Wednesday, September 10, 2008

2008 Scotia Capital Financial Services Conference

The Globe and Mail, Tara Perkins, 10 September 2008

Just days after the U.S. government stepped in to save Fannie Mae and Freddie Mac, the system confronted its next big challenge as shares of Lehman Brothers plunged on fears that the fourth-largest investment bank on Wall Street would not be able to raise needed capital.

The bank that helped establish a formal market for cotton, and financed new companies from Sears to F.W. Woolworth Co., has been worrying investors ever since the collapse of its competitor Bear Stearns in March. But yesterday it became the global financial community's most pressing concern.

Panic set in following unconfirmed reports that talks had ended between Lehman and Korea Development Bank.

The South Korea-based bank has been considering a bailout of the New York-based investment bank. Lehman shares dropped more than 40 per cent in afternoon trading while rumours swirled and the bank declined to comment.

Lehman put out a press release late yesterday saying that it would release its expected third-quarter results and "key strategic initiatives" this morning at 7:30 a.m. Lehman is believed to be approaching many potential investors, and attempting to sell or spin off certain assets, in the wake of more than $8-billion (U.S.) in writedowns and credit losses over the past year. Its debt was put on watch by rating agency Standard & Poor's yesterday.

The market's reaction comes as bank executives in Canada and abroad make it increasingly clear that they are not eager to plunge into the U.S. market, even though struggling banks in that country have become less expensive.

Since June there has been talk that Canada's largest bank, Royal Bank of Canada, might have been taking a look at Lehman. That's speculation that RBC chief executive officer Gordon Nixon once again sought to lay to rest yesterday as he spoke to an industry conference in Toronto.

While he did not mention Lehman directly, he noted that investment banking makes up about one-quarter of RBC, while three-quarters is consumer banking, wealth management and insurance. That is the "right composition for long-term success," he said, adding that he has no intention of shifting it.

HSBC Holdings PLC's name also came up again yesterday as another possible saviour for Lehman. But that too seems unlikely. While he declined to comment on Lehman, HSBC chairman Stephen Green suggested in an interview last week that he's also in no rush to make a move in the U.S. just because assets have become cheaper. The London-based bank is focusing its investment dollars on fast-growing areas, particularly the world's emerging markets, he said. "To put it another way, we don't buy things just because they're cheap. They have to be a strategic fit." The dramatic drop in Lehman shares occurred two days after the U.S. government stepped in to essentially take over Fannie Mae and Freddie Mac, that country's mortgage financing giants. That move boosted financial shares because it raised expectations that a recovery was one step closer.

But the tone from Canadian bank chief executives who spoke at yesterday's conference in Toronto suggests that they don't see the light at the end of the tunnel yet.

"To declare victory here just because you saved Fannie Mae and Freddie Mac seems to me a little bit of euphoria, and so I think everybody should stay vigilant because we are restructuring the financial services industry in the next two or three years," said Toronto-Dominion Bank chief executive officer Ed Clark.

He told the industry to "stay nervous."

"I would caution central bank governors: Don't declare victory here. I think there's still lots of room for action this year," Mr. Clark said. "I'd rather them worry, be as nervous as I am as they go through here, because we don't need an accident here." Mr. Clark said his skittishness stems partly from the fact that a large number of banks around the world have been increasing their loans more dramatically than they have been increasing their deposits, thanks largely to the use of off-balance-sheet financing. Many financial institutions now have to fundamentally change how they finance themselves, and that makes the system accident prone, he said.

Another reason for his fear is the lack of certainty about the extent of the U.S. economy's troubles.

"People keep on saying the housing prices in the United States are falling less quickly, isn't this wonderful news? I look at it and say, until they stop falling we do not know the depth to which they will pull down the U.S. economy," Mr. Clark said.

He too said he's reluctant to make any major expansion moves in the U.S. right now. TD closed the $8.5-billion (U.S.) takeover of New Jersey-based Commerce Bancorp Inc. this spring.

"I don't know what the value of retail assets or commercial assets are in the United States today, and so I'm not keen to try to find out by buying some and looking at them," Mr. Clark said.
The Globe and Mail, Tara Perkins, 9 September 2008

Royal Bank of Canada chief executive Gordon Nixon again poured cold water on the idea that Canada's biggest bank would buy a troubled U.S. investment bank, reiterating Tuesday that he is not looking to significantly beef up RBC's investment bank.

Mr. Nixon noted that roughly one-quarter of the bank is currently wholesale operations, or investment banking, while three-quarters is made up of consumer banking, wealth management and insurance.

The bank has no intention of shifting that mix, Mr. Nixon told a banking conference in Toronto. His comments come after the Financial Times reported RBC looked at Lehman Brothers this summer, speculation that has been circulating since June.

Mr. Nixon added that RBC is keeping abreast of consumer banking, or retail, acquisition opportunities in the United States, but that it will be disciplined and “we are not in a rush.”

The key challenge, he said, is taking on another bank's balance sheet.

Mr. Nixon also noted that Canada's biggest bank is not limited to opportunities in the United States, or to consumer banking. It is looking across all of its business lines, such as wealth management and insurance, and all geographies, he said.

As for its investment banking operations, he said RBC is exiting some businesses with less attractive futures, such as in structured credit, but is investing in others.

Toronto-Dominion Bank chief executive Ed Clark said Tuesday he has an extremely cautious view on acquisitions, noting that the bank is not a hedge fund.

The real value of U.S. assets today is hard to discern, and TD is still working to integrate its recent blockbuster acquisition of New Jersey-based Commerce Bancorp, Mr. Clark noted.

He said the only thing that might change his mind in the near future are small acquisitions.

Mr. Clark said he is still quite nervous about the environment surrounding banks.

Many banks around the world grew assets more than deposits, making the system accident prone, he suggested.

And until house prices stop falling, it's impossible to know the depth to which they will pull down the U.S. economy, he said.
Reuters, Lynne Olver, 9 September 2008

U.S. government action to take control of mortgage giants Fannie Mae and Freddie Mac represents "a huge positive" but does not necessarily spell financial-system stability, Toronto-Dominion Bank President and Chief Executive Ed Clark said on Tuesday.

He and other Canadian bank chiefs, speaking at a conference, praised the U.S. government's moves to shore up Fannie and Freddie, but they cited uncertainty about the depth of the U.S. housing slide and the economic slowdown for their cautious approach to making U.S. acquisitions.

"All I'm really saying is 'stay nervous'," Clark told a Scotia Capital financial services conference on Tuesday.

"To declare victory here just because you saved Fannie Mae and Freddie Mac seems to me a little bit of euphoria, and I think everybody should stay vigilant because we are restructuring the financial services industry in the next two or three years."

Clark said he was nervous that the financial industry crisis is not over because many banks around the world increased their assets "dramatically more" than they increased deposits.

The processes of "de-leveraging" -- or reducing risky positions -- and restructuring could continue for some time, Clark added.

"I believe in the end of the day the markets will cure this and work their way through it," but banks will likely lend less as a result, which could exacerbate the economic slowdown, Clark said.

Royal Bank of Canada Chief Executive Gord Nixon said the U.S. government's intervention in Fannie Mae and Freddie Mac marked an important step in regaining stability in U.S. real estate and financial markets.

Nixon said there are still issues to be resolved but commended the actions that were taken in the past couple of days. "I think they're the right ones," he told the conference.

U.S. mortgage rates fell on Monday after the government seized control of Fannie and Freddie, raising hopes the plan would provide at least temporary respite from housing and credit-market troubles.

The U.S. government committed up to $200 billion to support the two huge lenders, which together back about half of the $12 trillion in U.S. mortgages.

Bank of Montreal President and CEO Bill Downe also praised the U.S. actions, but noted that tough times persist.

"Placing Freddie Mac and Fannie Mae under conservatorship clears away a large obstacle that was in the path of home mortgage markets returning to health," said Downe, who has been a member of the Federal Reserve Board's Federal Advisory Council since 2006.

All three CEOs expressed caution about making U.S. acquisitions at this time, with Downe saying there is no need to rush, and Nixon stressing that he does not want to compromise RBC's strong capital position or debt ratings.

BMO owns Harris Bank in the Chicago area, while Royal Bank's U.S. operations are focused in the Southeast.

TD Bank is working to integrate its TD Banknorth operation in New England with its latest U.S. acquisition, Commerce Bank, in the Mid-Atlantic states.

"My view is to be extremely cautious today," TD's Clark said about U.S. acquisitions.

"I don't know what the value of retail assets or commercial assets are in the United States today...we would like to see housing markets stabilize and the market clarify for us how deep this U.S. recession is."
Bloomberg, Doug Alexander and Sean B. Pasternak, 9 September 2008

Toronto-Dominion Bank Chief Executive Officer Edmund Clark said he's concerned the crisis that led the world's financial institutions to record more than $500 billion in credit losses and writedowns isn't over yet.

``I'm nervous that we haven't made it all the way through the financial services crisis,'' said Clark, speaking today at an investor conference in Toronto sponsored by Scotia Capital. ``I don't know the depth of the slowdown that we're still facing.''

Toronto-Dominion is the only Canadian bank to avoid debt writedowns tied to the U.S. subprime mortgage market. Clark, 60, said he thinks problems may linger.

``I'm nervous because a large number of banks around the world grew their asset side dramatically more than they grew their deposit side,'' Clark said.

Investors shouldn't be too comforted that U.S. housing prices aren't falling as quickly as before, he added.

``Until they stop falling we do not know the depth to which they will pull down the U.S. economy,'' Clark said.

The U.S. government rescue of Fannie Mae and Freddie Mac is ``a huge positive,'' Clark said. He added that it's too soon to say the worst is over, and central bankers shouldn't ``claim victory.'' He urged investors to ``stay nervous.''

``Until we actually get through and see this market stabilize it's a brave person that says I can call the bottom,'' Clark said.
Bloomberg, Doug Alexander, 9 September 2008

Royal Bank of Canada, the country's biggest bank by assets, isn't in a hurry to buy U.S. consumer banks even as a global credit crunch makes assets cheaper, Chief Executive Officer Gordon Nixon said.

``We are not in a rush and we are not interested in making a deal that fails to satisfy our strategic, financial and cultural criteria,'' Nixon, 51, said today at an investor conference in Toronto sponsored by Scotia Capital. ``While equity valuations of some U.S. targets may appear attractive, a key challenge is of course taking on another bank's balance sheet.''

Royal Bank has spent more than C$2 billion ($1.87 billion) on U.S. acquisitions in the past two years, including Atlanta-based Flag Financial Corp. and Alabama National BanCorporation. The bank also bought RBTT Financial Holdings Ltd. in Trinidad and Tobago for about $2.2 billion in June.

``When we look at potential opportunities we are not limited to the U.S. retail space,'' Nixon said. ``In fact we're always looking at opportunities across our businesses and in a variety of geographies.''

Nixon also welcomed the U.S. government's seizure of Fannie Mae and Freddie Mac, putting the two mortgage companies in a government-operated conservatorship.

``The restructuring of Fannie and Freddie will prove to be a very important step in terms of the stability process in the United States,'' Nixon said.