31 December 2007

% Returns, as at 31 December 2007

GlobeInvestor, 31 December 2007


Advocacy Group Opposes RBC Bid for Alabama National

Bloomberg, Joe Schneider, 31 December 2007

Royal Bank of Canada's proposed $1.6 billion acquisition of Alabama National BanCorp. was challenged by a New York watchdog group that claims Canada's biggest bank engages in discriminatory lending practices.

Fair Finance Watch, a financial advocacy group for poor consumers, said it asked the Federal Reserve Bank of Richmond, Virginia, in a Dec. 28 letter for public hearings and all documents relating to the proposed buyout.

Royal Bank agreed Sept. 6 to buy Birmingham-based Alabama National for cash and stock in its biggest acquisition since expanding into U.S. consumer banking six years ago. Barred from merging at home, Canada-based banks are taking advantage of a stronger Canadian dollar to step up acquisitions abroad.

``RBC's proposal, on the current record, should not be approved or allowed,'' Matthew Lee, executive director of Fair Finance Watch, said in a letter to the Richmond Federal Reserve, a copy of which was made available to Bloomberg News. Officials at the regulator weren't immediately available for comment.

Citing the Home Mortgage Disclosure Act, Fair Finance Watch claimed Royal Bank's RBC Centura unit in 2006 denied mortgage refinance applications in Charlotte, North Carolina, to blacks 4.4 times more frequently than whites. In the Atlanta area, RBC Centura allegedly denied home improvement mortgage applications of blacks 4.2 times more frequently than whites, the group said.

`An Inquiry'

``There should be an inquiry,'' Lee said in the letter.

Judi Levita, a Royal Bank spokeswoman, said ``the lending practices of RBC Centura satisfactorily comply with all applicable requirements.''

Levita added the bank hasn't yet reviewed the letter.

Royal Bank also agreed in October to buy RBTT Financial Holdings Ltd. in Trinidad & Tobago for about $2.2 billion to double its Caribbean branch network. That acquisition also deserves heightened scrutiny, Lee claimed in the letter, addressed to Linwood Gill III and Dan Tatar at the Richmond Federal Reserve.

Both men were unavailable for comment, said Donna Tapscott, a spokeswoman at the Richmond Federal Reserve.

Will Matthews, spokesman for Alabama National, didn't return a call seeking comment. Royal Bank fell 88 cents to $51.04 at 4:02 p.m. in New York Stock Exchange composite trading.

28 December 2007

Banks Compete for Business of New Immigrants

Rita Trichur, 28 December 2007

Bank of Montreal snagged new immigrant Jun Yuan as a client even before the Chinese shipping agent set foot in Canada.

Like other savvy newcomers, 35-year-old Yuan wanted to avoid the hassle of waiting to open a new account and began shopping around for a Canadian bank while still in his native city of Shanghai.

"After a comparison, I chose Bank of Montreal," said Yuan, noting his short list also included Canadian Imperial Bank of Commerce and Bank of Nova Scotia.

But fees and products were just part of his assessment.

What really sold him on BMO was positive word of mouth and an information seminar the bank held in Shanghai – a primer on life in Canada. Basic banking, it seems, was just part of the agenda.

After walking Yuan through the basics of applying for a social insurance number and provincial health card, BMO's staff also advised him on what financial pitfalls to avoid when starting a new life in Canada.

"When I decided to immigrate to Canada, I knew nothing about what to do after landing," Yuan said. "This lecture is very helpful."

He was also impressed with the bank's ability to set up his account and transfer his savings to a branch in the heart of Toronto's Chinatown even before he boarded a plane for Canada.

"I didn't need to carry the money with me," Yuan said.

After arriving, BMO activated his account and gave him a reference so he could secure an apartment in Scarborough. Immigrant settlement services are the latest twist to Canada's retail banking war.

Roger Heng, managing director and BMO's country head for China, said prospective clients pepper his staff with a wide range of queries about Canada – most of which have nothing to do with banking.

The most popular questions are about where to reside and the best schools for their kids.

"The Chinese population migrating to Canada is getting more affluent," Heng said. "Therefore, the need, the wealth and the knowledge that they bring in are very much different than five or 10 years ago."

Faced with an aging population and a ban on big-bank mergers, Canadian lenders are falling all over themselves to court and poach new-immigrant clients as they represent a rare source of growth for their mainstay personal and commercial operations.

"Really, the primary growth in the Canadian population is going to be fuelled by immigrants. And we're not just talking about the general population, but our workforce as well," said Rania Llewellyn, Scotiabank's vice-president of multicultural banking. "Obviously, that is a huge opportunity for the banks to tap into that market."

Statistics Canada does not track how much money new immigrants bring to Canada annually, but one 2005 estimate by Royal Bank of Canada pegged the potential new-immigrant banking market at about $3 billion a year.

Canada accepts about 250,000 new immigrants annually.

With China and India the top source countries, banks are in hot pursuit of those Asian-born arrivals.

No one knows that better than 25-year-old Apurva Talsania. When the Indian immigrant approached Royal Bank about opening a new account in 2006, he also ended up getting a job.

Now an account manager, Talsania said the branch staff directed him to RBC's career site the very same day he opened his account. Won over by that "personal touch," he said the experience stands in sharp contrast with banking practices back home.

"The (Indian) banks do not really bother about talking to the client and finding out they want, what their needs are," Talsania said.

And that "different banking experience" starts with the first point of contact, he said. That's because a new chequing account could eventually lead to a new mortgage, credit card, loan or lucrative wealth-management investments for growth-hungry Canadian banks.

According to a 2006 Ipsos Reid report, new Canadians are "prolific investors" and are "more likely to be heavy credit card users in terms of total dollars spent." The findings are based on 2,005 telephone surveys with first-generation Chinese and South Asian adults.

And it seems the banks' own research suggests that new immigrants have different financial priorities. While 70 per cent of new immigrants – those here 10 years or less – are still focusing on having enough money to cover daily expenses, new arrivals are "more likely" to cite saving for their children's education than other goals, according to a recent RBC study.

"This doesn't entirely surprise us as new Canadians are likely to have more education than the overall population," said Mark Whitmell, RBC director of cultural markets. About two-thirds of new immigrants have some university education.

He says a big obstacle facing new immigrants is their lack of Canadian credit history. To get them started, RBC, like other banks, offers a secured credit card. "A credit card is something that someone needs just to participate," Whitmell said. "You can't rent a movie, you can't get your phone hooked up, you can't do any of those kinds of things without a credit card."

As part of its effort to woo clients, RBC launched a pilot referral program with the Canadian Society of Immigration Consultants last month. Consultants are rewarded with points for each new client that is referred to a participating branch. Points can be redeemed for travel and merchandise.

CIBC, meanwhile, is investing $280 million to expand its branch network to reach immigrants in major cities, while "leveraging" the diversity of its front-line staff.

"When you get into more complex investments, mortgages or transactions like that, those clients would prefer, in some cases, to talk about that in the language they are most comfortable with," said Christina Kramer, executive vice-president of retail distribution. Meanwhile, all CIBC bank machines across Canada will be enhanced with Chinese-language capabilities in 2008.

Capitalizing on the rising popularity of remittances, Scotiabank launched a pilot agreement this month to offer the Western Union money-transfer service. It is also sponsoring a wide array of "grassroots" initiatives to drum up business. Banking on Bollywood star power, it recently sponsored a preview of the highly anticipated Sony Pictures movie, Saawariya (Beloved), in the GTA and Vancouver.

It seems, however, that Toronto-Dominion Bank remains tops with South Asians, according to a new report scheduled for release in January by Solutions Research Group.

"We were surprised to some extent by the magnitude of the lead that TD had," said Solutions Research spokesperson Kaan Yigit. "Fundamentally, I think it speaks to having started marketing to various ethnic consumer segments a little bit earlier."

Tim Hockey, TD's group head of personal banking, said the big reason for TD's success is longer hours and better service: "The least international of the banks, which would be us ... is by far the favourite."

His explanation: banking is local. "In the new-to-Canada communities, we find word-of-mouth advertising is much more powerful than traditional means," Hockey said.

And it is the little things that count. That means accommodating Chinese clients who may ask for safety deposit boxes and bank account numbers with the number "8" – a sign of prosperity – while avoiding the number "4", which is associated with death.

But some critics say the big banks' multicultural marketing is just "tokenism."

"It is just so completely patronizing," said David Innis, creative director of Fat Free Communications Inc., a Toronto-based advertising agency.

"Most of them use brown people in their ads and the headlines are translations of what they are either doing in the mainstream," he said. "To merely have shots of brown people shows a complete lack of imagination."

Innis, who is of Indian origin, was part of a recent campaign for the 2007 Dodge Caliber that plays off the theme of arranged marriages with the tag line: "If your parents are going to choose your fiancé, don't let them choose your car."

In contrast, he says Canadian bank advertising in ethnic media is "completely devoid" of personality.

"Okay, TD is green, CIBC is red and yellow (and) BMO is blue, but if you take away the colours, one is interchangeable with the other."

20 December 2007

CIBC Expects Huge Writedown in Q1 2008

Scotia Capital, 20 December 2007

CM - ACA Downgraded - US$2.0 Billion Write-Down or $3.88 per share Expected in Q1/08

• CM announced that there is a reasonably high probability that it will incur a large write-down in Q1/08 as a result of ACA's downgrade to CCC from A.

• CM has a US$3.5 billion hedge against U.S. sub-prime exposure with ACA Financial Guaranty Corp (ACA). As of November 30, 2007 the mark-to-market write-down on this position would be US$2.0 billion (US$1.3 billion after-tax or $3.88 per share) versus US$1.7 billion (Exhibit 1) at the end of October. CIBC projects that its Tier 1 ratio will remain in excess of 9% as at January 31, 2008.

• CM's US$2.0 billion estimate on mark-to-market losses likely has some subjectivity to it where actual losses could potentially be US$500 million to US$1.0 billion higher or another $1.00 to $2.00 per share. We estimate the bank could take a maximum charge of up to $4.2 billion pretax and still maintain a capital ratio of 7%. We do not think the bank needs to issue common equity in the face of these write-downs, however, they may feel compelled to do so.

ACA Downgraded to CCC from A by S&P

• On December 19, 2007, S&P downgraded ACA to CCC, one notch above default, from A and changed the financial insurer's outlook to CreditWatch Developing. CreditWatch Developing reflects the possibility of an upgrade or further downgrade in the not-too-distant future. In the case of ACA an upgrade could come as the result of a potential capital rescue or take over while a downgrade would be the result of default.

• S&P indicated that the credit downgrade is the result of the capital adequacy stress test which applies default assumptions to various subprime transactions that have been insured by the company and then compares the losses to the capital cushion (in excess of minimum requirements) the insurer has. ACA's test losses amounted to approximately US$2.2 billion in excess of the US$650 million capital cushion (at December 31, 2007).

• Ambac Assurance Corp and MBIA Insurance Corp ratings were affirmed by S&P, however, outlooks were changed to negative reflecting the potential for further market deterioration.

• On December 14, 2007, Moody's affirmed Ambac and MBIA ratings at Aaa with Ambac's outlook remaining stable and MBIA's outlook changed to negative from stable.

Potential Bail Out of ACA?

• The New York Times reported on December 19, 2007, that Bear Stearns and Merrill Lynch were in talks about a potential bail out of ACA Capital. Both companies are thought to have substantial stakes in ACA. Talks have not been confirmed by either Bear Stearns or Merrill Lynch.

• Bear Stearns owns 29% of ACA with two executives from their Merchant Banking on ACA's board including David E. King, Chairman of the Board. Merrill owns less than 1% and is rumoured to have US$5 billion of CDO hedges with ACA Capital. Goldman Sachs also owns 1.4% of outstanding ACA shares.

• ACA was delisted on December 18, 2007 for not meeting market capitalization rules as ACA's market capitalization had fallen below $75 million for 30 consecutive trading days. ACA shares (Exhibit 8) have fallen from $15 per share in June 2007. Ambac and MBIA share prices have also declined significantly (Exhibit 9 and 10).


• Our 2008 and 2009 operating earnings estimates remain unchanged at $9.00 per share and $10.00 per share, respectively. This excludes the potential $3.88 per share write-down expected in Q1/08. We are reducing our 12-month target share price to $100 per share from $115 per share reflecting a weaker balance sheet and potentially lower earnings. Our target share price represents 11.1x our 2008 earnings estimate and 10.0x our 2009 earnings estimate.

• CM valuation has declined significantly with relative P/E (declining to 74% on our 2008 earnings estimates (excluding major write-downs) (Exhibit 3) and 83% on relative market to book value basis. The P/E multiple discount is now slightly greater than the 1998 Asia crisis where CM ended up with $600 million of trading losses. The magnitude of the potential loss in 2008 of $2B - $3B probably dictates some type of overshoot. The P/E discount widened through the Enron debacle but to a lesser extent due to market expectation of a shift in CM strategy away from risk taking that clearly hasn't occurred.

• We maintain a 2-Sector Perform rating on CM as we expect its share price to remain under pressure in the near term despite more favourable valuation as the Risk Management Debacle unfolds. BMO, NA and CM are significantly underperforming the bank group and are now trading at meaningful P/E discounts reflecting weaker operating platforms. However, we continue to recommend TD and RY based on expected higher earnings growth rates over the next five to ten years as well as superior operating platforms, high profitability and favourable earnings mix.
The Globe and Mail, Sinclair Stewart, Tavia Grant, Tara Perkins, 19 December 2007

Canadian Imperial Bank of Commerce set the stage Wednesday for a $2-billion (U.S.) writedown on its subprime mortgage exposure, although many analysts believe the figure will be much higher.

The bank and a number of other financial institutions bought themselves some time late yesterday by reaching an agreement with troubled bond insurer ACA Capital, which is struggling to avoid bankruptcy.

That scenario could force CIBC and a number of other banks that hold complicated securities guaranteed by ACA to collectively swallow tens of billions of dollars in charges. Yesterday's forbearance deal, which was reached just hours after credit rating agency Standard & Poor's downgraded ACA, will see the bond insurer's 30-odd lenders hold off on any calls for collateral in a bid to buy it some time.

CIBC has about $3.5-billion (U.S.) worth of U.S. subprime real estate exposure that's hedged with ACA. The bank has more than $6-billion in additional exposure that's hedged with other counterparties.

While CIBC suggested that its first-quarter writedown could be about $2-billion, most analysts believe it will be larger. And many observers suggested the bank should just clean the sleight.

"I think they have to take the writedowns and make some changes, senior management changes," said Shane Jones, managing director of Canadian equities at Scotia Cassels.

"Clearly there will be some writedowns, but will it be enough or do these issues continue to plague the bank and the stock?" he said. "If you look at the U.S. institutions, they are starting to throw everything including the kitchen sink into the writedowns."

Dundee Securities analyst John Aiken, who expects the bank to take a charge of about $2.4-billion, said "it would make sense for CIBC, if they're going to take a charge, to take it all in one quarter now and just try and be done with it."

One issue hanging over the bank is whether bond insurers other than ACA see their businesses deteriorate to the point that they won't be able to pay their debts, potentially putting in jeopardy the bulk of CIBC's exposure that is not hedged with ACA.

On a conference call yesterday afternoon, officials at S&P said the agency's "research has led us to the conclusion that the potential for further mortgage market deterioration remains uncertain and will challenge the ability of the insurers to accurately gage their ongoing additional capital needs in the near term."

While ACA was the only one to be downgraded, the agency put a number of other bond insurers on watch for possible downgrades.

S&P analyst Dick Smith said ACA's lower rating came as the agency's models determined that possible losses of nearly $2.2-billion were well above the company's capital cushion of roughly $650-million.

ACA has been diligently working to address liquidity concerns that S&P raised back in November, but "it has not focused significantly on raising additional capital," he said.

The company is doing less new business, which is helping but is not enough to close the gap between losses and its capital cushion, he said. "The gap is large enough to create significant doubt that the company could possibly access significant hard capital resources to resolve the problem."

S&P was aware that ACA was in negotiations with its counterparties, which is "why we instituted the developing credit watch rather than simply suggesting this will continue to decline," he said. "The 'developing' indicated that there was a positive outcome possible."

In a note to clients yesterday, CIBC World Markets bank analyst Darko Mihelic said he sees $4.4-billion as a plausible total loss from CIBC's subprime exposure.

If that were to happen, he thinks the bank might need to raise at least $1.5-billion of equity.

"We view a loss of $2.4-billion as manageable whereas anything around $4.4-billion or higher requires an equity issue," he wrote. "A significant gray area exists in between these two loss ranges. Given such uncertainty, we expect continued volatility in [CIBC]'s stock."

Peter Routledge, senior credit officer at Moody's Canada's financial institutions group, said yesterday that he wouldn't rule out the possibility of an equity infusion, but added it's "not terribly likely."

The bank has "a good solid franchise in Canada that generates a lot of earnings quarterly," he said. "And the second reason is their capital ratios are actually pretty strong."

CIBC said yesterday that a $2-billion (U.S.) charge would still leave its capital ratio higher than the level required by regulators.

Following Standard and Poor's announcement today that it had reduced the credit rating of ACA Financial Guaranty Corp. from "A" to "CCC", CIBC confirmed that ACA is a hedge counterparty to CIBC in respect of approximately U.S. $3.5 billion of its U.S. subprime real estate exposure.

It is not known whether ACA will continue as a viable counterparty to CIBC. Although CIBC believes it is premature to predict the outcome, CIBC believes there is a reasonably high probability that it will incur a large charge in its financial results for the First Quarter ending January 31, 2008.

As CIBC disclosed on page 52 of its Investor Presentation dated December 6, 2007, the mark of the hedge protection from the "A-rated" counterparty (ACA) as at October 31, 2007 was U.S. $1.71 billion. As at November 30, 2007, this mark was US$2.0 billion. If the charge in the First Quarter were to be U.S. $2.0 billion (US$1.3 billion after tax) CIBC currently projects its Tier 1 capital ratio to remain in excess of 9 per cent as at January 31, 2008.
Canadian Press, 19 December 2007

Royal Bank of Canada said Wednesday that Moody's Investors Service has given its highest rating, P-1, to Canadian asset-backed commercial paper trusts administered by Canada's largest bank.

Moody's previously rated three Royal Bank U.S. ABCP conduits, but this is the first time the bank has arranged to have Moody's rate its Canadian ABCP.

ABCP administered and supported by the big Canadian banks has not been entangled in the seize-up of the third-party Canadian ABCP market.

But Royal Bank said getting U.S. rating-agency assurances on its Plaza Trust, Pure Trust and Storm King Funding conduits “is consistent with the bank's goal of meeting global standards for the highest quality programs.”

Asset-backed commercial paper consists of short-term debt instruments that package underlying assets which can include mortgages, credit card receivables, car loans and other debt.

The Moody's rating complements the existing R-1 (high) rating from Toronto-based DBRS, and Nick Lewis, head of Canadian conduit programs at RBC Capital Markets, said that “we look forward to receiving additional third-party ratings in the coming months, which we hope will reinforce our clients' comfort with the quality of their commercial paper holdings with RBC's Canadian conduits.”

The RBC announcement comes as the market for $33-billion worth of non-bank commercial paper remains frozen.
Reuters, 14 December 2007

There was a time when people said Canada's "Big Six" banks were all the same. That has never been less so than now, analysts say.

If you had chosen to put money into Toronto-Dominion Bank at the start of this year, your investment now would be up 4%. If you had gone for Canadian Imperial Bank of Commerce, it would be down a whopping 25%.

The differences between the banks are only expected to become more stark next year if the global credit crunch continues to underline which of them embraced riskier business practices, and as lenders' traditionally solid Canadian retail operations face tougher conditions.

"Years ago people used to think of the Canadian banks as monolithic. Whatever one did, so did the other. That is just not the case anymore with strategies and managements really having diverged in recent years," said James Cole, senior vice president and portfolio manager at fund manager AIC.

He points to TD, Canada's second-largest bank, which had a tumultuous 2002, when its results were buffeted by big loans to the troubled telecom sector, but which subsequently pulled in its horns and made a pledge to stick to lower risk areas of banking.

As a result TD is the only one of Canada's big banks, and one of the few in the world, not to have any writedowns in 2007 for investments in some way linked to the default-hit U.S. subprime housing market.

By comparison, CIBC, Canada's No. 5 bank, revealed it had $11-billion (US$10.8-billion) exposed to the subprime market, and analysts say it might have to write off $2-billion of that in the first half of next year.

"We were sorely disappointed in CIBC and the extent of its exposure to subprime," BMO Capital Markets analyst Ian de Verteuil said in a report this week. "We had hoped that the relatively young management team was well along the path toward changing the bank's culture."

"In reality, the recent problems showed that the cost-cutting has been too extreme and that risk-management is not sufficiently independent of the business lines," BMO said.

Two years ago, CIBC replaced its chief executive and committed to conservative banking after paying out $2.4-billion for its role in the failure of Enron Corp.

Overall, though, Canadian banks are in much better shape than their counterparts in the United States, where the subprime debacle has hit much harder, analysts say.

That's reflected in the about 30% drop in the U.S. S&P Banks Index this year. By comparison, the stocks of Canada's Big Six banks are down by 11%, on average.

Banks globally have written off more than $50-billion of subprime and other assets since September, with U.S. banks accounting for the bulk of these charges.

"It's really looking through the clouds at this point and trying to identify how much of the negative news is priced in," said Vincent Delisle, director of portfolio strategy at Scotia Capital, which is recommending shareholders load up on financial stocks in 2008.

"Going overweight in financials, we would do it much more aggressively in a Canadian setting than in the United States," he said this week, adding that he believed 60% to 70% of the bad news was priced into stocks.

RBC Capital Markets banks analyst Andre-Philippe Hardy forecasts Canadian bank earnings will increase by a modest 4% to 7% next year, well down from the double digit growth investors have got used to in recent years.

He expects earnings from banks' capital market businesses to be flat or lower next year but says their flagship domestic retail-banking and wealth-management operations will remain fairly sturdy, although provisions for bad loans may creep up.

"This is a key difference with the outlook for U.S. banks, and it should lead to Canadian bank valuations remaining higher than in the U.S.," Hardy said in a note to clients.
Daily Telegraph, Jonathan Sibun, 12 December 2007

CIBC has become the latest bank to make widespread redundancies in London after axing more than 60 staff in what bankers fear could be the first of a series of cuts at the Canadian group.

CIBC employees, who total about 450 people in London, fear the redundancies could leave the bank with as few as 100 front-office bankers in the City, though sources close to the company said the cuts were mostly complete.

At least 60 bankers, working in debt capital markets and leveraged finance, have already been laid off or are in discussions with the bank about their positions. However, some back-office staff, including secretaries and those in IT and other support services, are likely to follow.

The redundancies come amid signs that banks in the City could be tightening their cost controls amid the downturn in the financial markets.

CIBC has been hit hard by the credit crisis and last week admitted that it could face "significant" losses on its C$9.3bn (£4.5bn) sub-prime mortgage portfolio. The portfolio is hedged but analysts fear that counterparties to the hedges may be downgraded or fail outright, landing CIBC with big losses.

In London, the bank also employs a corporate finance team and equity traders. A source close to the company said they had not been affected by this week's cuts.
Dow Jones Newswire, 12 December 2007

Bank of Montreal’s two structured investment vehicles that go by the names of Links and Parkland have outperformed many of their peers in portfolio market performance since July, “providing a reasonable basis for optimism with respect to future relative performance,” writes Blackmont Capital’s Brad Smith.
Moreover, the bulk of the underlying collateral investments are "marked to market" on a daily basis, instead of the riskier "mark-to-model" valuation method, he points out.

And even though BMO management is reluctant to increase liquidity support to the two SIVs, the analyst “stress tested” the valuation and found the bank’s capital ratio remains healthy.

As a result, he reiterated a “buy” on the stock, with a $72 price target, saying the current market valuation remains “deeply discounted relative to its domestic peers.”
At 12:45 p.m. EST on Wednesday, BMO has gained 1 per cent to $60.26
The Globe and Mail, Janet McFarland, 11 December 2007

Shareholder advocate Bob Verdun says Canadian Imperial Bank of Commerce awarded shares worth more than $100-million to top executives between 2000 and 2003 without clearly disclosing the value of the incentive program.

Mr. Verdun said on Tuesday he has analyzed the bank's shareholder proxy circulars to piece together the value of a special incentive program created in 2000 to link executive compensation to merchant banking investments.

Mr. Verdun, a long-time critic of Canada's big banks, believes most of the program was linked to the bank's investment in Global Crossing Ltd., a U.S. technology company that CIBC bought a piece of in 1996. The position was sold and hedged in 2000, earning CIBC total gains of $2.3-billion (U.S.), which were recognized over four years.

News reports in the past have disclosed that CIBC executives had compensation linked to merchant banking operations, but there have not been dollar values attached to the compensation program.

Mr. Verdun has called on CIBC to review its compensation disclosure.

CIBC spokesman Rob McLeod said yesterday the bank has disclosed far more than required about the special incentive program. Disclosure of the program began in the proxy statement for 2000 and has continued every year since then, he said.

“This disclosure has provided investors with an overview of the program, and, over time, the necessary information to calculate the potential benefits for named executive officers at a particular date,” he said.

In its 2001 proxy circular, the bank said four executives – including then-chief executive officer John Hunkin and current CEO Gerry McCaughey – got a total of 17,500 units based on “net gains from certain CIBC investment holdings.” Mr. Verdun said it was not clear enough to readers that the relatively modest number of plan units would be subsequently converted into a total of 1.09 million CIBC deferred share units before the program ended in 2003.

Executives were required to hold the special deferred share units until they left the bank. Mr. Hunkin, who retired in 2005, cashed out his units for a total of $25.7-million. The gain was disclosed in the company's shareholder proxy circular, but Mr. Verdun argues investors failed to understand the source of the units.

Mr. McCaughey, who has not left the bank, received a total of 219,095 CIBC deferred share units under the program, currently worth $17.6-million.
Financial Post, Duncan Mavin, 10 December 2007

There were more questions on Bay Street about Canadian Imperial Bank of Commerce's subprime losses yesterday as observers sought further clarity about just how big a mess the bank is in.

The latest speculation was around whether some of its multi-billion-dollar hedging contracts are heavily stacked against the bank. Rumours suggest financial guarantees the bank took out to cover US$4.6-billion of potential losses will not pay out for decades - in contrast, CIBC's losses would be booked in the accounts as soon as they arise, the speculation indicated.

Late yesterday afternoon, a spokesman for CIBC said payments to the bank under hedging contracts "mirror" payments it would have to make due to losses from subprime-related securities.

The speculation followed last week's revelation from the bank that its book of hedged collateralized debt obligations (CDOs) related to the U.S. subprime-mortgage market totals US$9.8-billion.

Already the bank has acknowledged its book is in the hole for billions of dollars, but CIBC said it had hedged those losses by taking out what amounts to its own guarantees with third parties, or counterparties.

But on Saturday, the Financial Post reported one of those third parties is facing financial difficulties of its own that might prevent it from paying out at all - a number of analysts say this will result in more than $2-billion of losses at the bank in the first quarter of 2008.

Any losses the bank eventually records in its hedged book of CDOs are in addition to almost $1-billion in losses the bank has already suffered in relation to its unhedged exposure to the U.S. subprime crisis.

Its total charges related to the mess are now expected to be at least $3-billion, significantly higher than those recorded by any other Canadian bank so far.

Yesterday's speculation, which the bank has denied, focused on questions about whether some of the bank's hedging contracts could see CIBC take US$2-billion or more in additional charges it cannot recover for decades.

If true, the bank could miss out on interest and would likely have to write down the value of such a long term interest payments, said one analyst who asked not to be named.

Also, "the longer away a payment is, the greater the potential you are never going to get it," the analyst said.

In a note on CIBC, Genuity Capital Markets analyst raised the issue of the timing of payments, saying "certain financial guarantors may be not required to settle in cash (on the principal) until the very end of the contract, which in this case can run for 30 to 40 years."

The issue "could have a significant impact on our estimates of core cash earnings per share, return on equity and ultimately valuation," he said.

Mr. Mendonca said the payment terms for CIBC's contracts are not yet clear.

As further details emerge about the full extent of CIBC's subprime mess, there is likely to be more focus on the bank's risk management processes.

Chief executive officer Gerry McCaughey took over the bank with a mission to rid it of a reputation for slipping up. As part of the process. Mr. McCaughey also clamped down on the bank's cost base.

However, with CIBC's capital markets division in trouble once again there will be question marks about whether Mr. McCaughey went far enough to eliminate risk at the bank, or whether his appetite for cost-cutting may have contributed to its problems if it reduced the bank's capacity to manage risk effectively.

Since the emergence of the bank's subprime problems, the CIBC CEO has acted decisively to eliminate capital markets risk - in early November, the bank agreed to the sale of its U.S. investment banking and related debt capital markets businesses to Oppenheimer Holdings Inc. The bank also parted company with Phipps Lounsbery, head of debt capital markets.

Last week, rating agency Moody's downgraded the bank from "stable" to "negative" saying it is concerned, especially because CIBC has been cited in the past for risk-management failings that appear not to have been fully addressed at senior levels.

Also last week, Mr. McCaughey said the bank had "underestimated the extent to which the subprime market might deteriorate and the degree to which that would impact securities that were structured to be very low risk."

He also said the bank's subprime exposure was too large for its risk appetite.

17 December 2007

TD Bank Rejects Taking-on Non-Bank ABCP Risks

Financial Post, Duncan Mavin, 17 December 2007

Toronto-Dominion Bank chief executive officer Ed Clark slammed claims his bank should bail out Canada's seized-up asset-backed commercial paper market since it could mean taking on risks the bank has been careful to avoid.

"We are being drawn into an issue that we haven't been involved in and [one where] our relationship is quite peripheral," Mr. Clark said in an interview Monday evening.

"Those that are involved, and thought they were going to make a profit that then goes sour, should step up to the plate proportionate to the [degree] which they are involved," Mr. Clark said.

The bank will be willing to consider measures that are in the best interests of TD shareholders and could provide liquidity to the market if it does not involve taking on risk, he said.

"If people need liquidity we are prepared to look at it, but we are not prepared to look at liquidity if it means we take on risk," Mr. Clark said. The TD chief is speaking out after a committee working to free up Canada's troubled $33-billion non-bank ABCP market missed its deadline for releasing a proposal on its restructuring plan for the second time last Friday.

Purdy Crawford, who heads up the committee, as well as Bank of Canada governor David Dodge have asked the big banks to provide billions of dollars in support of the illiquid market that collapsed in August.

Although discussions about how to resolve the crisis have been going on since the summer, TD's Mr. Clark said the first time he was asked to help out was just last week.

"We haven't been involved. We stayed away from this file and only last week we were asked, 'If we get toward a solution will you get involved?'"

The TD chief railed that he has not been privy to "a whole set of bilateral discussions going on here."

BMO Capital Markets bank analyst Ian de Verteuil said it is "a positive" for ABCP holders but not necessarily for bank shareholders that the big five banks have been asked to help out.

"Given their limited involvement in this situation, big bank CEOs' reluctance to become involved is understandable," Mr. Verteuil said.

TD is the only one of Canada's big six banks that has not announced a big credit-market writedown.

The bank's largest rivals have taken about $2-billion in credit crunch charges so far, including writedowns related to the ABCP market.

"I think it's understandable that people that benefited financially from these instruments in the first place are going to find themselves required to help dig this situation out," Mr. Clark said.

"I happen to be at a bank that didn't sell any of this to my clients and my customers and therefore didn't earn any money from them and therefore take an alternative view. "

The non-bank ABCP market has been frozen since August when issuers were unable to roll over maturing notes because of fears they were linked to the U.S. subprime mortgage meltdown.

When emergency liquidity providers declined to step in, a group led by the Caisse de dépôt et placement du Québec and other holders of the paper launched the so-called Montreal Proposal, under which the ABCP would be converted into longer-term notes.

Mr. Crawford's committee missed its deadline for releasing its restructuring plan on December 14 and set a new target date for the plans of January 31, 2008. The committee also aims to close the restructuring by March 14, 2008.

However, the latest delay has stretched committee's credibility.

"Another missed deadline increases odds of problems developing," said BMO Capital Markets' Mr. de Verteuil.

"Remember that some holders of the ABCP have not signed onto the Montreal Accord, and could launch lawsuits that would complicate progress.
The Globe and Mail, Tara Perkins, 17 December 2007

Toronto-Dominion Bank said Monday that it's willing to support the third-party asset-backed commercial paper market, but it's reluctant to take on risk by doing so.

"TD is willing to consider measures that support attempts to resolve liquidity issues in the financial markets," chief executive officer Ed Clark said. "However, our position has been that As Friday's self-imposed deadline to complete a restructuring proposal for the frozen $33-billion non-bank ABCP market loomed, players were still at a loss to agree on who would commit to providing emergency loans if the assets backing the restructured notes fall into trouble in the future.

A request was made that Canada's big five banks ante up as much as $1-billion apiece, prompting a confrontation Thursday night. The banks argued that they had little to do with the crisis, and so it would be tough to explain to their investors why they wound up on the hook for the money. Sources said TD was leading the negotiations for the banks.

In the wee hours Saturday morning, the committee that's working to restructure this market — led by lawyer Purdy Crawford — said it was extending its deadline until the end of January. Over the weekend, big investors such as the Caisse de dépôt et placement du Québec and foreign banks such as Deutsche Bank AG agreed to take on more risk, and in return the Canadian banks were asked only to put up about $500-million apiece, sources said.

A spokeswoman for Royal Bank of Canada said Monday that, "Although RBC is not a significant participant in the non-bank sponsored market, we will continue to be actively involved in finding a solution that returns our domestic commercial paper market to normalcy and preserves the interests of RBC shareholders."

Mr. Clark has recently been hammering away the message that TD was the only big Canadian bank to avoid making any writedowns related to the credit crunch in the most recent quarter.

At a recent conference with his senior management group, he said the stock market had "recognized we're running a different strategy — that we don't have the risks so many others have."

"We avoided the effects of the recent market turmoil," he said, according to a copy of his remarks that was filed with regulators on Friday. "We made the right decisions and we were rewarded for them."

"How am I feeling? Unbelievably optimistic," he told his managers, according to his remarks. "Just look around the world — there are few banks like TD. We had no writedowns reported in 2007. We protected our customers and clients from faulty asset-backed paper investments."

While that's helping the bank's stock, the market is also reacting to TD's decision to spend $8.5-billion (U.S.) on New Jersey-based Commerce Bancorp. "Even though Commerce is a terrific franchise, the markets don't like U.S. banking today," Mr. Clark told managers. "Our stock price is feeling the effects of that. But we're not worried."

Mr. Clark noted that 10 years ago, during Charles Baillie's first year as the bank's CEO, more than half of TD's earnings came from wholesale, or investment, banking. Now, it derives about one-fifth of its profits from investment banking while 80 per cent comes from basic consumer banking.

10 December 2007

Scotiabank Hit with Overtime Lawsuit

The Globe and Mail, Jacquie McNish, 10 December 2007

Bank of Nova Scotia is the latest bank to be targeted by a class action lawsuit which alleges that bank employees have been discouraged from claiming over time pay for extra work.

The lawsuit is separate from a class action that was launched against Canadian Imperial Bank of Commerce in June after Toronto bank teller Dara Fresco said she and thousands of her colleagues at the bank were repeatedly not paid when they worked overtime. She and other CIBC employees are seeing $600-million from CIBC.

Two Canadian law firms, Roy Elliott Kim O'Connor LLP and Sack Goldblatt Mitchell LLP which represent Ms. Fresco are also behind the Scotiabank lawsuit, which will be unveiled at a press conference this morning.

The action covers thousands of current and former non-management, non-unionized employees of Scotiabank who are or were personal bankers or other front-line customer service employees working at Scotiabank retail branch offices across Canada.

Cindy Fulawka, a personal banking representative who has worked in several Scotiabank branches in Saskatchewan and Ontario for over 15 years, is the representative plaintiff in the new lawsuit. Based on her own experience, she claims the unpaid overtime situation is widespread at the bank among non management employees.

A spokesman for Bank of Nova Scotia was not available to comment,.

Douglas Elliott, partner at Roy Elliott Kim O'Connor, said that the law firm has heard from numerous bank employees across the country since it launched the CIBC lawsuit.

“We said then that we suspected that CIBC was not the only Canadian bank that was failing to pay its employees for the hours they actually worked. This second case demonstrates that the problem does not appear to be unique to one bank,” Mr. Elliott added.

07 December 2007

Scotiabank Q4 2007 Earnings

RBC Capital Markets, 7 December 2007

• Scotiabank's Q4/07 core cash EPS of $0.94 were below our estimate of $0.99 and consensus estimates of $1.00. The increase over Q4/06 was 9%.

• Results were below our expectations in domestic banking on severe margin compression, but both international banking and wholesale banking divisions earned more than we had forecast.

• The quarterly dividend was raised to $0.47 per share from $0.45, as we expected.

• Our 2008 core cash EPS estimate of $4.35 (unchanged) is at the low end of management's 2008 core cash EPS target of approximately $4.30 to $4.50.

Outlook for Stock

• We maintain our Sector Perform rating and 12-month target of $54 per share.

• Scotiabank has, in our mind, above-average medium- and long-term growth prospects compared to its peers due to its presence in Latin America and the Caribbean, and it is seemingly less exposed to headline risk in the near term.

• The bank's 12.0x 2008E P/E is tied for highest among Canadian banks, which we believe caps potential expansion in relative valuation given its greater exposure to business lending and the rising Canadian dollar, while the domestic franchise lags the two leading banks', in our view.
The Globe and Mail, Tara Perkins & Jacquie McNish, 6 December 2007

Canaccord Capital Corp. is alleging that Bank of Nova Scotia received material non-public information about third-party asset-backed commercial paper in July and began reducing its own holdings of the paper, even as it continued to pitch the investment to clients.

The allegations have arisen as part of two lawsuits filed by investors against Canaccord in the Supreme Court of British Columbia.

Canaccord brought Scotiabank into the suits because the bank sold the ABCP to Canaccord, which in turn sold it to companies and individual investors.

Canaccord named Scotiabank's investment banking arm, Scotia Capital Inc., as a party to the suits, alleging that it made negligent misrepresentations, failed to warn Canaccord and breached its fiduciary duty.

Scotiabank denies each and every allegation and plans to defend itself vigorously, spokesman Frank Switzer said yesterday.

"Canaccord is a sophisticated participant in the market, they understood the nature of the products they were buying, and they didn't rely on us for advice," Mr. Switzer said, adding that Scotia Capital was not provided with any information it considered complete or material. "We continued to rely on the DBRS rating, which did not change, as did others, including, presumably, Canaccord," he said.

The suits are among the first of a potential wave of litigation that could hit the banks and investment dealers if the a co-operative of investors and banks known as the Crawford Committee (initially known as the Montreal Accord) fails to successfully restructure $33-billion of stricken ABCP into longer-term investments.

Legal sources said dozens of companies that have been stranded with troubled ABCP, structured by non-bank firms such as Coventree Inc., are furious that their banks sold them the notes in late July and early August when there were growing signs of turmoil.

These investors have quietly prepared potential lawsuits, but they have put the claims on hold until at least Dec. 14 when the Crawford Committee is set to unveil its proposals to restructure frozen ABCP.

Jeffrey Carhart, a restructuring specialist with Miller Thomson LLP, said his firm currently represents numerous companies that hold hundreds of millions of dollars in ABCP. "We really, really, really want the workout process to work, but if it doesn't it stands to reason that there is going to be litigation," he said.

The B.C. suits against Canaccord were launched by two investors, Gregory Hryhorchuk, the chief financial officer of a gold exploration company, and First Allied Development Corp., a B.C.-based company owned by Robert Madiuk.

Each suit names Canaccord and one of its salespeople as defendants for putting more than $100,000 of the investor's money into a third-party ABCP trust called Structured Investment Trust III (SIT III).

The suits allege Canaccord was negligent and breached its duty to the investors for several reasons, including failure to do a reasonable study of the securities and failure to warn of the purchase risks.

None of the allegations have been proven in court.

In its defence documents, Canaccord says that it did not guarantee the success of any advice it provided and that it was not a custodian to the investors. If those investors did incur losses, "it was the result of unexpected market occurrences, and not the fault of the defendant," it states.

It also cites the role of other parties, including credit rating agency DBRS, which gave SIT III commercial paper the highest rating possible. Canaccord says DBRS failed to take into account that the exposure of SIT III notes to U.S. subprime mortgages could result in a loss of confidence by the market, and therefore a lack of liquidity.

The rating agency also failed to take into account the limitations of the emergency lines of credit arranged for the trusts, Canaccord alleges. DBRS has not been named as a party to the lawsuits.

Canaccord also cites Coventree Inc. and its subsidiary Nereus Financial Inc., which created the SIT III trust, for failing to disclose to Canaccord the trust's actual exposure to U.S. subprime mortgages and for failing to limit the exposure. Neither Nereus nor Coventree have been named as a party to the lawsuits.

Scotia Capital, the lead dealer for SIT III ABCP, was named as a party.

It "actively and aggressively marketed [the paper] to Canaccord by means of frequent or daily written and oral solicitations and communications," Canaccord alleges.

It further alleges Scotia Capital received material information about the trust's exposure to U.S. subprime in July, and acted on that information.

On July 24, Scotia Capital and other dealers received a Coventree e-mail disclosing some of its trusts' exposures to U.S. subprime mortgage assets, including SIT III. Canaccord's defence alleges Scotia Capital received the same basic facts from sources before July 14.

"In or about July, 2007, Scotia Capital began to reduce, limit or eliminate its own SIT III ABCP inventory, and the SIT III ABCP owned by Scotia Capital clients, because of Scotia Capital's knowledge of undisclosed material information concerning the U.S. subprime exposure of Coventree sponsored ABCP," it alleges.

Between July 10 and Aug. 13, Scotia Capital began offering a higher relative rate of return on the paper, it adds. "Scotia Capital failed to disclose its knowledge to Canaccord that the rates were higher because Coventree and Nereus conduits, including SIT III, were experiencing increasing difficulty in finding buyers to purchase new ABCP to fund the payment of maturing ABCP."

It also says Scotia Capital had an ethical standard to resign as a seller of Coventree and Nereus paper after it allegedly received the material non-public information in July.

CIBC Q4 2007 Earnings

RBC Capital Markets, 7 Decembber 2007

We are lowering our 12-month target price per share from $105 to $95, based on lower valuation multiples and lower estimated excess capital in 12 months. Our new 12-month target price implies a forward P/E multiple of 10.0x, compared to the current trading multiple of 9.4x.

We are modeling $2.3 billion in pre-tax writedowns in Q1/08 related to unhedged and hedged exposures to U.S. CDOs and RMBS. We feel that this represents a scenario that is at the conservative end of the spectrum, but not impossible to fathom at this time.

We believe that CIBC will remain adequately capitalized if losses are limited to its unhedged exposures as well as to its exposure to an A-rated financial guarantor that is almost certainly ACA.

We believe that CIBC's stock will remain cheap relative to peers while the environment surrounding U.S. residential lending and financial guarantors remains clouded. The lack of certainty in performing worst-case analysis is a big negative for the stock price, in our view.

We maintain our Sector Perform rating. CIBC's stock has some attractive characteristics: (1) Expenses are being aggressively managed; (2) The bank has lower exposure to deteriorating business credit quality given the size of its loan portfolio; and (3) The dividend has upside potential as it currently only represents 40% of our estimated earnings for the next 12 months, which is the lower limit of the bank's target payout range is 40-50%.

Factors that we believe will keep the stock from outperforming those of its peers in spite of those positive factors are: (1) The environment surrounding U.S. residential lending and financial guarantors remains clouded, and the ultimate cost to CIBC is highly uncertain. (2) Domestic retail revenue growth lags the industry. (3) Shareholders that had bought CIBC as a low risk alternative to other banks may rethink their positions.
Financial Post, Duncan Mavin, 7 December 2007

Buying shares in Canadian Imperial Bank of Commerce is "essentially a bet on the subprime market," said Genuity Capital Markets bank analyst Mario Mendonca in a note after CIBC released a fourth quarter earnings statement that stunned the banking community by revealing the full extent of its multi-billion dollar exposure to the troubled U.S. housing market.

The bank said its writedowns have already reached $1-billion, and warned of significantly higher losses in the future related to its US$9.8-billion in hedged exposure to the subprime market. Some estimates suggest total writedowns could eventually be more than $3-billion, which would be significantly higher than any other Canadian bank has reported, putting CIBC in the same league as the big U.S. banks that have suffered badly from the subprime meltdown.

Shares of CIBC have dropped about 8% over the past two sessions. The revelations sparked a frenzy of activity among analysts on Bay Street, where fears are focused on the potential that counterparties to CIBC's hedges could fail outright and the potential that further weakening of the U.S. subprime market will cause CIBC's exposure to losses to get even bigger.

CIBC's stock lost ground again on Friday, sliding 3.5% after losing 5% on Thursday.

"The key risk area is to one counterparty [on a US$3.5-billion exposure] rated A," Mr. Mendonca said. "CIBC's credit protection (an asset) purchased from this counterparty is US$1.7-billion, but has likely increased to US$2.0-billion since the end of the quarter. We believe investors should prepare for a charge of US$2.18-billion or US$1.5-billion after tax. By our estimates, a charge of this size would reduce the banks Tier 1 ratio materially, but remain above 9.0%."

Mr. Mendonca's bearish view of the bank's subprime woes was echoed by a number of his peers.

Brad Smith of Blackmont Capital downgraded CIBC to a "sell" rating.

"Disclosure of the extent of the bank's gross US non-prime residential mortgage exposure can only be described as reflecting worst case scenario confirmation, reflecting a failure in certain internal risk controls," Mr. Smith said.

National Bank analyst Rob Sedran also downgraded CIBC's stock, and called the subprime exposure "troubling."

"The bank disclosed that its roughly US$10-billion in hedged exposure to subprime CDOs [collateralized debt obligation] and RMBS [residential mortgage backed securities] is hedged with eight counterparties, one of which (roughly 35% of notional exposure) is under credit watch with negative implications. As such, we believe CIBC's near-term risk profile is elevated."

RBC's Andre Hardy lowering his 12-month target price per share from $105 to $95.

"We are modeling $2.3 billion in pre-tax writedowns in first quarter of 2008 related to unhedged and hedged exposures to U.S. CDOs and RMBS. We feel that this represents a scenario that is at the conservative end of the spectrum, but not impossible to fathom at this time."

CIBC's fourth quarter earnings, revealed on Thursday, had surprised most observers because the underlying results were higher than expected. Profits for the final quarter of 2007 were $884-million, up from $819-million last year.

However, all eyes are on the bank's risky credit exposure "The near-term risk associated with subprime CDOs and RMBS is higher than we had previously assumed," Mr. Sedran said. "Moreover, we believe the uncertainty will remain as the bank works to lessen its exposure. Therefore, we are downgrading CM to Sector Perform."

The disclosure has also raised questions about how the bank could have run into trouble yet again. Chief executive officer Gerry McCaughey was supposed to have cleaned up the bank which had developed a reputation for being accident prone, especially after it took a $2.5-billion hit related to its role in the Enron scandal.

But it appears to be back to the drawing board for Mr. McCaughey, with some analysts even questioning whether his cost-cutting and belt-tightening measures may have contributed to the bank's latest problems.

Mr. Mendonca said CIBC's move into riskier wholesale banking be a function of, "Cutting too close to the bone in areas such as risk management, assessment, and monitoring; lack of growth in other areas, including and especially Retail Markets with the result that the bank was desperately searching for any form of revenue growth; and perhaps most importantly, a lack of experienced leadership at the very senior ranks."

Mr. McCaughey yesterday acknowledged the bank had understimated the extent to which the subprime market would deteriorate and the degree to which it would impact its structured products business. He also said the bank was working to reduce risk.

Mr. Mendonca said he can see "a scenario under which management so significantly downsizes the wholesale business as to make it only a very minor contributor to the bank's revenue and earnings."

Last month CIBC sold its U.S. investment banking business in a move that was widely perceived as a risk reduction measure.
Financial Post, 7 December 2007

Confirmation of CIBC’s credit default swap exposure has prompted Blackmont Capital analyst Brad Smith to downgrade his rating on the bank to “sell.”

“Disclosure of the extent of the bank’s gross U.S. non-prime residential mortgage exposure can only be described as reflecting worst case scenario confirmation, reflecting a failure in certain internal risk controls,” he told clients in a note.

However, Mr. Smith left his 2008 and 2009 earnings per share estimates unchanged given expectations that many of CIBC’s near-term losses anticipated in coming quarters will be considered “non-operating.”

He slashed his price target to $76 per share from $103 and his target price/earnings multiple to 8.5 times from 11.5 times.

The analyst said this reflects the level recently accorded to National Bank after its substantial asset-backed commercial paper exposure was revealed. However, National’s exposure may prove to be modest relative to CIBC’s newly confirmed challenges, Mr. Smith said.
The Globe and Mail, Sinclair Stewart & Tara Perkins, 7 December 2007

This year was meant to provide the capstone on Gerry McCaughey's quest to turn around the fortunes of Canadian Imperial Bank of Commerce. [CM-T] Annual profit was on pace for a record. The balance sheet was strong once again, and capital levels were high, meaning CIBC might finally be ready to follow its peers into the U.S. retail market. Most importantly, investors were beginning to believe Mr. McCaughey had righted the accident-prone bank, and eradicated a cowboy culture that has led to several costly — and embarrassing — problems.

They believed it until yesterday, anyway, when CIBC resurrected its well-worn reputation as the bank most likely to walk into a sharp object. The bank confirmed it has $9.8-billion (U.S.) worth of hedged exposure to the crumbling subprime mortgage market, and warned it could suffer "significant future losses" because of these positions. That number, which doesn't include an additional $741-million worth of unhedged exposure, was far greater than predicted, and several times higher than any of the other Canadian banks.

Unsurprisingly, CIBC's shares were hammered by the news, even though the full-year profit hit a record $3.3-billion.

Analysts scrambled to calculate the possible fallout. Ian de Verteuil, of BMO Nesbitt Burns Inc., said there is a risk the bank could be faced with $2-billion (Canadian) in additional charges during the first half of 2008, a figure which, combined with the $753-million in subprime writedowns CIBC has taken in the last two quarters, is bigger than the $2.4-billion (U.S.) in penalties CIBC paid three years ago to settle a class action lawsuit stemming from Enron Corp. Other analysts suggested the number could be even higher if ACA Capital Holdings Inc., a shaky bond insurer with which CIBC has $3.5-billion in exposure, tumbles into bankruptcy.

But the financial damage is only part of the problem. The bigger issue, arguably, is the credibility of Mr. McCaughey and his senior management team, who have repeatedly stressed the progress they've made at reducing the bank's risk profile. Several investors and analysts said yesterday that their faith in the bank had been shaken yet again, and predicted it will be a challenge for Mr. McCaughey to recapture that hard-won trust.

"Commerce unfortunately has a propensity to step in every pothole that there is along the road, and we were disappointed, as I guess the market was obviously too, with what's happened," said John Kinsey, a portfolio manager with Caldwell Securities Ltd. "I really don't want to come out flatly and say that it's bad management, but I mean it has to be something when you consider their record against the other four major Canadian banks. It's by far the worst and, as I said earlier, if there is a pothole in the road they just seem to be able to hit it."

Moody's Investors Service, meanwhile, placed the bank on credit watch negative, suggesting the magnitude of CIBC's exposure raised questions as to whether the bank's much-touted improvements in risk management had taken hold in the company.

"It pretty much looks like it's another Enron," lamented one analyst, who said the bank has a propensity to live up to even the more dire rumours in the marketplace. "All we need to do now is just walk up and down the street and any story we hear about CIBC is correct. They don't need an investor relations department — we'll just call up the hedge funds."

In a conference call to discuss the bank's fourth-quarter results, Mr. McCaughey acknowledged that he has more work to do on the risk management side.

"In our risk assessments, we underestimated the extent to which the subprime market might deteriorate and the degree to which that would impact securities that were structured to be very low risk," he said. "This, coupled with an overdependence on the extremely high ratings of these securities, resulted in the build up of exposures that are too large for our risk appetite."

The question on many investors' minds is how did this happen under the watchful eye of Mr. McCaughey, a retail veteran who has repeatedly shown an intolerance for needless risk, particularly within the investment banking arm CIBC World Markets.

When he took over as CEO in the summer of 2004, CIBC had just recorded its Enron charge. It also became engulfed in a mutual fund trading scandal that resulted in costly settlements with regulators. His first order of business was restoring the bank's capital strength, sloughing the bank's reputation as a volatile performer, and eliminating risk. Despite the size of the subprime exposure, it was not seen as a high-risk area, given the assets' credit quality, and was not singled out for priority attention.

Part of Mr. McCaughey's strategy was to halve the amount of capital allocated to the investment bank, a move that, theoretically, would remove CIBC from a lot of undesirable businesses. But it is clear that these moves did not go far enough in reining in a culture known both for its aggression and its tendency to behave like a U.S. bulge bracket firm.

Indeed, most of CIBC's foul-ups have been related to the U.S. market, and banking industry observers note that CIBC has followed the lead of larger U.S. rivals to a much greater degree than other Canadian banks.

"When all the smart people have left the party, they're still partying away, saying we've got to be here," explained one money manager who has owned CIBC stock for several years. "I'd be shocked if this doesn't give him the excuse to get into that part of the operation and clean it up, big time.

Mr. McCaughey alluded to his clean-up efforts yesterday, pointing out that the bank has replaced its head of debt markets, added new hedges for its subprime exposure, and begun exiting some of its structured products business. Its biggest move came this fall, when Mr. McCaughey jettisoned CIBC's money-losing U.S. investment bank.

"The risk/return characteristics of these businesses were not consistent with our expectations or the strategic framework we have set for CIBC, a framework we intend to vigorously adhere to," he said. "We also intend to place additional emphasis on building capital strength, which we believe to be prudent given the uncertainty of the current market conditions."

This capital, which would normally be earmarked for a possible U.S. retail acquisition, will now double as a cushion against potential writedowns. CIBC said yesterday it would take an additional $225-million in charges in the month of November on its unhedged exposure — exposure that is not insured against losses — bringing the total so far on that portfolio to $978-million. The far bigger worry, though, is on the $9.8-billion hedged book, especially given the uncertain financial health of U.S. bond insurers who provide these hedging contracts.CIBC said almost half of its $9.8-billion in hedged exposure is spread across five triple-A-rated financial guarantors, and has purchased an additional $420-million of protection against this group. A further 18 per cent is with two double-A insurers.

What investors are focusing on, however, is $3.5-billion worth of exposure that is thought to be hedged with ACA. These assets have already declined by half in value, meaning that ACA would owe CIBC $1.7-billion. These assets have likely deteriorated even further in recent months, and the question now is how much, if any, money will ACA be able to pay.

"How does CIBC get this big of an exposure in the first place?" asked another analyst. "And why $3.5-billion to one counterparty? These are two massive mistakes, and they're going to pay the price."

One money manager, who said he is a fan of Mr. McCaughey's overall strategy, nevertheless said investors will want to see proof that CIBC is making more progress on uprooting its old culture. As part of that effort, he said, there should be changes in the senior executive ranks.

"He's going to be embarrassed by this, and i think embarrassment provokes a reaction, he said. "But no change in leadership equals no change in culture, as far as I'm concerned."
Bloomberg, Doug Alexander, 6 December 2007

Canadian Imperial Bank of Commerce had its biggest decline in more than two years after the bank said it may take additional writedowns on investments tied to the U.S. mortgage market.

Canada's fifth-biggest bank said it expects pretax writedowns of C$225 million ($223 million) for November, bringing total pretax costs to almost C$1 billion. The bank also said it has about $4.3 billion in hedged derivatives contracts tied to subprime mortgages that may face ``significant future losses.''

``They just seem to be able to run into every pothole on the road and the other banks seem to be much better at avoiding these kind of things,'' said John Kinsey, who helps manage about $1.9 billion for Caldwell Securities Ltd. in Toronto. ``They just keep seeming to surprise us with their inability to avoid any calamity that comes along.''

Canadian Imperial fell C$4.69, or 5.4 percent, to C$82.40 at 4:24 p.m. on the Toronto Stock Exchange, leading other Canadian bank stocks lower. That's the biggest drop since Aug. 3, 2005, when the bank reported costs of $2.4 billion to settle claims over failed energy trader Enron Corp. The decline today wiped out C$1.57 billion in market value.

Chief Executive Officer Gerald McCaughey, 51, who took over the top job a day before the Enron announcement, said the writedowns don't meet the bank's goal of reducing risk.

The writedowns ``were not in line with our strategic imperative of consistent and sustainable performance,'' McCaughey said in the statement. ``Our focus in this area is on reducing existing risk.''

Moody's Investors Service said today it may cut the ratings of Canadian Imperial because its build-up of collateralized debt obligations ``highlights the weakness in the firm's strategic risk management.''

``Moody's is also concerned that it has cited CIBC in the past for risk management weaknesses, and despite expected improvements, it now appears the bank has not fully addressed appropriate risk-taking at a senior, strategic level,'' the ratings company said in a statement. Moody's changed its outlook on the bank to ``negative'' from ``stable.''

Canadian Imperial joined four other Canadian banks that reported combined writedowns of about C$1.9 billion on asset- backed investments in the quarter after U.S. mortgage defaults soared. Global banks and brokerages have recorded writedowns and losses of about $66 billion this year from the credit-market meltdown. Canadian Imperial's pretax writedowns on securities tied to U.S. home loans were C$463 million in the period, bringing total costs to about C$978 million this year.

``We underestimated the extent to which the subprime market might deteriorate and the degree to which that would impact securities that were structured to be very low risk,'' McCaughey said in a conference call with analysts.

Canadian Imperial had $784 million in unhedged investments in U.S. mortgage-backed securities and collateralized debt obligations as of Oct. 31.

The bank also said it has about $9.9 billion in U.S. subprime investments through derivative contracts hedged with counterparties. The derivatives contracts have a ``fair value'' of about $4.3 billion, according to Canadian Imperial.

Canadian Imperial has insurance against these investments through credit default swaps, McCaughey said. He said 47 percent of the hedged investments are spread across five AAA-rated guarantors, while 18 percent is with two AA-rated guarantors. The rest, with a face value of $3.47 billion, is with one A- rated guarantor that's under credit watch.

``Market and economic conditions relating to these counterparties may change in the future, which could result in significant future losses,'' the bank said in a statement.

Credit ratings of at least eight bond insurers are being examined by Fitch, Moody's and Standard & Poor's after a slide in the value of mortgage securities the companies guarantee. MBIA Inc. and Ambac Financial Group Inc., the world's two biggest bond insurers, are among those seeking to ward off potential credit-rating downgrades.

``We cannot be sure of who the counterparties CIBC refers to are, but concern will be that it is to bond insurers like ACA, MBIA and Ambac, whose ratings are under review,'' Desjardins Securities analyst Michael Goldberg said in a note.

Canadian Imperial's net income for the fourth-quarter ended Oct. 31 climbed to a record C$884 million, or C$2.53 a share, from C$819 million, or C$2.32, a year earlier, the Toronto-based bank said. Revenue rose 1.9 percent to C$2.95 billion.

Net income beat the C$2.44-a-share estimate from Brad Smith at Blackmont Capital Inc. Excluding one-time items, Canadian Imperial said it earned C$2.30 a share, topping the C$2.10-a- share median estimate of 10 analysts polled by Bloomberg News.

Consumer banking profit rose 82 percent to C$912 million, driven by higher volume growth and contributions from its Barbados-based FirstCaribbean Bank. A C$456 million pretax gain from the lender's stake in the Visa Inc. credit-card company boosted earnings. CIBC set aside C$132 million for bad loans, up from C$92 million a year ago.

Investment banking had a net loss of C$64 million in the period, compared with profit of C$218 million a year ago, because of writedowns.

Canadian Imperial said it met seven of its eight objectives for the fiscal year, including earnings-per-share growth of 10 percent. The bank said it aims to increase per-share earnings by 5 percent to 10 percent a year, on average, over the next three years.
Financial Post, 6 December 2007

CIBC’s fourth quarter results were better than expected with operating cash earnings per share (EPS) of $2.30, which was 23¢ ahead of the Street. Blackmont Capital analyst Brad Smith expected EPS of $2.23. Operating revenues were $2.9-billion, which was below the analyst’s forecast of $3.2-billion.

Mr. Smith also noted that CIBC confirmed that $9.3-billionn of its estimated $11-billion in gross exposure to U.S. subprime mortgages is currently hedged with investment grade counterparties.

“This confirms that [CIBC’s] ultimate potential loss exposure could be materially higher than previously thought,” he told clients in a note.

Mr. Smith rates CIBC a “hold’ with a $103 price target.
The Globe and Mail, Sinclair Stewart & Boyd Erman, 30 November 2007

Canadian Imperial Bank of Commerce could have as much as $10-billion worth of hedged exposure to the troubled U.S. subprime mortgage sector, although only a fraction of that amount is believed to be at risk of a writedown, according to people who have studied the bank's dealings.

While this level of exposure would be higher than most analysts have forecast, sources who closely monitorthe bank said it appears that CIBC has spread these hedges among many different parties, several of which are in good financial health.

The view is that the risk would be limited to between 10 per cent and 30 per cent of the portfolio - roughly $1-billion to $3-billion - if some of CIBC's hedging partners were to collapse and the bank had to take a charge.

That damage may already be reflected in CIBC's market capitalization, which has dropped about $3-billion in value over the past three weeks.

CIBC is expected to reveal the precise amount of its exposure, along with some information about its hedging counterparts, when it reports its year-end results next week, sources said yesterday.

Investors have been anxiously awaiting some clarity on the matter amid the growing deterioration of bond insurers, which provide guarantees on complex debt instruments held by banks like CIBC. The weakened state of these insurers has prompted speculation about massive losses at investment banks, and provided ammunition to short sellers that have helped drive down the price of CIBC's stock.

CIBC officials declined to comment on the matter, stating that the bank was in a so-called media quiet period, due to its earnings release scheduled for next week.

Three weeks ago, the bank announced it would take $463-million in fourth-quarter charges related to its exposure to the U.S. mortgage market. That was on top of a $290-million charge in the previous quarter. Both of these writedowns stemmed from $1.7-billion worth of collateralized debt obligations that were unhedged.

CDOs are complicated securities that pool together various forms of debt, including subprime mortgages.

The remainder of the bank's mortgage-related CDO and bond portfolio is hedged, meaning - in theory, at least - that CIBC has offloaded risk to third parties.

The problem is that several of the bond insurers who typically provide these hedges have been whacked by the mortgage fallout. If some of these suffer credit downgrades - or even bankruptcy - as many analysts speculate, the hedges will be impaired and banks will have to bring these CDOs and other mortgage-backed securities back on their books.

That could spawn $77-billion (U.S.) in charges for the world's largest banks, according to a report issued this month by analysts at JPMorgan Chase & Co. Given the magnitude of these potential losses, some bankers believe U.S. regulators will intervene to help prop up the capital strength of these insurers.

None of the major North American or European banks have quantified their hedged exposure, or disclosed their relationships with various insurers and other counterparties. That makes it almost impossible to predict the size or likelihood of charges with any degree of certainty.

This lack of information has been a boon for hedge funds, many of which have filled the void by issuing dire predictions about potential losses and simultaneously shorting bank shares. Short sellers borrow stock and agree to repay it at a later date in a bet that it will drop in value and they can profit from the difference.

CIBC, in part because it is thought to be heavily exposed to the subprime market, and in part because of its reputation for giving investors unpleasant surprises, has been particularly vulnerable. The company's shares were hammered last spring, when hedge funds openly speculated about its ties to the melting mortgage market. However, they rebounded sharply during the summer, once the bank reported its unhedged exposure.

This fall, however, as bond insurers began to falter, the rumour mill kicked into high gear once again. Hedge funds began calling Canadian bank analysts and faxing money managers to persuade them of the potential writedowns CIBC could face. They also seized upon the fact that CIBC's chief risk officer, Ken Kilgour, recently left on a one-month medical leave - a sign, they said, of internal pressures.

A CIBC spokesman confirmed that Mr. Kilgour was on leave, but only said he was expected back in early December.

On Nov. 15, an e-mail said to have emanated from a U.S. investment banking firm began circulating in the markets, warning that CIBC could be facing a charge of as much as $4-billion (Canadian).

"Sounds like the ultra bearish view is that at the [minimum] they have $2-billion in future writedowns coming. I have heard in excess of $4-billion," the unsigned note stated, before estimating that such charges could cut the bank's share price by 20 to 40 per cent. "Buzz is that its biggest counterparty is on the verge of filing for Chapter 11."

Around the same time, a hedge fund amassed a short position of almost two million shares in a few days of trading through RBC Dominion Securities Inc. CIBC's stock, which slid from $102 at the end of October to $92.30 on Nov. 14, dropped 4 per cent on Nov. 15, and was down more than 9 per cent over the next three days.

03 December 2007

Moody's to Review Rating of BMO's SIV

The Globe and Mail, Tara Perkins, 3 December 2007

Bank of Montreal stock fell nearly 3 per cent Monday on news that credit-rating agency Moody's Investors Service is cutting or reviewing ratings on $19.1-billion (U.S.) worth of securities in the bank's structured investment vehicle, Links Finance Corp.

"Links Finance's net asset value declined to 78 per cent from 94 per cent since Moody's review of September 5th," the rating agency said in a note Friday. The current asset value is inconsistent with Aaa/Prime-1 ratings, it added.

"Moody's will consider possible mitigating factors and expects to conclude its review within one week," it said.

A spokesman for BMO said the bank feels that Links' current rating reflects its underlying strong asset quality and the plans of the bank and other stakeholders to address the issues the SIV faces given the current state of the SIV market.

Last week, BMO said it had bought about $1.25-billion of senior notes out of its SIVs thus far. It has capped its participation at about $1.6-billion.

In addition to Links Finance, the bank has Parkland Finance Corp.

Moody's actions Friday came as the agency completed part of its review of the SIV sector. It confirmed, downgraded or placed on review for possible downgrade 79 debt programs worth about $130-billion (U.S.) that are part of 20 SIVs.

"The rating actions Moody's has taken today are not a result of any credit problems in the assets held by SIVs, but rather a reflection of the continued deterioration in market value of SIV portfolios combined with the sector's inability to refinance maturing liabilities."

RBC Q4 2007 Earnings

Scotia Capital, 3 December 2007

Q4/07 Earnings - High Quality - Solid - ROE 23%

• Royal Bank (RY) reported Q4/07 cash operating earnings of $1.01 per share and reported earnings of $1.03 per share, in line with expectations. Earnings increased 4% from $0.97 per share a year earlier. ROE was solid at 22.9%.

• RY earnings were solid with wholesale earnings growing at 15%, followed by Wealth Management earnings growth of 9%, and retail lagging at 5%, with U.S. Banking earnings disappointing declining 61%.

• Fiscal 2007 earnings increased 17% to $4.24 per share from $3.62 per share a year earlier.

ROE for fiscal 2007 was an impressive 24.9%

• Reported earnings were impacted by one-time items netting to positive $0.02 per share. The items included $326 million ($269 million after-tax or $0.21 per share) in VISA gains, $121 million ($79 million after-tax or $0.06 per share) in credit card liability adjustments and a $357 million ($160 million after-tax or $0.13 per share) write-down on CDOs and RMBSs. RY has provided additional disclosure on high risk assets reflecting nominal exposure.

• We remain optimistic about the earnings outlook for RY based on continued high revenue growth and expected normalization of expenses in retail and wealth management, recovery in fixed income trading, reduced earnings drag from U.S. business and currency and better results from Insurance.

High Operating Leverage

• Overall bank operating leverage was solid at 5%, with revenues and non-interest expenses adjusted for insurance and VIEs increasing 10% and 5%, respectively.

Canadian Banking Earnings

• Canadian Banking cash earnings (including Global Insurance) increased 5% to $711 million from $676 million a year earlier. Canadian Retail (excluding Global Insurance) earnings increased 7% to $609 million from $570 million a year earlier.

• RY Canadian Retail earnings growth at 7% compares favourably to BMO at 4% and NA growth of 5% but is well below TDCT earnings growth of 14%. RY management indicated it expects revenue growth in retail to accelerate in 2008 and at the same time, expense growth to slow, which would reaccelerate earnings growth in this very important segment.

• Revenues in the Canadian Retail segment increased 8.1% (excluding Global Insurance, VISA gain and credit card liability adjustment), with non-interest expenses increasing 5.7%, resulting in positive operating leverage of 2.4%.

• Global Insurance earnings declined 4% to $102 million from $106 million a year earlier. Business growth was offset by claims experience, less favourable than a year ago. Revenue growth from Insurance was negatively impacted by the bank's strategic reduction in exposure to the property catastrophe reinsurance business.

• Loan loss provisions (LLPs) increased 22% to $212 million versus $173 million a year earlier due to higher losses in personal and business loans and volume growth in the loan portfolio.

• Fiscal 2007 Canadian Banking (including Global Insurance) earnings increased 11% to $2,804 million versus $2,545 million in fiscal 2006. Canadian Retail (excluding Global Insurance) increased a modest 5% to $2,362 million from a year earlier. Global Insurance increased 48% to $442 million from $302 million a year earlier.

Canadian Retail NIM Declines 14 bp

• Retail net interest margin (NIM) declined 5 basis points (bp) sequentially and 14 bp from a year earlier to 3.10%.

Wealth Management Earnings Increase 9%

• Wealth Management cash earnings increased 9% to $185 million from $169 million a year earlier, reflecting strong net sales and growth in mutual fund assets.

• Revenue growth was an impressive 9.2% with operating expenses up 8.9% due to higher variable compensation, the J.B. Hanauer acquisition and heavy reinvestment.

• Both Canadian Wealth Management and U.S. Wealth Management revenue growth was strong at 10% and 7%, respectively.

• The appreciation of the Canadian dollar reduced wealth management earnings by 4% or $0.01 per share.

• Mutual fund revenue increased 11% from a year earlier to $373 million. Mutual Fund assets (IFIC) increased 19% from a year earlier to $81.9 billion.

• Wealth Management earnings in fiscal 2007 increased 26% to $784 million versus $624 million a year earlier.

U.S. & International P&B Earnings Decline Sharply

• The operating performance in the U.S. was disappointing as earnings declined sharply to $36 million from $101 million in the previous quarter and $92 million a year earlier, reducing earnings by $0.04 per share reflecting systematic deterioration in the U.S. housing market.

• LLPs increased sharply to $72 million from $17 million in the previous quarter and $5 million a year earlier relating to U.S. Residential Builder Finance. Although this is manageable within the context of RY, this abrupt change is not well received and causes concern about the U.S. business.

• Operating leverage was negative 10.2% with revenue growth of 6.1% and expenses growth high at 16.3%. The large increase in expenses was due to the acquisition of 56 branches and 10 de novo branches as the bank builds out its distribution platform.

• Net interest margin in the U.S. continues under pressure declining 18 bp sequentially and 26 bp year over year to 3.40%.

• Fiscal 2007 U.S. & International P&B earnings declined 2% to $299 million from $304 million a year earlier due mainly to weak earnings in the fourth quarter.

RBC Capital Markets Earnings Strong – 15% Growth

• RBC Capital Markets earnings were strong, increasing 15% to $346 million (excluding write-down on CDOs and RMBSs) from $300 million a year earlier. Including the writedown,

RBC Capital Markets earnings declined 38%.

• RBC Capital Markets earnings increased 11% in fiscal 2007 to $1,453 million from $1,306 million in fiscal 2006.

Trading Revenue Strong

• Trading revenue on a tax-equivalent basis was $630 million (excluding write-down on CDOs and RMBSs) versus $592 million in the previous quarter and $495 million a year earlier.

• Fiscal 2007 trading revenue was $2,551 million versus $2,240 million a year earlier.

Capital Markets Revenue Solid

• Capital markets revenue was $625 million versus $677 million in the previous quarter and $589 million a year earlier.

• Securities brokerage commissions increased 9% to $324 million from $296 million a year earlier, with underwriting and other advisory fees at $301 million, an increase of 3%.

• Fiscal 2007 Capital Markets revenue increased 13% to $2,570 billion versus $2,267 million in fiscal 2006.

Security Gains Negligible

• Security gains were a loss of $24 million or $0.01 per share versus $0.02 per share in the previous quarter and $0.01 per share a year earlier.

• Unrealized security surplus was $105 million at quarter-end (now contained in AOCI) versus the $89 million surplus at the end of the previous quarter and the $365 million surplus a year earlier.

Loan Loss Provisions Increase to 42 Bp

• Specific loan loss provisions (LLPs) increased to $263 million, or 0.42% of loans from $159 million or 0.29% of loans a year earlier. LLPs in Canadian Banking increased 22% to $212 million from $173 million a year earlier. The major increase was in the U.S. with LLPs increasing to $72 million versus $17 million in the previous quarter and $5 million a year earlier.

• Fiscal 2007 LLPs were $791 million or 0.32% of loans versus $479 million or 0.22% of loans in fiscal 2006.

• We are increasing our 2008 LLP estimates to $900 million or 0.37% of loans from $800 million or 0.34% based on higher loan volumes and higher loan losses from the U.S. We are introducing our 2009 LLP estimate at $1,000 million or 0.41% of loans.

Loan Formations Increase

• Gross impaired loan formations increased to $589 million from $383 million in the previous quarter and $309 million a year earlier. Net impaired loan formations increased to $435 million, up from $275 million in the previous quarter and $245 million a year earlier, the biggest increase was in U.S. wholesale (U.S. commercial real estate).

Tier 1 Ratio Stable at 9.4% – RWA Growth 11%

• Tier 1 capital was 9.4% versus 9.3% in the previous quarter, but declined from 9.6% a year earlier.

• Risk-weighted assets increased 11% to $247.6 billion. Market at risk assets also increased 11% to $16.3 billion.

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

Exposure to High Risk Assets

Canadian Non Bank ABCP
• $4 million of direct holdings.
• Nominal participation as distributor or liquidity provider.
• No holdings in money market funds.

Exposure to SIVs (Structured Investment Vehicles)
• No direct sponsorship of SIVs.
• $1 million of direct holdings.
• $140 million of liquidity facilities (none drawn).
• $88 million of normal course interest rate derivatives (none impaired).
• Money market funds do not hold SIVs.

U.S. Sub-Prime CDO and RMBS Exposure
• $216 million of net exposure to U.S. sub-prime CDOs (held-for-trading).
o CDS protection of $240 million, recorded at fair market value of $104 million with counterparties rated less than AAA.
o Other CDSs provide additional $1,053 million in protection against gross exposure and are collateralized or with counterparties rated AAA.
• $388 million of exposure to U.S. sub-prime RMBS (available-for-sale, but intention to hold to maturity).
o No net exposure after $1,113 million in CDS protection with AAA rated counterparties or collateral.
• Total U.S. sub-prime CDO and RMBS exposure equates to 0.1% of assets.

Exposure to Monoline Insurance

• Credit derivative protection is predominantly from monoline insurers rated AAA by S&P and Moody's.

LBO Exposure
• $1 billion of underwriting commitments, with none over $250 million.
• Commitments represent less than 0.2% of assets.

Level 3 Securities (Unobservable)
• Level 3 securities are 2% of assets or $12 billion representing 54% of common equity.

Recent Events

• On September 6, 2007, RY announced its intention to acquire Alabama National BanCorporation (ALAB-O) through RBC Centura for US$1.6 billion or US$80 per ANB share. The deal price represents a P/E multiple of 19.8x on 2007 earnings estimates, 3.02x price to tangible book, and a 24.7% core deposit premium. The transaction is expected to close in early 2008 and be accretive to RY’s earnings in fiscal 2009.

• On October 2, 2007, Royal Bank announced plans to acquire Trinidad and Tobago’s RBTT for approximately US$2.2 billion or US$6.33 per share, 60% cash, and 40% common shares. The number of RY shares received by RBTT shareholders is subject to a 10% plus/minus collar based on a RY share price of US$54.42. The acquisition price is an 18% premium on RBTT’s closing price on September 28, 2007, and a 27% premium on RBTT’s average share price over the last 12 months. The transaction is expected to be accretive in fiscal 2008.


• Our 2008 earnings estimate is unchanged at $4.80 per share which is $0.20 per share above the high end of the bank's guidance of $4.50 per share to $4.60 per share. We are introducing our 2009 earnings estimate at $5.30 per share.

• Our 12-month share price target remains unchanged at $75, representing 15.6x our 2008 earnings estimate or 14.2x our 2009 earnings estimate.

• We maintain our 1-Sector Outperform rating on the shares of Royal Bank based on: strength of franchise and operating platforms, particularly retail banking and wealth management; higher than bank group ROE; and no valuation premium.
Financial Post, Duncan Mavin, 3 December 2007

Analysts are watching RBC’s U.S. segment closely following signs the bank’s profits from its U.S. business are under pressure from the weakened credit environment and the rising Canadian dollar.

The bank turned in fourth quarter earnings broadly in line with expectations (the bank’s earnings per share of $1.01 compared to consensus among most analysts of about $1.03). But operating profit from the international and U.S. segment of $92-million was down 18% from last year, and loan loss provisions at RBC Centura — RBC’s U.S. retail bank — were on the rise.

“Results at Centura [RBC’s U.S. retail bank] must have been ugly,” says Desjardins Securities analyst Michael Goldberg, who notes that Centura’s results are not split out by the bank.

Blackmont Capital analyst Brad Smith also expressed concern.

“While appreciating the conservative approach to credit provisioning reflected in the U.S. segment results, we remain concerned that continued slowing of the U.S. economy may result in an acceleration of the credit deterioration already making itself apparent in the U.S. housing credit market,” Mr. Smith said.

Mr. Smith lowered his 12-month target price for RBC to $62.00 from $65.00.

Desjardins’ Mr. Goldberg maintains his $60.50 target price and “Hold–Average Risk” rating on RBC.

“We believe that further risk of trading markdowns is small, but RBC is vulnerable to increasing U.S. and Canadian economic uncertainty,” he said. “We see 2008 shaping up as a year of flat earnings and more moderate dividend growth.”
The Globe and Mail, Janet McFarland, 1 December 2007

Royal Bank of Canada is not concerned about a "contagion" of U.S. subprime financial woes hitting other lending portfolios and reducing profit more broadly at its RBC Centura unit in the southern United States.

The bank retains confidence in its U.S. banking operations, despite recording a $357-million writedown in the fourth quarter for weakness in subprime mortgage securities, chief executive officer Gordon Nixon said yesterday.

"We certainly remain committed to our long-term strategy of building a strong retail banking operation in the U.S. Southeast," he said during a conference call with analysts.

Also during the call, which was dominated by questions about the bank's exposure to subprime mortgages and problematic commercial paper, chief risk officer Morten Friis said he is not worried by media reports that financial problems in U.S. real estate will soon spread to other loan portfolios in the consumer and business sectors.

"While we all read the press about the worries about contagion into other areas, it has yet to show up in any of those portfolios," he said.

"Current performance is strong and we don't anticipate the spread into these portfolios any time soon. ... I think to the extent you have contagion it will take a little longer until it hits portfolios of the type we have at Centura."

The bank reported yesterday a fourth-quarter profit of $1.32-billion and a profit of $5.49-billion for the full year, up 5 per cent and 16 per cent respectively over last year.

Although RBC took a $357-million pretax writedown on its holdings of securities related to the U.S. subprime real estate market and other collateralized debt obligations, the hit was offset by a one-time pretax gain of $326-million from its shares in Visa Inc., which is going public.

The bank warned, however, that it expects growth to slow next year, cutting its growth outlook for diluted earnings per share to between 7 per cent and 10 per cent, compared with 17 per cent in 2007.

Meanwhile, shares of Canadian Imperial Bank of Commerce gained ground yesterday despite a report in The Globe and Mail that the bank will reveal next week it could have as much as $10-billion worth of hedged exposure to the U.S. subprime mortgage sector, although only a fraction of that amount is believed to be at risk of a writedown. CIBC shares climbed $1.46 to $88.85.

RBC offered more detailed disclosure on its subprime exposure yesterday, reporting that it also has $216-million of net exposure to U.S. subprime collateralized debt obligations of asset-backed securities, and $388-million in U.S. subprime residential mortgage-backed securities that it intends to hold until maturity.

Analyst André-Philippe Hardy at RBC Dominion Securities Inc. said the disclosure was "extremely helpful," and is what the market is also looking for from CIBC next week so investors can do worst case scenario analysis without guessing on exposures.

Analyst John Aiken said RBC's fourth-quarter earnings were "disappointing" and the targets for next year may prove challenging.

"That said, Royal's domestic franchise remains as solid as ever and is still the true earnings engine for the bank," Mr. Aiken wrote in a research note.

RBC is one of the banks that causes the least concern about "unpleasant surprises," he said, but cautioned that its share price may fall due to slower growth in 2008, reiterating his "neutral" rating on the shares.
Financial Post, Jonathan Ratner, 30 November 2007

Quarterly results from Canada’s biggest bank may have further calmed investor fears about the financial services sector. Shares of Royal Bank of Canada rose slightly in early trading, but had lost some ground as of 11 a.m. ET.

The bank reported fourth quarter operating cash earnings per share (EPS) of $1 on Friday morning, beating Blackmont Capital’s estimate of 97¢ but missing the consensus by a penny. Net revenue of $5.1-billion was in line with analyst Brad Smith’s forecast, as were loan loss provisions of $263-million.

Guidance for 2008 EPS growth from RBC was in the range of 7% to 10% – also in line with expectations, the analyst wrote in a note to clients.

“Overall, we view the Q4 results as being of good quality and modestly above expectations,” Mr. Smith said, maintaining his “buy” recommendation and $65 price target. RBC shares have risen roughly $4 so far this week, closing at $53.67 on Thursday.

Dundee Securities analyst John Aiken wasn’t as impressed. He said RBC’s results were disappointing given the relative strength in earnings from both Bank of Montreal and Toronto-Dominion Bank.

And while RBC’s targets for 2008 look good, he says meeting them could be challenging given higher than expected provisions for credit losses in both domestic and U.S. personal and commercial banking, “particularly if Royal is unable to receive some relief on net interest margins in the U.S.”

“With that said, RY’s domestic franchise remains as solid as ever and is still the true earnings engine for the bank,” Mr. Aiken wrote in a note to clients.

He added that RBC is one of the banks that yields the least concern in terms of negative surprises and is therefore a good long-term holding for most investors. Nonetheless, the analyst thinks its premium valuation could see some pressure and the stock could give up some of its recent gains.

Mr. Aiken continues to rate RBC at “neutral” with a $56 price target.
Bloomberg, Doug Alexander, 30 November 2007

Royal Bank of Canada, the country's biggest bank, recorded its slowest quarterly profit growth in two years on a slump in U.S. lending and a writedown for debt linked to the subprime-mortgage market.

Net income for the quarter ended Oct. 31 rose 4.9 percent to C$1.32 billion ($1.33 billion), or C$1.01 a share, from C$1.26 billion, or 96 cents, a year earlier, the Toronto-based bank said today in a statement.

Royal Bank fell after the company reduced its profit growth target to between 7 percent and 10 percent for this fiscal year because of a slowing economy, the rising Canadian dollar and tightening credit conditions in the U.S. Per-share earnings rose 17 percent in fiscal 2007.

``There are some soft spots coming up,'' said John Kinsey, who helps manage $1.9 billion at Caldwell Securities Ltd. in Toronto, including Royal Bank stock. ``The disappointing thing about their report was the outlook for 2008. That will disappoint quite a few people.''

The shares fell 67 cents, or 1.3 percent, to C$53 at 4:10 p.m. on the Toronto Stock Exchange, the only Canadian bank stock to decline. The stock has fallen 4.5 percent this year, compared with a 2.4 percent drop for the nine-member Standard & Poor's/TSX Banks Index.

Merrill Lynch & Co. analyst Sumit Malhotra said Royal Bank earned C$1 a share excluding items, missing his per-share estimate of C$1.04.

The bank said it met four of its five financial targets this year, including earnings-per-share growth of at least 10 percent. Revenue rose 5 percent to C$5.62 billion, the bank said. Royal Bank set aside C$263 million for soured loans, compared with C$159 million a year ago.

``We do expect both the U.S. economy and the Canadian economy to slow from current growth rates,'' Chief Operating Officer Barbara Stymiest said in an interview. ``That is one of the fundamental reasons why we've lowered our outlook for earnings per share growth.''

Royal Bank is one of five Canadian lenders that announced combined writedowns of about C$1.9 billion this month after the value of their debt investments deteriorated amid a global credit crunch. For Royal Bank, the writedowns were offset by a C$269 million gain from its stake in the Visa Inc. credit-card company, and increased deposits and mortgages in Canada.

Investment-banking profit fell 38 percent to C$186 million from a year ago after the bank recorded a C$357 million pretax writedown for its investments in U.S. subprime mortgage securities.

Royal Bank has C$216 million of net exposure to U.S. subprime collateralized debt obligations and C$388 million in investments of U.S. subprime residential mortgage-backed securities, Chief Executive Officer Gordon Nixon said in the statement. That's less than 0.1 percent of the bank's assets, he said.

Royal Bank had C$4 million in Canadian non-bank asset- backed commercial paper and C$1 million invested in structured investment vehicles, the bank said in a slideshow presentation on its Web site. Royal Bank also has commitments to provide up to C$140 million in emergency funding for the so-called SIVs, which borrow short-term to invest in longer-dated securities such as asset-backed bonds and bank debt.

``We believe our exposure is well contained given the size of the organization,'' Stymiest said.

Total trading revenue fell 64 percent to C$160 million after a C$187 million loss from interest rate and credit trading reduced revenue.

A stronger Canadian currency compared to the U.S. dollar and British pound also pared investment banking profit by C$28 million. The Canadian currency gained 17 percent this year against the U.S. dollar, touching an all-time high on Nov. 7 before weakening in the past three weeks.

Canadian consumer-banking profit rose 33 percent to C$899 million, driven by higher credit-card revenue and growth in mortgages and personal deposits. Royal Bank recorded a C$326 million pretax gain from revaluing its investment in Visa after a reorganization of the credit-card company ahead of next year's initial public offering. The bank also said it had a C$121 million pretax charge related to its credit-card loyalty program.

Profit from U.S. and international consumer banking, which includes Raleigh, North Carolina-based RBC Centura, fell 73 percent to C$21 million on higher loan-loss provisions amid a deteriorating U.S. housing market. That's the smallest profit in at least nine quarters for that business.

Royal Bank resumed buying consumer banks in the U.S. last year with takeovers of American Guaranty & Trust and Flag Financial Corp. In March, Royal Bank bought 39 branches in Alabama from AmSouth BanCorp. and on Sept. 6 agreed to buy Alabama National BanCorp. for $1.6 billion in cash and stock.

``Given the uncertain economic and banking environment in the U.S., the downturn in credit quality is concerning,'' Malhotra said in a note. Malhotra, who doesn't own the shares, downgraded the stock from ``buy'' to ``neutral'' on Nov. 1.

Wealth management earnings, which include mutual funds sales, rose 9.8 percent to C$180 million from a year ago.
Reuters, Lynne Olver, 30 November 2007

Royal Bank of Canada is comfortable with its U.S. loan portfolio and committed to its pending acquisition of Alabama National BanCorp , bank executives said on Friday, after the slumping U.S. housing market dented Royal's fourth-quarter profit.

"We are very positive on the Alabama National acquisition," Chief Executive Gord Nixon said on a conference call, referring to the US$1.6 billion deal that is expected to close in early 2008.

Royal Bank's plans for its U.S. retail business over the next year include integrating Alabama National and managing "the real estate issues" as best it can, Nixon said.

"We think we'll come out of that with a good platform and a good asset base."

The deteriorating U.S. housing market hurt fourth quarter profit, as Royal took higher U.S. provisions for credit losses and recorded a C$160 million writedown on securities related to the U.S. subprime mortgage market.

Royal, Canada's largest bank, said overall profit rose 5 percent to C$1.32 billion ($1.32 billion) in the three months ended October 31, or C$1.01 a share.

That was up from C$1.26 billion, or 96 Canadian cents a share, in the same 2006 period, but marked a slowdown from double-digit profit growth earlier in the year.

Fourth-quarter profit slid 73 percent in Royal's U.S. and international banking segment, to C$21 million, as loan loss provisions jumped to C$72 million from C$5 million a year earlier. That was almost entirely due to the residential builder finance business of its RBC Centura unit in the U.S. Southeast.

Credit problems in this portfolio are primarily contained to Georgia and California, Royal Bank's chief risk officer, Morten Friis, said on the conference call.

The bank stressed that its builder loans makes up less than 20 percent of RBC Centura's loan portfolio.

"Higher provision levels are probable given the expected weakness within the residential and commercial real estate markets in the U.S. Southeast," Credit Suisse analyst Jim Bantis said in a research note.

Royal Bank also said that economic growth looks set to slow next year, and trimmed its 2008 "objective" for overall earnings per share growth to between 7 percent and 10 percent.

In 2007, the bank's actual increase in EPS was 17 percent, far outpacing its goal of more than 10 percent.

Full-year profit rose 16 percent to a record C$5.5 billion.

Nixon said domestic banking should remain strong next year.

"I wouldn't overemphasize the word slowdown, I think it's still going to continue to be a reasonably good market," Nixon said, noting that unemployment rates remain low and real estate inflation hasn't been as severe as in other countries.

Fourth-quarter profit in Royal's core Canadian banking and insurance operations climbed 5 percent to C$709 million, excluding a Visa restructuring gain and other items.

Its wealth management unit saw quarterly profit increase 10 percent to C$180 million.

But capital markets profit fell 38 percent to C$186 million on the U.S. subprime mortgage-related writedowns.

For 2008, the bank kept most of its 2007 objectives. It aims to earn more than a 20 percent return on equity, and to pay out 40 percent to 50 percent of profit as dividends.

In the year just ended, return on equity was 24.6 percent and the dividend payout ratio was 43 percent.

Shares of Royal Bank fell 1.2 percent on the Toronto Stock Exchange, closing down 67 Canadian cents at C$53 a share.

The stock is down 5 percent this year, underperforming competitors Bank of Nova Scotia and Toronto-Dominion Bank.
Bloomberg, Stephen Kirkland and Jon Menon, 30 November 2007

Credit Suisse Group raised its recommendation on global banks to "benchmark" from "underweight," citing valuations, growth prospects and lower interest rates.

Global economies will avoid a hard landing, underlying profitability should improve and short rates will fall "significantly," strategists including Andrew Garthwaite wrote in note published today.

Credit Suisse has "outperform" ratings on Intesa Sanpaolo SpA, Unione di Banche Italiane Scpa,, National Bank of Greece SA, DBS Group Holdings Ltd. and KBC Groep NV, because they face fewer funding constraints, the report said. Brazil, Italy, Canada, Singapore and Greece are the ``safest'' regions for banks, where "indebtedness and financial penetration is low and property affordability is least challenging," the report said.

The report comes after financial institutions, which have written down more than $65 billion for debt related losses, face higher credit costs related to the collapse of the U.S. subprime mortgage market. The falling value of subprime assets globally may reach $400 billion, Deutsche Bank AG analysts wrote Nov. 12.

Credit Suisse also highlights its ``outperform'' rating on UBS AG, which trades below its breakup value. U.S. investment banks' earnings will increase 26 percent in 2008, according to the median of analysts' estimates, said the note.