31 August 2007

CIBC Q3 2007 Earnings

Analysts' ratings and target prices for CIBC:

• Blackmont Capital maintains "hold,"

• Credit Suisse maintains "neutral,"

• Desjardins Securities maintains "buy," 12 month target price raised to $108.00 from $106.00

• RBC Capital Markets maintains "outperform,"

• Scotia Capital maintains "sector perform," 12 month target price is $115.00
RBC Capital Markets, 31 August 2007

Maintain Outperform rating following Q3/07 results

CIBC's reported GAAP EPS of $2.31 were in line with the pre-release of August 13, 2007. There were many moving parts but key points were as follows:

• Retail earnings were 6% higher than our estimate, benefiting from weaker than average, but higher than expected, revenue growth of 4%.

• Wholesale earnings are likely to decline from the Q3/07 level on lower merchant banking gains and further mark downs of U.S. sub-prime CDOs and RMBS.

• The quarterly dividend was raised to $0.87 per share from $0.77 (we had an aggressive $0.90 estimate). The new dividend only represents 40% of our estimated earnings for the next 12 months; we expect another large increase in the quarterly dividend in Q1/08 (from $0.87 to $1.00) as the bank's target payout range is 40-50%.

• The bank again committed to maintaining 2008 expenses at Q4/06 levels, as it did in 2007. In the context of flat expenses, every 1% of revenue growth drives approximately $0.25 in incremental EPS.

Maintaining price target and Outperform rating

Our 2008E cash EPS are up from $8.60 to $8.75 on higher estimated retail profitability. Our 12-month target price of $108 is unchanged. We have an Outperform rating on CIBC shares because of (1) the potential for further material increases in dividends; (2) lower exposure to wholesale income and deteriorating business credit quality; (3) tight expense management, which leaves room for upside earnings surprises in our view; and (4) a current 0.5x P/E multiple discount against the industry average.

We remain concerned that Canadian banks could trade sideways or down in the near term on negative news flow out of world financials, as well as potential earnings disappointments in Q4/07. The increased risk aversion and tightening of liquidity, if it continues, could have a much larger impact on wholesale revenues in Q4/07 than it did Q3/07, in our view. The biggest risk to our positive 12-month outlook is that capital market issues become economic issues; a scenario that our economists do not envision at this time.
Scotia Capital, 31 August 2007

• CM reported cash earnings of $2.34 per share. Earnings after a number of unusual items were $2.45 per share, including the $290 million ($190 million after-tax or $0.56 per share) write-down on CDOs and RMBSs. Earnings excluding other unusuals and including the CDO write-down were $1.89 per share.

• CM increased its dividend 13% to $3.48 per share from $3.08 per share higher than expected.

What It Means

• Earnings were very strong with an estimated underlying run rate of $2.10 to $2.20 per share.

• CIBC World Markets reported an 80% increase in earnings excluding adjustments, the best of the bank group. CIBC Retail Markets earnings were also very strong increasing 23% assisted by FirstCaribbean.

• We are increasing our 2007 and 2008 earnings estimates to $8.45 per share from $8.15 per share and to $9.00 per share from $8.65 per share, respectively. Our Q4/07 earnings estimate of $1.98 per share includes $90 million ($60 million after-tax or $0.18 per share) of further writedowns to the bank's CDOs as announced. Maintain 2-Sector Perform.
The Globe and Mail, Tara Perkins, 31 August 2007

Canadian Imperial Bank of Commerce wrapped up third-quarter earnings season for Canada's big banks by announcing a 26-per-cent rise in earnings despite continuing troubles from investments related to the U.S. subprime mortgage market.

CIBC also said it would boost its dividend by 10 cents to 87 cents a share.

But the company also revealed that its investments in securities related to U.S. subprime mortgages appear to have dropped in value by about $90-million this month.

That's on top of the $290-million hit the bank took in the third quarter, which ended July 31, as a result of the securities.

CIBC said earlier this month that its total exposure to these subprime-related investments was about $1-billion (U.S.).

The announcement lifted the bank's share price at the time, partly because some investors were relieved the figure wasn't higher.

"What this quarter showed is that CIBC is getting better at managing its earnings when conditions are tough," BMO Nesbitt Burns Inc. analyst Ian de Verteuil wrote in a note to clients.

He titled his note about the bank's quarter, "A Sloppy Joe: Messy but Good."

CIBC is closing the gap between itself and the other big banks when it comes to increasing revenue from its core Canadian banking operations, Merrill Lynch analyst Sumit Malhotra wrote in a note to clients.

The bank increased the assets it has under management in its mutual funds and managed accounts by 15.7 per cent from a year ago to $62.4-billion (Canadian).

It also said it gained market share in credit card debts outstanding, mortgages and deposits.

It said revenue growth in its personal lending business should come up to industry levels as it continues to improve its risk profile.

Chief executive officer Gerald McCaughey said the bank's "first priority is to sustain and enhance the strength of our core businesses."

CIBC's profit was $835-million for the quarter, up from $662-million a year ago.

On a cash basis, its diluted share profit was $2.34, up from $1.87 a year ago.

Analysts had only been expecting the bank to make $1.91 a share this quarter, but it revealed earlier this month that it would exceed those expectations.

The profit was helped by a $75-million reversal of funds it had set aside to deal with lawsuits; a $77-million gain because changes in credit spreads mean the bank's corporate loan credit derivatives are worth more on paper; and a $48-million tax recovery after the favourable conclusion of an income tax audit.

On the flip side, the earnings were hurt by the $290-million pretax writedown of the value of the investments related to U.S. mortgages, and a $16-million premium paid on preferred share redemption.
Bloomberg, Sean B. Pasternak and Doug Alexander, 30 August 2007

Canadian Imperial Bank of Commerce and National Bank of Canada, the last of the country's six largest banks to report third-quarter earnings, said profits rose on higher fees from investment banking.

CIBC said net income for the period ended July 31 climbed 26 percent to a record C$835 million ($785.8 million), or C$2.31 a share. National Bank, the No. 6 lender, said profit rose 10 percent to C$243 million, or C$1.48 a share.

Earnings for the six banks topped analysts' estimates, rising 16 percent on average, as record mergers lifted advisory fees and a 30-year-low jobless rate boosted demand for credit cards and mutual funds. Profit growth may slump next year as the subprime-mortgage crisis slows the economy in the U.S., Canada's biggest trading partner.

``The banks are a good measure of the economy, and as long as the economy is doing well, the banks will do well,'' said David Cockfield, who helps manage C$2 billion in assets at Leon Frazer & Associates Inc. in Toronto, including CIBC and National Bank.

CIBC rose 95 cents, or 1 percent, to C$94.92 at 4:10 p.m. in trading on the Toronto Stock Exchange. National Bank shares fell 73 cents to C$55.96.

Analysts including Dundee Securities Corp.'s John Aiken have reduced profit and stock-price targets for most of the Canadian banks next year because of a ``greater level of risk'' from the subprime-mortgage fallout.

``We will likely see a somewhat slower economy in 2008, but I don't actually see a dramatic fall-off,'' Toronto-Dominion Bank Chief Executive Officer Edmund Clark told investors last week.

Canadian Imperial, Canada's fifth-biggest bank, said investment-banking profit rose 37 percent to C$261 million, driven by higher underwriting and advisory fees. That helped counter a C$190 million writedown from collateralized debt obligations and mortgage-backed securities, first announced on Aug. 13. CIBC said today it may have an additional C$60 million writedown for August, the first month of the fiscal fourth quarter.

CIBC's challenge is ``to continue to delever the risk profile of the bank,'' said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier Inc. in Toronto, which manages $4.3 billion in assets, including CIBC.

The additional writedowns may reduce fourth-quarter earnings by 18 cents a share, RBC Capital Markets analyst Andre-Philippe Hardy said today in a note.

Profit excluding one-time items such as the writedown and tax recoveries was C$2.45 a share, beating the C$1.94 median estimate of eight analysts polled by Bloomberg.

Consumer banking profit rose 14 percent to C$555 million from C$487 million a year ago, driven by higher revenue from credit cards, mortgages and personal lending. CIBC set aside C$162 million for bad loans, compared with C$152 million a year ago. Barbados-based FirstCaribbean Bank, which is now 91.4 percent owned by CIBC, added C$133 million to earnings.

CIBC raised its quarterly dividend by 13 percent to 87 cents a share, the second increase in three quarters.

``This big dividend increase is likely to be a confidence booster and lead to a positive reaction in the stock,'' Desjardins Securities analyst Michael Goldberg said today in a note.

Overall revenue rose 5.4 percent to C$2.98 billion, Toronto- based CIBC said.

National Bank Q3 2007 Earnings

RBC Capital Markets, 31 August 2007

Q3/07 better than expected - Maintain Underperform

National Bank's core cash EPS of $1.48 were ahead of our expectations of $1.40, and up 18% versus Q3/06. The wholesale division contributed most of the earnings beat, with other divisions close to our estimates. The quarterly dividend was maintained at $0.60 per share, whereas we had looked for an increase.

As expected, the bank was not in a position to clarify two key issues related to developments in the Asset Backed Commercial Paper market and its purchase of $2.0 billion in ABCP from clients. (1) How much credit risk is there in underlying assets? and (2) What is the financial impact of potential business lost from commercial and corporate customers?

Lowered EPS estimates and target price

Our 12-month target price of $60 is down from $64 as we lowered our 2008E cash EPS by $0.10 (reflecting lower estimated financial markets earnings) and we lowered our target multiple to 10.8x 2008E EPS. This 2 point valuation discount versus our target average for other banks reflects (1) slower expected retail earnings growth; (2) uncertainty related to the ultimate outcome of the bank's

ABCP-related challenges; and (3) greater reliance on wholesale markets as a percentage of total income.

We maintain our Underperform rating as we believe the shares of the 4 lifecos we cover and most other banks offer more upside. The two major risks to our rating would be (1) a rapid and favourable resolution to ABCP challenges; and/or (2) improving relative retail revenue and earnings growth.

We remain concerned that Canadian banks could trade sideways or down in the near term on negative news flow out of world financials, as well as potential earnings disappointments in Q4/07. The increased risk aversion and tightening of liquidity, if it continues, could have a much larger impact on wholesale revenues in Q4/07 than it did Q3/07, in our view. The biggest risk to our positive 12-month outlook on the industry is that capital market issues become economic issues; a scenario that our economists do not envision at this time.
The Globe and Mail, Tara Perkins, 30 August 2007

National Bank of Canada's CEO cautioned Thursday that a proposal designed to fix problems in a troubled corner of the commercial paper market is an unprecedented undertaking, casting some doubt on whether the plan will salvage all investments in the $35-billion sector.

“As far as I know, there's never been a case of restructuring of one of these vehicles in Canadian legal history,” said chief executive officer Louis Vachon, who took up his job this summer.

“So, you know, we're sort of going forward all in good faith,” he said. “But, you know, exactly what the outcome will be after 60 days, it's too early to say.”

Mr. Vachon was referring to the so-called “Montreal proposal,” a plan to save the portion of the Canadian asset-backed commercial paper (ABCP) market that's not sponsored by banks. It was driven by the Caisse de dépôt et placement du Québec and endorsed by more than 10 financial institutions from Canada and abroad, including National Bank.

Executives at National cautioned Thursday that it's too early to know whether investors in non-bank ABCP will recoup all of their money, and the bank could face a “material charge” to its earnings in the future.

National recently announced that it's buying $2-billion in non-bank ABCP back from its mutual funds and clients, to protect its reputation, after recommending the paper as an investment. But Thursday one of its executives acknowledged the bank isn't sure what assets are behind that ABCP.

Asset-backed commercial paper is a complicated type of short-term debt that's backed up by packages of loans, ranging from credit card receivables to car loans to mortgages. The sector lacks transparency, and many investors did not know whether their paper was backed by subprime mortgages.

That fuelled some of the panic that led to the troubles in recent weeks, as liquidity dried up and some of the paper could not be rolled over, leaving some investors without their cash.

In a presentation to analysts Thursday, National said the $2-billion it's buying includes “minimal” exposure to the U.S. subprime mortgage market.

When an analyst asked for further details on the assets underlying the ABCP, Ricardo Pascoe, co-chief executive officer of National Bank Financial Inc., said “we are still in the process of doing our due diligence and really getting into what's in those assets. But, you know, I just refer to DBRS's statements that, as far as the credit quality of the underlying assets, they are very comfortable that those assets are still performing like triple-A assets.” That means that, even where there's subprime exposure, the assets are still highly rated, he added.

Mr. Pascoe, like Mr. Vachon, went on to warn that the Montreal proposal is not yet a solution for the troubles in the non-bank ABCP market.

Two key elements of the Montreal proposal were, first, to slap a 60-day moratorium on investors trying to get their money out of the trusts as well as issuers seeking funds from lenders, and then, second, to convert the paper into longer-term debt instruments called floating-rate notes (FRNs).

National described the proposal as “at a very formative stage” Thursday.

Mr. Pascoe said it's too early to say what the outcome of the process will be, and whether ABCP investors might recoup all of their money.

“When the consortium announced the proposal for the long-term restructuring that included the FRNs, that was just a proposal, and we are engaging a number of players in the debate, so it's hard to say what will actually come out,” he said.

National Bank also reported profit of $243-million Thursday, up 10 per cent from a year ago.

But its stock was downgraded to “neutral” from “outperform” by Credit Suisse analyst James Bantis, who said there are “tougher times ahead” for the bank.

It has an excessive reliance on wholesale banking activities, and there are difficult capital markets conditions ahead, Mr. Bantis said. National also has weaker-than-expected trends in consumer banking and wealth management, he said.

30 August 2007

BMO Q3 2007 Earnings

Analysts' ratings and target prices for BMO:

• Blackmont Capital maintains "hold,"

• CIBC World Markets, 12 month target price reduced to $71.00 from $78.00

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

• Genuity Capital Markets downgrades to "sell" from "hold," 12 month target price is $69.00

• RBC Capital Markets maintains "underperform," 12 month target price is $69.00

• Scotia Capital maintains "underperform," 12 month target price is $80.00
Financial Post, David Berman, 30 August 2007

It is very unusual for analysts to give Canadian bank stocks "sell" recommendations, given that these investments have a stellar track record of outperforming the index and rewarding investors with steadily rising dividends.

But take a look at Bank of Montreal right now and you will see that no less than four of the 11 analysts who cover the stock have given it the thumbs-down, which is one of the most damning assessments of a bank stock in recent years.

However, rather than squirming over the thought that they may be stuck with a dog, BMO shareholders should take heart: Bank stocks are at their best when they are beaten up and friendless, proven by the recent rebound of Canadian Imperial Bank of Commerce after it wrote off huge losses due to its exposure to Enron.

What's more, while analysts tend to concentrate on the nitty-gritty of a bank's operations, bank stocks are affected far more by the macroeconomic climate. As long as that climate stays healthy, it is hard to envision BMO suffering while its competitors bask in glory.

Mario Mendonca, an analyst at Genuity Capital Markets, is the latest BMO naysayer, but his downgrade has little to do with the current credit crunch that is hitting most bank shares around the world. Instead, he switched his recommendation on the stock to "sell" from "hold" based largely on the bank's slow-growing revenue, too much reliance on trading revenue (which could be fickle) and its inability to grow its market share within Canada.

"Our target price of $69 is based on the bank trading at a 5% discount to its peers," he said in a note to clients.

The stock closed yesterday at $65.40, down 25¢. Curiously, that means Mr. Mendonca's target price still implies a 6% upside over the next 12 months -- more if you include BMO's generous 4.3% dividend yield.

There are certainly reasons to fret over a possible short-term setback in bank stocks. Higher borrowing costs could send the U.S. economy into recession, which would most certainly hit the Canadian economy as well. Also, exposure to investments tied to the U.S. subprime mortgage market, which is now walloping banks as far away as Germany, could blow big holes in earnings somewhere down the road.

"In our view, the prudent course is to wait and watch as the information leaks out over the next one, two or three months," said Nick Majendie, portfolio strategist at Canaccord Adams, in a note to clients yesterday. "During this period of uncertainty, we believe that the odds favour our getting the opportunity to re-establish long-term positions in the Canadian banks at lower and more attractive prices."

However, bank stocks are nothing if not resilient, thanks to their ability to generate huge profits through either growth or cutbacks. For example, BMO has been the poorest performer among Canadian bank stocks this year, with a stock price that is down about 5%. But since the start of the decade, the stock has outperformed the S&P/TSX composite index by a factor of three and still sports one of the best dividend yields in Canada.

The lesson? There may be good and bad Canadian bank stocks over short periods of time, but for anyone with a longer-term horizon just about any bank stock will do.
Financial Post, Duncan Mavin, 29 August 2007

Genuity Capital Markets analyst Mario Mendonca has downgraded Bank of Montreal from a “hold” to a “sell” after the bank’s third quarter earnings report.

BMO’s results showed “little promise on the revenue growth side of the equation” and “challenges in gaining market share,” said Mr. Mendonca. Cost savings from previously announced headcount reductions are not sustainable as the bank will likely redirect funds to initiatives to grow market share, he added.

Mr. Mendonca also highlighted BMO’s reliance on trading as a source of revenue growth as a cause for concern. Of the $193-million increase in revenue compared to the previous year, $107-million, or 85%, came from capital markets excluding trading, and a further $57-million was trading related, he said.

“If the capital markets environment is slowing as management suggested on the [earnings conference] call, how can BMO grow revenue going forward,” asked Mr. Mendonca.

BMO reported profits of $660-million for the quarter, a drop of $50-million from the same period last year. The bank blamed the decline on after tax losses of $97-million related to the winding down of its problem book of natural gas trades.

“Management stated that the fair value of the commodity derivative contracts [declined] from $22.7-billion to $11.5-billion, and stated that it may take a further two quarters to wind down the exposure,” Mr. Mendonca said.

The Genuity analyst’s target price for BMO’s stock of $69 is based on the bank trading at a 5% discount to its peer group, rather than the “modest” 2-3% discount it offers at present, he said.
RBC Capital Markets, 29 August 2007

BMO's core cash EPS of $1.46 were ahead of our expectations of $1.37, and up 13% versus Q3/06. We exclude commodity trading losses of $0.19 per share after-tax, clearly an operating event, although one we exclude given its magnitude. Divisionally, results were ahead of expectations, with growth strongest in capital markets (excluding the commodity losses) and in private client. The quarterly dividend was raised $0.02 to $0.70 per share. We have raised our 2007E cash EPS estimates by $0.10 and our 2008E EPS by $0.05 to reflect higher expected retail earnings.

Maintain Underperform Rating

We continue to believe that BMO's stock is likely to underperform its Canadian peers. The bank trades slightly below the industry median valuation (11.3x versus 11.5x 2008E EPS), a discount that we believe is likely to remain in place as (1) we believe that BMO will struggle to bring its domestic retail revenue growth up to the industry's leading banks at the same time as it embarks on cost cutting initiatives; (2) we expect slower dividend and earnings growth; and (3) the bank derives a higher proportion of earnings from wholesale banking. To be clear, our underperform argument is relative; our 12-month target price of $69 (unchanged) is 5% higher than the current stock price, and the stock's dividend yield is 4.3%.

We remain concerned that Canadian banks could trade sideways or down in the near term on negative news flow out of world financials, as well as potential earnings disappointments in Q4/07. The increased risk aversion and tightening of liquidity, if it continues, could have a much larger impact on wholesale revenues in Q4/07 than it did Q3/07, in our view. The biggest risk to our positive 12-month outlook is that capital market issues become economic issues; a scenario that our economists do not envision at this time.
Scotia Capital, 29 August 2007

• BMO reported cash earnings of $1.30 per share slightly below our estimate of $1.32 per share and below consensus of $1.39 per share. Earnings were impacted by a $149 million pre-tax ($97 million after-tax or $0.19 per share) commodity trading loss in the bank's natural gas portfolio. We expect losses in this portfolio to continue over the next few quarters with total losses reaching nearly $1 billion before the position is fully closed out.

• BMO increased its dividend a very timid 2.9% to $2.80 per share from $2.72 per share, below our forecast of $2.88 per share. BMO's dividend increase was the lowest increase of any bank in the past seven years.

What It Means

• Underlying earnings were solid driven by BMO Capital Markets up 45%, excluding the commodity trading loss, Private Client earnings increasing 26% with P&C Canada earnings up 14% aided by lower expenses.

• We maintain our 3-Sector Underperform rating on BMO based on expected lower earnings growth, low return on equity versus the bank group, and weak strategic positioning and no meaningful P/E multiple discount to the bank group.
AP, 29 August 2007

A CIBC World Markets analyst said Wednesday the big investment banking fees and trading revenue that strengthened Bank of Montreal's profit in the third quarter are not sustainable.

Bank of Montreal said Tuesday it earned $630 million in the third quarter. A big reason was growth in the company's capital markets business, which collected more fees for helping companies issue stocks and bonds and buy one another.

CIBC World Markets analyst Darko Mihelic said this kind of revenue in the capital markets segment is "unsustainable in the current environment."

The capital markets are suffering from fewer buyers and a greater aversion to risk, making it more difficult for investment banks to sell certain kinds of products, he said.

Mihelic cut his price target to $71 from $78. The stock, which lost more than 3 percent Tuesday, closed at $61.75.
The Globe and Mail, Tara Perkins, 29 August 2007

Bank of Montreal said it is working to clean up its natural gas portfolio and put its large losses behind it, but revealed yesterday that the threat of lawsuits or other charges could loom for some time.

BMO has received inquiries, requests for documents and subpoenas from a number of regulators and law enforcement agencies in connection with its surprise announcement in April that it had lost hundreds of millions of dollars from its natural gas-trading activities.

The bank said it's co-operating with the inquiries, which are in the early stages, and doesn't know whether any proceedings against it will arise.

The disclosure came in BMO's third-quarter earnings yesterday, which took a $149-million pretax hit from the commodities trading activities. About half of that loss came as BMO sold a chunk of its natural gas investments. BMO's attempts to reduce risk in the remainder of its portfolio contributed to much of the other half.

That brings the total losses from the trading problem so far this year to $829-million.

"We made considerable progress this quarter to reduce both the size and risk of our commodities portfolio," chief executive officer Bill Downe told analysts on a conference call.

"We're now much closer to where we want to be in our natural gas business," he said.

The bank expects it will take two more quarters to reduce its trading book to the level it wants, Mr. Downe said.

BMO did not name which regulators or law enforcement agencies were pursuing inquiries but, earlier this month, Optionable Inc. - the small New York-area brokerage that BMO used for much of its natural gas trades before the loss - disclosed that it had received a grand jury subpoena from the New York District Attorney's office, as well as requests for information from the U.S. Commodity Futures Trading Commission and the U.S. Securities and Exchange Commission.

Mr. Downe said an internal review of BMO's risk management practices is expected to be complete by the end of its fiscal year, but the bank has already acted on information that has been brought forward.

All told, the bank earned $50-million less this quarter than it did a year ago, after the impact of the commodity losses.

Not including the commodity losses, cash earnings per share were $1.49, while analysts had been expecting $1.39.

The bank also raised its dividend by 2 cents, to 70 cents a share.

BMO also said yesterday that it has $400-million of non-bank asset-backed commercial paper (ABCP) in its trading portfolio, amounting to about 0.1 per cent of its assets. That could expose it to potential paper losses.

Mr. Downe said BMO pioneered the asset-securitization business in Canada, and the bank is a leader in the bank-sponsored programs for short-term commercial paper here. The bank-sponsored programs have not fallen into the same trouble that has been plaguing the non-bank programs lately.

But a shadow has been cast on the whole asset category, Mr. Downe suggested.

"The experience in the subprime markets in the U.S. has coloured a much broader asset category, and many asset-backed securities that contain no subprime exposure are now trading below their intrinsic value," he said, adding that the market will take some time to rebalance.

BMO said it is comfortable with its exposure to U.S. subprime mortgages, which it added is not a material amount.

Meanwhile, the bank's main business line, personal and commercial banking in Canada, saw its earnings rise 1 per cent to a record $350-million. Mr. Downe said that its actual performance was better than those numbers suggest, because the same quarter a year ago included a substantial investment gain and tax recovery.

RBC Dominion Securities Inc. analyst Andre-Philippe Hardy said BMO's core domestic revenue growth trailed that of its rivals that have reported earnings so far. While BMO stole some market share in personal and business lending, challenges continue in mortgages and deposits, Mr. Hardy wrote in a note to clients.

Frank Techar, BMO's head of Canadian banking, said the bank is starting to see positive results from a recent move it made to offer customers Air Miles when they use their debit cards.

BMO's U.S. unit, Harris Bank, saw earnings fall this quarter as it attempts to integrate new acquisitions. Profit at BMO's investment banking division fell 3.4 per cent, partly related to the bank's commodity trading problems.

"With the exception of the commodities business, we had good results in BMO Capital Markets, with revenues in some of our investment banking businesses doubling from a year ago," Mr. Downe said.
Financial Post, Duncan Mavin, 29 August 2007

Bank of Montreal's natural-gas trading losses continue to cast a shadow over the bank as BMO revealed yesterday it may face legal or regulatory action related to the losses which put a dent in third-quarter profit.

Earnings fell to $660-million, a drop of $50-million, or 7%, compared with last year.

The bank blamed the shortfall on $97-million in after-tax losses related to reducing the size and risk of its commodities portfolio.

The bank's cumulative aftertax losses related to the trading activity now amount to $424-million.

BMO also said it could yet face "proceedings" related to the losses and revealed it has received inquiries, requests for documents and subpoenas from "securities, commodities, banking and law enforcement authorities."

Analysts said the natural-gas trading losses, which first came to light in April, continue to cloud the bank's performance.

"Headline risk remains related to the commodities portfolio," said RBC Capital Markets analyst Andre-Philipe Hardy in a note.

"Additional commodity trading losses are a very large spectre looming over the quarterly results," said Dundee Securities analyst John Aiken. BMO's exposure to natural gas trading still stands at more than $11-billion, Mr. Aiken said.

BMO initially estimated its total mark-to-market losses at about $350-million but that figure was later increased to $680-million.

BMO also fired two of its traders in connection with the losses, and suspended its business with Optionable Inc., a New York-based brokerage that had worked closely with the BMO employees who lost their jobs.

In May, Bill Downe, BMO chief executive, said the bank had hired a top New York law firm, Sullivan and Cromwell LLP, to unravel "irregularities" related to the losses.

Meanwhile, Optionable has became the subject of several class-action lawsuits and is also the focus of investigations by the Securities and Exchange Commission and the New York district attorney's office.

The bank said the process of winding down its book of trades will take another six months.

Excluding the trading losses, BMO's profit was up $47-million compared to last year, though the bank's business lines offered a mixed performance.

BMO's domestic retail bank -- which has underperformed compared to its peers in recent periods -- reported net income of $350-million, up $40-million, or 14%, after allowing for the impact of one-time items in 2006.

Personal loans grew 12% compared with last year, but the bank failed to increase its market share of deposits.

"Core domestic revenue growth of 5.2% trails that of the [other Canadian] banks that have reported so far (8% to 9%)," said RBC's Mr. Hardy.

In the United States, BMO's Chicago-based Harrisbank franchise also struggled. Profits were down $4-million or 17% to $26-million. The bank blamed the decline on the cost of recent acquisitions as well as a "difficult economic and competitive environment" in the United States for the decline. The private-client group provided a highlight, with profits up $22-million or 26% to $105-million.

BMO also increased its divided by 2 a share to 70 a share, a hike of 12.9% from a year ago.
Bloomberg, Doug Alexander & Sean B. Pasternak, 28 August 2007

Bank of Montreal, Canada's fourth- largest lender, said its commodities-trading losses swelled by C$97 million ($91 million), weighing on profit for the fourth straight quarter.

Bad bets on natural-gas have cut earnings by C$424 million this fiscal year in the biggest trading debacle for a Canadian bank, and the toll may rise as the company unwinds the remaining C$11.5 billion of investments. Toronto-based Bank of Montreal said in a statement today that it has been contacted by law- enforcement authorities and securities regulators in connection with the trading losses.

``It raises the question, is there more to come here?'' said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier Inc. in Toronto, which holds Bank of Montreal shares among $4.3 billion of assets under management. ``You would have thought they'd have cleaned that up in the second go-round.''

The mounting cost will make meeting annual profit targets ``extremely challenging,'' Bank of Montreal said. The losses swelled after the bank, which started trading commodities to meet clients' needs, started betting its own money on natural- gas contracts in an ill-fated effort to boost profit.

Bank of Montreal shares fell C$1.52, or 2.3 percent, to C$65.65 at 4:10 p.m. on the Toronto Stock Exchange. The stock has fallen 4.9 percent this year, compared with the 3.1 percent decline of the nine-member S&P/TSX Banks index.

Net income for the third quarter ended July 31 fell 7 percent to C$660 million, or C$1.28 a share, from C$710 million, or C$1.38, a year earlier, Bank of Montreal said in the statement. The company raised its dividend 2 cents to 70 cents a share.

The profit decline contrasts with other Canadian banks, which posted higher earnings in the quarter. Bank of Nova Scotia said today that profit climbed 10 percent to C$1.03 billion, or C$1.02 a share, from C$936 million, or 93 cents, a year earlier.

Toronto-Dominion Bank and Royal Bank of Canada said last week that profits beat analysts' estimates on higher fees from mutual funds and investment banking. Toronto-Dominion said net income rose 39 percent to C$1.1 billion. Royal Bank's profit climbed 19 percent to C$1.4 billion.

Bank of Montreal, which first disclosed the trading losses on April 27, has reported C$849 million in pretax losses for commodities trading in the last four quarters, including C$149 million in the most recent period.

The bank said in May that it failed to supervise commodity traders and relied too heavily on a single broker, Valhalla, New York-based Optionable Inc., to value its holdings. The bank said at the time it may have more losses, or gains, as it reduced the size of natural-gas investments.

Bank of Montreal has been targeting a 5 percent to 10 percent increase in earnings per share.

Excluding one-time items, third-quarter profit was C$1.49 a share, the bank said. That beat the median estimate of C$1.39 a share from nine analysts in a Bloomberg survey. Revenue was unchanged at C$2.6 billion.

Bank of Montreal Chief Executive Officer William Downe, who took over when Anthony Comper retired on March 1, has been trying to generate growth in consumer banking while cutting the bank's risk from commodities.

``We made significant progress in reducing our trading book during the quarter and while further reduction is still intended, it will occur within the ongoing trading activity of the business,'' over the next two quarters, Downe said in a statement today.

The bank reduced the market value of commodities derivatives contracts by about half in the quarter from C$22.7 billion. It incurred about 50 percent of the quarter's trading loss by buying offsetting contracts for ``large proprietary positions.'' The bank also appointed Jeff Poulsen as head of energy trading.

Bank of Montreal's Canadian consumer-banking profit rose 0.9 percent to a record C$350 million from C$347 million a year ago, when the unit benefited from a tax recovery and a gain on the initial public offering of MasterCard Inc. shares.

Profit from the Harris Bank unit, based in Chicago, fell 13 percent to C$26 million as the Canadian currency reached a 30- year high relative to the U.S. dollar.

Bank of Montreal set aside C$91 million for soured loans, compared with C$42 million a year earlier.

Profit from the private-client group, which includes brokerage, investing services and mutual funds, rose 27 percent to C$105 million.

Investment-banking profit fell 3.4 percent to C$196 million, dragged down by the trading loss. Underwriting and advisory fees at the BMO Capital Markets investment bank rose 74 percent to C$160 million, the bank said. Revenue from trading corporate bonds, government securities and interest rate derivatives more than doubled to C$117 million from C$52 million a year ago.

The bank may face ``some headwinds'' in the fourth quarter, BMO Capital Markets CEO Yvan Bourdeau said in a conference call with analysts.

``There's no question that there's turbulence in the financial markets and also there is some clouds on the horizon with regard to the potential credit crunch that may appear in the U.S.,'' Bourdeau said in the call.

Scotiabank's 23 percent increase in domestic banking profit, led by sales of mutual funds, was offset a 3.4 decline in international banking, where the firm had a year-earlier tax recovery in Mexico. It was the first drop in international banking earnings in more than two years. Scotiabank shares fell 62 cents, or 1.2 percent, to C$50.54.

``We'll probably not see the same amount of earnings growth,'' said Juliette John, who helps manage about C$19 billion in assets at Bissett Investment Management in Calgary. ``Capital markets are likely to be weaker going forward and, as loan growth slows and the cycle matures, we'll see some loan losses start to increase.''

Canadian Imperial Bank of Commerce and National Bank of Canada, the fifth- and sixth-biggest lenders, will report results on Aug. 30.
Financial Post, Duncan Mavin, 28 August 2007

Bank of Montreal continues to feel the strain of natural gas trading losses that first came to light earlier this year, with profits suffering as the bank unwinds its troublesome book of commodities trades.

“BMO reported normalized cash earnings per share of $1.30, flat with prior year and $0.13 below our expectation,” wrote Blackmont Capital analyst Brad Smith. Revenue of $2.6-billion also fell $100-million short of Mr. Smith’s forecast.

“Both the earnings and revenue shortfalls resulted from the incurrence of an additional $97-million of commodity trading losses,” Mr.Smith said. “The trade position unwinding process is expected to continue for tow more quarters. Additional losses cannot be ruled out.”

Profits for the third quarter were $660-million, 7% or $50-million down from $710-million last year.

Excluding the impact of the trading losses, earnings per share would have been $1.38. That’s still below the Blackmont analyst’s forecast – Mr.Smith blames the shortfall on “weaker interest margins and higher than expected operating expenses.”

He maintains his 12-month target price of $72.00 for BMO’s stock and leaves his “hold” recommendation unchanged.

29 August 2007

Scotiabank Q3 2007 Earnings

Analysts' ratings and target prices for Scotiabank:

• Blackmont Capital maintains "buy,"

• CIBC World Markets 12 month target price reduced to $54.00 from $60.00

• Credit Suisse maintains "neutral," 12 month target price is $58.00

• RBC Capital Markets maintains "sector perform," 12 month target price raised to $55.00 from $54.00
RBC Capital Markets, 29 August 2007

Very strong quarter in domestic retail banking

• Domestic retail net income of $395 million was well ahead of our $361 million estimate, and up 23% versus Q3/06.

• Revenues were up 9% (7% in banking, 19% in wealth management), and expenses were only up 1%, a growth rate that would have been higher if not for lower pension and benefits costs.

• Average assets were up 12%, deposits were up 6% and margins were down 11 basis points on loan mix, competitive pressures and higher funding costs.

• Market share was up 18 basis points in residential mortgages and 21 basis points in term lending. Mortgages are the lowest yielding form of retail lending, while term lending is the most expensive form of retail funding (although high yield savings account are also high cost). We believe that these volume trends partly explain the margin pressure.

• The potential for rising short term interest rates in the near term has declined dramatically in the last month. Scotiabank's net interest income margins are usually most negatively impacted by rapid increases in short term rates given heavier reliance on wholesale funding than others.

• The multiple initiatives undertaken to improve the bank's mutual fund business appear to be paying off. Mutual fund fees were up 34% versus Q3/06 and the bank's asset management arm ranks fifth in Canadian industry net sales of long term funds so far this year.

International banking growth could slow in near term

• International banking income of $276 million was well up versus Q3/06 (17%), but below the profitability of the first half of the year.

• Foreign currency translation, the change in the fair value of trading securities, and lower trading revenues in Mexico led to a decline in revenues versus Q1/07 and Q2/07.

• The mark to market of trading securities could continue to be a drag on earnings growth if risk aversion leads to further expansion in risk spreads on emerging market debt, which had essentially been declining for five years until July.

• Management believes that, if it can complete the acquisition of Banco del Desarrollo in Chile, it could bring up its ROE in that country closer to industry levels. Scotiabank's loan market share in Chile is fairly small and profitability, although improved in recent years, is below average. The rumoured acquisition size ($1 billion if the acquired interest is 100%), indicates to us that management is not overly concerned by the various issues that could affect the liquidity positions of financial institutions around the world.

Management seems relatively optimistic on wholesale earnings

• Scotia Capital net income of $280 million was close to our estimate and in line with Q3/06. The 12% sequential drop in core net income was mainly due to lower interest and loan loss recoveries. Year-over year revenue growth of 5% was offset by 15% growth in expenses on higher performance-based compensation and technology costs.

• The business loan book continues to grow rapidly; up 19% in the last 12 months, with the "vast majority of the growth in investment grade loans".

• Scotia Capital was clearly well positioned in its trading portfolio to take advantage of widening risk spreads and interest moves seen in the quarter. Total trading revenues of $312 million were up just over 20% both sequentially and year-over-year. Management did not sound alarmed about a potential drop-off in trading revenues in the near term.

• Value at risk (VaR) of $15.6 million in Q3/07 compares to $11.3 million in Q2/07 and $9.2 million in Q3/06. The increased VaR is due to larger interest-related positions, increased M&A risk arbitrage and the impact of volatility in equity markets on reported VaR. The increased capital commitment probably helps explain why management is comfortable with the sustainability of trading revenues.

• The bank noted that (1) it has no direct exposure to U.S. sub-prime mortgages and that its indirect exposure is not significant, (2) it has no significant holdings of Canadian third-party asset backed commercial paper or liquidity backup exposure, and (3) LBO underwriting commitments represent only about $800 million (0.2% of total assets).

• The Canadian banks that have reported so far (including Scotiabank) appear to have manageable exposure to "hot" areas but, to the extent that news flow and negative surprises affect risk spreads across asset classes, Canadian banks' wholesale results are still at risk of weakening in a risk averse environment.

• We are concerned about news flow because there is still no or very little liquidity for many structured finance assets, most of which have not been marked to market, U.S. subprime mortgage delinquency rates are likely to increase as interest rate resets take effect, and there are still many LBO loans that are waiting to be distributed. We realize that those issues are not material by themselves for Canadian banks, but we doubt Canadian bank stocks will perform well if negative news flow leads to weaker share prices for financial institutions worldwide.

• Our outlook for the banks does not assume a recession, which is in line with our economists' outlook. If liquidity continues to be a concern and credit availability is restrained for an extended period, it would have a negative impact on the economy.

We agree with Scotiabank management's assessment that the current capital markets turbulence and expansion in credit risk spreads will likely create opportunities for trading businesses, it should be a positive for margins in commercial and corporate lending, it should help well-capitalized organizations get higher returns on capital as competition for investments becomes scarcer, and acquisition opportunities may arise. This period of opportunity does, however, typically come after a period of pain in which assets get marked to market. We do not believe that this adjustment period is over.

Other highlights

• Credit quality remains excellent by long-term standards, as is the case with other banks, but the trend is toward rising provisions. Specific provisions for credit losses of $92 million were well up versus $74 million in Q3/06 and $45 million in Q2/07, driven by lower recoveries and reversals.

• Securities gains of $134 million were higher than the $94 million average of the last four quarters. Unrealized securities gains dropped from $1.2 billion to $960 million as gains were realized and widening credit spreads affected the value of fixed income securities and emerging market debt.

• Currency negatively impacted EPS growth by $0.02 versus Q3/06 and $0.05 versus Q2/07. We expect a continued drag on year-over-year growth in upcoming quarters, based on current rates. About 45% of the bank's income comes from outside of Canada, with the next highest Canadian bank at approximately 30%.


Our 12-month price target of $55 is a combination of our sum of the parts and price to book methodologies. It implies an approximate forward multiple of 12.2x earnings, compared to the 5-year average forward multiple of 12.5x. Our P/B target of 2.7x in 12 months is slightly higher than our target average for the banks given a slightly higher ROE and strong capitalization.

Our sum of the parts target of 12.2x 2008E earnings is in line with our target average for the banks, as strong performance in the growing international division is offset by slower growth in domestic retail banking relative to other banks in recent years and lower exposure to wealth management.

Price Target Impediment

Risks to our price target include the health of the overall economy, sustained deterioration in the capital markets environment, the potential for non-accretive acquisitions and/or related execution risk, deterioration in the Latin American political and economic climate, a rising Canadian dollar and rising business loan losses.
Financial Post, David Pett, 29 August 2007

Bank of Nova Scotia's international group may have taken a back seat to its domestic cousin when the company reported stronger-than-expected third quarter results Tuesday, but it still proved there is plenty of money to make overseas.

Profits at Scotiabank rose 9% year-over-year to $1-billion in the quarter, as domestic operations rung in profits of $391-million, up 23% from last year.

The international group, for their part, turned in profits of $270-million, a 15% increase from the year previous, after Scotia CEO Richard Waugh said operations in Peru, the Caribbean, South America and Chile all reported strong results.

"We were encouraged by the continuiing strong revenue growth and return to positive operating leverage reported by the international segment," Blackmont analyst Brad Smith said in a note to clients. "These two factors have allowed the international division to grow despite headwinds in the form of a rising effective tax rate and a rising Canadian dollar."

Mr. Smith added that with the effective tax rate rise poised to declerate and the rising Canadian dollar on pause, the profit growth outlook for Scotia's international operations appears solid.

He maintained his "buy" rating on the stock and left his $61 price target unchanged.

Meanwhile, RBC Capital analyst Andre-Phillipe Hardy reiterated his "sector perform" rating and increased his price target from $54 to $55 following Scotia's third quarter results.

However, he wrote that he remains concerned that Canadian banks could trade sideways or down if more negative news flows as a result of the ongoing credit crunch crisis.

As for Scotia's international segment, he told clients that banking growth could slow in the near term, as rising risk aversion could affect the multiple paid on earnings from emerging markets.

Mr. Hardy also said he believes net income for Scotiabank's key Mexican division may disappoint in the near term.
The Globe and Mail, Andrew Willis, 29 August 2007

It's fascinating to watch bank chief executive officers successfully turn their backs on their corporate roots.

Rick Waugh started his career at Bank of Nova Scotia in a Winnipeg branch. He came of age as the head of Scotiabank's U.S. commercial banking operations. One of his early achievements as CEO was the expansion of the bank's South American operations.

The hole in Mr. Waugh's résumé when he took the top job was in wealth management. He hadn't spent time swapping stories with stockbrokers, or running portfolios. Human nature would tell you that as CEO, Mr. Waugh would play to his strengths, and devote the bank's resources to the business lines he knows, while conceding wealth management to rivals.

Nothing could be further from the truth.

Over the past two years, Mr. Waugh and head of domestic personal banking, Chris Hodgson, made mutual funds a priority. The fact that Mr. Hodgson is in this position speaks volumes about Scotiabank's priorities. The head of the branch network is not a retail banker by training, but rather a former stockbroker at Scotia McLeod, who left to run Altamira Investments, then returned to the fold when the mutual fund manager was taken over by National Bank.

What did Scotiabank do to catch up with competitors? It hired new managers and pushed training programs on staff, then rejigged the commissions they earn from selling funds. The bank ensured that it had a full inventory of products, launching monthly income funds, for example. Mr. Hodgson also ensured that the funds he sold were top performers. And, gasp, he lowered customer fees.

What was the result? Year over year, Canadian mutual fund assets are growing at a 17-per-cent clip, according to the Investment Funds Institute of Canada.

Scotiabank's fees from selling mutual funds are rising at twice this clip, up 34 per cent from last year.

The bank, the No. 10 player in this sector with $20.7-billion of assets under management, is grabbing market share from rivals.

It's not just fund management that's growing at a torrid pace. Revenue from Scotiabank's retail brokerage was up 15 per cent, and the private client division, a hidden jewel when it comes to estate planning and caring for wealthy individuals' portfolios, saw revenue jump 12 per cent.

This from a CEO who said in a recent interview that he still has far to go on wealth management. All this growth helped boost Scotiabank's quarterly profit from domestic banking by 22 per cent, year over year, to $391-million.

Mr. Waugh is far from unique in moving to a shareholder-friendly strategy on taking the top job.

Royal Bank's Gordon Nixon has done much the same by investing heavily in systems and people at his market-leading retail bank, while challenging former colleagues at investment bank RBC Dominion Securities to do more with less capital.

High-margin retail banking, and wealth management, get far more respect from investors, in the form of premium stock market multiples. The same focus can be seen at Toronto-Dominion Bank, where Ed Clark betrays his roots as a Merrill Lynch financier by making the retail bank a top priority.

The meltdown in commercial paper this month took the market by surprise, and left many smart folks wondering where the next financial land mines may explode.

Bank of Nova Scotia's earnings call yesterday signalled where the country's most global bank sees possible problems.

Chief risk officer Brian Porter took analysts through Scotiabank's exposure to third-party asset-backed commercial paper, which is minimal, and U.S. subprime mortgages, also insignificant.

Then Mr. Porter, without prompting, pointed out that Scotiabank has relatively small commitments to financing leveraged buyouts. Analysts are still trying to get a handle on what loans promised to private equity funds in recent months are going to end up costing U.S. banks.

Scotiabank also went out of its way to say that while it deals extensively with hedge funds, it takes steps to minimize the risks associated with this trading and has no credit issues with these clients.

On a separate front, analysts fear the new problem child in European banking circles will be a creation known as SIV-lites, which combine traditional structured investment vehicles (SIV) with collateralized debt obligations (CDOs), the instruments that have already been the source of much woe in the asset-backed paper market.
The Globe and Mail, Andrew Willis, 29 August 2007

Canada's most global bank, Bank of Nova Scotia, rode a strong showing from its domestic branch network to a 10-per-cent profit rise over all, earning more than $1-billion in the most recent quarter.

Improved performance from its bank tellers, mutual fund arm and stockbrokers helped boost Scotiabank's retail banking profits by 22 per cent year over year, to $391-million. That rise made up for slightly weaker results from the bank's international operations.

"The domestic banking division led the way," said a report yesterday from analyst Andre-Philippe Hardy of RBC Dominion Securities. Scotiabank posted quarterly profit of $1.02 a share, beating analysts' forecast of $1 a share. Quarter-over-quarter, the bank's profit dropped slightly, to $1.032-billion from $1.039-billion, owing to unfavourable currency moves that hurt international earnings, and lower interest rates and loan-loss recoveries.

Over the past two years, Scotiabank reworked its $20.7-billion lineup of mutual funds, launching new funds and improving performance at others in a push to rise above its position as the No. 10 Canadian player in the fund sector.

"We were lagging rivals," said executive vice-president Chris Hodgson in an interview. "We were known as the lending bank, and we wanted to expand the focus of our branch system.

"One of our biggest efforts in domestic banking has been to improve our showing in mutual funds," said Mr. Hodgson, who used to run mutual fund manager Altamira Investments. Scotiabank has succeeded in that effort, with fee revenue from fund sales rising 34 per cent and overall wealth management revenues up 19 per cent compared with the previous year.

"Our third quarter saw continued contributions across all three of our platforms for growth," said Rick Waugh, Scotiabank's chief executive officer. He said recent turmoil in credit markets has not dampened Scotiabank's appetite for international acquisitions, and the bank is evaluating opportunities in countries such as Chile and China.

Despite this summer's credit crunch, Mr. Waugh said Scotiabank is on track to meet its annual performance benchmarks, which include 7-to-12-per-cent earnings growth and a 20-to-23-per-cent return on equity.

Scotiabank boosted domestic banking revenue by 9 per cent, while expenses crept up by just 1 per cent. The Toronto-based bank will be hard-pressed to keep producing this low-cost growth. Its industry-leading profit margins are expected to dip in coming months as Scotiabank opens 16 to 20 new domestic retail branches, and spruces up Caribbean and South American operations, according to analyst Mario Mendonca at Genuity Capital Markets. However, he has a "buy" recommendation on Scotiabank, in part because of the international operation's profit potential.

Return on equity at the bank continued to be strong at 22.7 per cent, compared with 22.8 per cent in the same quarter last year. The bank increased its share buybacks to $629-million through the first nine months of the year.

Scotiabank took pains yesterday to show it has minimal exposure to credit markets problems related to U.S. subprime mortgage loans.

Scotiabank is the fourth bank to report its third-quarter results. Earlier yesterday, Bank of Montreal posted a 7-per-cent fall in profit, to $660-million or $1.28 a share. The drop reflected commodity trading losses that the bank said are now the subject of a regulatory probe.

Toronto-Dominion Bank beat analysts' expectations with a $1.1-billion profit that was up 39 per cent from the previous year, while Royal Bank of Canada also did better than expected, with earnings that rose 19 per cent to $1.4-billion.
Financial Post, Duncan Mavin, 29 August 2007

For a change, it was Bank of Nova Scotia's domestic banking operations rather than its overseas business that stole the limelight when the bank reported its third-quarter earnings yesterday.

Scotiabank's Canadian retail bank turned in profits of $391-million, up $71-million or 23% from $319-million last year.

The improvement was "especially satisfying as we continued to make investments aimed at attracting and retaining customers," said Scotiabank chief Rick Waugh.

The bank has opened more branches, recruited more sales staff, and spent on marketing initiatives as it tries to grow market share at home.

The domestic banking unit turned in revenue of $1.5-billion, up 9% from last year, on the back of strong volume growth and higher wealth management fee income.

Assets were up 12%, while deposits rose 6%.

Overall, Scotiabank's profits of $1-billion were up 9% compared to $928-million last year.

Although the domestic bank stole much of the limelight, Scotiabank's international group also produced a strong set of results.

Overseas operations turned in profits of $270-million, up $36-million or 15% from last year after allowing for a one-off $51-million tax recovery in Mexico in 2006. "Solid results were reported by operations in Peru, the Caribbean and Central America, and Chile," Mr.Waugh said.

The bank also completed its purchase of 24.99% of Thailand's Thanachart Bank during the quarter.

Executives also confirmed Scotiabank is looking at buying Chile's Banco del Desarrollo, Inversiones Norte Sur. It already has a presence in Chile through its subsidiary, Scotiabank Sud Americano, S.A.

"For us, Chile's a strong investment grade country," said Rob Pitfield, Scotiabank's head of international banking.

"Our target is to achieve 10% or critical mass and we are looking to do that in Chile. Talks are continuing."

Scotia Capital's profits declined slightly from $278-million in 2006 to $276-million this year.
Bloomberg, Sean B. Pasternak, 28 August 2007

Bank of Nova Scotia, Canada's second-largest bank, said profit climbed for the 17th straight quarter, led by higher revenue from consumer banking and mutual fund sales.

Net income for the third quarter ended July 31 rose 10 percent to C$1.03 billion ($970 million), or C$1.02 a share, from C$936 million, or 93 cents, a year earlier, the Toronto- based bank said today in a statement. Revenue increased 11 percent to C$3.2 billion.

Domestic banking profit jumped 23 percent to C$395 million, as the company increased mutual fund sales by selling through its branch network. Higher brokerage and fund fees led to a 19 percent increase in asset-management revenue.

``I think it's a reflection on the Canadian economy,'' said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier Inc. in Toronto, which manages $4.3 billion of assets, including Scotiabank shares. ``The major battleground, going forward, is to grab more share of wallet from the Canadian consumer.''

The bank was expected to earn C$1 a share, according to the average estimate of four analysts surveyed by Bloomberg.

Scotiabank opened 16 branches in Canada this year and introduced debit and credit cards that offer rewards at movie theaters. The bank lags behind most of its main Canadian competitors for market share in deposits and credit cards, Dundee's Aiken said.

Scotiabank shares fell 62 cents to C$50.54 at 4:10 p.m. in trading on the Toronto Stock Exchange. They've fallen 3 percent this year.

International banking profit declined for the first time in more than two years, down 3.4 percent to C$276 million, mainly because of a year-earlier tax recovery at its Scotiabank Mexico unit.

Chief Executive Officer Richard Waugh has been pursuing more international acquisitions in recent months. In March, Scotiabank agreed to buy 25 percent of Thailand's Thanachart Bank Pcl, and on Aug. 10, the bank said it was in talks to buy a stake in Chile's Banco del Desarrollo. The bank yesterday completed its purchase of a 10 percent stake in Puerto Rico's First Bancorp for $94.8 million.

Profit from investment banking was unchanged at C$280 million. The Scotia Capital unit ranked second in the quarter for merger advice involving Canadian companies, advising on 12 completed deals valued at $8.49 billion, according to Bloomberg data.

The bank set aside C$92 million for bad loans, a 24 percent increase from the year-earlier period.

27 August 2007

RBC Q3 2007 Earnings

Analysts' ratings and target prices for RBC:

• BMO Capital Markets maintains "outperform," 12 month target price reduced to $60.00 from $63.00

• Blackmont Capital maintains "buy,"

• CIBC World Markets maintains "," 12 month target price reduced to $57.00 from $64.00

• Desjardins Securities maintains "hold," 12 month target price raised to $61.50 from $60.00

• RBC Capital Markets maintains "outperform," 12 month target price is $63.00

• Scotia Capital maintains "outperform," 12 month target price is $75.00
BMO Capital Markets, 27 August 2007

Royal Bank reported third-quarter cash earnings of $1.4 billion, or $1.08 per share, compared to $1.3 billion, or $0.99 per share, last quarter and $1.2 billion, or $0.91 per share, in the same quarter of last year. This quarter included various accounting adjustments that added $0.02 to EPS. Excluding unusual items in all three quarters, the appropriate operating comparison is $1.06 per share in this quarter, $0.99 in the last quarter, and $0.92 in the same quarter of last year. Results were slightly ahead of our forecasts of $1.03.

While Royal exceeded expectations, there was certainly fodder for both the 'bears and bulls.' On the negative front, overall earnings were inflated by lower tax rates and the retail business produced a lower than expected contribution. In addition, the trading results in the second half of July could be a worrying preview for the fourth quarter. However, we believe that this is too pessimistic a perspective. Expenses were somewhat elevated in the quarter and this should moderate by year-end. Furthermore, we have already assumed a fall-off in trading activity in the fourth quarter.

The bank boosted its dividend by 9% and its ROE was over 24% in the quarter. Royal continues to operate high quality retail and wholesale franchises.

The Canadian Banking segment reported earnings of $700 million, an increase of 13% over the second quarter and 6% over the year. On a quarter-over-quarter basis, results were largely driven by a stronger contribution from Insurance. The lack of growth in contribution from domestic banking was disappointing, with good revenue growth offset by higher expenses and loan losses. We believe the bank should be able to manage these expenses down over the next quarter.

Spreads declined both over the quarter and the year, but despite the spread compression, revenue growth was about 8%. Clearly, the retail operation remains as strong as ever. Wealth Management earnings were $183 million, down 8% over the second quarter but up a very strong 30% over the year. Good growth in fee-based revenue this quarter was offset by seasonally lower transactional revenues and relatively higher expenses. Asset growth remains strong across all businesses.

The U.S. and International Banking segment reported earnings of $101, up 23% over the quarter and in line with our expectations. Stronger results reflected an increase in contribution from Dexia as well as from the various recent acquisitions Royal has made in the U.S. Results were partially offset by the continued strength of the Canadian dollar and acquisition-related costs.

The Capital Markets segment reported earnings of $360 million, roughly flat over the quarter, but up 18% over the year. This was ahead of our expectations. Trading revenues were higher than we expected. Other investment banking and capital markets revenues were also strong. There was a falloff in trading revenues in the second half of July, and the conditions in August suggest that overall revenues will be lower in the fourth quarter. There is likely some flexibility in variable compensation accruals so we believe a fourth quarter contribution in the $250-300 million range is achievable.

The Corporate segment reported earnings of $73 million exceeded our estimates due to various tax-related adjustments which more than offset weaker securitization revenues. On the credit front, Royal's loan losses were roughly in line with our forecasts at $178 million. Gross and net impaired loans increased somewhat this quarter, but continue to be in line with our industry-wide expectation of a modest uptick as we move forward.

Royal's Tier 1 ratio remained stable at 9.3% this quarter. On the negative front, Royal has a modest unrealized securities loss position. The bank was somewhat less active than we expected in share buybacks this quarter but did announce a larger than expected 9% increase in its quarterly dividend.

Projections and Valuation

Our 2007 forecast of $4.25 is unchanged and we are reducing our 2008 forecast modestly to $4.45 from $4.50. We are also reducing our target price, to $60 from $63. Royal remains a very high-quality bank and its broad, strong retail and wholesale franchises ensure that it will benefit in the long term from the current market disruption.

Royal Bank has been more aggressive (and more successful) than its peers in capital markets. It is reasonable to assume that if the current malaise in fixed income markets continues into the fall, there is more risk to Royal's earnings than to that of its peers. We maintain an Outperform rating on RY shares, but for investors concerned by the current environment, CM and TD (both rated Outperform) are lower risk bets in our view.
RBC Capital Markets, 27 August 2007

Earnings better than expected

RY's Q3/07 core cash EPS were $1.08, up 19% versus Q3/06, and ahead our consensus-like estimate of $1.03. All divisions did better than we thought, except for Canadian banking, where earnings were 4% below our expectations. The tax rate was 19.5% - about 2.5% below the average of last four quarters, which helped EPS by about $0.04. The quarterly dividend was increased $0.04 to $0.50, $0.01 higher than we expected.

Maintain Outperform rating

We believe that Royal Bank's premium valuation is sustainable (0.7x on 2008E P/E) and that the bank should grow earnings at a more rapid rate than its peers in 2008 (8% versus an industry median of 6%), based on: 1) Leading, and rapidly growing retail banking and wealth management franchises, the two highest multiple businesses Canadian banks participate in; 2) A more diversified capital markets business, which should lead to lower volatility in revenue and earnings than some of the other Canadian banks' investment dealers; 3) A superior outlook for near-term revenue growth, driven by a 15% increase in risk weighted assets in the last twelve months, a result of organic growth and acquisitions.

12-month outlook on RY positive; near-term risks remain

Our 12-month target price of $63 (unchanged) on Royal Bank is much higher than the current stock price and we maintain our Outperform rating. However, we remain concerned that Canadian banks could trade sideways or down in the near term on negative news flow out of world financials, as well as potential revisions to near-term earnings estimates. The increased risk aversion and tightening of liquidity, if it continues, could have a much larger impact on wholesale revenues in Q4/07 than Q3/07, in our view. Wholesale earnings represent 30% of earnings for the industry. The biggest risk to our outlook is that capital market issues become economic issues; a scenario that our economists do not envision at this time.
Scotia Capital, 27 August 2007

Q3/07 Earnings Increase 19%

• Royal Bank (RY) reported Q3/07 cash operating earnings of $1.08 per share slightly above our estimate of $1.07 per share and consensus of $1.04 per share. Earnings increased 19% from $0.91 per share a year earlier. Earnings this quarter were aided slightly by a lower tax rate adding $0.02 to $0.03 per share.

• Return on equity was 24.9% versus 23.3% a year earlier. Return on risk-weighted assets increased to 2.24% versus 2.18% a year earlier.

• Earnings were driven by strong earnings growth of 30% from Wealth Management. RBC Capital Markets earnings were solid with 18% growth. U.S. & International Banking and Canadian Banking earnings growth was modest at 7% and 6%, respectively.

• The bank's performance was strong in Wealth Management and RBC Capital Markets but disappointing in Canadian Banking. Insurance earnings returned to more normal levels this quarter, however, underlying Canadian Banking earnings were weaker due to decline in retail NIM and higher non-interest expense due to heavy reinvestment. The bank has added approximately 1,500 branch sales personnel with a large portion of the additions taking place in this quarter.

Dividend Increased 9%

• RY increased its dividend by 9% to $2.00 per share from $1.84 per share as expected.

Canadian Banking Earnings Weak

• Canadian Banking cash earnings (including Global Insurance) increased 6% to $700 million from $662 million a year earlier. Excluding Global Insurance, Canadian Banking earnings were $597 million, a decline of 1% from $601 million a year earlier due to lower net interest margin, higher loan losses and higher non-interest expenses due to reinvestment (discretionary spending to grow platform).

• Revenues in the Canadian Banking segment increased 7.6% (excluding Global Insurance), with non-interest expenses increasing 8.1% resulting in negative operating leverage of 0.5%. • Global Insurance earnings improved to more normal levels this quarter with earnings of $103 million versus $52 million in the previous quarter and $61 million a year earlier. Earnings were driven by favourable disability claims and growth in the European life reinsurance business.

• Loan loss provisions (LLPs) increased 57% to $190 million versus $121 million a year earlier due to volume increases in personal loans and credit cards and some deterioration in the business loan portfolio.

Canadian Retail NIM Declines 11 bp

• Retail NIM declined 10 bp sequentially and 11 bp from a year earlier to 3.15%. The decline in retail NIM was primarily due to change in product mix and lower spreads on mortgages and personal deposits. We also believe the bank's weaker deposit mix is placing higher pressure on spreads and transfer pricing is not as favourable.

Wealth Management Earnings Increase 30%

• Wealth Management cash earnings increased 30% to $183 million from $141 million a year\ earlier, reflecting strong net sales and growth in mutual fund assets.

• Revenue growth was an impressive 19.3% with operating expenses up 15.6% due to higher variable compensation. Operating leverage was a solid 3.7%

• Both U.S. Wealth Management and Canadian Wealth Management revenue growth was strong at 19% and 17%, respectively.

• Mutual fund revenue increased 7% sequentially and 17% from a year earlier to $385 million. RY led the industry in long-term asset (LTA) net sales with 18% market share in Q3. Mutual Fund assets (IFIC) increased 22% from a year earlier to $78.7 billion.

U.S. & International P&B Earnings Growth Modest at 7%

• U.S. & International P&B Q3/07 cash earnings increased 7% year over year to $101 million due to higher loan and deposit volumes and the impact of recent acquisitions.

• Revenue growth was strong at 21%, with expense growth high at 27% due to integration costs from recent acquisitions.

• Net interest margin declined 11 bp sequentially to 3.58% but declined 12 bp from a year earlier.

RBC Capital Markets Earnings Strong - 19% Growth

• RBC Capital Markets earnings were strong increasing 19% to $360 million from $304 million a year earlier due to robust M&A and equity origination activity.

• Operating leverage was positive 6.4% in Q3 with revenue increasing 13.3% from a year earlier and expenses increasing 6.9%.

Solid Operating Leverage

• Overall bank operating leverage was solid at 5% with revenues and non-interest expenses adjusted for insurance and VIEs increasing 12% and 7%, respectively.

Trading Revenue Solid

• Trading revenue on a tax-equivalent basis was $592 million versus $581 million a year earlier and $608 million in the previous quarter. Fixed income and money market trading revenue declined 2% with equity and foreign exchange contracts remaining relatively stable.

Capital Markets Revenue Increases 24%

• Capital markets revenue increased to $677 million from $657 million in the previous quarter and from $544 million a year earlier.

• Securities brokerage commissions increase 26% to $368 million from $291 million a year earlier, with underwriting and other advisory fees at $309 million, an increase of 22%.

Security Gains Negligible

• Security gains remain low at $34 million or $0.02 per share versus nil per share in the previous quarter and $0.01 per share a year earlier.

• Unrealized security surplus was $89 million at quarter-end (now contained in AOCI) versus the $112 million surplus at the end of the previous quarter and the $49 million deficit a year earlier.

Loan Loss Provisions Increase to 29 Bp

• Specific loan loss provisions (LLPs) increased to $178 million, or 0.29% of loans from $99 million or 0.18% of loans a year earlier. LLPs in Canadian Banking increased 57% to $190 million from $121 million due to higher provisions in credit cards and personal unsecured credit line portfolios. RBC Capital Markets net LLP recoveries remained unchanged from a year earlier at $7 million.

• We are increasing our 2007 and 2008 LLP estimates to $700 million or 0.30% of loans and $800 million or 0.34% of loans from $600 million and $700 million, respectively. Our forecast increase is based on higher volumes particularly in credit cards and unsecured personal loans.

Loan Formations Increase

• Gross impaired loan formations were $383 million versus $363 million in the previous quarter and $240 million a year earlier. Net impaired loan formations increased moderately to $275 million versus $227 million in the previous quarter and $158 million a year earlier.

Minimal Sub-Prime, CDO and Non-Bank ABCP Exposure

• Management indicated that RY does not originate sub-prime mortgages and only has minimal exposure through RMBS and CDOs (collateralized debt obligations). At the end of the quarter, exposure for RMBS and CDO securities was $1.1 billion, less than 0.2% of assets, with CDO squared exposure nominal. The bank also disclosed its LBO exposure at $2 billion in commitments, of which $1.3 billion, representing 0.2% of assets, were priced and committed to before the market correction. No single commitment represents more than $250 million.

• At quarter end, RY had approximately $40 billion in liquidity backstop facilities for bank asset-back commercial paper (ABCP). Of this amount 94% was reserved for RY sponsored conduits. The bank has no exposure to non-bank ABCP.

Tier 1 Ratio Stable at 9.3% – RWA Growth 15%

• Tier 1 capital was 9.3% unchanged from the previous quarter but declined from 9.6% a year earlier.

• Risk-weighted assets increased 15% to $250.2 billion. Market at risk assets increased 23% to $19.0 billion.

• The common equity to risk-weighted assets (CE/RWA) ratio was 9.0% unchanged from the previous quarter but down from 9.3% a year earlier.

Share Buybacks

• This quarter RY repurchased 1.0 million shares at an average price of $58.00 per share for a total of $58 million.


• Our 2007 earnings estimate remains unchanged at $4.32 per share. We are trimming our 2008 earnings estimate to $4.80 per share from $4.90 per share based on our higher LLP forecast and slightly lower retail NIM.

• Our 12-month share price target remains unchanged at $75, representing 17.4x our 2007 earnings estimate or 15.6x 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 only a slight valuation premium.
Financial Post, Duncan Mavin, 25 August 2007

The volatility of capital markets has put Canada's wholesale banks on the defensive for now.

But in the longer term, recent upheavals will increase margins and open up new opportunities, Chuck Winograd, the head of RBC Capital Markets, said yesterday.

"Be clear. We are right now playing defence and trying to make sure we get ourselves through this situation," Mr.Winograd said.

Once the volatility settles, the drying up of liquidity in the market could benefit higher-rated banks and liquidity providers such as RBC, he said on a conference call to discuss the bank's third-quarter earnings.

"A lot of what is going on is just repricing of risk," Mr. Winograd said.

"And repricing of risk is just another phrase for higher spreads, and higher spreads gives us a lot of leverage."

RBC's earnings for the quarter jumped 19% to $1.4-billion, compared to $1.2-billion in the same quarter last year.

Profits from RBC Capital Markets also increased 19% to $360-million on revenue of $1.2-billion.

Despite Mr.Winograd's assurances about the long-term outlook, some analysts said the capital markets group will likely not be able to sustain its

recent growth in the quarters to come.

"Given our moderating outlook for the capital markets, we are forecasting a moderate decline in the level of capital markets revenue," said John Aiken, a Dundee Securities analyst.

Market volatility should help trading revenue, but it will likely be offset by lower fees for underwriting and advisory work as fewer transactions take place.

Overall, RBC's performance for the quarter was steady, said Credit Suisse analyst Jim Bantis.

Revenue increased 9% from $5.2-billion last year to $5.7-billion. But top-line growth was more than offset by an 11% increase in operating expenses, from $2.9-billion last year to $3.2-billion in the current quarter.

Nevertheless, the results showed "strong underlying trends," Mr. Bantis said.

The bank earned $103-million from insurance, double its profits from that segment in the second quarter.

Global wealth management profit of $177-million was up 30% from last year.

The bank also increased its quarterly dividend by 4¢ per share or 9% to 50¢.

The bank confirmed it has "minimal" exposure to hedge funds and the U.S. subprime mortgage market, and "nominal" exposure to Canadian non-bank sponsored asset-backed commercial paper conduits with general market disruption liquidity facilities.
The Globe and Mail, Tara Perkins, 24 August 2007

Shares of the Royal Bank of Canada fell Friday morning, after its third-quarter earnings came in only slightly ahead of analysts' expectations and its CEO said it has minimal exposure to a number of problem areas.

The stock was down about 1 per cent at $54.89 on the Toronto Stock Exchange in early morning trading.

The country's biggest bank reported profit of $1.395-billion for the three months ended July 31, up 19 per cent from a year ago.

On a cash basis, the earnings were $1.08 per share. Analysts had expected the bank to earn $1.04 per share.

Market expectations for the bank's earnings rose on Thursday after Toronto-Dominion's profits blew past analyst expectations. Earlier this month, the Canadian Imperial Bank of Commerce pre-announced that its results would be significantly higher than analysts' expected, despite a $290-million hit it will take on its investments related to the U.S. subprime mortgage market.

RBC chief executive Gord Nixon said Friday that Royal has “minimal” exposure to U.S. subprime residential mortgage-backed securities and collateralized debt obligations.

The bank said its exposure amounts to less than 0.2 per cent of its total assets of $604.6-billion, or about $1.2-billion.

Woes in the U.S. subprime mortgage market have rippled through the world's financial markets as investors become more fearful of risks. Subprime mortgages are those given to prospective homeowners with a poor credit record.

Mr. Nixon said RBC's exposure to hedge funds and its underwriting commitments to leveraged buyouts were also “minimal.”

The bank's hedge fund trading and lending exposure, including prime brokerage, is less than 0.3 per cent of its assets. Its underwriting commitments to leveraged buyouts is less than 0.2 per cent of its assets.

The bank did not quantify its exposure to the sector of the Canadian asset-backed commercial paper market that has fallen into turmoil in recent weeks, but indicated that it is “nominal.” Mr. Nixon stressed that RBC does not hold this paper in any of its mutual funds or private client accounts.

The bank also said on Friday that it is raising its dividend by 4 cents per share, or 9 per cent, to 50 cents.

While its quarterly results were helped a bit by a lower tax rate, they showed strength in capital markets, wealth management, and basic Canadian banking. “I am very pleased with the results this quarter across all of our business segments,” Mr. Nixon said.

RBC's biggest division, Canadian banking, saw profit rise 6 per cent.

The bank has experienced higher amounts of bad loans on its credit cards and unsecured credit lines, and so its provision for bad loans rose to $178-million from $99-million. Small business loans and commercial loans also contributed to the higher provision.

RBC cautioned that “while credit growth of both consumer and business lending in Canada was solid, credit quality weakened moderately during the period as conditions appear to be reverting to more normalized levels.”

The bank's capital markets division saw profit rise 19 per cent, while wealth management profit rose 30 per cent.

Total revenue rose 5 per cent to $5.48-billion.
Bloomberg, Doug Alexander, 24 August 2007

Royal Bank of Canada, the nation's biggest lender, reported profit that beat analysts' estimates as the country's banks sidestepped most of America's subprime-loan fallout.

The company said third-quarter net income climbed 19 percent to C$1.4 billion ($1.33 billion), or C$1.06 a share, from C$1.18 billion, or 90 cents. The Toronto-based bank raised its dividend 9 percent to 50 cents a share.

Royal Bank benefited from a 30 percent profit gain at its asset-management unit, and higher fees from arranging mergers and underwriting stocks and bonds. The stock declined after trading revenue fell and the bank set aside more money for bad loans.

``Everybody was really nervous about the subprime business and some of the banks were hit quite hard,'' said John Kinsey, who helps manage $1.9 billion at Caldwell Securities Ltd. in Toronto, including Royal Bank stock. ``You kind of hear things that the economy is slowing, but their main banking business seems to be very solid.''

The bank said profit for the quarter ended July 31 was C$1.08 a share excluding one-time items, topping the median estimate of C$1.03 a share from nine analysts polled by Bloomberg News.

Royal Bank shares fell 43 cents to C$55 at 4:14 p.m. in trading on the Toronto Stock Exchange. The stock has fallen 1 percent this year, compared with a 1.7 percent decline in the Standard & Poor's/TSX Banks Index.

Canadian banks have so far not been buffeted by the credit crunch sparked by rising defaults in U.S. subprime loans. Toronto-Dominion Bank said yesterday that profit rose 39 percent, beating estimates, on higher investment-banking fees. The six-biggest lenders will probably post average profit increases of 13 percent before one-time items, according to Kevin Choquette at Scotia Capital in Toronto.

The credit crunch is having more of an impact than previous market downturns in 1998 and 1987, RBC Capital Markets Chief Executive Officer Charles Winograd, 59, said today on a conference call with analysts.

``It's more complex, deeper and broader than 1987 was,'' Winograd said. ``1987 was really in one product, which was equities.''

Royal Bank doesn't originate U.S. subprime loans and had investments of about $1.04 billion linked to the subprime market at July 31. Most of the holdings are in mortgage-backed securities and collateralized debt obligations, CEO Gordon Nixon said in a statement. The investments are equal to less than 0.2 percent of bank assets, Nixon said.

By comparison, Canadian Imperial Bank of Commerce said on Aug. 13 that its holdings in the U.S. residential mortgage market were about $1.7 billion before it took a writedown of C$190 million to reflect a decline in the value of the investments.

Royal Bank also has ``nominal exposure'' to Canadian non- bank asset-backed commercial paper funds, which have been unable to roll over most debt since last week. The bank backs some of these funds for emergency financing.

Trading was hurt by concerns over the U.S. subprime market, and reduced ``liquidity'' in late July, the bank said. Trading revenue fell 20 percent to C$546 million, led by fixed-income and equities. Royal Bank had six days of trading losses in the quarter, five of which were in the latter part of July, Chief Operating Officer Barbara Stymiest said in an interview.

``Both the gains and losses that we've been experiencing through this period of volatility have been significantly in the fixed-income area,'' Stymiest said.

Royal Bank's wealth management group earned C$177 million, up 30 percent from a year ago. Royal Bank had C$1.42 billion in mutual fund sales in the quarter, up from $720 million a year earlier, according to preliminary figures from the Investment Funds Institute of Canada.

Profit from the consumer-banking unit in Canada rose 5.9 percent to C$699 million from C$660 million, the slowest growth in at least five quarters. Profit from U.S. and international consumer banking, which includes Raleigh, North Carolina-based RBC Centura, rose 6.1 percent to C$87 million, the highest in at least nine quarters.

Royal Bank set aside C$178 million for soured loans, compared with C$99 million a year ago, as provisions for credit cards and consumer and small business loans rose. Loan-loss provisions for Canada's six main banks are projected to rise an average of 55 percent this quarter, according to estimates from Credit Suisse analyst James Bantis.

Profit from global insurance rose 69 percent to C$103 million as insurance claims fell 59 percent from a year ago.

Royal Bank and other lenders also benefited from higher fees from investment banking. Profit at the RBC Capital Markets investment banking unit rose 19 percent to C$360 million from C$303 million a year ago. Underwriting and other advisory fees rose 22 percent to C$309 million, the bank said.

The firm ranked No. 1 for advising Canadian firms on mergers and acquisitions, which surged 46 percent to $53.9 billion in the fiscal quarter. RBC Capital worked with Thomson Corp. on the $7.75 billion sale of its education unit.

Total market-sensitive revenue, which includes trading and underwriting fees, rose 16 percent to C$2.01 billion, Merrill Lynch analyst Sumit Malhotra said today in a research note.

``Sentiment on the stock will likely be challenged by the fact that a large proportion of the growth came from areas that the market does not appear to believe are sustainable,'' wrote Malhotra, who rates Royal Bank a ``buy'' and doesn't own the stock.

CIBC, the No. 5 bank, said last week it expects profit to top forecasts, even with the debt writedown. Bank of Montreal and Bank of Nova Scotia report results on Aug. 28, while Canadian Imperial and National Bank of Canada report on Aug. 30.

24 August 2007

TD Bank Q3 2007 Earnings

Analysts' ratings and target prices for TD Bank:

• BMO Capital Markets maintains "outperform," 12 month target price is $78.00

• Blackmont Capital maintains "hold," 12-month target price raised to $77.00 from $73.00

• Desjardins Securities maintains "top pick," 12-month target price raised to $84.00 from $79.00

• RBC Capital Markets maintains "outperform," 12 month target price raised to $83.00 from $81.00

• Scotia Capital maintains "outperform," 12 month target price is $90.00
BMO Capital Markets, 24 August 2007

TD Bank reported third-quarter cash earnings of $1,192 million, or $1.64 per share, compared to $952 million, or $1.31 per share, last quarter, and $909 million, or $1.17 per share, in the same quarter of last year. This quarter's results were positively impacted by the mark-to-market of credit derivatives of $0.04 per share. Exclusive of this, TD defined its adjusted earnings as $1.60, which was well ahead of our expectations of $1.34 per share.

This was great quarter for TD Bank. Having said that, we are the first ones to highlight that the $1.60 reported this quarter included tax reversals, very strong trading revenues and a securities gain on AMTD shares. We suggest that investors focus on $1.45 as a 'sustainable' earnings result, after we remove the non-recurring items in the Corporate segment and 'normalize' trading in TD Securities. Even at this level, however, the result was ahead of our expectations due to strong volume growth and good control of expenses.

The bank also boosted its quarterly dividend by 8% to $0.57. This surprised us and clearly reflects management confidence in its ability to manage through what has become a difficult environment since quarter-end.

The Canadian Personal and Commercial Banking segment reported earnings of $597 million, up 11% over the second quarter and 14% over the year and ahead of our expectations. We are assuming a slowdown in loan growth to 5% in 2008, and still expect contribution from this segment to rise by 7%.

This was the first quarter in which TD Banknorth results were fully consolidated into TD Bank. Net income was $109 million, in line with our expectations. Despite high levels of competition and the outlook for higher loan losses in the U.S. banking system, management appears confident that it can grow the contribution from BNK.

Wealth Management results, including AMTD, were $185 million, down 6% over the quarter but up 22% over the year. The contribution from TD Ameritrade was pre-announced at $59 million, down slightly from the previous quarter. In the domestic Wealth business, revenue was up 30% year over year. Given the volatility in most markets since the end of the quarter, we have assumed a decline in earnings in the fourth quarter and about 10% growth for 2008.

TD Securities reported very strong earnings of $253 million, up 17% over the quarter and 41% over the year. Trading revenues were $308 million, higher than our expectations.

Outside of trading the bank had excellent revenue performance, consistent with what appears to be very good momentum in M&A and underwriting. Provisions for credit losses were $8 million, inclusive of a $3 million recovery in the merchant banking portfolio. For 2008, we are assuming a 25% reduction in contribution from TD Securities.

TD disclosed that it has no exposure to U.S. sub-prime mortgages, third-party ABCP or hedge fund lending. It has nominal exposure to hedge fund trading and ensures collateralization of its prime brokerage activities.

The Corporate segment's operating earnings of $20 million were well above our expectations of a loss of $25 million reflecting a $29 million resolution of a tax audit, and a $6 million gain on the sale of AMTD shares. From a credit perspective, loan losses of $171 million were roughly in line with our expectations.

TD's Tier 1 ratio increased from 9.8% last quarter to 10.2% this quarter due to strong internal capital generation as well as a US$500 million preferred stock issue. On the other hand, book value actually declined in the quarter. This will likely be a trend seen at other banks as the rise in the Canadian dollar impacts the valuation of non-Canadian assets.

Projections and Valuation

We are raising our forecast for 2008 to $5.95 from $5.85. This modest increase includes an assumption of higher loan losses, weaker trading revenues and more moderate growth in retail banking. We are modestly reducing our fourth quarter earnings estimate to $1.33 from $1.37, to reflect the difficult capital markets conditions of the past month.

It has been easy for bank management to highlight that there are risks associated with the extremely robust capital markets conditions over the past couple years. The difficulty has been to act on this concern. TD Bank has done both, hence the title of this report. We continue to highlight TD Bank as our favourite Canadian bank stock. It offers investors a combination of great underlying franchises, a defensive business mix and some growth options. We are maintaining our Outperform rating and $78 target price.
RBC Capital Markets, 24 August 2007

EPS ahead of expectations, but not sustainable

Core cash EPS of $1.60 were well ahead of our $1.35 estimate, and up 33% versus Q3/06. $0.21 of the $0.25 "beat" came from the wholesale and corporate segments, where results are not likely to be sustained in the near term and valuation multiples on those earnings are low. The dividend was raised $0.04 to $0.57, $0.01 more than we had anticipated.

EPS estimates and target price raised

We have raised our 2007E cash EPS to $5.75 from $5.45, reflecting mostly the higher than expected Q3/07 results while our 2008E EPS are up $0.10 to $6.10, mostly reflecting higher estimated earnings at TD Canada Trust. We have raised our 12-month target price by $2 to $83 on the back of the higher estimated earnings. This valuation implies a forward multiple of about 12.7 times, slightly higher than the bank's 5-year average of 12.2 times. We believe that multiple expansion is likely as the bank's earnings should prove less volatile than the rest of the group in turbulent capital and credit markets.

TD offers balance of growth and lower risk

Domestic retail momentum and higher earnings from the U.S. (driven by cost synergies at TD Ameritrade, and by higher ownership of TD Banknorth) should drive above-average retail earnings growth for TD. We also believe that there is less downside risk to our earnings forecasts for TD than for the industry as the bank is less exposed to wholesale earnings, and appears to have a more conservative mix of businesses within its wholesale division.
Scotia Capital, 24 August 2007

Q3/07 Earnings Increase 32% - High Quality

• Toronto-Dominion Bank (TD) reported terrific Q3/07 earnings of $1.60 per share better than expected with extremely strong earnings in all business lines, particularly Wholesale Banking. Cash operating earnings of $1.60 per share (including $0.04 per share tax adjustments) were up 32% from a year earlier.

• Earnings were driven again this quarter by exceptional results from Wholesale Banking with growth of 41%, with Wealth Management and TDCT earnings increasing 22% and 14%, respectively. TD Banknorth earnings declined slightly from a year earlier but increased sequentially with positive earnings momentum expected going forward.

• TD increased its dividend by 7.5% to $2.28 per share from $2.12 per share as expected.

• Cash ROE was 22.2% versus 18.6% a year earlier. Return on risk-weighted assets was 3.07% versus 2.54% a year earlier. TD's cash return on RWA this quarter, we believe, is the first for a Canadian bank to ever earn a return on RWA of over 3.00%.

• Reported earnings were $1.51 per share which included the following after-tax items: the amortization of intangibles expense of $91 million or $0.13 per share and a gain of $30 million or $0.04 per share due to the change in fair value of credit default swaps hedging the corporate loan book.

Impressive Operating Leverage

• TD’s operating leverage was impressive in Q3 at 8.7%, with revenue growth of 12.6% and expense growth of 3.9%.

Canadian P&C Earnings Up 14%

• Canadian P&C earnings increased 14% to $597 million primarily due to volume growth in real-estate secured lending, credit cards and deposits.

• Canadian retail NIM increased 2 basis points (bp) sequentially to 3.07% in the quarter but declined 1 bp from a year earlier.

• Retail market share improved over the past year with gains in credit card market share of 68 bp, small business lending 59 bp and personal lending 6 bp. Personal deposit market share declined 24 bp from a year earlier.

• Loan securitization revenue was relatively flat at $86 million versus $85 million a year earlier but declined from $97 million in the previous quarter. Insurance revenue increased to $257 million from $230 million a year earlier. Card service revenue increased to $119 million from $103 million in the previous quarter and $93 million a year earlier.

• Operating leverage was very strong at 8% with revenues increasing 9% and expenses increasing 1%.

• The efficiency ratio improved 200 bp to 50.0%.

• Loan loss provisions increased to $151 million from $143 million in the previous quarter and from $104 million a year earlier, due to higher loan growth and higher loss rates on new accounts.

Total Wealth Management Earnings Up 22%

• Wealth Management earnings, including the bank’s equity share of TD Ameritrade, increased 22% to $185 million.

Canadian Wealth Management – Earnings Increase 30%

• Domestic Wealth Management earnings increased 30% to $126 million from $97 million a year earlier, due to higher transaction volume and higher mutual fund fees from asset growth.

• Operating leverage was strong at 4.5% with revenue increasing 19.3% and expenses increasing 14.8% to $587 million and $395 million, respectively.

• Mutual fund revenue increased 31% to $206 million from $157 million a year earlier.

• Mutual fund assets under management (IFIC, includes PIC assets) increased 19% to $59.1 billion.

TD Ameritrade - Earnings Increase Modest 7%

• TD Ameritrade contributed $59 million or $0.08 per share to earnings in the quarter versus $63 million or $0.09 per share in the previous quarter and $55 million or $0.08 per share a year earlier. TD Ameritrade’s contribution represented 5% of total bank earnings.

TD Banknorth Earnings Improve Sequentially

• TD Banknorth earnings contributed $109 million or $0.15 per share in the first full quarter of earnings since its privatization representing 9% of TD earnings. This compares with an earnings contribution of C$68 million or $0.09 per share a year earlier.

• On a comparable basis, earnings declined modestly year over year but increased sequentially. It is early, but TD Banknorth's goal of earnings of C$500 million or C$0.70 per share in 2008 seems aggressive but attainable. This would represent a 17% earnings improvement from this quarter's earnings level.

• Net interest margin at TD Banknorth declined 3 bp from the previous quarter and 21 bp from a year earlier to 3.86% due to the flat yield curve and strong competitive pressure.

Wholesale Banking Earnings Increase 41%

• Wholesale banking earnings increased 41% to $253 million versus $179 million a year earlier and increased 17% sequentially from $217 million.

• Revenue growth was impressive at 18.7%, with expenses increasing 7.6%. Operating leverage was strong at 11.1%.

Capital Markets Revenue Solid

• Capital markets revenue increased 14% to $390 million from $343 million a year earlier.

Impressive Trading Revenue

• Trading revenue increased to $308 million from $289 million in the previous quarter and from $242 million a year earlier.

• Trading revenue was driven by equity and other portfolios' trading revenue increasing to $144 million from $99 million a year earlier. Trading revenue in foreign exchange products improved slightly to $87 million from $80 million a year earlier. Interest rate and credit portfolios’ trading revenue increased to $77 million from $63 million a year earlier.

Securitization Activity Moderate

• During the quarter, TD securitized $2.2 billion in assets versus $3.1 billion in Q2 and $2.2 billion a year earlier. At quarter end, TD had $31.7 billion in securitized assets outstanding.

• The economic impact before tax of securitization this quarter was a loss of $4 million versus a loss of $4 million in the previous quarter and a loss of $13 million a year earlier.

Liquidity Risk

• At quarter end, TD's surplus liquid asset position was $4.2 billion, a more normal level than the $18.8 billion excessive surplus the bank was carrying at the end of Q4/06. The flat to inverted yield curve made carrying excess liquidity nominal at the end of 2006 but has since become more expensive. Therefore, the decline in liquidity was at the bank's discretion and is not related to the recent liquidity crisis.

Security Surplus Stable at $1 Billion

• Security gains declined slightly to $94 million or $0.08 per share from $102 million or $0.09 per share in the previous quarter and $113 million or $0.10 per share a year earlier. Security gains included a $6 million gain from sale of TD Ameritrade shares as the bank reduced its equity stake in TD Ameritrade to 39.9% from 40.3% as required by its stand still agreement.

• Unrealized surplus increased to $1,010 million basically unchanged from the previous quarter but up substantially from $707 million a year earlier. The bank currently has 10 quarters of security gains remaining in its securities portfolio based on the level of gains recognized this quarter.

Loan Loss Provisions

• Specific loan loss provisions (LLPs) increased to $171 million or 0.37% of loans versus $109 million or 0.26% of loans a year earlier.

• We are increasing our 2007 and 2008 LLP estimates to $675 million or 0.37% of loans and $750 million or 0.40% from $600 million and $675 million, respectively. This increase in LLP estimates reflects higher loan losses particularly in credit cards, which is a function of volume not credit quality deterioration, and also reflects higher loan losses at TD Banknorth and overall higher volume growth.

Loan Formations Decline Sequentially

• New gross impaired loan formations declined to $375 million from $461 million in the previous quarter but increased from $234 million a year earlier.

• Net impaired loan formations declined to $209 million from $303 million in the previous quarter but increased from $160 million a year earlier.

Tier 1 Capital Increased Sequentially to 10.2%

• Tier 1 capital ratio increased to 10.2% from 9.8% in the previous quarter but declined from 12.1% a year earlier primarily due to the privatization of TD Banknorth.

• Risk-weighted assets increased 8% from a year earlier to $150.8 billion, with market at risk declining 13% to $3.0 billion.

Share Buybacks

• In Q3/07 TD repurchased a total of 3.2 million shares at an average price of $72.92 per share for a total of $236.1 million.


• We are increasing our 2007 earnings estimate to $5.80 per share from $5.45 per share and our 2008 earnings estimate to $6.30 per share from $6.00 per share based on operating earnings strength in Wholesale Banking, continued earnings strength at TDCT and improving earnings at TD Banknorth.

• Our 12-month share price target remains unchanged at $90, representing 15.5x our 2007 earnings estimate and 14.3x our 2008 earnings estimate.

• TD management is very pleased with their earnings thus far in 2007 and remains optimistic about the outlook for 2008.

• We reiterate our 1-Sector Outperform rating of shares of TD based on strong high quality earnings momentum, high relative profitability, growth potential from TD Banknorth and TD Ameritrade (including M&A potential) as well as attractive valuation (slight P/E discount to the bank group versus our expected 10% premium).
The Globe and Mail, John Heinzl, 24 August 2007

During the recent market turmoil, we've been harping about the importance of dividends, especially investing in companies that increase their dividends regularly.

Judging by the response to last week's "10-step recovery plan for panicked investors," many of you are taking the advice to heart.

As Carmela from Vancouver wrote in an e-mail to the Market Moves reader communications centre, "Even if it is the end, your article made me feel better for a moment."

Okay, so, uh, some people need a bit more reassurance.

With that in mind, in today's column we will offer incontrovertible proof that investing in companies that pay rising dividends is, if not a guaranteed way to enjoy a life of wine-tasting aboard your private yacht, at least a whole lot better than listening to stock tips from your dentist or throwing darts at the stock tables.

Today's example: Toronto-Dominion Bank.

Yesterday, TD announced a third-quarter profit of $1.1-billion, up 38 per cent from a year earlier. Boffo bank profits always make headlines. But TD had another piece of uplifting news for investors: It boosted its quarterly dividend by 4 cents, to 57 cents a share - an increase of nearly 8 per cent.

You didn't have to be a genius to see this coming. In recent years, Canada's third-biggest bank has established a pattern of bumping its dividend every other quarter, hiking its payout at a five-year annual rate of 12.5 per cent.

A 4-cent increase may seem like peanuts, but over time such small dividend increases add up. TD's payout is now twice as big as it was just five years ago; had you bought the stock in August, 2002, the dividend yield on your original investment would be 6.7 per cent. As well, the stock has more than doubled.

And, the thing is, unless the economy gets really ugly, TD's dividend is expected to keep rising. According to Bloomberg forecasts, it will jump to 62 cents in February, 65 cents next August and 68 cents by February, 2009. By 2010, it should be up around 76 cents.

These are just estimates, of course. There's no guarantee the dividend will rise at that rate. But investors can take comfort from the fact that the company has been making dividend payments without interruption since 1857. That's before we were born!

TD is just one example. Some other banks have been boosting their dividends at an even faster clip. Royal Bank, which reports today and which some analysts expect will announce a hike, has been raising its payout at an 18.4-per-cent annual pace, just behind Bank of Nova Scotia, at 18.8 per cent.

Other companies sporting double-digit dividend growth rates include Manulife Financial, Sun Life Financial, Power Financial, Reitmans and Shaw Communications.

If you're looking for other companies that raise their dividends, check out http://www.dividendachievers.com, a website operated by financial data provider Mergent. To make Mergent's index of Canadian dividend and income trust achievers, a company must have raised its payout at least annually for five years. For U.S. companies to make the cut, they must have raised their payouts annually for at least 10 years. Companies on the U.S. index include 3M, Abbott Laboratories, Anheuser-Busch, Altria Group, Coca-Cola, Colgate-Palmolive, General Electric, Johnson & Johnson, Pfizer and McDonald's, among hundreds of others.

Dividend achievers are "high-quality, stable companies," Mergent says. "These companies outlasted the technology bubble that began in March of 2000, declining market returns in 2000, 2001 and 2002, and corporate malfeasance."

They also have strong cash reserves, and they generally have a track record of solid earnings growth.

Those rising profits are what allow them to raise their dividends year after year, in good times and bad.

"It is these increasing dividend payments that promote investor confidence," Mergent says.

Whether it was TD's juicy profit, the dividend increase, or a bit of both, investors were eager to snap up the stock yesterday. TD's shares surged $1.06 or 1.5 per cent to $70.49, pacing the S&P/TSX capped financials index to a 0.66-per-cent gain - the largest advance of any sector.
The Globe and Mail, Tara Perkins, 23 August 2007

Buoyed by another quarter of stellar earnings, Toronto-Dominion Bank is seeing the bright side of this summer's darkened financial market, suggesting the recent correction may even open up takeover opportunities for the bank in the United States.

“While nobody likes to see this degree of disruption, there is a positive side benefit,” chief executive Ed Clark told analysts on a conference call Thursday.

“The market has been moving, in recent years, to under-price risk, allow excessive leverage, and over-reward unproven structures with significant illiquidity,” he said.

Shaking things up to more accurately reflect the risk/reward tradeoff will ultimately be a good thing, “however painful in the short term.”

The first big Canadian bank to report third-quarter results, TD blew past analysts' expectations as its profit rose 38 per cent to $1.1-billion from $796-million a year ago. It also raised its dividend 4 cents to 57 cents, an 8-per-cent increase. The quarter ended July 31, before a market rout took effect and raised global concerns about the condition of banks.

TD took many of its lumps last year, however, as it got out of its global structured businesses.

Its wholesale bank exited areas where risk is not transparent and the bank's shareholders are now benefiting, Mr. Clark said.

TD has no exposure to non-bank asset-backed commercial paper, or to U.S. subprime mortgages.

Mr. Clark said the bank is “extremely comfortable” with the bank's approach to risk, both on the credit and the market side.

“While repositioning the bank may have helped us avoid some of the more immediate impacts of the turmoil, we are not immune from the knock-on effects if market turmoil slows capital market activity or feeds into a slower economy,” Mr. Clark cautioned.

He expects a slower economy in 2008, but not “a dramatic falloff.”

This year, 2007, will be a great year and “exceed expectations,” Mr. Clark said, “but we remain very positive about 2008.”

Meanwhile, as the U.S. subprime mortgage crisis continues to work its way through the American financial system, there might be attractive acquisition opportunities south of the border – although Mr. Clark has yet to see such opportunities.

He wants the institution's U.S. banking division, TD Banknorth Inc., to “get its game plan down” and focus on organic growth.

The bank has recently passed on a couple of small banks, he said.

TD bought the shares of Banknorth that it didn't already own for $3.7-billion in April.

That led to a 60-per-cent rise in profits from TD's U.S. division, in line with many analysts' expectations.

Mr. Clark reiterated that, while there is still lots of work to be done to bring it up to potential, Banknorth remains a priority.

The CEO, who has come under attack recently by two major U.S. hedge funds for allegedly trying to thwart a merger between TD Ameritrade and one of its rivals, also took some time to explain how Ameritrade benefits from its relationship with TD Bank, which owns 40 per cent of the online brokerage.

TD Ameritrade's “risk-adjusted return is dramatically higher than if they had their own bank,” Mr. Clark said.
Financial Post, Duncan Mavin, 23 August 2007

Toronto-Dominion Bank chief Ed Clark trumpeted the bank's strategic approach to risk yesterday as TD reported record quarterly earnings despite recent market upheaval.

"We are extremely comfortable with what our approach to risk has been on both the credit and the market side," Mr.Clark said.

TD turned in adjusted quarterly earnings of $1.2-billion, up 33% from $886-million last year. Revenue was up 12% from $3.3-billion last year to $3.7-billion in the third quarter of 2007. The bank also raised its quarterly dividend by 7.5% to 57¢ a share from 53¢ a share

Compared with other Canadian banks, TD's profits are more focused on retail banking. TD's domestic retail operations saw profit jump 14% from $524-million last year to $597-million.

Mr. Clark said the bank is "not immune from the knock-on effect" of market volatility on clients, and also said the bank is expecting some economic downturn in 2008. "But I don't see a dramatic fall off," he added.

Analysts reacted positively to the bank's results.

"TD Bank -- rising above the turmoil with a stellar third quarter," said Jim Bantis of Credit Suisse in a note. "With a lack of exposure to the speculation most recently impeding bank valuations -- U.S. subprime residential and domestic third-party asset backed commercial paper -- TD remains in a very strong position."

Dundee Securities' John Aiken noted that TD has set the bar high for its Canadian peers, whose results will be released over the following week.

"A great quarter on all metrics will be hard for other [Canadian banks] to beat," Mr.Aiken said in a note.

Mr.Clark also clarified TD's position on a possible deal involving TD Ameritrade, the U.S. discount brokerage in which TD has a 39% stake.

Speculation that TD Ameritrade could be involved in a transaction with rivals Charles Schwab or E*Trade Financial has been circulating for several months. Chatter intensified in June when two hedge funds with an 8.4% interest in the brokerage said TD and Mr. Clark were blocking a merger that would be in the interest of other TD Ameritrade shareholders. And this week a U.S. media outlet reported that TD Ameritrade and E*Trade executives have been in negotiations for several weeks, though neither firm has confirmed the reports.

Mr.Clark said TD is "totally supportive" of an acquisition that management and the board of TD Ameritrade believes is right.

"Let me underscore points TD Ameritrade and we have made in the past. It will be the TD Ameritrade board that will decide whether or not to make an acquisition," said Mr.Clark.

The key issues related to any deal are "strategic," he added, citing TD Ameritrade's "pureplay brokerage strategy." E*Trade Financial, unlike TD Ameritrade, has a portfolio of mortgages.
Bloomberg, Sean B. Pasternak, 23 August 2007

Toronto-Dominion Bank, the first Canadian bank to report third-quarter results, said profit rose 39 percent, topping analysts' estimates, on higher investment- banking fees and earnings from its U.S. unit.

Net income for the period ended July 31 climbed to C$1.1 billion ($1.05 billion), or C$1.51 a share, from C$796 million, or C$1.09 a share a year earlier, Canada's third-biggest bank said today. Revenue rose 11 percent to C$3.65 billion, the highest in at least nine quarters.

The results indicate Canadian banks haven't been hurt yet by the credit crunch sparked by rising defaults in U.S. subprime loans. Canada's six-biggest lenders will probably post average profit increases of 13 percent before one-time items, the ninth- straight quarter with growth of at least 10 percent, said Kevin Choquette at Scotia Capital in Toronto.

Profit ``looks fantastic,'' said Greg Taylor, a money manager at Aurion Capital in Toronto, which runs about C$2.5 billion in equities, including Toronto-Dominion shares. ``It sets a high bar for the other banks.''

By comparison, the average earnings per share growth among U.S. lenders Bank of America Corp., Wells Fargo & Co., Wachovia Corp., SunTrust Banks Inc. and PNC Financial Services Group Inc. was 4.3 percent in the quarter ended June 30, according to Blackmont Capital analyst Brad Smith.

Before one-time items such as acquisition costs, Toronto- Dominion had profit of C$1.60 a share. That compares with the C$1.37-a-share average estimate of eight analysts surveyed by Bloomberg. Toronto-Dominion raised its quarterly dividend by 7.5 percent to 57 cents a share, the fourth increase in two years.

Toronto-Dominion shares rose C$1.06, or 1.5 percent, to C$70.49 in 4:10 p.m. trading on the Toronto Stock Exchange. Other bank stocks rose, including Royal Bank of Canada and Bank of Montreal.

The bank said it will probably exceed its 2007 objectives of 7 percent to 10 percent earnings growth after profit rose 25 percent in the first nine months of the fiscal year.

Toronto-Dominion reiterated today it doesn't have any holdings in the U.S. subprime mortgage market, or non-bank asset-backed commercial paper.

``We are not immune from the knock-on effect if it slows capital markets activity,'' Chief Executive Officer Edmund Clark told investors on a conference call today. He said he doesn't expect a ``dramatic fall-off'' in economic growth next year.

Canadian banks aren't at the heart of the subprime crisis because they offer fewer high-risk mortgages than their U.S. counterparts. Such loans accounted for about 3 percent of the mortgage market in Canada at the end of 2006, compared with 13 percent in the U.S., Choquette said.

Still, Toronto-Dominion set aside C$171 million for bad loans, up 57 percent from C$109 million a year earlier, and provisions may rise in the fourth quarter, it said. Loan-loss provisions for Canada's six main banks are projected to rise an average of 55 percent this quarter, according to estimates from Credit Suisse analyst James Bantis.

The bank said ``market volatility'' may have a ``negative impact'' on the investment-banking business. Gains in investment banking aren't sustainable, and profit from that business will fall in the fourth quarter, said Andre-Philippe Hardy, an analyst at RBC Capital Markets in Toronto.

Earnings at the TD Banknorth unit in the U.S. soared 60 percent to C$109 million after Toronto-Dominion bought a 41 percent stake it didn't already own. The bank pledged to reverse a slump at Portland, Maine-based TD Banknorth, where profit had declined in six of the last eight quarters.

The bank reduced the number of full-time employees at the unit by 848, or 9.3 percent, over the last year. The bank said in March it would cut about 400 jobs as part of a plan that included closing as many as 24 branches in New Jersey, New York and other states.

Asset-management earnings climbed 22 percent to C$185 million because of higher sales of mutual funds. The bank's net sales of funds rose more than ninefold to C$948 million in the quarter, according to estimates from CIBC World Markets analyst Darko Mihelic.

Toronto-Dominion said in July that TD Ameritrade Holding Corp., the third-biggest online broker, would contribute C$59 million to earnings. The Canadian bank owns a 40 percent stake in the company, which is in merger talks with rival E*Trade Financial Corp., the Wall Street Journal reported yesterday.

Toronto-Dominion is ``totally supportive of an acquisition that's the right deal at the right time'' for TD Ameritrade, Clark told investors. He didn't say whether the two firms were in talks.

Canadian consumer bank earnings climbed 14 percent to C$597 million on higher revenue from credit cards and deposits. Clark said that later this year 800 of the bank's Canadian branches will be open at least 62 hours a week, which is 50 percent longer than Toronto-Dominion's four main competitors.

Investment-banking profit surged 41 percent to C$253 million on trading revenue and advisory fees. The bank's TD Securities arm ranked second in Canada for equity offerings and fourth for merger advice in the quarter, according to Bloomberg data.

Trading income at the wholesale bank climbed 27 percent to C$308 million, led by equities. Overall ``market sensitive'' revenue, which includes fees from trading, investment advice and funds, jumped 16 percent to C$1.03 billion, Merrill Lynch & Co. analyst Sumit Malhotra said.

Toronto-Dominion agreed in July to provide C$3.8 billion in financing for the proposed takeover of BCE Inc., Canada's biggest phone company, by a group that includes the Ontario Teachers' Pension Plan. Clark said that the bank is ``very comfortable'' with the risk associated with that transaction.

Royal Bank of Canada, the country's largest bank, is scheduled to report results tomorrow, followed by Bank of Nova Scotia and Bank of Montreal on Aug. 28, and Canadian Imperial Bank of Commerce and National Bank of Canada on Aug. 30.