Credit Ratings of TD Banknorth & TD Ameritrade Affirmed

Investment Executive, James Langton, 31 May 2007

Rating agency DBRS has confirmed the ratings of TD Banknorth Inc., following a detailed review of the company’s operating results and financial fundamentals. The trend on all ratings remains stable.

“TD Banknorth’s ratings are based on the ownership by the financially strong TD Bank Financial Group, a sound banking franchise with a healthy core deposit base, and solid asset quality,” DBRS says.

It notes, however, that the ratings also take into account, “the company’s need to rationalize its operating platform, less robust organic growth of loans and deposits, and below-peer capitalization”.

On April 20, Banknorth became a wholly owned subsidiary of TD. DBRS says its ratings factor in the expectation that TD has the resources and motivation to support Banknorth, in the unlikely event that it required financial support. Without the support of its parent, Banknorth would likely be rated at a lower level, it notes.

As for the bank’s business, DBRS characterizes the company’s deposit franchise as significant. It notes that asset quality continues to remain strong and credit costs continue to compare favorably to its peer banks for the past five years.

In the first quarter of 2007, however, DBRS says, “the company reported elevated levels of [non-performing assets] from its residential construction portfolio, primarily in the Mid-Atlantic region, due to a slowdown in the housing market.” TD Banknorth continues to have an elevated exposure to the commercial real estate sector, it adds.

DBRS notes, however, that the company’s disciplined underwriting standards including conservative loan-to-value ratios, well secured positions, strict capital-based product loan limits and ample debt coverage somewhat mitigate this concentration.

TD Banknorth’s profitability improved in 2006 and Q1 2007 compared to 2005 levels, it says. “This improved profitability along with strong loan and deposit growth was primarily driven by the Hudson United Bancorp and Interchange Financial acquisitions. The company, however, was challenged by the difficult operating environment that negatively impacted its net interest margins,” it says.

“In addition, TD Banknorth’s financial statements continue to have a material amount of charges related to acquisitions and discontinued operations. DBRS believes that TD Banknorth needs to rationalize its existing operating network, which has been built via acquisition and whose profitability has been below peer levels for the past few years as management fully integrates the newly acquired institutions and promotes the TD Banknorth brand,” DBRS adds.

TD Banknorth’s management is currently focusing on leveraging TD’s expertise in products and services while reducing expense levels, the rating agency observes. “Although TD Banknorth’s loans and deposits have expanded by approximately 40% annually over the past two years, growth excluding acquisitions has been in the low to mid single-digit range. Management is focused on enhancing organic growth; however, DRBS believes that this will be a significant challenge given the difficult operating environment, its highly competitive newer markets and its legacy acquisition-based culture,” it says.

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Investment Executive, James Langton, 30 May 2007

Fitch Ratings has affirmed its ratings on TD Ameritrade Holding Corp., and revised the outlook to stable from positive.

The rating affirmation follows TD Ameritrade’s announcement to acquire a portion of Fiserv’s Investment Support Services business. “To date, the integration between TD Waterhouse and Ameritrade has gone smoothly with debt service ahead of schedule,” it says. “Long-term ratings recognize TD Ameritrade’s position as a leading online discount brokerage firm that is also focused on generating more asset-based revenues. Cash flow has been strong and leverage ratios have also improved.”

The ratings outlook has been revised, Fitch explains, “recognizing the increase in goodwill, reversal of positive trends in tangible equity and an expectation that smaller acquisitions may continue further pressuring a return to positive equity.”

Fitch says it believes that the Fiserv deal presents additional scale in fee-based businesses. “The purchase comprises $28 billion in client assets, broken down between assets held by Registered Investment Advisers of $17 billion and assets held in third-party administered retirement plans of $10 billion. The transaction results in 500 new independent RIA relationships and is expected to be immediately accretive,” it notes.

The price for these assets is $225 million with the potential for an additional $100 million outlay if revenue targets are met, increasing goodwill, Fitch reports. Current debt outstanding was approximately $1.7 billion at March 31, and equity was $1.8 billion. Fitch continues to monitor the success of the company’s ability to meet synergies and debt reduction targets.

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Scotiabank Q2 2007 Earnings

Analysts' ratings and target prices for Scotiabank:

• BMO Capital Markets maintains "underperform," the target price has been raised raised to $55.00

• Blackmont Capital maintains "buy," the target price is $61.00. Blackmont's research report notes that Scotiabank's 2nd quarter EPS came-in 4¢ above its estimates of $1.03, due to better than expected revenue growth & lower loan loss provisions.

• Citigroup maintains a target price of $64.00

• Credit Suisse maintains "neutral," the 12 month target price has been raised from $57.00 to $58.00. Credit Suisse notes that Scotiabank has posted its 2Q EPS significantly ahead of the estimates and the consensus. Scotiabank's domestic retail operations generated robust earnings growth of 23% y/y in the quarter, marking a second successive quarter of better operating trends, the analysts add. Robust organic growth at the International division in the quarter was partly offset by normalized LLPs and an increased tax rate in Mexico, Credit Suisse says. The EPS estimates for 2007 and 2008 have been raised from $3.95 to $4.00 and from $4.30 to $4.35, respectively.

• Desjardins Securities maintains "top pick," the target price has been raised from $57.00 to $60.00

• Dundee Securities raised the target price from $58.00 to $62.00. Dundee noted that the core underlying earnings are in great shape, as revenue from capital markets did not make a major contribution to Scotiabank’s earnings.

• RBC Capital Markets maintains "sector perform," 12 month target price is $57.00

• TD Securities maintains "hold," 12 month target price is $57.00

• UBS maintains "buy," the target price has been raised from $61.00 to $63.00. UBS notes that Scotiabank posted its domestic results marginally ahead of expectations for the 2nd consecutive quarter. Scotiabank’s International division has the potential to deliver superior returns and growth over the medium term. Scotiabank also has room to either increase its dividend payout ratio or pursue a more active share buyback program going forward, UBS adds. The EPS estimates for 2007 and 2008 have been raised from $3.92 to $4.00 and from $4.35 to $4.45, respectively.

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RBC Capital Markets, 30 May 2007

Investment Opinion

Core cash EPS of $1.02 were ahead of our $0.96 estimate and consensus of $0.95. We exclude 1.5 cents from reported EPS, representing the release of the general allowance for credit losses. Growth in core cash EPS versus Q2/06 was 14%, third best among the four banks that have reported so far. The quarterly dividend was raised from $0.42 to $0.45 - we had looked for an increase to $0.44. Our pre-tax income estimates were off by $116 million as revenue was $37 million (1.2%) higher than we had expected while provisions for credit losses of $20 million were $80 million lower than we expected (including a $25 million reversal of the general allowance). All three operating divisions came in ahead of our estimates, Scotia Capital driven by loan losses, Domestic and International banking by revenues.

We have increased our 2007E core cash EPS by $0.10 to $4.05 and our 2008E core cash EPS by $0.05 to $4.35. Higher expected revenues caused both years' forecasts to go up, while lower estimated loan losses also contributed in 2007. Our 12-month target price of $57 is unchanged.

We maintain our Sector Perform rating. Scotiabank's stock trades at 13.4x 2007E earnings, slightly above the Canadian peer average of 13.0x. Scotiabank holds the most excess capital of the Canadian group and has, in our mind, above-average medium- and long-term growth prospects compared to its peers due to its presence in Latin America and the Caribbean. However, domestic retail revenue and net income growth lags the leading banks', the bank is more exposed to normalizing business loan losses and Mexican operations are likely to be taxed at a higher rate and see higher loan losses in 2007 than in 2006. Our 12-month price target of $57 implies a forward P/E multiple of 13.1x, compared to the current multiple of 13.4x.

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TD Securities, 30 May 2007

Event

BNS reported operating EPS of $0.99, ahead of our estimate and consensus of $0.96 and $0.95, respectively. Headline results include a $25 million general reserve release (which we have excluded) and $51 million in net credit loss recoveries recorded in the investment bank (of which we have partly excluded in our operating number). Overall, we believe the bank reported solid results but caution investors in regards to the sustainability of BNS’s credit loss levels, particularly given the strong growth of their corporate and international loan books and what we view as the unsustainable level of recoveries. As expected, the bank announced a $0.03 dividend increase to $0.45.

Impact

Neutral. We are increasing our 2007 EPS estimate to $4.03 (from $3.93) to reflect better than expected Q2/07 results, and increased our 2008 estimate by $0.05 to $4.35. We are maintaining our Hold recommendation and $57.00 target price.

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Bloomberg, Sean B. Pasternak, 29 May 2007

Bank of Nova Scotia, Canada's second- largest bank by assets, said profit rose for the 16th straight quarter, topping analysts' estimates, on higher fees from mutual funds and mortgages.

Net income climbed 16 percent to a record C$1.04 billion ($970 million), or C$1.03 a share, from C$894 million, or 89 cents, a year earlier, the Toronto-based bank said today in a statement. Revenue climbed 13 percent to C$3.21 billion.

Scotiabank said domestic banking profit surged 23 percent to C$367 million, the fourth Canadian bank to report higher earnings from consumer banking. The bank plans to open 35 new branches this year, introduced new loyalty programs and had record mutual fund sales in the first six months of fiscal 2007.

``On the consumer banking side, things seem fairly good with good growth, whether it's been residential lending or credit cards,'' said Juliette John, who helps manage about C$19 billion in assets at Bissett Investment Management in Calgary.

Shares rose 50 cents to C$54.25 in 4:10 p.m. trading on the Toronto Stock Exchange. The stock has risen 4.1 percent this year, compared with a 4.8 percent gain for the nine-member Standard & Poor's/TSX Banks Index.

Profit before one-time items was C$1.03 a share in the second-quarter, topping the 96-cent-a-share median estimate of nine analysts polled by Bloomberg.

Income from mutual fund sales rose 22 percent after the bank named Barbara Mason executive vice president of wealth management a year ago. Mason has said that fund sales from the bank's branches will double this year, and in April the firm hired former Royal Bank of Canada money managers John Varao, Shane Jones and John Kellett.

Mortgage assets soared 17 percent, and the bank said it gained market share in Canada, after it bought Maple Trust last year to expand in the high-risk mortgage market.

``Domestic results appear to be picking up momentum,'' UBS Canada analyst Jason Bilodeau wrote in a note to investors. Bilodeau said the bank beat his profit estimate by 3 cents a share.

Profit from the Scotia Capital investment bank rose 16 percent to a record C$320 million, led by higher brokerage and underwriting fees.

Scotia Capital ranked third for mergers advice involving Canadian companies, advising on five deals valued at $11.1 billion in the quarter. That compares with seven transactions worth $3.58 billion a year ago, according to data compiled by Bloomberg.

International banking profit climbed 10 percent to C$297 million, the slowest growth in at least five quarters, as expenses and loan losses rose. Chief Executive Officer Richard Waugh has spent about C$1 billion over the past two years adding to operations in Costa Rica, Jamaica and other regions where demand for banking services is growing faster than in Canada.

``Their unique international operations set them apart from the other Canadian banks,'' said Tom Kersting, an analyst at Edward Jones & Co. in St. Louis. ``While their growth may be a little lighter than some of the others, I think their longer- term growth prospects are pretty bright.''

Scotiabank set aside C$20 million for credit losses this quarter, compared with C$35 million in the year-earlier period.

The bank raised its quarterly dividend 3 cents, or 7.1 percent, to 45 cents a share, the second increase in three quarters.

Bank of Nova Scotia is the fourth lender to report earnings, and the third to top analysts' estimates. Bank of Montreal last week said earnings rose 3 percent to C$671 million, or C$1.29 a share. Toronto-Dominion Bank reported that profit climbed 19 percent to C$879 million, or C$1.20 a share. And Royal Bank of Canada said earnings rose 14 percent to C$1.28 billion, or 98 cents a share, missing analysts' estimates.

Canadian Imperial Bank of Commerce and National Bank of Canada, the fifth- and sixth-largest banks, are scheduled to report results May 31.

Scotiabank had C$411.7 billion in assets at the end of the quarter, surpassing Toronto-Dominion as the country's second- largest bank by assets. Royal Bank is Canada's largest bank by that measure.

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BMO Trading Woes Began Earlier Than First Revealed

The Globe and Mail, Tara Perkins, 30 May 2007

Bank of Montreal's problems in its commodity trading division began before November of last year, the company has revealed in its restated first-quarter results.

BMO disclosed commodity trading losses of $680-million earlier this month and said "an investigation determined that the losses relate to both the first and second quarters of 2007."

It allocated $509-million of the losses to its first quarter, which runs from November to the end of January. That chopped $237-million off the bottom line, after accounting for lower taxes and lower bonuses for employees.

But a note, filed with regulators late Monday evening, said they include "a reduction of $203-million in trading revenue and a reduction of $94-million in net income related to periods prior to the first quarter of 2007."

The same note says the bank restated its results to reflect a more appropriate market-based methodology for its commodities trading portfolio. It also cited "concerns regarding the reliability of quotes received from the bank's principal commodities broker used in the original January 31, 2007 valuation."

Several weeks after the end of that quarter, a former bank employee signed a deal with Optionable Inc., the commodity trading group's principal broker, under which the bank would obtain market information to help it value its portfolio, according to a copy of a document obtained by The Globe and Mail.

A Bank of Montreal spokesman declined to comment on, and could not confirm, the authenticity of the document. A spokesman for Optionable did not return a request for comment.

The document is signed Feb. 23, 2007, and carries a signature that says Robert B. Moore Jr.

BMO has recently said that two former employees in its New York trading group are no longer employed by the bank, including executive managing director Bob Moore. His lawyer did not respond to requests for comment this week.

BMO has also said its "portfolio had been marked to market each day by traders and the valuations confirmed independently, primarily by our principal external broker on a monthly basis."

Sources in the industry say it is standard practice to have multiple independent sources verify the value of a trading portfolio.

The document was signed with Opex Analytics, an Optionable service that "provides specific market information based on actual market quotes obtained by Optionable."

Optionable announced in September that it would begin offering Opex Analytics, "a real time mark-to-market valuation service for natural gas and crude oil options," starting Nov. 15.

Last week, BMO said that "as our natural gas portfolio grew in the first few months of fiscal 2007, we sought additional verification of the valuations from other independent sources. Management subsequently initiated an external investigation of the trading activity which resulted in concerns with the reliability of quotes received from the principal external broker.

"At that time, we suspended our business relationship with the broker, pending the results of the external review," BMO said.

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RBC Q2 2007 Earnings

Analysts' ratings and target prices for RBC:

• BMO Capital Markets maintains "outperform," 12-month target price has been raised from $62.00 to $63.00

• Blackmont Capital maintains "buy," 12-month target price has been raised to $65.00

• CIBC World Markets downgrades from "outperform" to "sector perform,"

• Desjardins Securities downgrades from "buy" to "hold," 12-month target price is $60.00

• National Bank Financial maintains "sector perform," 12-month target price has been raised to $64.00

• RBC Capital Markets maintains "sector perform," 12 month target price is $64.00

• Scotia Capital maintains "sector outperform," 12 month target price is $75.00

• TD Securities maintains "action list buy," 12 month target price is $67.00

• UBS maintains "neutral," target price has been raised from $65.00 to $66.00

UBS analysts mentioned that RBC has reported its results for the 2nd quarter short of expectations due to a decline in trading, expenses associated with several acquisitions, and volatility at the insurance unit. UBS analysts expect RBC to post robust results in the forthcoming quarters, with the performance of the core global wealth management and domestic banking operations continuing to be impressive.

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BMO Capital Markets, 28 May 2007

Royal Bank reported second quarter cash earnings of $1.3 billion, or $0.99 per share, compared to $1.5 billion, or $1.16 per share, in the last quarter, and $1.1 billion, or $0.86 per share, in the same quarter of last year. Excluding unusual items included in the previous quarters, the appropriate operating comparison is $0.99 per share this quarter, $1.13 last quarter, and $0.86 in the same quarter of last year.

On virtually all metrics, this was a great quarter from Royal Bank. Retail Banking in Canada and Wealth Management were both up 21% and the U.S. and International Banking businesses were strong. Cash EPS rose by 15% and Cash ROE was over 23%. Having said that, the expectations for the bank were very high with two other banks having already reported results 10-15% ahead of our expectations.

Why didn't Royal surprise as much as its peers? Two reasons - one, the insurance business reported a very disappointing result. Two, the Capital Markets business was comparing to two very strong quarters. The reality is that the stellar results came from the 'high P/E' parts of the bank and this bodes well for the company longer term. We also believe that the Insurance and Capital Markets operations will report stronger earnings in the coming quarter. We maintain an Outperform rating on Royal Bank.

The Canadian Banking segment (which no longer includes Wealth Management) reported earnings of $620 million. Results were down from the previous quarter due to a combination of seasonal factors and a large swing in Insurance results. The Insurance contribution was very weak- at the lowest level in several years (if we ignore the quarter that was impacted by Hurricane Katrina). We believe that the weakness in earnings is short-term in nature and expect quarterly contribution that is at least 50% higher than that achieved this quarter.

The newly formed Wealth Management segment reported earnings of $199 million, down 8% over the quarter but up 21% over the year. Due to a tax reversal booked in the last quarter, the year-over-year trend is more indicative of this segment's strong performance.

The U.S. and International Banking segment reported earnings roughly flat over the quarter and up 11% over the year. Results reflect the integration of Royal's various acquisitions in the U.S. as well as a strong contribution from Dexia. Our forecasts assume a modest increase in the contribution from this segment as expense growth moderates.

The Capital Markets segment moderated in the quarter, although the comparison quarters were the two highest earning quarters for this segment ever. While the underwriting and advisory businesses appeared solid, trading revenues declined from the comparative quarters due to lower fixed income trading.

The corporate segment reported earnings of $50 million, higher than our forecasts due to the favourable resolution of an income tax audit and higher securitization activity. We are forecasting results closer to breakeven going forward.

From a credit perspective, loan losses were $188 million, slightly higher than our expectations, driven largely by higher provisioning for business lending. Gross impaired loans remained stable, and net impaired loans declined over the quarter. Like TD, Royal is experiencing higher levels of provisioning as loan volumes grow.

Royal's Tier 1 ratio was 9.3% at the end of the quarter, up slightly from the last quarter, on the back of a preferred share issue which offset higher goodwill due to acquisitions. We were pleased to see the growth in risk-weighted assets stabilize after several periods of sharp build-up.

Projections and Valuation

Our earnings estimates for 2007 are unchanged at $4.25, but we are bumping our 2008 forecast to $4.50 given TD and Bank of Montreal’s material earnings surprises.

The issue for RY shares is how much premium is warranted. On the positive side, the leadership positions in retail banking and wealth management are impeccable and the track record in capital markets is impressive. On the other hand, it appears as if the bank has been more aggressive on lending and trading than its peers. Given the current environment, however, we believe that Royal will continue to outperform its peers from a fundamental perspective. We believe that a 5-10% premium is warranted for the high ROE and growth rates. We are raising our target price modestly to $63 to reflect our slight uptick in earnings for 2008. We continue to recommend CM, TD and RY within the bank group.

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RBC Capital Markets, 28 May 2007

Investment Opinion

RY's Q2/07 cash EPS were $0.99, lower than our estimate of $1.05 and the street estimate of $1.01, but still up 16% versus Q2/06 on a core basis. The higher earnings were driven by 11% revenue growth and 8% expense growth. Canadian banking, wealth management and US & International Banking all posted double-digit revenue growth, offsetting flat revenue in capital markets. Core net income was up by 18% or more in all divisions except for capital markets, which witnessed an 11% decline. Our 2007E EPS are down $0.05 to $4.25, reflecting the negative earnings variance against our estimates in Q2/07. We believe that many of the items that caused earnings to be lower than our forecast were specific to Q2/07, and as such our 2008E EPS of $4.70 are unchanged, as is our 12-month price target of $64.

We maintain our $64 price target on Royal Bank and Sector Perform rating. The bank's premium valuation (13.8x 2007E EPS versus the Canadian bank median of 13.1x) reflects, in our view, its leading position in Canada, above average revenue momentum (which has been partly driven by capital deployment), improved U.S. performance and an industry-leading wealth management platform. The bank is not immune to deteriorating credit quality, however, and some of the other banks have less exposure. Royal Bank also has greater exposure to wholesale revenues - a lower P/E source of earnings, in our view - than some competitors. Our 12-month price target of $64 implies a forward P/E multiple of 13.6x, essentially in line with the current valuation multiple.

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Scotia Capital, 28 May 2007

Q2/07 Earnings - Below Expectations

• Royal Bank reported a 15% increase in cash operating EPS of $0.99 per share, below expectations. Earnings were negatively impacted by $0.04 per share from higher insurance disability claims as well as by $0.04 per share from lower loan loss recoveries.

• Return on equity was 24.0% versus 23.3% a year earlier. Return on risk-weighted assets declined to 2.16% versus 2.23% a year earlier.

• Overall earnings disappointment was due to relatively weak earnings from RBC Capital Markets which declined 15%. Retail and Wealth Management earnings remained strong both growing 21%. U.S. & International Banking earnings growth was 11%.

• Bank revenue growth in Q2 was strong at 10.2% with non-interest expenses increasing 7.7%. Operating leverage was solid at 2.5% in the quarter.

Retail Earnings Increase 21%

• Canadian Personal and Business (P&B) cash earnings increased 21% to $620 million from $512 million a year earlier due to strong loan and deposit growth and a higher net interest margin, partially offset by higher loan losses.

• Revenues in the Canadian P&B segment increased 10.8%, with expenses increasing 3.4% producing high operating leverage of 7.4%. Revenue was strong across all products, excluding the Global Insurance operations; revenue was up 12.7%, while expenses increased 3.1%.

• Loan loss provisions (LLPs) increased 21% to $204 million versus $168 million a year earlier. Higher LLPs were due to volume increases in personal loans and credit cards and some deterioration in the business loan portfolio.

• Overall retail market share including personal lending, credit cards and residential mortgages increased 30 bp this quarter to 15.3% from 15.0%.

Canadian Retail NIM Improves 5 bp

• Retail NIM increased 5 bp from a year earlier to 3.25% aided by some transfer pricing and increased 6 bp sequentially.

Wealth Management Earnings Strong

• Wealth Management cash earnings increased 21% to $199 million from $164 million a year earlier, reflecting strong net sales and growth in mutual fund assets. This is the first quarter RY is reporting its Wealth Management business earnings on a segmented basis.

• Revenue growth was an impressive 13.4% with operating expenses up 10.2% due to higher variable compensation. Operating leverage was a solid 3.2%

• U.S. Wealth Management revenue growth was strong at 15% with Canadian Wealth Management earnings increasing 11%.

• Mutual fund revenue increased 2% sequentially and 14% from a year earlier to $361 million. RY led the industry in long-term asset (LTA) net sales with a 17% market share in Q2. Mutual Fund assets (IFIC) increased 21% from a year earlier to $77.3 billion.

U.S. & International P&B Earnings Solid

• U.S. & International P&B Q2/07 cash earnings increased 11% YOY to $82 million due to higher loan and deposit volumes and the impact of recent acquisitions.

• Revenue growth was strong at 17% with expense growth high at 18% due to integration costs from recent acquisitions.

• Net interest margin increased 8 bp sequentially to 3.69% but declined 10 bp from a year earlier.

RBC Capital Markets Earnings Relatively Weak

• RBC Capital Markets earnings were weak compared with peers, declining 15% to $350 million versus TD Wholesale Banking growing 55% and BMO Capital Markets up 17%. RBC Capital Markets was relatively weak due to lower trading revenue and lower LLP recoveries.

• Operating leverage was negative 7% in Q2 with revenue remaining flat from a year earlier and expenses increasing 7% due to higher costs of growth initiatives.

Trading Revenue - Weak Fixed Income Trading Revenue

• Trading revenue declined 7% to $544 million from $586 million a year earlier and $652 million in the previous quarter. Fixed income and money market trading revenue declined 40% with equity and foreign exchange contracts remaining relatively stable.

Capital Markets Revenue Increases 8%

• Capital markets revenue was $657 million versus $611 million in the previous quarter and $606 million a year earlier.

• Securities brokerage commissions were strong at $338 million, with underwriting and other advisory fees at $319 million, an increase of 23%.

Security Gains Negligible

• Security gains were negligible at $5 million or nil per share versus $0.02 per share in the previous quarter and $0.01 per share a year earlier. The bank continues to have very low reliance on security gains.

• Unrealized security surplus was $112 million at quarter-end (now contained in AOCI) versus the $135 million surplus at the end of the previous quarter and the $166 million deficit a year earlier.

Loan Loss Provisions Increase to 33 Bp

• Specific loan loss provisions (LLPs) increased 52% to $188 million, or 0.33% of loans versus $124 million or 0.25% of loans a year earlier. LLPs in retail increased 21% to $204 million from $168 million due to volume increases and higher Canadian business loan losses. RBC Capital Markets net LLP recoveries declined to $5 million versus $78 million a year earlier.

• Our 2007 and 2008 LLP estimates remain unchanged at $600 million or 0.26% of loans and $700 million or 0.30% of loans, respectively. RY LLPs at 0.33% of loans compares with TD at 0.39% of loans, with BMO's LLPs extremely low at 0.14% of loans.

Loan Formations Increase Slightly

• Gross impaired loan formations were $363 million versus $311 million in the previous quarter and $262 million a year earlier. Net impaired loan formations were $227 million versus $237 million in the previous quarter and $180 million a year earlier.

Tier 1 Ratio Declined to 9.3% - RWA Growth

• Tier 1 capital declined to 9.3% versus 9.5% a year earlier due to a 16% increase in risk-weighted assets to $243.8 billion. Market at risk assets increased 27% to $8.4 billion.

• The common equity to risk-weighted assets (CE/RWA) ratio was 9.0% unchanged from the previous quarter but down from 9.4% a year earlier.

Share Buybacks

• This quarter RY repurchased 2.9 million shares at an average price of $54.83 per share for a total of $159 million.

Recent Events

• In Q2 the bank announced and completed several small acquisitions primarily benefiting its U.S. & International and Wealth Management businesses.

• On April 17, 2007 RY announced a joint venture agreement in which RY will acquire a 50% stake in Fidelity Merchant Bank & Trust in the Bahamas. The transaction is expected to be completed within the next few months. On April 30, 2007, RY announced an agreement to acquire Seasongood & Mayer, a public finance firm and leading underwriter of municipal debt with $1.5 billion in assets. On May 18, 2007, RY completed the acquisition of J.B. Hanauer & Co. previously announced March 13, 2007. In addition, RY acquired 39 AmSouth branches in Alabama.

Recommendation

• We are trimming our 2007 earnings estimate to $4.37 per share from $4.50 per share based on this quarter's weaker earnings. Our 2008 earnings estimate remains unchanged at $5.00 per share. Our 12-month share price target remains unchanged at $75, representing 17.2x our 2007 earnings estimate or 15.0x our 2008 earnings estimate.

• We maintain our 1-Sector Outperform rating on the shares of Royal Bank based on strength of franchise and operating platforms, particularly retail banking and wealth management, higher than bank group ROE and no valuation premium.

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TD Securities, 28 May 2007

RBC reported Q2/07 EPS of $0.99, in-line with our estimate and consensus of $1.00, respectively. Despite results being negatively impacted by higher credit losses and lower profitability from the bank’s global insurance business, RY grew its year over year EPS by over 15% and recorded an ROE of over 23%. We believe this was a very good quarter for the bank, which is demonstrating excellent underlying growth in its important domestic retail businesses. We believe investors should be patient, as we expect superior relative earnings growth to return next quarter.

Impact

Neutral. We are increasing our 2007 and 2008 EPS estimates to $4.30 (from $4.15) and $4.70 (from $4.65) respectively, reflecting superior operating leverage and growing retail share in both banking and wealth. We are maintaining our 12-month target price of $67.00 and we reiterate our Action List Buy recommendation.

Details

Canadian Banking results were below our estimates, with operating cash earnings of $620 million, but still up 18% year over year. In our opinion RY’s domestic fundamentals remain very strong demonstrated by another quarter of 'above average' revenue growth (up 10.8% yoy). Growth was primarily driven by an expansion in net interest margins, industry-leading asset growth across multiple product categories, and continued efficiency gains (the bank sported an impressively low 42.0% efficiency ratio). Also, the bank maintained its leading market share position in important product categories.

While we were slightly surprised at the magnitude of credit losses in quarter, we note that higher credit losses are to be expected at this point in the credit cycle. Nevertheless, most of the uptick experienced in the quarter related to some deterioration in the business loan portfolio (due to increased impairment and lower corporate recoveries). However, we believe that rising credit losses are also a reflection of growth in the business loan portfolio (business loan balances grew 9% yoy, a positive trend that we believe will continue).

Importantly, volatile insurance earnings (down 27% yoy) offset what would otherwise have been viewed as a good quarter. Management points to a slowdown in disability claims resolution time, which will be resolved. Management guided towards a sustainable earnings level roughly $40 million higher than reported this quarter. Wealth Management results were above expectations, as mutual fund momentum carried over from Q1/07. Perhaps most impressive this quarter was the 21% growth in cash net income, driven by strong growth in AUM and improvement in full-service brokerage productivity. Superior distribution capabilities, unmatched size and scale, and international growth opportunities provide further growth opportunities going forward. In our opinion RY owns the 'best-in-class' wealth franchise in the group and will be hard pressed to relinquish this leadership position anytime soon. Management implied that further actions will soon be taken in order to further pressure the competition.

U.S. & International Banking results were solid. The drivers for the quarter were expanding net interest margins, solid balance sheet growth (albeit the results include the affects of M&A activity), and a strong contribution from RBC Dexia (which grew AUA by 15.7% yoy). We believe that the division will generate improving results through a combination of international M&A, product enhancements, organic growth, and further recruitment. Management noted that roughly $20 million in M&A related non-operating expenses were incurred during the quarter

RBC Capital Markets results were inline with our expectations, reporting operating cash earnings of $350 million. Although we were slightly disappointed with the bank’s wholesale results (given the solid showing by peers already reported) we note that strong results from investment banking were offset by lower trading revenues (which are unpredictable) as well as a materially lower contribution from investment securities gains (even more unpredictable).

Justification of Target Price

Our $67.00 target is a product of adding 50% of the $67.84 value derived from our 2008 P/E valuation of 14.4 times to 50% of the $67.42 value derived from our 2008 price-to-book valuation of 3.40 times.

Key Risks to Target Price

We believe the four key risks are: 1) unfavorable interest rate movements; 2) a downturn in the credit cycle; 3) additional US acquisitions at premium valuations; and 4) trading volatility.

Investment Conclusion

Given the material under-performance in RY’s shares on Friday, investors were clearly expecting the bank to significantly exceed consensus earnings estimates. Without considering the earnings build-up generated by the bank’s fast growing assets and assets under administration we can easily count $0.07 of EPS that will be added to Q3/07 earnings. We believe the headline reaction today provides long-term investors with a GARP bias an excellent opportunity to buy one of Canada’s best companies. RY’s scale and momentum in domestic retail operations is tremendous, US retail operations are demonstrating decent growth in a difficult environment, and the wholesale operation is growing into a global player. We believe the collection of these businesses is deserving of superior valuation, yet the bank is now only trading at a slight premium to the group. We re-iterate our Action List Buy rating.

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Financial Post, Duncan Mavin, 26 May 2007

There is just no satisfying some investors, as shown by yesterday's reaction to Royal Bank of Canada's robust $1.3-billion second- quarter profit.

Despite remaining on target to be the first Canadian bank to amass earnings of $5-billion in a single year, RBC's results were marginally short of expectations, $1.79 was slashed off its stock price and almost 11 million RBC shares changed hands.

The bank suffered because the bar has been raised too high, said Dundee Securities Corp. analyst John Aiken.

"Our biggest concern regarding Royal related to lofty earnings expectations, of which we ourselves were guilty," Mr. Aiken said in his research note, a rare mea culpa from the analyst community.

"The drop in the stock price was absolutely nothing that Royal did wrong at all," Mr. Aiken said in an interview later in the afternoon. "Far from it, it was a pretty solid quarter, but Royal's share price had no room for imperfection in the quarter."

In particular, RBC's results suffered by comparison with those of Toronto-Dominion Bank and Bank of Montreal, which both reported earlier this week and which both beat expectations.

Before yesterday's earnings release, RBC's stock price had run up 12.5% since the previous quarter to $60.62, its highest close ever. The latest love-in for Canada's biggest stock was partly on the back of the strong results from its two rivals.

"When TD reported a good set of results, the market assumed that RBC was going to report a similar blow-out number way above expectations," said Bruce Campbell, of Campbell & Lee Investment Management Inc. "What they really reported was a very good number, but built into it was that the earnings were going to be great and they weren't."

"The bank didn't set the expectations so you can't blame them, but investors are just trying to get a jump and buy in early," Mr. Campbell said.

RBC's reported earnings of 98? a share compares with an average of analysts' forecasts of $1.02 a share.

The results were "good, but disappointing," said Credit Suisse analyst Jim Bantis, as if to prove how difficult it is for the bank to please these days.

In fact, the bank's earnings were up 14% compared with the same period last year. Total revenue increased $547-million, or 11%, to $5.67-billion.

The results were helped by strong earnings from domestic retail banking and wealth management, which were up 21% and 22% respectively.

"The core domestic personal and commercial and wealth businesses appear to be running well and underpin one of the better platforms in the group," said UBS Investment Research analyst Jason Bilodeau.

The main weak spots were in insurance and capital markets.

Profits in the capital markets group of $350-million were down $64-million or 15% from last year. Softer trading results following a strong 2006 was "a bit of drag," Mr. Bilodeau said.

Earnings from insurance fell 22% compared with last year to $46-million as a result of poor disability claims experience.

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The Globe and Mail, 26 May 2007

Royal Bank of Canada's profit rose 14 per cent from a year ago, despite being nicked by lower trading revenues because of the U.S. subprime mortgage market.

But investors punished the bank's stock as the second-quarter financial results fell slightly short of analysts' expectations.

Shares of the country's biggest bank dropped 2.95 per cent on the Toronto Stock Exchange yesterday.

While RBC's key Canadian personal and consumer banking operations and its wealth management business appear to be running well, its U.S. and international operations seem to have some potential growth problems, UBS analyst Jason Bilodeau wrote in a note to clients.

And RBC Dominion Securities, the investment banking arm, saw profit fall by $64-million, or 15 per cent, on the back of lower trading revenues in the fixed-income business. The fixed-income business dragged the bank's trading revenue down $149-million, or 21 per cent, from a year ago, despite higher trading revenue from equity, or stocks. Total trading revenue, a figure that includes all income related to trading, was $544-million, down 7 per cent.

The bank said it had net trading losses on seven days during the quarter, and one day in the quarter on which it pulled in trading revenue of $57-million.

On a conference call with analysts, RBC's head of investment banking Chuck Winograd said his division's flat revenue picture, compared with last year's second quarter, was mainly a result of problem fixed-income trades in the U.S. subprime market.

Those trades resulted in "a few percentage points" of lost revenue in the quarter, he said, and most of that was from a single structured transaction.

As it was setting up that particular deal, Mr. Winograd said, the bank found itself with subprime loans on its trading book just as the market weakened.

"Liquidity dried up, and we recorded mark-to-market [paper] losses." Some of the losses were recovered as the bank completed the transaction, producing a "decent outcome," he added.

Subprime mortgages are risky home loans, some of which were packaged by investment banks and sold as high-yield bonds to hedge funds and mutual fund investors. When U.S. house prices dropped in value earlier this year, these loans quickly lost value.

Considering that the investment banking group had a "near record" quarter a year ago, the lack of revenue growth in the second quarter of this year was actually a positive result, he said.

This is the first quarter that RBC has reported its financial results under its new business structure, having carved out a wealth management segment so that the bank has four divisions rather than three.

The bank's total profit came in at $1.279-billion, up $161-million from the same period last year, in what Credit Suisse analyst Jim Bantis summed up as "good, but disappointing results." Profit per share of 98 cents was 4 cents below the consensus forecast, Mr. Bilodeau noted.

The bank put aside more money for bad loans this quarter, with its provision for credit losses rising by $64-million or 52 per cent from a year ago, partly because of growth in its personal loan and credit card portfolios.

Meanwhile, insurance-related revenue dropped 1 per cent, excluding the favourable impact of an accounting change. RBC said the drop in insurance revenues was mainly due to lower sales of annuities in the United States.

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Bloomberg, Doug Alexander, 25 May 2007

Royal Bank of Canada said second- quarter profit rose 14 percent, missing analysts' estimates for the first time in almost three years, as trading revenue fell and earnings growth slowed in the U.S.

Net income for the period ended April 30 climbed to C$1.28 billion ($1.18 billion), or 98 cents a share, from C$1.12 billion, or 85 cents, Canada's biggest bank said today in a statement. Revenue rose 11 percent to C$5.67 billion.

Profit from the U.S. unit rose 8 percent, trailing growth in Canada, as expenses rose for acquisitions and new branches, and after the Canadian dollar gained against the U.S. currency.

``You've had the currency dragging that down'' in the U.S., said Gavin Graham, chief investment officer for Guardian Group of Funds in Toronto, which oversees about $5.3 billion in assets including Royal Bank shares. ``It's not a good place to be for a commercial bank.''

Excluding some items, profit was 99 cents a share, trailing the C$1.03 median estimate of nine analysts surveyed by Bloomberg News, the first time in 11 quarters that earnings lagged analysts' expectations. Profit growth was the slowest in six quarters.

Royal Bank fell C$1.79, or 3 percent, to C$58.83 at 4:10 p.m. trading on the Toronto Stock Exchange, the biggest drop since Aug. 27, 2004. The stock has risen 6 percent this year, beating the 4.5 percent gain for the nine-member Standard & Poor's/TSX Banks index.

``After much stronger-than-expected earnings last quarter, Royal was the best performing Canadian bank stock over the past three months,'' Desjardins Securities Inc. analyst Michael Goldberg said today in a note. ``With these results and its relatively full evaluation, that strong relative performance is unlikely to continue.''

Consumer banking profit in Canada rose 21 percent to C$618 million and posted a 29 percent return on equity, a measure of profitability. Mortgages, personal loans and credit card balances rose in the period. Earnings at that unit were tempered by a slump in insurance, as operating profit fell 27 percent to C$43 million on higher claims and other expenses.

``Some of the businesses where they did disappoint are ones that are more volatile in nature anyway,'' said Juliette John, who helps manage about C$19 billion at Bissett Investment Management in Calgary. ``The strength that we've seen on the retail side as well as the wealth management side are still the more high-quality businesses.''

Profit from U.S. and international consumer banking, which includes Raleigh, North Carolina-based RBC Centura, rose to C$67 million, with a return on equity of 7.4 percent.

Costs in the U.S. rose 18 percent as the bank expanded through acquisitions and new branches. Royal Bank bought 39 branches in Alabama from AmSouth Bancorporation and acquired Flag Financial Corp. in the past year, helping to add another 70 offices and 2,267 employees. The bank had C$20 million in one- time costs in the period to integrate its acquisitions.

Royal Bank set aside C$188 million for bad loans, up from C$124 million a year ago and the highest in at least nine quarters.

Profit at RBC Capital Markets fell 15 percent to C$350 million. Trading revenue fell 7.2 percent to C$544 million on lower revenue from fixed-income, including a trading loss from high-risk, or ``sub-prime'' mortgage loans in the U.S. Revenue from equity trading almost doubled.

The bank lost ``a few percent of our capital markets revenues'' from investing in sub-prime securities, with a large portion of that coming from one transaction, RBC Capital Markets Chief Executive Officer Charles Winograd said in a conference call with analysts.

By comparison, Bank of Montreal, which lost C$680 million this year from trading natural-gas contracts, had a C$10 million trading loss in the period.

``In terms of the specific business that the other bank had an issue with, clearly the size of our business in that area is significantly smaller that what they had,'' said Morten Friis, Royal Bank's chief risk officer.

An increase in new stock issues and a surge in sales of Canadian-denominated Maple bonds helped increase underwriting fees, after the bank helped manage a C$2.5 billion sale for Morgan Stanley in February, the largest corporate bond sale in Canada.

The wealth management group's earnings rose 22 percent to C$194 million. Mutual fund sales climbed 25 percent to C$2.8 billion from the previous year as stock prices rose and the bank sold more funds through its branches. Fund industry sales hit a nine-year high last month, with Royal Bank and Toronto-Dominion Bank leading net sales in Canada.

Royal Bank is the third Canadian lender to report second- quarter earnings. Bank of Montreal said May 23 that profit rose 3 percent to C$671 million as higher investment banking fees and mutual funds offset losses from commodities trading. Toronto- Dominion Bank said yesterday that profit rose 19 percent to C$879 million. Both banks' profits beat analysts' estimates.

;

TD Bank Q2 2007 Earnings

Analysts' ratings and target prices for TD Bank:

• BMO Capital Markets maintains "outperform," 12 month target price has been raised from $75.00 to $76.00

• Blackmont Capital maintains "hold," 12-month target price is $73.00

• Desjardins Securities maintains "top pick", 12-month target price has been raised to $79.00

• RBC Capital Markets maintains "outperform," 12 month target price has been raised from $78.00 to $82.00

• Scotia Capital upgrades from "sector perform" to "sector "outperform." 12 month target price has been raised from $81.00 to $85.00

• UBS maintains "buy." The target price has been raised from $82.00 to $85.00.

In a research note published this morning, UBS mentioned that the company’s superior revenue growth is being driven by investments into domestic retail. According to UBS, the commencement of synergies at TD Ameritrade would bolster TD Bank’s 2H07/08 earnings. The EPS estimates for 2007 and 2008 have been raised from C$5.30 to C$5.51 and from C$5.90 to C$6.11, respectively.

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BMO Capital Markets, 25 May 2007

TD Bank reported Q2/07 cash earnings of $952 million, or $1.31 per share, compared to $998 million, or $1.37 per share, in the last quarter, and $818 million, or $1.12 per share, in the same quarter of last year. Various unusual items were included in all three quarters, including a $43 million pre-announced TD Banknorth restructuring charge taken this quarter and a $60 million reversal of general taken in the second quarter of last year. After adjustments, the operating comparison is $1.36 per share in this quarter, $1.38 in the last quarter, and $1.09 in the same quarter of last year. Results were ahead of both our estimates and street forecasts.

On virtually all bases, this was another very strong quarter for TD. While the U.S businesses had its challenges, the Canadian operations appear to be going full steam. From the same quarter of last year, Canadian P&C earnings are up 16%, Wealth Management earnings are up 19% and Wholesale earnings are up 55%.

The Canadian Personal and Commercial Banking segment reported earnings of $540 million, roughly unchanged from last quarter but up solidly from last year. Loan volume and market share growth remain strong across most products. Net interest margin remained stable. Provisions for credit losses were largely unchanged from last quarter and expenses remained very well controlled.

The privatization of TD Banknorth is now complete. The operating environment south of the border continues to be challenging, and the strengthening Canadian dollar has not provided relief. Management, however, has expressed optimism about the long-term opportunities to improve performance by leveraging TD Bank's retail expertise. Wealth Management, including TD Ameritrade, reported earnings of $197 million, up from $186 million last quarter.

The contribution from AMTD was pre-announced at $63 million. In the domestic business, growth came from all business areas. The bank's market share of both long-term and money market funds continued to grow. Expense increases were largely volume-related.

TD Securities reported earnings of $217 million, well ahead of our forecasts of $139 million. Results out of this segment over the past few quarters indicate that TD's wholesale franchise is becoming an increasingly important player within its defined markets. Robust underwriting and advisory activity as well as strong corporate lending contributed to the growth. Trading revenues came in at $289 million - consistent with previous quarters and in line with our expectations. Investment securities gains were $102 million, somewhat higher than they have tracked in the past. This was an unusually strong quarter for TD Securities and we are forecasting a contribution closer to $150 million quarterly.

On the credit front, loan losses of $172 million were roughly in line with our expectations. Gross impaired loans tracked up in the quarter, due mainly to TD Banknorth. Loan losses in domestic banking continue to run above the bank's historical levels reflecting the acquisition of VFC and the substantial volume growth over the past couple of years. So far, we are unconcerned on the loan loss front, but TD has clearly moved up the 'credit risk' scale.

From a capital perspective, TD's Tier 1 ratio was 9.8%, down from 11.9% in the last quarter due to the buyout of the remaining shares of TD Banknorth. TD has traditionally operated with some of the higher capital ratios in the bank group, but this decline puts the bank in line with its peers.

Projections and Valuations

We are increasing our 2007 and 2008 cash EPS estimates by $0.10 to $5.40 and $5.85, respectively, and we are increasing our target price to $76. We are assuming a moderation in the earnings contribution of TD Securities, and modest improvement in the contribution from the U.S. operations.

We also note that with the debt financing for the buyout of the minority interest of Banknorth, some of the earnings growth at TD Bank is being driven by leverage of the balance sheet rather than fundamental improvements.

We have been long-time bulls on TD shares, and this quarter was a perfect reflection of what we like at the bank. We believe that management has achieved a solid marriage of investing for the long-term, while delivering short-term earnings. To date, however, TD's investment in the U.S. and its caution on aggressive expansion in Wholesale have exacted an opportunity cost for shareholders. Over time, we believe that the TD's two U.S. vehicles will deliver growth (and better returns). This should ensure that TD can maintain earnings growth when the inevitable slowdown occurs in Canada.

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RBC Capital Markets, 25 May 2007

Q2/07 Results Ahead of Expectations

Core cash EPS of $1.37 were well ahead of our $1.22 estimate and the Street estimate of $1.26, and were up 27% YoY. Both retail and wholesale banking came in ahead of our expectations on strong revenue growth and controlled expense growth. Domestic wealth management net income was slightly above our expectations, up 19% YoY while TD Ameritrade and TD Banknorth results had been pre-released.

Bar Has Been Set High For Other Banks

Both TD and BMO reported results that were well ahead of expectations, setting the bar high for banks that have yet to report results. Core retail banking revenue growth of 12% at TD and 7% at BMO (in spite of market share losses) suggest continued strength in retail banking results. Buoyant capital markets activity was also a key driver of the outperformance at both banks, with revenue increases of 20% and 13% respectively in wholesale banking. Other banks should also post strong results.

TD Offers Balance of Growth and Lower Risk

Domestic retail growth and higher earnings from the U.S. (driven by cost synergies at TD Ameritrade, and by higher ownership of TD Banknorth) should buoy earnings growth for TD. We believe that TD can grow 2007 and 2008 earnings per share by 19% and 11%, respectively, ahead of median expected growth of 16% in 2007 and 8% in 2008 for the bank's five Canadian peers. We also believe that there is less downside risk to our forecast for TD than for the industry.

12-month Price Target up to $82 from $78

Our 12-month price target of $82 implies a multiple of 13.4x 2008E cash EPS, compared to the current 12.9x multiple on 2007E earnings and a 5-year average forward multiple of 12.1x. Our EPS estimates were raised for both 2007 and 2008; to $5.50 and $6.10, up $0.20 and $0.15. The increases reflect the positive earnings variance this quarter and the portion we expect to be sustained going forward. Our 12-month target price is up on increased earnings estimates, a higher than expected increase in book value in the quarter, and a slight increase in our valuation multiple from 13.1x to 13.4x.

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Scotia Capital, 25 May 2007

• Wholesale Banking led earnings growth up 55% due to strong capital markets activity. Wealth Management and TDCT produced strong results with earnings growth of 30% and 16% with TD Banknorth up a modest 5%.

• TDCT earnings were particularly impressive driven by 12% revenue growth aided by net interest margin improvement. Expense growth was modest at 4% for 8% operating leverage fully offsetting higher LLPs.

• We are increasing our 2007 earnings estimate to $5.50 per share from $5.30 per share and our 2008 earnings estimate to $6.10 per share from $5.90 per share based on operating earnings strength at TDCT and Wholesale Banking. We are increasing our 12-month share price target to $85 from $81.

• We are upgrading TD to a 1-Sector Outperform from a 2-Sector Perform based on earnings increases, valuation discount and continued operating strength at TDCT, Wealth Management, a more stable wholesale platform and substantially lower downside risk at TD Banknorth.

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The Globe and Mail, Tara Perkins, 24 May 2007

Toronto-Dominion Bank became the second big bank to top analyst estimates for second-quarter earnings yesterday, as it reported a profit gain of 19 per cent.

The bank's bread-and-butter domestic personal and commercial banking unit saw profit rise 16 per cent to $540-million, on the back of a strong showing in real estate secured lending, small business banking, life insurance and credit cards.

The outlook for revenue growth from that division "remains solid for the balance of the year but is expected to be lower compared to the first half of the year," TD said. Provisions for bad loans on both the personal and business banking side are expected to grow modestly, it added.

TD, which took its New England-based TD Banknorth unit private last month, will not be satisfied with subpar earnings from the U.S. retail business, TD president and chief executive officer Ed Clark said.

"We know the U.S. banking environment is challenging right now, and that TD Banknorth is delivering below our long-term expectations," Mr. Clark said.

"Our focus is on turning TD Banknorth into a consistent earnings growth engine," he added.

TD Banknorth, based in Portland, Me., reported lower profit as job cuts and branch closings boosted costs. Banknorth earned $23-million in the quarter, down 61 per cent.

TD Banknorth was the only dark cloud in an otherwise sunny second quarter.

TD's total provision for credit losses rose from $16-million a year ago to $172-million this quarter.

Meanwhile, one of the top performers this quarter was wholesale banking, where profit rose 55 per cent to $217-million. Gains came from TD's equity investment portfolio, or trading, as well as investment banking.

"While wholesale banking had a very strong performance in the first half of this year, it is not expected that this performance will be repeated in the traditionally slower second half of the year," TD said.

Wealth management, which includes TD's stake in TD Ameritrade, saw profit rise 30 per cent to $197-million, propelled largely by the Canadian mutual fund and advice business.

"In Canada, we're really starting to get traction from the investments we've made in our client-facing adviser network and supporting infrastructure," Mr. Clark said.

The bank saw more transactions at its discount and full-service brokerages and strong growth in client assets. But, lower commissions per trade for active traders and wealthy households led to a decrease in commission revenue at the discount brokerage.

TD Ameritrade contributed $63-million to the bank's profit. TD said it will be selling some of its shares in TD Ameritrade, as share buybacks brought its ownership stake up to 40.3 per cent at the end of April. The bank plans to bring that back down to 39.9 per cent.

While this quarter exceeded expectations, profit was 5 per cent lower than in the first quarter of this year. TD has earned $1.8-billion so far this fiscal year, down 41 per cent from the same period last year. In 2006, the bank recorded a $1.67-billion gain on the sale of TD Waterhouse to Ameritrade.

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Canadian Press, David Friend, 24 May 2007

Cautiously looking towards the future, the CEO of TD Bank Financial Group said Thursday that reining in expenses will help eclipse an expected slowdown in revenue growth.

Chief executive Edmund Clark said during a quarterly earnings call that preparing for the worst actually helped the bank's second-quarter profits jump 19 per cent, and that the bank expects a similar approach will help it do so in the future.

"We continue to worry about the effects of (the) high Canadian dollar on Central Canada and we still expect some slowing in revenue growth, but we're going to keep expenses growing less quickly so that we maintain our traditional three per cent expense gap," he said.

The plan comes on the heels of second quarter earnings that exceeded market expectations.

The bank said it earned $879 million or $1.20 per share in its second quarter ended April 30, up from $738 million or $1.01 per share in the year-earlier period.

Revenue rose 12 per cent to $3.5 billion from $3.12 billion, and assets expanded by two per cent to $396.7 billion.

Clark credited the results to a cautious plan outlined in the first quarter.

"Earlier this year, we said we expected revenues to slow down. So we wanted to slow expense growth and get ahead of the curve while still investing in business for the future," he said.

"Clearly revenue growth continued to grow faster than we had expected. Combine that with expense discipline and you get exceptional earnings growth."

TD shares closed ahead 21 cents to $70.74 after hitting a record high of $71.85 in the morning - up from $56 last summer - on the Toronto Stock Exchange.

Annualized return on equity for the quarter was 17.1 per cent, compared with 16.5 per cent in the February-April period of last year.

The bank said its adjusted earnings were up 27.5 per cent to $995 million or $1.36 per share, excluding items such as amortization of intangibles and a $43-million charge on TD's restructuring and taking full ownership of TD Banknorth and other American operations.

The ex-items result handily exceeded the Thomson Financial average analyst expectation of $1.25 per share. This came after Bank of Montreal (TSX:BMO) beat forecasts Wednesday with a 3.1 per cent profit increase to $671 million despite natural gas trading losses.

TD said its provisions for credit losses were $172 million, deepening from $16 million a year earlier and from $163 million in the November-January quarter.

The quarter's profit gain was led by wholesale banking, including investment banking and trading, which had what Clark called a "fantastic quarter" and raised its earnings by 55 per cent from a year earlier to $217 million. But the bank warned it doesn't expect this strength to continue in what's traditionally a slower second half of the year.

Profits in Canadian personal and commercial banking increased 16 per cent to $540 million, while TD's wealth management unit boosted its profit by 30 per cent to $197 million thanks to strong growth in mutual fund and advisory businesses.

Clark predicted that the bank would exceed its earnings objectives for the full year.

"Yes, good markets clearly are helping our performance, but the reality is that you're now seeing the outcome of the tough decisions that we made and the hard work that we undertook that's been going on in the wholesale bank for the last few years," he said.

The bank has been focusing on customer service, convenience and a stronger relationship with its clients, said Tom Kersting, a financial services analyst with Edward Jones in St. Louis.

"You can see that through the increased mutual funds sales. It's making the customer sticky and enjoy the service that they receive," he said.

TD Ameritrade, the Omaha-based brokerage owned 40 per cent by TD, contributed $63 million to wealth management earnings.

U.S. personal and commercial banking was the slack segment, earning $23 million, down from $59 million a year ago.

"We're continuing to tackle a tough banking and credit environment head-on while leveraging some of TD's industry-leading practices in Canada to improve growth at TD Banknorth," Clark stated.

Excluding restructuring, privatization and other merger-related charges, U.S. personal and commercial banking earned $62 million.

At Maine-headquartered TD Banknorth, where TD raised its ownership to 100 per cent from 59 per cent effective April 20, "we're very positive about TD Banknorth's long-term potential to grow organically and deliver value to our shareholders," Clark added.

In what will continue to be a "challenging year" in U.S. banking, TD said stateside results are expected to improve on cost cuts and a focus on extending branch hours, simplifying fees and adding new retail products.

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Financial Post, Jonathan Ratner, 24 May 2007

Toronto-Dominion Bank’s shares were up on Thursday morning after its second quarter earnings per share of $1.36 (adjusted) came in 3¢ higher than Blackmont Capital analyst Brad Smith forecasted because of a lower-than-expected effective tax rate.

TD’s consolidated revenues of $3.5-billion were in line with his projections and 12% ahead of the previous year.

Mr. Smith made no changes to his earnings estimates, “hold” rating or $73 per share target price for TD.

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Bloomberg, Sean B. Pasternak, 24 May 2007

Toronto-Dominion Bank, Canada's second-largest lender, said profit climbed 19 percent, topping analysts' estimates, on higher fees from trading, investment banking and mutual funds.

Net income in the second quarter ended April 30 rose to C$879 million ($813 million), or C$1.20 a share, from C$738 million, or C$1.01, a year earlier, the Toronto-based bank said today in a statement. Revenue jumped 12 percent to C$3.5 billion, the highest in at least nine quarters.

Profit from the TD Securities investment bank jumped 55 percent to C$217 million, close to a six-year high, as the value of mergers and new stock sales in Canada surged. Chief Executive Officer Edmund Clark has pledged to expand the investment bank so that it ranks in the top three among Canadian lenders for advisory services.

``That isn't usually one of their strong points, but certainly here it seems to have contributed very well,'' said John Kinsey, a fund manager at Caldwell Securities Ltd. in Toronto, which oversees $900 million in assets, including Toronto-Dominion shares.

Toronto-Dominion rose 21 cents to C$70.74 at 4:10 p.m. trading on the Toronto Stock Exchange and earlier touched a record C$71.85. Shares of Royal Bank of Canada and Canadian Imperial Bank of Commerce also hit records.

Clark reiterated today that the bank will probably exceed its 2007 target of increasing earnings per share before one-time items by as much as 10 percent. Profit on that basis rose 22 percent in the first half of the fiscal year.

``We expect to exceed by a significant margin our earnings objectives for 2007,'' Clark told investors on a conference call today.

The bank expects profit growth to slow in the second half of the year, Chief Financial Officer Colleen Johnston said in an interview today.

``We don't see that type of growth rate continuing, but we still do very much expect to achieve good double-digit growth in the latter half of the year,'' Johnston said.

Capital markets revenue will probably slow after mergers surpassed last year's record pace in the first five months of the year. TD Securities advised on seven mergers and acquisitions in the quarter valued at $6.36 billion, up from two deals worth $1.84 billion a year ago, according to data compiled by Bloomberg. The firm managed $1.37 billion of stock sales in the quarter, compared with $516 million a year ago.

Trading revenue climbed 15 percent to C$289 million in the quarter, led by equity and fixed income. That contrasts with Bank of Montreal, which reported yesterday a loss of C$10 million in that business, on losses from natural gas trading.

Profit from asset management rose 30 percent to C$197 million, the highest in eight years. Canadian mutual funds sales soared to a nine-year high last month, with Toronto-Dominion leading net sales among the 24 fund companies tracked by the Investment Funds Institute of Canada.

``The banks, with not only their branch networks, but also their brokers, have very strong distribution channels,'' said John Aiken, an analyst at Dundee Securities in Toronto. ``It's becoming a bit of a challenge for the independent mutual fund sellers.''

The bank also owns about 40 percent of TD Ameritrade Holding Corp. in the U.S., the third-largest online brokerage, which added C$63 million to asset management earnings, up 62 percent from a year ago.

Excluding one-time items such as costs for job cuts, the bank said it earned C$1.36 a share. Toronto-Dominion was expected to earn C$1.25 a share on that basis, according to the median estimate of nine analysts polled by Bloomberg News.

Canadian consumer banking profit climbed 16 percent to C$540 million because of higher revenue from credit cards, mortgages and deposits.

Earnings from consumer banking in the U.S., where the bank owns Portland, Maine-based TD Banknorth, dropped 61 percent to C$23 million. The bank said in March it will cut jobs and close as many as 24 branches to offset lower demand for loans and higher advertising costs.

``TD Banknorth expects 2007 to continue to be a challenging year,'' the bank said in the statement. ``Competition for customers remains keen, while the interest rate environment is not expected to improve."

Toronto-Dominion last month bought the 40.2 percent it didn't already own of TD Banknorth, whose profit has declined in six of the past eight quarters.

The bank set aside C$172 million for bad loans, more than 10 times higher than the C$16 million it had a year ago.

Bank of Montreal was the first Canadian bank to report second-quarter earnings. Canada's fourth-biggest bank said yesterday that profit rose 3 percent to C$671 million, or C$1.29 a share, topping analysts' estimates, as mutual fund sales offset the biggest commodities trading loss ever for a bank in Canada.

Profits before one-time items for the six-biggest Canadian banks are expected to rise on average 14 percent this quarter from a year ago, according to Genuity Capital Markets.

Earnings have risen nine straight quarters for the banks. Mergers are running ahead of last year's record pace, increasing advisory fees, while a 30-year-low jobless rate boosts demand for consumer loans and mortgages. The banks' trading revenue also rose after volume on the Toronto Stock Exchange climbed 10 percent from a year ago.;

Optionable's Many Red Flags

The Globe and Mail, Tara Perkins & Sinclair Stewart, 25 May 2007

Optionable Inc., the tiny energy brokerage that is at the centre of a spiralling trading scandal, sits in a non-descript building in the small town of Valhalla, N.Y. But before its troubles began this year, before it was linked to a $680-million loss at Bank of Montreal, and slapped with a half-dozen class-action lawsuits, the energy firm occupied an office with Sleepy Hollow Coffee Roasters in nearby Briarhill Manor.

Had anyone bothered to look, they might have noticed something more unusual than the shared address. They might have noticed that Optionable was charging the coffee maker thousands of dollars a year for administrative services; that the coffee maker was owned by two of the firm's most senior employees, including its chief executive officer; and that these two officials ran another firm, Capital Energy Services, that charged Optionable $50,000 (U.S.) a year, plus expenses, to help carry out derivatives trades on the New York Mercantile Exchange.

Had they looked a little deeper, they might have even discovered that one of these officials, Kevin Cassidy, served time in prison for fraud, and was released just two years before he was named Optionable's CEO.

But this would have been merely one red flag that should have triggered more and earlier investigation into a dizzying network of related-party transactions and insider dealings. The fact that it didn't has raised serious questions about the quality of the diligence process at BMO, which was by far Optionable's biggest client (and which relied heavily on the firm to verify its trading positions each month), as well as Nymex, which made a major investment in Optionable, and even nominated one of its executives to the company's board.

Spokespersons for BMO and Nymex have declined to say how much their companies knew about Optionable before they built close business relationships with the firm. Both have launched internal reviews of the matter.

Yesterday, unconfirmed news reports surfaced that the U.S. Securities and Exchange Commission has initiated its own investigation into the Optionable fiasco, and is looking both at its business practice of offering energy traders stock warrants in exchange for their trading business (again, something that was fully revealed in filings, had anyone checked) as well as its relationship with affiliated companies, like Sleepy Hollow.

Some firms have confirmed that Optionable offered them shares for their business, but it's not clear whether anyone at BMO's New York commodities trading desk received any.

Optionable, whose stock price has plummeted in the wake of these revelations, is urgently trying to sever some of its related ties and revive its slumping business amid this uproar. BMO has already stopped doing business with the firm, as has Sempra Energy and Coral Energy, which once accounted for 10 per cent of Optionable's business.

BMO trader David Lee, and his boss, Bob Moore, were suspended last month and officially left the bank a week ago. Both men were said to be friends with Optionable's Mr. Cassidy, according to sources.

The embattled energy brokerage revealed yesterday that its newly minted CEO, Albert Helmig, who replaced Mr. Cassidy when he abruptly resigned this month, has left the board of Platinum Energy Resources Inc. Another Optionable director, James Bashaw, also quit the board of Platinum Energy, the firm said.

Platinum, like Sleepy Hollow, is one of a handful of related companies that investigators are expected to look into as they try to figure out how BMO managed to rack up hundreds of millions of dollars in trading losses in the span of mere months.

While both men said the departures had no reflection on Platinum Energy's business, it's clear Optionable is trying to strike a pose of independence.

New Jersery-based Platinum Energy was founded by its chairman Mark Nordlicht, who is also a co-founder and former chairman of Optionable (he resigned from the company earlier this month, after BMO revealed its trading losses).

Optionable neglected to mention Mr. Helmig's ties to Platinum when they announced he would take over as chairman and CEO. It also failed to note that Mr. Cassidy, who stepped down as CEO before the company went public in 2004, and then regained the role not long after, had spent time in prison.

The lack of disclosure is one thing that irked lawyers like Michael Swick of the class-action firm Kahn Gauthier Swick LLC who filed the lawsuits.

"If you look back at the registration statement and prospectus, you'll see that they take pains to provide paragraphs about each of these guys," Mr. Swick said in a recent interview. "In the paragraph on this guy Nordlicht, they indicate he is a chairman of a company called Platinum Energy. If you look at this statement about Helmig, they don't tell you anything about his relationship to Platinum Energy. That, to me, is particularly disturbing."

Mr. Bashaw did not return a request for comment yesterday. Optionable has repeatedly declined requests to interview Mr. Helmig, who served as vice-chairman of the New York Mercantile Exchange in the late 1990s. Mr. Cassidy's lawyer says he cannot comment due to several class-action lawsuits that have been filed.

Mr. Nordlicht, meanwhile, has also had several related-party dealings with Optionable over the years. Before taking Platinum Energy public in 2005, one of the several companies he operated was Platinum Value Arbitrage Fund LP. That fund agreed to lend Optionable up to $500,000 in 2003. Optionable also struck an agreement with Mr. Nordlicht that gave him a 20-per-cent reduction in trading fees in exchange for a lump-sum payment of $1.2-million.

Meanwhile, Optionable funded a 2003 operating loss by issuing notes payable to Mr. Nordlicht and Platinum Partners LP "amounting to $1,880,000 which accrued interest of $240,000," the company said in May, 2005, regulatory disclosures.

Mr. Nordlicht's father, Jules Nordlicht, was a major Optionable shareholder, and owned nearly 2.2 million shares of the company as of March, 2006. The elder Mr. Nordlicht pleaded guilty to price rigging in the crude oil market in 1978, when he was president of Pressner Trading Corp. He and four other defendants were indicted for creating more than $27-million in fraudulent tax losses through prearranged trading of commodity futures and price manipulation in the crude oil markets.

When reached at his home by phone recently, Jules Nordlicht declined to comment.

Optionable also had unusual business dealings with Mr. Cassidy. When he temporarily stepped down as CEO in 2004, he continued to work at Optionable as a consultant. Optionable awarded him 1.2 million warrants, paid to a private holding company called Pierpoint Capital, that were "intended to induce Mr. Cassidy to introduce additional customers to the company," according to a 2005 8-K filing with U.S. regulators.

Edward O'Connor, who co-owns the coffee roaster with Mr. Cassidy and is also a managing partner of Capital Energy, the firm that charged Optionable for trading services, replaced Mr. Cassidy as CEO between March, 2004, and October, 2005. Mr. O'Connor has been the public face of the company, appearing on CNBC earlier this year and heading up investor road shows last fall.

Optionable's shares soared over the past several months, after it announced Nymex would pick up a 19-per-cent stake in the company. That deal was finalized in April, when Mr. Cassidy, Mr. Nordlicht, and Mr. O'Connor cashed out approximately $29-million worth of stock in the company, according to a lawsuit filed against the company and the three men.

Nymex placed a representative, Ben Chesir, on Optionable's board as part of the deal. It announced it was pulling him off on May 14. This week, Nymex's CEO said the company might take legal action against Optionable.

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Banks Considering Sharia Compliant Products

The Globe and Mail, Tavaia Grant, 25 May 2007

Bank of Nova Scotia and Toronto-Dominion Bank are quietly considering whether to start offering sharia-compliant products, as part of the big banks' strategy to reach out to a growing immigrant population.

Representatives at Canada's second and third largest banks by market capitalization were among the 200 delegates at the Islamic Finance World conference in Toronto this week.

"I can confirm it's something we're tentatively looking at," said Frank Switzer, Scotiabank's spokesman, without providing further detail. TD spokeswoman Kelly Hechler said "it's something we're looking at and we're interested in."

That interest comes as Islamic financial services are growing in Canada and abroad. KPMG has estimated worldwide assets at more than $300-billion (U.S.), with global Islamic institutions growing at 15 per cent a year.

What was considered fringe three decades ago has now become mainstream. Global banks, from HSBC to Deutsche Bank, are offering sharia-compliant financial services as petrodollars fuel demand from the Middle East. The Gulf region alone has as much as $2-trillion (U.S.) in investments, much of which is flowing abroad.

"Every day we are told about the start of a new Islamic bank," Sheik Nizam Yaquby of Bahrain told the Toronto conference. Sharia-compliant products vary and there's little standardization in the sector, which is thought to be the fastest growing in financial services today. Generally, products can't have any explicit interest; transactions can't be in such areas such as gambling, alcohol, pork or pornography; and they can't be deemed as too high risk.

Practitioners liken it to any other form of socially responsible investing and stress that it's open to all religions.

Canada's been a bit late to the game, but momentum's building. Yesterday, iTrust Partners Inc. launched a $400-million (Canadian) sharia-compliant income fund for Middle Eastern and European investors that are interested in Canadian assets. BMO is the prime brokerage and CIBC is providing administrative services.

Retail demand in Canada is still unclear and that may be why the Big Five banks are slow to jump on board. At present, though, services such as mortgages are more expensive. UM Financial Inc. has provided sharia-compliant mortgages to almost 500 homeowners in Ontario - even though it charges a deposit and costs about 0.60 percentage points more than a regular mortgage. Its homeowner mortgages tend to be structured like a rent-to-own system to avoid interest.

Demand has been so great that UM Financial has stopped all marketing and has a 5,000-person waiting list of people who want to switch over from conventional mortgages to ones that are sharia-compliant, said Omar Kalair, the chief executive officer of UM Financial.

UM wants to offer its mortgages at prices similar to what the banks offer - and to do so it says it's talking with one of the Big Five banks about financial backing. He estimates there are about 200,000 Muslim households in Canada and wants to capture 2.5 per cent of that market within a year or two.

In Canada, lawyers from many of the big law firms were in attendance at this week's conference, scrambling to learn about the new, and potentially lucrative, field.

"Every indicator we've seen, both statistical and anecdotal, has made it clear that the retail market in Canada is a multibillion-dollar market," said Walied Soliman, a lawyer at Ogilvy Renault LLP.

The sector still faces multiple hurdles. Chief among them are a lack of regulation and transparency among many of the fledgling companies offering products.

Standardization is another issue, with plenty of debate over what's allowed among the few sharia scholars qualified to approve new investment products.

A global dearth of scholars also means long wait times in getting new products approved.

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BMO Q2 2007 Earnings

Analysts' ratings and target prices for BMO:

• BMO Capital Markets maintains "market perform," 12-month target price has been raised from $70.00 to $72.00

• Blackmont Capital maintains "hold," 12-month target price is $72.00

• CIBC World Markets raised BMO from "sector perform" to "sector outperform." The 12-to-18-month price target is $78.00

• Credit Suisse maintains "underperform", 12-month target price is raised to $73.00

• Desjardins Securities maintains "buy," 12-month target price is $77.00

• National Bank Financial maintains "sector perform", 12-month target price is $76.00

• Scotia Capital maintains "underperform," 12-month target price is $80.00

• TD Securities maintains "hold," 12-month target price has been raised from $71.00 to $75.00

• UBS reiterates its "neutral" rating, while raising its estimates. The target price has been raised from $75.00 to $76.00.

In a research note published this morning, UBS expects BMO to report mid pack results in the upcoming quarters. UBS notes that BMO has achieved healthy capital results, made progress in P&C and faces positive credit trends. The EPS estimates for 2007 and 2008 have been raised from $5.35 to $5.55 and from $5.70 to $5.92, respectively.

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BMO Capital Markets, 24 May 2007

Details & Analysis

BMO Financial Group reported second quarter cash earnings of $668 million, or $1.31 per share, compared to $348 million, or $1.15 per share, in the last quarter, and $652 million, or $1.27 per share in the same quarter of last year. It was, as expected, a messy quarter. This quarter included a portion of the pre-announced commodities trading losses which amounted to $90 million, or $0.18 per share. Also in the quarter were several unusual items - an insurance gain, a gain on securities in the retail bank and a large interest recapture which added about $0.10 per share. Last quarter's earnings (after restatement) were also impacted by the commodity trading losses - by $237 million, or $0.46 per share, as well as by a $88 million restructuring charge that took $0.17 off of EPS.

We believe the appropriate operating comparison is $1.49 per share in this quarter, $1.32 in the last quarter, and $1.27 in the same quarter of last year. We had forecast $1.34, so the results were better than we had expected, reflecting the $0.10 of one-time items, very strong performance in underwriting and M&A, and a better result in the domestic bank.

Canadian Personal and Commercial Banking reported earnings of $327 million, up 11% over the quarter and 24% over the year. This quarter included a $23 million after-tax insurance gain and a $9 million after-tax investment security gain. Exclusive of these items, the domestic bank reported a 12% year-over-year gain. It will be interesting to see if this stands up as good performance in the context of its peers.

Chicagoland P&C earnings have been and continue to be weak. Earnings were roughly unchanged from year-ago levels in US$ terms. It is telling that with half the year now over, 2007 looks like this will be the second year in a row of declining contribution from this business. We see little on the horizon that would justify optimism on the operating fundamentals of this unit.

The Private Client group produced earnings of $102 million, up 6% over the quarter, and in line with our expectations. Slightly slower asset growth was offset by higher fee-based revenue. We believe that this level of earnings should remain roughly stable for the remainder of the year. The contribution from the Corporate Segment was normal at $20 million.

Ironically, the results out of the Investment Banking group were, excluding the trading losses, quite strong. The reported profit of $199 million included $90 million for the net effect of the trading losses and various adjustments. Fee revenue appeared to be at the highest level ever. We expect to see quarterly profits in the $200-$250 million range assuming that there are no further trading losses, and that capital markets activity moderates.

From a credit perspective, the bank's results reflect the strong credit environment. Our concern that recoveries and reversals might start to track downwards was unjustified, and gross and net impaired loans fell over the quarter.

Tier 1 declined slightly in the quarter to 9.7%, from 9.9% at the end of the first quarter, and versus the year end. Tier 1 has declined from 10.2% to 9.7% this quarter, with about half of this arising from the trading loss and the rest from rapid growth in risk-weighted assets, partially offset by the issuance of non-cumulative preferred shares.

There was some additional disclosure on the trading loss, though the bank continues to hedge on the ultimate financial impact of the snafu. Apparently, the commodity portfolio was being 'marked-to-market' by traders daily, with independent monthly valuations confirmed by Optionable. The bank now uses a market-based methodology for valuing the portfolio.

Projections and Valuation

We are raising our 2007 and 2008 operating earnings estimates to $5.65 and $5.95, respectively. The 2007 estimate excludes the impacts of the trading losses in both quarters as well as the restructuring charge taken last quarter. With reported earnings of $1.49 ($1.39 excluding a variety of unusual items) in a seasonally weak quarter, our forecasts are not aggressive.

BMO currently trades at the lowest P/E in the bank group reflecting its below-average ROE and as a penalty for the lack of visibility on the trading losses. The second quarter did include some positive news: retail earnings showed double digit growth, the investment bank has momentum and the balance sheet is strong. We believe that other banks will also display strong year-over-year comparisons and that earnings revisions for Canadian bank stocks as a whole will remain to the upside. We continue to prefer CM, TD and RY at current levels.

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RBC Capital Markets, 24 May 2007

Investment Opinion

Core cash EPS of $1.42 were ahead of our $1.36 estimate (consensus of $1.31) on higher than expected revenue in investment banking and, to a lesser extent, domestic retail banking. M&A as well as underwriting activity drove the positive variance in investment banking.

We have raised our 2007E and 2008E core cash EPS by $0.15 to $5.55 and $5.90, respectively, to reflect the positive variance in Q2/07 earnings and greater than previously anticipated benefits from the restructuring charge announced in January 2007. We have bumped up our 12-month target price to $71 from $70 as a result.

Trading losses related to commodities came in as pre-announced ($509 million in the restated Q1/07 results, and $171 million in Q2/07 results) and reported Q2/07 cash EPS of $1.31 include an impact of $0.18 net of taxes and adjustments to performance-based compensation.

Credit losses remained low at $59 million and guidance for 2007 losses was lowered from $325 million to $300 million on "favourable Q2 results and more subtle expected deterioration later in the year."

The earnings would suggest strong capital markets results for the industry (NA is most exposed among banks we cover) while continued low loan losses would most benefit NA and BNS among the banks we cover. The 7% increase in core revenue in domestic banking in spite of market share losses should lead to good results from the stronger domestic banks. TD is most exposed among the banks we cover.

Management quantified expected savings of $300 million from the $135 million restructuring charge announced earlier this year - the number is higher than we would have thought and a portion is expected to flow to the bottom line, whereas we had previously believed most of the savings would be reinvested in revenue-generating initiatives.

We maintain our Underperform rating. BMO trades at 12.6x 2007E EPS, compared to an industry median of 13.1x. We feel that a discount is justified given retail banking challenges in both Canada and the U.S., less room for dividend increases and less earnings coming from retail businesses.

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Scotia Capital, 24 May 20007

• Earnings were better than expected due to stronger results from BMO Capital Markets and P&C Canada. Underlying operating earnings were $1.44 per share versus our estimate of $1.33 per share.

• Earnings growth in Q2 was led by BMO Capital Markets and P&C Canada. BMO Capital Markets was up 17%, excluding the impact of the commodity trading loss with P&C Canada earnings growth excluding insurance and investment gains up 12%. Private Client earnings increased a modest 4% with P&C U.S. continuing to struggle, down 4%.

• We are increasing our 2007 earnings estimate to $4.90 per share from $4.75 per share due to the stronger earnings recorded in this quarter. Our 2008 earnings estimate remains unchanged at $5.80 per share.

• Maintain 3-Sector Underperform.

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Financial Post, Duncan Mavin, 24 May 2007

Bank of Montreal has engaged a top New York law firm to unravel "irregularities" related to two of the bank's former commodity traders and a brokerage firm that are at the centre of the $680-million the bank lost betting on the natural-gas market.

Lawyers at Sullivan and Cromwell LLP have been asked to investigate the losses that were covered up because the bank's book of natural-gas trades was valued wrongly based on data provided by New York-based Optionable Inc.

One result of the investigation could be possible legal action, BMO chief executive Bill Downe said yesterday.

"Our actions will be informed both by the results of our internal review and the legal review by Sullivan and Cromwell to identify irregularities in trading or valuation," said the BMO chief. "The actions that are within our control will be taken promptly," he added.

The bank first revealed the losses almost four weeks ago--initially estimating the shortfall at up to $450-million--and blamed poor luck in the markets.

But after the National Post reported BMO had hired forensic auditors to investigate its commodity trading business in February, a wider story emerged, centred on former star trader David Lee, his boss Bob Moore, and their relationship with Optionable.

Messrs. Lee and Moore had been making huge profits for the bank during early 2006 and had become the single biggest client for Optionable, a fast-growing commodity broker.

At some stage, the BMO men's luck ran out and their profits turned to massive losses. However, the bank's senior management was unaware of the problems because their star trader's book of trades was based on inaccurate information.

Mr. Downe, who only took over at BMO in March, was speaking yesterday on a conference call for analysts following the announcement of the bank's second quarter earnings.

BMO's year-to-date net income was $1-billion, down 19%, or $238-million from a year ago.

The company's stock closed on the TSX yesterday at $70.20, up $1.32 on the day.

Mr. Downe said it will take six to 12 months for the bank to work its way out of the problem trades and reduce its portfolio to a more appropriate level.

However, as the bank focuses on tightening up controls over its trading activities, its investigation into the losses will likely focus on Optionable.

The New York firm has plunged into crisis since BMO announced its losses. Its stock price has plummeted more than 90%; its biggest shareholder, the New York Mercantile Exchange, has threatened the company with legal action; and the chief executive and chairman of Optionable have both resigned.

It has also emerged that former chief executive Kevin Cassidy -- a close friend of the deposed BMO natural-gas trader Mr. Lee -- spent time in jail for tax and payment fraud in the 1990's.

The National Post also reported last week that Mr. Cassidy had offered traders at other firms stock or warrants in Optionable if they pushed their employers' business the way of his company -- a practice considered highly unethical by many in the industry and which legal experts said could be against U.S. federal and state laws.

Optionable has also been named in a number of class-action lawsuits filed on behalf of shareholders. The suits allege Optionable did not properly disclose Mr. Cassidy's criminal past or the full extent of its relationship with the BMO traders.

Meanwhile, BMO said Canada's top banking regulator, the Office of the Superintendent of Financial Institutions, has been kept apprised of the events surrounding the trading problems.

Mr. Downe acknowledged that lapses in the bank's own risk management processes were partly to blame for the losses and said the bonus pool has been reduced by $120-million.

"With the benefit of hindsight we could have done a number of things better with the managing of this business," Mr. Downe said. "Our commodity trading team did not operate according to standard BMO business practices. Leadership oversight of the business was not as disciplined or as rigorous as it could have been."

The natural-gas trading losses add to a difficult start to life in the BMO hot seat for Mr. Downe. In January, the bank announced it will slash 1,000 jobs.

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The Globe and Mail, Tara Perkins, 24 May 2007

The Bank of Montreal's chief executive officer, commenting on recent trading losses, says its commodity trading team didn't operate according to standard BMO business practices, and executives accept responsibility for the "isolated lapses."

Bill Downe said the $680-million trading losses, allocated to the first and second quarters, came after the bank's commodity portfolio was incorrectly valued. The wrong valuations "masked the rapid escalation of risk and the real cost of the positions," he said.

The portfolio contained "an unacceptable level of out-of-the-money options, which by their nature are illiquid, at a time when there was a steep decline in the volatility of gas prices," he said in a conference call with analysts.

BMO is continuing to take "every additional step we deem necessary on behalf of our shareholders, including possible legal action, and any further organizational and personnel changes," he said.

The bank's total trading operations lost $362-million in the first six months of the fiscal year, dragged down by commodities, specifically natural gas. Trading brought in $442-million a year earlier.

Now BMO's efforts to tighten risk controls will mean smaller growth in the trading business, and that revenue will be missed, UBS analyst Jason Bilodeau said in a market note.

BMO was the first big bank to announce second-quarter financial results, and it surpassed expectations despite a hit of $171-million from the trading losses. Lower taxes and lower bonuses for employees mean the final hit was only $90-million. The quarter's profit, reported yesterday, came in at $671-million, up $20-million from a year ago.

BMO allocated most of its trading losses to the previous quarter. First-quarter profit was restated yesterday, lowered by $237-million after taxes and bonus reductions.

The trading loss means BMO will struggle to meet its annual financial targets, the bank said. "With the benefit of hindsight, we could have done a number of things better in the management of this business," Mr. Downe said.

To value its portfolio, the bank had been relying on independent market quotes from a New York-area brokerage firm called Optionable Inc.

BMO is now using multiple sources to value its portfolio, and has hired the prominent Wall Street law firm Sullivan and Cromwell to investigate "possible irregularities in trading and valuation" - including a review of the quotes provided by Optionable.

BMO is no longer doing business with Optionable, and two bank employees in New York - natural gas trader David Lee, and his boss, Bob Moore - are no longer employed by BMO.

The bank is confident its portfolio is properly valued as of April 30, Mr. Downe said. "Having already reduced the risk in this portfolio, we're continuing to reduce the risk every day. And, with each passing day our comfort with the total level of risk is increasing. A fire sale is not necessary and it's not on." He expects it will take six months to a year to draw the portfolio down to the appropriate level of risk.

"In the future in this portfolio we will only engage in the amount of market-making activity required to support the hedging needs of our oil and gas producing clients," he said.

"We're satisfied that these losses were restricted to one business, in one location, during one time period."

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Bloomberg, Doug Alexander, 23 May 2007

Bank of Montreal said second-quarter profit rose 3 percent as higher fees from mutual funds and stock sales offset the biggest commodities trading loss for a Canadian bank.

Net income for the three months ended April 30 climbed to C$671 million ($619 million), or C$1.29 a share, from C$651 million, or C$1.25 a share, a year earlier, the Toronto-based bank said today. The stock rose after profit beat some analysts' estimates.

Record mutual fund sales and rising demand for loans contributed to a 24 percent increase in consumer banking profit, countering the natural gas losses. The bank said on May 17 it would report a pretax trading loss of C$680 million, with about 75 percent of that reported in the fiscal first quarter.

``I think it was better than expected in light of the commodity trading loss, but a big portion of that has been shifted to the first quarter,'' said Jackee Pratt, who helps manage C$755 million at Mavrix Fund Management in Toronto.

Canada's fourth-biggest bank expanded trading in natural gas options after prices rose following Hurricane Katrina in 2005. The bank relied on one broker to price contracts as the portfolio grew, resulting in an ``inappropriate level'' of options that lost value when there was a decline in the volatility of gas prices, Chief Executive Officer William Downe said today on a conference call.

``The steep level of loss was largely a result of incorrect valuation of the commodity portfolio, which masked the rapid escalation of risk and the real cost of the positions,'' Downe said. ``Our commodity trading team did not operate according to standard BMO business practices. Leadership oversight of the business was not as disciplined or rigorous as it could have been.''

Bank of Montreal hired New York-based law firm Sullivan & Cromwell LLP for an external investigation into possible ``irregularities'' in trading and options valuation, including prices provided by broker Optionable Inc., Downe said. Two New York-based bankers involved in the trades are no longer with the firm, including Bob Moore, the executive managing director of commodities products, and David Lee, who did natural-gas trades for the bank through Valhalla, New York-based Optionable. A message left with Richard Keating, an outside spokesman for Optionable, wasn't immediately returned.

Downe, 55, said the trading losses haven't reduced the bank's risk ``appetite.'' He said the natural gas portfolio is now ``appropriately'' valued, and that the loss was an ``isolated event.''

``I want to make it clear that there has been no change in our appetite for risk, and I'll repeat that: there has been no change in our appetite for risk,'' he said.

The bank reduced the risk in its commodities portfolio since January, and it may take six to 12 months to draw the portfolio down to an appropriate level, he said, adding the bank won't hold a ``fire sale'' to reduce it. The bank will also scale back its so-called ``market making,'' or buying and selling natural gas contracts.

Bank of Montreal shares rose C$1.32, or 1.9 percent, to C$70.20 at 4:10 p.m. trading on the Toronto Stock Exchange, the biggest gain in two months. The stock is up 1.7 percent this year, compared with a 4.8 percent increase for the nine-member Standard & Poor's/TSX Banks Index.

Bank of Montreal said first-quarter profit was C$348 million, or 67 cents a share, according to restated numbers. That compares with net income of C$585 million, or C$1.13 a share, reported March 1. The total impact of the commodities trading loss was C$327 million, or 64 cents a share, for the first half of the fiscal year.

Bank of Montreal said profit was C$1.31 a share excluding one-time items, an increase of 3.1 percent from a year ago. Profit was boosted by a lower tax rate and insurance gains. The median estimate of nine analysts polled by Bloomberg News was C$1.32 a share on that basis. Blackmont Capital analyst Brad Smith, who rates the stock a ``hold'', said the bank earned C$1.42 a share on that basis, beating his estimate by nine cents a share.

The trading losses will make it harder for the bank to meet its profit target for the year, Downe said. Bank of Montreal said per-share earnings were C$2.13 for the first half of fiscal 2007, a 12 percent drop from a year ago. The bank's annual target is earnings growth of between 5 percent and 10 percent.

``We are now unlikely to meet our performance targets for this year,'' Downe said.

Canadian consumer banking profit rose to C$324 million, topping estimates from UBS Canada analyst Jason Bilodeau. The unit had higher revenue from loans, deposits and credit cards, the bank said. Profit from its Chicago-based Harris Bank unit fell 3.7 percent to C$27 million as the Canadian currency surged 6.2 percent in the quarter relative to the U.S. dollar.

Bank of Montreal set aside C$59 million for soured loans, compared with C$66 million a year earlier.

``Their retail banking operations showed some pretty good improvement in the quarter,'' said Tom Kersting, an analyst at Edward Jones & Co. in St. Louis. ``The fact that the retail banking operations did well -- and they have been struggling quite a bit -- you would assume that the other banks did well in the quarter.''

Profit from its private client group, which includes brokerage and mutual funds, rose 5 percent to C$101 million. Mutual fund sales at the bank, including its Guardian Group of Funds unit, rose 17 percent to C$1.08 billion in the quarter, according to preliminary figures from the Investment Funds Institute of Canada.

Investment banking profit fell 19 percent to C$199 million because of the commodities trading loss. Revenue from underwriting and advisory fees rose 41 percent to C$159 million, the bank said. The BMO Capital Markets investment banking unit managed $1.38 billion in equity sales in the quarter, up nearly threefold from $473.9 million a year earlier, according to Bloomberg data.

``If you can bring yourself to ignore the trading losses, BMO's underlying quarter was strong on capital markets-related activities,'' CIBC World Markets analyst Darko Mihelic said today in a note.

Downe said the bank set a cost savings target of C$300 million, and aims to meet half that amount this fiscal year. The company announced January it would cut 1,000 administrative and head office jobs. About a third of those jobs have been cut, with the rest done by January, Chief Financial Officer Karen Maidment said today on the call.

Bank of Montreal, the first lender to report results, may be the laggard among Canada's six biggest banks in the second quarter. Profit before one-time items will rise on average 14 percent, led by fees from investment banking and trading, Genuity Capital Markets analyst Mario Mendonca said in a note. That would be the slowest profit growth in a year.

The six Canadian bank stocks are trading close to record highs, and profits have risen nine straight quarters. Mergers are running ahead of last year's record pace, increasing advisory fees, while a 30-year-low jobless rate boosts demand for consumer loans and mortgages. The booming economy has pushed the Canadian dollar to a 30-year high against the U.S. currency.

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