29 September 2008

RBC Investor Day

Scotia Capital, 29 September 2008

• Royal Bank held an Investor Day on Friday, September 26, 2008 with a focus on its International Banking and Capital Markets segments. Presentations were made by Gord Nixon, President & CEO, Jim Westlake, Group Head International Banking & Insurance, and Mark Standish and Doug McGregor, Co-Presidents of RBC Capital Markets.

International Banking - Long Term Outlook Modest

• RY's International Banking earnings have declined sharply over the last year primarily due to increased loan loss provisions in the bank's Builder Finance portfolio and an extremely difficult operating environment.

• RY's strategy in the U.S. remains to target specific markets and not to try to be everything for everyone as is the case with its Canadian Banking platform. The priorities for the bank going forward are to focus on improving efficiency and filling in product and service offerings for clients.

• Management indicated that it is monitoring retail banking acquisition possibilities but is not willing to sacrifice its capital position or credit rating to complete an acquisition.

• Industry growth has been, and is expected to remain, in the low single digit range over the next few years. RY believes that it can achieve double the industry level of earnings growth in the U.S.

RBC Capital Markets Well Positioned - Outlook Extremely Positive

• RBCCM considers itself a global investment bank with 50% of its revenue coming from outside of Canada (42% U.S., 8% International). RBCCM has enjoyed significant success in Canada, where it is the largest investment bank with top tier market share in virtually all businesses and is considered a "bulge bracket" firm. In the U.S. RBCCM has a wide collection of capital markets businesses, such as municipal finance, debt sales and trading and financial products, focused on mid-market clients with market capitalization of less than $2 billion. Internationally, RBCCM is focused on a select number of client segments, products and markets. U.K. and Europe are the centre for product manufacturing and client origination. The focus in Asia is on distribution and the focus in Australia is debt sales and trading, infrastructure finance, and global mining.

• RBC Capital Markets is extremely well positioned to take advantage of unique opportunities after the dramatic and seemingly-overnight demise of many of its U.S. competitors. For example, RY is becoming the counterparty of choice having access to capital at reasonable levels. RY is also able to participate in businesses, such as leveraged finance.

• RBCCM intends to build up its platform organically as opposed to making acquisitions. In fact, management explicitly stated that RY will not be pursuing wholesale banking acquisitions in the U.S. Rather, the bank will focus on investing in technology to integrate its businesses and recruit talent from now defunct competitors.

• RY remains optimistic on the outlook for the global capital markets industry, stating that industry growth is expected to outpace global GDP growth. As well, RY's position within that industry is being solidified as the bulge bracket divide continues to narrow.

High Risk Exposure Update

• RY indicated its exposure to Washington Mutual is extremely small. The bank also indicated it has made good progress unwinding positions with Lehman and anticipates that the net result of the unwind will be flat to slightly positive. RY has been monitoring and managing its exposures to certain financial institutions for the last few months and seems to have been adequately prepared for the events of this past week.

• RY also addressed the status of its auction rate securities (ARS). The bank stated that the $1 billion of ARS in U.S. retail client accounts as reported at the end of Q3/08 has since been reduced. In addition, the bank has expressed an interest in repurchasing the securities from client accounts but must wait for regulatory approval. The financial impact from this action would be negligible.


• Our 2008 and 2009 earnings estimates remain unchanged at $4.45 per share and $4.90 per share. Our share price target is unchanged at $70 representing a 14.3x our 2009 earnings estimate.

• We reiterate our 1-Sector Outperform rating on shares of RY based on strength of operating platforms, opportunities in wholesale banking, strength of balance sheet and modest premium to the bank group.
Financial Post, Zena Olijnyk, 29 September 2008

Royal Bank of Canada says it is holding steady in the wake of the continuing U.S. financial crisis, which is good enough for Desjardins Securities to maintain its buy rating after attending RBC's annual investor day last week.

“Management stated that it is satisfied with the minimal exposure Royal Bank has with banks in the news recently,” Desjardins analyst Michael Goldberg says in a report. As the bank did not make any material announcements, Mr. Goldberg maintains a target per-share prediction of $57.

RBC also announced it has no plans for a large U.S. capital markets acquisition, but Mr. Goldberg notes the bank's capital markets segment does continue to make up between 20% and 30% of revenues.

In fact, RBC has become a beneficiary of desperate billion-dollar clients looking for a safe haven. “We are doing business with clients that historically we would have struggled to get into. They would have been solely the property of bulge-bracket firms,” co-chief executive of RBC Capital Markets Mark Standish told the Financial Post on Sunday.

“Management stated RBC Capital Markets has been a beneficiary of the recent 'flight to quality.'” Mr. Goldberg says.

Elsewhere, Mr. Goldberg notes that RBC's focus is on improving its operating leverage and reducing its expense/revenue ratio. As well, its U.S. and Caribbean retail segments are each contributing about $50-million in earnings to Royal Bank.
Financial Post, Eoin Callan, 28 September 2008

The anticipated flow of clients out of Wall Street's oldest investment houses and into the arms of mid-tier competitors has accelerated to an unprecedented pace in recent days, according to Canada's top investment banker.

"It is unfolding in real time," Doug McGregor, the newly appointed co-chief executive of Royal Bank of Canada's global capital markets business, says.

As titans of the banking industry struggle to extricate themselves from a collapsing web of complex credit transactions, billion-dollar clients that once pledged fealty are fleeing to more peripheral institutions they hope will offer more security.

This means that RBC, and banks like it, have seen humble plans to extend their global reach -- which were meant to take years -- move closer to fruition in mere days.

"We are doing business with clients that historically we would have struggled to get into. They would have been solely the property of bulge-bracket firms," Mark Standish, co-chief executive of RBC Capital Markets, says.

The latest wave of defections from premier clients to the less well-connected has been led by hedge funds, which have been pulling their prime brokerage accounts from top firms like Goldman Sachs Group Inc. and Morgan Stanley. The hedge funds are then moving the accounts to deposit-taking banks with balance sheets that are perceived to be more safe, says a senior investment professional based in Toronto.

Mark Standish, co-chief executive of RBC Capital Markets, confirms the bank has benefited from a sudden in flow of hedge fund clients in the last two weeks.

Institutions like Canada's largest bank are appealing because they are seen as less likely to be crippled by the collapse of big firms that have acted as counterparties on masses of credit transactions.

It is not that RBC has no exposure to credit losses (it does) or is alone in having a big balance sheet (it is not). But the bank's capital markets operation is among those thought less likely to be sucked into the black hole of failing debt insurance contracts that has swallowed the likes of American International Group. RBC's exclusion from Wall Street's inner circle is suddenly a virtue.

The co-chief executives emphasize that while they are not turning hedge fund managers away, the real prize has been the business of big institutional investors in equities and major participants in the market for fixed-income products like corporate bonds.

"We have become a counterpart of choice," Mr. Standish says.

Not only is RBC winning international business it has long coveted, it is able to demand better terms than it could have dared hope because of the ongoing global credit and liquidity squeeze.

"We are seeing a lot more spread in almost all of our core businesses, which is great," Mr. Standish says. "One of the things that has come out of the crisis is we've been given the opportunity to actually prove ourselves and it has allowed us to break into a new level."

The goal of the New York-based executive is to become a legitimate contender for bond issues when businesses want to raise money in U.S. markets and to lose the association with specialist issues in foreign currencies that have defined much of RBC's international success.

It remains to be seen how well these new mainstream clients and better margins will insulate RBC's capital markets operations from mounting credit losses and the lean times ahead for the entire industry.

The fresh in-flow is unlikely to compensate for the appalling year so far, which has seen income at the capital markets operation fall by nearly half, pushed down by $1.4-billion in writedowns on bad bets.

This means the unit will probably make a smaller contribution this year to the overall RBC group, which derives 20-30% of revenue and earnings froms its market operations.

But with about half that revenue coming from outside of Canada, the improving international standing of RBC has important strategic implications for its future.

RBC is already in the top 15 in global rankings for fees collected from investment banking, advising on mergers and acquisitions, and underwriting issues of bonds and equities, according to Bloomberg data.

But in the last two weeks alone the management team have been compelled to lift their expectations of how high their standing might rise as pillars of Wall Street have crumbled around them, says the Toronto-based Mr. McGregor. The top ten beckons.

Some of RBC's elevation in status is by default. The bankruptcy of Lehman Brothers and disappearance of Bear Stearns and Merrill Lynch has already thinned out the top of the table.

"This has been good for us," Mr. McGregor says, pointing to an increase of daily revenues of 40% in straight stock trading.

But RBC appears reluctant to take advantage of this by broadening the range of global industries where it will try to compete for lucrative roles advising on mergers and acquisitions.

Mr. McGregor says he plans to maintain a niche focus on oil and gas, a mainstay of investment banking in Canada amid the energy boom, and to extend this specialization to mining.

This means building up teams in commodity hot spots like Australia. But the head of investment banking is reluctant to commit to venturing beyond these limits. Building capacity to advise on deals in new international industries would probably mean making an acquisition of an investment bank, and this does not appear to be in the cards.

Mr. McGregor has been one of the architects of an alternate strategy to recruit small complimentary teams of bankers instead, which avoids the hassles and risks of buying a firm outright.

This reflects what appears to be the over-arching response of RBC's capital markets team to the credit crisis, that while it will welcome any serendipitous acceleration of its plans, it is very reluctant to fundamentally alter its strategy to win market share amid the historic upheaval on Wall Street.

Life Insurance Cos Exposure to AIG, Lehman, WaMu

Scotia Capital, 29 September 2008

• Sun Life will take a $0.30 EPS hit on its $270 million WaMu bond exposure. Combined with $334 million in LEH exposure (75% write-down is a $0.28 EPS hit), and the $315 million AIG bond exposure ($88 million at holdco with a 60% writedown and the rest at op. co. with a 40% write-down for an estimated $0.16 EPS) gives a total $0.74 EPS hit in Q3/08.

• MFC's disclosed WaMu bond exposure, $41 million, translates into a $0.02 EPS hit. $380 million LEH bond exposure translates into a $0.14-$0.16 EPS hit and its $47 million AIG holdco and $212 million AIG op. co bond exposure is a $0.04 EPS hit. Total $0.20 Q3/08 EPS hit.

• GWO's disclosed $101 million LEH bond exposure ($0.05 EPS hit) and $149 million AIG holdco and $116 million AIG op.co bond exposure (total estimated AIG EPS hit of $0.09 EPS), for a total EPS Q3/08 hit of $0.14, we estimate. NAIC filings show just $47 million in WaMu bonds, for an estimated $0.04 EPS hit. IAG's $16 million AIG op. co. exposure would be a $0.08 EPS hit.
Financial Post, Jonathan Ratner, 29 September 2008

Two Canadian financial names involved in the turmoil south of the border should see a significant impact if things progress the way they appear to be.

Sun Life Financial Inc. has disclosed $270-million in exposure to Washington Mutual Inc. bonds and will not recover any of this now that the largest U.S. savings and loan has failed, according to RBC Capital Markets. Analyst Andre-Philippe Hardy cut his third quarter earnings estimate by 58% from 53¢ per share to 22¢ as a result. This follows a 4¢ per share reduction as a result of weak equity markets, and 14¢ and 26¢ cuts as a result of credit exposures to AIG and Lehman Brothers, respectively.

“The greatest near term risks to earnings related to credit are downgrades on financial services holdings (which represent approximately 28% of Sun Life’s bond portfolio) and their impact on reserves,” Mr. Hardy told clients. “If bonds held by Sun Life start seeing more downgrades in ratings, it would force them to strengthen their reserves (which has an earnings impact) even if there is no default or impairment.”

The analyst does feel Sun Life shares offer appealing upside and rates them at “outperform” with a $47 price target.

He is also growing more bullish on CIBC, which faces plenty of downside risk due to its structured financed holdings hedged with financial guarantors. However, Mr. Hardy said that the U.S. government’s Troubled Asset Relief Program could lead to stabilization in the value of these assets, as they could be bought for more than market value.

“If the value of structured finance assets indeed stabilizes, we believe CIBC’s stock should benefit, as a key source of uncertainty would be reduced,” the analyst said.

He upgraded CIBC to “sector perform” from “underperform” and boosted his price target to $65 per share from $62. However, $1-billion in writedowns before tax are expected from the bank in the fourth quarter as a result of wider credit default swap spreads of guarantors compared to the end of July.

RBC CM Upgrades CIBC to Sector Perform

RBC Capital Markets, 29 September 2008

The introduction of the Troubled Asset Relief Program could lead to stabilization in the value of structured finance assets, as it appears that the U.S. Government might purchase assets at prices that could turn out to be higher than market value.

• We believe the U.S. Government is in a bind because buying the assets at market value would likely force banks to record valuation writedowns and further hurt capital positions, so it is likely to find a way to pay prices that reflect valuations based in part on held-to-maturity values, even if that increases the risk of losses to U.S. taxpayers.

• The pricing mechanism for assets sales in the TARP has yet to be finalized, and it is not a given that structured finance assets will for sure be bought at prices above market (nor what kinds of structured products will be bought) but directionally, it seems to us as if there is a strong likelihood that structured finance asset values should benefit.

• Prior to our rating change, the stock's discount valuation was not appealing to us because of our limited ability to get comfort over downside risk related to CIBC's structured finance holdings hedged with financial guarantors. If the value of structured finance assets indeed stabilizes, we believe CIBC's stock should benefit, as a key source of uncertainty would be reduced.

• We do expect writedowns in Q4/08E, however, of $1.0 billion pre-tax given the wider CDS spreads of financial guarantors compared to July 31.

Raising 12-month target price per share to $65

• We have raised our 12-month target price from $62 to $65 to reflect our perception of decreased downside risk.

• Our 12-month target reflects a P/B multiple of 2.1, versus 2.2x today, and a P/E (based on NTM earnings) of 8.5x, versus 8.9x today. We believe CIBC's P/E multiple will remain below the leading banks' given a lower growth profile.

• CIBC remains a bank that we expect will face revenue challenges relative to peers in both its retail and wholesale divisions, but its projected earnings mix, relatively high ROE and limited exposure to the U.S. in its loan portfolio limit relative downside risk, in our view.

26 September 2008

RBC on US Regulators' List in Auction Rate Securities Probe

Bloomberg, Doug Alexander, 26 September 2008

Royal Bank of Canada expects an agreement "soon" with the U.S. Securities and Exchange Commission and other regulators on the lender's role in the $330 billion market for failed auction-rate securities.

``We have been in discussions with the SEC and other regulators since April and we hope to reach a conclusion with them soon,'' Chief Executive Officer Gordon Nixon said today at an investors conference in Toronto.

Banks have been settling claims stemming from an investigation into allegations they peddled auction-rate securities as investments that were as liquid as cash. The market seized up in February, when the credit crisis prompted banks to stop supporting auctions at which the long-term securities were bought and sold.

Royal Bank, Canada's biggest lender by assets, has ``significantly'' less than the $1 billion of auction-rate securities held in customer accounts in April, because much of the debt has been redeemed by issuers at par, Nixon said.

``We want to purchase the remainder from our retail investors and assist them with their liquidity difficulties, however we cannot do this until we complete our discussions with regulators,'' Nixon said.

A buyback of the securities would have a ``negligible'' impact on the lender based on the estimates of the difference between par value and current valuations, the bank has said.

Nixon also said Royal Bank has no plans to pursue large takeovers of investment banks, though the lender would consider adding consumer banks or money-management assets.

``We are, and have been, active in terms of exploring strategies and alternatives in both those sectors,'' Nixon said. ``Both remain of interest in terms of our growth plan.''

Opportunities could arise in the next year, both within and outside the U.S., Nixon said.

``Under the right circumstances we could strategically support a retail banking or wealth management acquisition, and we expect opportunities particularly, but not limited to, the United States to unfold over the next 12 months,'' he said.

Royal Bank fell 58 cents, or 1.1 percent, to C$50.92 at 4:10 p.m. in Toronto Stock Exchange trading.

Chief Risk Officer Morten Friis said Royal Bank had ``very small'' investments linked to Washington Mutual Inc., the Seattle-based thrift seized in the largest U.S. bank failure in history.
The Globe and Mail, Tara Perkins, 25 September 2008

Royal Bank of Canada approached U.S. regulators two weeks ago in an attempt to resolve an outstanding investigation with respect to auction-rate securities, a spokeswoman said Thursday.

Canada's biggest bank confirmed to The Globe and Mail in August that it was one of a number of financial institutions subpoenaed in the United States in April in connection with an investigation into the $330-billion (U.S.) market for auction-rate securities, which collapsed earlier this year as a result of the liquidity crunch, leaving many U.S. investors stuck with frozen securities.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, but the interest rates on the investments were reset at regular auctions, some as frequently as once a week.

The U.S. Securities and Exchange Commission and the New York Attorney General's office have been negotiating settlements with a number of banks which sold the securities, alleging that they were telling customers the securities were safer than they actually were.

"Two weeks ago we proactively approached them to resolve our case, and we are hoping to reach a resolution soon," a Royal Bank spokeswoman said Thursday.

Earlier this year, the bank's customers were estimated to have $1-billion in auction-rate securities, but the figure has fallen since that time.

Other banks that have reached settlements with regulators have been forced to buy back the securities from clients and to pay fines. Merrill Lynch & Co. Inc., for instance, agreed to buy back $12-billion of the securities and pay a $125-million fine. Goldman Sachs agreed to buy $1.5-billion and pay a $22.5-million fine.
Financial Post, Eoin Callan, 24 Sptember 2008

U.S. federal enforcement officials are turning their sights to the Royal Bank of Canada as they crack down on financial institutions amid mounting public anger over a plan to bail out banks exposed to the credit crisis at the expense of taxpayers, according to officials.

Canada's largest bank is at the top of the list for enforcement agents at the Securities Exchange Commission who are pursuing financial institutions implicated in the collapse of the $330-billion auction-rate securities market, according to two federal officials.

The collapse of the market in the spring left many Americans unable to access funds they believed would be there for them to pay for short-term needs like college tuition and medical expenses, according to the S.E.C.

The disclosure is the first time officials at the agency have acknowledged they are preparing a federal enforcement action against RBC, and follows a parallel probe being pursued by state authorities. The pending enforcement action would make RBC one of the first Canadian banks to be called to account for its role in the credit crisis.

The regulator is actively pursuing a case against RBC after previous investigations found firms dealing in auction-rate securities misled customers into believing the financial products were safe and highly liquid investments comparable to cash deposits, according to an enforcement officer.

A U.S. federal official said there had been a brief hiatus in enforcement actions amid the recent market panic that swept Wall Street, but authorities were redoubling their efforts after a bailout plan was proposed that leaves taxpayers on the hook for losses on complex securities that have gone bad.

An RBC executive said Wednesday the bank was working with regulators, and indicated management at the bank's capital markets operations expected to reach a comprehensive settlement with U.S. authorities.

The bank faces an estimated payout of $1-billion based on precedent-setting agreements negotiated with other U.S. and international institutions by state and federal authorities to buy back securities held by individual customers, charities and small businesses, and to reimburse those clients for damages.

RBC is also the target of a class-action law suit from customers of the bank alleging there was mis-selling of the securities pursuant to "top down management directives", according to a filing submitted to in a U.S. district court by law-firm Girard Gibbs.

The filing and the wider probe by federal authorities is also investigating the extent to which dealers continued to market auction rate securities as liquid investments even after it became clear the system for maintaining cash flows could collapse.

The focus of the investigation into RBC's activities is its treatment of individuals and families rather than institutional investors, reflecting a significant shift by U.S. authorities that have focused largely on bigger shareholder losses in recent financial crisis.

Auction-rate securities became a favoured form of financing used by dealers amid the credit boom, but when the market froze many customers were unable to access their money and some were left holding securities that will not mature for decades.

The focus of regulators has been on getting these customers their money back, though the SEC is now expected to zero in on the conduct of bankers after a fresh agency directive that investigations encompass the conduct of individuals as a deterrent to others.

RBC has already begun writing down its estimated $4.9-billion exposure to the auction-rate securities market and has been setting aside money for losses on U.S. credit markets.

But over the past decade the bank's American and capital markets operations have been a big contributor to earnings. Wednesday RBC underlined its continued commitment to its U.S. operations by dividing its capital markets empire between Toronto and New York, appointing co-heads in each city.

Mark Standish will stay on in New York and become co-chief executive of capital markets for RBC along with Doug McGregor, who will run investment banking operations out of Toronto. The promotions accompany the retirement of Chuck Winograd, the veteran bank executive who has led the dramatic growth in RBC's capital markets operations over the past 10 years, during which time it has seen it grow from under 30 offices to more than 75 worldwide with the New York operation overtaking the Toronto unit.
The Globe and Mail, Boyd Erman, 24 September 2008

Bay Street's biggest investment bank will now be run in part from Wall Street after RBC Dominion Securities Inc. announced that one half of its new chief executive officer tandem will be in New York, where the firm is concentrating its growth.

RBC Dominion, the securities arm of Royal Bank of Canada, Wednesday named Doug McGregor and Mark Standish to be the firm's new co-chief executive officers when Chuck Winograd retires next month.

Mr. Standish, 47, will run mostly trading-related businesses from New York, while Mr. McGregor, 52, will oversee the bankers who advise companies on matters such as fundraising and mergers, as well as stock traders, from Toronto.

The naming of a New York-based executive as co-CEO will give the firm a deeper connection to what is still the global financial capital, even after the carnage of the subprime meltdown. The seismic shifts on Wall Street over the past month have opened the door to smaller rivals, with two of the biggest independent firms disappearing from the scene.

“We have a lot of people in New York and we need leadership in that community,” Mr. McGregor said. “We need leadership with people who work for us, with the customers and the regulators.”

RBC Dominion already gets more than half its revenue from the United States after a long steady buildup of its investment banking and trading capabilities through hiring and acquisitions. The firm also employs more people in the United States than in Canada.

Mr. Standish and Mr. McGregor spent the past year and a half as co-presidents under Mr. Winograd while the firm prepared for the transition.

While the bank wants to grow in the U.S., it is unlikely to make big acquisition of a struggling rival in the investment banking business. Royal Bank CEO Gordon Nixon has said he doesn't want RBC Dominion to generate much more than about 25 per cent of the whole bank's profits, which basically rules out a large purchase and has kept RBC out of the mix as humbled rivals such as Lehman Brothers Holdings Inc. have sought buyers.

“Some people thought that six months ago an acquisition may have made sense, but you look back at it now and it clearly wouldn't have made sense,” said Mr. Standish. “In this environment, whatever business you're in, caution is an extremely important discipline to have.”

Instead, RBC will continue on the path of using hiring and small acquisitions to bolster its business. The firm has been nabbing bankers fleeing sinking rivals to buttress its American operations.

“We've been trying to grow in the U.S., and we've been accomplishing that, but I think we can probably accelerate it,” said Mr. McGregor. “Depending on what the market gives us in terms of opportunity to hire talent or do some small acquisitions, similar to what we've been doing, that would be a good opportunity.”

While Mr. Standish will actually sit in New York, his bailiwick and Mr. McGregor's span both sides of the border. The firm has about 1,500 employees in the United States, compared to about 1,100 in Canada, with more scattered through offices ranging from London to Australia.

The dual-CEO role is becoming more common in the securities industry as firms become larger and have ever more complicated operations. Rival Scotia Capital, for example, has long split the CEO job along similar lines, with one person overseeing investment banking and another handling trading operations.

“It would be an extremely talented person that would have the background to directly manage all the businesses that we are in,” Mr. McGregor said.
The Globe and Mail, John Partridge, 24 September 2008

Wall Street's meltdown has presented Canada's largest investment dealer with a rare chance to both grow by attrition and cherry-pick top industry personnel to expand its own businesses, its departing chief executive officer says.

“The biggest opportunity is just that there are fewer competitors,” Chuck Winograd said in an interview Wednesday, shortly after Royal Bank of Canada announced that he will retire Oct. 31 as chairman and chief executive officer of RBC Capital Markets.

“Our objective has been to be a top-15 investment bank on a global basis. We're not far away from there and, let's face it, a couple of the players have disappeared.”

But in contrast to the disappearing titans of Wall Street, RBC also remains strong and well capitalized and in a position to expand and “globalize” some of its businesses, not just in the United States and Europe where it has been concentrating, but also elsewhere in the world, Mr. Winograd said. And here, good people, not bricks and mortar, are the key.

“We don't want to make a large acquisition in this business, but we do want to bring on teams [and] this is one of the few opportunities I've seen to speed up your growth because talent is available,” he said, although he added that the firm may also make some small acquisitions.

Mr. Winograd is stepping down from RBC Capital Markets after seven years in the top posts and 12 years with the firm. He joined in 1996, when the bank took over Richardson Greenshields, the Winnipeg-based brokerage he had headed since 1987, having signed on as a research analyst there 16 years earlier.

He will be replaced by the current co-presidents, Doug McGregor, 52, who will become chairman and co-CEO, and Mark Standish, 47, who will be president and co-CEO.

Mr. Winograd turned 60 last January and said that the firm's policy is that the CEO retires at the end of the fiscal year following that milestone.

In fact, the handover has been under way since February of last year when Mr. McGregor and Mr. Standish were appointed co-presidents.

“We have done a transition over an 18-month period,” he said. “I have given up the hold I had on the place, and they have taken it on, so it's just natural that it should happen.”

Still, acknowledging the extraordinary turmoil that has led Washington to seek Congressional approval for an unprecedented $700-billion (U.S.) aid package to bail out Wall Street, Mr. Winograd said it “does seem strange to be getting off this particular roller-coaster at this particular time.”

Congress is seeking to attach conditions to any rescue, including restricting sky-high Wall Street CEO pay packages.

Mr. Winograd agreed there have been “excesses,” but warned that an over-reaction will do more harm than good. “It's in everybody's interest to have a lot of strong players in the marketplace [and] if you get regulation run wild, it will not help the economy,” he said.

Mr. Winograd has presided over a period of dramatic growth at RBC Capital Markets. For example, between 2001, the first year of his tenure as the firm's CEO, and fiscal 2007, its profit more than tripled, leaping to $1.29-billion (Canadian) from $349-million.

Still, its performance this year has been caught in the global storm. Its profit for the first nine months of fiscal 2008 came in at $586-million, down from $1.1-billion a year earlier.

Mr. Winograd's career has made him a wealthy man by Bay Street standards, although not, perhaps, by those of Wall Street.

It was not immediately clear how many Royal Bank shares he currently owns. However, rough calculations based on information in the bank's most recent management proxy circular suggest that at the current share price of just over $51, he is sitting on deferred share units and unexercised stock options worth more than $50-million.

“My family has been very fortunate,” Mr. Winograd said.

Royal Bank CEO Gordon Nixon praised the departing investment banker in a news release.

“Chuck has led the transformation of our capital markets business to a significant and growing global concern,” Mr. Nixon said. “He played a strong and effective leadership role in our decisions to pursue new markets and enter new businesses [and] has also overseen our premier domestic Canadian capital markets franchise that is stronger than it has ever been.”

As for Mr. Winograd's successors, Mr. McGregor has been in the investment business since 1979 and joined RBC when it bought Marcil Trust in 1990. As co-president, based in Toronto, he has headed the firm's global investment banking business, including corporate finance, mergers and acquisitions and equity sales and trading.

In his new incarnation, he will have the specific responsibility for the firm's client relationships, along with its investment banking, equity agency trading and credit business, RBC said.

Mr. Standish, meanwhile, has been an investment banker for 30 years. He joined RBC in New York in 1995, and, his co-presidential responsibilities have included running its global debt, financial products, fixed income, foreign exchange and municipal finance from that city.

In his new role, he will oversee sales and trading, financing, as well as what RBC described as oversight and management of its balance sheet.

Both executives will remain in their current locations, giving the firm “leaders in both Toronto and New York,” said Gillian Hewitt, a spokeswoman for the bank.

25 September 2008

Manulife Weighs Bid for AIG's Asian Units

The Globe and Mail, Tara Perkins & Andrew Willis, 25 September 2008

Manulife Financial Corp. is weighing a bid for Asian operations of American International Group Inc., a move that would vault the Canadian insurer into the top ranks of one of the world's hottest insurance markets.

Chief executive officer Dominic D'Alessandro and his successor Don Guloien, who will take over when Mr. D'Alessandro retires in May, have been meeting with investment bankers and financial advisers in the past week to look at an offer for parts of AIG, according to people familiar with the matter.

Manulife is most likely to bid for Asian operations. Mr. Guloien, who headed up Manulife's mergers-and-acquisitions department from 1994 to 2001, is a seasoned deal maker who was instrumental in the firm's push into Japan.

He has been responsible for the company's Asian operations, which currently account for roughly one-fifth of its profit, since last year.

Manulife and its advisers are pouring over AIG's public documents in preparation for what they expect to be a heated battle for parts of the firm.

The Toronto-based life insurer, North America's biggest by market capitalization, has also begun scouring the wreckage of the financial crisis for other acquisition opportunities.

Manulife spokeswoman Laurie Lupton declined comment yesterday.

There are stumbling blocks to a deal for the most coveted pieces of AIG, the New York-based insurance behemoth that was bailed out by the U.S. government last week after being nearly crippled by mortgage exposure.

AIG is believed to be already working on deals for some of its non-insurance assets, such as its aircraft leasing business, but officials at the company are still coming up with a process to sell parts of its insurance operations, according to sources familiar with the situation. It's not yet clear what businesses, if any, it will be willing to part with.

Competition for the Asian operations is expected to be fierce and to attract some of the world's biggest insurers. The company's most prized assets are in Asia and the U.S., where AIG holds big slices of the markets.

AIG's roots are in Asia, and its life insurance operations in the region could fetch $28-billion to $37-billion (U.S.), according to Credit Suisse. Investment bankers predict a protracted bidding war and improved credit conditions could push the price of the company's Asian unit above $40-billion. AIG's Asian insurance business is five times the size of Manulife's operations in the region.

Two likely rivals for any Asian piece of AIG: Beijing-based China Life Insurance Co. and Shenzhen-based Ping An Insurance Group Co. of China Ltd. China Life has $8-billion (U.S.) of excess capital, while Shenzhen-based Ping An has up to $6-billion. Both companies are debt-free, according to Credit Suisse analyst Chris Esson.

In comparison, Manulife has $3-billion (Canadian) of excess capital it could use in an acquisition, and could likely borrow an additional $2-billion.

"If AIG were to pursue a break-up, we believe China Life and Ping An would be interested in acquiring the Asian operations," Mr. Esson wrote in a report.

The two Chinese firms could prove tough for Manulife to beat. "I cannot see any Canadian insurer competing with China Life for what should be seen as a once-in-a-lifetime opportunity to establish the premier life insurance franchise in Asia," said one Toronto-based investment banker who works with Chinese firms.

Other AIG prize assets include the U.S. group retirement business, which could be sold for up to $9.8-billion, while its U.S. annuities division could fetch $8-billion, analysts say. This unit has $80-billion in assets, making it half again larger than Manulife's U.S. annuity business.

AIG's new CEO Edward Liddy, who was given his role by the U.S. government, plans to host a conference call on Oct. 3 to update shareholders on the company's "future direction."

As part of its 11th-hour rescue deal on Sept. 23, AIG received an $85-billion (U.S.) credit line from Washington with an interest rate that currently amounts to more than 11 per cent, which must be repaid within two years.

The suitors that have begun circling AIG are hoping Mr. Liddy will feel more heat to repay the loan quickly than he does to get the maximum price for any asset sales.;

Scotiabank has Renewed Talks with Bank of Dalian

Bloomberg, Zhang Dingmin and Sean B. Pasternak, 25 September 2008

Bank of Nova Scotia, Canada's third largest by assets, may buy minority stakes in China's city commercial banks as it expands in emerging markets, Chief Executive Officer Richard Waugh said.

Scotiabank has renewed talks with Bank of Dalian Co., a lender in northeast China with 90 branches, Waugh said today at Peking University in Beijing.

Scotiabank, based in Toronto, has operations in about 50 countries, including China, Mexico and Peru, and gets about one- third of its profit from outside Canada. The lender reported a third straight quarterly profit decline last month because of higher bad-loan provisions.

``The opportunities are still in the developing and emerging economies,'' said Waugh. ``The U.S. is obviously a great market, but the opportunities for us are elsewhere.''

Waugh, 60, has said he will continue to look for acquisitions abroad. It's unlikely the company would buy a U.S. consumer bank, the chief has said.

Scotiabank entered a bidding process to buy Cleveland-based National City Corp., the Wall Street Journal reported in April. The Canadian lender hasn't confirmed the report.
Dow Jones Newswires, 25 September 2008

Bank of Nova Scotia will eschew large acquisitions in the short term amid an uncertain outlook for the global financial system, a top executive said.

"You won't see Scotiabank taking aggressive action on acquisitions and doing very sizable moves in the short term," said Stephen McDonald, co-chairman and co-chief executive officer of Scotia Capital and head of global corporate and investment banking, at a press conference Thursday in Mexico City.

Scotiabank, Canada's most international bank with operations in 50 countries, has been an active buyer in recent years, especially in Latin America where it has built up a sizable commercial-banking franchise across the region.

The group's most recent deal was the acquisition of the Canadian operations of E-Trade Financial Corp. earlier this week for $442 million.

In Latin America, Scotiabank's purchases include Chile's No.7 bank, Banco de Desarrollo, for $1.02 billion last year, $293.5 million for Costa Rican bank Interfin, $330 million to acquire and merge two Peruvian banks in 2006 and $178 million for El Salvador's No. 4 bank, Banco de Comercio, in 2005.

"We are quite methodical about how we go about executing our plans," McDonald said. "We won't likely be seen as 'opportunistic.' We are going to be more disciplined."

Commenting on his outlook for the global financial system, McDonald sees a painful period of deleveraging ahead as financial institutions trim their debt levels and restrict lending.

"Access to credit is a very important thing," he said. " "It affects pricing of all asset classes. I think it's a genuine worry what happens when leverage levels come down."

McDonald described the actions being taken in the U.S., where the federal government has proposed a $700 billion rescue package for the banking industry, as "prudent" following last week's events.

"I think we were in very dire shape [in terms of] global financial-market conditions last week where we didn't have commercial paper for high-quality issuers rolling over," he said. "The whole [commercial-paper market] was coming quickly to a stop and something massive had to be done," he said.

Credit Market-Related Losses Top U$523 Billion

Bloomberg, Yalman Onaran and Dave Pierson, 25 September 2008

The following table shows the $523.1 billion in asset writedowns and credit losses at more than 100 of the world's biggest banks and securities firms as well as the $380.7 billion capital raised to cope with them.

Those with a star next to their name have figures that were updated since the table was last published.

Firm Writedown & Loss Capital Raised
Citigroup Inc. 55.1 49.1
Merrill Lynch & Co. 52.2 29.9
UBS AG 44.2 28.4
HSBC Holdings Plc 27.4 5.1
Wachovia Corporation 22.7 11.0
Bank of America Corp. 21.2 20.7
Morgan Stanley* 15.7 5.6
IKB Deutsche Industriebank AG 15.1 12.4
Washington Mutual Inc. 14.8 12.1
Royal Bank of Scotland Group Plc 14.5 23.8
JPMorgan Chase & Co.* 14.3 9.7
Lehman Brothers Holdings Inc.* 13.8 13.9
Deutsche Bank AG* 10.6 6.2
Credit Suisse Group AG* 10.5 3.0
Wells Fargo & Company 10.0 5.8
Credit Agricole S.A. 9.0 8.7
Barclays Plc 7.9 18.3
Canadian Imperial Bank of Commerce 7.3 2.8
Fortis 7.3 7.1
Bayerische Landesbank 7.1 0.0
HBOS Plc 7.0 7.4
ING Groep N.V. 6.8 4.7
Societe Generale 6.7 9.6
Mizuho Financial Group Inc. 6.1 0.0
National City Corp. 5.4 8.9
Natixis 5.4 12.1
Indymac Bancorp Inc* 4.9 0.0
Lloyds TSB Group Plc 4.9 4.9
Goldman Sachs Group Inc.* 4.9 10.6
Landesbank Baden-Wurttemberg 4.8 0.0
WestLB AG 4.7 7.4
Dresdner Bank AG 4.0 0.0
BNP Paribas 3.9 0.0
E*TRADE Financial Corp. 3.6 2.4
HSH Nordbank AG* 3.6 1.9
Rabobank 3.6 0.0
Nomura Holdings Inc. 3.4 1.2
Bear Stearns Companies Inc. 3.2 0.0
Bank of China Ltd 3.1 0.0
DZ Bank AG 2.7 0.0
Landesbank Sachsen AG 2.6 0.0
UniCredit SpA 2.5 0.0
Commerzbank AG 2.3 0.0
ABN AMRO Holding NV 2.3 0.0
Royal Bank of Canada 2.2 0.0
Fifth Third Bancorp 1.9 2.6
Dexia SA 1.7 0.0
Mitsubishi UFJ Financial Group 1.6 1.6
Bank Hapoalim B.M. 1.5 2.6
Marshall & Ilsley Corp. 1.4 0.0
Alliance & Leicester Plc 1.3 0.0
U.S. Bancorp 1.3 0.0
Bank of Montreal 1.2 0.0
KeyCorp 1.2 1.6
Groupe Caisse d'Epargne 1.2 0.0
Hypo Real Estate Holding AG 1.2 0.0
Sovereign Bancorp Inc. 1.0 1.9
Gulf International Bank 1.0 1.0
Sumitomo Mitsui Financial Group 1.0 4.9
Sumitomo Trust and Banking Co. 0.8 1.0
National Bank of Canada 0.7 1.0
DBS Group Holdings Limited 0.2 1.1
Other European Banks* 8.8 3.0
(not listed above)
Other Asian Banks* 5.5 8.9
(not listed above)
Other US Banks* 2.9 4.9
(not listed above)
Other Canadian Banks 0.4 0.0
(not listed above)
________ ________
TOTAL 523.1 380.7

All the charges stem from the collapse of the U.S. subprime mortgage market and reflect credit losses or writedowns of mortgage assets that aren't subprime, as well as charges taken on leveraged-loan commitments since the beginning of 2007. They are net of financial hedges the firms used to mitigate losses and pre-tax figures unless the bank only provided after-tax numbers. Credit losses include the increase in the provisions for bad loans, impacted by the rising defaults in mortgage payments.

Capital raised includes common stock, preferred shares, subordinated debt and hybrid securities which count as Tier 1 or Tier 2 capital as well as equity stakes or subsidiaries sold for capital strengthening. Capital data begins with funds raised in July 2007.

All numbers are in billions of U.S. dollars, converted at today's exchange rate if reported in another currency.

24 September 2008

Buffett Drove Hard Bargain with Goldman Sachs

The Wall Street Journal, Susan Pulliam, Kate Kelly and Matthew Karnitschnig, 24 September 2008

For six months, as the credit crisis deepened, billionaire investor Warren Buffett turned away a string of Wall Street firms that came hat in hand looking for help.

On Tuesday, Mr. Buffett says, he was sitting with his feet on his desk in Omaha, drinking a Cherry Coke and munching on mixed nuts, when he got an unusually candid call from a Goldman Sachs Group Inc. investment banker. Tell us what kind of investment you'd consider making in Goldman, the banker urged him, and the firm would try to hammer out a deal.

That midday call from Goldman's Byron Trott, who had done deals with Mr. Buffett for years, touched off a rapid chain of events. Within hours, Goldman had announced that Mr. Buffett's Berkshire Hathaway Inc. would invest $5 billion in Goldman -- a move viewed by many investors as a vote of confidence in the nation's reeling financial system.

The swiftness of the deal underscores the intense pressure now faced by Goldman, long regarded as one of the most financially secure firms on Wall Street. Over a 10-day stretch this month -- amid federal bailouts of Fannie Mae, Freddie Mac and American International Group and a bankruptcy filing by Lehman Brothers Holdings Inc. -- Goldman shares dropped 36%. Investors began asking questions about whether it had the capital to survive. On Sunday night, Goldman secured federal approval to become a bank holding company, ending 139 years as a securities firm.

On Wednesday, Goldman said it had completed a separate $5 billion stock offering, double the size of the offering announced on Tuesday. Its shares jumped $7.95 to $133 in 4 p.m. New York Stock Exchange trading, although they remain far below their 52-week high of more than $250. The deal with Mr. Buffett and the stock offering means Goldman shareholders could eventually have their stake diluted by as much as 20%.

Mr. Buffett's decision to invest now in Goldman gives an indication of how the famed investor believes the financial crisis might shake out. At a minimum, he regards Goldman as a survivor, although the firm's profits could be pinched as it adjusts to life as a banking holding company, taking fewer risks and facing heightened regulation.

In a telephone interview Wednesday morning from his office in Omaha, Mr. Buffett said he believes the proposed federal bailout will be approved by Congress and that it will succeed. "The government has a great opportunity," he says. "If they buy things at market prices with the government's cheap funding, they should make a lot of money."

If Congress fails to approve the bailout, Mr. Buffett says, all bets are off. His investment in Goldman will "get killed, and so will all our other investments."

Goldman's moves in recent days mark a repudiation of the strategy that catapulted the firm to enormous success. At one time, Goldman was a white-shoe investment bank that made its mark advising corporate clients on deals. In recent years, it became a hard-charging trading firm, more akin to a hedge fund than a bank. Run by Lloyd Blankfein, a former gold salesman, Goldman borrowed enormous sums to fund big trades. Profits soared, and the rest of Wall Street -- from Merrill Lynch & Co. to Lehman to Morgan Stanley -- followed suit.

Neither Mr. Blankfein nor Mr. Trott, the Goldman banker who reached out to Mr. Buffett, responded to requests for comment.

This year, as the credit crunch tightened its grip, investment banks began to suffer. At first, Goldman reveled in its position as one of the strong players. Unlike many competitors, it hasn't posted a quarterly loss during the crisis.

But Goldman appeared to miscalculate how serious and how long the crisis would be. "We're probably in the third or fourth quarter," Mr. Blankfein said in April. "We're closer to the end than we are to the beginning." In June, Goldman's chief financial officer echoed those views. Even last week, as Goldman reported its worst quarter since becoming a public company in 1999, executives dismissed the notion that Goldman couldn't survive the storm without radical action.

Out in Omaha, Mr. Buffett had been fielding calls for months from Wall Street firms and other investors who wanted him to take part in rescue efforts. The first major pitch came on Saturday, March 15. Bear Stearns was reeling after clients had removed billions of dollars from the securities firm. Federal regulators were pushing for a white knight to buy Bear Stearns before the Asian markets opened late the following day.

Mr. Buffett received a call at 4:30 p.m. that Saturday from a private investment firm trying to assemble a group to buy the embattled financial giant. "I'm calling about Bear Stearns,'" the private investor began, according to Mr. Buffett. "Should I go on?'"

Mr. Buffett recalls thinking: "It's like a woman taking off half her clothes and asking, 'Should I continue?' Even if you're a 90-year-old eunuch, you let 'em finish." Mr. Buffett says he passed on the proposed deal. Bear Stearns was bought by J.P. Morgan Chase & Co. the following day.

A few weeks later, in April, Lehman executives made a pitch to Mr. Buffett to participate in a round of financing. Mr. Buffett says he felt the Lehman offer was unrealistic and he decided not to participate.

Lehman went on to raise billions of dollars more from other investors at terms similar to those it offered Mr. Buffett. But the pressure continued to build. Talks with a Korean bank failed to materialize. The government brought two ailing mortgage giants, Fannie Mae and Freddie Mac, into federal conservatorship. The financial markets were rickety.

By Saturday, Sept. 13, Lehman was collapsing and insurance giant American International Group Inc. was on the ropes. Mr. Buffett was in Edmonton, Canada, at a charity dinner when he started getting calls about AIG. Fielding calls throughout the weekend, Mr. Buffett considered a $5 billion insurance transaction, part of a larger effort to save the insurer that involved other investors. That transaction fell apart, and the Federal Reserve assembled an $85 billion bailout package for AIG three days later.

This past weekend, Goldman's top leadership -- Mr. Blankfein, co-presidents Gary Cohn and Jon Winkelried, and chief financial officer David Viniar, among others -- discussed ways to raise capital. The executives figured with the market's current emphasis on safety and soundness, the firm might need more capital, according to people familiar with the matter.

The executives soon zeroed in on Mr. Buffett as an ideal option. His holding company, Berkshire Hathaway, had often used Goldman as an investment banker on deals. His reputation, both for smart investing and solid ethics, would likely give investors the reassurance they needed, the executives reasoned.

Mr. Trott had approached Mr. Buffett before with at least one offer to invest in Goldman. "They had sounded me out in the past, as everyone else had," Mr. Buffett says. The previous offer, he says, was "nothing I would say 'yes' to."

On Tuesday, however, Goldman put the ball squarely in Mr. Buffett's court. Mr. Buffett is famous for making quick investment decisions based on his gut. For the Goldman deal, he says, "I didn't see a book. I just made a judgment." The quality of Goldman's management team and its franchise, he says, sealed the deal for him.

He didn't insist on a complicated term sheet, he says. Instead, he spent 15 minutes with Mr. Viniar, Goldman's chief financial officer, outlining points of the deal. "They asked me about this or that," he says. "It sounded fair."

By the time markets closed in New York at 4 p.m., Mr. Trott was sealing the deal with a final call to Mr. Buffett. Mr. Blankfein was in Washington for the day to brief members of Congress about the state of the markets. After the deal was struck, he called Mr. Buffett. "We talked for five minutes," recalls Mr. Buffett, who says he told Mr. Blankfein to "keep working."

Mr. Buffett left his office at 7 p.m. and spent the evening reading the newspapers and "nibbling" on Cheetos and licorice pastel candies. He says Mr. Trott "called me once or twice to tell me what was going on with the equity offering." Mr. Buffett was asleep by 10:30 p.m.

Goldman executives were working the phones in hopes of raising more capital. Armed with a list of about two dozen of the firm's top investors, executives canvassed shareholders to see if they'd be willing to add to their Goldman holdings. It was an all-night affair.

Mr. Winkelried fine-tuned the details of the Buffett investment, and David Solomon, the firm's co-head of investment banking, coordinated the stock offering. By 8 a.m. on Wednesday, the group had gathered on the 50th floor of a Goldman building in downtown Manhattan to figure out who would get shares and at what price. They finished in time to announce a $5 billion offering, shortly before 9:30 a.m.

For his $5 billion, Mr. Buffett receives "perpetual" preferred shares that aren't convertible into equity, but pay a 10% dividend. That payout equates to roughly $1.3 million each day. He also has warrants to buy Goldman shares at $115, which, if he exercised Wednesday would theoretically net him a profit of more than $600 million. If Goldman's earnings grow at a modest pace, he could make a tidy profit, some investors say.

Some investors are griping about what they say is a sweet deal for Mr. Buffett. But some Goldman shareholders say Wednesday's stock offering was too good to pass up. "The valuation was right, the business expertise, we feel, is unparalleled, and the money coming in from Warren Buffett at this time was a catalyst to add to our position," says Tom Marsico, CEO of Denver-based Marsico Capital Management LLC, one of Goldman's largest investors.

Mr. Buffett's investment isn't without risk. As a commercial bank, Goldman will be forced to curb much of the risk taking that generated big profits. Hedge funds and private-equity firms are likely to try to lure away Goldman's stars with fatter pay.

The question now: Will Mr. Buffett -- whose firm has invested a total of about $24 billion in a number of ventures in recent months -- plunk down more money on Wall Street?

He says he remains interested in some of AIG's businesses "if they are available." He adds: "I still have some money left."

23 September 2008

TD Bank Weighs Bid for Washington Mutual

The Globe and Mail, Tara Perkins & Andrew Willis, 23 September 2008

Toronto-Dominion Bank is among a handful of major institutions circling Washington Mutual Inc., one of the first signs that Canada's banks will have a seat at the table as the credit crunch rapidly reshapes the U.S. banking industry.

TD stands out among peers for having avoided major writedowns on risky exposures, and is looking to build a North American consumer banking franchise, making it an obvious phone call for the investment bankers, led by Goldman Sachs, who are working for WaMu.

The Canadian bank could pick up branches in key areas if WaMu is broken up, or if some of its risky exposures are mitigated by regulators and the U.S. government.

“Every Canadian bank should be looking in the U.S., and is looking at U.S. opportunities,” said one investment banker who works on cross-border takeovers

“The problem right now is there are still too many uncertainties for Canadian bank directors to comfortably sign off on a major deal.”

With 2,300 branches – roughly double Toronto-Dominion's U.S. network – WaMu is a larger target than TD chief executive officer Ed Clark has been considering.

And, having skirted through the financial crisis in relatively good shape, the Canadian bank has no appetite for Seattle-based WaMu's toxic mortgage assets.

But investment bankers describe the opportunities that are coming up in the U.S. as historic, with the financial industry being radically reformed.

Canadian bank executives say they plan to stay apprised of the possibilities and will look at various assets that come up. Canada's banks are in better financial shape than many U.S. and European rivals, and so are being pitched on a wide range of deals. But they remain hesitant to make major moves.

The plunging market values of U.S. banks mask other costs of any acquisition, most importantly the risk of incorrectly valuing loan books and esoteric securities on bank balance sheets, Canadian executives say.

In WaMu's case, the U.S. government's plan to buy up to $700-billion (U.S.) in troubled financial assets from ailing financial institutions could help to mitigate some of that risk, but it remains to be seen exactly how much.

“There's $240-billion in risk-weighted assets in WaMu – I doubt TD wants to choke that down,” said Genuity Capital Markets analyst Mario Mendonca.

TD is still digesting the $8.5-billion (U.S.) acquisition of New Jersey-based Commerce Bancorp that closed earlier this year.

That deal was announced in October, months after Mr. Clark sent hundreds of people to New Jersey to perform due diligence on Commerce, and construct detailed growth forecasts for each of its branches.

Commerce won't be fully integrated with TD until the fall of 2009, and so Mr. Clark had planned to take a “pause” from acquisitions for the time being.

This week, credit rating agency Moody's Investors Service downgraded WaMu's financial strength rating based on “severe asset quality issues which are depleting its capital base and leading to an erosion of its franchise,” adding to the urgency with which the bank must raise capital or find a buyer.

“We believe WaMu's capital is insufficient to absorb its mortgage losses,” said Moody's senior credit officer Craig Emrick.

WaMu's regulator, the Office of Thrift Supervision, is reportedly considering negotiating a deal that would see the company divided up among several banks if a buyer for the whole can't be found within days.

The OTS declined comment yesterday, but one banking executive said it would be necessary for regulators and the government to clean up WaMu's exposures and reduce its risk before a sale could happen.

WaMu spokesman Brad Russell declined to comment. Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co. are believed to be the players most interested in a deal for WaMu.

Analysts said Tuesday that while anything is possible in the current environment, they would be surprised if TD walked away with more than a few pieces of WaMu.
The Globe and Mail, Tara Perkins, 23 September 2008

Toronto-Dominion Bank is looking at embattled Washington Mutual Inc. and its assets, but sources say the Canadian bank is being conservative in its approach.

TD is reluctant to make another major move in the United States at this point, following on its $8.5-billion (U.S.) acquisition of New Jersey-based Commerce Bancorp Inc., but is exploring its options as WaMu, stung by the credit crisis, is shopping for buyers.

Earlier this month chief executive Ed Clark said he's “extremely cautious” about U.S. acquisitions.

“We are not a hedge fund. We are franchise builders. I don't know what the value of retail assets or commercial assets are in the United States today, and so I'm not keen to try to find out by buying some and looking at them,” he said.

That means the bank, which will still be working on the integration of Commerce until the fall of 2009, is “in pause,” he said, adding that “the only thing that might change our mind would be small acquisitions where we can do deals where we're not taking significant asset risk ...”

Analysts said Tuesday they were not surprised TD was taking a look at WaMu, but doubted it would take a gamble by making an offer for the whole bank.

“There's $240-billion in risk weighted assets in WaMu - I doubt TD wants to choke that down,” said Genuity Capital Markets analyst Mario Mendonca. “I think TD, like many of the other banks, is hoping to buy parts of WaMu.”

In a note to clients Tuesday, National Bank Financial analyst Robert Sedran said an acquisition of WaMu would be a tough deal for TD to pull off.

There is little overlap with the bank's current U.S. acquisitions, TD's integration of Commerce Bancorp “has barely started,” and the bank's capital position is already stretched as a result of that deal, he wrote.

“While acknowledging that anything is possible in the current environment, owing to these issues, we would be surprised if TD emerged as the ‘winner' of this asset (assuming it does not get broken up, with TD contemplating a bid for only part of the company),” Mr. Sedran wrote, adding that a deal for all of WaMu would likely be viewed negatively by investors.

While WaMu might appear cheap based on its beaten up market value, the real test for banks considering a bid is the need to put a future value on WaMu's assets. An overly optimistic assessment of their worth could prove fatal.
Bloomberg, Ari Levy & Zach Mider, 22 September 2008

Washington Mutual Inc., the lender that put itself up for sale last week, fell 22 percent in New York on concern a $700 billion government-sponsored bank bailout plan won't erase enough of its soured mortgages to lure bidders.

``There could be an in-limbo case, where potential buyers are unwilling to take on WaMu's troubled mortgage book until issues are ironed out,'' CreditSights Inc. analyst David Hendler wrote in a note to investors today. ``But the company needs to raise incremental capital in the meantime.''

Toronto-Dominion Bank joined JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Banco Santander SA as potential bidders for WaMu, and talks extended through the weekend, according to a person familiar with the matter. While bidders are primarily interested in WaMu's 2,300 branches and $143 billion in retail deposits, they must also contend with up to $19 billion in mortgage losses during the next 2-1/2 years.

WaMu spokesman Brad Russell said the lender doesn't comment on speculation. Simon Townsend, a spokesman for Toronto-based Toronto-Dominion, declined to comment, as did spokesmen for the four other banks.

The Bush administration yesterday widened the scope of the bailout plan to include assets other than mortgage-related securities. The change to potentially allow purchases of instruments such as car loans and credit-card debt may force an increase in the size of the package as the legislation proceeds through Congress.

Moody's Downgrade

Three-quarters of Seattle-based WaMu's $309.7 billion in assets are loans and mortgages. The lender, the largest U.S. savings and loan, says it remains ``well capitalized'' with $50 billion in liquidity.

WaMu slid 92 cents to $3.33 at 4 p.m. in New York Stock Exchange composite trading. The stock has lost 76 percent this year, the biggest decline in the 24-company KBW Bank Index. The stock moved by an average of 20 percent a day during the past two weeks and more than doubled in the previous two trading days.

Moody's Investors Service today reduced WaMu's financial strength to E from D+ and placed the debt ratings on review for possible downgrade. WaMu has ``severe asset-quality issues, which are depleting its capital base and leading to an erosion of its franchise,'' Moody's said. Benefits to WaMu from the Treasury's plan are ``uncertain'' in the short term, the statement said.

``We believe WaMu's capital is insufficient to absorb its mortgage losses,'' Craig Emrick, a Moody's vice president and senior credit officer, said in a statement.

WaMu could potentially be acquired by a larger financial firm, in a transaction that could involve regulatory assistance, Moody's said. In such a deal, deposits would probably be assumed by the acquirer.

``Moody's believes it is unlikely that the obligations of Washington Mutual would be assumed by an acquiring entity in an assisted transaction, and the potential loss on these instruments could be significant,'' Moody's said.

22 September 2008

RBC CM: Still Too Early to Buy Banks

RBC Capital Markets, 22 September 2008

We last wrote in detail on the Canadian banks on September 2, 2008, following the release of their Q3/08 results.

• What a three week stretch it has been: Lehman Brothers failed, Fannie Mae, Freddie Mac were placed in conservatorship, AIG was put on life support by the U.S. Government, and Merrill Lynch was essentially forced to sell itself. Credit spreads widened significantly and funding markets stopped functioning properly, until Thursday.

• Canadian bank stocks fared better than their European and U.S. counterparts as concerns over financial system stability grew, as their direct exposure to the rapidly deteriorating funding conditions was much lower. At their trough, though, the Canadian bank stocks were down 8% since our September 2 report.

• Recent initiatives (some actual, some announced) by U.S. Government and regulatory organizations should bring tremendous relief to the short term pressure on both credit markets and bank stocks.

• Canadian banks stocks understandably rallied from the 2-week trough Thursday afternoon and Friday as (1) bank shares worldwide rose, (2) systemic risk has declined, and (3) declining credit spreads from peak levels decreases concerns over writedowns of fixed income holdings. Share prices are now up 4% compared to September 2, 2008.

Still too early to buy

While the volatility of the last three weeks has been massive, our view on Canadian banks today is not different from what it was on September 2, 2008 when we last wrote a detailed report on Canadian banks: it is still too early to buy bank stocks.

• Canadian banks should (and do) trade higher than they did earlier last week given U.S. Government actions that greatly reduced systemic risk, but the operating environment is not that different from what it was three weeks ago for Canadian banks.

• We continue to believe that it is too early to buy Canadian bank stocks, reflecting our expectations for continued pressure on profitability due to both a slowing economy and credit/funding markets that remain challenged, and valuations that are not overly cheap on a historical basis considering the economic environment we think the banks will be facing. Median projected total returns to our 12-month target prices are 5%. (They were 4% on September 2, 2008).
The Globe and Mail, Tara Perkins & Kevin Carmichael, 22 September 2008

Canada's banks are expected to push to be included in bailout efforts that will buy risky exposures from financial institutions, but will be lower on the priority list because they've held up better than foreign counterparts during the liquidity crunch.

With U.S. administrators pushing through the largest financial intervention since the Great Depression, Treasury Secretary Henry Paulson is coming under fire for potentially using taxpayer money to bail out foreign institutions, and is pushing global counterparts to come up with their own rescue plans.

Mr. Paulson said yesterday that foreign banks affect the U.S. economy, and those with large U.S. operations should be eligible to participate in the government's $700-billion (U.S.) program to buy up troubled financial assets.

"If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," he said on the ABC network.

But he also said the United States is forcefully pushing other countries to come up with their own programs.

"We are talking very aggressively with other countries around the world and encouraging them to do similar things, and I believe a number of them will," he said.

A Finance spokesman declined to comment directly on Mr. Paulson's statement, but cited Prime Minister Stephen Harper's declaration last week that Canada's banks don't need rescuing. "There is no bailout package being considered for Canadian banks or financial institutions," Mr. Harper said on Sept. 19. "The overall balance sheets of the Canadian financial sector remain very healthy."

Group of Seven finance ministers, including Canada's Jim Flaherty, postponed a call yesterday and were scheduled to discuss the situation today.

Mr. Flaherty did not comment on whether Canada might adopt its own program.

However, he said on CTV's Question Period yesterday that Canada's banks remain healthy.

"As the Prime Minister has said, we have a solid banking system in Canada," Mr. Flaherty said. "Our banks are well-capitalized. Our households are well-capitalized."

Canadian chartered banks are following recommendations, "and I'm comfortable with the actions that they have taken, and their stability," he added.

This country's banks have already taken more than $10-billion (Canadian) in charges related to the liquidity crunch, and continue to hold tens of billions of dollars more in potentially toxic exposures. But their writedowns pale in comparison to those of their big European and American rivals, and they have relatively small exposure to U.S. subprime mortgages.

To be eligible for inclusion in the U.S. program, banks "must have significant operations in the U.S., unless [Mr. Paulson] makes a determination, in consultation with the chairman of the Federal Reserve, that broader eligibility is necessary to effectively stabilize financial markets," the Treasury said in a statement over the weekend. The program will buy up mostly mortgage-related loans and securities, but other assets could be considered if officials decide they must be bought for the stability of financial markets.

The Canadian bank that has taken the largest hit on U.S. subprime mortgage exposure is Canadian Imperial Bank of Commerce, which has relatively insignificant operations south of the border. CIBC wrote down about $6.8-billion in the nine months ended July 31. As the toxic exposure became more of a headache for chief executive officer Gerald McCaughey late last year, he decided to sell the bulk of CIBC's U.S. banking and trading operations, and the bank parted ways with about 600 employees when that deal closed at the start of this year.

Canada's banks "certainly will want to be included" in the U.S. program, but it's not clear which ones or which assets will be eligible, said an analyst who declined to be named.

An official at one of the big banks said they expected that, after U.S. financial institutions, European institutions would be the priority. But they noted that banks would want to have a level playing field globally.

Charles Geisst, professor of finance at Manhattan College, said in an interview yesterday that he thinks foreign governments have good reason to resist stepping up to the plate.

"It's an American problem," he said of the financial crisis. U.S. subprime mortgages wound up in a number of complicated financial instruments that banks around the globe were holding. "The U.K. was the closest to it, simply because of the interbank connection," Mr. Geisst said. But "the German banks who bought these mortgage-backed securities just as investments have got to be wondering what the hell they were sold, as would the Chinese and folks in Singapore. And I think they're right."
Associated Press, 22 September 2008

Twelve U.S. federally insured banks have been shut down by regulators this year:

Ameribank Inc. Northfork, W.Va., closed Sept. 19. $115-million (U.S.) assets, $102-million deposits.

Silver State Bank Henderson, Nev. closed Sept. 5. $2-billion assets, $1.7-billion deposits.

Integrity Bank Alpharetta, Ga., closed Aug. 29. $1.1-billion assets, $974-million deposits.

Columbian Bank and Trust Topeka, Kan., closed Aug. 22. $752-million assets, $622-million in deposits.

First Priority Bank Bradenton, Fla., closed Aug. 1. $259-million assets, $227-million deposits $72-million cost to fund, $13-million uninsured deposits.

First Nat. Bank of Nevada Reno, closed July 25. $3.4-billion assets, $3-billion deposits.

First Heritage Bank Newport Beach, Calif., closed July 25. $254-million assets, $233-million deposits.

IndyMac Bank Pasadena, Calif., closed July 11. $32-billion assets, $19-billion deposits.

First Integrity National, Staples, Minn., closed May 30. $54.7-million assets, $50.3-million deposits.

ANB Financial National, Bentonville, Ark., closed May 9. $2.1-billion assets, $1.8-billion deposits.

Hume Bank Hume, Mo., closed March 7. $18.7-million assets, $13.6-million deposits.

Douglass National Bank Kansas City, closed Jan. 25. $58.5-million assets, $53.8-million deposits.
Financial Post, David Pett, 22 September 2008

U.S. government intervention has the sick financial system back on its feet, but the drastic measures are far from a cure, says John Aiken, Dundee Securities analyst.

While the bail-out has alleviated matters near term and propped up the valuations of financial services stocks for the time being, Mr. Aiken says it does not solve the underlying problem: U.S. residential real estate prices.

"The U.S. government is buying time for the financial services sector to try to heal itself. However, unless significant changes are made to the proposal, which would delay implementation, there is no support for American consumers who are drowning in debt,"

He also said that liquidity will still be hard to come by – even though inter-bank lending spreads have eased – because of lingering distrust amongst various lending institutions. As well, he reminded clients that the U.S. economy is still heading towards a consumer driven recession.

As for the Canadian banks, who have varying direct exposure to the United States, Mr. Aiken said provisions for credit losses will no doubt increase while earnings growth in 2009 will continue to be challenged.

The analyst continues to recommend a defensive strategy regarding bank stocks, with Toronto Dominion Bank and Royal Bank of Canada his top picks. He has a "buy" rating and $71 price target on TD and a "buy" rating and $54 price target for Royal Bank.
Financial Post, Jonathan Ratner, 22 September 2008

National Bank Financial’s purchase of a 12.5% stake in Wellington West Holdings Inc. comes at an important time given that operating profit from National’s wealth management business has been flat for the past seven quarters.

National will pay $35.8-million and an additional $35-million if Wellington meets certain earnings targets over the next three years. It also has the right to buy an additional 5% of the company and has been granted right of first refusal if Wellington decides to pursue an outright sale or of a substantial block of shares.

While National’s revenues have been driven primarily by trading recently, the deal allows it to expand its wealth management platform and distribution alternatives nationwide, said Desjardins Securities analyst Michael Goldberg.

He considers the news as positive for National, which he rates a “buy” with a $60 price target.

Mr. Goldberg also noted that the Supreme Court’s decision not to hear the ABCP settlement appeal is good for the bank since its capital position had “large embedded risk due to its reliance on the outcome of the ABCP restructuring.”

He pointed to the bank’s valuation (based on internal models, not observable market values) of its ABCP exposure at $1.671-billion. This assumed a 90% probability that the restructuring would be a success and that a 5% change in probability would cut the valuation by $35-million.

This implied that the paper would be worth $1.74-billion assuming a successful restructuring and only $630,000 if it did not go through, Mr. Goldberg told clients. Therefore, $1.1-billion, or nearly 25% of its book value, was riding on the outcome.

RBC CM: Reducing Estimates of Life Insurance Cos on Disclosed Credit Exposures

RBC Capital Markets, 22 September 2008

EPS estimates of Life Insurance Companies lowered for the second time in a week

Q3/08 estimates down to reflect exposures to AIG/LEH/WaMu

We have lowered our Q3/08 earnings per share estimates on disclosed credit exposures to Lehman Brothers and AIG, while Manulife and Industrial Alliance have also communicated their exposures to Washington Mutual.

• We estimate that write-downs related to these exposures will impact SLF the most (43% of our prior Q3/08 EPS estimate), followed by GWO (31%), MFC (21%) and IAG (12%).

• Our estimate revisions are as follows: Great-West (from $0.62 to $0.43), Industrial Alliance ($0.80 to $0.71), Manulife ($0.67 to $0.53) and Sun Life ($0.93 to $0.53). We provide our detailed calculations in Exhibit 1.

Equity markets' volatility increases risk to EPS forecasts

Global equity markets are now down by 8%-13% since the end of Q2/08, but those numbers mask greater intra-quarter volatility.

• The drop in equity markets is meaningful as lifeco earnings are sensitive to material movements in equities. Movements in equity markets should translate to changes in experience gains and future expected profit (based on fees based on asset levels).

• Our EPS estimates reflect current market levels; we will reassess them at the quarter's end based on equity market levels at the time.

Longer-term positives could arise from market disruptions

The fallout of the global financials crisis could lead to attractive buying opportunities for Canadian lifecos.

• We believe that AIG is a likely seller of some subsidiaries. We think Manulife could be interested in its U.S. insurance subsidiaries, its U.S. variable annuities business and its Asian businesses.

• AIG's asset management business may also be a candidate for sale and, along with Lehman's Neuberger Berman business, would be interesting to any of the Big 3 Canadian lifecos.

• Organically, we believe that the Canadian lifecos' high ratings should help their sales, and their private bond businesses should benefit from improved conditions in corporate lending from a spread and term perspective.

Shares of IAG have the least risk in the near-term

In the near-term, we believe shares of Industrial Alliance have less risk than those of the Big 3 lifecos. IAG has minimal exposure to the U.S. market and the most conservative bond portfolio; 60% invested in government or government-related issuers and a low proportion rated BBB (6.8%) and BB & below (0.08%).
The Globe and Mail, Eric Reguly, 22 September 2008

Manulife Financial is among the global insurers poised to launch bids for parts of American International Group, the giant insurer that became a ward of the U.S. government when last week's financial crisis pushed it to the brink of collapse.

Manulife executives, led by CEO Dominic D'Alessandro, met with financial advisers late last week to consider ways to exploit AIG's probable breakup, sources said.

Buying all of AIG, or big parts of it, would propel Manulife to the top rank of the global financial services industry.

It could also severely damage the company if the hurricanes hitting Wall Street do not lose their fury.

Mr. D'Alessandro isn't talking about Manulife's plans and did not return e-mails seeking comment. Manulife spokeswoman Laurie Lupton declined to comment yesterday.

AIG, the world's biggest insurer, would have collapsed had the U.S. Federal Reserve not agreed to lend it up to $85-billion (U.S.) in exchange for 79.9 per cent of its equity, making its rescue a de facto nationalization. Analysts expect AIG to be sold, in whole or in part.

While other insurers, ranging from Germany's Munich Re to Australia's QBE Insurance, are also potential bidders for large chunks of AIG, Manulife is viewed by some as a more logical suitor.

The Toronto-based insurer is a strong player in a weak market.

Like other insurers and banks that escaped the worst of the credit crunch, the company is ready to feast on the remains of the companies consumed by their own excesses, analysts said.

In a note published last Wednesday, Citigroup insurance industry analyst Colin Devine called Manulife, Canada's largest insurer, "an ideal candidate to make an aggressive bid for AIG."

"We consider [Manulife] the only insurer in the world with sufficient balance sheet strength that would allow it to bid for all of AIG's U.S. and Asian life insurance businesses," Mr. Devine said in his report.

Manulife's share price - $35.15 on Friday - is only 24 per cent off its 52-week high, giving it a market value of $52-billion.

Its profits, balance sheet and investment portfolio are robust and its insurance subsidiaries are rated triple-A, Standard & Poor's top rating. It has $3-billion in excess capital and could borrow much more to finance a deal.

Mr. D'Alessandro, 62, is set to step down as CEO by next spring, and he is to be replaced by chief investment officer Don Guloien. With little more than half a year to go, Mr. D'Alessandro might be reluctant to plunge himself and his executives into yet another transformational deal. Nor could he do it without Mr. Guloien's approval. Whatever Mr. D'Alessandro starts, his successor will have to finish.

But Mr. D'Alessandro has always wanted to build a Canadian-based global champion, and prizes like AIG come along only once in a century.

AIG's share have gone from a high of $70.11 to about $4, giving the biggest name in the business a market value of a mere $10-billion. The insurer's Asian business would turn Manulife into a powerhouse in that part of the world. Manulife is already third among foreign insurers, measured by earnings contribution from Asia. AIG is first, with 70 per cent of its earnings from Asia.

Analysts say AIG's crown jewels are its Asian operations and the group pension business in the United States. The U.S. business would be doubly attractive to Manulife because of the synergy potential with John Hancock, the big U.S. insurer bought by Manulife in 2004 for about $11-billion.

AIG is certainly a target. Its loan from the Fed comes at a punitive interest rate - 8.5 percentage points above the London interbank offered rate (Libor). The expensive loan gives AIG a huge incentive to unload assets so it can pay back the money quickly. Even before last week's nightmare, AIG had announced its intention to sell International Lease Finance Corp., the largest aircraft leasing business.

Manulife could make a quick offer for the whole company, which would please the regulators.

The problem is that the toxin levels in AIG's portfolios are not known. Buying certain divisions would be far less risky for Manulife or any other bidder.

The risk that comes with buying divisions instead of the whole company is getting trapped in bidding wars with powerful foreign rivals eager to build their U.S. presence.

Buying parts of AIG would be very much in character for Mr. D'Alessandro, who turned Manulife into a perpetual motion machine. Under him, the company de-mutualized and joined the stock market in 1999. He was keen to have a takeover to build the company.

In 2002, he bought Zurich Life's Canadian arm and tried to buy CIBC, an effort that was stopped by John Manley, the finance minister at the time. A year later, he landed John Hancock. Businesses were collected across Asia.

Today, Manulife is the top insurer in Canada, the second-biggest in North America and the sixth-biggest in the world. Half of its earnings come from the United States, with the other half split between Asia and Canada.

Size doesn't guarantee success, as AIG found. But Manulife is no AIG. While it has been an aggressive purchaser of companies, it was careful not to pay too much. In 2003, for instance, it ended its pursuit of Canada Life when the bidding got too rich (Great-West Lifeco was the winner).

Crucially, it shied away from products that seemed too good to be true, like credit default swaps, or CDSs, which are insurance against defaults on assets linked to corporate debt and mortgage securities. AIG teetered when it was downgraded by S&P on Sept. 15 and was suddenly unable to come up with the collateral to back its swaps. That's when the Fed came charging to the rescue. Its collapse would have sent financial shockwaves around the planet.

19 September 2008

OSC Imposes Temporary Short-Selling Ban

Bloomberg, Sean B Pasternak & Joe Schneider, 19 September 2008

Canada's main stock-market regulator banned temporarily the short-selling of bank and financial stocks following similar moves by U.S. and U.K. regulators.

``We will take the appropriate steps necessary to protect our markets and ensure that they are not used for purposes of regulatory arbitrage,'' Ontario Securities Commission Chairman David Wilson said in an e-mailed statement. ``We will monitor trading in securities of other Canadian financial issuers.''

The U.S. Securities and Exchange Commission halted the short selling of 799 financial companies in a move to combat investors seeking to drive down shares following the collapse of Lehman Brothers Holdings Inc. and the bailout of American International Group Inc.

Short sellers borrow stocks and sell them, betting the price will fall and they'll be able to rebuy them later, return them to the lender, and pocket the difference in price.

Ontario Finance Minister Dwight Duncan said he supports the OSC action.

``These measures are aimed at protecting Ontario and Canadian investors,'' he said in a statement today. ``We are confident that our financial markets are strong and well positioned to withstand the current economic challenges.''

The Canadian companies affected by the ban are: Aberdeen Asia-Pacific Income Investment Co., Bank of Montreal, Royal Bank of Canada, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Manulife Financial Corp., Fairfax Financial Holdings Ltd., Sun Life Financial Inc., Kingsway Financial Services Inc. Quest Capital Corp., Thomas Weisel Partners Group Inc., the Toronto-Dominion Bank and Merrill Lynch & Co.

The U.S. ban, in place until Oct. 2, helped send Canadian financial shares higher for a second day, with the 43-member S&P/TSX Financials Index rising 5.5 percent, led by Royal Bank and Toronto-Dominion Bank.

The Canadian ban will be in effect until Oct. 3, unless it's further extended, the OSC said.

Royal Bank, the country's largest bank, climbed C$3.59 ($3.43), or 7.5 percent, to C$51.43 in 4:16 p.m. trading on the Toronto Stock Exchange. The second-largest bank, Toronto- Dominion, rose C$4.74, or 7.9 percent, to C$64.94, the stock's biggest jump in a decade.
Bloomberg, Sean B Pasternak, 19 September 2008

Royal Bank of Canada, Bank of Nova Scotia and Manulife Financial Corp. are among at least six Canadian companies on the list of stocks for which short selling was halted by the U.S. Securities and Exchange Commission.

The SEC compiled a list of 799 financial companies last night, pressing an assault on speculators after the collapse of Lehman Brothers Holdings Inc. and the bailout of American International Group Inc.

Other Canadian firms on the list include insurers Fairfax Financial Holdings Ltd., Sun Life Financial Inc. and Kingsway Financial Services Inc.
Dow Jones Newswires, 19 September 2008

Bank of Nova Scotia and Toronto-Dominion Bank are included in UBS global bank strategist's top 10 list of those financial institutions most likely to "emerge in a favourable position after the current turmoil in credit and financial markets." He divides the winners into two groups - well-capitalized banks with strong retail depository franchises - an apt description of TD - and banks with appropriate exposure to emerging markets - which BNS has given its Mexican, Asian and Latin American operations.
Dow Jones Newswires, 19 September 2008

Canadian bank shares soaring in wake of US Treasury's plan for financial markets, but Dundee Securities says long-term investors should be selective. Analyst recommends Toronto-Dominion Bank and Royal Bank of Canada because of strong domestic franchises. National Bank of Canada also in good shape, but Dundee remains negative on Bank of Montreal and Canadian Imperial Bank of Commerce even if they are due for the biggest immediate pop. Meanwhile, Dundee cautious on Bank of Nova Scotia as it's exposed to US economy through its Mexico and Caribbean operations. In Toronto, financial services index recently up 4.6%.
The Globe and Mail, Tara Perkins, 19 September 2008

Bank of Montreal chief executive officer Bill Downe was not caught off guard by BMO's exposure to a number of items that became ticking time bombs for financial institutions when the liquidity crunch erupted last year. What rattled him was how the crisis affected them.

"The surprise was the external environment," he said in an interview. "There wasn't anything that we stumbled over and said 'what is this?' "

Mr. Downe, who has a history in investment banking, said he knows well many of the esoteric investments that are at the heart of the crisis. "I think I had the advantage of knowing these businesses as a consequence of having been involved with them as they grew up," he said.

When the non-bank asset-backed commercial paper crisis arose last year, and calls were flying between the Bank of Canada and the country's financial institutions, "I really anticipated that the adjustment process would be a lot harder than people were talking about," Mr. Downe said.

As the crisis has evolved, Canada's financial institutions have been hunting for the next possible explosion and trying to minimize the damage. That process was in full swing this week as they frantically measured their exposure to Wall Street firms whose potential demise was unthinkable not long ago.

At Caisse de dépôt et placement du Québec, employees scoured its exposure to the likes of Morgan Stanley and Goldman Sachs to determine the impact "if the worst occurred" and the firms went under, chief executive officer Richard Guay said yesterday.

"In terms of counterparty risk, we are really fine. We have no worries at all," he said, although the dropping stock markets churned his stomach.

Executives at Canadian institutions admit being taken aback by recent events, but insist Canada's financial sector is differentiating itself from the U.S. and Britain.

At Standard Life Assurance Co. of Canada's offices in Montreal, employees pored through the books and found no worrisome exposure to U.S. institutions.

"Call it lucky, call it smart, but we're fine in terms of exposure, so we're thrilled about that," CEO Joseph Iannicelli said.

He thinks Canadian institutions are benefiting from prudent practices coupled with strict regulations. "I don't think it can be lucky if this many companies in Canada steered clear from major exposure."

Canada's banks are in very good shape compared to global peers, Mr. Downe said. "We are good managers of risk."

That doesn't mean they don't have problems.

Canadian Imperial Bank of Commerce, which had to tap the markets for an equity infusion this year, continues to whittle away at more than $25-billion of risky structured-finance holdings.

Genuity Capital Markets analyst Mario Mendonca said CIBC's writedowns are an issue, "but we all know what's coming." There's more uncertainty about Bank of Montreal, he said.

"BMO's potential to take on some of these off-balance-sheet vehicles and take some major charges would be the single greatest risk right now among the Canadian financials," Mr. Mendonca said.

RBC Dominion Securities analyst André-Philippe Hardy suggested yesterday that clients buy Toronto-Dominion Bank stock and short shares of BMO.

BMO's U.S. exposures could lead to more soured loans; its Canadian consumer banking results are lagging leading banks; and recent events have caused spreads to widen, possibly putting more pressure on the value of its structured investment vehicles (SIVs), Mr. Hardy wrote.

Mr. Downe counters that BMO has earned a reputation for sticking with its customers in difficult times, and will pick up market share as other banks tighten up on credit. "We have proven that we are not fair-weather bankers," he said.

He said the bank has systematically managed through its trouble spots. "If you look at what we've accomplished as a company, we really set about to do things in the correct order," he said.

Top priority as the credit crisis erupted was to make sure that the bank's asset securitization programs were funded, he said.

The next was the SIVs, which have now been reduced in size from $28-billion to less than $10-billion at the end of the last quarter, progress he's very pleased with.

"Those programs were really set up with sophisticated investors, long-term clients of the bank, who really understood the product very well and they didn't want the programs to be liquidated too quickly because they wanted their capital to be protected," Mr. Downe said.

The bank surprised analysts in its recent quarter by boosting its provisions for bad debts related to the U.S.

But Mr. Downe said the higher provisions are consistent with a balance sheet the size of BMO's, given the credit cycle.

And he rejects accusations that the consumer bank has been neglected. Loan growth is good, deposit growth in commercial banking is strong, and wealth management is showing record results, he said.

"I think it's appropriate for analysts to look for confirmation in performance," he said. "And we have talked about the fact that we believed that customer loyalty needed to change in order for us to grow strongly." Loyalty has improved in the last year, and that's beginning to show up in the numbers, he added.
Financial Post, Eoin Callan, 18 September 2008

The chief executives of Canada's largest banks were summoned to an emergency meeting Thursday with Mark Carney, governor of the Bank of Canada, for crisis talks about the meltdown in the global financial system, say people close to the discussions.

The executives filed into the central bank's Toronto office on King Street West Thursday afternoon for a "frank" dialogue that included a "status update" on the stresses the banks are suffering amid a worsening credit squeeze, according to one source familiar with the talks.

The meeting came amid a co-ordinated effort by central banks and regulators around the world to alleviate an unprecedented seizure that had taken hold in money markets and to discourage actions by institutions that risked weakening the financial system.

Central banks injected US$180-billion of liquidity into financial markets worldwide after the U.S. Federal Reserve took the extraordinary step of providing the Bank of Canada and other countries with billions of dollars each to pass on to domestic banks desperately seeking short-term loans of dollars.

After making US$10-billion of dollar liquidity available to banks in the morning, the talks with bankers allowed Mr. Carney to assess the ongoing stress levels in inter-bank lending and discuss contingencies, according to one person briefed on the dialogue.

Called to the meeting were Gord Nixon, chief executive of Royal Bank of Canada, Ed Clark of Toronto-Dominion Bank, Gerry McCaughey from Canadian Imperial Bank of Commerce, Rick Waugh of Bank of Nova Scotia, and Bill Downe of Bank of Montreal and other senior figures.

People involved in the talks were acutely sensitive to the timing of the crisis meeting, coming during a general election and amid an economic slowdown seen as hampering the campaign of Stephen Harper, the Prime Minister.

Officials stressed after the meeting that Canadian banks have healthy balance sheets and absolute leverage that is significantly lower than many of their peers overseas.

Both bank executives and officials in Ottawa also emphasized that the meeting was part of a regular dialogue between the central bank and financial institutions.

That dialogue has taken on heightened importance in the current climate.

But the move to arrange an emergency dollar swap between the U.S. and Canadian central banks underlines how the dysfunction emanating from Wall Street has spread throughout the international banking system.

Central bankers around the world have been following up Thursday's injections of liquidity by impressing on banks the systemic risks that arise if they start refusing to lend to one another.

The collective liquidity actions were unveiled simultaneously by central banks who said they were taking "co-ordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets." They promised to "continue to work together closely" and to take "appropriate steps to address the ongoing problems."

An erosion of trust between many of the world's leading financial institutions after a series of implosions on Wall Street has served to deepen the crisis in recent days, threatening the future of Wall Street pillars including Morgan Stanley.

The emergency actions helped relieve some of the pressure in money markets, while Canadian banks also sought to reach out to clients and stakeholders to reassure them the country's banks remained stable.

While Canadian banks have been reluctant to comment publicly on their exposures to credit markets, they have privately sought to emphasize that the risks they face from troubled sections of securities such as credit default swaps does not threaten their survival.

While Bay Street banks have big positions in credit markets with notional underlying values in the hundreds of billions, the losses they risk collectively on credit instruments overlaying these pools of securities are likely limited to the low tens of billions, according to analysts.

Banks have also been reluctant to discuss the pressures they face in overnight lending markets, though further liquidity actions are seen as likely in the coming period as policymakers monitor the situation closely.