09 May 2008

Manulife Q1 2008 Earnings

RBC Capital Markets, 9 May 2008

Q1/08 core EPS of $0.57 was well below our $0.73 estimate and the consensus estimate of $0.72.

• The quarter was disappointing, highlighted by greater sensitivity to equity markets than we expected. However, the causes of the miss should not be as detrimental to earnings in Q2/08 and beyond and Manulife continues to grow its core business.

• This was a disappointing quarter from a growing company operating in a tough macro environment, not a miss that causes us to conclude that the company is broken.

• We have lowered our estimated EPS by $0.15 to $2.95 in 2008 and by $0.10 to $3.35 in 2009 mainly to reflect the greater than anticipated impact of equity markets on the earnings of the company but believe that bottom line results will improve significantly in upcoming quarters versus Q1/08.

• Our 12-month target price of $41 is down from $42, reflecting our lower estimated EPS.

• We continue to rate Manulife's shares as Outperform based on the company's sales and earnings growth track record, excess capital holdings, and growth prospects in Asia. Diversity of operations limits (but does not eliminate) downside earnings risk and reserves appear conservative, with large provisions for adverse deviations relative to reserves and a track record of booking experience gains. The company remains well positioned to make acquisitions if attractive opportunities arise.

• Manulife's stock trades at 11.6x NTM EPS, versus 11.0-12.1 times for its peers and a 5-year average of 13.3x. We expect lifecos to trade at higher multiples in the medium term, but trading multiples could remain below the 5 year average for some time given the potential negative impact of lower interest rates, probable deterioration in credit quality, and uncertain equity markets.
Scotia Capital, 9 May 2008


• A significant miss. EPS was $0.57, well below our $0.73 estimate and consensus at $0.71, primarily due to weak equity markets.

• Volatility increases and earnings quality still difficult to decipher - CEO to step down. This, combined with the announcement that CEO D'Alessandro will step down May 2009, all suggests that MFC's valuation premium versus the group will more than likely continue to contract. Given potential management changes we expect no near term acquisition catalyst.

• Reducing EPS estimates by $0.09 in 2008 and $0.06 in 2009. The company noted the QOQ decline in equity markets (down 11% on a weighted average basis by geography) hurt EPS by nearly $0.18 in the quarter (most of which was reserve related as the company's variable/segregated business remains largely unhedged), suggesting the company would have reported $0.75, $0.02 above our estimate, had equity markets "behaved normally" in the quarter. Should equity markets continue their rebound since the end of Q1/08 (they're up nearly 8% QOQ using the same weighted average metric by geography) we expect we could likely get the majority of this back before the end of the year. That would imply we essentially leave our numbers unchanged. But instead we're reducing our EPS estimates by $0.09 in 2008 to reflect a lower level of gains in these tougher economic conditions (largely lower gains from private equities, alternative investments and "other assets") and a tougher credit environment.

• Source of Earnings Analysis suggests that outside of the negative impact of the equity markets, experience gains/assumption changes were exceptionally large, helping EPS more than normal, the extent to which may not necessarily be sustainable. Two items we can point directly to include changes in actuarial assumptions, which, when measured as a percent of actuarial reserves, were above their long term average, contributing an additional $0.03 to EPS, and an extraordinarily large 16% annualized return on "other assets", contributing an additional $0.03 in EPS over its usual 8%-9% yield. With the earnings release noting "favourable investment results" throughout several divisions, as well as good claims experience, as well as still very good credit experience, we believe there was likely an additional $0.03-$0.06 in other favourable experience gains, over and above the normal runrate, when measured as a percentage of actuarial liabilities. Obviously the equity market decline hurt EPS, likely by the $0.18 indicated by management. But the other "positives" helped EPS to the tune of $0.09-$0.12. Exhibit 1 includes our Source of Earnings analysis, where we suggest EPS was hurt by just $0.06 versus long term average. We believe the continued reliance on these experience gains to propel the bottom line will continue to lead to earnings volatility and earnings that may be construed to be of lower quality.


• Top-line momentum continues. Another great quarter in this regard, with U.S. individual insurance sales up 42%, U.S. variable annuity sales up 18%, and Canadian wealth management sales up 12%. Asia and Japan were strong. The company's ability to continue to expand distribution with an innovative product array is definitely its key strength.

• After a couple years of struggling Japan is up nicely. After having declining net income in 2005 and 2006 excluding the impact of currency, Japan's net income increased 23% excluding FX, despite difficult equity markets, with exceptionally strong sales growth (wealth management sales were up 77% and individual insurance sales doubled over a weak Q1/07).

• Poised for exceptionally strong 14% EPS growth in 2009. This could be much higher if in 2009 average equity markets appreciate above our 7%-8% expectation and the C$ continues to weaken versus the USD and the Yen. Manulife is the most sensitive of the Canadian lifecos to equity markets (a 10% change in equity markets, over and above our 7%-8% estimate could add an additional 8% to EPS growth), and the most sensitive to currency (a $0.95 Canadian dollar in 2009 versus our parity assumption could add another 4% to EPS growth).

06 May 2008

Preview of Banks' Q2 2008 Earnings

Scotia Capital, 6 May 2008


• Banks begin reporting second quarter earnings May 27. We are trimming our 2008 and 2009 earnings estimates 2% and 3%, respectively, due to slowing economic activity and difficult capital markets. Return on equity is expected to remain in the 20% range.

• We are expecting second quarter earnings to decline 2% YOY and 5% QOQ due to a drag from the appreciating Canadian dollar (Exhibit 14) and lower wholesale banking earnings. We expect ROE to remain high at 20.5% for the quarter. We expect MTM writedowns to be modest except for CM. CM could potentially recognize a $1 to $2 billion MTM this quarter with the market factoring in some of this.

• We expect earnings momentum (Exhibit 5) to remain negative in Q3 shifting to positive growth in Q4/08. The reacceleration in earnings momentum in Q4 is expected to be a catalyst for dividend increases.

• Bank stocks have bounced nicely from the March 17 (Bear Stearns rescue) lows but they still have a lot of upside.

• Canada's superior banking system, solid economy with well capitalized banks with high quality balance sheets is a competitive advantage.

• We continue to recommend aggressively buying the bank stocks.

Banks Begin Reporting Second Quarter Earnings May 27

• Banks begin reporting second quarter earnings, with Bank of Montreal (BMO) and Bank of Nova Scotia (BNS) on May 27, followed by Toronto-Dominion Bank (TD) and Laurentian Bank (LB) on May 28, Canadian Imperial Bank of Commerce (CM), National Bank (NA) and Royal Bank (RY) May 29 and Canadian Western (CWB) closing out reporting June 5. Scotia Capital’s earnings estimates are highlighted in Exhibit 1.

Trimming 2008 and 2009 Earnings - ROE 20%+

• We are trimming our 2008 and 2009 earnings estimates for the bank group by 2% and 3% (Exhibit 2), respectively due to economic deterioration and difficult capital markets environment. Scotia Capital Economics has lowered its 2008 GDP forecast to 1.3% from 1.5% and 2009 to 1.9% from 2.0%.

Retail NIM Attempting to Stabilize?

• Domestic retail banking earnings are expected to be relatively solid this quarter, although, net-interest income may decline sequentially due to fewer days in the quarter. The retail net interest margin continues to have very difficult YOY comparisons, with the margin expected to decline 14 bp YOY in Q2. If the retail NIM stabilizes in the 280 bp range we expect YOY comparisons (Exhibit 13) to improve substantially in Q4/08. We expect the retail net-interest margin to show signs of stabilizing in the quarter after essentially declining since 2001 (briefly stabilizing slightly in 2005 and 2006). We expect RY and TD to lead the bank group in retail banking revenue and earnings growth, given the strength and size of their platforms.

Narrower Credit Spread/Steeper Yield Curve - Bodes Well for Overall NIM

• The prime-BA spread has returned to more normal levels at 165 bp up from 154 bp in the previous quarter but similar to 166 bp a year earlier. The credit spreads have improved recently and the yield curve has steepened which should help the banks overall net interest margin going forward. The BA-T-Bill spread improved immensely declining from the record high of 215 bp (March 17) to 58 bp. This level is still higher than the normal 20-30 bp range.

Wealth Management - Solid but Muted Growth

• Wealth management earnings are expected to be weak due to a decline in retail brokerage activity and lower growth in mutual fund assets. Year-over-year comparisons may be difficult as the 2007 RRSP season was the strongest on record and market activity was robust. Although equity markets were down versus a year earlier with the exception of the S&P/TSX, average bank mutual fund assets increased 5%. The growth in AUM may result in modest year-over-year improvement in Wealth Management earnings. Comparisons will become less difficult beginning in Q3/08.

• RY led the industry in net sales this quarter with solid LTA sales and very strong money market net sales.

International Banking - Negative Impact from Appreciating C$

• International earnings are expected to remain under pressure this quarter as the result of the appreciating Canadian dollar. The Canadian dollar appreciated (Exhibit 14) an average of 13% versus the U.S. dollar and 10% versus the Mexican peso from a year earlier. We expect the currency drag to lessen by Q3/08 and be fully removed by the fourth quarter.

• TD Ameritrade is expected to contribute C$67 million or C$0.09 per TD share in the second quarter versus C$0.12 per share in the previous quarter and C$0.10 per share a year earlier.

• Second quarter earnings are expected to include RY's acquisition of Alabama National which closed on February 25, 2008 while TD's acquisition of Commerce Bancorp will not be reflected until Q3/08 earnings are released.

Wholesale - Last Quarter of Meaningful Writedowns

• Wholesale earnings are expected to be weak again this quarter due to lower capital markets activity and continuing writedowns in the trading book although modest.

• We expect trading revenue to be weak due to continued market volatility and increased risk aversion on the part of the banks. The lower number of M&A deals is also expected to be a drag on earnings. The number of M&A deals that closed in the quarter declined 12% sequentially and 6% from a year earlier and the value of closed deals was flat QOQ and declined 39% from a year earlier. The value and number of pending M&A deals declined 24% and 12%, respectively.

• CM remains the one bank with the potential for significant further writedowns. Our guesstimate is that CM could take an additional writedown of $1 to $2 billion ($650 million to $1.3 billion after-tax or $1.70 per share to $3.40 per share) on its hedged and unhedged CDO exposure. The other Canadian banks are expected to have modest writedowns. We believe this quarter will represent the last quarter of meaningful writedowns for the bank group.

LLPs to Increase Modestly

• On a quarterly basis, we expect loan loss provisions to increase to $1,200 million or 0.42% of loans (Exhibit 15) for the bank group up 16% sequentially and 77% from a year earlier. Although the growth rates are high the incremental loan loss provisions from a year earlier are a moderate $523 million. We believe loan loss provisions are very manageable. We expect LLPs to peak in 2010-2012.

Dividend Increases on Hold until Q4/08

• TD increased its dividend 4% to $2.36 per share from $2.28 per share in Q1/08, the only bank to do so. We believe dividend increases will be put on hold for Q2 and Q3. Dividend increases are expected to resume in the last quarter of 2008 with the potential for dividend increases in the 5%-10% range across the board. This would coincide with the reacceleration of earnings growth in Q4/08 after three quarters of negative earnings growth due to the appreciation of the Canadian dollar.

Recommend Aggressively Buying Banks at These Levels

• Canadian banks are currently trading at 11.0x 2008 earnings estimates and 9.9x 2009 earnings estimates, near all time lows. We remain overweight the bank group and recommend aggressively buying bank stocks. Our order of preference remains RY, CWB, TD, CM, NA, BMO and LB.

Sun Life Q1 2008 Earnings

RBC Capital Markets, 6 May 2008

Q1/08 EPS were short of our expectations by 8% and were down 4% on a core basis versus Q1/07. The weakness was mostly driven by the difficult macro environment, namely the high Canadian dollar, deteriorating credit quality and weak equity markets.

We have lowered our 2008E EPS from $4.30 to $4.10, our 2009E EPS from $4.80 to $4.60 and our 12-month target price from $53 to $50 per share. We expect Q1/08 results to be the weakest of the four 2008 quarters as currency comparisons should become easier and equity markets have rebounded from Q1/08 levels.

We now expect 2008 growth in EPS of 4%, well below what the company has delivered in the past and below management's medium term objective of 10% annual EPS growth.

Sun Life's stock trades at 11.2x NTM EPS, versus 11.9-12.7 times for its peers and a 7-year average of 13.7x. We expect lifecos to trade at higher multiples in the medium term, but trading multiples could remain below the 7-year average for some time given the potential negative impact of lower interest rates, probable deterioration in credit quality, and uncertain equity markets.

We continue to rate Sun Life's shares Sector Perform. Sun Life is highly capitalized, has exposure to large asset management businesses, and has a well-positioned domestic group platform. We also believe that the company is in a better position than banks to manage through a volatile capital market and credit environment, although the company is not immune to the difficult macro environment, as evidenced by the last two quarters' results. We are relatively more positive on the stocks of Industrial Alliance (IAG.TO, $39.40, rated Outperform, Average Risk) and Manulife (MFC.TO, $39.25, rated Outperform, Average Risk).

TD Bank's Use of Commerce Name Challenged by Rival US Bank

Financial Post, Duncan Mavin, 6 May 2008

When the Boston Celtics loaded up the roster with superstar talent last summer, it seemed inevitable the team would reach the National Basketball Association finals.

But even as Kevin Garnett, Paul Pierce, Ray Allen et al march on to their destiny, one thing far from certain is the future name of the Celtics' hallowed home court, TD Banknorth Garden.

Toronto-Dominion Bank scored a coup in 2005 by landing the naming rights to the Celtics' famous stadium -- formerly Boston Garden. The hook-up with the green-shirted Celtics was a branding winner for TD Banknorth, the Canadian bank's business in the U.S. northeast.

Now the stadium is slated for another name change after TD announced the rebranding of its entire U.S. operations following the acquisition of New Jersey-based Commerce Bancorp in March.

But TD's plans have hit a snag after a U.S. court temporarily blocked the bank from using its proposed new brand in Massachusetts, the Celtics' home state.

In March, TD made a big fanfare of the retirement of the Banknorth brand and the launch of the new TD Commerce Bank name that will be applied to all 1,100 U.S. branches from Maine to Florida.

But, last Friday, U.S. district court Judge F. Dennis Saylor IV granted an injunction barring TD from using the new brand after a rival bank claimed TD's new name is causing confusion among customers.

"We saw the [TD Commerce brand] announcement and we were kind of shocked because it was really our name," said Brian Thompson, chief executive of 53-year-old Commerce Bank & Trust Co., which operates a dozen branches out of Worcester, Mass.

"We are literally next door to each other -- I'm sitting in an office one side-street away from TD's headquarters in Worcester -- so there's tremendous confusion among customers. People have been coming into our branches and asking if the manager was going to be out of a job because they thought we had been bought out."

Mr. Thompson said TD has not been in touch with Commerce Bank & Trust to discuss the dispute.

Despite the obvious size difference between the two banks -- Commerce Bank & Trust has assets of about US$1-billion, which is less than TD anticipates in income from its U.S. operations in 2009 alone -- he is confident of success as the Worcester bank has a 2002 trademark on the Commerce Bank name.

Judge Saylor is due to give more clarity on the brand dispute tomorow, with a further ruling likely to include whether the injunction will stand permanently, and to which parts of the TD Commerce Bank territory any injunction will apply.

TD's executives will be hoping for a dismissal of the challenge to their branding strategy, but executives at Commerce Bank & Trust are pressing for the injunction to stand throughout the state. A TD spokesperson declined to comment.

The bank is also yet to announce its decision regarding the future name of the Celtics' stadium, which is reported to cost TD about US$6-million a year. It is thought TD Boston Garden or TD Garden, as well as TD Commerce Bank Garden, are all possibilities.

04 May 2008

Citigroup's Amateur, Novice, & Unskilled Analyst Recants Last Week's Analysis on RBC

Citigroup Global Markets, Shannon Cowherd, 4 May 2008

• Reducing Estimated Write-Down to C$2.6B from C$5B — Based on incremental information and a broader comparison of similar institutions’ related write-down/mark to market valuation metrics, we have revised our assumptions on potential write-downs at RBC to be less aggressive than in our previous report. Of the C$2.6B, RBC has taken C$787mm, leaving C$1.8B.

• The Most Significant Changes Were to ARS, ABCP and ACL — We revised our assumptions to reflect a 10% valuation adjustment on auction rate securities and zero on asset backed commercial paper, driven by the lack of transparency and the potential market shift. The allowance for credit loss was reduced to reflect a 130% coverage ratio.

• Net Impact — The net effect of these changes is an C$0.11 increase to our prior FY08E of $2.91. Our target price rises to C$42 from C$40 previously, established by applying a discounted P/B multiple of 2.2x to our revised BVPS of $19.14. Changes to earnings and BVPS are driven by the revised allocation between net income and OCI for the estimated w/d.

• Maintaining 3H Rating — Given an ETR of -11.8%, we reiterate our 3H (Sell/High Risk) rating on Royal. The P/B multiple of 2.2x is a discount to the 10-year historical average of 2.5x. We think the discount is warranted given it reflects the current environment and lack of transparency surrounding the possibility of future write downs.