Friday, February 25, 2011

CIBC Q1 2011 Earnings

  
Scotia Capital, 25 February 2011

• CIBC (CM) cash operating EPS increased 19% YOY to $1.97, significantly above expectations due to very strong wholesale earnings, higher retail, and lower LLPs. Wholescale earnings were slightly higher than the strong Q1/10 and almost triple Q4/10. Underwriting and advisory fees were up significantly with trading revenue solid.

• Operating ROE: 24.0%, RRWA: 2.89%, Tier 1 Capital: 14.3%.

Implications

• The bank indicated that its Basel III Common Equity Tier 1 ratio would be just in excess of the 7% 2019 minimum capital requirements. CM's dividend payout ratio on our 2011E EPS is 45%, versus the target range of 40%-50%.

Recommendation

• We are increasing our 2011E and 2012E EPS to $7.70 and $8.50 from $7.00 and $7.80, respectively, due to recovery in wholesale earnings and improving retail. Our one-year share price target is unchanged at $100.

• We reiterate our 1-Sector Outperform rating due to CM's high profitability (RRWA) and strong operating leverage from the stability in the bank's wholesale and retail operating platform.
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National Bank Q1 2011 Earnings

  
Scotia Capital, 25 February 2011

• NA cash operating earnings increased 16% YOY to $1.80 per share above expectations.

• Operating ROE: 19.0%, RRWA: 2.37% Tier 1 Capital: 14.6%.

Implications

• Earnings were driven by strong Retail and Wealth Management earnings and higher security gains. Volume growth was strong at 7% with revenue growth of 7% and expenses increasing 4% for positive operating leverage of 3%.

• Wealth Management earnings increased 91% with Retail earnings increasing 15%, offsetting a 5% decline in Financial Markets earnings.

• The bank disclosed its Basel III Tier 1 Common ratio at 8.1%, exceeding minimum 2019 requirement of 7%, extremely positive.

• NA dividend payout ratio of 38% on our 2011 earnings estimate is below its target range of 40%-50%.

Recommendation

• We are increasing our 2011 and 2012 earnings estimates to $7.00 and $7.70 from $6.80 and $7.50 due to strong earnings from wealth and improving retail. One-year target is unchanged at $90. We maintain our 1-SO rating.
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Friday, February 18, 2011

Preview of Banks' Q1 2011 Earnings

  
Scotia Capital, 18 February 2011

Banks Begin Reporting February 24

• Banks begin reporting first quarter earnings with Canadian Imperial Bank of Commerce (CM) and National Bank (NA) on February 24, followed by Bank of Montreal (BMO) on March 1, Canadian Western (CWB) (after market close) on March 2, Royal Bank (RY) and Toronto-Dominion (TD) on March 3, Bank of Nova Scotia (BNS) on March 8, and Laurentian Bank (LB) closing out reporting on March 9.

• Scotia Capital’s earnings estimates are highlighted in Exhibit 1, consensus earnings estimates in Exhibit 2, and conference call information in Exhibit 5.

First Quarter Earnings – Recovery Cycle Begins – Growth 3% YOY

• We expect first quarter operating earnings to increase 3% year over year (YOY) and 8% sequentially (more normalized expense levels). We expect wholesale banking earnings to be solid on a sequential basis but well below the exceptionally strong earnings from a year earlier. This quarter, wholesale earnings are expected to be driven by strong underwriting and advisory revenue partially offsetting weak fixed income trading revenue. Retail banking earnings growth is expected to begin to slow but to remain resilient with double-digit growth. Wealth management earnings are expected to continue to show strong momentum, the strongest of any of the business lines. International for BNS and TD is expected to be strong, with continued weakness at RY and BMO.

• Earnings growth YOY is expected to be led by BMO, BNS, and NA at 15%, 13%, and 8%, respectively. TD and RY have very challenging comps with earnings declines of 3% and 5% expected, respectively. CM, LB, and CWB earnings growth is expected to be modest at 3%, 3%, and 0%, respectively.

• Bank earnings recovery/growth has been a grind this cycle thus far as earnings growth in 2010 was anaemic due to the countercyclical high wholesale earnings in 2009. In fiscal 2010, TD, and NA have had the strongest earnings recovery at plus 1% and 0% versus peak earnings, with BNS 3% below peak. CM, RY, and BMO are significantly below peak earnings at 27%, 17%, and 16%, respectively, due mainly to lower wholesale earnings and perhaps capital allocation issues.

• We believe dividend increases are again possible this quarter, following up on dividend increases by NA, LB, and CWB last quarter. TD is the most obvious candidate for a dividend increase, followed by BNS. We expect TD to increase its annual dividend 6.6% to $2.60 per share this quarter. BNS, although less likely in our view, could increase its annual dividend 6.1% to $2.08 per share. Further dividend increases by NA, LB, and CWB are also possible mid-year, if not very large ones in the fourth quarter. The banks' payout ratios and quarterly dividend trends are highlighted in Exhibit 6.

• The most significant earnings variable this quarter remains the net interest margin, particularly the retail net interest margin. Stability in the margin is critical to drive revenue growth, especially in light of the countercyclical slowdown expected in consumer and mortgage loan growth. We expect a stable to expanding margin based mainly on the expectation of higher interest rates, which we believe will fully offset competitive pressures driven by slowing volume growth. We expect the oligopoly pricing structure to hold.

• The banks’ overall net interest margin has many cross-currents with average BA rates up 11 bp sequentially; however, the yield curve actually steepened modestly sequentially, although still substantially flatter than a year earlier. The positive impact of higher short-term interest rates, we believe, is still filtering through, helping offset competitive pricing pressures. The residential mortgage GIC spread (posted) continued to decline in the quarter in both the one and five-year term. The caveat is that drawer rates have become more of a factor in the past 10 years; nevertheless, this remains a concern.

• Canadian banks' Investment Banking Division/Wholesale earnings in Q1/11 are expected to increase 10% quarter over quarter (QOQ) but decline 25% YOY based mainly on lower trading revenue. Trading revenue in Q1/11 is expected to decline 8% QOQ and decline 31% YOY to $1.9 billion due mainly to weaker fixed income trading results. Underwriting and advisory revenue is expected to increase slightly YOY and 4% sequentially.

• Credit trends remain positive, with gross impaired loan formations declining. Loan loss

provisions are expected to continue to decline with improvements moderating. We expect a modest 4% sequential decline in provisions.

• International earnings are expected to improve, aided by the lower drag from the high C$, especially for BNS and TD with their solid operating earnings base. The C$ has appreciated 5% YOY in Q1/11 vs. 4% YOY in Q4/10 and a peak of 21% YOY in Q2/10. The C$ appreciation QOQ is only 3% and we expect the C$ drag to be de minimis going forward.

• Quarterly earnings variables (see Exhibits 7, 8, and 9) are relatively stable for the bank group. Positives are steeper yield curve, higher prime savings rate spread, higher fixed income underwriting, higher equity underwriting, equity trading volume, and higher mutual fund assets. Negatives are higher bond yields, slightly lower wholesale spreads, substantially lower posted mortgage GIC spreads, higher short-term funding costs (BAs), and lower M&A closed.

• Bank profitability this quarter is expected to remain solid, although with a lower return on equity at 16.4% (see Exhibit 12) due to continued wholesale banking weakness, net interest margin pressure, and deleveraging. However, on a RRWA basis, profitability is expected to be near record highs at 2.24% (see Exhibit 13).

• Bank earnings beat Street expectations for most of fiscal 2009 and the first quarter of 2010. However, banks missed earnings expectations the past three quarters (Q2/10, Q3/10, Q4/10). Earnings expectations have now been toned down, especially with respect to capital market or wholesale earnings, thus we would expect banks to meet expectations with some beat possibilities as we progress through 2011.

• The one trend that remains solidly intact is balance sheets continuing to strengthen. We expect capital levels to continue to build based on internally generated capital and management of risk-weighted assets. Balance sheet strength and solid earnings are expected to position the bank group for further dividend increases.

• Bank disclosure on the impact of Basel III is critical as we move through 2011. We are hopeful that banks begin to release pro forma Tier 1 common calculations or a part thereof as early as this quarter, which will provide the necessary clarity that the market is looking for. “Clarity on Capital” is one of the themes we have cited for 2011. This is in addition to the other 2011 themes: “Return to Operating Normalcy,” “Dividend Increases,” “Moderation of Fears about Consumer Debt and House Prices” (see report titled Bank Index Poised to Hit New All-Time High).

Valuations Attractive – High Dividend Yield

• Bank valuations remain very attractive with a dividend yield of 3.6%, which is 102% of the 10-year bond yield and 158% of the TSX dividend yield versus historical means of 59% and 145%, respectively. The bank earnings yield relative to corporate bond yields is 150% versus the historical mean of 131%.

• Bank dividend yield relative to Pipes and Utilities and REITs are also very attractive at 0.4 and 1.4 standard deviations above the historical mean, respectively.

• Bank P/E multiples, we believe, are attractive at 12.7x and 11.3x our 2011 and 2012 earnings estimates and are poised for expansion. Basel III goal is to lower systemic risk, which we believe will ultimately result in a lower risk premium or higher P/E multiples. The resumption of dividend growth is expected to be a further catalyst for higher P/E multiples.

Reiterate Overweight – Bank Index Poised to Hit New All-Time High

• Bank share price performance continues to be resilient despite the hot resource market, with the bank group outperforming early in 2011, which is a very positive sign. January mutual fund data also is bullish for banks stocks as Fixed Income inflows plummeted and banks, we believe, are the premier dividend/income play in the equity markets in Canada.

• We recently boosted our bank share price targets 8% for a total expected return of 22% over the next 12 months. Stock splits may soon be on the horizon. Our new target prices are based on a target P/E multiple of 15.2x our 2011 earnings estimates versus our previous target of 13.9x. Our new target multiple is similar to the highs reached in 2006, which we considered late cycle. We believe we are early cycle in 2011 and earnings growth visibility will improve in 2011.

• Thus, in our view, the beginning of a great decade for bank share price performance. The theme for the decade is expected to be “Generation of Surplus Capital, Capital Deployment, and Share Repurchases.” Share repurchases have never occurred of any consequence in Canadian banking.

• Canadian banks did not repurchase shares between 1967 and 1994. Share repurchases from 1995 to 2010 were insignificant, averaging only 1.0% of shares outstanding, with the highest year being 2.3% of shares outstanding. Bank share repurchases hype over the past 10 years was not matched by actual activity. Thus, the market did not differentiate much between individual bank capital levels or capital generation ability (RRWA). Capital deployment with a focus on share repurchases and RRWA (new profitability paradigm) are expected to be the themes of the next decade, supporting the expected continuation of the bank group’s long term outperformance.

• Bank stocks have substantially outperformed the market since 1967, we believe, because the market underestimates the sustainable earnings power and growth of the sector (barriers to entry and strategic industry) and is slow to attribute an appropriate multiple to reflect the fundamentals, profitability, and structural changes that have occurred in the industry. We expect long-term outperformance to continue and this could be one of the banks’ best decades for absolute and relative share price performance.

• We believe bank fundamentals are strong and valuations are attractive. We reiterate our overweight recommendation and we would have no sells in the group on an absolute return basis. TD Bank is our top pick in the sector. We have 1-Sector Outperforms on TD, CM, NA, and CWB, with 2-Sector Performs on LB, BNS, RY, and BMO.
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Wednesday, February 16, 2011

Bank Index Poised to Hit New All Time High

  
Scotia Capital, 16 February 2011

• The Canadian Bank index is poised to hit a new all time high surpassing the previous high reached in May 2007. The bank index hit another 52-week high yesterday and is only 3% below the all time high.

• TD, BNS, NA, and LB recently reached new all-time highs. Individual bank share price performance versus their highs seems to be correlated with earnings performance except forLB, CWB, and NA whose share price performance has lagged their earnings performance.

• Bank earnings level in 2010 was 9% below the bank group earnings peak of 2007. Bank earnings in 2011 are expected to surpass the 2007 peak by a modest 2%. Return on equity in 2011 is expected to be 16.7%, down from the record level of 23% in 2007. ROE in 2007 was driven by trough loan loss provisions, strong capital markets, high consumer and mortgage loan growth, and lower equity levels. Common equity in 2010 was $45 billion or 50% higher than 2007 levels. Consequently, Return on Risk Weighted Assets (RRWA) in 2010 was 2.12%, only slightly below 2007 level of 2.28%.

• Earnings growth for the bank group peaked in 2007 (see Exhibits 7, 8), with 2008 and 2009 representing the bottom of the cycle. Earnings recovery in 2010 was anaemic due to the countercyclical high wholesale earnings in 2009. We expect the earnings cycle recovery to gain momentum throughout 2011 (see Exhibit 8). Although earnings growth in this recovery cycle is expected to be solid but lower than most past cycles due to lower GDP growth, lower earnings leverage to the credit cycle, and countercyclical slowing of consumer and mortgage credit growth. Earnings growth is expected to remain at or above long-term rates over the next five years. RRWA for the bank group is expected to reach new highs in 2011 and 2012 of 2.32% and 2.31%, respectively (see Exhibit 20).

• The themes for 2011 are a "Return to Operating Normalcy for the Banking Industry," "Dividend Increases," "Improved Clarity on Capital Levels," and "Moderation of Fears about Consumer Debt and House Prices." Thus, the beginning of a great decade for bank share price performance, in our opinion. The theme for the decade is expected to be "Generation of Surplus Capital, Capital Deployment, and Share Repurchases." Share repurchases have never occurred of any consequence in Canadian banking.

• Canadian banks did not repurchase shares between 1967 and 1994. Share repurchases from 1995 to 2010 were insignificant averaging only 1.0% of shares outstanding with the highest year being 2.3% of shares outstanding. Bank share repurchases hype over the past 10 years was not matched by actual activity. Thus, the market did not differentiate much between individual bank capital levels or capital generation ability (RRWA). Capital deployment with a focus on share repurchases and RRWA (new profitability paradigm) are expected to be the themes of the next decade, supporting the expected continuation of the bank group's long-term outperformance.

• Bank stocks have substantially outperformed the market since 1967 (see Exhibits 4 and 12), we believe, because the market underestimates the sustainable earnings power and growth of the sector (barriers to entry and strategic industry) and is slow to attribute an appropriate multiple to reflect the fundamentals, profitability, and structural changes that have occurred in the industry. We expect long-term outperformance to continue and this could be one of the banks' best decades for absolute and relative share price performance.

• Basel III goal is to lower systemic risk, which we believe will ultimately result in a lower risk premium (see Exhibit 27) or higher P/E multiples as the quality of the ROE has improved considerably as reflected in the RRWA trend (see Exhibit 20). We also believe the market will focus more on bank dividend yields, especially given renewed expectations of dividend growth returning to the long-term rate of 10%.

• Bank dividend yields are extremely attractive relative to Government Bonds, Equities (TSX), Pipes & Utilities, and REITs (see Exhibits 23, 24, 25, and 26).

• We expect that TD and BNS will be the first major banks to increase their dividends in 2011, which should be a positive catalyst for bank stocks. NA, LB, and CWB are also likely to increase in 2011 following up on their modest increases in 2010.

• Banks are currently trading at a P/E multiple of 14.1x trailing earnings, below the 15.1x level reached in February and November of 2006 or 14.5x in February 2007.

• We are increasing our share price targets for the bank group (see Exhibit 1) with our target P/E multiple on 2011 earnings estimates increasing to 15.2x from 13.9x, which brings our target up to the 2006 peak levels. The P/E multiple in 2006 was late cycle where we believe 2011 is early cycle (see Exhibit 8).

• We are increasing our 12-month share price targets on TD and CM to $100, NA to $90, BNS to $72, BMO to $68, RY and LB to $65, and CWB to $38. Stock splits may soon be on the horizon.

• We reiterate our Overweight recommendation and we would have no sells in the group on an absolute return basis. TD Bank is our top pick in the sector. We have 1-Sector Outperforms on TD, CM, NA, and CWB with 2-Sector Performs on LB, BNS, RY, and BMO.
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Friday, February 11, 2011

Manulife Q4 2010 Earnings

  
Scotia Capital, 11 February 2011

Event

• The incremental cost of hedging more equity market and interest rate risk of C$0.08 per share garnered a disproportionate amount of attention compared to decent underlying trends in the business and the substantial reduction in risk exposure.

Implications

• We estimate base line run-rate earnings on a normalized basis of C$1.50 per share, including incremental costs of hedging and assuming no growth in 2011; when adding growth in the business, we lower our 2011 and 2012 EPS estimates to C$1.70 and C$1.93 from C$1.82 and C$2.15, respectively. Admittedly, we had factored hedging costs of C$300-$350M and higher earnings on surplus, now reconsidered given the cost of financial leverage and increased costs of hedging.

Recommendation

• The MFC stock got ahead of itself, in our view, in recent months, rising 35% since early December. We are lowering our 12-month PT to C$19, based on our new blended valuation model of 10x 2011E EPS (30%) and 1.25x BVPS (70%), which considers greater earnings stability, partially offset by lower ROE expectations. We would be more constructive closer to $16

Our main takeaways from the conference call include:

• We found it interesting that there was such an intense focus on the actual costs of hedging over the next few years, and little attention to the company being substantially ahead of plan in reducing earnings sensitivity to equity markets and interest rates. Through actions taken during the quarter, MFC decreased equity market and interest rate sensitivities by 43% and 18%, respectively.

• We expect the rating agencies to respond favorably to these developments, particularly when combined with early signs of fundamental improvement in the U.S. business, although we do not expect ratings upgrades until there is more evidence of the sustainability of these improvements and a demonstration of more stable earnings trends. Ratings upgrades could occur in late 2011, in our view.

• Our base line run-rate normalized earnings estimate of C$1.50 per share is based on calculations in Exhibit 1. We have revised our 2011E and 2012E EPS based on these estimates, which we believe to be conservative given they take into account more than the direct impact of equity markets and interest rates (C$933M). As such, we begin with adjusted earnings from operations of C$692 million.

• Sales results in Q4/10 were strong among the products that MFC has targeted for growth. Sales of individual life, travel insurance, and mutual funds posted records.

• In the U.S., the company made progress in sales of individual life products excluding universal life with secondary guarantees, which rose 14% in the quarter; John Hancock Mutual Funds recorded record sales for the year, at US$9.7 billion, and total AUM ended the year at US$98 billion.

• Sales in Asia rose 56% and reflected diversification of products and distribution channels throughout Asia, particularly in Japan and Hong Kong. The bank channel is becoming an increasingly important network, and MFC is making considerable progress in expanding relationships in this system.

• In terms of earnings, the most significant progress was seen in the U.S., where earnings before the impact of investment and market related experience gains more than tripled in the insurance segment and rose 14% in the wealth management business.

• Book value per share ended the year at C$14.23, an increase of 3% from Q3/10. The MCCSR rose 15 bp to 249%. Management suggested that, despite the improvements in the risk profile of the business, the substantial capital cushion, and improved macro environment, no action to redeploy capital will be taken until future capital regulations are clear, as requirements in many jurisdictions are under review.

• We expect ROE's of 11.3% to 11.5% in 2011 and 12.4% to 12.6% in 2012.
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Great-West Lifeco Q4 2010 Earnings

  
Scotia Capital, 11 February 2011

Event

• GWO's Q4/10 reported EPS of C0.54 per share included non-operating items which, in total, added C$0.09 per share, resulting in adjusted EPS of C$0.45, below our estimate of C$0.48, and consensus of C$0.51. Results varied from strong (U.S.) to mixed (Canada) to weak (Europe).

Implications

• While we were not surprised by the asset impairment provision in Europe, the size (C$121 million, or C$0.13 per share) was considerable compared to overall EPS, and Canada's mixed results are worth watching as IIIP earnings appear to have leveled off. Europe is another source of risk as the investment portfolio's exposure to "PIIGS" is high relative to equity (6%).

Recommendation

• GWO trades at a considerable premium to its peers at 13x our 2011E EPS and 2.3x BVPS, and while earnings have proven to be quite resilient and stable, the company's investment portfolio and high financial leverage continue to warrant caution.

Q4/10 Highlights

• Reported earnings included items that we believe do not represent core run-rate income - the benefit from a tax related item of C$0.04 per share, the benefit from an adjustment to the acquisition cost of Canada Life of C$0.07 per share, and the negative impact of currency translation of C$0.02 per share. All in, we calculate adjusted EPS as C$0.45 per share.

• Sales were strong pretty much across the board, with Canada individual sales up 20%, U.S. single premium whole life insurance policy sales rising 104% (on a constant currency basis), Putnam mutual fund sales jumping 16% (on a constant currency basis), and sales in the U.K. up 57%.

• Earnings were more of a mixed bag. In Canada, adverse mortality impacted the IIIP segment, which held down total segment earnings, after adjusting for unusual items.

• In the U.S., earnings improved significantly, even after adjustments for unusual items, primarily on higher interest margins, strong equity market performance, and sales. Partially offsetting these were lower mortality charges and higher expenses.

• In Europe, earnings were negatively impacted by C$121 million related to asset impairment provisions of C$50 million and a related increase in actuarial liabilities of C$71 million. These were partially offset by excess interest margins of C$43 million and a C$24 million positive adjustment to the acquisition price of Canada Life in 2003.

• We calculate ROE (excluding AOCI) on an annualized basis of 11.0% for Q4/10.
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Thursday, February 03, 2011

TD Bank CEO Says Capital Push Won't Impact M&A & Dividends

  
Bloomberg, Sean B. Pasternak, 3 February 2011

Toronto-Dominion Bank Chief Executive Officer Edmund Clark came to Wall Street this week with a simple recipe for bankers trying to avert another financial crisis: more transparency and less arrogance.

“Hubris is the biggest risk in the banking system,” Clark said in an interview at Bloomberg’s headquarters in New York. “It is the most dangerous emotion to run a financial institution.”

Clark is in a position to dispense advice. As head of Canada’s second-largest bank, he averted most of the writedowns and credit losses that led to the financial crisis in 2008. The bank is one of five lenders rated Aaa at Moody’s Investors Service and its stock gained 24 percent in the past three years, compared with a 40 percent drop in the KBW Bank Index.

Toronto-Dominion exited a structured products business in 2005, which included collateralized debt obligations, after Clark said he didn’t understand the risks associated with it. As a result, the lender recorded less than C$1 billion ($1 billion) in debt-related writedowns during the financial crisis, compared with the $1.49 trillion recorded by banks and brokers worldwide.

Canada’s banks received no government bailouts during the crisis and has been ranked the world’s soundest for three straight years by the Geneva-based World Economic Forum.

Clark warned against Canadian lenders resting on their laurels after weathering the crisis better than many U.S. or European competitors.

“The risk in Canada is we get too comfortable with how well we did,” Clark said.

Clark, 63, says he’s tried to foster transparency and openness at his Toronto-based company so that employees and executives aren’t afraid to speak up when they think the bank is heading in the wrong direction.

“You’ve got to build cultures of transparency; comfort where people say ‘Ed, I don’t agree with this. It’s a really stupid idea,’” Clark said.

He cites an example of a bank teller who posted a comment on the company’s internal message board complaining about Clark’s compensation package, which totaled C$10.4 million last year.

“This teller in one of the branches writes ‘Ed, I love you to death, but this is ridiculous how much you get paid.’ Someone sees that, then they say ‘maybe it’s alright for me to push back here.’”

He warned against banks believing “their own propaganda” and creating a culture where people don’t push back.

“I always tell my people, take the business totally seriously but don’t take yourself too seriously,” Clark said.

Clark, who holds a Doctorate in economics from Harvard University, has no plans to extend his term beyond 2013, when he will retire. He was appointed CEO in 2002.

“I look at myself as being lucky to get a chance, for 10 years or whatever, to run a 155-year-old institution in Canada, have a shot at making it better for my successor to do the same,” he said. “To go and blow up those institutions, is a terrible, terrible thing to have done, just by letting your ego get out of control.”

Clark said the lack of hubris applies to his investment- banking unit TD Securities, which last year trailed RBC Capital Markets and BMO Capital Markets in Bloomberg rankings for stock issuance and merger advice.

About 21 percent of Toronto-Dominion’s C$4.6 billion in profit last year came from wholesale banking, compared with 32 percent at domestic rival Royal Bank of Canada. Clark said he doesn’t want TD Securities to make risky bets on capital markets.

“It’s a totally different strategy,” to what other investment banks have done in Canada, said Clark, who spoke yesterday at an investor conference in New York sponsored by Morgan Stanley. “I’ve always said ‘I don’t care what percentage you are; I care what you do’.”

The investment bank will continue to earn about C$800 million to C$1 billion a year working on large Canadian transactions and assisting clients in the U.S. and abroad.

“The trick is not to let them drift and say, ‘why don’t I take on Goldman, or why don’t I take on Morgan Stanley?’” Clark said. “Because I don’t think it’s a space we can occupy.”

Toronto-Dominion will focus expansion mostly in North America instead of markets such as China, Clark said.

“Trying to figure out an Asian strategy would be one of our harder tasks,” said Clark. “If I would go head to head with a competitor, why am I going to get more, on average? What’s my competitive edge?”

Toronto-Dominion rose C$1.45, or 1.9 percent, to C$77.63 at 4:28 p.m. on the Toronto Stock Exchange. The shares have climbed 4.6 percent this year.
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Reuters, 2 February 2011

The head of Toronto-Dominion Bank says a push to rapidly phase in tighter capital rules won't affect the bank's plans for dividend hikes or acquisitions.

The Basel III rules, unveiled last year, set higher capital ratio levels for global banks, and Canada's financial regulator said this week that Canadian banks should meet the new levels "as soon as possible".

The Office of the Superintendent of Financial Institutions, also said banks should be cautious on "actions that weaken their capital position", such as dividends and acquisitions.

"It doesn't change the way I feel about acquisitions," TD Chief Executive Ed Clark said at the Morgan Stanley Financials Conference in New York. He said TD would issue equity in conjunction with an acquisition if it felt it was necessary.

"I believe you shouldn't do acquisition unless you were prepared to issue shares," Clark said.

The bank's capital ratio under Basel III rules is believed to be well below the 7 percent standard that must be in place by 2019.

Clark said the bank sets dividend on earnings levels, targeting a payout ratio of 35-45 percent.

He has said the bank will issue guidance on dividends when it reports first-quarter results next month. Analysts have taken that to mean the bank will raise its payout at that point.

Canada's other big banks are also expected to raise dividends over the next year. Most of the banks have not raised their payouts since 2008, when the financial crisis took hold.

Brad Smith, an analyst at Stonecap Securities, said the banks with lower capital levels, like TD, may feel compelled to implement a smaller dividend hike than a better-capitalized bank.

The Basel rules are designed to stave off a repeat of the global financial crisis. Canada's banks emerged from the crisis relatively unscathed, without needing any government bailouts, unlike many U.S. and European rivals.
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