Friday, December 07, 2007

Scotiabank Q4 2007 Earnings

RBC Capital Markets, 7 December 2007

• Scotiabank's Q4/07 core cash EPS of $0.94 were below our estimate of $0.99 and consensus estimates of $1.00. The increase over Q4/06 was 9%.

• Results were below our expectations in domestic banking on severe margin compression, but both international banking and wholesale banking divisions earned more than we had forecast.

• The quarterly dividend was raised to $0.47 per share from $0.45, as we expected.

• Our 2008 core cash EPS estimate of $4.35 (unchanged) is at the low end of management's 2008 core cash EPS target of approximately $4.30 to $4.50.

Outlook for Stock

• We maintain our Sector Perform rating and 12-month target of $54 per share.

• Scotiabank has, in our mind, above-average medium- and long-term growth prospects compared to its peers due to its presence in Latin America and the Caribbean, and it is seemingly less exposed to headline risk in the near term.

• The bank's 12.0x 2008E P/E is tied for highest among Canadian banks, which we believe caps potential expansion in relative valuation given its greater exposure to business lending and the rising Canadian dollar, while the domestic franchise lags the two leading banks', in our view.
The Globe and Mail, Tara Perkins & Jacquie McNish, 6 December 2007

Canaccord Capital Corp. is alleging that Bank of Nova Scotia received material non-public information about third-party asset-backed commercial paper in July and began reducing its own holdings of the paper, even as it continued to pitch the investment to clients.

The allegations have arisen as part of two lawsuits filed by investors against Canaccord in the Supreme Court of British Columbia.

Canaccord brought Scotiabank into the suits because the bank sold the ABCP to Canaccord, which in turn sold it to companies and individual investors.

Canaccord named Scotiabank's investment banking arm, Scotia Capital Inc., as a party to the suits, alleging that it made negligent misrepresentations, failed to warn Canaccord and breached its fiduciary duty.

Scotiabank denies each and every allegation and plans to defend itself vigorously, spokesman Frank Switzer said yesterday.

"Canaccord is a sophisticated participant in the market, they understood the nature of the products they were buying, and they didn't rely on us for advice," Mr. Switzer said, adding that Scotia Capital was not provided with any information it considered complete or material. "We continued to rely on the DBRS rating, which did not change, as did others, including, presumably, Canaccord," he said.

The suits are among the first of a potential wave of litigation that could hit the banks and investment dealers if the a co-operative of investors and banks known as the Crawford Committee (initially known as the Montreal Accord) fails to successfully restructure $33-billion of stricken ABCP into longer-term investments.

Legal sources said dozens of companies that have been stranded with troubled ABCP, structured by non-bank firms such as Coventree Inc., are furious that their banks sold them the notes in late July and early August when there were growing signs of turmoil.

These investors have quietly prepared potential lawsuits, but they have put the claims on hold until at least Dec. 14 when the Crawford Committee is set to unveil its proposals to restructure frozen ABCP.

Jeffrey Carhart, a restructuring specialist with Miller Thomson LLP, said his firm currently represents numerous companies that hold hundreds of millions of dollars in ABCP. "We really, really, really want the workout process to work, but if it doesn't it stands to reason that there is going to be litigation," he said.

The B.C. suits against Canaccord were launched by two investors, Gregory Hryhorchuk, the chief financial officer of a gold exploration company, and First Allied Development Corp., a B.C.-based company owned by Robert Madiuk.

Each suit names Canaccord and one of its salespeople as defendants for putting more than $100,000 of the investor's money into a third-party ABCP trust called Structured Investment Trust III (SIT III).

The suits allege Canaccord was negligent and breached its duty to the investors for several reasons, including failure to do a reasonable study of the securities and failure to warn of the purchase risks.

None of the allegations have been proven in court.

In its defence documents, Canaccord says that it did not guarantee the success of any advice it provided and that it was not a custodian to the investors. If those investors did incur losses, "it was the result of unexpected market occurrences, and not the fault of the defendant," it states.

It also cites the role of other parties, including credit rating agency DBRS, which gave SIT III commercial paper the highest rating possible. Canaccord says DBRS failed to take into account that the exposure of SIT III notes to U.S. subprime mortgages could result in a loss of confidence by the market, and therefore a lack of liquidity.

The rating agency also failed to take into account the limitations of the emergency lines of credit arranged for the trusts, Canaccord alleges. DBRS has not been named as a party to the lawsuits.

Canaccord also cites Coventree Inc. and its subsidiary Nereus Financial Inc., which created the SIT III trust, for failing to disclose to Canaccord the trust's actual exposure to U.S. subprime mortgages and for failing to limit the exposure. Neither Nereus nor Coventree have been named as a party to the lawsuits.

Scotia Capital, the lead dealer for SIT III ABCP, was named as a party.

It "actively and aggressively marketed [the paper] to Canaccord by means of frequent or daily written and oral solicitations and communications," Canaccord alleges.

It further alleges Scotia Capital received material information about the trust's exposure to U.S. subprime in July, and acted on that information.

On July 24, Scotia Capital and other dealers received a Coventree e-mail disclosing some of its trusts' exposures to U.S. subprime mortgage assets, including SIT III. Canaccord's defence alleges Scotia Capital received the same basic facts from sources before July 14.

"In or about July, 2007, Scotia Capital began to reduce, limit or eliminate its own SIT III ABCP inventory, and the SIT III ABCP owned by Scotia Capital clients, because of Scotia Capital's knowledge of undisclosed material information concerning the U.S. subprime exposure of Coventree sponsored ABCP," it alleges.

Between July 10 and Aug. 13, Scotia Capital began offering a higher relative rate of return on the paper, it adds. "Scotia Capital failed to disclose its knowledge to Canaccord that the rates were higher because Coventree and Nereus conduits, including SIT III, were experiencing increasing difficulty in finding buyers to purchase new ABCP to fund the payment of maturing ABCP."

It also says Scotia Capital had an ethical standard to resign as a seller of Coventree and Nereus paper after it allegedly received the material non-public information in July.