TD to Stay Focused on US Despite Headwinds

Bloomberg, 30 March 2006

Toronto-Dominion Bank, Canada's No. 2 lender, will focus this year on making at least one acquisition in the U.S. and bolstering its investment-banking unit, Chief Executive Officer Edmund Clark said.

TD Banknorth, Toronto-Dominion's U.S. lender, will have ``opportunities'' to make purchases, Clark said in an interview today following the annual meeting in Vancouver.

``I think we will get some opportunities over the next year because the environment is tough'' for smaller banks, Clark said. ``I think we'll have some real choices.''

Toronto-Dominion bought control of TD Banknorth last year for about $3.5 billion, its first consumer-banking presence in the U.S. TD Banknorth has since purchased Mahwah, New Jersey- based Hudson United Bancorp for about $1.9 billion, and has said it plans to make one or two purchases a year.

Toronto-Dominion also wants to expand its TD Securities investment bank, which ranked fifth in Canada for equity and equity-linked deals last year, and was 10th in mergers advice, according to data compiled by Bloomberg.

``How do we get more people on the front line in investment banking who know more CEOs and have better relationships in order to build that part of the franchise?'' Clark said. ``That will be our next big focus.''

Clark also said the bank will expand its asset-management business on its own rather than make acquisitions. Canadian lenders such as Bank of Nova Scotia have been looking at ways to expand their fund businesses to take market share from mutual fund companies.

Goodwill Costs

``The value added we're getting through organic growth is pretty phenomenal,'' Clark said. ``When you compare that with the economics of acquiring someone and paying a bunch of goodwill, it's not obvious the economics work for us.''

The banks increased their share of the country's C$570 billion ($491.2 billion) fund market to about 35 percent last year from 25 percent in 2000, according to the Investment Funds Institute of Canada.

Toronto-Dominion owns the fifth-largest fund company in Canada and has been No. 2 in net sales of long-term mutual funds for three years, Clark said at the meeting. Profit from asset management climbed 41 percent to C$138 million in the fiscal first quarter.

CI Financial Inc. Chief Executive Officer William Holland said in January he expects Canada's five main banks to buy fund companies to continue their expansion.

Two years ago at the bank's annual meeting in Edmonton, Alberta, wealth management head William Hatanaka said Toronto- Dominion would consider buying fund companies.

Clark, 58, also today urged the federal government to relax a ban prohibiting banks from selling insurance in their branches so that consumers can get more information.

Insurance Competition

Canadian banks are pushing for insurance rules changes to compete with insurers such as Manulife Financial Corp. and ING Canada Inc. Banks can sell insurance over the Internet and through brokers, but can't sell in branches.

Clark said the Toronto-based lender isn't seeking the right to sell insurance in branches, but wants to be able to provide information to clients about its insurance products.

``We're the only country in the world that has these rules,'' Clark said. ``Everyone knows we should (be able to) do this. The question is, is there any political will to do these minor sort of changes?''

Clark said he doesn't expect the government to remove its ban on bank mergers among the five largest lenders anytime soon. He said Prime Minister Stephen Harper, who was elected in January, has outlined his five policy priorities.

``Bank mergers is not one of them,'' Clark said.

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Canadian Press, Craig Wong, 30 March 2006

Troubles in the American banking industry could open up acquisition opportunities south of the border for Toronto-Dominion Bank's business in the northeastern United States, chief executive Ed Clark said Thursday.

Banking in the United States is having a rough ride is recent months with rising short-term interest rates being a negative for growth at TD Banknorth, Clark said.

But the TD CEO said that same bad environment is creating opportunities for acquisitions by the regional bank.

“Organizations that are operating in there that are small, and in the long run, don't think that they are going to be survivors are saying, ‘Am I going to hang around and survive for the next two years when it is ugly or should I maybe get out now,”' Clark said after the bank's annual meeting.

“Canadian banks have sat back and not built sustainable franchises in the United States and I think if you want to be a North American bank that's what you have to do. So, I think if we find the right strategic fit, we'll take advantage of it.”

TD Bank acquired a 51 per cent stake in TD Banknorth last year for $3.8 billion (U.S.) as a vehicle for its expansion in the United States. Since then, TD Banknorth bought Hudson United Bancorp of New Jersey for $1.9 billion in cash and shares in a deal backed by its parent company.

Expansion into the United States has proven troublesome for some Canadian banks in the past.

Royal Bank's subsidiary RBC Centura has had disappointing results since Canada's largest bank bought the small North Carolina-based retail network for about $3.3 billion in 2001 Meanwhile, CIBC has rid itself of much of its U.S. operations in recent years including the sale of its Oppenheimer wealth management business and the closure of its Amicus U.S. electronic banking operation, which entailed half a billion dollars' worth of restructuring charges.

But Clark remains convinced his bank's strategy with TD Banknorth and stake in TD Ameritrade is the right one.

“We've focused in on the northeastern United States and we've focused in on the online brokerage business,” he said.

RBC Capital Markets analyst Jamie Keating has suggested the Hudson United acquisition will add about one third to TD Banknorth's revenue and earnings, however work still needs to be done.

“The U.S. bank, while profitable on a run-rate basis, is still costing the bank in terms of restructuring charges and economic profit,” Keating wrote in a research note to clients.

Clark's attention to growth in the U.S. follows signals from Ottawa that new rules on mergers between Canada's banks are not one of the five main priorities for the minority Conservative government.

But he said changes still could and should be made that would allow Canada's banks to give out information about insurance products in branches, refer customers and market insurance products to customers who need it.

“The insurance industry would be better off and the consumer would be better off,” Clark said.

“This is a regulatory change. It is not a big thing. There's no public policy dispute on this. You bring in any expert and they'll all say, this is a no-brainer.”

TD Bank reported last month a first-quarter profit of $2.3 billion or $3.20 a diluted share, thanks to a huge gain from selling control of its U.S. retail brokerage. The profit compared with $630 million or 95 cents a year ago.

The bank's decision to sell TD Waterhouse Group Inc.'s U.S. retail brokerage business to on-line broker Ameritrade Holding Corp. resulted in a $1.67-billion after-tax gain.

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Reuters, Cameron French, 30 March 2006

Toronto-Dominion Bank said on Thursday it plans to stick with building its U.S. Northeast retail bank franchise despite a difficult profit environment in the sector.

"We're going to be prudent, we're not going to go do something stupid," chief executive Ed Clark told Reuters after the bank's annual meeting in Vancouver. "On the other hand, you have to sit there and say you do actually think there's a limited window of time here that you can go into the United States

"So we're hoping ... this tough environment will throw up things that are perfect for us strategically, at reasonable prices."

With domestic bank mergers currently not allowed, TD, Canada's No. 2 bank by assets, has focused its growth aspirations on the United States. It acquired a majority stake in Maine-based Banknorth last year and sold its Waterhouse USA discount broker to Ameritrade Holdings Inc. in exchange for an about one-third stake in the combined company.

Banknorth has since acquired New-Jersey-based Hudson United Bancorp, and Clark said he expects the U.S. retail franchise to have a market capitalization of $10 billion to $15 billion within five years.

Profits from Banknorth, however, have lagged expectations, prompting some analysts to question whether TD might alter its strategy.

Speaking to Reuters after the meeting, TD Banknorth chief executive William Ryan said he didn't expect much improvement in the U.S. business until 2007. The segment has suffered from the declining gap between -- and recent inversion of -- short- and long-term U.S. interest rates.

But he said the integration of Hudson United was going better than expected, and that Banknorth was already capable of going after other acquisition targets.

TD has been making money hand-over-fist from its domestic branch-banking business, and has also seen improved profit from its mutual fund business. While the bank has plenty of excess capital to handle acquisitions, Clark said he prefers to grow the fund business organically and use the capital to expand the bank's U.S. presence.

Speaking at the meeting, Clark also called for reforms in Canadian rules that prevent banks from selling most kinds of insurance through their branches.

The bank has had success in the sector with its profitable property and casualty insurer, Meloche Monnex.

Public bank policy discussions in Canada have largely focused on whether to allow mergers of big banks or "cross-pillar" mergers of banks and insurers.

But Clarke said that he doesn't expect much immediate progress on those fronts, and that rule-makers should focus on smaller changes, such as allowing banks to give information about insurance products through their branches, which they are currently not allowed to do.

"We're getting a clear message from the government that (mergers) are just not a priority," he said.

"The way we look at it is: can we tweak the rules?"

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Reuters, 30 March 2006

TD Banknorth's integration of recently acquired Hudson United Bancorp is going better than expected, and the bank is capable of handling more acquisitions immediately, its chief executive said on Thursday.

"I feel very comfortable with where we are with the Hudson United conversion that we could look at banks right now," TD Banknorth chief executive William Ryan told Reuters after the Toronto-Dominion Bank annual meeting.

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National Bank & CIBC at NBF Financial Services Conference

Canadian Press, Allan Swift, 29 March 2006

The CEO of National Bank of Canada says the Montreal-based bank is not overly exposed to Canada's flagging pulp and paper industry, which is concentrated in the province of Quebec.

Real Raymond told a banking conference Wednesday that most of the debt for that industry is held by secondary markets in the United States.

"Our exposure is very much under control," Raymond told analysts after giving a speech.

In any case, Raymond said, National Bank's overall corporate loan portfolio of all industries combined has shrunk to about $2.7 billion from $6 billion to $7 billion about five years ago.

Analysts say National Bank is vulnerable by having all its branches and most of its activities within Quebec, with the province's dependence on export-related manufacturing hurt by the rising Canada dollar.

But Raymond said the province's economy has done relatively well and is more stable even than Ontario, which is overly dependent on the volatile automotive sector.

Raymond said that in any case, his Quebec-based bank now gets 65 per cent of its revenue from business not related to lending. The growth has come in the growing areas of wealth-management products like mutual funds and insurance.

With the aging Canadian population, "revenue in wealth management will continue to grow at a fast pace," Raymond said.

The CEO said the bank sees a huge opportunity in selling its products through the financial advisers of its partners, called white label products because the consumer does not know the loan or other product comes from the bank.

National Bank has access to 8,000 third-party representatives, and Raymond said only 30 per cent of them have so far sold at least one of the bank's products.

"There's a huge opportunity there, we touch maybe five or six per cent of that client base overall," he said. "There is a lot more we can do with our partnerships."

Earlier, CIBC's chief executive Gerry McCaughey said the Toronto-based bank is ahead of its target to reduce its annual non-interest expenses by $250 million by the end of this fiscal year.

While CIBC's cost cutting in the first quarter put it on the road to passing the goal, McCaughey said the target is in the context of other banks also reducing their non-interest expenses, so the target may have to be raised.

He said CIBC wants to reach the median non-interest expense ratio of the other banks, or exceed it.

The $250-million target "should get us to the median; if not, that would mean our competitors have also improved their operations," he said.

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Manulife Would Rather Acquire Than Increase Dividend Payouts

Bloomberg, 29 March 2006

Manulife Financial Corp. would rather spend excess cash on acquisitions than pay out more of its earnings in dividends, chief financial officer Peter Rubenovitch said. The company has "the flexibility to pursue any kind of options we would consider to be attractive to shareholders," he told investors yesterday at Montreal conference sponsored by National Bank Financial. Manulife raised the proportion of earnings paid to shareholders to as much as 35 per cent last year, from up to 30 per cent. Mr. Rubenovitch didn't name acquisition targets.

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RBC to 'Reaccelerate' US Footprint in 2007

Canadian Press, 29 March 2006

RBC Financial Group plans to ramp up its presence in the United States - a market that has proved challenging in the past - with 15 to 20 new branches per year starting in 2007, says the head of its American operations.

Scott Custer, CEO of RBC Centura Banks Inc., made the remarks Wednesday during a presentation to a Canadian financial services conference in Montreal.

He said that planned reacceleration, primarily in the Atlanta and Florida markets, would follow "slowed expansion" in 2006 as the bank focuses "on key business development and operational initiatives."

Canada's largest bank, also known as Royal Bank of Canada, had already outlined those expansion plans after opening 10 U.S. branches in 2005 and 18 in 2004.

Royal Bank, however, has previously coped with operational challenges in the United States, with RBC Centura posting "disappointing" earnings in 2004.

That led the bank to exit its U.S. mortgage business - RBC Mortgage Co. - to focus on "high-growth client segments" such as businesses, business owners, professionals and commercial clients.

In 2005, it sold its U.S.-based RBC Mortgage and its 135 branches for an undisclosed price to a subsidiary of real estate trust New Century Financial Corp. of Irvine, Calif., marking its farewell from the cut-throat American national market for mortgage services.

Earlier this month, RBC president and CEO Gordon Nixon acknowledged those challenges when addressing shareholders at the bank's annual meeting, but said that shifted focus has resulted in strong growth of both consumer and commercial loans and deposits, while contributing to a "significant improvement" in RBC Centura's financial performance.

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Cdn Banks Will Have to Deal with Significant Challenges in 2006

The Globe and Mail, Paul Waldie, 29 March 2006

Canada's big banks enjoyed stellar financial results in 2005, but they face several challenges in 2006 that could hurt profits, according to a report released yesterday by PricewaterhouseCoopers.

The big six banks chalked up more than $12-billion in combined profit last year, thanks largely to a strong Canadian economy, high commodity prices and low interest rates. Excluding one-time charges related to litigation costs at a couple of banks, the results were up 18.5 per cent from 2004, the report said.

However, rising interest rates, slower growth in lending and problems in the automobile industry are a few of the issues that could affect earnings this year, said the report entitled "Canadian Banks 2006."

"What we're saying is, we expect 2006 to be challenging for the banks," said Diana Chant, a partner in the consulting firm's Canadian financial services practice. "Lending absolutely does go in cycles, and things are not going to stay high forever."

The report noted that interest rates have been creeping up in Canada and the United States. Rising rates are usually not beneficial to banks because their interest-earning assets are long term and are typically funded by short-term liabilities. "Most economists are calling for continued increases in Canadian and U.S. interest rates throughout 2006 and sustained pressure on interest rate margins [at the banks] is anticipated by most, if not all, analysts," the report said.

The report also said household debt is at unprecedented highs, leaving little room for more consumer borrowing.

Canada's banks have enjoyed a stable credit environment in recent years but there are concerns about rising loan defaults, the report said. Problems at General Motors Corp. and Ford Motor Co., and the fallout to their suppliers, is already being felt in parts of Central Canada.

Soaring pension costs is another major issue for corporations and ultimately banks, Ms. Chant said.

"Some people have said that that is one of the biggest looming problems that we have in the business environment that will kind of hamper corporations," she said. "And when corporations are hampered, then lending and banks get implicated."

On the plus side, Canada's banks are seen likely to continue to benefit from strong commodity prices, which are expected to remain high this year.

As for possible bank mergers, the report said there were signs in 2005 that political opposition to mergers has softened. The election of a Conservative minority government could also hasten the release of merger guidelines, which have been delayed for months. The report noted that the largest Canadian bank, Royal Bank of Canada, ranked 32nd in the world in terms of market capitalization.

Ms. Chant said the merger issues have gone on for so long that most banks have reconciled themselves to looking elsewhere for growth.

"I think the banks themselves are coming out and getting beyond the question of mergers. They are sort of saying, 'Well, you know if it happens it happens, if it doesn't it doesn't. We've got our strategies we've got to keep going.' "

Savings plan

Canada's big banks have enjoyed a stable credit environment in recent years, but concerns about loan defaults are rising. As a result, many banks set aside more money last year to cover problem loans.

	Total provisions (millions)	Provisions as a % of loans
	2003	2004	2005	2003	2004	2005
BMO	$455	-$103	$179	0.31%	-0.07%	0.10%
Scotiabank	893	390	230	0.49	0.21	0.11
CIBC	1,143	628	706	0.71	0.39	0.42
National	177	86	33	0.38	0.17	0.06
RBC	721	346	455	0.34	0.15	0.19
TD	186	-386	55	0.13	-0.25	0.03
Combined	3,575	961	1,658	0.40	0.10	0.16

Source: PricewaterhouseCoopers

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Investment Executive, 28 March 2006

Although Canada’s top six banks enjoyed another record-breaking year in 2005, they will need to embrace change more than ever to meet the challenges of the coming year, according to the Canadian Banks 2006, PricewaterhouseCoopers’ (PwC) annual survey of the banking industry.

“The banks are certain to find 2006 challenging. The year likely holds continued margin pressure, slower growth in lending volumes and increases in credit provisions.” says Diana Chant, partner and leader of the PwC financial services practice in Canada. “It will be a challenge for banks to continue the record-breaking profits of the past few years.”

The Big Six earned a combined net income of over $12 billion and thrived in the strong Canadian economy. If not for litigation losses, aggregate results would have been over $16 billion, an increase of 18.5% over 2004.

“2005 was a banner year for Canadian banks. The economy provided a solid foundation for generating strong profits and the banks responded, delivering another year of outstanding results,” says Chant. “But behind this performance are governance, risk and compliance projects impacting the operations of all banks.”

These projects include the implementation of Sarbanes-Oxley 404 in 2006 for all but one of the Big Six. All banks are leading up to the implementation of the Basel Capital Accord and are also developing systems to manage the new accounting requirements for financial instruments. Added to this is the challenge of an uncertain U.S. economy and the negative consequences a slowdown south of the border would bring.

“Canadian banks and the rest of the world need a robust and growing U.S. economy,” says Chant. “Spending is already trending down in the U.S. With high consumer debt, large fiscal deficits and a weak North American auto industry, it is likely there will be a slowdown south of the border in 2006. 2005 was a great year for Canadian banks. The question now is: Where do they go from here?”

Change is the focus of Canadian Banks 2006, and the survey addressed several emerging trends and hot topics in the banking industry, including:

- sharpening client focus and progressive practices in segmentation;
- aligning governance, risk and compliance with the business agenda;
- operational tax risk;
- re-engineering processes;
- the outlook for economic capital in financial services;
- the new Canadian Financial Instruments Standards;
- 2005 accounting and reporting developments.

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Manulife Covets China's Uninsured as Health-Care Costs Soar

Bloomberg, Le-Min Lim, 28 March 2006

Lu Yahu decided to buy health insurance from American International Group Inc. four years ago after his mother, a retired factory worker, caught a cold and spent half her $124 monthly pension on a single hospital visit.

``Medical charges in China are so ridiculously high these days, you really can't afford to get sick,'' says Lu, 31, the founder of Shanghai Good Faith Translation & Consulting Co., who pays about 30 yuan ($3.74) a month for his policy. ``I buy health insurance from AIG so I can get treatment when I need it without worrying too much about costs.''

Overseas insurers, including AIG and Manulife Financial Corp., are vying for customers in China, where 90 percent of the 1.3 billion people lack health-care coverage. Medical bills are rising as changing lifestyles push up rates of diseases such as cancer that are the costliest to treat. China's private health- insurance market will swell 14-fold to $56 billion by 2020, estimates John Wong, Boston Consulting Group Inc.'s Asia chairman.

``Medical insurance should become very attractive to middle-class families in China because they really don't want to undertake that risk themselves,'' says Wong, 51, who's based in Hong Kong.

New York-based AIG, the world's biggest insurer, is betting on China's undeveloped market.

``We see double-digit growth in the China health business,'' says Barry Stowe, 48, the Hong Kong-based head of AIG's global accident and health unit.

Rising Burden

By contrast, U.S. health-insurance premiums probably grew 6.8 percent in 2005, slowing for a third consecutive year, according to the Centers for Medicare and Medicaid Services, a unit of the U.S. Department of Health and Human Services.

The health-care burden on China's households has risen as the communist government, shifting toward a market economy, dismantles its cradle-to-grave welfare system. The state began cutting hospital subsidies in the early 1980s, and by the mid- 1990s covered just 20 percent of urban state hospitals' costs, says Hana Brixi, a Beijing-based adviser to the United Nations' World Health Organization.

That leaves patients such as Cha Guoqun, who works odd jobs on building sites in the eastern city of Hangzhou, vulnerable. Cha, 46, visited a state hospital in November after a cut on his leg got infected and prevented him from working.

The doctor gave him two options: Pay 1,000 yuan a day for treatment -- his entire monthly income -- or have his leg amputated. He ended up seeking treatment at a Christian charity hospital and was cured with a six-day course of medication that cost 250 yuan.

`I Was Lucky'

``I was lucky this time,'' Cha says. ``But on the whole, medical treatment is too expensive for people like me.''

In China, the majority of the uninsured -- most of them rural residents -- avoid going to hospitals for treatment because they can't afford it, says Brixi, 38. Most treat themselves with over-the-counter drugs, she says.

Premier Wen Jiabao pledged at this month's National People's Congress meeting in Beijing to narrow the widening income gap between China's urban and rural populations by spending more on health care, agriculture and education. Twenty- five years of economic growth averaging 9.8 percent annually has mostly benefited China's towns and cities, leaving behind rural areas that are home to 70 percent of the population.

About 130 million people in China have health insurance, leaving almost 90 percent of the population without coverage, says Guan Ling, a Beijing-based executive secretary at the China Insurance Regulatory Commission's health and life insurance department. About 16 percent of the U.S. population lacked coverage in 2004, according to U.S. census figures.

Cancer, Heart Disease

Chinese patients paid an average of 56 percent of their own medical costs in 2003, up from 21 percent in 1980, according to the Health Ministry.

In the five years through 2003, the average cost of a hospital stay climbed 67 percent to 4,123 yuan, a ministry survey shows. During the same period, per-capita disposable income in urban areas rose 45 percent to 8,472 yuan, according to the China Internet Information Center, a government Web site.

``Private health insurers will definitely take a bigger role in helping defray rising health-care costs in China,'' says the insurance regulator's Guan.

Cancer and vascular ailments such as heart disease are now the country's leading causes of death, fueled by cigarette smoking and a lack of exercise, according to a study published in September in the Waltham, Massachusetts-based New England Journal of Medicine.

Costlier to Treat

In 2003, cancer was the leading cause of death in rural China, according to the Health Ministry. In 1999, respiratory disease topped the list. Cancer costs dozens of times more to treat because it requires longer hospital stays, says He Yansu, 47, an insurance professor at Central University of Finance and Economics in Beijing.

In response to these changes, AIG plans to expand its 23,000-member China sales force and may start advertising on television and billboards, Stowe says, without giving details.

AIG, founded in Shanghai in 1919, is China's No. 2 overseas insurer by premiums after Trieste, Italy-based Assicurazioni Generali SpA knocked it from the top spot in 2005.

Unlike Generali and other rivals, AIG doesn't have a license to sell group policies in China, so it relies solely on individual customers. AIG withdrew its group license application last year pending a Chinese regulatory probe into whether its agents in Hong Kong illegally sold products in mainland China.

10 Percent Profit Margin

The company's health-insurance unit wasn't implicated in the accounting scandal that prompted the resignation of Chairman and Chief Executive Officer Maurice Greenberg in March 2005.

AIG's 1.5 million health-insurance customers in China paid $100 million in premiums in 2004, about 1 percent of the company's global accident and health business, Stowe says. The unit has a profit margin of about 10 percent, matching the companywide average, he says.

While overseas insurers charge less than $5 a month for some policies, they limit costs by offering capped payments rather than unlimited coverage.

Manulife-Sinochem Life Insurance Co., a venture of Toronto- based Manulife Financial and government-controlled chemical trader Sinochem Corp., charges 500 yuan a year for a standard policy. Hospitalized policyholders receive a one-time payment of 4,000 yuan plus 150 yuan for each day spent in the hospital. Outpatient treatment isn't covered.

Obstacles

Health-care costs in China are a fraction of those in developed markets, which also limits expenses for insurers, says Wong of Boston Consulting. For example, a hip replacement costs about $400 in China and more than $10,000 in the U.S., he says.

To succeed in China, overseas insurers must overcome entrenched domestic rivals.

Local insurers such as Beijing-based China Life Insurance Co. and Shenzhen-based Ping An Insurance Group Co., the two largest, control more than 90 percent of the overall market, according to the insurance regulator.

China Life had 663,000 sales agents as of June 2005, while AIG has 23,000.

Hong Kong-traded shares of China Life have risen 46 percent this year, compared with a 6.3 percent gain in the benchmark Hang Seng Index. Shares of Ping An have gained 43 percent.

``Size matters when you're an insurance company trying to grab market share,'' says Dorris Chen, a Shanghai-based insurance analyst at BNP Paribas Peregrine Ltd. ``Foreign insurers have an edge over domestic rivals in risk assessment, but that doesn't make up for their lack of size.''

Medical Fraud

Widespread fraud in medical claims is another pitfall, says Boston Consulting's Wong. Doctors commonly prescribe unnecessary medicines and longer hospital stays to pad their incomes, according to a November report by the World Bank.

In 2004, patients admitted to Shanghai hospitals stayed an average of 17 days, compared with eight days in Hong Kong, according to Manulife-Sinochem.

``You can't control what the hospitals do in terms of the medicine they prescribe and the number of days of hospital stay they recommend,'' says Edmond Lee, 42, a Shanghai-based vice general manager at Manulife-Sinochem, China's No. 6 overseas insurer by premiums. ``The government should do more gatekeeping to keep costs down.''

Manulife-Sinochem plans to expand its 4,200-person sales team in China by 20 percent a year to tap rising demand for health coverage, Lee says.

Restrictions Relaxed

Overseas insurers are expanding more rapidly as China relaxes restrictions to comply with World Trade Organization rules. The government in December 2004 let non-Chinese insurers operate nationwide rather than in select cities, and allowed them sell to companies as well as individuals for the first time.

Copenhagen-based International Health Insurance Danmark A/S, which doesn't yet have a China license, expects the country to become its biggest health-insurance market in Asia within a decade, says Niels Haaber, 31, the company's Hong Kong-based Asia chief. Hong Kong is currently IHI's biggest Asian market.

``All foreign health-care insurers are looking at the Chinese market,'' Haaber says.

International Health, a unit of London-based British United Provident Association Ltd., the world's No. 1 specialized health insurer, is in talks with Ping An to form a venture, Haaber says.

China's state medical insurance plan covers about 130 million people, mostly company employees in cities, according to the Ministry of Labor and Social Security.

Lax Enforcement

The plan covers fewer than half the nation's 300 million urban workers, even though all are legally entitled to it, because many employers fail to offer coverage and enforcement is lax, says Wang Guojun, an insurance professor at the University of International Business and Economics in Beijing.

A 35-year-old worker in Beijing is required to contribute 1 percent of his salary to a health-insurance account, and his employer must pay 4 percent. Workers can use that money to buy prescription drugs and cover hospital costs. After draining their accounts, they have to tap their savings.

Shen Jiai, a financial planner at the government-run Shanghai Taxi Management Bureau, says relying on state health insurance alone is foolhardy.

Shen bought an AIG policy for her husband in 1994 and recently bought Ping An policies for herself and her 18-year-old daughter. The AIG and Ping An policies each cost Shen, 44, about 30 yuan a month, and the state plan costs about 20 yuan.

``State insurance is only good for minor ailments,'' Shen says. ``It leaves you financially vulnerable if expensive illnesses like cancer strike.''

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KN News Desk, 28 March 2006

Shanghai-based Manulife-Sinochem Life Insurance Co Ltd (MSL) is planning to move beyond supplying only individual life insurance coverage and expand its scope to include group insurance, bancassurance, as well as opening up more outlets throughout the country. China's first joint venture insurer has already launched group insurance services aimed at small and medium-sized enterprises (SMEs) in Shanghai, Guangzhou, Beijing and Ningbo. The company plans to continue making group insurance a business focus this year.

Arthur Lin, company vice-president and general manager of the MSL Beijing branch, told China Daily that the insurer's target customers for the group insurance would be SMEs and foreign-funded companies. "It is more difficult to evaluate large enterprises' group insurance risks. Moreover, they usually have had a steady co-operation with other insurers," Lin said.

"The quality, or rather scale, is our major concern," Lin said. The 10-year-old company is also thinking about developing bancassurance, which is a challenging sector for the insurer.

"Bancassurance business has a big market but low profit margin," said Lin. "This is due to the dynamic competition between banks and insurers. If the insurance products sell well in the bank, the bank is likely to raise the commission. On the other hand, if the products sell badly, the insurer will go to another bank." In addition to venturing into a new business sector, MSL is also speeding up its network expansion. The company got nine outlet licences last year and expects to have 20 licences total by the end of this year. "The Yangtze Delta and Pearl River Delta were our major targets last year, and we are taking more efforts to explore the market in Sichuan, Shandong and Fujian provinces this year," said Lin.

MSL has got the licence to enter Sichuan Province from the regulatory authority, and the Sichuan branch is expected to start business in June, Lin added. Thanks to the rapid expansion in the past two years, the insurer posted 700 million yuan (US$87.5 million) in total premium income in 2005, an increase of 17.5 per cent over the previous year. The company's premium growth outpaced the market average in Shanghai last year, but lagged behind the rate posted by the city's foreign-invested insurers.

The joint venture insurer's Chinese parent company is China Foreign Economic and Trade Trust & Investment Company, a member of the State-owned chemical industry giant Sinochem Corporation. Manulife Financial holds a 51 per cent stake of MSL, while Sinochem holds the remainder. MSL has entered into 12 cities in China, with additional applications being processed.

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Morgan Stanley Downgrades Manulife

Bloomberg, 28 March 2006

Manulife Financial Corp. was cut to "underweight" from "equal weight" by Morgan Stanley analyst Nigel P. Dally in New York.

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Veritas on BMO's Q1 2006 Earnings

National Post, Duncan Mavin, 28 March 2006

In the numbers Bank of Montreal's above-expectations earnings for the first quarter of 2006 didn't impress Veritas Investment Research analyst Ohad Lederer too much.

Although BMO reported diluted earnings per share of $1.22 compared to analysts' consensus forecast ranging from $1.17 to $1.21 per share, the figures "were not greeted with applause," noted Mr. Lederer in a report.

In fact, even though BMO also announced an 8.2% dividend hike, it was the only Big Five bank to see its share price decline after the earnings dust settled, he said.

The reason? Perceived low-quality earnings -- too much reliance on trading revenues -- and flat performance in personal and commercial banking, said Mr. Lederer.

"Quarterly trading revenues were $231-million, or $100-million higher than the average quarterly trading revenue of the previous ten quarters," he noted.

Furthermore, while domestic banking revenues were a key earnings driver for Canadian banks in 2005, domestic revenue was up only 0.1% quarter on quarter at BMO. "One main reason for the flat performance was falling deposit market share resulting in increased usage of higher cost wholesale funding, thus crimping margins," said Mr. Lederer.

However, it could have been even worse, if BMO had followed rival Royal Bank of Canada's lead when it comes to accounting for stock options. After carefully comparing BMO's report to RBC's, Mr. Lederer was able to deduce that BMO is continuing to "smooth out" certain stock option expenses for retiring employees, whereas RBC is taking the hit for the same stock options the way companies in the U.S. do -- expense them right away.

The result, according to Mr. Lederer's calculations, is that BMO's results were $42-million ($29-million after tax) better than they would have been if RBC's accountants had prepared BMO's numbers.

"In short," said Mr. Lederer, "the earnings per share effect of [BMO's accounting] was a boost of 5.7 cents, or 4.6% of earnings. Put another way, all else being equal, BMO's results would have fallen short of expectations."

Of course, Canadian accounting principles are sufficiently vague on the matter to allow both banks to report as they see fit.

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RBC, Priced to Perfection?

The Globe and Mail, Angela Barnes, 23 March 2006

Royal Bank of Canada shares hit a record high Thursday, the same day as a Desjardins Securities report came out suggesting that the Royal's shares are richly valued.

“We believe that Royal is now priced to perfection,” said Desjardins analyst Michael Goldberg. Even after its “surprisingly” big dividend increase, Canada's largest bank has the lowest relative yield among the banks while its capital position is the second weakest after Canadian Imperial Bank of Commerce. Yields for the banks are measured against long corporate bonds.

Meanwhile, Bank of Montreal, whose shares have been lagging and are well below their high, is currently trading at the highest relative yield among the major banks, Mr. Goldberg noted in a report yesterday. “Considering BMO's earning power and its growth and capital flexibility, its low valuation looks like an anomaly to us,” he said.

Mr. Goldberg rates Royal a “hold” along with National Bank of Canada and Laurentian Bank of Canada. He has BMO as a “buy” and upgraded CIBC to a “buy” from a “hold.” His top picks are Bank of Nova Scotia and Toronto-Dominion Bank, which are the two best capitalized banks.

Mr. Goldberg adjusted some of his 12-month target prices for the banks. He raised CIBC to $89.50 from $87, BMO to $75.50 from $70.50 and Royal to $104 from $93 largely because of the higher than anticipated dividend increase. Royal began trading on the Toronto Stock Exchange yesterday after an effective two-for-one split so the adjusted target is $52, up from $46.50. He left his targets of $52.50 for Scotiabank, $70 for TD, $65 for National Bank and $34.50 for Laurentian unchanged.

He noted that BMO has the most upside to his target.

Mr. Goldberg noted in his report that nearly all the banks delivered positive surprises in their first quarter reporting season but market reaction to the surprises was mixed. Investors rewarded CIBC and TD for their growth in operating profit, while banks whose profit growth came from non-operating sources saw their results ignored or punished. The two examples of the latter were National and BMO. “BMO was punished for interest margin compression as its positive earnings surprise was driven by better-than-expected loan quality and a lower tax rate,” Mr. Goldberg said.

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Banks, Insurers Told to Plan for Bird Flu

The Globe and Mail, Paul Waldie & Sinclair Stewart, 23 March 2006

Canada's top financial industry regulator is pushing the country's banks and insurers to draw up plans to cope with a possible outbreak of avian flu.

The Office of the Superintendent of Financial Institutions has sent letters to three major industry associations -- the Canadian Bankers Association, Insurance Bureau of Canada and the Canadian Life and Health Insurance Association -- asking what actions they have taken to prepare for a pandemic and who at the association "has been tasked with co-ordinating your activities."

"In recent months increasing attention has been paid to the possibility of an outbreak of avian flu," says the letter signed by assistant superintendent Julie Dickson. "While public health experts cannot predict whether an easily communicable human strain of 'avian flu' will result in a serious outbreak of influenza in the near future, the potential for such an outbreak raises significant issues in terms of business continuity and resilience practices."

Rod Giles, an OSFI spokesman, said the letter is only a first step and the regulator also plans to meet with individual financial institutions.

"The key here is that the financial sector needs to be aware of the potential, really, for an outbreak and needs to consider how such an event could impact their operations," Mr. Giles said. "We're going to be conveying to them our expectation but in general it's consistent with business continuity planning." He added that this is the first time OSFI has taken such an active stand. Officials from the three organizations said they had received the letter and they are working with their members on preparations.

According to the World Health Organization, the H5N1 strain of avian flu has killed 103 people since it re-emerged in 2003. The virus was initially concentrated in Asia but has since spread to parts of Europe. While all of those who have died were in contact with dead or diseased birds, public health officials are concerned the virus might mutate and become transmissible among humans. In a report this week, the Canadian Manufacturers & Exporters (CME) estimated that a pandemic would cause between 11,000 and 58,000 deaths in Canada, and wipe out about 5 per cent of the national economy.

The memory of the outbreak of severe acute respiratory syndrome, or SARS, three years ago is still fresh in the minds of many businesses. The 375 cases of SARS overwhelmed the health care system and had an estimated economic impact of $2-billion across Canada.

Many financial institutions, such as Sun Life Financial Inc., are already well along with preparations.

As one of Canada's largest insurers, Sun Life has more concerns than most about a possible outbreak of avian flu. On the one hand, it has to have a plan in place to ensure its businesses continue to operate effectively: A task complicated by the fact that it has units across Asia, which is considered more vulnerable to a pandemic. The benefit of being international, however, is that it can shift the workload from countries that have been hurt by the flu to other areas that are safe.

On the other front, Sun Life has to ensure it has the financial strength to pay out life insurance claims, which would obviously be expected to rise if there was a mass outbreak. Sun Life began working on the avian flu issue nearly a year ago, and has created a steering committee that includes the company's chief medical officer.

The insurer has already done some predictive modelling to gauge its ability to withstand the financial hit. Sun Life considered a scenario in which the normal death rate for people between 25 and 75 would triple: Roughly double the number of deaths that occurred in the influenza epidemic of 1918. Even with that grim outcome, however, the insurer determined it would still be able to service its customers.

"We're assessing significantly worse mortality than actually occurred in 1918," said Tom Reid, a spokesman for the company. "Under the extreme scenario we've looked at, we still have the capital to run the business."

The country's largest banks have also been preparing themselves for a possible avian flu problem. Some of the banks have their own doctors, who help shape programs to keep employees healthy, whether it be limiting face-to-face contacts between executives, or keeping masks on hand for branch staff and head office personnel.

The banks also have an open conference line with one another that automatically kicks in during any crisis and allows them to develop co-ordinated responses.

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J.P. Morgan Chase / Jamie Dimon

Jamie Dimon, the new CEO of J.P. Morgan Chase is taking a shot at the title of world's most important banker and trying to whip a sprawling financial conglomerate into shape.

Fortune, Shawn Tully, 22 March 2006

(FORTUNE Magazine) - Just about everyone who works on Wall Street has heard the stories about Jamie Dimon. The one about his shutting down the gyms and pulling the fresh flowers at J.P. Morgan Chase. (That story is true.) And the one about his grilling limo drivers parked in front of headquarters to find out who'd ordered the Lincolns, then screaming at the culprits for wasting money. (That one's apocryphal, but Dimon doesn't mind people repeating it, because fear helps him control costs.)

Here's one you haven't heard. Dimon became president of J.P. Morgan Chase in mid-2004 when it acquired Bank One, where he had been CEO. Soon after, he convened an emergency meeting and ripped into his new colleagues for "letting pay get totally out of hand."

Among the examples that set him off: Regional bank managers at J.P. Morgan earned around $2 million -- five times the $400,000 that comparable Bank One people made. Morgan's human resources chief was pocketing better than $5 million. Outraged, Dimon announced he was slashing comp for hundreds of staff positions by 20% to 50% over two years.

"I'd tell people they were way overpaid," Dimon recalls, "and guess what? They already knew it." The kicker: Most of the managers stayed on despite the cuts.

A few months later, at a retirement party for J.P. Morgan CFO Dina Dublon, 52--whom Dimon was replacing with an ally from Bank One -- Dimon stepped to the podium and praised her service to the company. Then he unleashed a biting one-liner: "But if you paid one dollar for Texas Commerce bank" -- which J.P. Morgan acquired in 1987 for $1.2 billion -- "you paid a dollar too much!" The room, studded with Texas Commerce alumni and executives who had championed the deal, went dead silent.

As these stories suggest, Jamie Dimon is not known for subtlety. He has shouted down a U.S. Congresswoman who was pushing Bank One to keep more jobs in Chicago, and told a roomful of J.P. Morgan internal auditors that a colleague "knows as much about accounting in her baby finger as all of you combined."

He will lash out in meetings with trusted confidants -- "That's the dumbest thing I've ever heard" -- and expect them to come right back at him. ("If not, he won't respect you," says J.P. Morgan asset-management and private-bank chief Jes Staley.)

Yet far from hindering his career, this brash, iconoclastic manner has made Dimon the most watched, most discussed, most loved, and most feared banker in the world today. From Wall Street to the City of London, just mention "Jamie," and everyone knows you're talking about the rampaging rebel who's as loud as he is tight. He's much more than a cost cutter with a colorful personality, and his compulsive candor is just one of his highly effective management tools.

Working alongside boss and mentor Sandy Weill, Dimon helped engineer 12 years of audacious mergers that turned an obscure Baltimore loan company called Commercial Credit into Citigroup, the world's largest financial services company. After being unexpectedly shoved aside by Weill, he re-emerged at a dysfunctional Bank One, turned it around, and sold it in the deal that made him, as of January, CEO of J.P. Morgan Chase, the third-largest financial corporation in the U.S. (2005 revenues: $55 billion), behind Citi and Bank of America.

Now he wants to perfect the model he and Weill created at Citigroup -- and defeat the house he helped build. "It's all about having the best systems, the best people, the best products, the best risk controls," he says. "It's all about being the best, the best, the best."

That's why investors, industry watchers, and fellow CEOs trade all those Jamie stories. They see him as the one figure with the skills and opportunity to prove once and for all whether the model of a one-stop-shop financial firm can live up to its promise. And they know that Jamie is just itching to expand his empire with at least one breathtaking deal.

It would be hard to find a company more in need of the Dimon treatment than J.P. Morgan. A hodgepodge of businesses from multiple mergers that were never fully integrated, the giant bank is burdened with a lazy culture and an underperforming stock ripe for reinvigoration. While J.P. Morgan ranks at or near the top in many key categories--second in retail deposits, credit card balances, and investment-banking fees; first in U.S. private-banking assets and cash-management revenues--growth has been tepid and profitability mediocre. J.P. Morgan's return on equity, a crucial yardstick for financial firms, is just 10%, well below that of its top rivals. No wonder the stock has barely moved in five years.

J.P. Morgan, of course, isn't the only financial conglomerate with an identity crisis these days. At Citi, the original incarnation of the do-it-all firm, CEO Charles Prince is struggling to overcome scandals and management turnover.

"Financial conglomerates like J.P. Morgan are feeding grounds for smaller, more nimble and focused players," says Tom Brown, chief of hedge fund Second Curve Capital. "Shareholders of all the supermarkets would be better served if they were broken up." Some analysts are already getting impatient with Dimon. "He told us to expect big progress in 2005," says Meredith Whitney of CIBC. "Now we won't see major improvements until 2007."

But many are betting that Dimon's rare combination of an analytical, Cartesian mind with a passionate, damn-the-social-graces style will end up rewriting the rules of the game. As Larry Bossidy, former Honeywell chairman and a J.P. Morgan director, puts it, "I don't use superlatives lightly, but he's the best guy I've ever seen in financial services."

"It's offensive to me to be called a cost cutter," says Dimon during one of a series of in-depth, exclusive interviews with FORTUNE. Striding about his eighth-floor Manhattan office, the stocky CEO, who took boxing lessons after being ousted from Citigroup, karate-chops the air and punches out sentences in staccato bursts that bear traces of his Queens upbringing.

He grabs a pen and begins scribbling on an easel to illustrate how the bank's revamped computer systems work. He pulls out a dog-eared piece of paper that he carries in his breast pocket to jot notes to himself--the "people who owe me stuff" list, he calls it (a surprisingly low-tech tool for someone who considers himself an IT geek).

A huge operation "can get arrogant and full of hubris and lose focus, like the Roman Empire," says Dimon. To prevent J.P. Morgan from falling into that trap, he has imposed rigorous pay-for-performance metrics and requires managers to present exhaustive monthly reviews, then grills them on the data for hours at a time.

"He jumps into the decision-making process," says Steve Black, co-head of investment banking. "If you just want to run your business on your own and report results, you won't like working for Jamie."

To be sure he's getting the real story, Dimon buttonholes staffers in the elevators and calls suppliers out of the blue like a hyperactive gumshoe, collecting scraps of information he can throw back at executives. "In a big company, it's easy for people to b.s. you," he says. "A lot of them have been practicing for decades."

While Dimon's rudeness can be offputting, the sheer force of his passion and intensity can be irresistible. And that's been the story of his life. "He loves misbehaving in places where he's supposed to behave," says his wife, Judy Dimon, who met him when they were fellow students at Harvard Business School.

She vividly remembers the first time she saw him, at an HBS watering hole called the Pub. "The room was a sea of Ivy Leaguers in pastel Lacoste shirts, all grinning, all trying to win each other over," she says. In the middle stood a Johnny Cash--style figure clad in black jeans, a black shirt, and black sunglasses. "He was sphinxlike, taking things in, not trying to be part of the group."

She recalls being astounded by his gall when, in the midst of a party she threw after they'd been dating for a few weeks, Jamie gave her a blunt ultimatum: "I'm going home, and I want you to go with me." That she said yes--and that they've been living together ever since, for 26 years, and have three daughters, ages 16, 18, and 20--is testament to how endearing Dimon's rough edges can be.

Two weeks into Dimon's first year at Harvard, recalls classmate Steve Burke, now COO of Comcast, they were assigned a case about a troubled cranberry co-op. "We'd just arrived, so we were all intimidated by this godlike professor," says Burke. "The professor starts discussing the cranberry case, and Jamie says, 'I think you're wrong!' We were all amazed." Dimon walked to the blackboard and wrote out his solution. The imperious prof was forced to acknowledge, "You're right," and Dimon immediately became a hero to fellow students.

He's had the same inspirational effect on the people who have worked for him over the years, many of whom have followed him from job to job. "Jamie's strength is that he's a leader, not a classic manager," says Charlie Scharf, who started with Dimon at Commercial Credit in the 1980s and is now head of retail banking at J.P. Morgan. "He can't help himself," adds Heidi Miller, chief of treasury and securities services at J.P. Morgan. "He can be a total pain, overdemanding, but you'd trust your life to him."

Dimon shuns the black-tie circuit and never sets foot on a golf course. He yanked Bank One's sponsorship of the Masters golf tournament because the country club hosting the event doesn't accept women members. His taste in food is basic; his favorite dish is a cheeseburger with fries.

He flies home to Chicago every week to be with his wife and youngest daughter, who is in high school there. On Friday evenings he invariably takes the family to dinner at a neighborhood Italian restaurant and orders the same thing: a martini followed by the house salad and grilled chicken Parmesan.

Music is practically his sole hobby. Dimon, who's taking guitar lessons, surprised his aides by practicing chords on a recent flight to China. At home he relishes lying on the couch in his library in a sort of trance, with the stereo blasting a melange of schmaltzy tunes that includes Sinatra's "My Way," "The Impossible Dream," "New York, New York," "What a Wonderful World," and Ray Charles's "America the Beautiful." He throws in "Ave Maria" for high art. (The family is so concerned about the blaring Americana that at the Park Avenue apartment they're renovating in Manhattan the interior walls are being lined with lead soundproofing.)

Of course, you might call cost cutting a hobby too. At home, spying a not totally empty bottle of ketchup in the trash ignites an explosion. At one point Dimon was appalled to see that his daughters were using bushels of towels--so he imposed a strict quota of one a week. He's so frugal that, to the shock of family and friends, he continued to wear T-shirts with the Citigroup logo long after Citi had fired him.

In 1982, armed with his Harvard MBA, Dimon hooked up with Sandy Weill, an old family friend, becoming his assistant at American Express. When Weill was forced out of his post as AmEx's president soon thereafter, Dimon followed him into exile, spending more than a year in a suite in Manhattan's Seagram Building hatching plans to build a financial empire.

During their long partnership, Weill was the strategist with the golden gut, Dimon the nuts-and-bolts operator who made the machine work. Citigroup was the culmination of their grand design. Yet Dimon grew increasingly frustrated at sharing power with other executives at Citi, and his natural combativeness got the best of him: He bickered with co-CEOs Weill and John Reed, among others, and in late 1998 found himself reliving the into-the-wilderness experience when Weill showed him the door.

As Weill and Dimon were building Citi, J.P. Morgan Chase was being cobbled together in its own series of mega-mergers: The old Chemical Bank bought Texas Commerce in 1987, then gobbled up Manufacturers Hanover in 1991, Chase in 1996, and J.P. Morgan in 2000. But unlike at Citi, there was no sustained effort to merge operations or substantially cut costs, and shareholders suffered.

William Harrison, who became CEO in 1999, eventually zeroed in on Dimon as the solution. In 2004 he agreed to buy Bank One. After becoming Bank One's CEO in 2000, Dimon had turned the sickly operation around by combining a crazy quilt of computer systems and imposing strict guidelines on a haphazard set of credit standards, almost doubling the market cap, to $58 billion.
For Dimon the merger represented a return to the big time--and a chance to face off against his old creation, Citi. As president, Dimon immediately set to work on a major makeover, attacking costs, consolidating systems, and instilling an aggressive sales culture. He filled key positions with trusted confidants, including Citi alumni Michael Cavanagh as CFO (replacing Dina Dublon), Charlie Scharf, and Heidi Miller.

Harrison, who was scheduled to stay on as CEO through June 2006, quickly ceded day-to-day control. In October it was announced that Dimon would take the helm in January, six months ahead of schedule (Harrison remains chairman). The truth is, he has been in charge from the moment he walked in the door.

Dimon's strategy for J.P. Morgan is deceptively simple: boost revenues at a healthy pace while keeping a lid on costs. "If the market is convinced you'll keep the cost line flat and that you have the disciplines to raise revenues faster than your competitors, your stock price can rise in double digits," says Dimon. "But you have to do both."

In pursuit of those goals, he doesn't get bogged down in a search for consensus or worry about hurt feelings. At a meeting early last year, Todd Maclin, head of J.P. Morgan's commercial bank, complained to Dimon that the investment bankers were hoarding hundreds of so-called middle- market firms--those with annual sales of $500 million to $2 billion--on their "prospects" list, keeping the commercial bankers from approaching them.

Dimon dropped everything and convened the top executives of the investment bank. "Are you calling on this company?" he demanded. "How often? How much business are you doing with them?" When it became clear that many prospects were being neglected, Dimon started reassigning them to the commercial bank. "The room was filled with hollering and yelling," says Maclin. But Dimon was adamant. "You're protecting clients you don't do business with," he said.

That was only half the battle. Dimon wanted Maclin's crew to have strong incentives to steer business to the investment bank. Maclin and his investment-banking counterpart, Douglas Braunstein, worked out an arrangement: The commercial bank gets 25% to 50% of the fees from M&A, debt, and equity deals involving their clients. The system is a success. Last year the investment bank sold almost $500 million in services to middle-market customers, twice as much as two years ago.

It's a prime example of how Dimon thinks a financial supermarket should work. Having a mix of businesses, he believes, has two advantages. It adds stability to earnings--consistent profits from branch banking, say, help smooth out swings in trading--and it should also lift sales, if you make sure that different divisions feed one another.

Dimon has already revamped J.P. Morgan's retail-branch system to encourage greater selling of mortgages, credit cards, and other products. When he arrived, branch personnel got the same pay for pushing products as for dozing behind their desks; 50% of branch managers received bonuses of $8,000 to $18,000. Today, under the watchful eye of retail-banking head Scharf--who instituted a similar plan for Dimon at Bank One--the firm pays big bucks to stars and fires laggards.

Branch managers are ranked based on how much they raise both profit and revenues; the top group gets bonuses as high as $65,000, and the lowest quintile zip. Salespeople in the branches can do even better, collecting "points" for selling credit cards, mortgages, and other products. Last year the biggest point-gatherer pocketed a $145,000 bonus. If you don't make your quota, you're out.

Dimon is bringing that kind of rigor to every corner of the firm. In the old J.P. Morgan, big units combined their results, so it was difficult for top management to figure out which ones were really making money. "Strong businesses were subsidizing weak ones, but the numbers didn't jump out at you," says CFO Cavanagh. "With the results mashed together, it was easy for managers to hide."

The hiding game is over. Right after the merger, Dimon split J.P. Morgan into six major profit centers--investment banking, retail, and cards are the three biggest--with dozens of units that must report like separate companies. Each month, division heads send Dimon 50-page books packed with data, from the ratio of overhead to sales on every product to BlackBerry bills per employee. Then Dimon goes over the reports in grueling sessions that last hours.

"He'll ask, 'Why do we have three times as many HR people in Europe as in Asia?'" says private-banking chief Staley. "'Are we doing something better in Asia?'" Last year the exercise led Dimon to have the communications and marketing department replace expatriates with local hires in its overseas offices, saving more than $100,000 per post.

Transforming the bank's technology is another pillar of Dimon's plan. When he arrived, J.P. Morgan was saddled with mismatched computer systems inherited from Chase, Chemical, and Texas Commerce. Lots of expensive software and interfaces were needed for the different systems to talk to one another, making J.P. Morgan's costs per transaction among the highest in the industry.

The computer confusion also hampered the bank's ability to market more products to existing customers. Sitting with a client, a branch banker couldn't call up much more than a checking history. Nothing popped up about whether the customer qualified for a mortgage or credit card.

On a Saturday in mid-February 2004, a month after the Bank One deal was announced, Dimon brought together the top IT people. He dazzled them with his grasp of protocols and software costs, then told the managers to choose a single platform in any area where multiple systems were in place. "If you don't do it in six weeks," he warned, "I'll make all the choices myself."

The IT managers met the deadline. Now, for example, J.P. Morgan has just one system for credit cards. The new platform, called TSYS, has helped bring down the bank's annual cost of processing statements to $52 per customer from $80. That makes J.P. Morgan one of the most efficient operators in the industry.

In the branches (all of which now carry the Chase brand), computers are now sales tools; the screens prompt bankers to offer customers every Chase product they qualify for but don't have, from home-equity loans to financial planning. One example of the new culture at work: Chase increased the number of credit card accounts opened in the branches by 55% in 2005.

In cleaning up the computer mess, Dimon displayed another tenet of his philosophy: Keep a firm grip on IT. Last year he canceled IBM's seven-year contract to manage J.P. Morgan's computer systems. IT isn't a sideline, he believes, but rather an essential skill the firm should totally control.

"When you're outsourcing it's almost impossible to do the integration, because people don't care that much," he says. "We want patriots, not mercenaries." And of course, he also hates paying the markup for having outsiders do the work.

Cutting costs isn't just about saving money --for Dimon it means freeing up capital to seed new growth. Retail banking is a case in point. When Dimon arrived, the bank employed five people and spent some $750,000 per branch in back-office costs, compared with two employees and $250,000 at Bank One. Consolidating the computer systems helped cut that down--as did eliminating nearly 2,000 support jobs in New York City. Now Chase is approaching Bank One's efficiency.

But Dimon has also spent heavily to upgrade dowdy branch facilities and to take on competition. Dimon and Scharf fired back at New York--area invaders like Bank of America and Wachovia, blitzing the Big Apple with fresh TV, radio, and billboard ads. Chase installed 270 ATMs in heavily trafficked Duane Reade drugstores, the first such arrangement by any bank with a big retailer in New York.

Across the U.S., Chase hired 3,000 new salespeople. Despite the new spending on advertising, systems, and the opening of 150 new branches, Chase managed to raise operating earnings at the retail bank 8% in 2005, to $3.4 billion.

One area that Dimon has not yet tamed is J.P. Morgan's wildly inconsistent trading operation. By its nature, proprietary trading--where firms bet their own capital on the direction of stock prices or interest rates--is risky. J.P. Morgan's problem is that it both makes less money and suffers from far more volatility than rivals like Goldman Sachs and Morgan Stanley.

And while J.P. Morgan's investment bank is raking in fee income (its take tops all rivals but Citi), the division lives and dies on trading. In the fourth quarter of 2005, for example, when the proprietary traders lost several hundred million dollars betting that both oil prices and interest rates would jump, profits at the investment bank slumped 29% from the previous quarter.

Still, Dimon embraces trading, for a simple reason: It's extremely profitable, despite the swings. So he's instituting stricter controls and spreading risks by diversifying beyond fixed-income and derivatives trading into energy and mortgage-backed securities--two fields where competitors were cleaning up. Last year J.P. Morgan hired a crack energy team from Morgan Stanley and recruited mortgage traders from all over Wall Street. Dimon is promising far smoother trading results in 2006. "We'll have less volatility, and we'll get paid more for the swings we do have," he says.

While Dimon would seem to be moving at lightning speed, things are actually going more slowly than he'd hoped. Getting J.P. Morgan's house in order has "probably taken longer than I thought," he says. "We had to increase spending in a lot of areas more than I initially said we would." Ultimately, he expects that spending to lead to greater profits and a higher stock price.

And a higher stock price is important, because even as Dimon lasers in on operations, dealmaking is never far from his mind. Harrison and board member Bob Lipp are out hunting for prospective partners. J.P. Morgan needs to expand its retail-branch footprint in California and Florida, the two big domestic markets from which it's absent. There are a number of banks Dimon could buy to fill those gaps, including SunTrust, Wachovia, and Washington Mutual.

But his grand dream, according to those close to him, is to create a worldwide retail network that rivals Citigroup's--so he also wants to ride the growth wave of the future, Asia. An ideal merger partner would be HSBC, which boasts interests in retail networks spanning from Mumbai to Shanghai. It's that quest that gives added urgency to fixing J.P. Morgan's operational problems and boosting its stock price. It's only when you accomplish those things, says Dimon, that "you earn the right to do a deal."

An extraordinary reunion took place last summer. Citigroup CEO Chuck Prince invited a dozen current and former colleagues, including Sandy Weill and Dimon, to dinner. They gathered in a renovated mansion on the grounds of Citi's Greenwich, Conn., retreat, a place many of them had been coming to since the late 1980s when Commercial Credit bought it. Back then, the building was a ramshackle relic with leaky plumbing and worn furniture, decorated in a style they called "early frat house."

For Dimon, the evening was a replay of good times--lavish dinners lubricated with rare wines from the mansion's hidden cellar--and bad: Seven years earlier, Weill had summoned Dimon to another building at the retreat to fire him. The mood was light, though, as the group joked and reminisced about the old days at the "frat house."

"You finally fixed it up," Dimon said, admiring the sumptuous renovations. Of course, Dimon is deep into a renovation of his own. What was unspoken that evening is that he wants nothing more than to vanquish the very people with whom he was swapping memories. And that's one Jamie story that remains to be told.

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Cdn Banks in the Carribean

BMO Nesbitt Burns, 22 March 2006

Highlights

We believe that properly structured and properly managed, banking in the Caribbean is an excellent business. The islands generally have solid democracies and well-developed infrastructures and, while the economies may be separate, there is extensive movement of goods and people, making a pan-Caribbean footprint quite workable.

This is an ideal environment for Canadian banks to operate in, with their excess capital positions and successful experience in retail and commercial banking. The way we look at it, there are several individual economies where well-run banking franchises can each make 20% ROEs with a growth rate of over 10%.

Canadian banks are very well positioned to capitalize on opportunities in the English-speaking Caribbean banking market. While Scotiabank’s position is well established and well documented, two other Canadian banks, Royal Bank (RBC) and CIBC, also have solid franchises currently. We believe that either (or both) RBC and CIBC will make further strategic moves in the coming years to improve their competitive positions in the region. Deals could involve outright purchase of, or merger with, local competitors.

We recommend the shares of three major Canadian banks at this stage—TD, CIBC and National Bank—but mainly for other reasons. In the case of TD, we think that it offers a great combination of leverage to the strong domestic economy, with some solid U.S. growth platforms. National Bank is, we believe, trading at a relatively inexpensive valuation for a strong regional franchise.

In the case of CIBC, we recommended the shares before the announcement that it intends to acquire Barclay’s stake in FCIB and we believe that the move to increase ownership of FCIB is simply another modest positive. It shows that despite its focus on fixing its domestic cost structure, CIBC is not without some longer-term growth options. From our perspective, the market already appreciates Scotiabank’s strength in this region. It is well documented and well known. Not surprisingly, it is also well reflected in the bank’s above average P/BV multiple.

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More Deals Seen as Insurers Seek to Expand Markets

Reuters, Simon Challis and Ed Leefeldt, 22 March 2006

More insurance takeover bids are likely in the wake of British insurer Aviva Plc's 17 billion pound offer for Britain's Prudential Plc, as companies jockey for position, but analysts are skeptical of a merger-and-acquisition spree.

Although Prudential has rebuffed Aviva's approach, the news, along with recent reports of early takeover talks between St Paul Travelers Cos. Inc and Zurich Financial Services AG, has sparked a frenzy of bid excitement in the sector.

"Where there is this much smoke, there is some fire," said Donald Light, an insurance analyst with Celent LLC. "I think there is big money in play out there."

France's Axa has said it is open to doing a major transaction, while in the United States, Light sees MetLife Inc. and American International Group Inc.as potential buyers.

More takeover talks could be in the offing as insurers look to increase their financial muscle and expand into new markets or countries, analysts argue.

The industry saw merger-and-acquisition momentum develop late last year when Swiss Re agreed to buy General Electric Co.'s reinsurance units for $7.6 billion, and London-based Old Mutual Plc won control of Sweden's Skandia Insurance Co. in a $6.8 billion cash-and-stock hostile takeover.

Analysts have predicted that the pace of consolidation may quicken this year as insurers have rebuilt their balance sheets after the World Trade Center disaster as well as the bear market that ended in 2003.

Strong operating conditions in both life and non-life insurance means companies are generating surplus cash that could go into war chests for acquisitions.

"Surplus capital is growing at 5 percent among property casualty insurers, while premium growth is only 1 percent," said Stephan Christiansen, director of research with Conning Research & Consulting Inc. "That puts pressure on companies to use that money."

In February, Hartford Financial Group Inc. Chief Executive Ramani Ayer said he expected to have excess capital of $1.5 billion by 2006 that he could use for acquisitions or other purposes. Canada's Manulife Financial Corp. has said it has $3 billion available for possible purchases.

Worries among top-ranking European insurers that a deal between rivals could drop them down the rankings has spurred a number to begin tentative bid talks with rivals, bankers say.

But analysts have indicated that shareholders remain wary of giving the go-ahead for big deals unless there is a clear logic behind them.

"We continue to believe that M&A activity, though potentially increased, will continue generally to be disciplined and focused, fulfilling hard economic as well as strategically sound criteria," said the European insurance team at specialist investment bank Fox-Pitt, Kelton in a note.

The bid by Aviva, Britain's biggest insurer, for rival Prudential is widely regarded as have a strong strategic logic. Aviva looks for Prudential to bring it thriving and fast-growing businesses in Asia and the United States, where it lacks presence.

In the same way, Bermuda insurers, hit hard by the hurricanes, may look to acquire Lloyd's of London insurers in an attempt to diversify their business and to limit their losses from future disasters.

Other Bermuda-based firms may be open to a takeover, said Peter Streit, an analyst with Williams Capital. "Their monoline (single insurance) strategy didn't hold up as well as a global multiline company," Streit said.

For life companies, mergers will be dictated by economies of scale, said Mark Rouck, an analyst with Fitch Ratings.

"The cost savings when you put two of these companies together may be substantial," said James Ellman of Seacliff Capital, a hedge fund. "But it ultimately comes down to when these companies want to sell."

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The Economist, 21 March 2006

Aviva has offered £17 billion to buy Prudential, a rival British insurer. A successful deal would create a domestic champion to rival Europe’s biggest insurers. But Prudential may prefer to wait for a better offer from abroad, as the industry braces for a new wave of mergers

PROPONENTS of free markets shudder at the mention of creating “national champions”. Of late, European governments have promoted economic nationalism by favouring mergers between domestic firms to exclude foreign competition. Yet the urge to build a national champion is one reason proffered by Richard Harvey, the boss of Aviva, Britain’s biggest insurer, to explain his firm’s all-share offer for Prudential, a home rival. The deal is worth some £17 billion ($29.9 billion). Luckily, commercial instinct not political meddling is the driving force behind this and other potential tie-ups among the world’s insurers.

A successful deal would create the world’s fourth-largest insurer by market capitalisation and has a “compelling strategic, financial and operational logic” says Mr Harvey. But Prudential is not convinced. On March 18th, the smaller firm turned down Aviva’s bid as not in the interests of its shareholders. Aviva hopes the shareholders will disagree and push Prudential’s board to the negotiating table to consider the current offer. Another option would be a hostile bid, appealing directly to the shareholders without the approval of Prudential’s board, but Aviva have ruled that out for now. Failing that, a higher bid may be needed.

Business looks bright for the two companies, so Prudential can afford to be choosy. Both made healthy profits last year, delivering much improved performances compared with the previous 12-month period. But forming a bigger company could make sense too. Consolidation is gathering pace across the industry worldwide, so combining the two could provide the scale and international reach to allow competition with big international insurers. The combined market captialisation of Aviva and Prudential would put it on a par with Europe’s insurance giants: AXA, of France, and Allianz, of Germany.

Even if Aviva is unsuccessful, its approach to Prudential could yet flush out other offers for Britain’s second-biggest insurance firm. AXA has long had its eye on Prudential. AIG, the American insurance giant, is also touted as a potential suitor despite its recent travails. So too is Prudential Financial, an American insurer that is not (yet) connected with its British namesake.

There are whispers of mergers throughout the insurance industry. Standard Life, a medium-sized British insurance company, is also talked of as a likely takeover target. Rumours have flourished for years of a tie-up between AXA and Generali, Italy’s biggest insurer. A transatlantic merger of some sort is widely expected. Recent reports suggested that St Paul Travelers, another huge American insurer, had held tentative merger talks with Switzerland’s Zurich Financial Services. The American firm has since denied making any such overtures.

The latest flurry of activity in the industry comes after some sizeable deals at the end of last year. In September Allianz paid €5.7 billion ($6.9 billion) to take full control of one of Italy’s biggest insurance firms. In November, Swiss Re paid $6.8 billion for GE Insurance Solutions, the reinsurance business of the giant American industrial and financial conglomerate. Another deal begun last year, the acquisition of Sweden’s Skandia by Old Mutual, a South African insurer, is close to completion.

Insurance companies are generally bullish after several lean years. Insurers make money from premiums and investing to raise funds to pay for future claims. For a time sluggish stockmarkets hampered profitability but these have looked a lot more buoyant recently. And new European regulations on capital levels favour insurers that are big and diverse.

A combination of Aviva and Prudential seems a good fit. Knitting together two British-based firms would avoid complications that inevitably accompany a cross-border takeover. There is not much overlap between the two companies’ operations in Britain, where the insurance business is growing slowly. Insurers are keenest to expand in booming markets elsewhere, especially in developing countries, and here the firms are well placed too. Aviva is strong in Europe whereas Prudential has operations both in America and the fast-growing markets of China and India. Aviva’s general-insurance arm is generating healthy returns which could provide funds to bolster expansion in America and in Asia.

Prudential’s life insurance business has not provided such rich pickings. In 2004 the firm was forced to raise £1 billion through a rights issue to fund expansion of its UK business and comply with EU funding requirements. But its shares are soaring now. Speculation mounted over the weekend that Aviva would improve its offer despite its protestations to the contrary. Another suitor from Europe or America could also dive in with a higher cash bid which Prudential will find harder to resist. Either way, the insurance business looks set for another round of consolidation. And this time global champions, not just national champions, may emerge at the end.

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UBS Raises BMO Target Price

The Globe and Mail, Angela Barnes, 20 March 2006

UBS Securities Canada Inc. has upped its 12-month price target for Bank of Montreal to $71 from $67, but maintained its “neutral” rating on the stock. The bank closed Monday at $66.17 on the Toronto Stock Exchange.

Jason Bilodeau, who follows the bank for UBS, made the change after spending time marketing with BMO's newly appointed chief operating officer, Bill Downe, in Europe. Mr. Downe is one of the front runners to replace Bank of Montreal chief executive officer Tony Comper, who is set to retire in April, 2007.

“For the most part, we found investors to be fairly receptive to the BMO story, particularly its track record of consistent credit management as many investors remain focused on the outlook for credit trends,” Mr. Bilodeau said in a report Monday. Investors were also particularly interested in BMO's Chicago-based Harris Bank and U.S. acquisitions, he added.

Mr. Bilodeau noted that BMO continues to hold excess capital in anticipation of acquisition opportunities in the United States. The analyst said transactions in the order of $200-million (U.S.) to $500-million appear to be more likely than larger deals, although larger deals are not out of the question. “If there are not reasonable acquisitions prospects, we see management returning capital to shareholders via buybacks, dividends or possibly special dividends,” he said.

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S&P Upgrades TD Ameritrade

TD Ameritrade Holding : Ups to 3 STARS (hold) from 2 STARS (sell)
S&P, Analyst: Robert Hansen, CFA

We are impressed by TD Ameritrade Holding's trading volumes in January and February, which significantly exceed our estimates. Furthermore, we think higher margin rates and relatively stable commission rates should benefit earnings per share (EPS) growth in fiscal year 2006 (ending September). Although trading volumes can be highly volatile, we think improving equity markets will benefit investor confidence. We are raising our fiscal year 2006 (ending September) EPS estimate to 95 cents from 90 cents. Our 12-month target price goes to $22 from $18, or about 23 times that estimate. Though we see improving fundamentals, we view the premium on TD Ameritrade Holding shares as appropriate.

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DBRS Confirms Ratings of BMO

Sale of direct investing operation strengthens U.S. businesses

Investment Executive, James Langton, 17 March 2006

Dominion Bond Rating Service today confirmed its ratings of Bank of Montreal.

The firm says that the ratings and stable trends reflect Bank of Montreal’s sizeable domestic franchise. DBRS says that the bank is focused on maintaining solid domestic consumer, commercial, and wholesale businesses, which it believes should contribute to strong profitability. BMO also has a favourable financial risk profile that positions the bank for growth opportunities through acquisitions or organically, it notes.

Additionally, BMO continues to grow its U.S. retail banking franchise, Harris Bankcorp Inc. In 2005, BMO management reiterated its desire to make more substantial acquisitions in order to become a U.S. Midwest super-regional bank.

In DBRS’s opinion, one of the primary challenges associated with its super-regional banking strategy is execution risk as future acquisitions are expected to be larger than historical purchases and outside of Harris’ contiguous footprint. “Historically, U.S. retail banking acquisitions have been within the Chicagoland area, where BMO has long-standing relationships with sellers,” it notes. “While the premiums accorded US banks is high, DBRS believes BMO will be disciplined in making a larger acquisition given its track record.”

During the year, BMO strengthened its U.S. businesses with the sale of its underperforming US direct investing operation Harrisdirect, it notes. “While not a material impact on the ratings of BMO, the sale does free up management time to focus on growing Harris, private banking, and investment banking operations in the US,” it suggests.

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DBRS Confirms Ratings of CIBC

Ratings agency notes improvement in business practices, corporate governance

Investment Executive, 15 March 2006

Dominion Bond Rating Service today confirmed the ratings of CIBC, with trends remaining stable. The ratings agency suggested that capital levels and reputation risk management are the key to higher ratings.

The bank’s ratings are supported by CIBC’s lower-risk retail business mix and progress in improving its expense ratio, which should contribute to earnings stability and credit quality, therefore better positioning CIBC for future downturns, the rating agency explained.

On the downside, the ratings are limited by CIBC’s capital levels (relative to peers). DBRS also has concerns regarding management’s ability to manage reputation-related risk, although it notes the bank has been making progress.

The rating agency said that CIBC’s intention to acquire Barclays Bank plc’s 43.7% ownership stake in FirstCaribbean International Bank, represents a meaningful negative impact of reducing tangible common equity to risk-weighted assets and Tier 1 capital ratios. It says that CIBC’s objective is to maintain a Tier 1 capital ratio at or above 8.5% upon close of the transaction (late 2006). DBRS expects this will be achievable but the capital ratios will be lower relative to its peer group, therefore limiting CIBC’s ability for future expansion or to absorb unforeseen events that impact capital. DBRS expects it will take some time for the gap between CIBC and its direct competitors to narrow.

During the year, CIBC has been making progress in addressing DBRS’s concerns regarding the bank’s ability to manage reputation-related issues. DBRS says it anticipates actions taken should help to mitigate some of the reputation-related issues that negatively impacted CIBC in the past, but reputation-related risk management remains an ongoing challenge. “CIBC has improved business practices, strengthened corporate governance, created an independent internal oversight committee to monitor compliance, and created a new CEO incentive compensation model that is more consistent with a longer-term view on CIBC’s performance,” it said.

“Raising capital to levels closer to direct competitors and ongoing management of reputation-related issues will be the catalyst for positive rating actions by DBRS, assuming that earnings and credit quality strengths can also be maintained. On these metrics, CIBC continued to perform well in Q1 2006,” DBRS said.

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TD Banknorth Warns Earnings Estimates 'Too High'

Reuters, 15 March 2006

TD Banknorth Inc., a large Northeast U.S. bank, said analysts' consensus forecast for first-quarter profit of 60 cents per share was "too high," leading some analysts to cut their estimates.

Chief Executive William Ryan said at an investor conference on Tuesday that first-quarter profit should be between 55 cents and 60 cents per share. The Portland, Maine-based bank also disclosed its forecast in a U.S. Securities and Exchange Commission filing.

The average analyst estimate, according to Reuters Estimates, on Wednesday called for a profit of 56 cents per share.

Canada's Toronto-Dominion Bank last year paid $4 billion for a 51 percent stake in TD Banknorth.

Analyst Mark Fitzgibbon of Sandler O'Neill & Partners LP cut his estimate for first-quarter profit by 5 cents per share to 55 cents. He cited Ryan's comments that TD Banknorth faces "continued margin pressure as well as a difficult loan and deposit gathering environment."

The Federal Reserve has increased short-term interest rates 14 times since the middle of 2004, but long-term rates have changed little, crimping bank margins.

Earlier this year, TD Banknorth paid about $1.9 billion to purchase Hudson United Bancorp Inc., adding more than 200 branches in New Jersey, Connecticut, New York and Pennsylvania.

In his presentation, Ryan said, "The Hudson United integration is going well, but has delayed some planned initiatives in our existing footprint."

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Scotiabank-AGF Gossip

The Globe and Mail, Derek DeCloet, 15 March 2006

When you run the best-performing large bank of the past 20 years, losing doesn't sit well. But every month brings Rick Waugh a reminder of Bank of Nova Scotia's biggest weakness, and a new theory on how he's going to fix it.

The Big Five banks are conducting a stealth takeover of the mutual fund business. Scotiabank is missing out. Its fund division is half the size of the next-biggest bank rival. Worse, the monthly sales data show it's losing market share. This RRSP season, Royal Bank's fund unit took in nearly $2-billion in new money; Scotiabank's got $85-million, excluding sales of funds managed by other companies.

Everyone knows this, which is probably why there's so much life to the rumour that Scotiabank is courting AGF Management.

The gossip has a few incarnations. The most recent says Scotiabank would sell its fund operations (or some part of them) to AGF in return for an equity stake. This is the deal-du-jour in financial services -- Merrill Lynch just swapped its asset management unit for a stake in BlackRock, and Citigroup handed over its funds to Legg Mason. Sun Life Financial set the precedent in Canada four years ago when it gave up Spectrum, its in-house mutual fund company, for about one-third of CI Financial. It's been a fine deal for both sides.

So, how about it? "I don't know where this is all coming from," says AGF chief executive officer Blake Goldring, whose family is the controlling shareholder. "There's nothing going on."

Pity, because the idea looks an elegant solution -- for both.

For Scotiabank, an asset trade might be the only answer. With less than $16-billion in fund assets and few compelling products to sell, it can't grow its way back into the game. (The number excludes about $1.7-billion in Scotia Partners Portfolios, packaged funds-of-funds that are primarily managed by outsiders, such as Mackenzie Financial, Fidelity and, yes, AGF.)

Mr. Waugh has plenty of dough for an acquisition -- the bank carries about $4-billion in excess capital, National Bank Financial analyst Rob Wessel says. Trouble is, most independent fund companies are too small to make a difference to Scotiabank's bottom line. A larger purchase, such as AIC or AGF, comes with a heap of good will, which banks try to avoid because Canadian capital rules punish them for it. But a simple asset-for-equity swap with AGF comes with no capital hit for the bank.

As for Mr. Goldring, it would allow him to make up for lost time. AGF has dropped to 10th place from 6th among fund companies in five years for reasons that are well documented -- the unexpected divorce from Brandes Investment Partners, a 3½-year streak of net redemptions that was stopped only last month. The company has stabilized and the stock is up 35 per cent in a year. "The AGF story just gets better and stronger by the month," Mr. Goldring says. Still, a danger looms: Price competition is heating up and AGF's funds are on the expensive side.

One way for the company to protect itself would be to bulk up. Fund management has great economies of scale. CI, an acquisition machine, has 39-per-cent pretax margins. AGF, which is less than half CI's size, had margins of about 18 per cent last year. The companies are far from identical and there are accounting differences, but that gap is glaring.

Mr. Goldring has tried to turn AGF's independence into a virtue, believing that an asset manager with no ties to any brokerage house is better able to sell its funds to financial advisers and planners from all firms. That may have been so in the 1990s but is less true today. Most advisers just want to make a commission and give their clients a decent return. RBC brokers will sell TD funds, CIBC brokers will sell RBC funds, if that's where the money is. There's no reason to believe they would boycott AGF if it joined with Scotiabank.

The truly sticky issue is power. AGF's minority shareholders have no vote, no annual meeting and no say in the company's direction. Scotiabank, which would probably be its largest shareholder, would want some control. Would the Goldrings give it to them?

If not, it's back to square one for Rick Waugh, and to the rumour mill for everyone else.

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Manulife Continues to Gain Ground in US Variable Annuities

Scotia Capital, 14 March 2006

• U.S. variable annuity Q4/05 industry statistics were released late last week.

• While Manulife continues to gain market share in terms of both sales and assets, the same cannot be said for Sun Life. Manulife's market share and positioning in variable annuity sales continues to climb, up from 5.6% to 6.0% QOQ, with market positioning increasing from #9 at the beginning of 2005 to #7 at the end of the year (and up from #8 as at Q3/05). More importantly, in terms of assets, Manulife's market share of total U.S. variable annuity assets continues to climb, up from 3.1% at Q3/05 to 3.23% at Q4/05 (and increasing to #10 rank at the end of 2005 vs. #11 at Q3/05 overall in terms of assets). Despite efforts to ramp up distribution and improve product, Sun Life's market share in terms of U.S. variable annuity sales, at 1.0%, has not moved throughout 2005, remains below its 2004 level, and well below 2001-2003 levels. In terms of assets, the company's market share continued to decline (from #17 and 1.35% at Q3/05 to #17 and 1.24% at Q4/05), as negative net sales for the insurer continue to hurt asset growth. The big continue to get bigger in U.S. variable annuity, and cracking the top 10 in terms if assets and/or sales is becoming increasingly difficult in this business.

• Sun Life's heavy investment (we estimate $30 million) in expanding U.S. variable annuity distribution is expected to bear fruit in early 2006 - we remain somewhat sceptical. The company notes that it there is a lag before the impact of the 50 wholesalers recruited over the last twelve months begin to significantly impact the bottom line. We remain somewhat sceptical. Furthermore, net sales continue to be negative, and at negative US$926 million (2005), are US$307 million behind last year's comparables, well below top ten players such as Manulife (at positive US$4.6 billion), Lincoln (at positive US$3.7 billion) and Prudential (at positive US$1.4 billion), all of whom have seen net sales increase in 2005.

• Sun Life hopes to climb into the top ten in the next three-four years. We remain sceptical. Assuming the industry increases sales at a rate of 5% per annum, Sun Life must increase its sales at an annual rate of over 40%, a tall order in our opinion.

• Expanding and diversified distribution as well as an excellent product offering continues to help Manulife. Manulife continues to benefit from excellent product and an expanding and diversified distribution system. We see no reason for this sales momentum to not continue through 2006.

• Sun Life continues to be a show me story, while Manulife, in our opinion, is already there and then some. Currently the spread between the companies in terms of a forward P/E multiple is 9%, above its 6% historical average. We remain somewhat sceptical as to Sun Life's ability to significantly increase marketshare (and achieve its goal of top ten in the next three years) in the highly competitive U.S. variable annuity market, and as such believe the relative multiple spread between the two companies will more than likely remain above historical averages, and continue to expand, rather than contract.

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