31 January 2007

TD Bank Plans No Dividend Payout Ratio Hike

Financial Post, Duncan Mavin, 31 January 2007

Investors in Toronto-Dominion Bank will not be paid a bigger share of the bank's earnings until there is a downturn in the financial-services industry, said TD's chief executive yesterday.

TD reported record earnings in 2006 of $4.6-billion, up from $2.2-billion the previous year.

But the bank did not touch its 40% target dividend payout ratio -- the proportion of earnings it pays out to shareholders.

There will be no change in that dividend policy until an economic slowdown puts the brakes on earnings growth, said TD chief execiutive Ed Clark, who was speaking to the Citigroup Financial Services Conference in New York.

TD has one of the lowest dividend payout ratios of all of Canada's banks. Royal Bank of Canada and Canadian Imperial Bank of Commerce have dividend payout ratio targets of 40% to 50%. Bank of Montreal increased its target payout ratio to 45% to 55% in May.

But Mr. Clark said there is no need to raise the targeted payout ratio to give more to shareholders when earnings are increasing. If profits rise then investors will get more back in the form of dividends even if the ratio of dividends to earnings stays the same.

Raising the dividend target during periods of rising earnings is "like having a nice meal but you're hungry the next d ay," Mr. Clark said.

Instead, it makes more sense to raise the payout ratio when earnings are falling, because that is the only way to maintain the actual amount of dividend paid out.

There was some speculation on Bay Street that BMO's decision to hike its dividend payout ratio last year would be followed by the other banks. But that has not been the case.

"I'm not that surprised that we haven't seen a more dramatic shift in dividend policies in the sector," said Jason Bilodeau, an analyst at UBS Investment Research.

"You have to balance near-term dividend policy against the medium- term outlook for sustainable earnings, reinvestment opportunities, share buybacks and acquisitions. I think you'll continue to see a pretty gradual climb in payouts across the group"

TD's Mr. Clark said his bank will return earnings to shareholders through share buybacks, and will also invest excess capital in its U.S.-based retail-banking subsidiary, TD Banknorth.

TD has made an offer to buy the 43% of Portland, Me.-based TD Banknorth it does not own. The Canadian bank is hopeful Banknorth's shareholders will vote in favour of its takeover offer this month.

Mr. Clark also confirmed that there will be no acquisitions in 2007 at Banknorth, which operates across the U.S. Northeast. However, the TD chief said there could be small acquisitions of between US$2-billion and US$3- billion at Banknorth starting in 2008.

30 January 2007

TD Bank CEO Comments on US Expansion Strategy

Bloomberg, Sean B. Pasternak, 30 January 2007

Following are comments made today by Toronto-Dominion Bank Chief Executive Officer Edmund Clark at a conference sponsored by Citigroup Inc. in New York.

Toronto-Dominion, Canada's second-largest bank by assets, offered in November to buy the 43 percent of Portland, Maine- based TD Banknorth Inc. that it doesn't already own for $3.2 billion in cash. The bank also owns about a third of TD Ameritrade Holding Corp.

On the outlook for TD Banknorth:

``Banking in the U.S. hasn't been a particularly great business over the past year or so, and I think faces tough prospects over the next couple of years.

``We see a market in which the deposit base isn't growing particularly rapidly, and we do see the potential for deteriorating credit.

``On the other hand, we also see tremendous opportunity in the U.S. We find that many of these small banks in the United States, indeed even medium-sized banks, are relatively unsophisticated on a world scale.

``We think the things that we need to do to improve the performance of Banknorth are all things that we know how to do.''

On making acquisitions at TD Bankorth:

``We're going to have a pause in terms of acquisitions for 2007 while we prove out that these techniques actually do work when you do export them, and that we do improve the performance of Banknorth and then we'll look to do small acquisitions that give us the positions we want in the marketplace and then build out from those acquisitions.''

On cost savings at TD Ameritrade:

``We're still in the early days of rolling out those synergies, but the main bump will come in the fourth quarter of this year, 2007, where the costs come out when you do the conversion. Ameritrade has a great track record of doing a number of these, of getting the costs out.

``So mathematically, there's a tremendous boost to our earnings as we did this transaction and as we roll out the cost synergies.''

29 January 2007

Canadian League Tables for 2006

Financial Post, Barry Critchley, 29 January 2007

Raising equity capital is the most financially rewarding part of the underwriting business. As a rule the dealers can expect to pocket at least 4% for their efforts. And the fee often goes higher when the underwriters sell stock on behalf of less-well known or junior issuers. In those situations, the basic fee could be 6% to 7%, which rises when so-called underwriters warrants are issued to the firms doing the underwriting.

Because of the larger-than-normal fees, the business is also very competitive with lots of firms chasing the same customers.

For 2006, there is a new name at the top of the leaderboard: after many years of swallowing the dust of perennial winner CIBC World Markets, RBC Capital Markets emerged as the leading equity underwriter on the basis of awarding the full credit to the book runner. On that basis, the book runner receives the full value of the amount of capital being raised while the other members of the syndicate receive nothing.

For the year, RBC ran the books on 94 equity financings; those deals raised $8.586 billion. Its biggest deals included:

Teranet Income Fund (a $762 million deal where it shared the book-running duties with CIBC); Pengrowth Energy Trust (which did two deals, one for $526.8 million and the other for $461.0-million); Air Canada (a part treasury, part secondary issue for $525 million that amounted to the initial public offering for the country¹s largest airline. TD Securities and Citigroup were the joint-book runner.); Addax Petroleum (the African-based oil producer was involved in two deals, a $450 million initial public offering and a $401 million issue done in August to help fund the purchase of Pan-Ocean Energy) and a $430 million offering by Oil Sands Sector Fund, the largest structured product offering for the year.

In all, RBC was either the book runner or joint book runner for six of the largest 10 common equity deals in 2006.

CIBC World Markets was in second place with 111 deals for $7.715 billion. TD Securities -- 52 deals for $3.549-billion -- was in third place, its highest ranking in many years.

GMP Securities -- a non-bank publicly listed income trust -- posted a banner year: It ran the books on 72 deals which raised $2.841 billion. That performance was good enough for fifth place on full credit to book runner.

(Indeed on this basis five of the top 10 firms last year were non-bank.) National Bank Financial, the smallest of the Big Six banks ended up in eleventh place.

Overall for 2006, $45.377 billion of equity capital was raised for our tables equity capital includes common shares, preferred shares, units of limited partnerships, units of income trusts and structured products.

Compared with 2005, RBC added 2.66 percentage points of market share in 2006. It ended up with a 19.26% share on 6% more business. The 2005 winner, CIBC lost 5.42 percentage points to market share while its business dropped by 29%.

A closer look at the numbers reveals that CIBC World Markets has much to be pleased with: On the so-called syndicate basis, it was the top-ranked firm last year. The syndicate basis is a measure of how much equity capital a particular firm actually placed. Accordingly, it is the aggregate measure of how much a particular firm sold for all its corporate clients for all the deals in which it was involved. As such is a measure of how much the firm got paid for doing what it does.

On that basis, CIBC was a syndicate member for 250 equity financings and raised $4.985- billion. RBC was in second place with 191 deals which raised $4.890 billion. BMO Nesbitt Burns -- which was the fourth ranked firm on the basis of full credit to book runner -- emerged in third place under this basis with 260 deals for $4.222 billion.

The numbers show that Canaccord Capital was the most active firm: It was in the syndicate for 425 financings. When the equity tables are broken down even further more interesting detail is revealed.

For instance: When issues of common shares are considered in isolation two independent firms, GMP and Canaccord, topped the poll. (For GMP, that result is a repeat of 2005.) The former ran the books on 69 deals which raised $2.751 billion while the latter weighed in with 120 deals for $1.869 billion.

Indeed, six of the top 10 firms were non-bank owned. Merrill, Sprott, Peters & Co. and Orion Securities were the other four non-bank owned firms to place in the top 10.

Part of the reason for the dominance of the non-bank owned firms was that 2006 was a year for the miners. GMP and Canaccord are both strong in that sector. For instance: Blue Pearl, ($230-million by GMP and UBS); Silver Wheaton (two deals, one for $228.6 million and another for $199.7 million, both done by GMP); Coalcorp Mining ($207 million by GMP and Canaccord); Yamana Gold ($200 million by Canaccord and Merrill); Ivanhoe Mines ($189.2 million by BMO and GMP); and Eldorado Gold ($186.3 million by Orion) were all in the top 20 by size.

Kevin Sullivan, chief executive officer at GMP Capital Trust, said 'our number one ranking in common equity underwriting is a testament to our growing franchise and our strong commitment to the Canadian mid-market, which generated much of the financing activity in 2006. We continue to build our own franchise by helping great Canadian growth companies with their capital market needs, he added.

Four bank-owned firms -- RBC, BMO, TD and CIBC -- were in the top 10 with RBC (25 deals for $1.579-billion) being the leader. Its big deals were Air Canada ($525-million split three ways); Addax (two deals for $902-million split three ways); First Uranium ($203-million) and Yamana Gold ($200-million) and NovaGold ($200.8-million split three ways.) National Bank (10 deals for $215.6-million) and Scotia Capital (one deal for $134-million) finished 27th and 33rd respectively. Scotia (whose one deal was for Addax) has already led three common equity deals this year.

For issues of income trusts, bank-owned firms filled the top six slots:

CIBC was the winner -- 32 deals for $4.196-billion -- comfortably ahead of RBC (26 deals for $3.436-billion). CIBC's larger trust issues included: Teranet ($762-million as a joint book runner); Canetic Resources ($690-million with three book runners); Harvest (two deals, one for $230-million of equity and the other for $638 million of units and convertibles); Yellow Pages ($381-million of equity done jointly and a $300-million convertible also done jointly); Enerplus ($253.5-million); Jazz Air ($250-million done jointly); and Calloway REIT (one for $226.1-million and another for $225-million.)

When issues of common shares and income trust units are added together, RBC emerged as the winner -- 51 deals for $5.015-billion, just ahead of CIBC: 54 deals for $4.967-billion.

Initial public offerings were dominated by income funds. For 2006 there were 27 offerings which raised a total of $7.695-billion. Teranet ($762-million), Jazz Air ($250-million), Resolve Business Outsourcing ($225-million), Crombie REIT ($215.1-million) and Supremex ($200-million).

RBC was the winner: seven deals for $789.3-million, while Canaccord did the most: 37 deals for $316.1-million.

There were 93 IPOs by corporations with Air Canada ($562.5- million); Addax ($450.5-million); North American Energy Partners and First Uranium ($233.5-million) all doing deals of at least $200-million. RBC was the leading firm in terms of corporate IPOS: seven deals for $1.029-billion.
Financial Post, Barry Critchley, 29 January 2007

RBC Capital Markets, the securities unit of the country¹s largest financial institution, Royal Bank of Canada, was the leading underwriter of Canadian corporations and governments for 2006 in the annual underwriting rankings compiled by the Financial Post. RBC was also the winner in the 2005 rankings.

According to the FP Data Group, RBC Capital Markets was the lead underwriter and/or book runner on $41.590-billion of corporate and government financings last year.

In all, the firm led 264 financings last year -- or more than one per working day. Last year Canadian companies and governments raised $205.277-billion of capital -- about $800-million per working day.

Accordingly RBC had a 20.26% market share of the 2006 financings. In 2005, its market share was 18.48%.

"It has been a great year for us. We thank our clients for giving us the opportunity to do the business that we did," said Charles Winograd, chief executive at RBC Capital Markets.

"We are working hard to ensure sure that we have the horses to take care of our clients¹ needs in 2007 and beyond. We want to stay one step ahead of the game," he added.

RBC's performance placed it comfortably ahead of second place TD Securities. That firm -- on either a full credit to lead manager and/or book runner -- was involved in 167 deals which raised $27.595-billion. (Its market share was 13.44% versus 11.77% in 2005.)

For TD its 2006 performance meant it went one better than it did in 2005: back then it finished third behind CIBC World Markets. In 2006, CIBC World Markets finished third with 189 deals for $23.437 billion. Its market share in 2006 was 11.25% compared with 17.05% in 2005.

Says Bob Dorrance, chief executive at TD Securities: We are really focused on helping our clients perform and we thank them for their trust and confidence in us to do so. We have focused on providing integrated solutions that best meet our clients’ needs on a competitive basis. Credit, equity, fixed income, foreign exchange, derivatives, M and A advice -- our promise is to provide the best solution to meet our clients' needs. RBC, TD and CIBC were significantly ahead of fourth-placed BMO Nesbitt Burns, whose 121 deals raised $16.871 billion. BMO was also fourth-ranked in 2005.

Rounding out the top five was National Bank Financial: 72 deals for $15.454 billion. For NBF that performance was one better than what it achieved in 2005.

NBF replaced Scotia Capital in the top five in 2006. Scotia ran the books on 89 deals last year which raised $13.379-billion with a market share of 6.52%. In 2005 its market share was 10.12%.

The next four places in the rankings were filled by foreign firms. As with 2005, Merrill Lynch was the top performing foreign firm with a seventh- place finish in 2006 and a market share of 5.76%. In 2005, its market share was 5.06%.

The bulk of the $205.277 billion of capital raised last year was for corporations. That group scooped up $132.111 billion -- $45.377 billion of equity and $86.735 million of debt. As expected, the domestic markets provided most of the corporate capital: All but $32.563 billion came from the local market.

RBC was the leader of the pack for corporate issues: On a full credit basis it led 217 transactions which raised $28.272-billion (a 21.40% market share).

RBC was the leader for both equity issuance - its 94 deals raised $8.586-billion -- and debt issuance - where its 123 deals garnered $19.687-billion.

CIBC was number two in equity and number four in debt. (TD and BMO were second- and third- ranked in corporate debt.) Measuring the different dealers by what they actually underwrote or more specifically the underwriting liability the different firms took on generates a different result. On that measure CIBC was at the top of the pile for equities: It was in 250 syndicates and assumed $4.985-billion of liability. RBC was in second place: 191 deals and a collective liability of $4.890 billion.

To show the importance of income funds, in 2006 six of the largest 10 deals were either for income funds or structured products. RBC ran the books - either solely or jointly -- on six of the top 10 deals. CIBC was second with four; TD third with three and Merrill Lynch with two (Brookfield Properties and Addax Petroleum.)

RBC was also the leader for taking companies and/or trusts and/or structured products public. In 2006 it led 39 deals which raised $3.333-billion, comfortably ahead of second-place CIBC: 50 deals for $2.539-billion.

For underwriting corporate debt, five of the top 10 firms were foreign-based, with Barclays Bank PLC being the top-rated bank: seven deals that raised $4.971-billion. Its three largest deals were Xstrata Finance Canada ($1.974-billion ); ConocoPhillips Canada ($1.415-billion) and CIBC ($1.254-billion.)

Citigroup (17 deals for $4.311-billion); Merrill Lynch (32 deals for $3.711-billion); J.P. Morgan (13 deals for $3.550-billion) and CreditSuisse (19 deals for $2.826-billion) were the other foreign-based banks to rank in the top 10 for underwriting corporate debt.

A $2.761 billion offering by Bombardier was the largest corporate debt deal in 2006. Overall $55.840 billion of corporate debt -- representing 64.38% of total corporate debt raised -- was gathered in Canada.

Among asset-backed securities -- and $12.540 billion was raised in this form -- BMO Capital Markets was the leading firm, comfortably ahead of RBC.

Canadian governments raised $73.165 billion of capital last year. While RBC was the best performer -- 47 deals for $13.318 billion -- National Bank Financial emerged in second place with 33 deals for $11.973 billion.

Two other firms -- TD and CIBC -- were the lead manager on deals that raised more than $10-billion. Four foreign firms -- Merrill Lynch, Deutsche Bank, Citigroup and Barclays Bank -- were in the top 10.

Issues by Canada Housing Trust dominated government sector financings: The issuer -- a special purpose securitization trust advised by Canada Mortgage and Housing Corporation -- taps the market on a quarterly basis.

In 2006 it raised $25.15-billion via the sale of Canada Mortgage Bonds. (The issue in December raised $8.1-billion, the largest issue in Canadian history).

The issuer uses the proceeds from those financings to buy mortgages packaged into MBS from sellers, which are typically financial institutions.
Financial Post, Duncan Mavin, 29 January 2007

Codename Seven, co-led by Royal Bank of Canada and U.S. powerhouse Goldman Sachs, was a $900-million initial public offering, guzzled down by investors around the globe. It involved a Canadian cultural icon, and was one of the most lucrative transactions anywhere in the world in the food and beverage sector.

The transaction was, of course, the Tim Horton’s IPO -- the project name “seven” a reference to the number of the jersey worn by the founder of the coffee and doughnuts chain when he played for the Toronto Maple Leafs.

RBC’s involvement was the payoff from years of relationship building -- at Tim Horton’s in Canada and at Wendy’s International Inc. in the United States -- and the bank’s investment in a global platform, such as a food and beverage research team in Atlanta, said Michael Norris, deputy chairman at RBC Capital Markets. But what finally helped secure RBC’s involvement in the U.S.-based deal was being Canadian.

“Unless you live here, you can’t understand the value [of the Tim Horton’s brand,]” Mr. Norris said.

“My 86-year-old mother and her buddies go to Tim Horton’s. My two sons’ favourite place of anywhere to go for lunch is Tim Horton’s. When the family goes to the cottage in different cars we all meet up at Tim Horton’s. It’s really part of the Canadian fabric.” The mega-deal doesn’t make the cut for the Financial Post’s domestic dealmakers league table because Tim’s was spun out into a U.S. company.

If Tim’s was added to the dealmakers’ league table, RBC would clearly have another huge chunk of business to add to its total. But what the deal indisputably shows is how Canada’s investment banks can use global networks to leverage domestic expertise and knowledge.

“League tables are important but equally important is our ability to grow our business outside of Canada,” said Tom Millroy, co-president of Bank of Montreal Capital Markets.

The firm has offices in 26 cities around the world, including Beijing, Rio de Janeiro, Shanghai and Melbourne. Internationally, BMO’s expertise as a Canadian bank in the mining and energy sectors are particularly useful marketing tools, Mr. Millroy said.

BMO’s investment bank makes more than half of its revenue and more than a third of its net income outside of Canada, and is looking to grow overseas, he said. And BMO’s not the only investment bank with bigger global ambitions.

In November, GMP Capital Trust chief executive Kevin Sullivan also talked up his firm’s international intentions.

The opening of an office in London that targets the small and mid-sized business on the U.K.’s Alternative Investment Market, “furthers [GMP’s] ability to execute on an international scale and is the next in our multi-stage effort to diversify and expand our core business to better serve our clients,” Mr. Sullivan said.

Canaccord Capital Inc. also expanded its London securities business in 2006, moving to larger premises to accommodate its growth there. The independent broker also purchased Adams Harkness, a Boston-based securities firm, during the year.

Philip Smith, head of corporate and investment banking for Scotia Capital, said his firm is using its homegrown expertise -- in energy and oil and gas -- to expand into overseas markets.

“Globally, those two sectors are our focus. The reason for that is those are two sectors where we have competitive advantage and there’s critical mass in Canada,” said Mr. Smith.

The policy is reaping rewards. Just last week, U.S. independent oil and gas producer Devon Energy Corp. said it has engaged Scotia Waterous -- the Calgary-based oil and gas M&A specialist Scotia acquired in 2005 -- alongside Goldman Sachs & Co. to sell Devon’s assets in West Africa.

RBC, too, has continued to invest in its overseas investment banking services during the year, snaffling up Daniels & Associates, L.P. a Denver, Colo.-based advisor to the cable, telecom and broadcast industries in November.

Daniels completed more M&A transactions within the cable, telecommunications and broadcast sectors in the United States than any other investment bank over the past six years, said RBC.

Meanwhile, RBC’s Mr. Norris said last year’s mega-deal with Wendy’s shows the value of a decade long strategy of overseas expansion.

“We’ve invested in a global platform and this is how we see a return on it,” Mr. Norris said. For RBC Capital Markets, the Tim Horton’s transaction was last year’s “icing on the cake.”
Globe and Mail, Boyd Erman, 29 January 2007 (Source: Thomson Financial)

• Top five IPOs of 2006
 Date        Company         Proceeds             Lead
(U$ millions)
Mar 23 Tim Hortons $772.5 RBC CM, Goldman Sachs
Jun 07 Teranet Income Fund 684.1 RBC CM, CIBC World Markets
Nov 16 Air Canada 461.1 Citigroup, RBC CM, TD Securities
Nov 21 North Am Energy Ptnr 222.0 Credit Suisse, UBS, Jefferies
Feb 02 Jazz Air Income Fund 218.4 RBC CM, CIBC World Markets

• Top five IPO underwriters
Rank                    Proceeds     Market  Num of
(U$ millions) Share Issues
1 RBC Capital Markets $1,795.2 33.8% 13
2 CIBC World Markets 839.1 15.8 8
3 TD Securities 807.1 15.2 12
4 Goldman Sachs 386.2 7.3 1
5 Canaccord Capital 189.2 3.6 6
Industry Total 5,315.6 61

• Top 15 financial advisers on Canadian M & A:
2006 2005               2006 Value  Market Num of  2005 Value  Market Num of
Rank Rank (U$ million) Share Deals (U$ million) Share Deals
1 2 CIBC WM $65,943.70 28.8% 56 $30,471.60 22.7% 54
2 9 JP Morgan 60,520.10 26.4 28 14,264.30 10.6 14
3 1 RBC Cap Mkts 53,477.40 23.4 46 32,587.10 24.3 33
4 6 Morgan Stanley 47,675.30 20.8 13 22,408.20 16.7 13
5 4 Goldman Sachs 47,407.40 20.7 24 24,880.60 18.6 17
6 5 UBS 43,983.80 19.2 26 22,613.70 16.9 19
7 15 Credit Suisse 38,903.80 17.0 16 6,113.90 4.6 17
8 11 Citigroup 33,162.20 14.5 16 10,338.00 7.7 13
9 7 TD Securities 31,933.40 13.9 21 18,473.80 13.8 26
10 12 Deutsche Bank 30,772.40 13.4 8 9,867.20 7.4 5
11 3 Merrill Lynch 25,668.00 11.2 12 26,095.10 19.5 14
12 10 Scotia Capital 24,409.90 10.7 29 11,692.30 8.7 26
13 16 GMP Securities 21,946.80 9.6 39 6,050.10 4.5 18
14 75 ABN AMRO 20,480.40 8.9 3 32.40 0.0 1
15 - Santander Inv 20,335.00 8.9 2 - - -
Industry Total $229,056.10 2,910 134,044.10 2,327

• Top ten equity issues:
Date         Company           Proceeds
(U$ million)
Dec 12 Brookfield Properties $1,254.0 Merrill Lynch, JP Morgan
Mar 23 Tim Hortons 772.5 Goldman Sachs, RBC CM
Jun 07 Teranet Income Fund 684.1 RBC CM, CIBC WM
Sep 18 Pengrowth Energy Trust 471.4 RBC CM
Nov 16 Air Canada 461.1 Citigroup, RBC CM, TD Securities
Aug 02 Canetic Resources Trust 408.3 TD Securities, CIBC WM, BMO CM
Dec 08 Pengrowth Energy Trust 400.2 RBC CM
Aug 18 Addax Petroleum 359.1 Scotia Capital, RBC CM
Aug 22 Yellow Pages Income Fund 341.8 CIBC WM, BMO CM, RBC CM, Scotia Cap
Oct 25 Harvest Energy Trust 337.6 TD Securities, CIBC WM

• For companies incorporated in Canada:
Rank                           Proceeds   Market Share  Number of Issues
(U$ million)
1 CIBC World Markets $4,437.10 17.9% 51
2 RBC Capital Markets 4,356.40 17.6 44
3 TD Securities 2,702.00 10.9 40
4 BMO Capital Markets 1,880.40 7.6 36
5 GMP Securities 1,675.20 6.8 44
6 Canaccord Capital 1,385.40 5.6 35
7 Merrill Lynch 1,367.10 5.5 7
8 Scotia Capital 1,080.80 4.4 20
9 National Bank Financial 722.70 2.9 18
10 JP Morgan 702.00 2.8 2
Industry Total $24,765.80 334

• For companies headquartered in Canada:
Rank                           Proceeds   Market Share  Number of Issues
(U$ million)
1 RBC Capital Markets $4,531.60 18.6% 43
2 CIBC World Markets 4,405.80 18.1 50
3 TD Securities 2,677.30 11.0 39
4 GMP Securities 1,643.90 6.8 43
5 BMO Capital Markets 1,590.70 6.5 34
6 Canaccord Capital 1,315.90 5.4 34
7 Merrill Lynch 1,171.10 4.8 6
8 Scotia Capital 1,080.80 4.4 20
9 National Bank Financial 722.70 3.0 18
10 JP Morgan 702.00 2.9 2
Industry Total $24,326.00 325
Every year, investment bankers spend endless hours fighting with rivals at other firms to win deals.

But when the year ends and the deals are done, the battle shifts into a new phase -- a lobbying fight to determine who gets the bragging rights as the busiest bank of the year.

Arguments rage and debates swirl over tiny points that could lead to the inclusion or disqualification of deals that might put one bank or the other over the top.

The discussions can get heated because, besides bragging rights, millions of dollars are at stake. Being recognized in rankings at the top gives investment banks something to point to when they pitch companies for business, and bankers something to point to when they pitch for big bonuses.

The battle for the 2006 title of top bank in the business of selling new stock and trust units to investors was among the most intense in memory, with the race very tight between 2005's winner, CIBC World Markets Inc., and rival RBC Capital Markets.

RBC, sensing a chance to dethrone CIBC, launched an intense campaign to fight for the inclusion of one of its own big deals -- the initial public offering of Tim Hortons Inc. -- and the exclusion of some CIBC transactions.

It may seem hard to believe, but Tim Hortons, under the rules of the rankings, didn't qualify as a Canadian deal. RBC set out to change that.

The firm argued that Tim Hortons is as Canadian as a maple-glazed doughnut and a double-double. The company was founded by a pair of Canadians, and its red-script insignia is ubiquitous in the True North strong and free.

Most of the doughnuts are sold to Canadians, as was most of the stock, RBC pointed out in numerous letters, presentations and phone calls to Thomson Financial, which compiles the rankings.

The problem lies with the "Inc." in Tim Hortons Inc. For all its Canuck pedigree, the company is incorporated in the United States.

By the rules of the rankings, only companies incorporated in Canada count in the results.

CIBC argued that rules are rules, and Thomson shouldn't change them mid-game.

In the end, Thomson stuck by its ruling and Tims was out.

Thomson did relent, however, and agree to publish a second ranking by nation of headquarters, which would include Tim Hortons.

RBC then launched a last-minute challenge to have some CIBC deals excluded, arguing that transactions done by CIBC World Markets for a company called Central Fund of Canada Ltd. shouldn't count.

RBC said Central Fund, which holds bullion, is more like a type of mutual fund than a company. CIBC, along with Central Fund's management, countered that Central Fund has a business, has always been treated as a company and should stay one in Thomson's eyes.

Deliberations went back and forth for more than two days, with Thomson reviewing reams of evidence. After all the conference calls and flurries of e-mails, Thomson made its call. Central Fund was in.

The final official tally shows CIBC leading 51 issues that raised $4.44-billion (U.S.) for Canadian companies, while RBC trailed with $4.36-billion and 44 issues.

RBC, while it fell short of winning the overall game, did lead the most IPOs, running offerings for Addax Petroleum Corp. and Teranet Income Fund, in addition to Tims.

With 2006's battles behind them, bankers will face a 2007 that may be very different. The government's decision to begin shutting down the income trust sector means that new trust unit sales, a CIBC specialty in recent years, may slow.

"We had a very leading position before trusts became the in-vogue product, but that's not to say we won't have to change some of our strategy," said David Leith, head of Canadian investment banking at the firm. "We clearly will."

Investors, especially those near retirement, will still want to get regular payouts, meaning 2007 could see big demand for dividend-paying stocks. "The overriding theme, which parallels the demographic situation we're in, is to focus on yield-oriented, cash-paying investments," said Roman Dubczak, head of equity capital markets at CIBC.

So far this year, there are some big offerings in the works, including one from TransCanada Corp. that could top $1-billion (Canadian) of new stock (on top of a pile of new debt) to pay for an acquisition of a U.S. pipeline network from El Paso Corp. Banks are already vying for a lead role on that transaction.

Top 5 Canadian Debt Underwriters

Globe and Mail, Boyd Erman, 29 January 2007

In a development that will shock nobody who follows the bond market, RBC Capital Markets won the race to underwrite the most debt sales in Canada.

And as usual, it wasn't exactly a photo finish. According to figures by Bloomberg News, the firm led 385 deals in the Canadian market in 2006, earning credit for raising $36.08-billion for companies and governments. Scotia Capital Inc. edged out TD Securities Inc. for second place, while CIBC World Markets Inc. and BMO Nesbitt Burns Inc. rounded out the top five. None of the other firms topped $30-billion in credit.

It was a busy year for the overall Canadian bond market, with sales totalling $175-billion, up from $122.5-billion in 2005.

A big year for the Canada Mortgage Bond program, which raises money to fund home loans, spurred activity in the government category.

Corporate issuance was also on the rise as competitive rates kept the country's companies borrowing in their home market and drew international borrowers here to take part in the new Maple bond market. Foreign companies that tapped the growing Maple market included Citigroup Inc., Goldman Sachs Group Inc. and Bank of America.

"These issuers would never have thought of selling bonds in Canada until recently and it's really changed the nature of the Canadian market from a local market to a global market," said Larry Bates, head of debt capital markets in Canada for RBC. His firm topped all three main segments of the market: raising money for governments, Canadian companies and foreign companies via Maple bonds.

Given the surge in borrowing in Canada last year, it will be tough to top 2006's total in 2007, Mr. Bates predicted.

"Last year we saw such a tremendous increase in borrowing activity in Canadian dollars, I can't imagine us having that kind of increase again next year," he said.

Bond deals generally slide under the radar, overshadowed by the flashier equity market, but one transaction last year that caught the eye of many who follow the world of debt was Barrick Gold Corp.'s innovative copper-linked note sale.

Toronto-based Barrick has always been a financial innovator. The mining company was a pioneer in using hedging to lock in gold prices to even out its earnings back when bullion had little shine in the eye of investors.

But when gold prices started to soar, Barrick's hedging quickly turned the company from darling to goat as the hedges, which locked in prices at lower levels, kept the miner from benefiting fully from the climbing value of bullion. So Barrick disavowed the practice, to the cheers of shareholders.

That left the company in a conundrum last year. After buying Placer Dome Inc. to become the world's biggest gold miner, Barrick suddenly found itself with copper production that didn't fit in with its strategic goal, but that could be used to raise money to build gold mines. The price of copper was soaring, making it tempting to hedge some of that copper to lock in prices -- except for the aforementioned distrust of anything related to hedging by mining investors. So Barrick chief financial officer Jamie Sokalsky started looking at ways to lock in copper prices without a straight-ahead hedge.

In concert with investment bankers at UBS and Morgan Stanley, Barrick hit on the solution -- bonds with interest payments funded by some of Barrick's copper production. Barrick would get $1-billion (U.S.) up front with sales of copper at locked-in prices bringing in the money to pay the first three years of interest.

Investors snapped up the issue and the demand has other mining companies calling the folks at Barrick, UBS and Morgan Stanley who thought up the structure to inquire about copycat financings.

"We were quite pleasantly surprised with what a positive reaction we got to it," Mr. Sokalsky said. "It did have a pretty high profile as opposed to just going out and hedging copper. People thought it was kind of innovative and nifty."

• Top five Canadian debt underwriters (Includes Government, Corporate and Maple Bonds):
Rank                      Amount        Number
($ million) of deals
1 RBC Capital Markets $36,081.30 385
2 Scotia Capital 23,961.90 245
3 TD Securities 23,380.50 261
4 CIBC 22,847.80 334
5 BMO Capital Markets 19,285.70 235

Source: Bloomberg Financial Services

Scotiabank May Buy First BanCorp, UBS Analyst Says

Bloomberg, Sean B. Pasternak, 29 January 2007

Bank of Nova Scotia, Canada's third-largest bank, offered to buy First BanCorp of Puerto Rico, UBS Canada analyst Jason Bilodeau said, citing an article in the Caribbean Business weekly newspaper.

First BanCorp has 138 branches through its FirstBank subsidiary, including 11 in Florida, Bilodeau said today in a research note to investors. An acquisition would increase Scotiabank's share of loans in the country to 13 percent from 3 percent, the analyst said.

Scotiabank, which has operations in about 50 countries, has said it will make acquisitions in regions where it already does business. The bank has invested more than C$1 billion ($845 million) on international purchases in the past year, buying banks in countries including Peru and the Dominican Republic.

``Adding to its presence in Puerto Rico could be a favorable move,'' Bilodeau wrote. First BanCorp, based in Santurce, has a market value of $842 million.

The stock had declined 25 percent in the past 12 months before today. The bank restated earnings from 2000 to 2004 following an accounting review of some mortgage-related transactions.

Scotiabank spokesman Frank Switzer declined to comment. First BanCorp spokesman Alan Cohen didn't return a phone call seeking comment.

First Bancorp shares rose 89 cents, or 9.3 percent, to $10.42 at 4:01 p.m. in trading on the New York Stock Exchange, the biggest gain in 18 months. Bank of Nova Scotia fell 46 cents to C$50.82 on the Toronto Stock Exchange.
Business News Americas, 29 January 2007

Canada's Scotiabank has made a written offer to acquire Puerto Rico's third biggest bank FirstBank, an analyst said on Monday, citing Puerto Rican daily Caribbean Business.

First BanCorp, FirstBank's parent, would have a market value of some US$770mn, UBS analyst Jason Bilodeau said in a report.

A Scotiabank spokesperson declined to comment when contacted by BNamericas.

Scotiabank already operates in Puerto Rico through 20 branches and commands a roughly 3% loan market share.

The deal would add 139 branches, including 11 in Florida, making Scotiabank one of the top three lenders on the island with a foothold in the mortgage market, Bilodeau said.

"There are, however, still some outstanding shareholder lawsuits at First BanCorp," he said.

First Bancorp is one of several banks on the island that over the last 18 months have run into serious accounting problems, elated to mortgage loans and consequently lost market share.

Last September, the bank restated financial results for the 2000-04 period, resulting in a US$17.1mn decrease in retained earnings and legal surplus, 3.4% lower than previously reported.

First BanCorp has said it expects to file the quarterly and annual reports for the year ended December 31, 2005, in 1Q07 and its quarterly reports for the corresponding quarters of 2006 thereafter.

Analysts believe the Puerto Rican banking market is ripe for consolidation as most stocks in the sector are near 52-week lows as the financial system suffers from a sluggish loan market due to an economy on the verge of a recession as well as an inverted yield curve.

27 January 2007

NDP Calls for End to ATM Fees

National Post, John Turley-Ewart, 27 January 2007

It's "time for fairness," thunders the NDP's Thursday press release demanding an end to service charges for using the banks' Automatic Teller Machines (ATMs). Jack Layton, the NDP leader, took to Toronto's frigid streets to say "hard-working Canadians should not be charged by banks when they deposit, withdraw or transfer their own money using an ATM."

Mr. Layton's impassioned fight on behalf of the little guy made for impressive political optics -- so impressive that even Jim Flaherty, Canada's Conservative Finance Minister, was moved to action, asking banks to explain themselves on ATM charges. "The issue is that the practice by some banks in other countries is not to charge," Mr. Flaherty told reporters. "Is there a justification or a rationale for that being particularly different in Canada than in other places?"

The NDP's research team even trotted out some numbers. Canada's banks "posted profits just over $19-billion" in 2006, party officials noted. At the same time, Canadians were being forced to "cough up an estimated $420-million" each year to use ATMs.

Yet a closer look at the numbers explains why few in Canada should trust an NDP government to manage our economy. Apparently, Mr. Layton and his researchers don't know the difference between revenues and profits, nor are they able to distinguish between American and Canadian consumers. In fact, Mr. Layton has little in the way of relevant data to support his demands that banks be legislatively prohibited from charging fees for ATM use.

Take, for example, the "estimated $420-million" the NDP says Canadians pay to use banks' ATMs. The source for this figure is a 2006 Associated Press story about the U.S. ATM market -- one that relied on a Florida Web site that "surveys approximately 4,800 financial institutions in all 50 states." The site, Bankrate.com, does not provide research on Canadian financial services or ATMs; indeed, its only claim to expertise is tracking U.S. financial services. By its estimate, Americans pay approximately US$4.2-billion in ATM fees annually. The NDP arrived at their figure of $420-million for Canada by dividing the Bankrate-reported U.S. figure by 10.

According to an NDP press secretary, this statistical manipulation was justified because "Canadian and U.S. ATM fee schedules are similar." But this is untrue. Price Waterhouse Coopers demonstrated in a 2003 study that the average bank-owned-ATM fee in Canada was $0.58, whereas in the United States it was $1.35, more than twice the Canadian amount.

Mr. Layton also claims that service charges account for only 5% of bank revenues, and so his plan to cut ATM fees would not affect banks' "bottom line." But an NDP press secretary later admitted that in 2006, that 5% portion of revenues would equal $6.2-billion, or 32% of profits. Taking away that 5% would therefore be disastrous for banks, their shareholders and the economy as a whole.

If Mr. Flaherty wants to know why Canadian banks charge fees for using their ATMS, he should not be taking his cues from the NDP, which is clearly suffering from innumeracy. He would do better to consider the facts, which show our banks have adopted a user-fee system that lets Canadians pay for the services they use. This allows for cheaper banking throughout the entire system.


- A 2003 survey by the left-leaning Public Interest Advocacy Centre showed that 53% of Canadians paid $10 or less per month for banking services, and that 24% paid nothing;

- Data from Statistics Canada and the Office for the Superintendent for Financial Services show that cost-per-transaction for banking services has declined since 1996;

- In the World Economic Forum's Global Competitiveness Report covering 1997 to 2005, Canadian banks are surpassed only by Japan and the Netherlands out of 14 industrialized countries for offering low-cost bank-service fees and loans.

Ironically, for all the media attention, ATMs are old news. Consumers in Canada are rapidly turning to direct payment, which is even more convenient than buying items with cash. This explains the continual decline in bank ATM transactions since 2000, as tracked by the Canadian Bankers Association.

In other words, for all its populist posturing and statistical distortions, the NDP has hitched its wagon to yesterday's issue. Mr. Flaherty shouldn't make the same mistake.
The Globe and Mail, Unnati Gandhi, 27 January 2007

Canadians have become used to paying the $6.95 monthly system-access fee for their cellphones. They'll still fork over $10 for a doctor's note. And dispensing fees at pharmacies? Not a problem.

But when it comes to paying $1.50 for using another financial institution's automated banking machine, Canadians still go a little, er, loonie.

"It's a funny kind of thinking that we have in Canada that things, including banks, should be a free good, a kind of public service," says Jim Hatch, a professor of finance at the Richard Ivey School of Business in London, Ont.

"Because banks have always been so big and they've always been there, we almost treat them as government, in some respects. So if somebody charges us for having an account in the bank, we say to ourselves, 'Jeez, we're giving them our money, so why are they charging us extra for that?' "

New Democratic Party Leader Jack Layton voiced that concern on Thursday, saying that charging consumers to use ABMs from a bank other than their own is price-gouging and should be outlawed.

In Ottawa, Finance Minister Jim Flaherty said he asked the banks about the fees in December and is waiting for a response.

But being able to withdraw cash from an ABM is a convenience offered by a business, not a necessity, Prof. Hatch says.

"If you only have a dollar in your account and you write a cheque for 10 cents once every week, that costs the bank a whole lot of money just to keep track of you," he said. "That's not a profitable account for them, so they charge you a fee for that, partially to discourage you from that kind of behaviour."

But despite persistent grousing about ABM fees, Canadians have shown an increasing willingness to shell out extra cash for the convenience of using white-label machines -- ones that aren't operated by the major banks and credit-card companies.

In 1998, there were a little more than 8,000 independently owned ABMs, compared with about 15,500 run by the banks. Today, there are more than 35,000 white labels, accounting for almost 70 per cent of the total ABMs in Canada. Many of these have sprung up in gas stations and restaurants, catering to consumers who would rather absorb a few dollars worth of charges rather than make a trip to their own bank machine.

Banking industry officials insist the use of white labels is no different than paying more for a box of cereal at a corner store: in the end, people will pay for convenience.

Caroline Hubberstey, a spokeswoman for the Canadian Bankers Association, said the current model is more transparent for consumers, since they can see the costs they are incurring to withdraw cash.

"You either do it on a user basis, or you subsidize it through other products and services," she said.

In other words, banks could simply increase fees in other areas if they are forced to operate their ABMs for free. British banks essentially offer free machine transactions, and absorb the costs if their customers use a rival bank-owned machine.

Even there, however, the rise of fee-charging white-label machines has been swift, and now account for about 44 per cent of all British machines.

In Australia, Westpac, the fourth-largest bank in the country, began charging non-customers $2 (Australian), even though all the other banks charge $1.50. And in the United States, fees for using another bank's machine range from $2 (U.S.) to $6.

Nadia Massoud, a professor of finance at the University of Alberta who has written a paper on ABM fees, said that by restricting banks from charging these fees, it will only force the institutions to take them out of commission. "This will not only add inconvenience, but it will provoke [independent ABM operators] to fill in the gap in the market," Dr. Massoud said.

Bruce Cran, president of the Consumers' Association of Canada, said that as long as consumers still have the option of walking into their bank's branch and making the same transaction without being charged a fee, it shouldn't call for the amendments to the Bank Act, currently under review, that Mr. Layton is proposing.

"To put it fairly, it's quite a convenient system and I find it well worth my while to go and draw my miserable $100 or $200 out here and there rather than risk a problem carrying a lot of money around."

Customers normally don't pay ABM fees when using their own bank's machines. But when they use machines that are owned by a rival bank, this fee varies, but can be as high as $1.90. A convenience fee can be as high as $3 for white-label operators.
Financial Post, Duncan Mavin, 25 January 2007

NDP Leader Jack Layton is calling on Canada's banks to stop charging their customers a fee for using automated bank machines. "Ordinary Canadians have seen an explosion of punishing fees at a time when Canadian banks are basking in record profits," said Mr. Layton yesterday. Canada's banks achieved record combined profits of about $19-billion last year. "The NDP believes hard-working Canadians should not be charged by their banks when they deposit, withdraw or transfer their own money using an ATM," said Mr. Layton. The NDP chief will hold a conference in downtown Toronto today to demand the banks "stop punishing ordinary Canadians." There are about 16,000 ATMs across Canada that process more than a billion transactions per year. The banks typically charge customers a fee for using one anothers' ATMs of about $1 to $2 per transaction. Banks in some other countries, such as the United Kingdom, do not charge for ATM transactions.

26 January 2007

RBC is a Zacks Number 1 Rank Stock

Zacks, 26 January 2007

Royal Bank of Canada, a Zacks #1 Rank stock, reported record profits for the full year of 2006. The Board of Directors recently declared a quarterly dividend of 40 cents per common share of stock, leading to a current dividend yield of 2.96%. Consensus estimates for this year are up over the past two months. The company has a price-to-book ratio of 2.7.

Royal Bank of Canada is Canada's largest bank as measured by assets and market capitalization and one of North America's leading diversified financial services companies. RY provides personal and commercial banking, wealth management services, insurance, corporate and investment banking and transaction processing services on a global basis.

On Nov 30, RY reported fourth-quarter earnings per share of 85 cents, which beat analysts’ expectations by 11.8%. Compared to profits of 35 cents per share in the prior-year period, earnings soared 142.9%. Total revenue from continuing operations amounted to 5.35 billion Canadian dollars ($4.77 billion), compared to 4.8 billion Canadian dollars in the fourth quarter of 2005.

For the entire year, profits came in at a record 4.73 billion Canadian dollars ($4.22 billion), which represented the highest annual earnings ever reported by a Canadian bank. Revenues climbed to 20.6 billion Canadian dollars ($18.4 billion) from 19.2 billion Canadian dollars last year.

President and CEO Gordon Nixon stated, “Throughout 2006, we continued to build on the momentum we established in 2005. Our record results reflect our growth initiatives across all of our businesses, as well as geographies.”

The consensus estimate for this year currently sits at $3.46. Compared to estimates of 60 days earlier, it has jumped 11 cents. Earnings per share are projected to grow 9% over the next 3-5 years. Looking ahead, RY expects “a robust Canadian economy with continued strong consumer spending and solid business investment.”

The Board of Directors recently declared a quarterly dividend of 40 cents per common share of stock. The dividend is payable on Feb 23 to common shareholders of record as of Jan 25. RY has a current dividend yield of 2.96% and a five-year average dividend yield of 3.23%.

On Jan 11, RY announced that it acquired Daniels & Associates, L.P. According to Thomson Financial, Daniels & Associates completed more M&A transactions within the cable, telecommunications, broadcast and Internet services sectors in the United States from 2000 through 2006 than any other investment bank—nearly double its closest competitor.

RY is currently trading at a valuation of 13.4x current fiscal-year estimated earnings and at 12.1x next fiscal-year estimated earnings. The market, as represented by the S&P 500, is trading at a valuation of 15.9x current fiscal-year estimated earnings and at 14.5x next fiscal-year estimated earnings. The company has a price-to-book ratio of 2.7, compared to 4.9 for the market.

CIBC Kept Quiet on Data Gaffe Until Forced by Watchdog

Financial Post, Duncan Mavin, 26 January 2007

Canada's privacy watchdog said yesterday that it forced Canadian Imperial Bank of Commerce to go public last week with the announcement it lost a file containing private data on half a million mutual fund customer accounts.

"We were very concerned about the direction they were planning to take with respect to notifying the public, and we encouraged them to be as open and transparent as possible," said Anne-Marie Hayden, spokesperson for the Office of the Privacy Commission of Canada.

Last Thursday, CIBC announced that a file went missing in late December when it was being transported from Montreal to Toronto.

The lost file contains personal details, including client names and addresses, signatures, dates of birth, bank account numbers and social insurance numbers from 470,000 accounts of current and former clients of Talvest Mutual Funds, which are managed by CIBC Asset Management.

Also yesterday Finance Minister Jim Flaherty said he has personally become involved in the matter.

"I spoke to [the privacy commissioner] myself about the issue we had with one of the banks. A data concern," Mr. Flaherty told reporters. "[The commissioner] and I had a constructive discussion on that so I expect we will be seeing some recommendations soon."

NDP Finance critic Judy Wasylycia-Leis also weighed in, expressing dismay that CIBC may not have gone public on the data gaffe without external pressure.

"That makes this even more horrific," Ms. Wasylycia-Leis said. "If Canadians think the banks will only comply with certain standards of decency under duress from Parliament, then we've got a serious problem on our hands."

A CIBC spokesman said last week that the bank contacted police, the privacy commissioner and financial services regulators several weeks ago as soon as the security breach became apparent.

"Our primary focus was to first proactively and directly notify all of the affected clients by letter," said spokesman Stephen Forbes.

"Throughout this process, we consulted with our various regulators to ensure that we took the best action on behalf of our clients."

CIBC said it started sending letters to affected customers last Wednesday.

So far there is no evidence any of the information has been accessed inappropriately, said a bank spokesman. However, data security experts have said the missing file could be used for the purposes of identity theft.

In 2004, the commissioner criticized CIBC after it accidentally faxed confidential information related to banking clients to a scrap yard in West Virginia over a period of three years.

After that incident, the commissioner said the bank's privacy policies and practices "were not functioning on a practical level.".
Financial Post, Emily Mathieu, 26 January 2007

Four out of five of the major Canadian banks have said there's not a single confirmed case of fraud reported from customers of Winners and Home Sense stores after hackers broke into computers belonging to the parent U.S.- based discount chain company.

The banks included the Canadian Imperial Bank of Commerce, Toronto-Dominion Bank, Bank of Montreal and Royal Bank of Canada. The Bank of Nova Scotia declined to speculate on the possible number of customers affected, but referred questions to VISA.

VISA Canada spokesperson Tania Freedman said it's too early to connect any reports of fraud with TJX, the parent company of Home Sense and Winners. Master Card was unavailable for comment.

"It's really difficult to link fraud back to a specific breach," she said.

TJX, based in Framingham, Mass., reported last week the sales and credit information of millions of customers was accessed through, and in some cases removed from, company databases.

The compromised information was from transactions that took place at TJX stores in Canada, the United States and Puerto Rico in 2003 and last year between mid-May and December.

On Wednesday, the Massachusetts Bankers Association, which represents 205 commercial savings and loans institutions in Massachusetts and New England, said U.S. customer information from TJX stores is being used fraudulently in Hong Kong, Sweden, Florida, Georgia and Louisiana. Spokesperson Bruce Spitzer said only a "handful" of U.S. cards have been used for fraud, but that number is likely to rise.

The Privacy Commissioner of Canada will be conducting an investigation, but the RCMP said it is not involved. The impact the breach will have on Canadian customers isn't clear.

"It's still too early to tell," said Rob McLeod, CIBC spokesperson. "We're still receiving information from VISA and we're analyzing that."

It is estimated that each Canadian bank flagged thousands of credit card numbers for heightened risk of fraud and are actively monitoring the accounts.

"Right now, we're focusing on contacting all the customers on the list and getting information to them to monitor their accounts," said Michael Edmonds, spokesman for BMO Financial Group.

Bruce Cran, president of the Consumers' Association of Canada, said he's not aware of any fraud in Canada related to TJX, but said it's a logical conclusion to assume if fraud is popping up in the U.S., Canada can't be far behind.

"People have expectations of privacy when they do business with financial institutions and I don't think we are getting that at all," he said.

25 January 2007

Citigroup Earnings Sets Tone for Cdn Banks?

Financial Post, Duncan Mavin, 25 January 2007

Disappointing fourth-quarter earnings at U.S. banking giant Citigroup last week provide clues for investors in Canadian financial institutions, said Genuity Capital Markets analyst Mario Mendonca in a note.

"As the largest financial institution in the U.S., Citigroup provides us with useful information on how a variety of businesses that impact Canadian banks are trending," he said.

Citi's earnings of US$1.03 per share from continuing operations beat analysts' consensus.

But the results represented a less-than-impressive 5.1% increase on the previous year. In particular, Citi trailed its peers because it could not match the performance of investment banks in areas such as commodity trading.

Mr. Mendonca points out that Canadian banks, too, might find trading results weakening in light of "choppy Canadian equity markets" and the government's decision to tax trusts, for instance.

Mr. Mendonca also notes that investors in Bank of Nova Scotia might take a look at the rising loan loss provisions at Citi's Mexican operations.

Scotiabank, like Citi, has a significant presence in Mexico.

Australian Bank Stocks

Bloomberg, Kevin Foley, 24 January 2006

Shares of Australia's biggest banks, which reached records in the past year, may fall in 2007 as the highest interest rates in six years curb demand for loans.

Credit growth will slow to 12 percent, according to Australia & New Zealand Banking Group Ltd. That would be the smallest gain since 2002. The central bank has increased rates three times since May to cool inflation, and borrowing costs may rise twice more this year, said Atul Lele at White Funds Management.

The prospect of rising bad debts and increased competition may also tarnish the outlook for National Australia Bank Ltd., Commonwealth Bank of Australia, ANZ Bank and Westpac Banking Corp., the country's four largest banks. Loan losses are bound to rise, said Jack Chemello of BT Financial Group. Overseas companies also are taking lending business away from the banks.

``Rising interest rates will hurt them,'' said Sydney-based Lele, who helps manage the equivalent of $332 million and has reduced his holdings of bank shares. ``It will get much harder from here as credit growth slows.''

Australian lenders' shares are expensive compared with most overseas peers.

Melbourne-based National Australia, the nation's biggest bank, trades at 15.4 times 2006 earnings. Sydney-based Commonwealth, the second-largest, trades at 16.3 times, the highest among the four biggest banks. That compares with 11.3 times at Bank of America Corp., the second-largest U.S. lender after Citigroup Inc., and 12.7 times at HSBC Holdings Plc, the biggest European bank by market value.

`Question Mark'

``There's a question mark over whether the higher P-E valuations are justified given the risk from rising interest rates, a slowing economy and threats to credit growth,'' said Rohan Walsh, who manages $1.9 billion at Invesco Asset Management in Melbourne. He declined to say if he is buying or selling bank stocks.

Annual inflation was 3.3 percent in the three months ended Dec. 31, the third consecutive quarter it has breached the Reserve Bank of Australia's target of 2 percent to 3 percent.

Lele said he expects at least one more rate increase in the first half and sees potential for more in the second. He's not alone.

``I'd expect to see two more rate rises in 2007,'' said Chemello, who helps manage $30 billion at BT in Sydney. ``That will definitely take the cost of money to a level where households may start to reduce their demand for credit.'' He declined to say if he was buying or selling shares in banks.

Cheaper Than Japan

Shares of National Australia fell 8 cents to A$40.32 at the close of trade in Sydney, having reached a record A$41 on Jan. 3. They climbed 25 percent in 2006, the most in the eight-member S&P/ASX 200 Banks Index. Commonwealth stock slipped 1 cent to A$50.15 after earlier touching a record A$50.51. It gained 16 percent last year, in line with the banks index.

Melbourne-based ANZ Bank rose 13 cents to A$28.93, and are down from a record A$30.21 on Nov. 8. Sydney-based Westpac climbed 5 cents to A$25, compared with a record A$25.35 on May 2.

Most Australian banks are cheaper than the largest lenders in Japan, where Mizuho Financial Group Inc. trades at 16.4 times and Mitsubishi UFJ Financial Group Inc. at 16.3. The banks index also has the fifth-lowest P-E ratio among 24 industry groups in the benchmark S&P/ASX 200.

``Relative to the rest of the market, we think banks are starting to look quite attractive,'' said Bob Van Munster, who helps manage $7.5 billion at Tyndall Australia Ltd. in Sydney. The firm increased its bank holdings in the past three months. ``We don't think short-term interest rate hikes will have much effect on bank earnings.''

Loan Losses

John McFarlane, chief executive of ANZ Bank, said in October that industry loan growth will slow to 12 percent in 2007 from 14.4 percent a year earlier on lower demand from homebuyers and companies. That would be the weakest growth since 2002, central bank data show. ANZ Bank is the nation's third-largest lender.

Westpac, Australia's fourth-biggest bank, has forecast the nation's credit growth will slow to 11 percent this year.

Last month, McFarlane said ANZ Bank's earnings growth will slow because of ``significantly higher'' provisions for loan losses. Credit losses will rise in 2007 from ``historic lows,'' Chief Financial Officer Peter Marriott said in October.

Australia's economy grew 2.2 percent in the third quarter from a year earlier, its slowest pace in three years as business spending dropped and the nation's worst drought in a century cut farm output. That compares with 3 percent growth in the U.S. and 2.7 percent in both Japan and the U.K.

`The Big Issue'

``Credit quality is the big issue,'' said BT Financial's Chemello. ``Loan losses can't get much lower than they are now and it's highly probable that we'll see some kind of deterioration from current pristine levels.''

Increased competition for loans caused Adelaide Bank Ltd., a regional Australian lender, to cut its earnings growth forecast in November to as low as 6 percent this fiscal year from at least 10 percent.

Rivalry for credit-card customers and mortgage borrowers is reducing profit margins. At least 15 card lenders, including Citigroup and General Electric Co. of the U.S., are offering interest rates lower than 11 percent, compared with an average 18 percent rate three years ago, according to InfoChoice Ltd. of Sydney.

Australia's home-loan approvals fell for a fourth straight month in November as rising rates curbed borrowing.

``Competition has gone to the next level in terms of ferocity,'' said Chemello. ``Volume growth has slowed so there's less pie to go around and there's more competitors than ever.''

24 January 2007

Scotiabank Added to Cramer's 'Mad Money Foreign Legion'

The Globe and Mail, Andy Hoffman, 24 January 2007

Canada's big banks have long struggled in vain to win the attention of U.S. retail investors. That all changed this week for Bank of Nova Scotia when it was likened on a popular American television show to a fictional underworld crime figure.

The bank is not complaining. Instead it's embracing the comments made by the host of Mad Money, a raucous stock-picking show on financial news channel CNBC.

“All I can say, is ‘Booyah! Jim Cramer,' “ Scotiabank spokesman Frank Switzer said in an interview, adopting the program's signature rallying cry.

On Tuesday, Mr. Cramer, a former hedge fund manager turned TV star, compared Scotiabank to Hyman Roth, a ruthless and ultimately untrustworthy character in Francis Ford Coppola's The Godfather: Part II — the second instalment of the film trilogy tracing the rise and fall of the Corleone family.

U.S. investors also applauded the comments, bidding Scotiabank shares up 62 cents (U.S.) or 1.4 per cent to $43.55 on the New York Stock Exchange.

More than 800,000 shares changed hands, more than 10 times the average daily trading volume over the past year.

So how is it that being equated with a mafia kingpin can be a good thing for Canada's second-largest bank by market value?

In this case, it's all about Scotiabank's impressive track record of success in Latin America and the Caribbean.

Scotiabank derives almost a third of its profit from its international operations. The bank recorded $1.054-billion in profit last year from the division, which includes 494 bank branches in Mexico and extensive operations in Latin American and Caribbean countries such as Costa Rica, El Salvador, Haiti, the Dominican Republic and Jamaica.

Citing Scotiabank's growth and the prospects for the region, Mr. Cramer added the bank to his “Mad Money Foreign Legion” — a list of stocks that he recommends to investors who want exposure to businesses that operate outside the United States.

With Cuban leader Fidel Castro ailing, Mr. Cramer suggested Scotiabank may be the institution best positioned to become a banking force in the country when and if there is a regime change.

“Given its incredibly strong presence in the Caribbean, I think it will be the bank to play Cuba when Castro joins Che, Ho Chi Min, Lenin and some of those other guys. I see BNS as the logical heir to Hyman Roth, when it comes to Cuba. That's before he tried to offload it to Michael [Corleone],” Mr. Cramer told viewers, referring to events in the movie.

In the film, Mr. Roth, who is loosely based on real-life gangster Meyer Lansky, is just about to enter into a lucrative deal with the corrupt government of Fulgencio Batista to open a group of Cuban hotels and casinos.

“Here we are, protected, free to make our profits without . . . the goddamn Justice Department and the FBI, 90 miles away, in partnership with a friendly government,” Mr. Roth, played by acting teacher Lee Strasberg, tells newly minted godfather Michael Corleone (Al Pacino). “Ninety miles! It's nothing! Just one small step, looking for a man who wants to be President of the United States, and having the cash to make it possible. Michael, we're bigger than U.S. Steel.”

Of course, the characters' plans are soon thwarted by Mr. Castro's revolution in 1959.

Scotiabank, in fact, once operated eight bank branches on the island before the Batista regime's ouster.

Currently, Cuba's banking system is closed to foreign investment and Mr. Switzer brushed off speculation that the company is considering a return to the island, populated by 11 million.

“It's premature to talk about that, but certainly we are very strong in the Caribbean. We actually had several branches in Cuba in the 1950s, and we're always interested in expanding in the Caribbean and Central and Latin America. It's something that's not really on our minds right now, but you never know,” he said.

And what does the bank think of being compared to the shady Mr. Roth, who is rubbed out after engineering a failed assassination attempt on Michael Corleone?

“I think everybody knows that Mr. Cramer lards his very sound commentary with some outlandish comments and comedy. That's why he's so popular,” Mr. Switzer said.

TD Banknorth Q4 2006 Earnings

RBC Capital Markets, 24 January 2007

Investment Opinion

• Earnings Summary: 4Q06 operating cash earnings declined by 18% year-over-year, but were flat sequentially.

• Modest Margin Pressure: BNK's margin decreased 6 basis points sequentially to 3.95% due to higher deposit and borrowing costs. Modest margin pressure is expected to persist over the next couple of quarters.

• Mixed Loan Growth Trends: Commercial business loans contracted by 1.3% sequentially, commercial real estate loans were flat, consumer loans increased 5.1% and residential mortgage loans contracted by 4.3%. We expect only moderate commercial and consumer loan growth over the next several quarters due to extremely competitive pricing for high quality lending opportunities.

• Mixed Deposit Trends Also Reported: Total deposits contracted 1.8% sequentially. Core deposits declined 3.1%, and CDs served as a partial offset, increasing 2.0% sequentially. Deposit gathering is expected to remain intensely competitive for the remainder of 2007, in our view.

• Asset Quality Deteriorated: Non-performing assets increased by 41% sequentially to $132.4 million, and net charge-offs jumped 79% to $11.3 million. These are sizable increases, but at 0.33% of total assets and 0.22% of average loans, NPAs and NCOs remain at very manageable levels, in our opinion. Further increases in NPAs and NCOs are likely over the next several quarters, but we think the deterioration should be viewed as a return to more normalized levels.

• Adjustments: We suspended our 2007 EPS estimate due to the fact that the TD Bank Financial Group is expected to complete its acquisition of TD Banknorth by the end of 1Q07. We do not expect TD Banknorth to report another quarter as a stand-alone entity.

• Rating: The stock trades at a fractional discount to the cash acquisition price of $32.33 per share, justifying our Sector Perform rating..
Bloomberg, Sean B. Pasternak, 24 January 2007

TD Banknorth Inc., the U.S. consumer banking unit of Toronto-Dominion Bank, said fourth-quarter profit rose 50 percent on increased deposits from its purchase of Hudson United Bancorp.

Net income climbed to $83.4 million, or 36 cents a share, from $55.6 million, or 32 cents, a year ago, the Portland, Maine-based bank said today in a statement.

TD Banknorth, along with larger rivals Bank of America Corp. and Wachovia Corp., have used acquisitions to increase deposits and counter declining profit margins as interest rates rise. Average deposits climbed 34 percent to C$27.3 billion, mostly because of Hudson United, acquired in February.

``Pressure on margins has been a theme for a lot of the regional banks,'' said Kevin Timmons, an analyst at Albany, New York-based CL King & Associates, before the results were released.

TD Banknorth's net interest margin, the difference between what it earns in loans and pays on deposits, fell to 3.95 percent from 3.96 percent a year ago.

TD Banknorth shares rose 2 cents to $32.19 at 4:10 p.m. trading on the New York Stock Exchange and are little changed this year. Toronto-Dominion rose 80 cents, or 1.2 percent, to C$69.60 on the Toronto Stock Exchange.

Bharat Masrani, who takes over as chief executive officer in March, said that competition for loans and deposits ``continues to be intense'' and that the bank will focus on increasing deposits and fee income through its existing branches. TD Banknorth competes in New York and New England against lenders including Sovereign Bancorp Inc. and Bank of America.

TD Banknorth is looking at cost-cutting measures that would reduce operating expenses by 5 percent to 8 percent, and may result in a one-time charge, Masrani told investors on a conference call today.

``We have come across a lot of opportunities in our review to become more efficient,'' Masrani said today in a telephone interview.

Toronto-Dominion, Canada's second-biggest bank, agreed in November to buy the 43 percent of TD Banknorth it doesn't already own for $3.2 billion in cash. Toronto-Dominion Chief Executive Officer Edmund Clark said that he wants to ``transform'' TD Banknorth, which has been struggling with higher expenses and declining interest margins. Profit has declined in five of the last seven quarters.

Non-interest expenses climbed 33 percent to $287.8 million in the quarter because of costs related to the Hudson United purchase. TD Banknorth set aside $15.5 million for bad loans, more than double a year ago.

Excluding one-time items, profit was 51 cents a share, in line with the average estimate of 12 analysts surveyed by Bloomberg News.

Clark said TD Banknorth will offer a wider variety of deposit and asset-management products, while putting acquisitions on hold. The transaction is expected to close in March or April.

``You have to build a bank before you can build a better bank,'' Clark said Jan. 17 at an investor conference in Toronto. ``We have to prove we can take that asset and make it more money than it is today.''

Toronto-Dominion said today that it expects to have first- quarter profit of C$64 million ($54 million) from its investment in TD Banknorth when it reports results on Feb. 22.

Toronto-Dominion's U.S. earnings will probably increase 31 percent in the fiscal quarter, based on reported results from TD Banknorth and TD Ameritrade Holding Corp., an online brokerage, Genuity Capital Markets analyst Sumit Malhotra wrote today in a report.

Preview of Insurance Cos Q4 2006 Earnings

Scotia Capital, 24 January 2007

Canadian Lifecos – Moving To Overweight

• Favourable macro environment. The macro environment continues to look good for our insurers. Currency rates are much more favourable than six months ago and continue to move in a direction that adds to our EPS estimates. Long-term interest rates appear to have stabilized, and with Scotia Economics forecasting both U.S. 10-year treasuries and government of Canada 10-year yields to generally remain at current levels through the middle of 2008, we see little in the way of headwinds due to declining long-term yields. U.S. equity markets, where the Canadian lifecos have the majority of their equity market risk, appear to be cooperating, which after increasing 14% last year appear to be on track (as per our strategist) to increase 7% this year (with average levels up closer to 10%, well above the 7% estimate implied by our models and most company reserve assumptions). Credit conditions continue to track at very favourable levels. Given this backdrop, along with an expected S&P/TSX increase in the mid-single-digit range for 2007, we recently increased our recommendation for the Canadian lifecos from market weight to overweight.

• Reasonable valuations – especially attractive versus other financials. At 13.3x NTM EPS, just marginally over the long-term average multiple of 12.6x, we believe the group is reasonably attractively priced, especially now that the group is down from the over 14x multiple it traded at for a good portion of 2006. Versus other financials – namely, the Canadian banks and the U.S. lifecos – the group looks very attractive. Canadian lifecos currently trade at a 2% premium (forward P/E multiple) to the Canadian banks, in line with their 2% average, and above the 4%-10% levels we’ve seen over the past three years. As well, the expected growth in EPS, heavily in the Canadian lifecos’ favour (15% in 2007, versus 10% for the banks, and 11% in 2008, versus 9% for the banks), adds to the attractiveness of the lifecos. We’ve seen a strong correlation in relative multiple (lifecos/banks) versus the U.S. 10-year treasury yields. As yields increase, the lifecos’ premium to the banks expands, and as yields decline, the premium contracts. Assuming long-term yields do not fall, we do not expect the relative multiple to decline below its current 2% premium. Should long-term yields continue to climb, we would expect the lifeco premium to the banks to expand beyond current levels. Versus U.S. lifecos, the Canadian lifecos look attractive, with a forward P/E multiple spread trading in line with historical average and better EPS growth. The forward P/E multiple for the Canadian lifecos has come down relative to their U.S. counterparts, from a 15% premium a year ago to a 5% premium now, in line with long-term average of 5%. With much better EPS growth, 13% annually through 2008E versus the U.S. lifecos at 8%-9%, we believe the Canadian lifecos look attractive relative to the U.S. lifecos.

Canadian P&C Insurers – Auto continues to pace ahead of industry norm, commercial becoming increasingly competitive but market remains rational

• The profitability of Canadian auto insurance continues to pace well ahead of industry norms due to the sustained effectiveness of automobile reforms and continued low frequency levels. We get the impression from management at ING Canada that this trend will continue throughout 2007. The U.S. non-standard auto market (a significant portion of Kingsway’s business) we expect will continue to be much more competitive, but perhaps begin to show signs of more pricing rationality in 2007. We do not anticipate acquisition activity will “heat up” for at least a year, as the exceptional profitability we are currently seeing in the Canadian marketplace could force acquisition prices up in what has tended to be a very cyclical business. Who wants to sell when you’re making profits well above average? When acquisition activity heats up again, likely in 2008, we expect ING Canada, with over $1 billion in excess capital and debt capacity, to be active.

• We continue to be somewhat cautious on commercial lines players at this point in the cycle, largely from a valuation standpoint (we believe Northbridge and Fairfax, at 1.4x and 1.2x respective book values, are approaching full and fair valuations). That said, we believe that while the market will continue to be increasingly competitive, it will likely remain rational, especially if interest rates remain low.

Great-West Lifeco Inc.

1-Sector Outperform – $37 one-year target, based on 3.0x 12/31/07E BV and 13.6x 2008E EPS

• We are looking for $0.56 per share for Q4/06, $0.01 per share above consensus. Our 2007E EPs estimate of $2.46 is $0.06 above consensus.

• With the roll-off of the currency hedge impact, and the accretion from four recent tuck-in acquisitions, we look fro 17% EPS growth in 2007 (14% ex f/x). .

• Any update on Power’s much talked about potential acquisition of Putnam? Likely not, but we believe the company's U.S. 401(k) business could benefit.

• U.S. Health Care (10% of bottom line) should continue to be encouraging, especially with the October 2006 acquisition of Indiana Health Network (75,000 members, a 4% boost in membership).

• European segment (24% of bottom line), up 26% in 2005 and 33% in first nine months of 2006 (ex foreign exchange), should continue to show double-digit growth – with further support in 2007 from the recently announced acquisition.

• Possible 7%-8% dividend increase, in keeping in-line with company's history of a 6%-10% dividend increase every six months.

Industrial-Alliance Insurance and Financial Services Inc.

3-Sector Underperform – $37 one-year target, based on 1.7x 12/31/07E BV and 12.2x 2008E EPS

• We are looking for $0.68 per share in Q4/06, $0.02 per share below consensus. Our 2007 EPS estimate of $2.87 is $0.07 below consensus.

• Low long-term rates and the associated new business strain continue to weigh on the company’s individual insurance segment.

• The Clarington acquisition will continue to propel individual wealth management earnings – but uncertain Canadian equity markets may cause some concern going forward.

Manulife Financial Corporation

2-Sector Perform – $42 one-year target, based on 2.5x 12/31/07E BV and 13.5x 2008E EPS

• We are looking for $0.64 per share for Q4/06, $0.01 per share below consensus. Our 2007 EPS estimate of $2.85 is $0.05 above consensus.

• New Q4/06 product launches – will they translate into a significant lift in growth? We will pay close attention to sales growth in Canadian individual wealth management, U.S. variable annuity and Japan variable annuity, all of which were down significantly YOY in Q3/06.

• A 50% increase in the U.S. Fixed Products segment contributed to MFC’s exceptional 18% growth (24% ex f/x) in the first nine months of 2006 – we don’t expect this trend to continue in 2007.

Sun Life Financial Inc.

1-Sector Outperform – $55 one-year target, based on 1.9x 12/31/07E BV and 12.6x 2008E EPS

• We are looking for $0.93 per share for Q4/06, in line with consensus. Our 2007 EPS estimate of $4.03 is $0.06 above consensus.

• We look for another clean and respectable 12% EPS growth, similar to the 13% we saw in Q3/06.

• U.S. variable annuity – starting to “walk the talk.” For the first time in over two years we saw the company make a significant gain in its market share in Q3/06 (its share was up 10%, making the company the second largest gainer among the top 25 players).

• Media speculation likely resulted in an one-time increase in net redemptions at MFS in Q4/06. We conservatively forecast US$1 billion, versus the US$100 million in Q3/06 and the US$700 in 1H/06.

• Possible 7%-10% dividend increase.

Fairfax Financial Holdings Limited

2-Sector Perform – US$195 one-year target, based on 1.15x 12/31/07E BV

• We expect another steady quarter ($4.67 EPS).

• Runoff segment remains under the radar screen. We expect the run-off to continue to beat its break-even bogey.

• Likelihood of beating estimates is high, given low level of catastrophe and strong equity markets.

ING Canada Inc.

2-Sector Perform – $60 one-year target, based on 2.05x 12/31/07E BV

• We are looking for $0.98 per share for Q4/06, $0.10 per share below consensus. Our 2007 EPS estimate of $4.29 is $0.14 below consensus.

• We forecast a combined ratio of 91%, not as good as the 90% in Q3/06 or the 88% in the first nine months of 2006, but Q4 is typically not as strong as Q2 and Q3.

Kingsway Financial Services Inc.

2-Sector Perform – $29 one-year target, based on 1.4x 9/30/07E BV

• We are looking for $0.77 per share for Q4/06; we believe this is $0.03 above consensus. Our 2007 EPS estimate of $3.04 is $0.04 above consensus.

• We look for a steady quarter in line with consensus, with no significant prior-period reserve development and a combined ratio in the 97% range.

• Recent developments with respect to U.S. non-standard market in Massachusetts, an improved arrangement with Robert Plan, and a declining Canadian dollar might be a catalyst for 2007.

Northbridge Financial Corporation

3-Sector Perform – $35 one-year target, based on 1.4x 12/31/07E BV

• We are looking for $0.87 per share for Q4/06, $0.04 per share above consensus. Our 2007E EPS estimate of $3.03 is $0.21 below consensus.

• We need a couple of steady, clean quarters to re-build investor confidence after significant misses in Q2 and Q3 due to recently exited businesses in the company’s Commonwealth subsidiary. Hopefully, Q4/06 will be the start. We look for a combined ratio of 90%.

23 January 2007

Canadians Mostly Satisfied with Their Banks, Survey Says

The Globe and Mail, Virginia Galt, 23 January 2007

More than half of Canadians have banked via the Internet and 89 per cent have used automated teller machines — with the “24/7” access a key driver of customer satisfaction, according to a poll released Tuesday.

“Some 71 per cent of Canadians are now using three or more banking channels such as ATMs, Internet, in branch and telephone,” SECOR Consulting said in reporting the results of a survey of 1,000 Canadians.

The survey also found that 62 per cent of respondents were “very satisfied” with their primary bank or credit union. However, the poll was conducted between Jan 9 and 11 — the week before the financial press was dominated by news that the Royal Bank of Canada had closed the U.S.-dollar chequing accounts of hundreds of dual-citizen Canadians and the Canadian Imperial Bank of Commerce revealed that one of its mutual fund subsidiaries had lost a backup computer file containing personal data for 470,000 investors.

SECOR Consulting said 53 per cent of the survey respondents would be “very likely” to recommend their institution to a friend or family member.

“Our findings indicate that access to financial information, services and products via a multitude of sources allows Canadians the 24/7 support they demand, and is likely one of the satisfaction drivers,” said Petrina Dolby, a partner with the consulting firm.

The survey was conducted by Ipsos Reid, which polled 1,000 adult Canadians by telephone. Almost 90 per cent said they had used ATMs at least once, 56 per cent had used the Internet, 93 per cent had done banking at their local branches and 50 per cent had conducted their banking business by telephone at least once.

Asked which channel they used most often, 37 per cent said ATMs, 30 per cent said Internet, 26 per cent said in-branch banking and 6 per cent most often used the telephone.

21 January 2007

Canadian Banks Too Timid in China, Beijing Says

The Globe and Mail, Steven Chase, 21 January 2007

China wants Canadian banks to abandon their timid approach to the Asian market of 1.3 billion consumers and instead step up investment there, federal Finance Minister Jim Flaherty said Sunday, passing on advice that he underlined should be heeded.

“One of the things I heard from officials in China is that our financial services sector — particularly our banks — have probably been too conservative, not aggressive enough, in the China market,” Mr. Flaherty said during a conference call with reporters at the end of a week-long trip to Beijing and Shanghai.

He contrasted the banks' record in China with two big Canadian insurance companies, Manulife Financial Corp. and Sun Life Financial Inc., that have a relatively big presence in the populous Asian country.

“Our two insurance companies that are very active here — namely Manulife and Sun Life — have been fairly aggressive and have ... quite substantial market participation,” Mr. Flaherty said.

Although he was conveying the advice of Beijing officials, the Finance Minister suggested that he agreed with the comments.

“I think there may be something to be learned there, from the comments of the [Chinese] officials, that our banks perhaps ought to be more aggressive in this marketplace.”

Mr. Flaherty's visit was chiefly to help rebuild ties after a recent quarrel between the Harper government and Beijing over human rights, one that has significantly chilled Sino-Canadian relations.

But the Finance Minister was also there to ensure the recent Ottawa-Beijing frostiness hadn't hurt prospects for Canadian financial institutions and insurance companies in China, where a relatively untapped financial services market of more than $1-trillion (U.S.) in banked personal savings is ripe for development.

Mr. Flaherty met with China's Finance Minister Jin Renqing, governor of the Bank of China Zhou Xiaochuan and top financial services regulators. He said China's call for more Canadian banking investment singled out initial public offerings of Chinese banks as a prime example.

“There have been some IPOs, as you know, of Chinese banks in the past year and they have been very successful. The comment was made to me that perhaps the Canadian banks should be less conservative in participating in some of those large IPOs,” Mr. Flaherty said.

He noted that other foreign banks have made greater strides in China. “Certainly some banks from some other countries have been more aggressive here than Canadian banks have been.”

Canadian banks, including Bank of Nova Scotia and Bank of Montreal, are expanding in China.

Scotiabank, Canada's third-largest lender by assets, and International Finance Corp. may be close to acquiring a 25-per-cent stake in China's Dalian City Commercial Bank for $321.1-million, Reuters reported last week.

Toronto-based Scotiabank has been in China for 25 years, starting with a representative office in Beijing. Last year, the bank said it became the first Canadian lender eligible to trade yuan-denominated stocks and bonds. The bank bought a minority stake in Xi'an City Commercial Bank with the IFC in 2004.

Bank of Montreal, the fourth-biggest bank in Canada, opened its first Beijing branch in 1996, and plans to open a corporate banking branch in Shanghai.

Mr. Flaherty's trip took place as China grants foreigners even more access to its banking and financial services markets, under a deal it struck when it joined the World Trade Organization five years ago.

China has been gradually opening its bank and financial services market to foreigners since 2001. It was supposed to enact the final set of liberalization moves on Dec. 11, 2006, but detailed rules on these last measures have yet to be published, Canadian banks say.

19 January 2007

Scotia Capital Upgrades Life Insurance Cos to Overweight

Scotia Capital, 19 January 2007

Increasing EPS estimates due to F/X and moving to Overweight

• Canadian Insurers - moving to overweight. The macro environment continues to look good for our insurers. Currency rates are much more favourable than 6 months ago and continue to move in a direction that adds to our EPS estimates. Long term interest rates appear to have stabilized, and with Scotia Economics forecasting both U.S. 10-year treasuries and Government of Canada 10-year yields to remain relatively at current levels through to the middle of 2008, we see little in the way of head winds due to declining long term yields. U.S. equity markets, where the Canadian lifecos have the majority of their equity market risk, appear to be cooperating, which after increasing 14% last year appear to be on track (as per our strategist) to increase 7% this year (with average levels up closer to 10%, well above 7% estimate implied by our models and most company reserve assumptions). Credit conditions continue to track at very favourable levels. Given this backdrop, along with an expected S&P/TSX increase in the mid-single digit range for 2007, we are subsequently increasing our recommendation for the Canadian insurers from marketweight to overweight.

• Increasing EPS due to revised f/x estimates. Over the last six weeks Scotia Economics has increased its 2007 average estimate for the USD, the Yen, and the British pound (all versus the Canadian dollar) by 5%, 1% and 8% respectively, and increased its 2008 average estimate for the USD, the Yen and the British pound (all versus the Canadian dollar) by 3%, 2% and 5% respectively. With considerable earnings exposure outside of Canada (70% for MFC, 55% for GWO and 50% for SLF), we have adjusted our EPS estimates for these stocks accordingly. Exhibit 1 summarizes our EPS estimate changes. In Manulife's case, the EPS estimate changes were enough to warrant an increase in the share price target (from $41 to $42). For Great-West Lifeco and Sun Life our targets remain $37 and $55 respectively. Our average exchange rate for the USD is C$1.164 in 2007 and C$1.116 in 2008 (or US$0.86 and US$0.89), with the pound at C$2.28 in 2007 and C$2.16 in 2008, and the Yen at C$0.0104 in 2007 and C$0.0110 in 2008.

• With favourable currency tailwinds we expect solid mid-to-high teen EPS growth for GWO, MFC and SLF in 2007. The increase in the Canadian dollar over the last five years has masked the underlying EPS growth for these three large international Canadian lifecos. EPS CAGRs from 2002 for GWO, MFC and SLF were an impressive 15%, 15% and 12%, respectively, but, excluding the impact of currency, they were 18% in the case of GWO, 19% in the case of MFC and 16% in the case of SLF, as outlined in exhibit 2. Excluding the impact of currency we expect 2006-2008 EPS CAGR of 14% for MFC and GWO and 12.5% for SLF.

• A 50% increase in the U.S. Fixed Products segment contributed to MFC's exceptional 18% growth (24% ex f/x) - we don't expect this trend to continue. Exceptional one-time gains (as described by management) in 2006 in the U.S. Fixed Products segment, a business which accounts for 1/3 of the company's U.S divisions and, in our opinion, was somewhat reluctantly taken in the John Hancock deal due to its inherent low ROE, was the primary 2006 growth catalyst. Assuming earnings for this segment increased in line with its historical average (10%), we estimate earnings for the company's U.S. division would have increased 10% (ex f/x) in first nine months of 2006 (rather than actual 22% ex f/x), and overall EPS growth would have been in the 11%-12% range (14%-15% ex f/x). Assuming little in the way of exceptional one-time gains in the Fixed Products segment in 2007 and 2008, we expect the U.S. segment to grow earnings in the 10% range (ex f/x), still better than US Lifecos (which average 8% EPS growth through 2008) and much better than the 4% CAGR earnings growth rate MFC's U.S. division experienced in the three years prior to the John Hancock acquisition.

• Banks or Lifecos? - Assuming long term rates don't fall lifecos look attractive, with favourable currency trends providing the additional upside. Canadian lifecos currently trade at a 2% premium (forward P/E multiple) to the Canadian banks, in line with their 2% average, and below the 4%-10% levels we've seen over the past three years. The expected growth in EPS is heavily in the Canadian lifecos favour (15% in 2007, versus 10% for the banks, and 11% in 2008, versus 9% for the banks). Furthermore, we see a strong correlation in relative multiple (lifecos/banks) versus the U.S. 10-year treasury (see Exhibit 3). Assuming long-term yields do not fall we do not expect the relative multiple to decline below its current 2% premium. Should long term yields continue to climb, we would expect the lifeco premium to the banks to expand beyond current levels.

• Versus U.S. Lifecos the Canadian Lifecos look attractive, with multiple spread trading in-line with historical average and better EPS growth. The forward P/E multiple for the Canadian lifecos have come down relative to their U.S. counterparts, from a 15% premium a year ago to a 5% premium now, in-line with long term average of 5%. With much better EPS growth, 13% annually through 2008 versus the U.S. lifecos at 8%-9%, we believe the Canadian lifecos look attractive relative to the U.S. lifecos.