Friday, March 30, 2007

News from TD Bank's Annual Meeting

  
The Globe and Mail, Tara Perkins, 30 March 2007

Toronto-Dominion Bank's head office appears to be loosening the apron strings in Quebec, even as it takes a firmer grip on its U.S. division.

"Quebeckers are no different than Americans and Canadians. They value -- as retail banking customers -- convenience, price, and great service," TD chief executive officer Ed Clark told reporters in Montreal after the bank's annual meeting yesterday.

"But, I think if you run that [strategy] in Quebec, and you do not say this is a distinct society, you will not succeed," he said. "And so . . . you have to have a francophone, Quebec-based team that says, 'How do you package that same skill set and sell that in the Quebec market?' " TD is expanding its branch network in Quebec -- where the bank's market share is weak -- by about 7 per cent a year, compared to just 3 per cent for the country as a whole, Mr. Clark said.

The independence granted to TD's management team in Quebec contrasts with the situation in the United States, where TD recently installed Bharat Masrani -- who had been the bank's Toronto-based chief risk officer -- as CEO of the U.S. retail business, TD Banknorth.

That move marked a shift from TD's strategy when it took a majority stake in Banknorth in 2004 and Mr. Clark had emphasized his desire to leave U.S. management running the show.

Mr. Clark and Mr. Masrani spent a chunk of yesterday afternoon engaged in a tête-à-tête in a hotel lobby. Just last week, Banknorth announced plans to cut about 400 jobs and close 24 branches in coming months. TD is in the process of trying to acquire the portion of Banknorth it doesn't already own.

At the annual meeting, Mr. Clark told investors that TD is confident of its ability to compete with the best banks in the U.S. "The measures needed to be successful in the United States are the same as Canada," he said. Those include reducing expenses, having longer hours, better branch locations and cross-selling products.

"It turns out that the best-in-class American banks do all the same things that make us the best retail bank in Canada," Mr. Clark told reporters afterwards, also noting that the majority of Banknorth's management is still American.

He believes all of the "little things" that have boosted TD's Canadian growth in the past four years "will work in the United States, because they work for Wells Fargo, they work for Bank of America, they work for Wachovia, so there's no reason why they can't work for Banknorth."

The U.S. market is changing, and in some ways emulating the Canadian sector, Mr. Clark suggested. "Ultimately, we believe that in the United States this will be dominated by universal banks that look like the Royal Bank here, or TD here, or Wells Fargo."

TD's original strategy with Banknorth was to gobble up acquisitions and reach a decent size before stopping to focus on improving the overall branch model, Mr. Clark suggested.

"Clearly, our original plan was why don't we spend our time consolidating . . .," he said. "Because Banknorth has made 26 acquisitions in a row, it has probably not had the time to spend to make it what we think the best-in-class American banks look like."

Acquisitions in the U.S. are largely on hold for now while Banknorth concentrates on tackling costs. It will then use some of the savings to expand its branch network, do more aggressive marketing, and introduce new products, Mr. Clark said. He seems relieved no attractive acquisition targets are tempting him to deviate from that plan.

"I could get put in a strategic dilemma -- and it would be a real dilemma for me -- if somebody that was really a good target got realistic on their [asking] prices, because then, frankly, I would find that a tough choice to make," he said.
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Bloomberg, Sean B. Pasternak, 29 March 2007

Toronto-Dominion Bank, Canada's second-largest lender, plans to adopt a new incentive strategy for its struggling U.S. consumer bank that rewards employees based on customer satisfaction and sales, Chief Executive Officer Edmund Clark said.

The employee program is used by the bank in Canada and by U.S. rival Wells Fargo & Co., Clark told reporters today following the annual meeting of shareholders in Montreal. The system, known as ``Model 4,'' ranks employees by the number of products they sell, and bases pay on customer satisfaction.

``Banknorth doesn't have that model,'' Clark said. ``We can hand them the Wells Fargo sales-management system.'' San Francisco-based Wells Fargo is the biggest bank on the West Coast.

Profit at TD Banknorth Inc. has declined in five of the past seven quarters because of lower demand for loans and higher expenses for acquisitions and advertising.

TD Banknorth, which has about 600 branches in eight states, said on March 23 it was cutting 400 jobs, or about 4 percent of its workforce, and would close as many as 24 branches. The bank aims to cut operating costs by 5 percent to 8 percent by next year.

Clark promoted Bharat Masrani, a former executive at Toronto-Dominion, to run Portland, Maine-based TD Banknorth beginning this month. Masrani helped implement the sales system at Toronto-Dominion in the mid-1990s.

Since becoming CEO of Toronto-Dominion in December 2002, Clark, 59, has increased domestic consumer bank earnings by at least 15 percent a year, higher than any of his Canadian peers.

``Given the success they've had at TD Canada Trust, this should be a critical part of their strengthening the U.S. platform,'' said John Aiken, an analyst at Dundee Securities Corp. in Toronto, who rates Toronto-Dominion shares a ``market neutral.''

Toronto-Dominion also plans to add 50 automated teller machines on campuses across Canada, in responses to concerns raised by Finance Minister Jim Flaherty that students and seniors pay too much in bank-machine fees. The machines will take about one year to install, Clark said.

``We believe Minister Flaherty, in our recent meeting, raised a legitimate concern: In some cases, students are isolated in post-secondary campuses with only one ABM machine available,'' Clark said in a speech at the annual meeting.

Clark added that the bank doesn't have any direct ``exposure'' in Canada or the U.S. to the subprime home loans that have resulted in increased delinquencies for Countrywide Financial Corp. and others. He also said the bank is counting on life insurance sales to help increase profit in Canada.
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Bloomberg, Sean B. Pasternak, 29 March 2007

Toronto-Dominion Bank plans to install more bank machines on university campuses, in response to concerns raised by Finance Minister Jim Flaherty that students and seniors pay too much in bank-machine fees.

The bank plans to add 50 automated teller machines on campuses across Canada, said Chief Executive Officer Edmund Clark. Clark said the additional machines will allow students who bank at Toronto-Dominion to avoid transaction fees. He didn't say the Toronto-based bank would lower its fees.

``We believe Minister Flaherty, in our recent meeting, raised a legitimate concern: In some cases, students are isolated in post-secondary campuses with only one ABM machine available,'' Clark said in a speech at the annual meeting in Montreal today.

Flaherty has urged the banks to lower fees, particularly for students and seniors. Lenders usually charge transaction fees when non-clients use their bank machines.

``It's always tempting for governments to quote `solve' issues by legislating lower prices,'' Clark said. ``But the consequences are going to be pretty clear -- less convenience.''
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Reuters, 29 March 2007

Being a player in North American retail banking is a better strategy than focusing on U.S. wholesale lending, Toronto-Dominion Bank President and Chief Executive Ed Clark said on Thursday.

Building "sustainable franchises" in both wealth management and retail banking will provide better diversification of earnings and use the bank's "proven skills in these areas," Clark told shareholders at TD Bank's annual meeting in Montreal.

"Clearly, our U.S. strategy sets us apart from other banks," Clark said.

About 80 percent of total earnings at TD Bank, Canada's third-largest bank by market capitalization, comes from its retail operations.

In the United States, its 59 percent-owned TD Banknorth unit, based in Portland, Maine, has been hurt by industry-wide problems that include low long-term bond yields, known as an inverted yield curve, and narrowed spreads.

"The recent subprime (mortgage) meltdown creates credit risk that runs the risk of spilling over into other parts of the market," Clark also said.

Banknorth is concerned about possible "collateral" effects of the subprime market contraction, Clark told reporters after the annual meeting.

For example, a big inventory of unsold houses hanging over the market could depress prices and slow overall mortgage lending growth, he said. "From a bank's point of view, you don't have to have a loan go bad just to have the growth of your loans go down," Clark said.

Short-term U.S. earnings growth will be "tough" given current market conditions, but TD understands retail banking and can compete in the United States by increasing revenues and reducing costs, Clark said.

Last week, Banknorth said it will cut about 400 jobs and close or consolidate up to 24 of about 600 branches. That cost-cutting move will result in a first-quarter charge of up to $17 million.

Minority shareholders of TD Banknorth will vote on April 18 on TD's proposed acquisition of the 41 percent of Banknorth it does not already own.

"With 100 percent ownership or not, we're confident that in a few years investors will look back and be pleased with the position TD Banknorth has achieved," Clark said.

The second prong of TD's U.S. strategy is its 40 percent stake in TD Ameritrade. To remain a top-three player in the U.S. online brokerage business, Ameritrade must maintain leadership in the active trader space and increase its market share in the long-term investor segment, Clark said.

Within Canada, politicians have put pressure on the big banks to reduce automatic bank machine fees. The banks charge a "convenience fee" of C$1.50 per transaction to customers of rival banks.

TD Canada Trust plans to add about 50 bank machines on or near post-secondary campuses across Canada because of a "legitimate concern" over limited access to bank machines on isolated campuses, Clark said.

Governments may be tempted to legislate lower bank-machine fees, but any such move would reduce convenience for consumers, damage the nonbank or "white label" ABM industry, and hurt small businesses who receive rent for putting third-party machines on their premises, Clark said.

White label machines account for about 70 percent of all bank machines in Canada.
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Canadian Press, 29 March 2007

TD Bank plans to tough it out in the United States despite short-term earnings challenges, shareholders were told today.

The bank's U.S. holdings include retail operation TD Banknorth and wealth-management firm TD Ameritrade.

While TD Ameritrade recorded its fourth consecutive year of record earnings, retail banking faces several challenges, including narrowed interest-rate spreads and the recent "subprime" mortgage meltdown.

"While these market conditions make short-term earnings growth tough, they'll also create opportunities, said CEO Ed Clark told the bank's annual meeting in Montreal.

"We understand retail banking. We're confident of our ability to compete with the best in the United States. This means focusing on growing revenues and reducing costs."

Clark said becoming more of a North American financial institution will diversify earnings options and help the Toronto-based bank achieve a long-term goal of seven to 10 per cent earnings per share growth.

Over the past couple of years, the bank has grown earnings and dividends by more than that. In 2006, adjusted earnings per share and the dividend both increased by 13 per cent.

"This reflects our philosophy that to consistently outperform on dividends, you have to consistently outperform earnings," Clark said.

Since 2002, adjusted earnings have been increasing on average of 21 per cent per year while average total shareholder return was almost 27 per cent. The bank's improved performance was affected by record-high earnings at TD Canada Trust and TD Meloche Monnex.

The bank has opened more branches in the past three years than the other five banks combined. This year it plans to open 30 branches, including seven in Quebec.
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Thursday, March 29, 2007

Scotiabank Expands in Thailand & Turkey

  
Dow Jones Newswires, Monica Gutschi, 29 March 2007

Bank of Nova Scotia is increasingly focused on opportunities in Asia, officials said Thursday in announcing the purchase of a small stake in a Thailand bank.

"The Asia-Pacific region has always been an important market for us," said Luc Vanneste, Bank of Nova Scotia's chief financial officer. "We are currently focused on extending our reach there."

The area's favorable demographics and growing economies make it an attractive place to invest, Vanneste said. What's more, local governments are becoming more welcoming of foreign investment, and have strengthened banking regulations. Bank of Nova Scotia already has operations in 11 countries in the region.

"Asia has become an area of focus for us," he said.

Earlier Thursday, Bank of Nova Scotia announced it had taken a 24.99% stake in Thanachart Bank for the equivalent of C$240 million (US$207 million).

It also has an option to raise its ownership to 49% by the end of the year if pending banking legislation is approved by the Thai parliament.

The initial deal is expected to add 3 Canadian cents a share to earnings in the third year, will have no impact on the bank's Tier 1 capital ratio. If the bank takes a 49% ownership, earnings accretion would double, said Tim Hayward, the bank's head of international acquisitions.

The transaction is expected to close by the end of June.

The move in Thailand comes shortly after Bank of Nova Scotia announced a minority investment in Bank of Dalian in China and highlights the bank's growing interest in Asia.

Vanneste said Thailand has a young and developing middle class, a consumer market twice the size of Canada's, and an improving banking industry. Bank of Nova Scotia has had a small presence since 1981, and its local branches will be sold to Thanachart.

Although Thailand has been politically unstable in recent years, Vanneste said the political risk is manageable, and its credit rating is similar to that of Mexico's, where Bank of Nova Scotia has a large presence.

"This is the next step in our long-term Asian strategy," Vanneste said.

Analysts said the deal is consistent with Bank of Nova Scotia's international strategy, and its policy to purchase attractive assets at a good price. The Thanachart buy was made at 1.6 times book value.

"Given the history of BNS operating in less than stable economies (and its desire to build its Asian platform), we believe the market will be supportive of this deal," BMO Capital Markets analyst Ian de Verteuil said in a note.

In Toronto, Bank of Nova Scotia is up 18 Canadian cents to C$53.80 on volume of 1.2 million shares.

Thanachart is Thailand's eighth-largest bank, with C$9.1 billion in assets and a 3% market share. It has a strong niche in consumer finance, and is the country's largest automotive financer. It holds more than 500,000 auto loans, giving it a 24% share of the new-car market.

The bank has also been rapidly expanding its branch network and its desire to grow even faster brought it to Bank of Nova Scotia, said Rob Pitfield, head of the bank's international unit. "They chose us because of the experience we've had" building retail banks internationally, he said.

Thanachart Bank, which is majority held by Thanachart Capital, increased its assets by 32% in 2006 and plans to continue growing aggressively, Hayward said.
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Dow Jones Newswires, 29 March 2007

Bank of Nova Scotia's latest international foray is a little unusual, notes BMO Capital Markets. Thailand's Thanachart Bank has weak ROE and most of loan book is auto-loans, not the usual profile for BNS. On other hand, firm says, purchase price of 1.4x book value is attractive, and BNS has strong history of improving results at entities it takes under its wing. BNS to take 25% in Thanachart for C$240M, with option to increase ownership to 49%.
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Financial Post, Jonathan Ratner, 29 March 2007

Bank of Nova Scotia continues to invest in its global banking business, with the launch of an office in Turkey and the purchase of a minority interest in Thailand’s top car loan company as its most recent moves.

Scotiabank is buying a 25% stake in Thanachart Bank for roughly US$203-million.

It’s plans in Istanbul, Turkey, while unlikely to have a significant financial impact in the near-term, according to Blackmont Capital analyst Brad Smith, reflects the confidence Scotiabank has in banking opportunities in Eastern Europe and elsewhere.

The bank’s past international initiatives collectively contribute more than 30% to Scotiabank’s revenues and earnings, Mr. Smith said in a note to clients.

He noted that Turkey’s Gross Domestic Product is 60% the size of Canada’s and the move should open doors for some of the bank’s other units, such as oil and gas specialist Scotia Waterous and precious metals trading group Scotia Mocatta.

Mr. Smith maintained his ‘buy’ recommendation and $61 price target on Bank of Nova Scotia shares, which represents upside of 13.7% from Wednesday’s close of $53.63.

Scotiabank, which operates in 11 countries in the Asia-Pacific and Middle East regions, says it has made seven international acquisitions in the past 18 months.

Last week, the bank signed a cooperation deal with Bank of Dalian Co. Ltd. as it pursues a strategic partnership and minority investment in China’s seventh-largest city commercial bank.
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Lawsuit Filed Against BMO & TD Bank for Funds Transfer Delays

  
The Globe and Mail, Tara Perkins, 29 March 2007

A class-action claim has been filed against the Toronto-Dominion Bank on behalf of customers who say they did not receive prompt access to their money after depositing cheques or receiving wire transfers.

The claim comes less than two weeks after a similar suit was launched against the Bank of Montreal by the same law firm, Juroviesky and Ricci LLP. Suits against other banks are possible, lawyer Henry Juroviesky said yesterday.

He filed the suit against TD in the Ontario Superior Court of Justice. It seeks $100-million in economic damages, plus an extra $20-million in punitive damages, on behalf of anyone who made a deposit by cheque or wire transfer into a TD account between March 27, 2001, and March 27, 2007, and did not receive access to the funds in a reasonable period of time.

"Barring extraordinary circumstances such as terrorist attacks, extremely inclement weather, or the like, cheques will clear by 11:00 a.m. or even earlier, on the first business day following the day a cheque is deposited by the customer," the statement of claim said. Generally, the cheque will be settled within 12 to 18 hours of clearing, it said. That means most cheques drawn on Canadian institutions are settled within two business days of deposit.

Cheques drawn on U.S. financial institutions are generally settled by the fifth business day after being deposited, it said.

The lead plaintiff in the suit, Toronto-based Re*collections Inc., alleges that it deposited a $10,000 (U.S.) cheque from a Citibank account into its account at TD on Feb. 28 and the funds were held until March 22. The plaintiff alleges the cheque cleared 20 days earlier, on March 2.

Implementing a standard 10, 15, or 30-day hold period on deposits without investigating the true settlement date is a "knowing and intentional breach" of common law duty, the suit alleges.

It is looking for damages based on the amount of interest the depositors would have earned by investing their funds during the time the bank held their money.

None of the allegations has been proven. Neither the suit against BMO nor the one against TD has been certified as a class action.

TD spokeswoman Kelly Hechler said the bank believes the suit against it "is without merit and (we) plan to vigorously defend against it." She would not comment on specifics, as the matter is before the courts. BMO declined to comment.

In an unrelated interview last week, Liberal Finance Critic John McCallum suggested the House of Commons finance committee will be looking into issues involving the length of time that banks hold on to money. Mr. McCallum was not commenting on these lawsuits.

"Generally speaking, when money goes into banks it goes in at lightning speed, when it comes out of banks it goes more at a snail's pace," he said in the interview last Wednesday. "So, in other words, the banks get to hold all this money for longer periods, and they get the interest, not the customer."

He said the committee would be examining "how we can recommend some changes that will see more interest in the pockets of Canadians, and less interest in the pockets of banks."

Questions at a preliminary hearing at the committee the following day focused on the timing of bill payments, or the discrepancy between when consumers pay their bills and when companies receive the money.
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Canadian Press, 19 March 2007

Bank of Montreal is facing a class action lawsuit filed on behalf of bank customers who didn't receive immediate access to their funds after cheques and wire transfers cleared.

The suit, filed on Monday by Juroviesky and Ricci LLP in the Ontario Superior Court, alleges that the bank "wrongfully withheld certain of its clients' funds on deposit."

The action covers clients that made at least one bank account deposit between March 19, 2001 and March 19, 2007 and couldn't access the funds immediately after the deposit.

Bank of Montreal spokesman Ralph Marranca declined to speak about the case.

"We have a long-standing practice of not commenting on matters before the courts," he said in a phone interview.

Juroviesky and Ricci said the move comes after "a thorough investigation" into the matter.
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RBC Offers High-Interest Savings Accounts

  
The Globe and Mail, Rob Carrick, 29 March 2007

You'll never believe who just came out with the sort of high-rate savings account that everyone needs for safely stowing cash.

It's Royal Bank of Canada, the country's largest and possibly most recalcitrant bank from the perspective of innovation for retail customers. I mean, this is an outfit that used to charge people to use Internet banking.

The High Interest eSavings account is a credible effort from RBC, with reasonably competitive interest rates (don't be fooled by the 4-per-cent introductory rate) and no tiers that reserve top rates for higher balances. Consider this new account as evidence that the big banks are no longer willing to be big stiffs when it comes to high-interest savings accounts.

RBC got in the high-interest game just this month, while HSBC Canada is another recent arrival. Bank of Nova Scotia and Bank of Montreal were early adopters, while Canadian Imperial Bank of Commerce is planning upgrades to an offering that, like the one from Toronto-Dominion Bank's TD Canada Trust division, offers high rates only if you have at least $5,000.

High-rate savings accounts usually work on the idea that a bank can offer better returns on accounts that clients access electronically and not through branches. Ten years after the arrival in Canada of Dutch-owned ING Direct, it's clear that a bank without a high-interest account is a bank that is losing assets. ING now has more than $20-billion in assets and you can bet that a massive chunk of this used to reside in traditional big-bank savings accounts.

Doug Collins, RBC's vice-president of consumer accounts, was cagey about this issue. "There's always a transfer of funds back and forth," he said. "But what we're trying to do is meet the needs of clients who are asking for this kind of account, and trying to ensure we have a relevant account lineup."

The eSavings account will certainly meet your needs if you're an RBC customer who banks online and is willing to make a bit less interest in exchange for avoiding the hassle of shifting money to and from a savings account at another bank. Mr. Collins said money transferred from eSavings into an RBC chequing account moves in real time, which means you avoid the usual 24 to 48 hours required for bank-to-bank electronic transfers, and any subsequent holds on the transferred money.

The introductory 4-per-cent rate on eSavings lasts until July 31. The rate is projected to then fall to 3.25 per cent, which compares with current rates of 3.5 per cent at ING Direct, 3.55 per cent at Citizens Bank of Canada, 3.75 per cent at Manulife Bank and ICICI Bank Canada, 4 per cent at President's Choice Financial (for balances of more than $1,000) and 4.1 per cent at the online banks Achieva Financial and Outlook Financial.

Any of these rates stand out in comparison to the laughably low rates that banks offer on traditional savings accounts. RBC's own Royal Money Maker Plus starts at zero per cent on balances to $4,999.99. It then surges all the way to 0.25 per cent on balances of $5,000 to $9,999.99, and moves all the way up to 3 per cent if you have $60,000 or more on deposit. Don't forget the fine print: The 3-per-cent rate is applicable only to the portion of your deposit above $60,000.

Another qualification on eSavings -- you have to be comfortable with Internet banking. The idea is to keep money in the account to earn high interest and then go online to shift funds into your RBC chequing account when needed. You can make withdrawals directly from eSavings using bank machines, debit or cheques, but you'll pay $5 a transaction.

That's a similar approach taken with Scotiabank's Money Master account, which was introduced almost five years ago and now offers 3-per-cent interest. BMO's Premium Rate Savings Account is also a few years old and pays 2.6 per cent, while HSBC's new Direct Savings Account pays 3.5 per cent.

The HSBC account is notable because of how user-friendly it is. Though you can't access it through HSBC branches, you can deposit cheques or make no-fee withdrawals through a network of 4,100 bank machines (HSBC, Bank of Montreal and a network called The Exchange), and you get free bill payments.

TD offers 3 per cent on its Guaranteed Investment Account, but you need a $5,000 minimum to qualify. CIBC's Bonus Savings Account now pays 0.1 per cent for balances below $5,000 and 3.05 per cent for higher amounts (yes, the entire balances qualifies), but it will shortly bump those rates up by 0.95 of a point.

If you already have a high-rate account at the likes of ING, then there's no reason to use the high-rate savings accounts offered by the big banks unless you like the added convenience. If you've never had a high-rate account, the big banks are making it easy to get one.
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Wednesday, March 28, 2007

Sun Life to Phase-Out Clarica Brand

  
Financial Post, Jonathan Ratner, 28 March 2007

Sun Life Financial Inc.’s decision to phase out its Clarica brand in favour of the Sun Life Financial name in Canada, will affect the company’s first quarter results.

Sun Life will incur asset write-downs in the range of $40-million to $50-million dollars, after tax, in the quarter, according to Desjardins Securities analyst Michael Goldberg. Another $15-million to $20-million in charges will come in the next 12 months for advertising, signage and other name-related changes.

“Management believes that the strategy will allow the company to realize greater economies of scale in marketing spending and reduce brand duplication in the Canadian market,” Mr. Goldberg said in a note to clients.

Despite lowering his earnings per share estimate for 2007 by 10¢ to $3.95, Mr. Goldberg maintained his ‘buy’ recommendation and $56 price target on Sun Life. This represents upside of roughly 6%.

Investment firm McLean Budden, which is jointly owned by Sun Life Assurance, will not be affected by the change.
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Market Volatility May Hurt TD Ameritrade

  
Financial Post, Jonathan Ratner, 28 March 2007

Market volatility in March likely hurt U.S. discount brokers like TD Ameritrade Holding Corp. and optionsXpress Holdings Inc., since their clients tend to avoid trading during periods of uncertainty, according to Goldman Sachs.

While analyst William Tanona is bullish on shares of both firms and assigns them ‘buy’ recommendations, he lowered his quarterly and fiscal 2007 earnings estimates due to their lower net interest and daily average revenue trades (DARTs).

While maintaining his estimates on other discount brokers, Mr. Tanona recently lowered his estimates for E*Trade Financial Corp., which he also rates ‘buy.’

He expects DARTs will see a 6% month-over-month decline in March for the industry as a whole, while expecting a 3% dip on an annual basis.

“While much of the percentage decline in the U.S. markets has been recouped from the late February sell-off, we believe many investors remain less active after an initial rebalance of their portfolio,” Mr. Tanona said in a note to clients, adding that firms with more exposure to derivative markets may do slightly better than others.

He expects valuations for the discount broker group to remain depressed in the near term, although the industry’s fundamentals appear in tact.

If they report better-than-anticipated DARTs in March or exceed expectations for their first quarter results, share prices could move up.

Mr. Tanona has a US$25 price target on TD Ameritrade, US$36 for optionsXpress and US$31 for E*Trade.
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Monday, March 26, 2007

Scotiabank Seeks Bigger Slice of Mutual Fund Pie

  
The Globe and Mail, Keith Damsell, 26 March 2007

Bank of Nova Scotia wants a bigger piece of Canada's mutual fund pie.

"We are turning the corner. Improving mutual fund sales is a key priority," Barbara Mason, executive vice-president of wealth management at Canada's third-largest bank, told a Montreal investment conference last week.

Scotiabank wants fund sales from its branches to double this year from a year ago. The bank opened 15 branches last year and another 35 are slated for 2007. A key target is the $50-billion in mutual fund assets held by the bank's clients that are managed by somebody else, she said.

"We have recognized that we have a long way to go but we are very focused on delivering a turnaround performance," Ms. Mason said.

Scotiabank has been an also-ran among the big banks when it comes to mutual funds. As of Feb. 28, the bank oversaw $17-billion in funds, the smallest share of the big five banks and a fraction of the $74.6-billion in fund assets managed by Royal Bank of Canada.

"We have not, I think, delivered . . . the extensive capabilities to move to the next level," Ms. Mason said.

Ms. Mason took over the strategic direction of the bank's fund business following the December departure of Karen Fisher, the president and chief executive officer of Scotia Securities Inc. Ms. Fisher had overseen the bank's mutual fund operations since 2000. Under her tenure, in-house funds generated little excitement and third-party offerings dominated sales.

Building up a seasoned sales and advice team is key to Ms. Mason's growth plans. The bank plans to add 100 investment executives to its team of 900 by the end of this year. The retail sales and service team increased by 700 in 2006 and another 200 will be hired in 2007.

Her efforts are starting to pay off. The bank recorded more than $1-billion in net sales for the four-month period ended Feb. 28 compared with net redemptions during the same period in fiscal 2006. Wealth management revenue is expected to grow 10 per cent this year.

A strategic acquisition in the fund business is high on the priority list but the right deal remains elusive, she said. The bank's criteria is "quite specific," including business synergies and cultural issues.

"The deal that we do here, the large one, is extremely strategic and therefore absolutely has to be the right one. We have looked at a number of sizable opportunities and have chosen not to participate for a variety of reasons," Ms. Mason said.
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Saturday, March 24, 2007

BMO Sued Over Currency Conversion Fees

  
The Toronto Star, Beth Marlin, 24 March 2007

James Richard MacDonald is fighting mad at his bank-owned brokerage house. He is suing for the return of thousands of dollars he says have been whisked out of his registered retirement accounts in unauthorized fee-heavy foreign exchange charges by BMO Nesbitt Burns.

MacDonald was a former financial adviser at BMO Nesbitt Burns, and his job gave him knowledge of how brokerage fees are levied. He is leading a legal action that he hopes to have certified as a $100 million class-action lawsuit on behalf of the brokerage's RRSP and other registered-account clients against his former employer.

The action challenges foreign-exchange conversion practices he says should have ended five years ago.

In his statement of claim, MacDonald alleges that BMO Nesbitt Burns, BMO Trust Co. and BMO Bank of Montreal have "breached their fiduciary and/or contractual obligations" to the class by "effecting unauthorized foreign exchange transactions and/or by charging undisclosed fees on all foreign-exchange transactions."

The foreign-exchange practices in question take place at many brokerage firms, not just at BMO.

Here's what's at issue. Investors who trade U.S. and other foreign stocks and bonds within their registered accounts are routinely subjected to associated currency-conversion costs.

Financial institutions buy currencies at one rate and sell them to retail investors at another; the difference is called the spread and creates profits for brokerages. Embedded within the spread, MacDonald's suit alleges BMO charges an administrative fee. Because BMO Nesbitt Burns rolls the exchange rate and its administrative fee into a single "currency conversion rate," clients can't easily calculate the exact amount of the administrative fee, MacDonald said.

He calculates the total conversion cost to the investor can be as high as 1.5 per cent to 2 per cent.

Currency-conversion costs are hard to avoid for investors with foreign stock holdings in their registered retirement savings plans. The proceeds of any sale of U.S. or foreign stocks are automatically converted into Canadian funds and subjected to conversion costs, as are any dividends such securities pay.

This automatic currency conversion means that the next time the client wants to buy a U.S.-listed stock or bond, they pay their brokerage conversion costs once again to change the funds back into U.S. dollars.

Both conversion fees could have been avoided if the cash had simply remained in the form of U.S. currency within the account. Some brokerages, however, may allow investors to avoid currency conversion if they are selling one U.S. stock and immediately buying another, if investors inquire ahead of time.

The currency conversion practice stems from an outdated government requirement that foreign currency not be held in RRSPs, registered retirement income funds or registered education savings plans, said MacDonald, who has researched the issue with the help of a forensic accountant.

"As of June 14, 2001, the (relevant) act was changed to finally allow Canadians to hold any currency in the world in their registered accounts," said MacDonald, who was also a senior federal civil servant. MacDonald said he's not aware of any firms that allow foreign-currency holdings in an RRSP.

JoAnne Hayes, a spokesperson for BMO Financial Group, said "because a related matter is before the courts, it would be inappropriate for us to comment at this time."MacDonald's statement of claim also seeks punitive damages of $10 million for "the high-handed, arrogant and oppressive manner with which the defendants have administered the trust accounts, in knowing breach of trust, breach of contract and breach of their fiduciary duties to the plaintiff and the class."

The statement of claim, originally filed with the Ontario Superior Court in August 2006, was amended on March 6, 2007, to add Lynn and John Zoppas and Tamas Varga as lead plaintiffs in the class, and to add BMO's Investorline to the list of defendants.

Plaintiffs' lawyer Margaret Waddell of the Toronto law firm Paliare Roland Rosenberg Rothstein said it will take about a year for the case to reach the certification stage in Ontario courts. She said a statement of defence had not yet been filed.

The financial industry, to whom the issue is worth "millions" of dollars, is not expected to settle the case, Waddell said.

"They're going to fight this proceeding," she said, noting that MacDonald is an ideal plaintiff to fight the issue. "Mr. MacDonald was (a financial adviser) at BMO Nesbitt Burns so he's very knowledgeable about the system."

In December, a class-action lawsuit was certified in B.C. Supreme Court against Merrill Lynch, alleging the brokerage house charges its clients with both registered and non-registered trading accounts hidden and unauthorized "currency conversion" fees to buy and sell securities in denominations other than the Canadian dollar, said Vancouver lawyer Bruce Lemer, co-counsel for the plaintiffs. Merrill Lynch is appealing the certification ruling, said a spokesperson, who declined further comment on the case.

At TD Waterhouse, Lisa Hodgins, manager of public affairs for TD Bank Financial Group, said the mandatory currency conversion practice is disclosed to clients in their account agreements.

"Rates vary, but we can confirm that (costs) are currently lower than 1.5 to 2 per cent each way," Hodgins said.

"TD Waterhouse does not currently offer foreign currency (including U.S. dollar) registered accounts because of system limitations," she said.

"The system for registered plans reports only in Canadian dollars in accordance with CRA reporting requirements," she wrote.

"U.S. securities are valued in Canadian dollars for this purpose. Accommodating reporting in U.S. dollars would require both a change to the structure of our registered plans and a significant system change."
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TD Banknorth Cuts 400 Jobs

  
Financial Post, Duncan Mavin, 23 March 2007

TD Banknorth, the U.S. retail banking unit of Toronto Dominion Bank, is slashing its workforce by 400 and closing 24 branches.

The cuts could include up to 70 non-branch jobs, according to Blackmont Capital analyst Brad Smith.

The measures could result in “one-time costs in the US$30-40-million range” said Mr. Smith. Portland, Maine-based Banknorth has targeted cost savings of between 5% and 8% by 2008.

The bank has been actively pursuing growth in the last couple of years, with acquisitions of US$3.2-billion in 2006 alone. But some of those purchases have come with problems, such as sub-standard branches.

The sector as a whole has also been hit by declining margins due to intense competition and an unfavourable interest rate environment. Management has said acquisitions are on hold for now.

Blackmont’s Mr. Smith said the announced cuts have no impact on his estimate for TD’s operating performance for 2007. He has not changed his 12-month target price of $73.00 for TD’s stock.
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Financial Post, 24 March 2007

When Toronto-Dominion Bank bought a controlling stake in TD Banknorth two years ago, TD chief executive Ed Clark said a fundamental factor was finding a local management team "I can bet my reputation on."

Yesterday, a new management regime recently installed at Banknorth and headed by a long-serving TD banker sent from Canada put its stamp on the operations of the Portland, Me.-based retail bank by slashing 400 jobs, including as many as 80 back-office positions, and closing 24 branches.

Banknorth's new chief executive -- TD's Bharat Masrani, who took over the role this month at the expense of former CEO Bill Ryan -- said the job losses are "necessary in response to the current operating environment."

The move comes only a few months after TD's Mr. Clark announced in November that TD has agreed to buy all the outstanding shares of Banknorth it does not own for US$3.2-billion.

Edward Jones analyst Tom Kersting said the retail-banking environment in the United States has changed significantly since TD acquired a stake in Banknorth.

"When they bought in and they were doing acquisitions, the industry conditions were a lot better than they are today,"

Mr. Kersting said. "Right now it's very difficult for all the regional banks in the U.S."

Banknorth's results have largely disappointed -- the U.S. bank contributed $64-million to TD's first-quarter results, down from $65-million a year ago.

Intense competition and a tough interest-rate environment for U.S. banks have taken a bite out of margins for the whole U.S. retail-banking industry. Banknorth's performance in 2006 also suffered from the cost of integrating US$2.5-billion worth of acquisitions bought up by former chief Mr. Ryan.

A spokesman for TD said that the recent developments at Banknorth, including the announced back-office job cuts, do not reflect a significant change in strategy on TD's part.

"The emphasis is definitely on operations instead of acquisitions, but I think the change is subtle," he said.

Mr. Masrani has said he will cut costs by between 5% and 8% by 2008, which includes the job losses and branch closures announced yesterday. TD and Banknorth executives have also said acquisitions are on hold for the short term.

Most of the branch locations earmarked for closure were acquired in Banknorth's buying spree in 2006, said spokesman Jeff Nathanson.

Some of the acquired branches were not up to the same standards of customer service expected of a TD or TD Banknorth branch. Also, the acquisitions resulted in Banknorth owning branches in locations that are close together.

Banknorth said it will incur a restructuring charge of US$11- million to US$17-million related to the cuts.

Meanwhile, TD's bid to buy 100% of Banknorth has faced opposition from some shareholders, who have sued Banknorth claiming the TD offer is under priced. However, the Canadian bank is expected to close the transaction some time in April.
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The Globe and Mail, Tara Perkins, 24 March 2007

After less than a month on the job, TD Banknorth Inc. chief executive officer Bharat Masrani is taking action to pare back the bank's fast-growing network.

But he insists TD Banknorth is still a growth company.

The bank will close up to 24 branches, eliminating 400 jobs. That will result in a charge of between $11-million (U.S.) and $17-million for the quarter that ends March 31.

It's likely not the end of the cutbacks. "We continue to look at other initiatives which may result in further charges," Mr. Masrani said in an interview yesterday.

The goal is to cut annual operating expenses by $50-million to $80-million by 2008.

Mr. Masrani took the CEO title at the start of this month. Toronto-Dominion Bank parachuted him down to the United States last fall, after nearly two decades with the company, to become president of TD Banknorth just months before TD announced plans to take the unit private. TD has offered $3.2-billion for the roughly 43 per cent of TD Banknorth shares it doesn't already own.

Yesterday's restructuring announcement "is a reflection of the tough banking environment," Mr. Masrani said, but "we continue to be a growth company."

Recent acquisitions have seen TD Banknorth virtually quadruple its assets to more than $40-billion since 2004, ranking it the 26th-biggest commercial banking organization in the United States. Acquisitions are on the back burner for the remainder of this year, although Mr. Masrani adds "never say never."

The strategy is very similar to that of rival Royal Bank of Canada, which followed a similar path for its U.S. retail bank Centura, Edward Jones analyst Tom Kersting noted.

RBC "bought a pretty large U.S. bank, they had some difficulties running it initially, they quit growing, they focused on their own operations," Mr. Kersting said. "And now you look at Centura, and they're doing pretty well and they're growing through acquisitions again."

This restructuring is "the right short-term move for TD Banknorth, and it should better position them for future long-term growth," Mr. Kersting said.

Mr. Masrani blames interest rates, or the "inverted yield curve," for much of the bank's woes. When short-term rates exceed long-term rates, it's more difficult to make money off the spread between the rate banks charge on loans and the rate they pay to borrow. And the interest rate environment has resulted in stiffer competition.

"That's causing big revenue pressures, not only for us but for all of the banks. And in order to address that, you have to address your expenses."

He's attempting to do that as another cloud hovers on the horizon.

TD Banknorth has no subprime, or high-risk, mortgage lending, he said.

"But, as is the case with any major financial problem, there could be knock-on effects that could impact other types of markets . . . Those are the issues that we worry about."

In the meantime, the job cuts will take place in coming months, mostly in New Jersey, with additional closings planned in Connecticut, New York, Pennsylvania and Massachusetts. Most branches are set to be closed in the third quarter, following regulatory approvals.

Blackmont Capital analyst Brad Smith wrote in a note to clients that the layoffs are about 4.6 per cent of the total work force, "suggesting 60-70 non-branch job[s] are included in the cuts." The branch closings are about 3.6 per cent of the branch network.

TD Banknorth, which made $128-million in the past quarter, is expected to become a wholly owned unit of the parent bank by April.

Some shareholders are taking legal action over that transaction, seeking to challenge the merger. TD said all of the lawsuits are without merit. In a regulatory filing last week, TD said it had agreed to settle one such suit for about $2.95-million. Other suits are still outstanding.

Also in its proxy statement last week, the bank said it was considering "various expense reductions and operational initiatives" that could include "possible management changes. . . .

"Although we are still evaluating these initiatives and none have yet been approved by our board of directors, we anticipate that we will record a pretax charge of approximately $40-million to $100-million . . . or approximately $0.11 to $0.27 per share, after tax, in the first or second quarter of 2007 to reflect the severance" and related costs, it said.
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Thursday, March 22, 2007

Banks Q1 2007 Review

  
Scotia Capital, 22 March 2007

Event

• Earnings growth reaccelerated to 24% in the first quarter, the strongest earnings momentum in the past three years.

• The bank group recorded its best quarter in history, with return on equity of nearly 24% and return on risk-weighted assets of 224 bp.

What It Means

• Earnings growth of 24% is even more impressive considering that fiscal 2006 represented the fourth straight year of 15% plus earnings growth - the first time the banking industry has achieved this in the past half century.

• Bank earnings continue to exceed market expectations, driven by strong underlying fundamentals and strong earnings growth from all business lines.

• Earnings quality remained solid. Bank revenue growth was 10% in the first quarter, one of the highest levels in the past five years. Banks are certainly not immune to a slowdown in the economy or capital markets activity, but we believe the market is overly aggressive in discounting potential earnings weakness.

• We expect the trend of declining volatility in bank earnings to continue and we expect the market to continue to reward bank stocks for this through further expansion of the P/E multiple. We reiterate a 1-Sector Outperform rating on RY and an overweight bank recommendation.

Blockbuster Quarter - Best in History

Summary and Conclusion

• The bank group recorded its best quarter in history, with return on equity of nearly 24% and return on risk-weighted assets of 224 bp.

• Earnings growth reaccelerated to 24% in the first quarter, the strongest earnings momentum in the past three years. This growth is even more impressive considering that fiscal 2006 represented the fourth straight year of 15% plus earnings growth - the first time the banking industry has achieved this in the past half century.

• Bank earnings continue to exceed market expectations, driven by strong underlying fundamentals and strong earnings growth from all business lines. Wealth management continues to produce high positive operating leverage and earnings growth. Wholesale bank earnings remain strong, driven by high trading revenue, solid capital markets revenue, and negligible loan loss provisions. Retail banking earnings are being driven by volume growth, a stabilizing retail net interest margin, and controlled expenses.

• Bank earnings are expected to continue to be more resilient or sustainable than market expectations due to loan losses staying lower for longer than expected in addition to the strong top-line growth the banks are generating. Bank revenue growth was 10% in the first quarter, one of the highest levels in the past five years. Revenue growth was particularly high at Royal Bank (RY) and Bank of Nova Scotia (BNS), at 15% and 14%, respectively, significantly higher than the bank group. Revenue growth in the mid-teens at RY and BNS reflects a very high growth platform at these banks. This is generally inconsistent with the market’s view of the banking industry as low growth.

• Banks are certainly not immune to a slowdown in the economy or capital markets activity, but we believe the market is overly aggressive in discounting potential earnings weakness. In addition, we believe the market continues to be slow in fully recognizing the level of profitability, high capital, low earnings volatility, and revenue diversification.

• The bank group’s strong earnings and profitability are being translated into consistent and frequent dividend increases. The banks have been very active in increasing dividends in conjunction with overall earnings strength.

• Four out of the six banks increased their dividends this quarter, led by RY with a relatively large 15% bump, followed by Toronto-Dominion Bank (TD) and Canadian Imperial Bank of Commerce (CM), each at 10%, with Bank of Montreal (BMO) at 5%. BMO’s increase follows a 5% increase in the previous quarter. Bank dividends have increased fourfold since the end of 1999. BNS and RY are leading the bank group in dividend growth at 250% and 241%, respectively, since the end of 1999. Despite the growth in dividends, the payout ratio remains in the low end of the banks’ target range at 41.6% on our 2007 earnings estimates.

• Earnings quality remained solid, with moderate security gains, high trading revenue, slightly above-average capital markets revenue, weaker retail net interest margins (although stabilizing), solid retail loan growth, low loan loss provisions, and stable and growing wealth management earnings.

• Bank earnings in the first quarter were not unduly reliant on market-sensitive revenue (trading and capital markets revenue), which represented 20% of total revenue, slightly below the eight-year average of 21%. Loan loss provisions at 24 bp remained near historical lows.

• We are now forecasting bank earnings growth of 16% in 2007, which would represent five straight years of 15% plus growth. Stronger-than-expected earnings in the first quarter, higher top-line growth, continued low loan loss provisions, and retail net interest margin stability are supportive of the higher earnings outlook.

• The bank group’s outperformance of the market in 2006 represented the 12th year of outperformance in the past 13 years. Banks are outperforming the market modestly thus far in 2007.

• Bank valuations have moved from attractive to compelling based on the strength of earnings and dividend increases in the first quarter. Bank valuations on a yield basis relative to bonds, pipes and utilities, income trusts, and the S&P/TSX composite are all in the strong buy range.

• Recent bank dividend increases have boosted dividend yields to 3.3%, representing 81% of the 10-year government bond yield, which is 3.1 standard deviations above the mean. Reversion to the mean with respect to bank dividend yields relative to bonds, pipes and utilities, business income trusts, and the S&P/TSX would suggest an increase in the bank index of 55%, 45%, 23%, and 36%, respectively.

• Bank P/E multiples have drifted to 14.0x trailing earnings from a recent high of 15.1x early in 2006 due to continued strong earnings growth. Banks are trading at a relatively low 12.7x and 11.5x our 2007 and 2008 earnings estimates, respectively. Our target P/E multiple is 15.5x our 2007 earnings estimate for total expected return of 26%. Our target prices may appear aggressive in the context of a nervous equity market, but we believe they are fully supported by high profitability, earnings growth, low earnings volatility, dividend growth, and low risk profile.

• We expect the trend of declining volatility in bank earnings to continue and we expect the market to continue to reward bank stocks for this through further expansion of the P/E multiple. The level of profitability also dictates much higher valuation. We have attempted to address the potential volatility in bank earnings by stress testing bank earnings (Exhibits 8 and 9) for a recession similar to that of the early 1980s and 1990s. Based on this stress testing, we expect a moderate 8% decline in bank earnings from record levels and a trough ROE of 18%. This trough ROE is higher than the previous trough of 15% in 2002. We conclude that bank earnings volatility is relatively low and profitability is sustainable at very high levels.

• In terms of bank stock selection, we continue to focus on the banks with the strongest profitability, capital, operating platforms, and the best growth opportunities. Individual bank P/E multiples have converged to historically low levels, occurring only a half dozen times since 1970 (Exhibit 35). Thus, investors are not paying any meaningful premium for the banks with the stronger operating platforms. On a long-term basis, three bank stocks have significantly outperformed: RY, BNS, and TD.

• We reiterate 1-Sector Outperform rating on RY, as we expect its P/E multiple to expand relative to the bank group towards the 10%-15% premium range over the next several years based on superior revenue growth, high ROE, and a business platform that is more orientated towards growth. BNS and RY led the bank group in revenue growth in fiscal 2006 at 10% and 8%, and in the first quarter of 2007 at 14% and 15%, respectively. BMO and CM significantly lagged in 2006 at 3% and -1%, respectively, with BMO, TD, and National Bank (NA) lagging in the first quarter at 4%, 5%, and 6%, respectively. We believe RY is the growth bank.

• RY (1-Sector Outperform) has above-average profitability and extremely strong operating platforms in retail, wealth management, and capital markets, with a slight valuation discount. RY’s superior growth is expected to be driven by its wealth management platform, supported by growth of its U.S. & International businesses, with RBC Capital Markets expanding its platform on a product and geographic basis. RY is expected to segment its wealth management business beginning in Q2/07. Wealth management revenue reported by RY in Q1/07 was nearly $1.3 billion, a sizable business that should attract a much higher P/E multiple.

• We maintain 2-Sector Perform ratings on TD, Laurentian Bank (LB), CM, and Canadian Western Bank (CWB), with 3-Sector Underperform ratings on BMO and NA. We have no sell recommendations on an absolute return basis.

• TD (2-Sector Perform) continues to generate strong earnings growth from TDCT and Wealth Management, with greater earnings stability in wholesale banking partially offset by weak operating performance from TD Banknorth. Overall, TD Banknorth continues to create uncertainty for investors and somewhat overshadows the strong overall performance of the bank.

• LB (2-Sector Perform) continues to improve in terms of operating performance. LB earnings are expected to grow at a much higher rate than the bank group over the next few years, becoming more visible with the release of first quarter earnings. LB is the least expensive bank stock on a market to book value basis and on a P/E multiple basis on our 2008 earnings estimate. LB return on equity continues to lag, but stronger relative earnings growth in 2007 and 2008 should support strong share price performance.

• CM (2-Sector Perform) has reduced the risk in its retail loan portfolio and significantly lowered its operating expense levels. The cost cutting has produced solid earnings gains in 2006 and is expected to continue into 2007; however, revenue weakness remains a challenge. The earnings gains achieved are unlikely to be sustainable in the medium to longer term unless the bank is able to grow revenue. It is always difficult to determine when aggressive cost cutting becomes not reinvesting in the business. Revenue risk persists.

• CWB (2-Sector Perform) continues to have a high growth profile, with 20% plus loan and deposit growth. CWB concentration in the strong economies of Alberta and B.C. and continued high loan and deposit growth are expected to continue to produce industry-high earnings growth, which is reflected in the bank’s premium P/E multiple.

• We maintain our 3-Sector Underperform rating on BMO based on the absence of any meaningful P/E multiple discount, despite the fact that it has the lowest profitability of the bank group and the weakest earnings growth outlook. It appears the market is paying an embedded premium for BMO’s superior historical credit performance, anticipating a major credit crunch. We believe this premium is too high, especially given the structural changes in the bank group’s balance sheets, as leverage to credit has declined four- or fivefold since the early 1980s.

• We maintain our 3-Sector Underperform rating on NA due to its lower earnings growth outlook, concerns regarding economic prospects in Central Canada and NA’s concentration in that region, and the bank’s earnings dependency on security gains and trading revenue.

• Our 12-month bank index target is 28,700 for a total expected return of 26%. Our target is based on a forecast P/E of 15.5x our 2007 earnings estimate or 13.6x our 2008 earnings estimate.

• Our 12-month share price targets on BMO, CM, NA, RY, TD, LB, and CWB are $80, $115, $77, $75, $81, $36, and $27.50, respectively.

• Risks to our bank share price targets are overall bearish market sentiment, severe economic slowdown or recession, a major spike in long-term interest rates above 5%, or a major decline in short-term interest rates of 200 bp or more. A major spike in long-term rates negatively impacts valuation and a major decline in short-term rates would negatively impact earnings.

• We remain overweight the bank group, based on record profitability and capital levels, low financial and earnings leverage to credit, diversified revenue mix, reasonable earnings growth outlook, low earnings volatility, ability to increase dividends, and attractive valuation, including extremely high dividend yields, low P/E multiples, and low relative risk.

• Bank betas remain extremely low, with a one-year average bank beta of 0.35, compared with a three-year average bank beta of 0.37 and a five-year average bank beta of 0.74.

First Quarter Earnings Highlights

• The bank group once again exceeded expectations, with operating earnings increasing 24% year over year and 13% sequentially.

Super Growth

• CM, RY, and LB led earnings growth in the 30% plus range at 34%, 32%, and 30%, respectively.

High Growth

• CWB, BNS, and TD followed with earnings growth in the 20% plus range at 21%, 20%, and 20%, respectively.

Growth Laggards

• Significantly lagging the bank group were BMO and NA, with earnings growth of 11% and 13%, respectively.

Dividend Increases - BMO, CM, RY, TD

• Four banks announced dividend increases in the quarter, with RY increasing its dividend by 15%, CM and TD increasing their dividends by 10% each, followed by BMO with a 5% increase. RY’s increase was the largest in the past seven years. BMO’s increase occurred over back-to-back quarters, with a payout ratio of 50.4% versus the bank group at 41.6%. Overall, the bank group has now increased dividends by 205% since the end of 1999/beginning of 2000.

High Revenue Growth Led by RY and BNS

• Revenue growth for the bank group in Q1 was 10%, one of the highest growth rates in the past six years. RY and BNS were very dominant in revenue growth at 15% and 14%, respectively, considerably higher than the bank group. CM, NA, TD, and BMO followed with more moderate revenue growth of 9%, 6%, 5%, and 4%, respectively.

Retail and Wealth Management

• Domestic retail and wealth management earnings were strong, increasing 16% year over year and 11% sequentially. CM led retail earnings growth at 20.7%, primarily due to lower loan loss provisions, cost cutting, and a lower tax rate. RY earnings increased 20.2%, led by wealth management and strong insurance results. NA earnings increased 17.5%, driven by improved net interest margin and lower-than-normal run rate expenses. TD earnings increased 14.6%, driven by strong insurance results and retail loan volumes and wealth management. BNS and BMO growth rates lagged at 9.8% and 11.4%, respectively. BNS was the weakest, although the bank recorded its best growth rate in over a year. BMO continued to lose market share in residential mortgages and personal deposits.

Underlying Retail Margin Stabilizing to Improving?

• Retail net interest margin (NIM) dipped below 3% for the first time to 2.99%, representing a 4 bp decline year over year and sequentially. However, the margin appears to be stabilizing for some banks. RY, TD, and NA margin increased 1 to 2 bp, with BMO unchanged on a year-over-year basis. CM and BNS margins declined 24 bp and 20 bp year over year, respectively, with declines of 11 bp and 4 bp sequentially. The margin decline at BNS has negatively impacted its earnings growth in this segment relative to the bank group.

Wealth Management - High Revenue Growth

• Wealth management earnings were very strong in the first quarter, although only three banks (BMO, NA, and TD) currently segment these earnings, with RY beginning in Q2/07.

• Earnings growth from domestic wealth management at NA and TD were 22% and 16%, respectively, with BMO lagging at 4%. Domestic wealth management revenue growth was strong at RY at 14%, followed by TD at 12% and NA at 9%.

• Mutual fund assets for the bank group increased 14% to $243 billion, led by RY at 21% growth, followed by TD at 17%, BMO at 14%, BNS at 11%, CM at 8%, and NA at 3%. RY and TD remain the industry leaders in net long-term asset (LTA) sales including transfers, with impressive market share of 20% and 16%, respectively.



• Performance at the bank group’s International divisions varied considerably, with RY and BNS recording very high growth, TD mixed, and BMO very weak. RY U.S. & International earnings increased 45%, driven by an 18% increase in wealth management revenue. BNS earnings increased 36% despite flattish earnings from Mexico. TD International performance was mixed, with TD Banknorth earnings declining 2% and TD Ameritrade’s contribution increasing 94%. BMO results from International were weak, as U.S. P&C (Harris) earnings declined 13% due to net interest margin decline and higher expenses.

• International Banking earnings at BNS were driven by strong growth in all regions, particularly Mexico and Asia, with solid contribution from new acquisitions in Costa Rica and Peru. Revenue growth at International Banking was very high at 30%.

• RY U.S. & International represented 11% of bank earnings, with BNS International the largest contribution of any bank at 32%. TD Banknorth’s earnings contribution was $0.09 per share, representing 6.5% of total bank earnings, with Ameritrade contributing $0.07 per share or 5% of earnings for a combined contribution of 12%. BMO’s U.S. P&C (Harris) contributed 5% to bank earnings.

Wholesale Banking Earnings Increase 12%, Strong at CM, RY, BNS; Weak at BMO, NA, TD

• Wholesale earnings for the bank group increased 12% year over year, led by CM with earnings growth of 63%, followed by RY at 34% and BNS at 14%. CM recorded significantly higher merchant banking and capital markets fees including M&A. RY recorded strong trading revenue and capital markets revenue growth. BNS offset a 25% decline in trading revenue, with higher spread income driven by asset growth as well as higher loan loss recoveries.

• NA, BMO, and TD all recorded slight earnings declines in wholesale banking of 4%, 2%, and 1%, respectively. BMO and TD earnings were both negatively impacted by lower fee income and trading revenue. NA earnings were relatively weak due to lower security gains and higher operating expenses.

• NA continues to have the highest earnings reliance on wholesale banking at 36% of earnings, followed by BMO at 32%, BNS 30%, RY 28%, CM 27%, and TD at 20%.

Trading Revenue Strength Indicator : 125%; YOY Change 2%

• The bank group recorded strong first quarter trading revenue, with a strength indicator of 125% (compared with the eight-quarter average). However, trading revenue actually increased a modest 2% to $1,775 million. There is clear seasonality in Canadian bank trading revenue, particularly in the first quarter. RY recorded the strongest trading revenue as it continues to build out its platform, with BNS reporting the weakest trading revenue of the group.

• In terms of trading volatility, BMO continues to have the highest trading volatility, with CM declining to the lowest of the bank group. BMO’s high volatility is followed by TD, RY, NA, BNS, and CM.

Capital Markets Revenue Strength Indicator : 105%

• Capital markets revenue was $2,222 million, a 9% increase year over year. The capital markets revenue strength indicator was at 105%, with BNS and RY above average at 118% and 110%, respectively, with TD and NA the weakest at 90% and 102%, respectively.

Market-Sensitive Revenue Remains Below Eight-Year Average; Outliers - NA on High End, BNS on Low End

• Market-sensitive revenue (which includes trading revenue and capital markets revenue) for the bank group represented 20% of total revenue, below the eight-year average of 21%. NA led the group with market-sensitive revenue representing 27% of total revenue, with BMO and RY at 22% each, CM and TD at 21%, and BNS trailing at 16%. The outliers are NA at 27% and BNS at 16%.

Loan Loss Provisions Stable at 24 bp

• Specific loan loss provisions (LLPs) increased 21% year over year to $611 million or 24 bp. Bank LLPs have been incredibly stable, running at approximately $500 million to $600 million per quarter for the past three years. LLPs are expected to remain lower for longer than market expectations.

• In terms of individual banks, BNS and BMO recorded extremely low LLPs, at 11 bp and 13 bp, respectively, aided by continued LLP recoveries.

• We have reduced our 2007 LLP forecast by $90 million or 3% to $2,550 million or 26 bp of loans due to the level of recoveries in the first quarter and continued strong credit quality. Our 2008 LLP estimate declined $100 million to $3,025 million or 30 bp of loans.

Impaired Loan Formations Increase Modestly

• Gross impaired loan formations increased modestly to $1,435 million versus $1,375 million in the previous quarter and $1,329 million a year earlier. Gross impaired loan formations are at extremely low levels, at 14 bp of the bank group’s loan portfolio, for an annualized rate of 58 bp.

• Net impaired loan formations increased to $961 million versus $896 million in the previous quarter and $630 million a year earlier.

Risk-Weighted Assets Growth Accelerates

• Bank risk-weighted asset (RWA) growth has been accelerating over the past three years from the lows of 2002 and 2003, which saw actual declines in RWA levels. Bank RWA growth in Q1/07 was 14%, the highest level since 1997. Banks have increased their trading operations, with market at risk being a growth driver in overall bank RWA levels. Market at risk is now 5% of total RWA and has been running in the 4%-5% range since mid-2003. The leaders in RWA growth have been BNS, RY, and BMO.

Record Profitability : RRWA : ROE

• The bank group reported record profitability, with return on risk-weighted assets (RRWA) of 224 bp and return on equity of 24%. This represents the highest RRWA and ROE ever recorded by the bank group. The divergence in profitability among the various banks is relatively wide contrary to their P/E multiples, which are narrow by historical standards.

• TD holds the lead in terms of profitability based on this measure, with RRWA of 2.73%, assisted by its business mix, followed by RY at 2.55%, CM at 2.46%, BNS at 2.00%, and NA at 1.94%, with BMO trailing badly at 1.59%. We believe TD’s and RY’s retail and wealth management platforms have a competitive advantage, which is reflected in their higher profitability. TD’s and RY’s RRWA are 114 bp and 96 bp higher than BMO’s, respectively.

• Return on equity for the bank group in the first quarter was a record at 23.6% on extremely high capital levels. CM, RY, and BNS led the bank group in ROE at 28.1%, 27.5%, and 23.1%, respectively. BMO is the laggard at 18.3%, which is 9.8% lower than CM and 9.2% lower than RY. This spread is enormous and is certainly not reflected in relative P/E multiples.
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New Budget Measure Could Pose Impediment to Financial Sector

  
The Globe and Mail, Steven Chase & Tara Perkins, 22 March 2007

Federal Finance Minister Jim Flaherty's office declared yesterday that it has no intention of backing away from a controversial budget move to scrap the tax deductibility of interest that companies incur to fund foreign operations.

Taxation experts have warned this measure – which Finance describes as eliminating an undesirable tax subsidy – could pose a major impediment to banks and other Canadian companies that want to make foreign acquisitions.

Mr. Flaherty's office spoke yesterday to clarify the Finance Minister's intent on the heels of reports suggesting he might reconsider the move.

“He's not backing down,” said Dan Miles, director of communications for the Finance Minister. “The policy is the policy.”

Mr. Flaherty said earlier this week that he would consult “stakeholders” – that could include affected companies and tax experts – so that Finance could design the implementing legislation “in the best way possible.”

But Mr. Flaherty was also clear that he was “satisfied” with the measure as proposed in the budget.

Under new measures outlined in the budget, Canadian companies borrowing money to finance foreign deals will no longer be able to deduct the interest costs against their Canadian income.

The 2007 budget document makes clear Finance considers the target of its action a subsidy that it says hurts Canada by encouraging the export of business operations.

Allan Lanthier, a retired senior partner of Ernst & Young and immediate past chairman of the Canadian Tax Foundation, warned yesterday that the budget move would hurt banks.

“I've been practising tax for 35 years – this is the single most misguided proposal I've seen out of Ottawa in 35 years, Mr. Lanthier said.

The proposal could also result in a number of large Canadian companies being put on the auction block, he said.

“A number of Canadian multinationals have become takeover targets,” he said. “You now have a Canadian multinational that's in a very tax-inefficient position, and that fact won't be lost on foreign purchasers. I think many of them may well become the subject of hostile takeover bids...

“This measure would put Canadian companies at a significant competitive disadvantage, and I think the economic fallout to the Canadian economy is potentially disastrous,” he said. “And I don't think the Finance Minister understands that, I don't think he was properly advised by his Finance officials.”

Compared with 10 years ago, “there are fewer Canadian multinationals now, they are more at risk, they are less robust, and other jurisdictions are creating fiscal climates to allow their domestic multinationals to expand,” he said.

Mr. Lanthier is suffering from a bit of guilt. He was one of the members of the Mintz committee, which recommended a similar measure a decade ago, although it had some differences, such as a grandfathering period.

Canadian banks are on high alert over the proposed change.

Royal Bank of Canada's Jim Westlake, head of Canadian retail banking, said yesterday: “Anything that would hurt growth and not support Canadian businesses abroad, we don't like. On the surface, it appears this tax may contain elements of that.”

Ogilvy Renault LLP tax expert Leonard Farber says the impact of the proposed measure is huge.

It “represents a major shift in long-standing policy affecting investment offshore but particularly Canadian multinationals,” said Mr. Farber, a former Finance official.

The budget – which only provides detailed fiscal data two years into the future – estimates that this will collect $10-million in 2007-08 and $40-million annually by 2009-10.

But experts warn the amount clawed back from Canadian companies each year by this measure would actually be hundreds of million of dollars. “Forty million dollars seems way low. It is probably much larger, to a magnitude of ten or twenty,” said one bank official who requested anonymity.

Finance watchers say the low official estimate is likely because the government is planning to grandfather some existing corporate activities. But over time, the extra taxes will climb, they predict.
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BMO Capital Markets, 20 March 2007

In yesterday's budget, the Federal Government proposed changes on the tax deductibility of interest payments and foreign affiliates. Specifically, corporations can issue debt in Canada (and enjoy the tax benefits) to fund foreign affiliates. However, when the earnings from the foreign affiliates are 'dividended' back up to the parent company, this dividend income is not necessarily taxed.

In the budget document, the government states that there is one "important kind of dividend income that does not get taxed in Canada. This is dividend income that a foreign subsidiary corporation, known as a foreign affiliate, pays to its Canadian parent company out of the foreign affiliate's 'exempt surplus'-its foreign business income. Despite the fact that these exempt surplus dividends are not taxed in Canada (and neither is the underlying foreign income), the parent company in Canada can deduct the interest it pays on borrowed money used to acquire the shares of the foreign affiliate."

In effect, the government is trying to eliminate the tax benefit of debt issued in Canada to fund non-taxable earnings from its foreign affiliates. In the budget proposal, the government could not have been clearer when it stated that, 'the [tax] system must ensure that appropriate taxes are paid so that everyone pays their fair share. Some corporations, both foreign-owned and Canadian, have taken advantage of Canada's tax rules to avoid tax.'

What does this mean for the lifecos? The Canadian life insurers are global companies with operations in lower tax jurisdictions including Asia, Ireland, and other parts of Europe as well as reinsurance operations in tax efÞ cient jurisdictions like the Caribbean. Almost all of these jurisdictions are growing faster than the domestic market. Accordingly, as earnings grow in other low tax jurisdictions, like Asia, we would expect there to be a natural bias downward in a life insurer's consolidated tax rate, particularly at Manulife and Sun Life.

However, we believe that other tax planning measures were underway to help lower consolidate tax rates and that most of this tax planning is unlikely to beneÞ t shareholders given the proposed new budget rules.

The consolidated tax rates and the reported tax rates in Canada for the four life insurers is presented in Table 1 below. Of note, reported consolidated and Canadian tax rates in 2006 benefited from the reduction in corporate tax rates announced in Canada last year that involved some non-cash charges. We believe that consolidated tax rates for the Canadian lifecos in the mid-20s appear reasonable given their extensive global insurance and reinsurance operations. The cash tax rates are can be considerably lower than the accrued tax rates reported in consolidated income statements.

Due to its long tailed nature, life insurance accounting tends to be complex and life insurance tax accounting only adds an additional layer of complexity. As one of the CEOs mentioned during a conference call when asked about taxes, he indicated that they 'file aggressively but account conservatively.' As a result, gauging the potential impact of these changes on the lifecos is challenging.

Our initial analysis suggests that these changes could reduce earnings by 1-2% based on the assumption that some portion of the benefits derived from lower effective tax rates on income not subject to tax in Canada would be affected by these proposed changes. In 2005, which is the latest available data, lower effective tax rates on income not subject to tax in Canada reduced taxes by 10-15% at the three large life insurers: Great-West, Sun Life, and Manulife. On a relative basis, we believe that Sun Life and Great-West have more exposure to these changes than Manulife.

At this stage, we believe that this is the worst case scenario. More likely in our view is that these changes are likely to create some headwinds in terms of EPS growth. As mentioned above, the Canadian life insurers are global companies with operations in lower tax jurisdictions including Asia, Ireland, and other parts of Europe as well as reinsurance operations in tax efficient jurisdictions like the Caribbean. Almost all of these jurisdictions are growing faster than the domestic market. Accordingly, as earnings grow in other low tax jurisdictions, like Asia, we would expect there to be a natural bias downward in a life insurer's consolidated tax rate, particularly at Manulife and Sun Life. This is our initial analysis and we expect to update our views over the coming days and weeks as we get greater clarity on the details. The life insurers remain Outperform rated.
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BMO Capital Markets, 20 March 2007

In yesterday's budget, the Federal Government proposed changes on the tax deductibility of interest payments and foreign affiliates. Specifically, corporations can issue debt in Canada (and enjoy the tax benefits) to fund foreign affiliates. However, when the earnings from the foreign affiliates are 'dividended' back up to the parent company, this dividend income is not necessarily taxed.

In the budget document, the government states that there is one "important kind of dividend income that does not get taxed in Canada. This is dividend income that a foreign subsidiary corporation, known as a foreign affiliate, pays to its Canadian parent company out of the foreign affiliate's 'exempt surplus'-its foreign business income. Despite the fact that these exempt surplus dividends are not taxed in Canada (and neither is the underlying foreign income), the parent company in Canada can deduct the interest it pays on borrowed money used to acquire the shares of the foreign affiliate."

In effect, the government is trying to eliminate the tax benefit of debt issued in Canada to fund non-taxable earnings from its foreign affiliates. In the budget proposal, the government could not have been clearer when it stated that, 'the [tax] system must ensure that appropriate taxes are paid so that everyone pays their fair share. Some corporations, both foreign-owned and Canadian, have taken advantage of Canada's tax rules to avoid tax.'

What does this mean for the lifecos? The Canadian life insurers are global companies with operations in lower tax jurisdictions including Asia, Ireland, and other parts of Europe as well as reinsurance operations in tax efÞ cient jurisdictions like the Caribbean. Almost all of these jurisdictions are growing faster than the domestic market. Accordingly, as earnings grow in other low tax jurisdictions, like Asia, we would expect there to be a natural bias downward in a life insurer's consolidated tax rate, particularly at Manulife and Sun Life.

However, we believe that other tax planning measures were underway to help lower consolidate tax rates and that most of this tax planning is unlikely to beneÞ t shareholders given the proposed new budget rules.

The consolidated tax rates and the reported tax rates in Canada for the four life insurers is presented in Table 1 below. Of note, reported consolidated and Canadian tax rates in 2006 benefited from the reduction in corporate tax rates announced in Canada last year that involved some non-cash charges. We believe that consolidated tax rates for the Canadian lifecos in the mid-20s appear reasonable given their extensive global insurance and reinsurance operations. The cash tax rates are can be considerably lower than the accrued tax rates reported in consolidated income statements.

Due to its long tailed nature, life insurance accounting tends to be complex and life insurance tax accounting only adds an additional layer of complexity. As one of the CEOs mentioned during a conference call when asked about taxes, he indicated that they 'file aggressively but account conservatively.' As a result, gauging the potential impact of these changes on the lifecos is challenging.

Our initial analysis suggests that these changes could reduce earnings by 1-2% based on the assumption that some portion of the benefits derived from lower effective tax rates on income not subject to tax in Canada would be affected by these proposed changes. In 2005, which is the latest available data, lower effective tax rates on income not subject to tax in Canada reduced taxes by 10-15% at the three large life insurers: Great-West, Sun Life, and Manulife. On a relative basis, we believe that Sun Life and Great-West have more exposure to these changes than Manulife.

At this stage, we believe that this is the worst case scenario. More likely in our view is that these changes are likely to create some headwinds in terms of EPS growth. As mentioned above, the Canadian life insurers are global companies with operations in lower tax jurisdictions including Asia, Ireland, and other parts of Europe as well as reinsurance operations in tax efficient jurisdictions like the Caribbean. Almost all of these jurisdictions are growing faster than the domestic market. Accordingly, as earnings grow in other low tax jurisdictions, like Asia, we would expect there to be a natural bias downward in a life insurer's consolidated tax rate, particularly at Manulife and Sun Life. This is our initial analysis and we expect to update our views over the coming days and weeks as we get greater clarity on the details. The life insurers remain Outperform rated.
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CBA Head Says Let Market Decide ABM Fees

  
National Post, Paul Vieira, 22 March 2007

Canadians have a bevy of choices in terms of withdrawing cash from an ATM — from paying nothing at a bank-owned machine to agreeing to a “much higher fee” for an automated teller at a strip club, the head of the Canadian Bankers Association told MPs on Thursday.

Raymond Protti, speaking on behalf of the country’s big chartered banks, disputed claims of how much money banks earn from ATM fees, and cited statistics suggesting most Canadians don’t pay fees on their ATM transactions.

Thursday's appearance before the House of Commons finance committee was the kickoff of hearings the MPs plan to hold regarding bank fees related to using automated teller machines, or ATMs. The issue has gained prominence since late mid-February when the Finance Minister, Jim Flaherty, demanded answers from the bank chief executives.

The Minister, who said he was acting at the behest of the NDP, wanted to know why Canadians were forced to pay a fee of $1 to $2 for withdrawing cash from a machine owned by a bank at which the customer does not have an account. The NDP is making ATM fees a cornerstone of its economic agenda.

Mr. Protti -- in one of his last acts as CBA president before retirement -- was under attack for most of the one-hour session, with MPs demanding to know why banks have closed branches, and criticizing the lack of ATMs in rural Canada and lower-income pockets in urban centres.

Liberal MP Robert Thibault pressed Mr. Protti on whether there was collusion among the banks regarding ATM fees, given most banks charge Canadians $1.50 per withdrawal from an ATM operated by a bank other than their own.

“If there is no collusion, why are the prices so similar,” Mr. Thibault asked.

Mr. Protti said banks are competitive for ATM business, and the fees charged vary -- much like the cost of a loaf of bread from grocer to grocer, or a price of a subcompact vehicle from dealer to dealer.

For instance, he cited the Desjardins network in Quebec, which increased its ATM fees for non-customers to $2 from $1.50. Also, white-label machines -- those not owned by a financial institution -- generally charge $3 to $4 per transaction, although it can be “much, much higher” if the generic ATM is located at an adult entertainment club. (Mr. Protti, however, said he wasn’t sure how high it was because he does not frequent such venues.)

Overall, Mr. Protti said an estimated 75% of transactions at bank-owned ATMs are fee-free, suggesting Canadians tend to use machines owned by their bank. The NDP has said banks pull in roughly more than $400-million in profit from ATM fees. Mr. Protti said that figure was incorrect, and was close to $153-million, or roughly a fraction of 1% of total profit from the country’s banks.
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The Globe and Mail, Simon Tuck, 20 March 2007

The federal government has no place regulating bank machine fees, the head of the Canadian Bankers Association said Thursday in Ottawa on the first day of a House of Commons review of the issue.

Raymond Protti said Canadians are well-served by the “explosion” of automated bank machines and a vast array of banking options, including accounts that offer reduced transaction charges.

“We really believe the market place is an ideal way to settle these issues,” Mr. Protti said following an appearance before the House of Commons finance committee.

The committee voted last month to review ABM fees and hopes to call the bank chief executives on the carpet to account for the lucrative profits they make from those transactions.

In his first public comments since the question of ABM fees started spiralling into a political issue earlier this year, Mr. Protti told the committee that Canadians are getting a good deal on their banking services, compared to other countries. He also said the machines are expensive to run and that the country's six largest banks have spent about $33-billion on ABMs and various other technology systems in the last decade.

Some MPs, however, are keen to return some of the banks' massive profits to constituents, by reducing or even eliminating ABM fees.

NDP MP Judy Wasylycia-Leis, the author of the motion that led to the review, disputed Mr. Protti's claim that Canadians enjoy excellent bank services, saying the country's largest financial institutions have replaced numerous branches with ABMs in recent years and then sold the machines to so-called white label operators.

Those operators, whose machines are often located in bars, restaurants and variety stores, charge as much as $5 for a single transaction.

Lewis Johnson, a finance professor at Queen's University in Kingston, Ont., told the committee that he thinks those fees are acceptable because consumers are choosing to pay for convenience, but that that's not true with all bank machine fees.

Inter-bank fees, the extra charges levied on consumers who use a machine owned by a bank other than their own, for example, are “egregious,” he said.

The total fee for an inter-bank ABM transaction is often $2.10, he said, and many consumers are captive to those machines.

“Access to financial services is a need and a right,” Prof. Johnson said.

The banks haven't yet decided how they will respond to the pressure to lower bank fees.

Some bankers appear to believe that they will have to extend an olive branch to the federal government, and they are preparing options for reducing the cost of electronic cash withdrawals. Others, however, say it would be a mistake to make a move in response to what appears to be pre-election politicking.
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The Globe and Mail, Tara Perkins, 22 March 2007

The term bank bashing, which was so popular in the late 1990s, has made its way back into the news lately as the Finance Minister publicly called on the big bank chiefs to justify ABM fees.

Is it a sign of a crumbling relationship between Ottawa and those who inhabit downtown Toronto's skyscrapers?

Bank officials in government relations say it's not, but they do rail against the difficulty of dealing with a minority government.

“One can't expect this relationship to always be peaches and cream,” said one banker involved in the situation.

Minority governments mean “constantly doing tradeoffs,” and that makes relationships challenging.

Krista Pawley, a spokeswoman for Bank of Nova Scotia, said that “while we don't always agree on all issues, we feel we have a relationship that is open and honest.”

Privately, some bank officials grumbled that they had not been invited to a press conference Finance Minister Jim Flaherty called after his meeting with bank CEOs on ABM fees.

And Royal Bank of Canada CEO Gordon Nixon complained that the issue had become “regrettably politicized.”

“Watching governments and banks some days is like watching a dysfunctional family try and get along,” said one person with ties to both sides. Each side is worsening the situation by a lack of understanding.

When Jack Layton made his “attack on the fees” and Mr. Flaherty stood up and said he'd ask the banks about it, “he didn't take a side,” this person said.

“In a minority parliament, [you can't] expect the minister to stand up and say, ‘What a silly thing you're saying, Jack Layton.'”

The banks “didn't understand why the minister reacted the way he reacted,” this person said.

“In the public policy arena, politics trumps policy concerns some times. The impression that one is left with is that [the banks] were irked at that, and did not respond in a way that was helpful to the government in a fast enough fashion.”

Retiring president of the Canadian Bankers Association, Ray Protti, says “managing your relationships with the federal government tend to be easier in a majority government,” and the current situation intensifies the workload and amount of “reaching out” on the industry's part.

But he praised Mr. Flaherty's semi-regular meetings with the banks' CEOs, and said the important part is that the channels of communication are open.

Paul Deegan, a spokesman for Bank of Montreal, made a similar point, saying the government “is certainly open to dialogue with various stakeholders, including the business community.”

He noted that Mr. Flaherty made time for the bank's board members on a recent trip to China.

The relationship is one that needs to be protected, said Janet Ecker, executive director of the Toronto Financial Services Alliance. “There's too much at stake for our economy to allow political disagreements to get in the way of a strong and effective working relationship.”
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Wednesday, March 21, 2007

News from NB Financial Services Conference

  
Bloomberg, Sean B. Pasternak, 21 March 2007

Bank of Nova Scotia, Canada's third-biggest bank, expects ``meaningful'' earnings from its Asian expansion in five to 10 years, Chief Executive Officer Richard Waugh said.

Scotiabank, as the lender is known, has operations in 11 Asian countries and announced on March 18 it was in talks to buy as much as 20 percent of China's Bank of Dalian Co. Terms of the transaction haven't been discussed, Waugh said.

``I don't think Asia will be meaningful in our financial earnings in the short term, but it will be important to us in the long term,'' Waugh said today in an interview in New York. He defined ``long-term'' as five to 10 years.

Waugh has been expanding outside Canada, spending more than C$1 billion ($865.7 million) on takeovers in the last year in regions such as Latin America and Asia. International banking helped boost earnings by 20 percent in the first quarter to C$1.02 billion, with about a third of profit from abroad. Scotiabank owns the sixth-largest bank in Mexico and the third- largest in Peru.

The Toronto-based bank also has operations in countries including India, Japan, Korea, Thailand and Vietnam, according to its Web site.

Expansion ``will have to be through acquisitions, which in Asia today are still very difficult,'' Waugh said, citing ownership and regulatory constraints.

In China, where the government in December opened the banking market to allow foreign banks such as Citigroup Inc. and HSBC Holdings Plc to lend and take deposits in the local currency, Scotiabank owns a 5 percent stake in Xi'an City Commercial Bank with International Finance Corp.

Waugh, 59, declined to say whether the bank plans to exercise an option to increase its stake in Xi'an City to 12.5 percent.

China lets foreign financial firms own a combined 25 percent of a local bank, with a single investor capped at 20 percent. A foreign lender can invest in up to two Chinese banks.

Waugh said the bank doesn't plan to expand into U.S. consumer lending, even though the bank has North American ``bookends'' in Canada and Mexico.

``I don't see anything in the short run,'' Waugh said. ``Some time, if we believe we can make great use of our capital, if we can either get value or bring value to the U.S., it might be of interest.''
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Bloomberg, Sean B. Pasternak, 21 March 2007

Bank of Nova Scotia, Canada's third-largest bank, expects mutual fund sales from its branches to double this year from a year ago, said Barbara Mason, executive vice president of wealth management.

The Toronto-based bank has added advisers and improved its technology for selling funds in its branches, Mason said today at an investor conference in Montreal sponsored by National Bank Financial. She didn't say how much revenue the bank earned from that segment.

The Scotia Securities mutual fund arm is the smallest among Canada's five main banks, with net sales of C$245 million ($211 million) in February, according to the Investment Funds Institute of Canada. Royal Bank of Canada's RBC Asset Management unit had sales of C$1.53 billion in the same period.

``Increasing the size and scale of our wealth-management platform is a primary focus of our management team,'' Mason said.

The bank will also continue to look at acquisitions and joint ventures in asset management, she said.
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Reuters, 21 March 2007

As banks start to look and act more like retail shops, Royal Bank of Canada will take steps to outdistance its domestic banking rivals, a senior executive said on Wednesday.

"Among Canadian banks, we have been taking more than our share of revenue growth, and we believe we can continue to do so," Jim Westlake, group head of Canadian banking, told a financial services conference.

Royal Bank, Canada's largest, is "in every business, in every part of the country, with leading market shares," and plans to build on its distribution strength, Westlake said.

It has also worked to foster a "sales culture" that Westlake said was critical to the bank's success.

"I think that banks are looking more like traditional retailers than they ever have in the past," he said.

Aside from products and services, RBC looks at trying to get the best locations for its branches, and plans to set up more adjacent insurance branches in high-growth areas.

"What does your branch look like, how are you staffing that, what are the sales resources that you're putting into it? ... It starts to sound a little more like Wal-Mart or Shopper's Drug Mart or Canadian Tire, in some respects, than it does like traditional branch banking," Westlake said.

Since Canadian banks are not permitted to promote insurance products within their branches, RBC has set up insurance operations next door to some retail branches.

It could open 30 to 40 insurance branches this year, with most focus on Ontario, Quebec and Alberta, Westlake said.

"Every time we open a new (bank) branch, we assess whether it would be a good spot for an adjacent insurance branch," Westlake said. "Every time we do a refresh or are doing some renovations ... if some space becomes available, we'll take a look and say, 'does that make sense?'."

Auto insurance is the key product that brings traffic in the door, so British Columbia, Saskatchewan and Manitoba are less attractive because they have provincially run auto-insurance systems, he noted.

At its first insurance branch in east Toronto, some 40 percent of sales are to non-Royal Bank customers, Westlake pointed out.

"If you choose locations with heavy traffic, you can generate brand new clients, and under the perverse rules of our land, we can refer those to the bank once they become insurance clients," he said.
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Reuters, 21 March 2007

Canadian Imperial Bank of Commerce will back moves by its FirstCaribbean International Bank unit to make acquisitions, likely in the English-speaking Caribbean, CIBC's top executive said on Wednesday.

"They are looking at consolidation within the region," CIBC president and chief executive Gerry McCaughey said at an investor conference. "FirstCaribbean has a history of small acquisitions, they have worked well," and CIBC supports deals of that type, he said.

CIBC, Canada's fifth-largest bank, picked up an additional 8.5 percent stake in FirstCaribbean in February, bringing its ownership stake to 91.5 percent, but FirstCaribbean still operates as an independent public bank, McCaughey said.

The Caribbean bank, headquartered in Barbados, could also grow by expanding certain products and services, such as wealth management, that are not yet as popular as they are in North America, he said.

"Growth (in wealth management) could be above the rates of growth that we're accustomed to in the Canadian marketplace, because it's earlier days in terms of the maturation of the wealth opportunities in their market," he said.

Meanwhile, CIBC will continue to review its quarterly dividend for possible increases, McCaughey also told the financial services conference, organized by National Bank Financial.

CIBC's first quarter dividend payout ratio, at 33 percent, was below its objective of 40 percent to 50 percent.

"We're aware that we are lagging in that regard," McCaughey said. But the bank had not rushed to boost its dividend because it was building up capital to pay for the FirstCaribbean deal, he said.
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Reuters, 21 March 2007

Bank of Montreal , which has been losing market share in the Canadian mortgage market, plans to focus on proprietary mortgage channels to turn the business around, a senior executive said on Wednesday.

The bank is no longer buying third-party mortgages and in the past month it decided to stop using mortgage brokers, Frank Techar, the bank's head of Canadian personal and commercial banking, said at a conference.

Bank of Montreal said it will stop using brokers because their business, although profitable, brings in the lowest spread, and because it confuses consumers who see BMO-branded mortgages offered at different rates.

"I don't think that lends itself to a very good customer experience," Techar told a financial services conference organized by National Bank Financial.

Also, trying to develop a broader banking relationship with customers who are brought in through mortgage brokers takes too much time and attention, he said.

Although dropping brokers might hurt market share slightly in the short term, "we're going to reinvest in our proprietary channels and we're going to get back into the marketplace for those valuable relationships," Techar said.

Bank of Montreal, the country's fourth-largest bank, has 180 mortgage specialists in its branches and plans to increase that number, Techar said. It also plans to boost its financial planning staff, and is taking a "hard look" at adding to its small business sales force.

The moves come after the bank said it would lay off 1,000 other staff this year, mostly in positions that do not deal directly with customers.

Techar said the bank has good momentum in certain aspects of the Canadian personal and commercial banking business. It has a No. 3 market position in credit cards and is strong in the "upper end" of the commercial banking market, although weaker at the small-business end, he said.
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Reuters, 21 March 2007

Toronto-Dominion Bank still sees room to boost its profits within the Canadian personal and commercial banking market, despite perception that the domestic market offers few growth opportunities, a senior executive said on Wednesday.

TD Canada Trust, the retail arm of the bank, expects to grow in "under-penetrated businesses" such as credit cards, small business and commercial loans, and full-service brokerage, Tim Hockey, group head of personal banking and co-chair of TD Canada Trust, said at an investor conference.

Bank officials frequently hear that the outlook for Canadian retail banking is dim because "bust-out" retail strategies are limited in the mature, slowly growing market.

"We would like to think with the results that we've had over the last number of years, that we actually have disproved that theory," Hockey said at a financial services conference in Montreal organized by National Bank Financial.

TD posted 17 percent earnings growth in its Canadian retail business last year, versus an average of 11 percent growth at its four big Canadian bank peers, Hockey noted.

Geographically, the province of Quebec is a "super growth opportunity" for TD Canada Trust, and the bank is skewing its energies toward growing faster in Quebec, Hockey also said.

"We don't have as high a presence, given the population base, that we should have in Quebec."

The bank is holding its annual shareholders meeting in Montreal next week.

Toronto-Dominion, Canada's third largest bank by market capitalization, has a "natural" 20 percent to 22 percent market share in most domestic retail products, Hockey said.

But in credit cards, it only has a 7.5 percent share of the Canadian market, he said.

"If we have a 21 percent share or 20 percent share of the bank account business, why shouldn't we have about that amount of the credit card (business)."

When TD acquired Canada Trust in 1999, it divested the combined operation's MasterCard business and kept Visa credit cards. Only about 40 percent of TD's domestic customers currently hold a TD-issued credit card, Hockey noted. By cross-selling to existing customers, "that number should get north of 50 percent and 60 percent over the next few years."

In 2006, TD Canada Trust opened 31 new branches in Canada, and it plans to open "30-plus" across the country later this year.

"You might think that's a bit of an oxymoron in the days of Internet banking and telephone banking, but in fact we still believe that customers do care about walking into their branch," Hockey said.

TD Canada Trust's skill in running "very good distribution systems" will be transferable to its United States operation, he also said. The bank plans to take its Portland, Maine-based TD Banknorth retail unit private over the next few months.

Banknorth shareholders will vote April 18 on TD's proposal to acquire the rest of Banknorth that it does not already own.
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