RBC Capital Markets, 20 June 2006
Last week, RBC Capital Markets hosted investor meetings with four of the big six banks. On average, we came away from the meetings more inspired on the group. We believe the themes supported our Outperform ratings for RY and NA, while our Sector Perform ratings for BNS and CIBC seem about right in the context of an over-weight recommendation for the sector as a whole.
Royal Bank of Canada – Explaining Wholesale
CEO Gord Nixon was very comfortable and forthright is his discussion. He demonstrated a sharpened bankwide knowledge base and dealt head-on with investor concerns that wholesale is growing too fast and contributing too much (implying RY could fall harder in a downturn on revenue pull-back and loan losses).
RBC provided some new slides and disclosures in its current investor package: (i) trading still represents only 10% of total revenue (low end of the range since 2003); (ii) trading volatility, at 14% standard deviation to the mean, is half the peer average of 29%; (iii) RY and its Canadian peers are below global banks on a risk / return basis (daily trading revenue versus 1-day VaR) and resisting internal pressure to match, and; (iv) business loans, at 13% of total, is still below 16% average. Further, RBC has executed 21 deals in last 5 years, all of which have been directed at P&C and none at wholesale banking.
CIBC – Revenue Concerns Persist
CEO Gerry McCaughey and team spoke to several areas of concern, from which we believe the key takeaways were: (i) get ready for another round of cost cuts at year end, as we mused in our last note it could be $300MM+ this time (up from the current $250MM program), and; (ii) CIBC seems more optimistic for revenue growth in second half of 2006, but we are still concerned they will be disappointed.
Revenue in retail is still vulnerable as the bank continues to shift from variable to fixed mortgages as well as unsecured to secured loans, which means poor sales and lower spread in the mean time. Credit cards remain under pressure – CIBC is no longer taking the monoline approach. The bank’s in-branch sales offer includes a total of 25,000 Aeroplan points available for balance transfers, chequing and deposit accounts. The wealth management cross-sell was actually uninspiring to us and we think the bank may be under-promising on this front. It sounds like wholesale will start growing again in 2007, as CIBC is convinced they can turn on the tap and hit the ground running again, which we think is reasonably compelling.
Bank of Nova Scotia – International Keeps Growing
We had a great expansive meeting with CEO Rick Waugh. At least half the meeting was focused on Scotia International, including the Costa Rican Interfin deal and the political environment. Waugh outlined the very cogent and compelling macro outlooks for Central American and Caribbean growth: (i) CAFTA for internal trade, and (ii) few foreign bank competitors make for a good pricing environment. Clearly BNS is a lot more comfortable than the market with the various Latin American and Mexican political concerns. There were lots of anecdotal stories of how most regions are following Mexico’s lead of opening the bank system and avoiding dictatorial regimes.
Scotia’s domestic revenue growth has been the bank’s weak link. Management argues BNS’ spread will recover more now as they attribute funding costs more directly to retail. They stress that looking at bank-wide spreads, which appear more stable, is more instructive. If and/or when domestic retail spreads outperform or catch up to the group, a negative could be lifted from the stock. To address the revenue issue, Waugh indicated the bank needs a material improvement in its wealth leverage, which we read as an acquisition.
National Bank of Canada – Perspective on Partners
Investors continue to look for more granularity on the Partners Program and the influence on volumes and margins in the P&C bank. However, we recognize that National must balance confidentiality agreements in place with its partners with the need for additional disclosure. We will watch for progress on this front over the course of the next 12-18 months.
Pierre Desbiens, SVP Sales and Personal Banking, gave us a better understanding of the client segmentation strategy and distribution network of the retail bank. To facilitate cross-selling, the bank has: (i) 1500 financial advisors, which are typically associated with specific products (ie. GICs); (ii) 300 personal bankers, which deal with assigned clients, and; (iii) 325 financial planners, which deal with the wealthy clientele. NA is focused on expanding all three layers, particularly through internal growth, and continues to “assign” a growing proportion of its client base. All of these in-branch advisors, planners and bankers are separate from NB Financial’s full service brokers.
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Last week, RBC Capital Markets hosted investor meetings with four of the big six banks. On average, we came away from the meetings more inspired on the group. We believe the themes supported our Outperform ratings for RY and NA, while our Sector Perform ratings for BNS and CIBC seem about right in the context of an over-weight recommendation for the sector as a whole.
Royal Bank of Canada – Explaining Wholesale
CEO Gord Nixon was very comfortable and forthright is his discussion. He demonstrated a sharpened bankwide knowledge base and dealt head-on with investor concerns that wholesale is growing too fast and contributing too much (implying RY could fall harder in a downturn on revenue pull-back and loan losses).
RBC provided some new slides and disclosures in its current investor package: (i) trading still represents only 10% of total revenue (low end of the range since 2003); (ii) trading volatility, at 14% standard deviation to the mean, is half the peer average of 29%; (iii) RY and its Canadian peers are below global banks on a risk / return basis (daily trading revenue versus 1-day VaR) and resisting internal pressure to match, and; (iv) business loans, at 13% of total, is still below 16% average. Further, RBC has executed 21 deals in last 5 years, all of which have been directed at P&C and none at wholesale banking.
CIBC – Revenue Concerns Persist
CEO Gerry McCaughey and team spoke to several areas of concern, from which we believe the key takeaways were: (i) get ready for another round of cost cuts at year end, as we mused in our last note it could be $300MM+ this time (up from the current $250MM program), and; (ii) CIBC seems more optimistic for revenue growth in second half of 2006, but we are still concerned they will be disappointed.
Revenue in retail is still vulnerable as the bank continues to shift from variable to fixed mortgages as well as unsecured to secured loans, which means poor sales and lower spread in the mean time. Credit cards remain under pressure – CIBC is no longer taking the monoline approach. The bank’s in-branch sales offer includes a total of 25,000 Aeroplan points available for balance transfers, chequing and deposit accounts. The wealth management cross-sell was actually uninspiring to us and we think the bank may be under-promising on this front. It sounds like wholesale will start growing again in 2007, as CIBC is convinced they can turn on the tap and hit the ground running again, which we think is reasonably compelling.
Bank of Nova Scotia – International Keeps Growing
We had a great expansive meeting with CEO Rick Waugh. At least half the meeting was focused on Scotia International, including the Costa Rican Interfin deal and the political environment. Waugh outlined the very cogent and compelling macro outlooks for Central American and Caribbean growth: (i) CAFTA for internal trade, and (ii) few foreign bank competitors make for a good pricing environment. Clearly BNS is a lot more comfortable than the market with the various Latin American and Mexican political concerns. There were lots of anecdotal stories of how most regions are following Mexico’s lead of opening the bank system and avoiding dictatorial regimes.
Scotia’s domestic revenue growth has been the bank’s weak link. Management argues BNS’ spread will recover more now as they attribute funding costs more directly to retail. They stress that looking at bank-wide spreads, which appear more stable, is more instructive. If and/or when domestic retail spreads outperform or catch up to the group, a negative could be lifted from the stock. To address the revenue issue, Waugh indicated the bank needs a material improvement in its wealth leverage, which we read as an acquisition.
National Bank of Canada – Perspective on Partners
Investors continue to look for more granularity on the Partners Program and the influence on volumes and margins in the P&C bank. However, we recognize that National must balance confidentiality agreements in place with its partners with the need for additional disclosure. We will watch for progress on this front over the course of the next 12-18 months.
Pierre Desbiens, SVP Sales and Personal Banking, gave us a better understanding of the client segmentation strategy and distribution network of the retail bank. To facilitate cross-selling, the bank has: (i) 1500 financial advisors, which are typically associated with specific products (ie. GICs); (ii) 300 personal bankers, which deal with assigned clients, and; (iii) 325 financial planners, which deal with the wealthy clientele. NA is focused on expanding all three layers, particularly through internal growth, and continues to “assign” a growing proportion of its client base. All of these in-branch advisors, planners and bankers are separate from NB Financial’s full service brokers.
