralized debt obligations and C$388 million in investments of U.S. subprime residential mortgage-backed securities, Chief Executive Officer Gordon Nixon said in the statement. That's less than 0.1 percent of the bank's assets, he said.

Royal Bank had C$4 million in Canadian non-bank asset- backed commercial paper and C$1 million invested in structured investment vehicles, the bank said in a slideshow presentation on its Web site. Royal Bank also has commitments to provide up to C$140 million in emergency funding for the so-called SIVs, which borrow short-term to invest in longer-dated securities such as asset-backed bonds and bank debt.

``We believe our exposure is well contained given the size of the organization,'' Stymiest said.

Total trading revenue fell 64 percent to C$160 million after a C$187 million loss from interest rate and credit trading reduced revenue.

A stronger Canadian currency compared to the U.S. dollar and British pound also pared investment banking profit by C$28 million. The Canadian currency gained 17 percent this year against the U.S. dollar, touching an all-time high on Nov. 7 before weakening in the past three weeks.

Canadian consumer-banking profit rose 33 percent to C$899 million, driven by higher credit-card revenue and growth in mortgages and personal deposits. Royal Bank recorded a C$326 million pretax gain from revaluing its investment in Visa after a reorganization of the credit-card company ahead of next year's initial public offering. The bank also said it had a C$121 million pretax charge related to its credit-card loyalty program.

Profit from U.S. and international consumer banking, which includes Raleigh, North Carolina-based RBC Centura, fell 73 percent to C$21 million on higher loan-loss provisions amid a deteriorating U.S. housing market. That's the smallest profit in at least nine quarters for that business.

Royal Bank resumed buying consumer banks in the U.S. last year with takeovers of American Guaranty & Trust and Flag Financial Corp. In March, Royal Bank bought 39 branches in Alabama from AmSouth BanCorp. and on Sept. 6 agreed to buy Alabama National BanCorp. for $1.6 billion in cash and stock.

``Given the uncertain economic and banking environment in the U.S., the downturn in credit quality is concerning,'' Malhotra said in a note. Malhotra, who doesn't own the shares, downgraded the stock from ``buy'' to ``neutral'' on Nov. 1.

Wealth management earnings, which include mutual funds sales, rose 9.8 percent to C$180 million from a year ago.
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Reuters, Lynne Olver, 30 November 2007

Royal Bank of Canada is comfortable with its U.S. loan portfolio and committed to its pending acquisition of Alabama National BanCorp , bank executives said on Friday, after the slumping U.S. housing market dented Royal's fourth-quarter profit.

"We are very positive on the Alabama National acquisition," Chief Executive Gord Nixon said on a conference call, referring to the US$1.6 billion deal that is expected to close in early 2008.

Royal Bank's plans for its U.S. retail business over the next year include integrating Alabama National and managing "the real estate issues" as best it can, Nixon said.

"We think we'll come out of that with a good platform and a good asset base."

The deteriorating U.S. housing market hurt fourth quarter profit, as Royal took higher U.S. provisions for credit losses and recorded a C$160 million writedown on securities related to the U.S. subprime mortgage market.

Royal, Canada's largest bank, said overall profit rose 5 percent to C$1.32 billion ($1.32 billion) in the three months ended October 31, or C$1.01 a share.

That was up from C$1.26 billion, or 96 Canadian cents a share, in the same 2006 period, but marked a slowdown from double-digit profit growth earlier in the year.

Fourth-quarter profit slid 73 percent in Royal's U.S. and international banking segment, to C$21 million, as loan loss provisions jumped to C$72 million from C$5 million a year earlier. That was almost entirely due to the residential builder finance business of its RBC Centura unit in the U.S. Southeast.

Credit problems in this portfolio are primarily contained to Georgia and California, Royal Bank's chief risk officer, Morten Friis, said on the conference call.

The bank stressed that its builder loans makes up less than 20 percent of RBC Centura's loan portfolio.

"Higher provision levels are probable given the expected weakness within the residential and commercial real estate markets in the U.S. Southeast," Credit Suisse analyst Jim Bantis said in a research note.

Royal Bank also said that economic growth looks set to slow next year, and trimmed its 2008 "objective" for overall earnings per share growth to between 7 percent and 10 percent.

In 2007, the bank's actual increase in EPS was 17 percent, far outpacing its goal of more than 10 percent.

Full-year profit rose 16 percent to a record C$5.5 billion.

Nixon said domestic banking should remain strong next year.

"I wouldn't overemphasize the word slowdown, I think it's still going to continue to be a reasonably good market," Nixon said, noting that unemployment rates remain low and real estate inflation hasn't been as severe as in other countries.

Fourth-quarter profit in Royal's core Canadian banking and insurance operations climbed 5 percent to C$709 million, excluding a Visa restructuring gain and other items.

Its wealth management unit saw quarterly profit increase 10 percent to C$180 million.

But capital markets profit fell 38 percent to C$186 million on the U.S. subprime mortgage-related writedowns.

For 2008, the bank kept most of its 2007 objectives. It aims to earn more than a 20 percent return on equity, and to pay out 40 percent to 50 percent of profit as dividends.

In the year just ended, return on equity was 24.6 percent and the dividend payout ratio was 43 percent.

Shares of Royal Bank fell 1.2 percent on the Toronto Stock Exchange, closing down 67 Canadian cents at C$53 a share.

The stock is down 5 percent this year, underperforming competitors Bank of Nova Scotia and Toronto-Dominion Bank.
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Bloomberg, Stephen Kirkland and Jon Menon, 30 November 2007

Credit Suisse Group raised its recommendation on global banks to "benchmark" from "underweight," citing valuations, growth prospects and lower interest rates.

Global economies will avoid a hard landing, underlying profitability should improve and short rates will fall "significantly," strategists including Andrew Garthwaite wrote in note published today.

Credit Suisse has "outperform" ratings on Intesa Sanpaolo SpA, Unione di Banche Italiane Scpa,, National Bank of Greece SA, DBS Group Holdings Ltd. and KBC Groep NV, because they face fewer funding constraints, the report said. Brazil, Italy, Canada, Singapore and Greece are the ``safest'' regions for banks, where "indebtedness and financial penetration is low and property affordability is least challenging," the report said.

The report comes after financial institutions, which have written down more than $65 billion for debt related losses, face higher credit costs related to the collapse of the U.S. subprime mortgage market. The falling value of subprime assets globally may reach $400 billion, Deutsche Bank AG analysts wrote Nov. 12.

Credit Suisse also highlights its ``outperform'' rating on UBS AG, which trades below its breakup value. U.S. investment banks' earnings will increase 26 percent in 2008, according to the median of analysts' estimates, said the note.
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