28 February 2007

Banks, Refuge from Roiled Stock Markets?

The Financial Post, Sean Silcoff, 28 February 2007

When markets go into crash mode, as they did yesterday, it usually pays to take a deep breath and ask, "OK, so what should I buy?"

That may take nerves of steel -- at the very least, it beats panicking -- but one sector always seems to pop up as the right answer to that question: Canadian banks. Keep an eye on them, but don't buy just yet. There could be some interesting bargains to come.

To be sure, bank stocks were hit yesterday: Five of the Big Six were down, by 0.3% (National Bank) to 2.9% (CIBC); only Bank of Montreal was up, by 0.6%.

The banks had been on a mini-run since Oct. 31, as billions of dollars drained out of the income trust market thanks to Finance Minister Jim Flaherty's Hallowe'en announcement. Those funds spilled into other investments offering good dividend yields.

But that pushed banks to levels that were too high -- the six bank stocks rose by an average 9.3% each -- leaving them with price-to-earnings and price-to-book-value ratios that were a bit too rich relative to their international peers.

Nick Majendie, chief portfolio manager with Canaccord Adams, for one, sold off some of the Canadian bank stocks in his portfolios.

Now, he's watching, and waiting: If the TSX sells off by 10% to 20%, as he expects, bank stocks will fall in tandem by 10% to 15%, he figures. If so, "I think there will be some great buys" among the banks. "But don't buy them today."

Consider this: Whether oil goes to US$20 a barrel or US$100, gold to US$400 an ounce or US$1,000, and long-term interest rates settle at 4% or 6%, Canadian bank profits will keep rising. "I don't think there's another sector in the TSX you can make that statement about," one bank analyst said. "If China corrects, and oil and gold and commodity prices go down, the least of your problems has to be your bank stocks."

For those of you thinking of selling your bank stocks now, a quick reminder: Canadian banks have an unbeatable franchise, stellar returns on equity and steadily growing profit and dividend payouts. Bank earnings rose from $13.6-billion for the Big Six in 2004 to $17.9-billion last year -- with the more stable parts of their business, such as retail banking and wealth-management, driving the bottom line.

Why do some Canadians hate the banks so much, and why is Mr. Flaherty after their ATM fees? Maybe it has to do with their latest round of record-breaking year-end results.

Their mutual fund businesses have been stealing customers from the independents, proving the controlled-distribution model is hard to beat. Even when they book big loan losses -- as they did during the telecom's nuclear winter earlier this decade -- and during market corrections the banks outperform the market. During the housing downturns in Calgary in the 1980s and Toronto in the 1990s, they did just fine.

Still not convinced? Ask yourself this question: Pick any Canadian bank and any gold company. If the market swoons, which one is likely to book higher profits two quarters from now?

Just don't rush to beat the RRSP deadline. The banks are still overvalued. But if the stock markets continue to roil, it might be time to make a deposit.

27 February 2007

Banks Ready ATM Fees Case for Flaherty

Financial Post, Duncan Mavin, 27 February 2007

Top bank executives are preparing their case this week for the defence of automated banking machine fees ahead of a meeting to discuss the controversial charges with federal Finance Minister Jim Flaherty scheduled for Monday.

Mr. Flaherty has asked Canada's big banks to explain why they charge the fees when some customers of banks in other countries do not have to pay anything.

The Finance Minister will face stiff opposition from the bankers, who are working on arguments they say show targeting the fees is unfair.

For instance, a minority of transactions result in charges, and the fees in any case reflect a cost of operating the machines, banking insiders argue.

They also point out that banks in other countries charge higher fees for other services.

As well, they note that the rapid expansion in the number of non-bank cash machines -- known as white label machines -- which charge higher fees than the banks, shows Canadians are willing to pay for the convenience of using ABMs.

"These fees are avoidable," said a senior executive of one of the biggest banks in Canada.

"If Finance is serious about this issue, they should launch a full-scale ad campaign to better-educate consumers on money-saving tips, such as using your own bank's machines, asking a store cashier for cash back on a debit transaction and making fewer, larger withdrawals," said another senior banker.

More than 75% of bank ABM cash withdrawals don't result in charges because they are by customers using their own banks' ABMs, according to the Canadian Bankers Association.

Canadians can also obtain money without incurring fees by taking cash back when they buy goods with their Interac debit cards. Almost two-thirds of Canadians who use Interac have taken cash back with a transaction.

The banks say they charge fees to customers of rival banks because there is a significant expense involved in having a network of ABMs.

Customers of Canada's banks have better access to ABM machines than bank customers anywhere else in the world. There are more than 1,600 ABMs per million inhabitants in Canada, compared with only about 1,300 per million in the United States, for example.

But that network has come at a cost to the banks. Toronto-Dominion Bank has just completed a project to upgrade 2,500 ABMs at a cost of $250- million, for instance.

Some banks say it costs as much as $500,000 to install a new machine, and then there is the cost of cleaning them and paying security firms to fill them with cash.

If the banks were not allowed to charge fees, there would be no incentive to maintaining an extensive network, said one executive. Instead of paying for your own ABMs, "why not allow your customers to ride on someone else's investment," he asked.

Some bankers say the government should allow individual financial institutions to determine their own ABM pricing structure. HSBC Canada, for example, has a deal with Bank of Montreal under which it has bought access to BMO's ABMs and has chosen not to charge a fee to HSBC customers.

The banks are also expected to point out to Mr. Flaherty next week that the highest fees are charged by the white label machines, such as those found in convenience stores and bars.

The white label market emerged in Canada after an order by the Competition Bureau in 1996 and was intended to increase the accessibility of ABMs. The bankers argue that the proliferation of the white label machines -- there are 35,000 non-bank ABMs compared with less than 16,000 that belong to the banks -- shows that Canadians are willing to pay for convenience.

Furthermore, Canadian banks argue that claims in other countries such as the United States and United Kingdom that banks do not charge customers for ABM transactions are misleading. Only a handful of U.S. bank customers get free ABM services. Although banks in the U.K. generally do not charge a fee for ABM usage, consumers and regulators there have complained vociferously in recent weeks about high levels of charges in other areas, such as fees for overdrafts and late credit card payments.

One Canadian bank executive said ABM fees charged by banks here are transparent. He also hinted that if the government put a ban on the bank's charging those fees, they might look elsewhere to cover their costs.

"We have to deliver a return to shareholders," he said. "If you give away ABM fees, you've got to get that from somewhere else."
Financial Post, Paul Vieira, with files from Duncan Mavin, 27 February 2007

There is more than just old-fashioned bank bashing going on in the current showdown between Ottawa and the country's lenders over ATM fees.

"The government seems intent on making this a political issue and no bank wants to get involved in politics," said a senior banking executive yesterday. "Is this what's good for consumers or is this about politics?"

The current probe by the Finance Minister, Jim Flaherty, or the pending study by MPs on the House of Commons finance committee, is not about making tangible changes to the way banks charge their customers for using automated tellers operated by another lender, observers say.

"There is no valid role for government intervention in ATMs. By and large, it is a case of Canadians who can't be bothered to walk a few hundred yards to another branch," said Laurence Booth, a professor at the University of Toronto's Rotman School of Management, noting there is an ATM network among credit unions that does not charge withdrawal fees.

Instead, there is a bigger game at play in Ottawa. The Conservatives are trying to distance themselves from the banks in the lead-up to a possible election, as well as raise the profile of the NDP; and legislators are issuing an invite to the banks to give up something now in return for favourable legislative changes down the road.

It was NDP leader Jack Layton that pushed ATM fees onto the federal agenda. Mr. Flaherty, at the NDP's behest, said he would look into that, and that has led to him meeting with bank chief executives next week. The get together was prompted after Mr. Flaherty suggested he was given an unsatisfactory response from the industry lobby group, the Canadian Bankers Association, about ATM fees.

By pursuing the issue, the Conservatives are strengthening the hand and relevancy of the NDP. For the Stephen Harper-led government, that is good -- because a stronger NDP potentially takes votes away from the Liberals, which in turn helps the Conservatives win seats in close, three-way races in the next election.

Should the Conservative government choose to go to the polls -- perhaps as early as this spring -- then it also doesn't hurt to position itself as a champion of the hard-working, taxpaying Canadian.

"He doesn't want to be seen in this environment with being too chummy with the banks," said an Ottawa insider who has ties to the financial services industry.

This is particularly the case given the $52-million in compensation that the big bank CEOs pocketed in 2006.

The banks can't be thrilled with Mr. Flaherty since he took over at Finance. He has ruled out bank mergers, saying they are not a priority, prohibited banks from selling insurance in the branches, and now has applied pressure over ATM fees.

"The ATM study is a pre-election ploy to appeal to the common people," said Lew Johnson, a finance professor at the Queen's School of Business, adding he drives to downtown Kingston, Ont., to go to his bank branch in order to avoid paying withdrawal fees on campus.

"We all use ATMs and we all get frustrated with the fees. People are really upset about the fees," he said.

Mr. Johnson said legislators such as Mr. Flaherty might have something else in mind in their fight against fees.

"If the banks gave up, or reduced, ATM fees, maybe implicitly Ottawa is saying, 'We might look more favourably on you as an industry if you come to us looking for changes in the Bank Act,' " he said.

26 February 2007

Dion Doesn't Favor Bank Mergers

Reuters, 26 February 2007

Liberal leader Stephane Dion said on Monday he did not favor bank mergers but would be willing to listen to any new arguments banks might advance for linking up.

Dion, the man most likely to run Canada's government if Conservative Prime Minister Stephen Harper loses the next election, said he believed Canada's banking system was working well as it is now.

"I do not favor bank mergers, but I am certainly willing to look at the issue to see how we may improve the system that is working well if you compare it to other countries," he told Reuters in his office on Parliament Hill.

Canada has six main banks, which have argued that they need to merge in order to meet global competition. The Conservatives may be their most natural ally, but Finance Minister Jim Flaherty has repeatedly said the issue was not a priority.

If the Liberals also oppose mergers, the file is unlikely to advance, at least until one of the parties gets a secure majority of seats in the House of Commons.

Dion said he understood "the need to be bigger in this competitive world."

But he said: "I think we need to protect our banking system, which is working very well in Canada. If they come up with additional reasons for bank mergers, we'll study them."

The Conservatives won a minority government in the January 2006 election. Canada could return to the polls this year, though many analysts do not expect an election till 2008.

25 February 2007

Ottawa to Grill Banks Over Fees

The Globe and Mail, Sinclair Stewart & Steven Chase, 25 February 2007

A high-profile Parliamentary committee is calling Canadian bankers on the carpet to justify the automated banking machine fees they charge consumers, adding further pressure on industry executives in advance of a private meeting with Finance Minister Jim Flaherty in Toronto next week.

The banks, which are preoccupied with annual meetings and posting quarterly results over the next several days, seem to have been taken off-guard by how quickly ABM fees have spiralled into a political issue.

The banks have yet to reach a consensus on how to respond.

Some bankers appear to believe that they will have to extend an olive branch to Mr. Flaherty, and they are preparing options for reducing the cost of electronic cash withdrawals.

Others, however, are dubious of this course, and insist it would be a mistake to craft policy simply in response to politicking.

While no one in the industry exactly welcomes the idea of going before a committee, they seemed to agree that public hearings on the fee debate could prove more useful than backroom conversations with the Finance Minister, since it would allow the banks to state their rationale for user fees to a larger audience.

“The hearings, I think, are a better route because it's a more fulsome, thoughtful discussion of the issue,” said an official with one of the Big Five banks, echoing similar sentiments within the sector.

The Commons finance committee voted to approve an NDP motion to probe ABM fees last Thursday, although the hearings aren't likely to begin until after the federal budget is tabled March 19. The House of Commons adjourns on Friday for a two-week break, and only resumes sitting the day the budget is delivered. Parliamentary committees usually do not meet when the Commons is not sitting. NDP finance critic Judy Wasylycia-Leis, the author of the motion, said MPs want the chief executive officers of Canada's major banks to show up at the hearings, and would like to build momentum to reduce or even abolish bank fees.

“I expect that when the CEOs are called, they will show up,” she said. “That they won't send PR people from their banks instead. That they'll be there in full force explaining why they need to charge such fees when they are, in fact, so profitable. Canadians deserve an answer. More than that, they deserve a break.”

The industry has argued that banking fees as a whole in Canada are relatively low, and that the cost of maintaining and expanding an ABM network requires them to charge. Furthermore, they argue that consumers can mostly avoid fees by withdrawing money from ABMs operated by their own banks, rather than using machines of rival banks.

David Moorcroft, a spokesman for Royal Bank of Canada, said the country's largest bank will co-operate with Ottawa if it is asked to attend the hearings. “I hope it will be an open, unbiased, fair evaluation of the facts, and not a witch hunt.” .

Frank Switzer, a spokesman for Bank of Nova Scotia, said the bank is always willing to engage in a “constructive dialogue with MPs” and would participate in the hearings if it is asked.

Mr. Flaherty wrote a letter to the banks in December, asking them to explain why they charge for ABM usage while banks in some other countries, such as Britain, run the network for free.

The banks responded through their lobbying arm, but the explanation failed to satisfy Ottawa. The Finance Minister wrote a letter to the bank CEOs 1½ weeks ago, saying he had heard a number of concerns about ABM fees, and inquiring what options they might have for reducing the burden of these charges on students and seniors.

One bank official suggested it's possible that a bank could act pre-emptively, and float a possible compromise before the hearings.

“I think people are more focused right now on the meeting with the minister,” rather than the hearings, the official said. “I think the question is still, what can you do? It's whether you move on your own, or whether you move as a group.”

One of the groups that will be conspicuously absent from the hearings is the cadre of so-called “white-label” operators whose independent ABMs have become fixtures in restaurants, gas stations, and convenience stores. These unregulated machines are typically far more expensive than banks, and have surged in popularity, accounting for more than two-thirds of the ABMs in Canada, according to the Canadian Bankers Association.

“If you really want to do something for consumers, you should regulate white labels as you do banks,” one banker groused.

Currently, however, these generic ABMs are regulated provincially under consumer protection law, meaning they won't be part of the hearings, Ms. Wasylycia-Leis said.

She added her party is willing to look for ways to help Ottawa assume more supervisory control over white-label machines, but is focusing on banks first. “It appears to be a joint responsibility with the provinces and it falls between the cracks — it's one of those areas that has been allowed to explode and nobody seems to be taking charge,” she said. “And Canadians and consumers are paying the price.”

24 February 2007

Brookfield Asset Management Inc. Profile

Barron's, Michael Santoli, 24 February 2007

Pension funds are desperate for long-term investment income amid low bond yields. Companies and governments are selling off their infrastructure assets to raise capital. And emerging-market economies are becoming resource consumers as well as producers.

Brookfield Asset Management, a low-profile but high-performance Toronto-based investment firm, stands astride these powerful and durable trends, having transformed itself in 15 years from a jumbled conglomerate of commodity and financial businesses into a focused manager of alternative assets, from real estate and hydro-power plants to timber lands and power grids. Its deal-making expertise, value-investing discipline and long-term perspective have generated superior returns on capital and extraordinary profits for shareholders.

Operating cash flow per share -- the preferred metric, because it adds back depreciation on assets that don't depreciate -- grew 35% last year, to $4.43, after rising 45% in 2005.

Brookfield's shares have more than doubled in two years, to a recent price of $55.

With its formidable head start in the burgeoning field of infrastructure management, Brookfield looks well-positioned to continue pleasing investors. Given foreseeable cash-flow trends, the stock easily could approach 70 in the next couple of years.

Although not well known in the U.S. -- except for its ownership of premium office buildings through 50%-owned Brookfield Properties -- the company has attained a $20 billion market value and manages $70 billion of assets.

Known as Brascan until November 2005, Brookfield was founded in 1895 to invest North American capital in Latin America. It largely exited Brazil in the 1970s, becoming a holding company with interests in mining, timber and real estate. The last of its mining assets, Falconbridge, was sold last year.

Bruce Flatt is president and chief executive of Brookfield, but he runs the company as first among near-equals, also sharing the title of managing partner with four other executives. This underscores Brookfield's collegial culture of capital stewardship.

Only 41 years old, Flatt has been with the company since 1990, and has been instrumental in re-imagining it as an opportunistic asset manager of tangible, long-lived, cash-generating properties.

Flatt and his colleagues began building Brookfield's office-building business in the real-estate recession of the early 1990s, taking on a large slug of the properties owned by then-bankrupt Olympia & York. (This portfolio includes New York's World Financial Center, home to Barron's.) Brookfield's value acumen was richly rewarded as commercial real-estate values soared in urban markets.

In the past decade, Brookfield has bought two-thirds of all the hydropower-generating stations that have come on the market, a sustainably profitable collection of assets in North and South America now worth more than $5 billion. In addition, the company acquired a large power-transmission system in Chile, which can serve as a platform for additional power-grid purchases. Brookfield also owns more than two million acres of timber lands, a position that will grow with the planned purchase of Canada's Longview Fibre.

As Flatt, who is based in Toronto, described the situation in an interview in his New York office, the company saw its holdings had benefited dramatically from declining interest rates. With rates unlikely to go much lower, "we decided five years ago that we had to earn an extra return," he says.

Around this time, Brookfield began to manage institutional money for outsiders, in addition to shareholder funds. Today, some $30 billion, or 43% of its managed assets are provided by unaffiliated institutions.

Brookfield has moved some holdings off its balance sheet and into discrete funds along with client money, a familiar model in asset management. It has launched a new fund to invest in Brazilian shopping centers, and a finance fund to invest in debt instruments and distressed securities, a specialty.

While Brookfield's asset mix might look haphazard, its target markets share several important similarities. They feature very long-duration assets requiring only modest ongoing capital investment, with steady and growing cash flows. Brookfield studies every investment sector in depth, maintains a value discipline in purchasing new assets and applies a sensible amount of leverage to attain its stringent return-on-capital goals. It is now looking at ports, pipelines, railroads and other large physical installations.

Brookfield's value standards were on display this month, when it was outbid by Simon Property Group for mall-operator Mills Corp. After doing intense due diligence on the company, Brookfield bid $21 a share and provided financing. But when Simon offered $24 a share, Brookfield stood down, collecting a $40 million breakup fee and a $25 million expense reimbursement. It had hoped to use Mills as a platform to build a larger retail real-estate portfolio, but is unlikely to buy other assets in the sector because prices are too high.

Flatt's insistence on buying high-quality assets at a decent price rather than subpar assets on the cheap is reminiscent of Warren Buffett's approach. Brookfield also shares Buffett's investment horizon: "forever."

And, like Buffett, Flatt's letters to shareholders clearly set out financial objectives and principles. Brookfield verges on under-promising; when it over-delivers, it cautions investors to keep stock-return expectations grounded. Brookfield seeks 12% annualized growth in operating cash flow.

Charles Kantor, a portfolio manager at Neuberger Berman, a longtime Brookfield shareholder, says, ""Management follows a very disciplined and patient long-term approach to capital allocation, that focuses on generating stable and growing long-term cash flow at attractive risk-adjusted returns. The team enjoys a unique ability to take advantage of stock- market dislocations to create wealth."

Infrastructure investing is fast becoming the next new thing on Wall Street. Goldman Sachs has entered the fray with a $5 billion new fund. Three big financial institutions bought London City Airport last year, and Barron's has chronicled the moves by Australia's Macquarie to pay up for U.S. toll roads.

Flatt acknowledges the growing popularity of infrastructure, and concedes it could make new investments at good prices harder to find. "More money [in this sector] is bad for the short-term investment horizon," he says. "Longer term, we'll have all these funds creating a new industry."

Flatt estimates global companies are 50% to 60% done with divesting infrastructure assets, while governments barely have started.

Brookfield enjoys several advantages over rivals. It is bigger than many, and can raise debt rapidly. It has experience with nontraditional assets, and perhaps most important, has built the operating structure around targeted industries, such as hydropower and Brazilian real estate.

It takes small positions in targets to learn the business and build relationships, and strives to keep existing management at acquired companies. Notably, Brookfield doesn't usually take management fees from the uninvested portions of client funds. Its own returns are its clients' returns, an arrangement that, like much else, should please both shareholders and clients for years to come.


23 February 2007

Scotiabank in Puerto Rico

BNamericas, 23 February 2007

Canada's Scotiabank is mulling further investments to lift its share of the Puerto Rico market to 8-10%, the head of the local unit told BNamericas.

On February 16, Scotiabank bought a 10% stake in Puerto Rico's First BanCorp - parent of FirstBank - for some US$94mn. First Bancorp will issue about 9.25mn shares that Scotiabank will buy, a deal expected to close in two months after regulatory approvals are granted, Scotiabank de Puerto Rico president and CEO Bruce Bowen said.

"When they approached us we expressed interest and we think that given the price and where the market is right now it will be a good medium to long-term investment," he said.

"We are looking at many different opportunities. I do think there are other institutions and portfolios that over the next year or two could be very good opportunities."

Scotiabank has been active since 1910 in Puerto Rico, where it operates through 20 branches and commands a roughly 3% loan market share.

"With that level of market share, it is very difficult to get a proper return on equity in the long term and economies of scale from an efficiency standpoint to compete with banks that have 10% or more market shares," Bowen said.

First BanCorp would negotiate exclusively with Scotiabank if it starts a sale process or receives an offer from the Canadian bank within 18 months. It will also give Scotiabank a chance to respond in the event of a third-party takeover bid.

"There certainly is nothing in our agreement with them that has anything specific about any further investment. It would be pure speculation to anticipate what will happen, but anything can happen," Bowen said.

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

The bank still faces outstanding class-action lawsuits and has not yet filed its 2006 financial results. Analysts see these legal and regulatory issues posing an obstacle for Scotiabank buying the rest of First BanCorp.

Analysts believe the Puerto Rican banking sector is ripe for consolidation 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.

Bowen said the banking system provides opportunities Scotiabank will take, as major players have become "distracted" over accounting woes.

The executive said Scotiabank de Puerto Rico has increased its market share in mortgage originations to slightly below 3% from 1% during the last 18 months.

San Juan-based First BanCorp is the second-largest financial holding company in the commonwealth and the 59th largest bank holding company in the US, with total assets of US$17.4bn as of end-September, 2006, and 139 branches.
The Globe and Mail, Andrew Willis, 23 February 2007

At first blush, Rick Waugh's latest foreign venture looked totally out of character for Bank of Nova Scotia.

A Canadian bank that wins praise for centralized management and tight control of operations dropped $94-million (U.S.) last week for a 10-per-cent stake in Puerto Rico's second-largest financial institution, First Bancorp. The cash doesn't even buy Mr. Waugh a seat at the table at what has been a troubled company: Scotiabank is simply a "non-voting observer" at the Puerto Rican bank's board meetings.

Why dip a toe in Caribbean waters, and take a tiny stake, when Scotiabank has more than enough firepower to take over First Bancorp?

To explain his strategic thinking, Mr. Waugh points to the long overseas experience of Canada's most international bank, which will celebrate its 175th birthday in March.

"Our preference is always to have control. But our approach is always to respect local owners and local regulations," said Mr. Waugh, a native of Manitoba who has climbed every corporate rung since taking a job at the Winnipeg branch in 1970. Then he starts into a quick history lesson.

Few of the deals done by Mr. Waugh and his predecessors happened quickly. Scotiabank was in Peru for decades with a minority stake in a privately owned bank. As both sides grew comfortable with one another, the stake grew.

Three years ago, an Italian bank decided to sell its Peruvian operation. Scotiabank was the only rival invited to bid, and with its local partner, was able to take over the entire operation for $390-million in 2005. It took decades, but Scotiabank now owns the No. 3 bank in Peru.

The same tactics — take an ownership toehold and turn it into a stranglehold over time — have played out in Costa Rica, the Caribbean and most importantly in Mexico, where Scotiabank now earns more than $400-million a year after simply breaking even and weathering crisis after crisis in the 1980s and early 1990s.

So while domestic rivals such as Toronto-Dominion Bank and Royal Bank of Canada are picking off regional U.S. retail banks, vying for the deals against some of the largest financial players on the planet, Scotiabank is continuing to work its Caribbean, Central and South American trap lines.

"If you look at U.S. bank takeovers, they are almost always contested auctions, with some very serious players involved," Mr. Waugh said. "Our deal pipeline is as full as it's ever been, and we aren't involved in situations where we are in bake-offs against bigger banks."

Which brings us to Puerto Rico. Scotiabank has been on the island for 97 years and has 600 employees, 23 branches and five mortgage centres, catering to both upper- and middle-class retail clients and the business community. As a result of the heft of its Canadian parent, which has $5-billion more capital than regulators say it needs, the local bank is one of the strongest in the region.

Crosstown rival First Bancorp spent the past two years coping with a weak balance sheet, management turnover and shareholder lawsuits. The hole in the balance sheet, now filled by Scotiabank's investment, stemmed largely from mortgage-based ventures that featured partners who did not hold up their end of deals with First Bancorp. The other problems flowed from those capital issues.

Scotiabank couldn't do a friendly takeover in Puerto Rico because the First Bancorp board wasn't willing to sell at what it saw as a fire-sale price. Mr. Waugh's arrival buys First Bancorp time to fix what's busted. However, in exchange for its money, Scotiabank has negotiated all sorts of advantages for staging a takeover in the next 18 months.

Acquisitions and any other growth plans at Scotiabank must meet three key criteria: They have to create sustainable revenues, represent a productive use of capital for a bank that turned in an industry-leading 22-per-cent return on equity, and must never expose the bank to potential risks that could endanger the entire franchise. These broad standards give local managers, and Mr. Waugh, a fair degree of flexibility when it comes to doing deals.

Mr. Waugh has been CEO for just three years. At 59, he can look forward to up to six more years at the helm. Yet many of the seeds the CEO is planting, including the Puerto Rican investment, may not bear fruit on his watch. That's exactly the way Mr. Waugh wants to run the bank.

"We like to think we run a tight ship, and deliver consistently on a quarter-to-quarter basis," Mr. Waugh said. "But my job, and the board's job, is to think a decade ahead, and we do that consistently, too."

Enron Trial Against Banks Delayed by 1 Week

Bloomberg, Laurel Brubaker Calkins and Jef Feeley, 23 February 2007

The judge overseeing Enron Corp. investors' $40 billion lawsuit against the company's former lenders delayed the trial by one week, to April 16.

U.S. District Judge Melinda Harmon in Houston yesterday pushed back the start of the trial, originally set for April 9, after refusing to delay the case indefinitely while an appeals court decides whether shareholders can continue to sue Merrill Lynch & Co., Credit Suisse Group and Barclays Plc as a group.

``Everybody is happy to have another week to get ready for trial,'' William Lerach, the investors' lead lawyer, said in an interview today.

Enron was the world's largest energy-trading company, with a market value of as much as $68 billion, before it collapsed in December 2001. The bankruptcy, the second-largest in U.S. history after WorldCom Inc., wiped out more than 5,000 jobs and at least $1 billion in retirement funds.

Enron's investors accused the Houston-based company's banks of helping former Chairman Kenneth Lay and ex-Chief Executive Officer Jeffrey Skilling manipulate company finances by disguising debt as loans, financing sham energy trades and using off-the-books partnerships to hide losses and inflate revenue.

New York-based Merrill, Zurich-based Credit Suisse and London-based Barclays have denied the allegations. On Feb. 5, Merrill and Credit Suisse told a U.S. appeals court in New Orleans that shareholders shouldn't be able to press their suit as a group because they can't prove that the firms directly participated in the accounting fraud at Enron.

Mark Herr, a Merrill spokesman, said he had no comment on Harmon's decision to delay the trial. Penn Pendleton, a spokesman for Credit Suisse, and David Braff, a New York-based lawyer for Barclays, weren't immediately available for comment.

2006 Compensation of Bank CEOs

Bloomberg, Sean B. Pasternak, 23 February 2007

Toronto-Dominion Bank, Canada's second-largest bank by assets, increased the pay of Chief Executive Officer Edmund Clark 3 percent last year after profit more than doubled to a record.

Clark received C$11.4 million ($9.85 million) in salary, bonus and stock options for the year that ended Oct. 31, according to a filing with regulators today. That compares with C$11.1 million in the year-earlier period. The bank also contributed C$515,000 to Clark's pension, compared with C$554,000, a year earlier.

Clark, 59, was the second highest-paid banker in 2006, after Royal Bank of Canada CEO Gordon Nixon, who received C$11.9 million. Toronto-Dominion's profit last year surged to C$4.6 billion from C$2.23 billion, led by a gain from selling a stake in its discount brokerage to TD Ameritrade Holding Corp.

Robert Dorrance, CEO of the TD Securities investment bank, was paid C$4.38 million in 2006, compared with C$4 million a year earlier. Chief Financial Officer Colleen Johnston, who started the job in November 2005, was paid C$2.4 million.

Toronto-Dominion is the last of Canada's six main banks to disclose executive compensation.
Bloomberg, Doug Alexander, 9 February 2007

Royal Bank of Canada, the country's largest bank, gave Chief Executive Officer Gordon Nixon a 25 percent raise to C$11.9 million ($10.1 million) in 2006 as earnings rose to a record.

Nixon, 50, received a salary of C$1.4 million, a bonus of C$5 million, and deferred shares and stock options valued at C$5.5 million, according to a filing today with Canadian securities regulators. That's up from C$9.5 million in fiscal 2005. The bank also contributed C$766,000 toward Nixon's pension plan, compared with C$620,000 a year earlier.

Royal Bank's profit rose 40 percent to C$4.73 billion in the year ended Oct. 31 and Nixon met six of his seven financial targets. He resumed the bank's U.S. expansion with five acquisitions last year, including Atlanta-based Flag Financial, American Guaranty & Trust, and 39 branches from AmSouth Bancorp.

Nixon was the highest paid CEO at a Canadian bank of the four that have reported full compensation. Bank of Nova Scotia paid Richard Waugh C$8.9 million, up 4.7 percent from the previous year. Bank of Montreal paid Anthony Comper C$8.1 million, unchanged from 2005, while National Bank of Canada cut compensation for Real Raymond by 7 percent to C$6.5 million.

Nixon's pay trails that of CEOs at similar-sized U.S. banks, such as US Bancorp. The Minneapolis-based lender paid chairman and former CEO Jerry Grundhofer total compensation of almost $18 million in 2005.

Royal Bank said Chief Operating Officer Barbara Stymiest earned C$4.55 million in total compensation, compared with C$4.2 million in the previous year. The bank contributed C$239,000 toward Stymiest's pension plan, up from C$179,000 a year earlier.

Charles Winograd, who heads the RBC Capital Markets investment bank, received C$10.4 million, up 73 percent from C$6 million in 2005. The bank contributed C$24,000 toward Winograd's pension, compared with C$21,000 in 2005.
Bloomberg, Sean B. Pasternak, 2 February 2007

Bank of Nova Scotia boosted the pay of Chief Executive Officer Richard Waugh by 4.7 percent last year after Canada's third-largest bank reported record annual profit.

Waugh, 59, received C$8.9 million ($7.5 million) in salary, bonus and stock options, the Toronto-based bank said today in a filing with Canadian securities regulators. That compares with C$8.5 million in the year-earlier period. Scotiabank also contributed C$553,000 to Waugh's pension, compared with C$533,000, a year ago.

Scotiabank increased earnings 11 percent to C$3.58 billion last year as the lender added to its international operations. The bank has spent about C$1 billion over the last year on acquisitions in Peru, Costa Rico and other areas.

Vice-Chairman and Chief Administrative Officer Sarabjit Marwah received C$3.48 million in total compensation last year, up from C$2.93 million a year earlier. Chief Risk Officer Brian Porter received C$3 million. His year-earlier compensation wasn't listed.

Scotiabank is the fourth of Canada's six main banks to report executive compensation for the year that ended Oct. 31. Bank of Montreal paid CEO Anthony Comper C$8.1 million, unchanged from the previous year, while National Bank of Canada cut the total compensation for CEO Real Raymond by 7 percent to C$6.5 million.
Bloomberg, Sean B. Pasternak, 26 January 2007

Bank of Montreal paid Chief Executive Officer Anthony Comper C$8.1 million ($6.87 million) in total compensation in 2006, unchanged from the previous year, after revenue growth was less than the bank expected.

Comper received a salary of C$1 million, a bonus of C$1.6 million, and shares and stock options valued at C$5.5 million, the Toronto-based bank said today in a regulatory filing. The bank also made C$845,000 in pension contributions to Comper.

Canada's fourth-biggest bank met four of its five financial targets, as profit rose to a record C$2.66 billion in Comper's last full year as CEO. Comper, 61, steps down March 1.

Revenue growth, excluding the 2005 sale of its U.S. online brokerage, was less than expected, the compensation committee said in the filing. The bank's ``relative performance was determined to be average'' after it exceeded the earnings per share target growth, the report said.

Chief Operating Officer William Downe, who will replace Comper, received $4.97 million in 2006, up from $4.9 million the year before, when he was head of the investment banking unit. Bank of Montreal also contributed $827,600 in pension costs.

Yvan Bourdeau, CEO of BMO Capital Markets, received C$6.5 million in total compensation, compared with C$5.5 million in the year-earlier period.

Chief Financial Officer Karen Maidment received C$3.15 million in salary, bonus and stock options, compared with C$2.97 million in 2005.
Bloomberg, Doug Alexander, 25 January 2007

Canadian Imperial Bank of Commerce, Canada's fifth-biggest bank, raised the salary of Chief Executive Officer Gerald McCaughey last year by 35 percent to C$1 million ($848,900) as profit rose to a record.

McCaughey's total compensation for the year ended October 2006, which may include cash bonuses and stock options, won't be determined until the end of this fiscal year, the Toronto-based bank said today in a regulatory filing. McCaughey had a 2005 salary of C$741,667 and total compensation of C$5.97 million.

CIBC reported a C$2.64 billion profit for the year as McCaughey, 50, pared expenses by cutting jobs and reducing rents and salaries as revenue growth slowed. The bank reached all but one of its financial objectives after missing a target for dividend payouts.

McCaughey currently holds 81,991 restricted and performance-based shares, valued at C$7.18 million at the end of October, according to the filing. McCaughey's employment contract states that all variable and equity incentives, excluding options, won't be determined until October.

The bank contributed C$365,000 to McCaughey's pension last year, about double the C$177,000 he received in 2005.

Brian Shaw, Chief Executive Officer of the CIBC World Markets investment bank, had total compensation of C$7.3 million last year, up from C$4.72 million. Chief Risk Officer Steven McGirr received C$4.88 million in total compensation, compared with a year-earlier C$3.76 million.

CIBC changed how it determines annual bonuses for a CEO in December 2005 to better reflect the executive's longer-term performance. Cash bonuses and restricted share awards for any fiscal year are determined by the board at the end of the following fiscal year.

The change was proposed by McCaughey, who became CEO after John Hunkin retired on July 31, 2005. A day after McCaughey took over, CIBC announced $2.4 billion in costs related to settlements of claims from investors of energy trader Enron Corp.
Bloomberg, Sean B. Pasternak, 24 January 2007

National Bank of Canada, the country's sixth-largest bank, decreased the compensation for Chief Executive Officer Real Raymond 7 percent to C$6.5 million ($5.5 million) in 2006, his last full year in the position.

Raymond, 56, received C$1 million in salary, C$4 million in stock options and other grants and a bonus of C$1.5 million, the Montreal-based bank said today in a regulatory filing. That compares with total compensation of C$7 million in the previous fiscal year.

National Bank had record profit of C$871 million, or C$5.13 a share last year because of higher fees from mutual fund sales and merger and acquisition advice. Raymond announced this month that he will leave the bank in June after more than three decades there.

Louis Vachon, the chief operating officer who will replace Raymond, was paid C$6.5 million in bonus and stock options, up from C$6.14 million a year ago. Vachon, 44, also served as head of the firm's National Bank Financial investment bank until July. The bank contributed C$124,000 to Vachon's pension, compared with a year-earlier C$55,000.

Raymond accumulated a pension of C$16.5 million as of Oct. 31, the filing said. The bank contributed C$451,000 to Raymond's pension, compared with C$395,000 in the year-earlier period.

TD Bank Q1 2007 Earnings

Scotia Capital, 23 February 2007

• Toronto-Dominion Bank (TD) reported cash operating earnings of $1.38 per share, an increase of 20% from $1.15 per share a year earlier. Wealth Management led earnings growth at 35% aided by TD Ameritrade, with Canadian P&C earnings up 14%, Wholesale Banking earnings declined 1% from a year earlier which was a near record quarter and TD Banknorth earnings declined 2%.

• The Corporate Segment aided by a favourable tax adjustment added $0.05 to $0.07 per share to earnings.

• Cash ROE in the quarter was 19.9% unchanged from a year earlier.

• Reported earnings were $1.26 per share which included the following after-tax items: the amortization of intangibles of $83 million or $0.11 per share and a loss of $5 million or $0.01 due to the change in fair value of credit default swaps hedging the corporate loan book.

Dividend Increased 10%

• TD announced a dividend increase of 10% to $2.12 per share from $1.92 per share. The current payout ratio is 40% based on 2007E earnings.

High Operating Leverage; Revenue Growth Solid

• TD’s operating leverage in Q1 was strong at 6%, with revenue growth of 5% and expenses declining 1%.

Canadian P&C Earnings Up 14%

• Canadian P&C earnings in Q1 increased 14% to $544 million driven by strong insurance results and strong retail loan volume.

• Retail market share remained stable, with the largest improvement in total small business loans, up 80 bp year over year and 10 bp sequentially.

• Loan securitization revenue increased to $134 million versus $97 million in the previous quarter and $92 million a year earlier.

• Insurance revenue increased to $254 million from $214 million in the previous quarter, and from $224 million a year earlier.

• Card service revenue was $110 million versus $113 million in the previous quarter and $81 million a year earlier.

• Total revenue in Q1/07 increased 11%, with expenses increasing 8% resulting in strong positive operating leverage of 3%.

• The efficiency ratio improved 190 bp to 52.7%.

Canadian Retail NIM at 3.03%

• Canadian retail net interest margin (NIM) was 3.03% in the quarter, down 4 bp sequentially, but up 2 bp from a year earlier.

Total Wealth Management Earnings Up 35%

• Wealth Management earnings, including the bank’s equity share of TD Ameritrade, increased 35% to $186 million.

Canadian Wealth Management

• Domestic Wealth Management earnings increased 16% to $122 million from $105 million a year earlier, due to higher transaction volume and higher mutual fund fees from asset growth.

• Revenue increased 12% with expenses increasing 10% to $551 million and $364 million, respectively.

• Mutual fund revenue increased 7% to $175 million from $164 million a year earlier.

• Mutual fund assets under management (IFIC, includes PIC assets) increased 17% to $55.9 billion.

TD Ameritrade

• TD Ameritrade contributed $64 million or $0.09 per share to earnings in the quarter versus $53 million or $0.07 per share in the previous quarter and $33 million a year earlier. TD Ameritrade’s contribution represented 7% of total bank earnings.

TD Banknorth Earnings Continue Drag on Profitability

• TD Banknorth earnings contribution to TD Bank declined 2% to $64 million from $65 million a year earlier. Earnings were negatively impacted by higher loan loss provisions and higher advertising and marketing expenses. TD Banknorth contributed $0.09 per share to earnings in the quarter.

• TD Banknorh earnings have been under pressure for the past 7 quarters.

• Net interest margin at TD Banknorth declined 6 bp from the previous quarter to 3.97% due to intense competition for both loans and deposits, and margin compression. NIM was down 1 bp from a year earlier.

Wholesale Banking Earnings Flat from Record High Quarter

• TD Securities earnings in Q1 declined 1% to $197 million from $199 million a year earlier, which was a near record quarter.

• Operating leverage was flat with revenue and expenses both declining 4% (Q1/06 expenses adjusted to exclude $50 million restructuring charge).

Capital Markets Revenue

• Capital markets revenue increased 9% to $373 million on a comparative basis.

Trading Revenue Rebounds

• Trading revenue rebounded to $330 million from a weak $174 million in the previous quarter and $375 million a year earlier.

• Trading revenue was driven by interest rate and credit portfolios trading revenue increasing to $105 million from $45 million in the previous quarter and from $199 million a year earlier. Equity and other portfolios were weak in the quarter at $6 million. Trading revenue in foreign exchange products was $73 million versus $54 million in the previous quarter and from $79 million a year earlier.

Security Surplus Increases to $990 Million

• Security gains were $70 million or $0.06 per share, compared with $87 million or $0.08 per share in the previous quarter and $58 million or $0.05 per share a year earlier.

• Unrealized surplus increased to $990 million with an estimated three quarters of the surplus derived from the Merchant Banking portfolio versus $774 million in the previous quarter and $806 million a year earlier.

Loan Loss Provisions

• Specific loan loss provisions (LLPs) increased to $163 million or 0.38% of loans versus $142 million or 0.33% of loans in the previous quarter. The increase in LLPs was due to higher VISA provisions due to operational issues with the bank's new VISA platform as well as higher provisions on personal loans related to volume, higher write-offs, and lower SB&C recoveries.

• Our 2007 LLP estimate is unchanged at $600 million or 0.35% of loans up from 2006 LLP levels of $424 million or 0.25% of loans, driven mainly by volume and lower recoveries in small business, in addition to higher loan losses at TD Banknorth (due in part to the Hudson United acquisition) and lower corporate loan recoveries.

• Our 2008 LLP forecast is unchanged at $675 million or 0.39% of loans.

Loan Formations

• New gross impaired loan formations were $332 million versus $299 million in the previous quarter and $263 million a year earlier. The increase in gross impaired loan formations was mainly at TD Banknorth and P&C Canada. The higher formations at TD Banknorth are expected to lead to higher loan losses especially if the weakness in housing continues to spread to the general economy.

• Net impaired loan formations were $216 million versus $218 million in the previous quarter and $168 million a year earlier.

Tier 1 Capital 11.9%

• Tier 1 capital ratio was 11.9%, down slightly from 12.0% in the previous quarter, and unchanged from a year earlier.

Recent Events

• On November 21, TD announced that it will acquire the remaining 41% stake in TD Banknorth for US$32.33 per BNK share or US$3.2 billion (C$3.6 billion) in an all-cash offer. The transaction will be financed by $3.0 billion primarily of subordinated debt. The transaction is expected to be accretive to TD by $0.05 per share in 2007 and $0.16 per share in 2008. Closing is expected for March or April 2007.

Maintain 2-Sector Perform

• We are increasing our 2007 earnings estimate to $5.30 per share from $5.15 per share and our 2008 earnings estimate to $5.90 per share from $5.65 per share. The higher earnings estimates reflect continued earnings growth at TD Canada Trust and Wealth Management and accretion from the buy in of TD Banknorth.

• Our 12-month share price target is $81, representing 15.3x our 2007 earnings estimate and 13.7x our 2008 earnings estimate.

• We maintain our 2-Sector Perform on TD with earnings strength at TDCT and Wealth Management expected to be muted by continued weakness at TD Banknorth.
Financial Post, Jonathan Ratner, 23 Febraury 2007

While the first billion dollar quarterly profit in Toronto-Dominion Bank history helped overshadow the company’s cautious growth outlook, the first quarter results did come in ahead of analyst expectations.

As a result, several of them have hiked their price targets for TD shares substantially.

While maintaining his “top pick” rating on the stock, Desjardins Securities analyst Michael Goldberg raised his target to $78.50 from $75, representing upside of nearly 11%.

He also noted that the bank’s decision to hike its quarterly dividend by 5¢, or more than 10%, to 53¢ per share, exceeded expectations.

In a research note, Mr. Goldberg highlighted how TD had grown through acquisitions – Canada Trust in 2000, TD Banknorth in 2005 and an almost 40% stake in TD Ameritrade in 2006.

While he thinks the bank is well capitalized as it prepares to privatize Banknorth, Mr. Goldberg sees the growth and diversification of its business platforms as key to earnings and dividend growth going forward.

Merrill Lynch analyst Andre-Phillippe Hardy also hiked his target price to $77 from $74 to reflect higher estimated earnings per share (EPS) and book value.

“The quarterly results give us comfort that TD should grow 2007 and 2008 EPS at a rate that exceeds the industry,” he said in a research note, adding that TD’s valuation will be somewhat protect by its business risk if capital markets and credit conditions deteriorate.

John Aiken at Dundee Securities also boosted his price target on TD shares to $78 from $76, but kept his “market neutral” rating unchanged.

Blackmont Capital’s Brad Smith upped his target to $73 from $68, while maintaining a “hold” rating on TD shares.

Jason Bilodeau at UBS is the most bullish of the bunch with an $80 price target, up from $77.
Financial Post, Duncan Mavin, 23 February 2007

Toronto-Dominion Bank delivered its first billion-dollar quarter yesterday, but tempered the positive results with rising bad-debt provisions and a cautious outlook for revenue growth.

TD kicked off bank-earnings season with adjusted net income of $1-billion, up 21% from $835- million a year ago. It was the first time the bank's adjusted earnings have beaten the billion-dollar mark in a quarter.

TD also announced an increase in its quarterly dividend of 5?, or 10%, to 53? a share.

However, there were warnings for investors too, as chief executive Ed Clark said the results will be "a hard act to follow" in the rest of 2007.

The bank's performance was driven by strength in domestic retail banking in particular. TD's Canadian bank franchise --among the strongest of the Canadian banks -- reported revenue grew by 11%, or $206-million, compared with last year. Mr. Clark said that sort of growth could be hard to come by in future periods.

"We're saying start to prepare that you're not going to have 11% revenue growth forever," he said.

Brenda Lum, managing director of Canadian financial institutions at Dominion Bond Rating Service, viewed the bank's results positively, but also asked, "How long can outstanding [domestic retail banking] growth last?"

The rate of growth in TD's topline "has to go down unless they can find ways to grow in businesses where they are under-represented," like insurance or small business banking, Ms. Lum said.

In anticipation of declining revenue growth, TD's management is hoping to keep a lid on costs.

The bank reported non-interest expenses of $2.2-billion in the quarter, essentially flat from the previous quarter and down 4.6% from the first quarter of 2006.

However, one area where costs could be set to rise is in relation to loan losses.

A downturn in the credit cycle has long been forecast as banks have recorded historically low levels of loan defaults for several quarters. Several financial institutions in the United Kingdom and the United States have recently reported higher levels of loan losses, and Canadian banks are expected to follow at some stage.

TD's results had some observers speculating that downturn could come soon, as the bank set aside a larger share of its earnings for loan defaults than in previous quarters.

The bank's provision for loan losses rose 43% to $163-million, compared with $114-million a year earlier.

UBS Investment Research analyst Jason Bilodeau said higher loan-loss provisions at TD "clearly reflect the reality of less favourable credit trends relative to the credit environment a year earlier."

However, Mr. Bilodeau was generally upbeat about TD's performance. He acknowledged the overall level of TD's loan loss provisions remains low, and that the increase in the quarter was largely driven by growth in loan volumes.

As a proportion of the bank's overall loan book, the provision for loan losses actually declined and is still significantly below the historical average.

Indeed, DBRS's Ms. Lum said there are few indications that Canada's banks will see a big swing on credit just yet.

"Unemployment rates are very, very low and I use that as a leading indicator [for credit losses], at least on the personal and commercial side," Ms. Lum said.
The Globe and Mail, 23 February 2007

Analysts will be keeping a close eye on growing loan-loss provisions as the big Canadian banks roll out their earnings.

Yesterday, Citigroup analyst Shannon Cowherd said she expects the provisions for Canada's six largest banks to rise 32 per cent from year-earlier levels, and said this will be a major contributor to her projected drop of nearly 20 per cent in the banks' profit for the fiscal first quarter ended Jan. 31. Her views are echoed by others on the Street: Analysts' consensus estimates for loan-loss provisions this quarter total $638-million for the six big banks, up 35 per cent from a year earlier and up 27 per cent from the fourth quarter -- symptomatic of a weakening economy, higher interest rates and a slowing housing market.

And those numbers could be worse. Toronto-Dominion Bank, which yesterday was the first bank out of the gate with its fiscal first-quarter numbers, raised its loan-loss provision to $163-million in the quarter -- up 43 per cent from a year earlier and above analysts' consensus call of $141-million.
The Globe and Mail, Andrew Willis & Tavia Grant, 23 Febraury 2007

As Canadian banks look hungrily for U.S. takeover targets, Toronto-Dominion Bank yesterday unveiled a stellar 21-per-cent jump in profit fuelled partly by its ability to crack the hypercompetitive American financial services market.

TD kicked off the sector's quarterly financial reports by turning in a better-than-expected $1.01-billion profit for the three months ended Jan. 31, along with a 10-per-cent boost to its dividend. The results came on the back of strong domestic retail banking and turbocharged performance from discount brokerage TD Ameritrade Inc.

"This extremely strong first quarter will be a hard act to follow," chief executive officer Ed Clark said.

TD's profit was $1.38 a share, compared with $835-million or $1.15 a share in the year-earlier period. Analysts polled by Bloomberg had expected $1.30 a share.

Mr. Clark said the bank expects the North American economy to slow through the rest of this year.

But he still forecast that profit growth will "well exceed" the bank's 7- to 10-per-cent target.

While TD is moving to cut costs and rekindle growth at its struggling U.S. retail branch network -- TD Banknorth is expected to become a wholly owned unit of the parent bank by April -- Mr. Clark has found a winning expansion strategy in the cutthroat American discount brokerage sector.

Last January, Mr. Clark opted for a merger that traded his bank's 100-per-cent ownership of TD Waterhouse USA, a middle-of-the-pack franchise, for a 40-per-cent holding in what's now the sector's No. 3 player. Driving more traffic through a single platform meant TD's profit from the unit jumped to $64-million in this quarter, compared with $33-million last year, prior to the merger.

Credit Suisse analyst James Bantis pointed to TD Ameritrade as an example of the bank's "operating leverage." He said it was one of several business units at the bank that are increasing revenue far faster than costs are rising.

Domestic growth opportunities are limited for Canadian banks, so every CEO is engaged in some form of foreign expansion. In the past five years, domestic banks have spent $11.1-billion (U.S.) on American retail banking acquisitions.

But none have built U.S. branch networks that come close to matching the profitability of their local franchises -- TD's quarterly Canadian retail banking profit was up 15 per cent to $666-million (Canadian), while TD Banknorth made $128-million.

To achieve scale -- or operating leverage -- U.S. takeovers remain in the cards and UBS Securities Canada Inc. analyst Jason Bilodeau predicted yesterday that Bank of Montreal and Royal Bank of Canada are likely suitors for two of the four big American banks that he views as up for grabs.

BMO, which has consistently said it wants to make a $2-billion-plus (U.S.) acquisition in the U.S. Midwest, is seen by the UBS analyst as a potential buyer of TCF Financial Corp. The Minnesota-based bank has 453 branches in seven states, all surrounding BMO's Chicago-area retail network, and it currently has a $3.5-billion market capitalization. BMO sold its U.S. discount brokerage to E*Trade Financial Corp. in 2005.

In the southeastern United States, where RBC is building RBC Centura branches, Mr. Bilodeau sees First Horizon National Corp. as a likely target. Its five-state branch network has a $5.6-billion market capitalization. The dominant player in the southern United States, SunTrust Banks Inc. is seen as being in play, but with a $30.9-billion price tag, Mr. Bilodeau says it's likely too expensive for RBC.

He also named Sovereign Bancorp Inc. as a target, with 20-per-cent shareholder Grupo Santander of Spain likely to step up. Last week, Banco Bilbao Vizcaya Argentaria SA, Spain's second-biggest bank, agreed to buy Alabama-based Compass Bancshares Inc. for $9.6-billion to add more than 400 branches in six U.S. states.
Bloomberg, Sean B. Pasternak, 22 February 2007

Toronto-Dominion Bank, Canada's second-largest bank, reported first-quarter earnings that topped analysts' estimates, led by higher mutual-fund fees and profit from its U.S. discount brokerage.

Profit before a year-ago gain climbed 21 percent to C$1.01 billion ($870 million), or C$1.38 a share, from C$835 million, or C$1.15, a year earlier, the Toronto-based bank said. Chief Executive Officer Edmund Clark said the quarter will be ``a hard act to follow,'' and that revenue growth will slow.

Toronto-Dominion, the first Canadian bank to report earnings, said asset-management profit rose 35 percent to C$186 million on higher fund sales. A 5.6 percent gain for the Canadian benchmark stock index during the quarter helped push fund sales to a decade high in January, according to the Investment Funds Institute of Canada.

``Mutual funds are up - they've really taken off,'' said David Cockfield, who helps manage $1.1 billion, including Toronto-Dominion shares, at Leon Frazer & Associates Inc. in Toronto. ``The banks will continue to gain market share as long as the financial markets keep rolling along.''

Shares of Toronto-Dominion rose 53 cents to C$70.74 in 4:10 p.m. trading on the Toronto Stock Exchange. They rose 10 percent in the last 12 months before today, compared with a 15 percent increase for the 41-member S&P/TSX Financials Index.

Toronto-Dominion and larger rival Royal Bank of Canada have taken market share from some fund companies such as Fidelity Investments and AIC Ltd. by using their branch networks to sell funds. Royal Bank had net sales of C$797 million in January, while Toronto-Dominion added C$549 million. Fidelity, the world's biggest fund company, had net redemptions of C$92 million.

Profit from the bank's stake in TD Ameritrade Holding Corp. almost doubled as stock prices rallied. Toronto-Dominion is the biggest shareholder of the Omaha, Nebraska-based discount broker after it sold its TD Waterhouse unit to Ameritrade last year.

Earnings from consumer banking in the U.S., where the company owns 59 percent of TD Banknorth Inc., fell 2 percent to C$64 million on rising costs and a slowdown in lending. Gross impaired loans from U.S. consumer banking doubled to C$125 million in the quarter.

Toronto-Dominion Chief Executive Officer Edmund Clark plans to cut costs at the Portland, Maine-based lender and appointed Bharat Masrani, a 20-year veteran at Toronto-Dominion, to run TD Banknorth beginning March 1. Masrani will replace William Ryan, who made 27 acquisitions at TD Banknorth in New York and New England over about 12 years. Toronto-Dominion has agreed to buy the rest of TD Banknorth it doesn't already own for $3.2 billion, with the purchase closing in April.

``I think it's a probably good move,'' said Jackee Pratt, who helps manage about $708 million at Mavrix Fund Management Inc. in Toronto, including Toronto-Dominion. ``Ed Clark is going to re-focus the operations, as opposed to just going out and acquiring and acquiring and acquiring.''

Toronto-Dominion said profit before one-time items topped the C$1.30-a-share median estimate of eight analysts surveyed by Bloomberg News. Revenue for the quarter ended Jan. 31 increased 2 percent to C$3.47 billion.

Net income fell 60 percent to C$921 million, or C$1.26 a share, from C$2.31 billion, or C$3.20, a year ago when it had a C$1.67 billion after-tax gain from the TD Waterhouse sale. Toronto-Dominion raised its quarterly dividend 10 percent to 53 cents a share, the fourth increase in two years.

Investment-banking profit climbed 20 percent to C$197 million after the value of mergers in Canada almost doubled from a year ago to $66.5 billion. TD Securities advised on mergers worth $3.94 billion in the quarter, up from $2.87 billion a year ago, according to data compiled by Bloomberg. The bank ranked third for managing new stock sales in the period, compared with eighth spot a year ago, according to Bloomberg.

Canadian consumer banking profit rose 14 percent to C$544 million on higher revenue from mortgages, consumer loans and insurance. Toronto-Dominion plans to open 30 branches in Canada this year to take advantage of demand for investment and banking products.

The bank set aside C$163 million for bad loans, up 43 percent from C$114 million a year ago, mainly from its consumer banking unit and from an auto lender it purchased last year.

Toronto-Dominion expects to exceed its forecast of 7 percent to 10 percent earnings per share growth in fiscal 2007, although revenue growth may slow, Clark said.

``This extremely strong first quarter will be a hard act to follow,'' Clark said on a conference call with analysts.

Average per-share profit before one-time items for Canada's six main banks is expected to rise 13 percent this quarter, according to Brad Smith at Blackmont Capital Inc. Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada, the fourth-, fifth- and sixth-biggest banks by assets, are scheduled to report results on March 1.

Royal Bank of Canada, the largest bank, releases earnings on March 2. Bank of Nova Scotia, the third-largest, will report March 6.
Bloomberg, Sean B. Pasternak, 21 February 2007

Toronto-Dominion Bank Chief Executive Officer Edmund Clark, who created record growth in consumer-banking profit in Canada, is struggling to revive U.S. earnings.

Canada's second-largest bank probably will say tomorrow that profit at the Portland, Maine-based TD Banknorth Inc. unit fell 1.5 percent during the past three months, based on a company forecast. TD Banknorth's earnings have dropped in five of the past seven quarters.

The bank may report that fiscal first-quarter profit before one-time items climbed 11 percent to C$1.28 a share, according to the average estimate from seven analysts surveyed by Bloomberg.

Clark agreed in November to spend another $3.2 billion to buy the remaining shares of TD Banknorth and appointed a new CEO. Clark, 59, also plans to cut costs, without saying how, and halted acquisitions in the U.S.

``This is Ed Clark's baby and it's for him to show that he can integrate this,'' said Todd Johnson, who helps oversee $640 million at Cardinal Capital Management Inc. in Winnipeg, Manitoba, including Toronto-Dominion stock.

Shares of Toronto-Dominion rose 9.6 percent in the past year, beating all but two of Canada's six main banks.

The U.S. consumer bank will contribute about C$64 million ($55 million) to earnings in the latest fiscal quarter, or about 8 percent of the total, according to an estimate by CIBC World Markets analyst Darko Mihelic. Clark, who has led Toronto-Dominion since December 2002, said last month TD Banknorth has a long way to go to meet the bank's target of increasing overall earnings by 7 percent to 10 percent this fiscal year.

Clark has had more success boosting profit in Canada. Since becoming CEO, domestic consumer bank earnings have climbed by at least 15 percent a year, higher than any of his Canadian peers. The bank added branches across Canada when rivals were curbing expansion, and offered incentives such as portable DVD players to entice new clients.

Toronto-Dominion is the first Canadian bank to report results for the fiscal first quarter ended Jan. 31. Average earnings per share, before one-time items, are forecast to rise 13 percent, led by higher fees from investment banking and mutual funds, estimates Brad Smith, an analyst at Blackmont Capital Inc. in Toronto.

U.S. consumer banking has been the worst of Toronto- Dominion's four main units, trailing Canadian retail banking, asset management and investment banking. TD Banknorth's profit will probably be little changed this year, Chief Operating Officer Peter Verrill told analysts in November.

``A number of investors would say, `We'd just as soon you give us the money back and not do the strategy at all,''' Clark said last month at a conference sponsored by RBC Capital Markets in Toronto. ``I say to them: `Well, go buy someone else then.'''

TD Banknorth's earnings have slumped because of rising costs for deposits and a slowdown in lending as interest rates increase. And non-interest expenses rose 31 percent in 2006 to $1.14 billion because of higher advertising and acquisition- related costs.

``With the benefit of hindsight, market conditions have turned out to be tougher than what we might have expected,'' said Bharat Masrani, a 20-year Toronto-Dominion veteran who's taking over as CEO of TD Banknorth on March 1. ``I would say that I don't see any great signs in '07 to suggest that the environment is going to turn for the positive.''

Royal Bank of Canada, the country's largest lender, had to sell a U.S. mortgage unit and cut about 500 jobs in 2005 before increasing profit. Bank of Montreal, Canada's fourth-largest bank, reported that its U.S. profit dropped 7 percent last year.

``The Canadian experience in buying up U.S. banks has not been the best,'' said Stephen Jarislowsky, chief executive officer of Montreal-based Jarislowsky Fraser Ltd., Toronto- Dominion's fourth-largest investor.

Since 2005, TD Banknorth has contributed $349 million to Toronto-Dominion's earnings, about 10 percent of the initial investment. Toronto-Dominion on Nov. 20 bid $32.33 a share for the remaining stock of TD Banknorth. Toronto-Dominion now owns 57 percent of the U.S. lender, after buying control for $3.5 billion.

Clark said last month at the RBC Capital conference that U.S. acquisitions are on hold for at least this year until he can prove that his ``techniques actually do work.'' Clark declined to comment for this story.

TD Banknorth will trim operating expenses by 5 percent to 8 percent, which may result in a one-time charge, Masrani, 50, said in a Jan. 24 interview.

22 February 2007

Banks Could Step Up US Presence, UBS Suggests

Dow Jones Newswires, Monica Gutschi, 22 February 2007

If merger activity accelerates in the U.S. banking industry this year as expected, Canadian banks will probably join in the fray, UBS suggested Thursday.

In a research note, analyst Jason Bilodeau said those banks with a U.S. retail presence already - Bank of Montreal, Royal Bank of Canada, and Toronto-Dominion Bank - would have to consider bulking up if the pace of U.S. consolidation were to quicken "since their competitive position and growth could be compromised."

Canadian banks will likely continue growing their U.S. franchises through de novo expansion and small bolt-on acquisitions, as they have been doing for the most part in the past few years, Bilodeau said. However, he suggested they may start to look at larger assets if merger activity increases so as not to lose more ground against larger players.

Bilodeau noted the U.S. banking industry remains highly fragmented and has considerable excess capital. The operating environment is also difficult, with "deteriorating deposit trends, inverted yield curve, slowing loan growth and rising credit costs."

However, as the chief executives of those Canadian banks active in the U.S. have often bemoaned, Bilodeau said traditional price-to-earnings ratios on potential U.S. targets remains rich.

Bank of Montreal, Royal Bank and Toronto-Dominion will also face competition from eager consolidators in that market, he said, pointing to Fifth Third Bancorp, Keycorp, Wachovia Corp., Wells Fargo & Co., Citicorp, and JP Morgan. Over the past five years, the three Canadian banks have invested slightly more than $11 billion in their U.S. retail franchises, with the largest transaction being Toronto-Dominion's $3.8 billion transaction to purchase a majority stake in Banknorth. Toronto-Dominion has recently extended a $3.2 billion offer to take Banknorth private.

Bilodeau noted the most active buyer has been Bank of Montreal, with a dozen deals since first acquiring Harris bank in 1984. It now earns about 11% of net income from its U.S. retail bank, with Royal Bank of Canada earning 5% and Toronto-Dominion, 13%.

Price Targets for Life Insurance Cos

Great-West Lifeco
• BMO Capital Markets maintains "outperform," 12-month target price is $40.00
• Desjardins Securities maintains "buy," 12-month target price is raised to $40.75 from $36.00
• National Bank Financial maintains "underperform," 12-month target price is raised to $37.00 from $36.00
• Scotia Capital maintains "sector outperform," 12-month target price is $40.00
• TD Newcrest maintains "hold," 12-month target price is raised to $37.00 from $36.00

Manulife Financial Corporation
• BMO Capital Markets maintains "market perform," 12-month target price is $44.00
• Desjardins Securities maintains "top pick," 12-month target price is raised to $48.00 from $41.00
• GMP Securities maintains "buy," 12-month target price is raised to $47.00
• Genuity Capital Markets downgrades to "hold" from "buy," 12-month target price is $45.00
• Scotia Capital maintains "sector outperform," 12-month target price $43.00
• TD Newcrest maintains "buy," 12-month target price is $44.00
• UBS maintains "buy," 12-month target price is raised to $46.00 from $44.00

Sun Life Financial Inc.
• BMO Capital Markets maintains "outperform," 12-month target price is $57.00
• CSFB maintains "outperform," 12-month target price is raised $57.00 from $55.00
• Desjardins Securities maintains "buy," 12-month target price is raised to $56.00 from $52.00
• GMP Securities Securities maintains "buy," 12-month target price is $57.50
• National Bank Financial maintains "sector perform," 12-month target price is raised to $57.00 from $54.00
• Scotia Capital maintains "sector outperform," 12-month target price is raised to $58.00 from $55.00
• TD Newcrest upgrades to "buy" from "hold," 12-month target price is raised to $58.00 from $55.00

On Fees, Banks to Give Flaherty a 'Win'

The Globe and Mail, Sinclair Stewart & Steven Chase, 22 Feburary 2007

Canada's major banks are preparing options for lowering the cost of automated banking machine services after Finance Minister Jim Flaherty ratcheted up his political pressure on the sector last week with a pointed letter to each of the industry's chief executive officers.

In the letter, a copy of which was obtained by The Globe and Mail, Mr. Flaherty said he had received "a number of representations" of concern surrounding ABMs, and noted that some transactions can include three layers of fees. Specifically, he indicated he would like to know what kind of discounts banks could provide to seniors and young people.

"I would be interested to know of options under low-fee retail deposit accounts, or special accounts for students or seniors," he wrote to the CEOs.

"I urge you to continue to work towards improving the system for the benefit of all consumers.

"Canadians expect their banking and lending institutions to engage in an ongoing effort to provide choice and competitive services."

Before Christmas, the populist-minded Finance Minister asked banks to justify their fees, and last month he publicly rejected their first attempt to rationalize the charges, suggesting they try harder.

The fact that he continues to press the issue has convinced many in the banking industry that they will have to cede some ground by lowering costs.

"Providing an explanation is not enough," acknowledged one senior banker. "We're going to have to really provide some more options in terms of how to reduce this one irritant cost for consumers. I suspect we're going to have to provide the Minister with a win, rather than just a reason."

The executive said he was unsure what that "win" would be, but said the bank is currently working on possible solutions. Some of these could be outlined to Mr. Flaherty when he meets with bank CEOs in Toronto early next month.

"It won't eliminate the costs -- it will reduce the costs," said the senior banker. "We'll have to come up with creative ways to see how to really convey a change while minimizing our loss in revenue."

Canada's banks have long claimed that the cost of banking here is lower than in many parts of the world. They argue that British banks subsidize their free banking network by burying the costs in other services, whether it be deposit accounts, mortgages, or other products.

If the banks do bend to Ottawa's political pressure and create new packages with lower ABM fees, there is a good chance that this lost revenue will be offset by new charges elsewhere.

"If you're going to make it less transparent, the consumer's not going to save any money," said another bank official. "We're going to get it transparently or we're going to get it non-transparently . . . It's a PR problem for the government, and it's a PR problem for the banks."

An executive at another bank conceded it is "wrestling" with the matter internally, and suggested some banks may have to examine whether there is a competitive advantage that could be gained by waiving fees -- much like Toronto-Dominion Bank subsidiary TD Banknorth recently did in the United States, in an effort to build market share.

On Tuesday, Mr. Flaherty noted he has powers under federal law to force banks to change their ABM fees but stopped short of saying he'd ever use them.

"We always are in a position given that the Bank Act is a federal statute but I much prefer to have a discussion about the goal of competition and choice in Canada," Mr. Flaherty said, adding he's impressed by how some Canadian credit unions have managed to avoid charging fees at machines.

"I like competition and choice for consumers. Among the big banks -- we'll see. I'm going to talk to them about that," Mr. Flaherty said.

Big banks represent an easy target for federal political parties because of their growing financial clout. Last year, Canada's six biggest banks reported combined profit of $19-billion, easily eclipsing the previous high-water mark of $13.1-billion, set in 2004.

Bank fees can vary wildly, but there are three types of basic charges: the regular account fee you pay when you withdraw money, which is typically waived when you do it at your own bank. If you withdraw from a rival bank, you will be charged a network access fee by your bank which can range between nothing and $1.90. The third fee is a "convenience" fee charged by the other bank you used -- a charge that can climb as high as $3 for so-called "white label" machines at convenience stores.

When you add it up, a withdrawal from a privately owned machine could cost as much as $6.15 in many cases -- and sometimes more, according to figures compiled by the Financial Consumer Agency of Canada.

21 February 2007

Enron's Banks Lose Bid to Delay Enron Trial

Bloomberg, Jef Feeley, 21 February 2007

Merrill Lynch & Co. and Credit Suisse Group lost their bid to delay the trial of a $40 billion investor lawsuit accusing the banks of helping Enron Corp. artificially inflate earnings.

U.S. District Judge Melinda Harmon in Houston ruled today there ``should be no postponement'' of the April 9 trial while an appeals court decides whether shareholders can continue to pursue as a group their claims against ex-Enron lenders Merrill, Credit Suisse and Barclays Plc.

``We are pleased by the judge's ruling and can't wait to get to trial and begin the process of recovering the billions owed to the victims of the massive Enron fraud,'' William Lerach, the investors' lead lawyer, said in an interview today.

Enron was the world's largest energy-trading firm with a market value of as much as $68 billion before it collapsed in December 2001. The bankruptcy, the second-largest in U.S. history after WorldCom Inc., wiped out more than 5,000 jobs and at least $1 billion in retirement funds.

Enron's investors accuse the Houston-based company's banks of helping former Chairman Kenneth Lay and ex-Chief Executive Officer Jeffrey Skilling manipulate company finances by disguising debt as loans, financing sham energy trades and using off-the-books partnerships to hide losses and inflate revenue.

New York-based Merrill, Zurich-based Credit Suisse and London-based Barclays have denied they played any role in Enron's meltdown. Merrill and Credit Suisse told a U.S. appeals court in New Orleans Feb. 5 that shareholders shouldn't be able to press their suit as a group because they can't prove that the firms directly participated in Enron's accounting fraud.

Mark Herr, a Merrill spokesman, said he had no comment on today's ruling. Pen Pendleton, a Credit Suisse spokesman, also declined comment. David Braff, a New York-based lawyer for Barclays, wasn't immediately available for comment.

Harmon ruled in August that thousands of Enron investors could sue the banks as a group. Plaintiffs in such class-action cases can pool their resources and claims, gaining more leverage to achieve bigger settlements, or a favorable verdict at trial.

The banks appealed Harmon's ruling, urging the 5th U.S. Circuit Court of Appeals in New Orleans to force shareholders to sue individually. That court hasn't ruled yet.

Lawyers for Merrill and Credit Suisse asked Harmon to delay the trial until the appeals court hands down the decision. Merrill is a passive minority investor in Bloomberg LP, the parent of Bloomberg News.

Lerach and other plaintiffs' lawyers countered that investors have waited as long as five years to have their claims heard and there was no reason to delay the case for an appellate ruling that may take years to arrive.

Jurors are expected to hear at least three months of testimony about the banks' roles in deals that Enron executives used to bolster earnings.

Preview of Banks' Q1 2007 Earnings

The Globe and Mail, Andrew Willis, 21 February 2007

As Toronto-Dominion Bank kicks off the big bank's quarterly financial reporting Thursday, the experts all agree the sector will continue to report fabulous profits from the retail branch networks.

The question analysts are asking is whether there are any surprises, good or bad, coming from the rest of the banks' operations that might move stocks one way or another.

With the exception of Canadian Imperial Bank of Commerce, where the share price has been rising steadily for eight months, bank stocks have gone sideways for the past three months. The domestic banking index up just 1.1-per-cent in the past quarter. However, the banks have been stellar performers over the past three years on the back of strong retail profits, and now command price-to-earnings multiples superior to those of U.S. and European peers.

“We remain steadfast in our view that the valuation premium of the Canadian banks is warranted,” said Credit Suisse analyst James Bantis in a report this week. He said: “Domestic retail earnings will once again underpin the earnings growth story in 2007.”

Beyond their retail operations, analysts see three major areas where the domestic banks could shock investors, for better or worse: provisions for bad loans, investment banking results and cost cutting.

The banks have enjoyed several years of minimal loan losses on the back of strong economic growth, and analysts forecast the good times to come to an end, with a fall in corporate credit quality. However, the banks proved better lenders than expected in 2006, with lower loan loss provisions than the analysts predicted. UBS Securities analyst Jason Bilodeau said in a report this week; “We expect the credit environment to slip. However, we expect the deterioration to be modest ... credit trends could come in slightly better than expected.”

On the investment banking front, there has been much hand-wringing on Bay Street over the federal government's decision to shut down the income trust market, a source of lucrative underwriting revenues for the Canadian bank-owned dealers for the past five years. But brokerage executives privately play down the potential for lost profits, because domestic underwriting has become an increasingly small component of most dealers' revenues.

“The cool-down in the income trust market is likely to have a marginal and we expect fleeting impact,” said Mr. Bilodeau. “We expect fairly healthy trading/capital markets fee revenue.”

When it comes to actually running the business, Bank of Montreal is the latest player to take an axe to costs, announcing up to 1,000 layoffs last month. Other banks may also announce initiatives aimed at boosting efficiency, as Mr. Bilodeau said: “With a slower top-line environment emerging, cost control/cutting efforts will be increasingly important to delivering bottom-line results.”

Three banks — TD, Royal Bank of Canada and CIBC — are expected to increase their quarterly dividends when they report results, with the bump forecast to be between 8 per cent and 12 per cent.

Here is what analysts are looking for at each of the six big banks: TD Bank reports Thursday and the consensus forecast from analysts has the bank earning $1.27 a share for the three months ended Jan 31. Domestic retail profits are expected to slow slightly from last year's heady 22-per-cent clip, but still grow at a double-digit pace.

National Bank reports on March 1 and is expected to post $1.31 per share profit. Investors will be looking for some sense of strategic direction from newly-named chief executive officer Louis Vachon.

Bank of Montreal reports March 1 and while the consensus earnings forecast is $1.29, the estimates range widely after a disappointing finish to 2006. Analysts will be trying to determine whether the bank is beginning to regain market share in domestic retail banking while at the same time bringing down costs.

CIBC also reports March 1 and is expected to earn $1.94. The bank picked up retail market share in 2006 and analysts will want to see whether this growth continues; CIBC may also announce a stock split.

Royal Bank reports on March 2, and is expected to earn 98 cents a share. The largest domestic branch network was also the fastest growing in 2006, and there are expectations that RBC's retail profit growth will slow to the industry's pace.

Bank of Nova Scotia is up to bat on March 6 and is expected to earn 94 cents a share. International expansion was the biggest driver of growth last year, and that's expected to continue. Analysts would like to see Scotiabank's domestic retail network gain market share on rivals.
Scotia Capital, 19 February 2007


• Banks begin reporting first quarter earnings February 22. We are looking for continued earnings resilience with growth expected at 11%. RY is rated 1-Sector Outperform. Maintain Overweight recommendation.

Banks Begin Reporting February 22

• Banks begin reporting first quarter earnings, with Toronto-Dominion Bank (TD) on February 22, followed by Laurentian Bank (LB) February 27; Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CM), and National Bank (NA) March 1; Royal Bank (RY) March 2; Bank of Nova Scotia (BNS) March 6; and Canadian Western (CWB) closing out reporting March 8. Scotia Capital’s earnings estimates are highlighted in Exhibit 1, consensus earnings estimates/target prices in Exhibit 3, conference call information in Exhibit 4, and dividend increases and trends in Exhibit 7.

Q1 Earnings Growth Forecast 11%

• We expect first quarter earnings for the bank group to increase 11% year over year and 2% sequentially. Earnings growth is expected to continue to be driven by wealth management, with solid earnings from retail and wholesale. Loan loss provisions are expected to remain at low levels. We expect LLPs to increase 28% to $662 million but remain at extremely low levels at 0.28% of loans. We believe loan loss provisions troughed in 2006 at 0.22% of loans.

• CM and RY are expected to lead in earnings growth at 20%, 13% and 12%, respectively. CM earnings growth continues to be driven by cost cutting and a relatively low earnings base. Revenue performance is expected to remain weak. RY earnings growth is expected to be driven by the strength of retail and wealth management platforms. Bank group profitability is expected to continue to run at historical highs on very large capital positions with return on equity of 21.2%.

• Wealth management earnings are expected to continue to be strong, although only three banks disclose these earnings on a separate basis, with RY recently announcing that it will segment its wealth management earnings beginning Q2/07. Bank average mutual fund assets are up 16% from a year earlier and 6% sequentially. The banks continue to dominate mutual fund sales; particularly RY and TD, with market share of long-term asset net sales at 20% and 16%, respectively, during the quarter.

• Retail banking earnings are expected to remain solid, although we expect some slowing in earnings growth in 2007 and 2008 as loan growth slows due to the weakening real estate markets. The major question is to what degree net interest margin expansion may offset the lower volume growth. The prime rate has increased 175 basis points or 41% in the past two years, with Q4/06 the first quarter in a year with no rate hike. We believe the stability of the prime rate at these higher levels will be positive for margin expansion and could be the source of a positive earnings surprise from the bank group. An improving retail margin could boost earnings growth to the 12% range in 2007, representing the third straight year of positive earnings surprises.

• Wholesale banking earnings are expected to remain solid, supported by strong revenue and cost containment offset by modestly higher loan losses due to lower loan loss recoveries, although LLPs are expected to remain at negligible levels. The wholesale net interest spread was solid in the quarter at 166 bp, up 5 bp from a year earlier and down 1 bp sequentially.

• Capital markets activity remained relatively strong in Q1, with TSX trading volume up 14% year over year and 15% sequentially. IPO dollar value increased sequentially by 45% but declined 3% from a year earlier. M&A activity continued to be very strong, up 13% sequentially and more than double from a year earlier. Bond yields backed up in Q1 in both Canada and the U.S. by 15 bp and 21 bp, respectively.

• Other earnings factors in the quarter are that stock-based compensation is expected to be up due to the 7% increase in bank share prices during the quarter. The Canadian dollar weakened 3.1% in the quarter sequentially against the U.S. dollar and 3.1% against the peso.

Dividend Increase expected from CM, RY, and TD

• Dividend increase candidates this quarter are CM, RY, and TD, with dividend increases expected to be in the 7% to 14% range (Exhibit 7). This follows dividend increases announced in the previous quarter by BMO, BNS, and NA of 5%, 8%, and 8%, respectively.

• The bank group’s dividend payout ratio on our 2007 earnings estimates is 41% and 38% on our 2008 earnings estimates, with BMO at a high of 49% and CM and NA at the low end at 35% and 37%, respectively. We continue to expect bank dividend payout ratios to drift towards 50%.

Stock Split likely for CM

• CM is the most likely candidate for a stock split given its share price levels. BMO, NA and TD are also stock split candidates over the next year. This follows stock splits by CWB in December 2006, RY in March 2006, and BNS in March 2004.

Strong Fundamentals - Remain Overweight

• We believe bank fundamentals remain strong, with low balance sheet risk, high capital levels, strong asset quality, record profitability, and historically low earnings volatility.

• Bank stocks are slightly underperforming the TSX early in the year (year to date as at February 15, 2007), with the bank index unchanged versus 3% gain for the overall market. Banks are trading at a low 13.4x our 2007 earnings estimates, with bank dividend yields relative to bonds (Exhibit 12), equity markets (Exhibit 13), pipelines and utilities (Exhibit 14) and income trusts (Exhibit 15) all in the Strong Buy range. Reversion to the mean would result in the bank index increasing on a relative basis by 41%, 34%, 35%, and 17% versus the bonds, equity markets, pipes & utilities, and income trusts.

• Canadian banks are trading at a 5% premium to the major U.S. banks and an 18% discount to U.S. regional Banks. The Canadian Banks premium, we believe, is fully supported by the respective government bond yields and lower earnings risk in the Canadian Banks, higher profitability, and stronger capital positions.

• We reiterate our Overweight Banks recommendation, based on attractive valuation, strong fundamentals, and low relative risk. We maintain a 1-Sector Outperform ratings on RY 2-Sector Perform ratings on CM, CWB, LB, and TD, with 3-Sector Underperform ratings on BMO and NA. We continue to have no sells in the bank group on an absolute return basis.

First Quarter Highlights

• Bank of Montreal is expected to report earnings of $1.28 per share, an 8% YOY increase and a decline of 3% sequentially. Earlier this month, BMO announced a restructuring charge for Q1 of $0.18 per share; therefore, reported earnings are expected to be $1.10 per share.

• Canadian Imperial Bank of Commerce is expected to report $1.95 per share, an increase of 20% YOY and a decline of 3% sequentially. Earnings are expected to be supported be strong M&A revenue. CM has been very successful at cost reduction and has significantly reduced the risk in its retail loan portfolio. However, revenue and market share weakness is its biggest challenge. A dividend increase of 14% to $3.20 per share is expected and a 2-for-1 stock split. This dividend increase would bring CM’s payout ratio to 40% on our 2007 earnings estimates, the low end of its target payout ratio range of 40%-50%.

• National Bank is expected to report $1.34 per share in the first quarter, an increase of 6% YOY and 2% sequentially. Wealth management earnings should remain solid. We remain concerned about the bank’s reliance on security gains and trading revenue over the past several quarters for earnings growth.

• Royal Bank is expected to report $0.99 per share, an increase of 13% YOY and 2% QOQ. Retail and wealth management earnings are expected to remain solid with overall earnings quality high. A dividend increase of 8% to $1.72 per share is expected.

• Toronto-Dominion Bank is expected to report $1.25 per share, an increase of 9% YOY and 4% QOQ. Retail earnings are expected to continue to be the earnings driver, with the U.S. platforms a drag on earnings growth. TD Ameritrade earnings contributions for Q1/07 are estimated at $0.09 per share versus $0.07 per share in the previous quarter, with TD Banknorth earnings of $0.09 per share, unchanged from the previous quarter. A dividend increase of 6 % to $2.04 per share is expected for TD.

BMO - Restructuring Charge

• On January 31, 2007, BMO announced a restructuring charge of $135 million ($88 million after tax or $0.18 per share). Approximately 1,000 jobs will be cut in an attempt to rejuvenate earnings and achieve financial targets in 2007. BMO stated that the cost savings will be invested in front-line sales and service in order to improve its retail operations, which have been a drag on earnings in recent quarters.

BNS Acquires Travelers Leasing Corporation

• On November 14, 2006, Scotiabank announced the acquisition of Travelers Leasing Corporation (TLC), a leading Canadian automobile financing company. The terms of the transaction were not disclosed. TLC is based in British Columbia and currently has $255 million in loans under management. The transaction closed February 15, 2007.

NA - New CEO

• On January 11, 2007, NA announced that Louis Vachon, the current Chief Operating Officer, will become the new Chief Executive Officer, effective June 1, 2007. Real Raymond, the current CEO, will serve as a part-time Special Advisor after May 31, 2007.

CM Completes FirstCaribbean Transaction

• On December 22, 2006, CM completed the US$1.1 billion purchase of Barclays’ 43.7% interest in FirstCaribbean, increasing its ownership to 87.4%. CM and Barclays merged operations in 2002 to create FirstCaribbean, of which each party owned 43.7%. Subsequent to acquiring Barclays’ stake, CM extended an offer to all remaining shareholders, acquiring an additional 4.1% of shares for total ownership of 91.5% as at January 30, 2007. This transaction is expected to be dilutive to cash EPS by C$0.01 in 2007. As a result of the FirstCaribbean acquisition, Tier 1 capital ratio is expected to decline to 9.9% from 10.4% in Q1 with tangible common equity declining to 7.0% from 7.7%.

RY - To Report Wealth Management Segment Earnings

• RY announced on February 7, 2006, that beginning in Q2/07 it will report financial results for its Wealth Management segment. We expect this would be positive for the bank, given RY’s significant Wealth Management business and the overall impact of Wealth Management earnings, which carry a higher P/E multiple than other business segments.

TD Banknorth Buy In

• On November 21, 2006, TD announced that it would acquire the remaining 41% stake in TD Banknorth for US$32.33 per BNK share or US$3.2 billion (C$3.6 billion) in an all-cash offer. The transaction will be financed by $3.0 billion, primarily of subordinated debt. The transaction is expected to be accretive to TD by $0.05 per share in 2007 and $0.16 per share in 2008. Closing is expected for March or April 2007.

TD - TD Ameritrade and TD Banknorth Earnings

• TD Ameritrade (AMTD) reported Q1/07 cash earnings of US$0.24 per share, up 14% from US$0.22 per share a year earlier, versus the IBES estimate of US$0.20 per share. At its current ownership level of 39.8%, the contribution to TD would be C$64 million or C$0.09 per share.

• TD Banknorth (BNK) reported Q4/06 cash earnings of US$0.51 per share, a decline of 18% from US$0.62 per share a year earlier and in line with IBES estimate of US$0.51 per share. TD indicated that BNK’s contribution this quarter would be C$64 million or C$0.09 per share.
BMO Capital Markets, 13 February 2007

Spreads - Consistent Signs That They Will Be Stable

Core Personal and Commercial Bank spreads have been under pressure for several years (see Chart 1), reflecting a material shift in business mix from high spread business loans to low spread residential mortgage loans. The majority of this mix shift has now run its course. Better demand for business borrowing plus some moderation in the demand for mortgage credit have resulted in stable loan mix and should ensure stable spreads.

Of course, other variables- Prime-BA spreads, absolute levels of interest rates and general competitive conditions- are also important in impacting spreads, but are far less material. The good news is that these secondary factors have generally been quite supportive. Prime-BA spreads broadly give us insight into the margins achieved on retail loans that are funded by wholesale money. With the well-telegraphed increase in the Bank Rate through most of 2006, wholesale markets anticipated the rate changes, which caused periodic compression of Prime-BA spreads. The good news is that in the past two quarters, a less well-defined trend in rates has made for modestly wider retail-wholesale spreads. As we show in Table 1, average Prime-BA spreads have been 169-170 basis points in the past two quarters.

While the rises in the Prime Rate temporarily hurt Prime-BA spreads, the good news is that it did take some pressure off deposit pricing. Remember that banks have a certain amount of 'free float' where there is either zero or minimal interest rates. These deposits are part of the funding mix for Prime-priced loans. All in, therefore, a higher Prime Rate is beneficial to margins.

Another variable that is somewhat positive is competitive conditions. Though there still remains a plethora of competitors who are prepared to undercut bank pricing (both on the deposit and loan side of the balance sheet), the highest profile competitor in High-Interest Savings accounts, ING Bank, continues to struggle with a flat yield curve that has compressed its spreads. We believe that there is a bit more sanity to the market now, and that most of the damage has already been done. At this stage, new entrants such as Altamira and Dundee seem to be more of a threat to ING than to banks themselves.

Loan Growth - More of the Same

We continue to be pleasantly surprised by the strength of loan growth in Canada. Overall loan growth, inclusive of consumer and business credit, grew at about 12% in November and December (see Chart 2). Although this is the slowest pace in the past year, it is still more than adequate to allow banks to show operating leverage and solid net interest income growth.

Despite the recent strength, it is not lost on us that loan growth is likely to slow in 2007. We forecast overall loan growth in 2007 of 7%, implying a relatively mundane outlook for growth in the second half of the year. Essentially, we believe that continued strength in business borrowing (driven by a relatively strong dollar, which creates tougher operating conditions for businesses and increases the appeal of additional investment in fixed assets) will not be enough to offset a slowdown in the consumer in later this year.

Trading Revenues - Seasonal Strength May Offset Low Volatility

Trading revenues in the second half of 2006 were certainly weaker than expected, reflecting the seasonal weakness in the business and the record low volatility in several markets. Volatility has remained very low and, as such, we would expect trading books to perform a bit better than in the fourth quarter, but below the performance of the first quarter of 2006.

We continue to grapple with the increased capital committed by most banks (but particularly Royal Bank) to trading because the increased capital has yet to produce any meaningful increase in trading revenues. Furthermore, this has occurred in an environment where VaR (which is mathematically affected by volatility) hasn’t moved much. Taken together, we believe that trading revenues, which are relatively unchanged in the past four years, could actually move meaningfully higher in the medium term.

Capital Markets - Little Impact from the Income Trust Fallout

Bank stocks really do climb a 'wall of worry.' With the decision to tax trusts, several parties highlighted the risk to bank earnings from lower capital markets activity levels. We believe that the banks will again show this quarter that their investment dealers are nothing if not resourceful (no pun intended).

We believe the revenues from M&A and underwriting will be as good this quarter as they have been anytime in the past year. Of course, the big driver has been M&A activity with numerous high profile deals, including Falconbridge, Glamis and Summit, over the past six months. We see little reason to forecast any slowdown given the tremendous liquidity, high interest by private equity buyers and an entire trust sector that probably needs to restructure in the next three to four years. This quarter, it appears as if TD, CIBC, and Scotia have all had comparatively strong performances.

Dividend Activity - A Hat Trick of Increases

We expect dividend increases from TD, CM, and RY this quarter (see Table 2). The most meaningful will be CIBC, which has telegraphed a review of its dividend and buyback policies. With the successful completion of the FCIB deal, the bank now has relatively good visibility on its capital needs. We expect a 10%-plus increase in dividend, a reinstatement of its share buyback program and a stock split (either 2:1 or 3:1). There is also a case to be made for an increase in the target payout range- though this is more of a possibility than a likely event.

Royal and TD are also both expected to increase dividends, despite the fact that the two continue to be at other ends of the payout spectrum. TD remains quite conservative and is far more cautious on dividend increases, while Royal is more focused on rewarding investors today with a 10% dividend increase. The reality is that the former is run by a CEO who is more cautious on the future than the latter. Over the past few years, TD has de-risked and has been preparing for a weaker environment (complete with greater risk premiums). On the other hand, Royal Bank has bet that the environment would hold together well and this bet has clearly paid dividends (both figuratively and literally) for RY shareholders. Of course, the reality is that success of either path will be clear only in the next down-cycle.

Other Items

New Accounting Rules: The bane of all analysts’ existence, new accounting rules, will be in full view this quarter. Starting this quarter, the CICA will require banks to adopt the U.S.-style 'other comprehensive income' (OCI) for establishing a market value for financial instruments (largely all assets other than loans and fixed assets).

This will create a transitional bump to OCI for banks with large unrealized securities gains (BNS and TD). It is unclear whether the market will include these taxed gains in book value and the calculation of ROE. We still expect banks to disclose the income statement impact of gains or losses in each quarter (at least for the banks that have done this in the past).

Tax Rate: We expect tax rates to be relatively comparable in 2007, exclusive with the few one-time items at CIBC, TD, and BMO. We continue to be surprised by the degree of success the industry has had in getting tax rates down to the mid-20% range (on a TEB basis). To date there is little sign that much will change on this front, but this remains one area where there is exogenous risk.

Loan Losses: No news is generally good news in the world of credit. We expect a modest uptick in loan losses, largely driven by fewer reversals rather than a fundamental deterioration in the loan book.

Individual Company Comments

• TD Bank - Retail and Wealth Management Continue to Drive Earnings

TD Bank reports earnings on Thursday, February 22nd, a full week ahead of the next bank, so its results will set the tone for investor perception on industry-wide trends. The bottom line improvements at TD (i.e. EPS increase) will likely be somewhat mundane but the fundamentals should be quite robust. We should note that the year-ago quarter was inflated by the large AMTD gain on dilution.

The core Personal and Commercial Banking business should continue to perform well with year-over-year growth of about 10%, reflecting strong volume growth and stable margins. Loan losses may continue to track modestly higher as the VFC book continues to mature. Given the material number of branch openings late in 2006, expense growth should moderate the strong revenue performance.

Both TD Ameritrade and TD Banknorth have pre-announced results that will add $64 million each to TD overall. This is the last quarter when the year-over-year comparison is affected by the timing of the Waterhouse-Ameritrade deal and it is appropriate that AMTD is beginning to show some operating leverage to TD’s earnings. The Wealth Business (domestic full-service, mutual funds and discount brokerage) should show a material quarter-over-quarter improvement for seasonal reasons.

TD Securities should have another solid quarter. Indeed, given the strong performance by the dealer at the end of the calendar year and with the seasonal strength of the trading business, there is potential for a very strong quarter. On the other hand, the reality is that volatility has remained low and TD Securities may take the opportunity to heavy up on accruals this early in the year. Our forecast of over $150 million of earnings is toward the higher end of the annual guidance.

The Corporate segment, after a fourth quarter that saw tax refunds and high levels of securitizations generate an unusual profit, should be back to a more normal run rate of a slight loss.

There will be several 'non-income statement' issues that will be noteworthy this quarter. We expect to see a solid dividend increase, to $0.51 from $0.48. CEO, Ed Clark, recently said that he would consider materially higher dividends if the bank was not growing meaningfully, so we don’t expect any change in target payout ratio. In addition, the hedge transaction that allowed the bank to get its ownership interest in AMTD to 45% will use up some capital. Overall, we expect the growth in retained earnings will mitigate some of this effect, and we believe that Tier 1 will be modestly lower. ROE and book value may be impacted by the creation of an OCI account.

• CIBC - Another Quarter of Upside Potential

After the strong results last quarter, CIBC has certainly begun to attract more fans. We believe that there is still some potential for further earnings revisions. Furthermore, the First Caribbean deal has now closed, so there is far more urgency for the dividend and the buyback issues to be addressed. Bottom line: it is hard to see much other than good news this quarter. The only issue is whether the CIBC results can gain any traction on a day in which two other banks report.

On the retail side, the bank appeared to have turned the corner in the middle of 2006. We believe that the combination of stable market share, tight control of expenses and reductions in loan losses argues for continued earnings momentum. Indeed, we would not be surprised to see CIBC have some of the better retail year-over-year trends in the first half of 2007.

CIBC World Markets also looks set for a solid quarter. Strong revenue in M&A and underwriting should offset a difficult comparison in trading, where the year-ago and linked quarter results were very robust. All in, we expect the dealer to continue to earn in the $125-175 million range. We also note that the first quarter of last year did see a somewhat elevated tax rate at World Markets, so this will help somewhat in the comparisons with last year.

Loan losses should continue to be well managed, with declining losses in the retail book offsetting higher levels in the corporate book. While there are still no obvious problems in the loan book generally, it is hard not to expect lower levels of reversals during 2007.

Like TD, there will be some focus on balance sheet strength, buybacks and share repurchases. The FCIB deal closed in late December and will take Tier 1 down from the 10.4% level at year-end. Despite this, a figure of around 9.0% seems reasonable at the end of the first quarter. We note that there were more FCIB shares tended by the minority to the follow-up bid than we had expected, so there will be slightly more leverage added in the quarter. The good news is that the acquisition will be slightly more accretive than we had forecast.

The buyback/dividend issue will be more important matter for investors. We assume an 11% increase in the dividend and a re-initiation of the buyback program. We would be surprised if CIBC was aggressive in the latter, at this stage- since the shares are at all-time highs, and the valuation is comparable to its peers. What is most likely is a commitment to ongoing regular dividend increases and gradual buybacks. We believe that there could be some opportunities for incremental capital deployment in the Caribbean, but this will obviously be opportunistically driven.

On a more superficial perspective, CIBC could easily announce a two-for-one, or even potentially a three-for-one, stock split.

• BMO - Earnings Are Important, So Is the Source of Earnings

Exclusive of the pre-announced restructuring charge of $88 million (after tax), we believe that BMO will show healthy year-over-year improvements at the domestic P&C business compared with the weak first quarter of 2006. In addition, the bank’s tax rate, which declined through all of 2006, should also provide some year-over-year momentum.

In Canada, the P&C business should continue to benefit from the re-pricing of the mortgage book that started in the middle of 2006. As such, we expect year-over-year and quarter-over-quarter margin improvement. In the U.S., we expect to see some moderation in expense growth (which dogged the bank in the fourth quarter) and stable margins.

The Investment Banking Group should perform in line with year-ago results, but well ahead of the weak fourth quarter. Reported trading revenues (which are distorted by technical factors) were particularly weak in the fourth quarter and we expect to see a more normal trading level of about $150 million. On the other hand, the capital markets business did appear to be slightly weaker. Private Client should report another solid result.

The Corporate Segment, which includes the 'true-up' of expected loan losses charged to the operating segments, continues to be quite volatile. This segment should include the $88 million restructuring charge this quarter. Furthermore, the progress on tax is most apparent in this reporting segment. Specifically, we expect the tax rate (TEB) to be lower than year-ago levels but above the level in the fourth quarter.

If we are wrong on loan losses, the variation is likely to be to the downside (i.e. losses will be lower and earnings will be positively affected). Having said that, with the ACL down to $153 million at year-end, it is hard to bet too much on reversals in the coming quarters.

We don’t expect any change in dividend (given the move last quarter) and buyback activity remains relatively predictable. Tier 1, which is strong, should strengthen modestly this quarter, barring a sharp rise in risk-weighted assets.

All in all, the negative sentiment on BMO does bear considering. As such, earnings surprises on the upside will be disproportionately important. We believe, however, that if earnings surprises come from tax rate reductions, unusually low loan losses or trading, the market is unlikely to be substantially impressed.

In addition, progress on expenses will be hard to rationalize given the 'one-time' charge this quarter.

• National Bank - Wholesale Strength Continues

National Bank is the third bank to report on March 1st, which will be the busiest day of this quarter’s reporting cycle. The wholesale business should continue to deliver solid results with trading and securities gains representing a meaningful part of earnings.

We expect both Wealth Management and Personal and Commercial (P&C) Bank to deliver reasonable year-over-year improvement. The Wealth Management business did underperform somewhat in the fourth quarter due to higher expenses, and we expect to see better comparative results this quarter. The P&C bank should continue to produce solid year-over-year growth and some good news is possible on spreads generally.

Financial Markets is likely to be below both the year-ago and linked quarter results. We expect a strong, though not outstanding, trading quarter, and underwriting and M&A do not yet appear to have turned as yet. Having said that, expenses should be well controlled. Over the past couple of years, the earnings surprises have broadly come from this segment, but to date the market has been reluctant to pay much for this outperformance. The loss in the corporate segment a year ago resulted from unusually low securitization revenues and we believe a more 'normal' result of a small loss is likely.

The other area of concern this quarter has been on credit, and questions on whether the Quebec economy is being disproportionately affected by the strong Canadian dollar. We expect National to earn through higher loan losses this quarter, but expect a moderation in the rate of impaired loan formation. With the dividend increase last quarter, we also don’t expect much new on this front, though the less aggressive buyback activity in the past six months does suggest more focus on dividends at the expense of buybacks.

• Royal Bank - More of the Same, Great Results

On Friday, March 2nd, Royal will likely report a continuation of the strong trends that have allowed the bank to outperform over the past two years. Furthermore, the bank has continued to aggressively increase its dividend to match earnings growth, and this quarter should be no exception, with a 10% increase in the dividend expected.

The Canadian Personal and Business segment will show strong year-over-year gains driven by continued strength in volumes, stable margins and good expense control (see Table 7). It is also noteworthy that the year-ago quarter did include some headwinds on insurance, so a more relevant year-over-year growth rate is closer to 13%.

In the U.S. and International segment, we expect to see continued solid improvements. We believe that Centura is performing relatively well and that the ongoing investment in Global Private Banking is producing good returns. We note that the regulated U.S. bank did take a securities loss this quarter, so this may create some headwind, depending on translation adjustments. As was the case for the Canadian segment, we note that the year ago quarter was somewhat weaker than we had expected, so the year-over-year results are above average.

It is always difficult to get a good read on RBC Capital Markets. It is clear that the bank showed its 'stripes' in the domestic market in 2006, but, as importantly, the dealer continued the build-out of its global aspirations with strong performance in several of its chosen niches. We expect trading to remain strong (though not as good as the blow-out results of the second and third quarters of 2006) and the advisory business to be quite robust. We do forecast minor loan losses this quarter compared to net reversal and recoveries in all of 2006. All in, we expect modestly lower contribution from this segment this quarter. The corporate segment, which includes the TEB adjustment for tax, should be closer to breakeven this quarter, after two comparable quarters when taxes and hedging gains bolstered results. Tier 1 should remain quite stable in the 9.5-10% range with high ROE funding strong RWA growth. As we have already mentioned, a $0.04 increase in the quarterly dividend is likely.

It is also possible that the Royal will move its 'targeted' payout range higher to 45-55% to mimic BMO.

Royal will restate its segmented disclosures in the second quarter to isolate a global wealth management business line. While this will create havoc with investor models, it is hard not to be positive on the incremental disclosure.

• Scotiabank - International Strength to Offset Weakness in Domestic

As is often the case, the big bank reporting seasons end with Scotiabank reporting results- this time on Tuesday, March 6th.

We believe that the continued strength in International will offset what will be relatively weak trends in domestic Retail and Wealth. All in, this should be another solid quarter from a well diversified franchise.

In the Domestic Banking segment (both P&C Banking and Wealth Management), year-over-year comparisons are made easier by a relatively weak base (see Table 8). 2006 saw virtually no growth compared to 2005. Spreads should bottom out and loan growth (partially driven by the Maple and Travelers deals) should be good. Loan losses, which were unusually low in the fourth quarter in Commercial, are likely to moderate.

International should produce a very solid quarter. Mexico continues to benefit from good volume growth, and the acquisitions in Peru and Costa Rica will ensure strong year-over-year earnings trends. Loan losses, which are volatile, should be somewhat higher than those in the fourth quarter, and should mitigate some of the core improvements.

Scotia Capital, like TD and CIBC, appears to have had a solid quarter on the M&A and underwriting front. Trading should be down from year-ago record levels, but with good expense control and the benefi t of loan growth on the NII line, contribution is expected to be relatively stable. One other variable of focus will be loan losses, which returned to positive territory in the fourth quarter. We don’t expect much movement either way this quarter. The Corporate segment, which included the benefit of a reversal of general allowance in the fourth quarter, should be back to a more normal result.

Two very positive elements of the Scotiabank story include the depth of unrealized securities and the strength of its capital position. Specifically, we expect that quarterly realized securities gains should be $90 million, plus or minus $20 million, and that the Tier 1 will remain above 10%. With a hefty dividend increase last quarter, we do not expect any material change in the short term.

Note that the accounting change discussed earlier will result in an 'other comprehensive income' gain of over $700 million. This could impact reported book value and ROE, but we expect it to be largely ignored.