22 March 2006

Cdn Banks in the Carribean

BMO Nesbitt Burns, 22 March 2006


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.