28 October 2008

Dundee Securities Cuts Banks' Ratings

Dundee Securities Target Prices:

• National Bank - target price cut to $49 from $58
• RBC - target price cut to $43 from $54
• Scotiabank - target price cut to $36 from $49
• TD Bank - target price cut to $59 from $71
Financial Post, Jonathan Ratner, 28 October 2008

A bearish outlook for 2009 and expectations for a weak fourth quarter has prompted Dundee Securities to downgrade shares of Royal Bank from “buy” to “sell.”

Analyst John Aiken has increased his forecast for credit loss provisions in the quarter for those banks with material exposure to the U.S., which includes Royal, Toronto-Dominion Bank and Bank of Montreal. However, he expects the greatest impact will be felt in the latter part of 2009 as the U.S. recession truly takes hold and bankruptcies spread beyond sectors linked to real estate.

The risk that the Canadian economy could be impacted also forced Mr. Aiken to increase his provision estimates for each of the banks, with expectations that the third quarter will see the largest such increases.

With capital no longer as critical an issue as it was early in 2008, earnings growth concerns appear to be coming into focus. The analyst told clients “it is difficult to see how the Canadian bank valuations will receive any meaningful lift in the near term.”

While capital market revenues and spreads may moderate, Mr. Aiken said looming credit losses will be the next threat to bank valuations and earnings estimates going into 2009.

The traditional end-of-year balance sheet clean-up should therefore see a myriad of write-downs, he predicted, insisting that the banks will not do anything that could bring future earnings into question, given that they are all being valued off of 2009 expectations.

Mr. Aiken estimates that most bank could maintain their capital positions even with charges above $2-billion, but doesn’t expect to see any (including CIBC) above $1-billion.

The analyst also downgraded Bank of Nova Scotia from “neutral” to “sell,” and both TD and National Bank from “buy” to “neutral.” He now has no banks rated a “buy.”

Fourth quarter earnings are also expected to be negatively impacted by unprecedented interest rate spreads as banks shy away from lending to each other and make funding very expensive. Declining loan growth that is forecast to be a negative revenue headwind through at least the first half of 2009 and the evaporation of capital markets revenues are also causing pain. Volatility may be good for trading activity, but it is hurting banks’ higher margin advisory business. When the concerns do subside, Mr. Aiken anticipates that trading volumes will fall to levels not seen for several years “as investors hide and lick their wounds and participants disappear.”

And while credit quality is weakening, he does not see a sharp increase in provisions for related losses until later in 2009. He does expect a “plethora” of cost-cutting efforts.

The good news? Mr. Aiken says bank dividends are safe and National, Royal and Canadian Western Bank should announce fourth quarter increases, although they are not expected to be material. “With an average dividend yield above 5% for the Big 6, any increases would not have any real impact on valuations,” he added.
Canadian Press, 28 October 2008

Canada's big banks are facing further discouraging results, according to industry analysts who are slashing their ratings in the sector on lower confidence.

John Aiken of Dundee Securities says the banks' disappointing results will stretch into next year as capital market revenues moderate and credit quality weakens.

Mr. Aiken broadly downgraded bank stocks, including the remainder of the sector he had rated as a “buy.”

The downgrades include Royal Bank dropping from a “buy” to a “sell” and Scotiabank, cut from “neutral” to “sell.”

Also changed were National Bank and TD Bank both from “buy” to “neutral.”

“Although not likely to be the catastrophic failures that we have seen in recent quarters, fourth-quarter earnings will not generate any reasons to celebrate either,” Mr. Aiken said in a note.

“Further, many of the issues that dominate the fourth quarter are likely to persist for several more quarters, in a time where deterioration in credit quality will overshadow any recovery in earnings.”

Expectations for the coming year were also reduced by Blackmont Capital analyst Brad Smith.

He slashed forecasts for the banks' fourth quarter ending Oct. 31, as well as next year based on “continuing signs of building global economic weakness.”

Financial stocks moved up 4.2 per cent in morning trading on the Toronto Stock Exchange.

Overall, the banks have shown some improvements in their results, Mr. Aiken suggested.

He said some issues that have dominated attention this year are no longer a major concern, such as shoring up capital, because governments have intervened to help global banks.

But he expects a widespread focus on cost-cutting to counter lower revenues and declining loan growth.

Weaker credit quality is also anticipated next year, especially for the banks with greater exposure to the United States.
Financial Post, Eoin Callan, 27 October 2008

While economists debate whether Canada and the wider world is headed for recession, domestic banks have already cast their vote by easing back the throttle on dividends, analysis by Brad Smith of Blackmont Capital suggests.

The analyst has amassed data showing Canadian banks have downshifted dividend growth trajectory from high to nil at one of the fastest paces on record.

Historically, zero growth in bank dividends has historically coincided closely with periods of a significant recession, Mr. Smith found after trawling through a quarter-century of trends.

Blackmont points out that when there are signs banks are becoming more pessimistic, this can also mean they are more likely to cut back lending, which can in turn worsen economic downturns.

"Their willingness to lend is a major determinant of economic activity," said Mr. Smith.

But Blackmont points out that the positive for investors is that banks tend to maintain steady dividends during tough economic times.

But Mr. Smith added: "While taking solace in the payout ratio, we would be remiss if we did not acknowledge that given the state of global credit markets, funding stresses, if sustained, may also need to be considered when judging the sustainability of current dividend scales."

23 October 2008

Ottawa to Guarantee Interbank Lending

The Globe and Mail, Kevin Carmichael, 23 October 2008

Canada's government has pledged to temporarily guarantee banks' medium and longer term borrowing in a bid to keep pace with the multi-billion dollar financial rescues offered by other countries over the past couple of weeks.

Finance Minister Jim Flaherty said Thursday that he will establish the Canadian Lenders Assurance Facility, which will offer financial institutions insurance on any debt they issue with terms greater than three months.

“We are being proactive,” Mr. Flaherty said at a news conference. “I've had the concern expressed directly to me, and certainly through our officials, that this potential downside could become a reality and it could happen fairly quickly.”

Canada's decision to offer a backstop for interbank lending comes almost two weeks after it signed a pledge by Group of Seven nations to work together to restore confidence in the global financial system. At least a dozen other countries have already offered some form of backstop for the wholesale debt market, including the United States, Australia and most recently Sweden.

The worry in Ottawa was that all these rescue packages would make it more difficult for Canada's banks to secure money abroad. While there's little evidence that this is happening now, the risk is that international lenders will opt to do business with counterparties that are backed by their government's treasuries. That could force Canadian banks to offer higher yields, an extra cost that would eventually be absorbed by consumers and businesses.

“This is a proactive step,” Mr. Flaherty told reporters. “There is this concern that our institutions could be disadvantaged competitively.”

Canada's government has had to do less than other nations to salvage the financial system because the countries banks are relatively sound. Institutions such as Royal Bank of Canada largely avoided the frenzy for the now toxic assets linked to U.S. subprime mortgage market, and stronger regulations forced banks to keep plenty of cash in reserve.

Mr. Flaherty repeated Thursday that Canada's banks are “sound.”

The government didn't attach a cost to the program. With international credit markets calmer, there's a chance the program won't be used. At the same time, if conditions worsen, the government could potentially be responsible for billions of dollars worth of loans.

When asked to further define Canada's potential liability, Mr. Flaherty said “zero to a lot.”

Canada's response to the credit crisis is modest compared with programs in the U.S. and Europe, where governments have used billions of taxpayers' funds to take stakes in financial institutions and guarantee all deposits.

Mr. Flaherty suggested Thursday that he feels he's done enough for now, saying Canada's banks are well capitalized and that he's satisfied with Canada's current guarantee on deposits of up to $100,000.

Bank of Canada governor Mark Carney endorsed Mr. Flaherty's insurance plan, calling the program “sensible.”

Mr. Carney, who spoke at a separate press conference in Ottawa, also backed Mr. Flaherty's assertion that no further measures are needed to support Canada's banks at this time.

Taking a question on whether Canada should buy stakes in banks, Mr. Carney said the reason countries such as the U.S. are injecting liquidity into their banks is to bring capital ratios up to Canadian standards. “We're already at the finish line,” Mr. Carney said.

Two weeks ago, Mr. Flaherty set up a program that will allow Canadian financial institutions to swap up to $25-billion of mortgages in return for cash to bolster their balance sheets.

The insurance program will start early next month, and remain in place until April 30, 2009. All federally regulated deposit-taking institutions are eligible to apply for insurance on each issuance of debt with terms longer than three months.

The backstop will come at a cost. The base fee will by 1.35 per cent on each request, with a surcharge of an extra quarter point for institutions with a credit rating of A- or above. Financial institutions with a lower credit rating will have to pay a surcharge of a half point.

The Canadian Bankers Association said it welcomed the move.

“Canada's banks are well capitalized and financially sound, with or without this federal government loan insurance,” said its head, Nancy Hughes Anthony.

“Governments around the world have guaranteed loans between banks and our federal government has recognized that, without a similar move in Canada, our strong banks could find it more difficult to compete for loans on the international market, which ultimately could affect borrowing for consumers and businesses.”
Financial Post, Paul Vieira & Eoin Callan, 23 October 2008

Jim Flaherty, the Finance Minister, went to some length on Thursday to let people know the borrowing guarantee Ottawa would provide to banks was "temporary." He also emphasized the insurance was available on "commercial terms."

As presented, the federal plan appeared measured and cautious -- two trademarks this federal Conservative government likes people to think is part of its DNA.

But perhaps it also had the earmarks of a Finance Minister not entirely sold on the concept. Sources close to the banking sector suggest Mr. Flaherty didn't feel it was necessary to provide a guarantee in the "Canadian context," given the strength of the financial system and improving credit conditions in the country.

"He didn't feel the urgency to move," said one person familiar with the talks between bank executives and the Finance Minister's office.

Canadian chartered banks had pushed Ottawa for some form of government-backed guarantee since Oct. 13, when Washington signaled it was taking this step. Banks were confident they could compete when it was only European governments that had made the commitment, but were concerned about getting elbowed out of North American borrowing markets once U.S. banks had this assurance.

As it happened, Mr. Flaherty became a reluctant convert. That was just fine with some economic observers, who say the Minister delivered a reasonable response to the banks' call.

"It was worth taking that little bit of extra time to craft something this elegant," William Robson, president of the C.D. Howe Institute, said yesterday of Ottawa's backstop plan.

Details of Mr. Flaherty's guarantee plan were unveiled on Thursday. The guarantee comes in the form of a temporary insurance program, the Canadian Lenders Assurance Facility, which federally regulated lenders can tap. The insurance will be available on wholesale term borrowing, such as interbank lending, and the scheme expires six months after it kicks in, expected some time in November.

Mr. Flaherty said the take up on insurance could range from "zero to a lot," without clarifying what "a lot" meant. Government documents, however, suggest the maximum amount of insurance available is equivalent to 20% of bank deposits as of Oct. 1.

"There may not be any take up ... because the insurance is on commercial terms," Mr. Flaherty said. Those terms are an insurance premium of 1.35%, plus an additional charge of a minimum 25 basis points, based on the debt's investment grade.

"The banks will have to reflect on whether or not they want to use it because there's a significant cost to it to protect Canadian taxpayers."

Initial response was lukewarm. Bank executives told the Financial Post the premium being charged meant they would balk at using the facility. Further, they were not able to pledge that the move would benefit consumers.

A former Department of Finance official said Mr. Flaherty and his officials likely struggled on what to charge as a premium.

"If the pricing is too attractive [to banks], then it could amount to additional contingent liabilities finding their way onto the government's books," the official said.

The Canadian plan is modeled somewhat on the British scheme, although not as strict. But is not nearly as generous as the blanket guarantee Washington has offered, observers say.

Mr. Robson said he particularly likes the exit plan laid out in Ottawa's insurance scheme.

"I like this way of going about it because it is relatively easy to do, and then when the crisis is over you can take it away again."

Other countries, like the United States, that have issued similar guarantees on borrowing "are going to find it difficult -– even if the crisis abates –- to undo some of what they have done," he said.

Scotiabank is Downgraded

RBC Capital Markets, 23 October 2008

Our Underperform rating on Scotiabank's stock has primarily reflected our view that the high valuation multiple leaves little room for disappointment. Scotiabank trades at a high P/E and P/B multiple relative to Canadian banks. We think that Scotiabank's high valuation reflects (1) strong asset growth in domestic banking, international banking and corporate lending; (2) less exposure to U.S. lending than some of its peers; (3) high capital ratios; and (4) less exposure to structured finance and off balance-sheet conduits than most.

• In this report, we show how quickly the fortunes of many Latin American countries have shifted. Latin America represents about 20% of revenues and about 13% of earnings assets for Scotiabank.

• We lowered our 12-month target price to $43 per share from $46 to reflect deteriorating economic conditions in Latin America and drastically lower valuations of publicly-traded Latin American banks. Our target price of $43 is based on a P/BV of 2.0x, versus 2.2x today.

• We believe that Scotiabank is not as well positioned to outperform its peers from an operating perspective in 2009 compared to 2008. (1) We believe that structured finance/off balance sheet conduit issues are likely to cause lower writeoffs for the bank's peers than in 2008. (2) We expect the credit cycle to broaden to areas beyond U.S. residential real estate/U.S. consumer/U.S. residential construction lending, into areas where Scotiabank has more exposure such as traditional business lending in the U.S., Canada, Latin America and the Caribbean. (3) The economic environment in Latin America has deteriorated rapidly, which has negative implications in our mind for both earnings risk and the bank's multiple relative to peers. (4) Capital ratios are still industry leading but the Tier 1 ratio is projected to decline 47 basis points (from 9.8% at Q3/08) due to the acquisition of a stake in CI.

• We therefore believe that the valuation gap between Scotiabank and its peers is likely to narrow in 2009, although it should still remain one of the more highly valued Canadian banks. Our 12-month price target multiple still implies a premium multiple to most banks to reflect strong asset growth, high ROE, and strong capitalization.
Financial Post, David Pett, 23 October 2008

BMO Capital Markets downgraded Scotiabank to Market Perform from Outperform. "We continue to recommend CIBC and BMO – the two larger banks that have well-understood problems and are already trading at low valuations. We are somewhat concerned that Scotiabank still trades at one of the premium valuations in the bank group," said analyst Ian de Verteuil.

21 October 2008

Sun Life Q3 2008 Earnings

RBC Capital Markets, 21 October 2008

Sun Life's pre-released Q3/08 results highlighted the pressure that the company is facing on earnings, but also that the company has ample capital resources.

Earnings pressure to continue

• The fully diluted loss was $0.71 per share versus our expectations for a profit of $0.11. The consensus estimate was $0.73 per share, but we do not believe the market believed that number.

• The after-tax impact of equity markets on earnings was $326 million while credit hurt earnings by $636 million. Both were larger than we had expected.

• If excluding the impacts of credit and equities, EPS would have been $1.00. However, we believe there will be other credit and equities hits in Q4/08, so we do not assume that "normalized" profits will be earned in Q4/08.

• We believe that equities alone could lead to a $0.80 hit on Q4/08 EPS if equity markets stay at current levels. We will review our estimates as Q4/08 progresses.

• We do not expect credit to hurt the company's earnings as much in Q4/08, given stabilization in areas that hurt the company in Q3/08 (financial services).

Capital levels adequate and are set to rise

• We believe that the company has adequate capital as at Q3/08, using a MCCSR ratio target of 200% and a RBC target of 300%. The MCCSR ratio was disclosed at 202%; we believe that the MCCSR ratio at the holding company level is slightly below 200% and management indicated that capital was injected in the U.S. operating subsidiary to maintain the ratio over 300%.

• We expect downward pressure on the MCCSR ratio in Q4/08 organically (potentially about 10 percentage points from equities alone).

• The CI gain could boost the MCCSR ratio by 40 percentage points.

Environment difficult but stock is cheap

We maintain our Outperform rating. SLF trades at 1.17x BV (1.12x pro-forma the CI gain). Pressure on earnings is significant in the near term but since we expect pressure from equities to abate in 2009, we look for Sun Life to post a meaningful earnings recovery, especially given recent movements in the CAD/USD. We also believe that Sun Life has ample capital to navigate through the near term earnings pressure.

Preview of Life Insurance Cos Q3 2008 Earnings

Scotia Capital, 21 October 2008

Canadian Lifecos – It's Gonna be an Ugly quarter

• Another brutal quarter – EPS will suffer. Markets were down 9% quarter over quarter (QoQ) in the United States, 19% in Canada, 13% in the United Kingdom, and 18% in Asia. Credit spreads widened considerably. Significant writedowns/impairment charges on LEH/AIG/Wamu bond holdings will take a big bite out of EPS. The only economic headwind that turned into a modest tailwind was the Canadian dollar, which fell 4% QOQ versus the U.S. dollar and yen.

• Weakening equity markets to take a big bite out of EPS, especially Manulife’s. A 10% decline in equity markets hurts annualized EPS for Manulife (MFC) by 8%, Industrial-Alliance (IAG) by 7%, and Great-West Lifeco (GWO) by 5%. (We are restricted on Sun Life Financial due to the CI Financial/Bank of Nova Scotia transaction.) And with equity markets, weighted by geography, down (QOQ) 12% for GWO, 19% for IAG, and 12% for MFC, this could be the worst quarter we have seen. Per MFC’s recent release, we expect the decline in equity markets will hurt EPS by $0.26, of which $0.12 in EPS is related to the company’s announced $200 million pre-tax reserve hit for segregated fund/VA guarantees and $0.14 EPS is related to other equity market items like the decline in the value of equities supporting liabilities (MFC generally has a higher percent of equities supporting liabilities than its peers), the decline in fee income, and the decline in the value of surplus assets. With the S&P/TSX down 19% QOQ, IAG, which is nearly as levered as MFC to declines in equity markets, and 100% vulnerable to swings in Canadian equity markets, will suffer as well (we estimate $0.09 in EPS). GWO, with a limited 100% segregated fund guarantee book of business in Canada and very insignificant U.S. variable annuity exposure, will suffer less. We estimate the impact of GWO will be $0.06 per share, predominantly related to declining asset values in wealth management businesses, including Putnam (which is still less than 5% of GWO’s bottom line), U.S. financial services (401(k) and P/NP), and offshore Isle of Man business

• Credit woes. Credit worries, more related to the spillover effect of the sub-prime meltdown rather than the sub-prime issue itself (to which the Canadian lifecos’ exposure is immaterial), will certainly weigh on EPS in Q3/08. Not only do we anticipate considerable EPS hits from the already disclosed exposures to Lehman, AIG, and Washington Mutual bonds, we also expect increases in provisions for defaults, primarily as a result of credit downgrades. Exhibit 3 outlines our estimates.

• Credit spreads are the widest we have seen. Widening credit spread risk is minimal for our lifecos (ex Sun Life) as they have limited exposure to book value guarantees on U.S. fixed annuity business.

• Next year EPS estimates reduced. The sharp decline in equity markets of late will obviously reduce average assumed market levels next year, even if markets climb back to our strategist’s unchanged 2009 year-end targets of 14,800 for the S&P/TSX and 1,400 for the S&P 500. Thus, the increase in the average level of the Canadian and U.S. equity markets is now assumed to be 5% and 2%, respectively, down 3% from previous estimates. As such, we have reduced 2009 EPS estimates by 3% to 5%.

• No more drag from currency. In the first half of 2008, the appreciating Canadian dollar was about an 11% drag on U.S. business, or a 3%-5% drag on the bottom line (more so for MFC). We forecast no EPS drag from currency in Q3/08 (apart from perhaps a very modest negative impact for GWO due to the weakening U.K. sterling), and expect a significant tailwind from currency in Q4/08 and 2009.

• Capital is not a concern. We believe capital concerns at Manulife are largely overblown. We anticipate the company has no plans to issue common equity to raise the capital level at one of its primary segregated fund/variable annuity insurance subsidiaries (Manufacturers Life Insurance Company, or MLI), and expect the company’s excess capital to decline to closer to $1 billion from over $3 billion (primarily due to reserves). Despite the decline, S&P maintained its AAA rating – the highest rating of any lifeco. We estimate GWO’s excess capital to have declined to $0.7 billion from about $1.1 billion and IAG’s excess capital to have declined to $100 million from $144 million. We look for MFC to utilize internal measures, such as co-insurance and/or an optimization of capital through subsidiary consolidation, to boost its excess capital level if necessary.

Great-West Lifeco Inc.

1-Sector Outperform – $33 one-year target, based on 2.5x 9/30/09E BV and 12.5x 2009E EPS
• We are looking for EPS of $0.48 for Q3/08, $0.06 below consensus.
• Putnam could likely be very weak. Net sales could be negative US$5B, margins 15%.
• We expect credit “hits” to be $0.12 EPS and weak equity markets to hurt EPS by $0.06.
• More U.K. payout annuity means more yield enhancement opportunities to help drive EPS growth, especially now with wider credit spreads. But additional credit default provisions could hurt bottom line.
• Europe top line will likely continue to be weak.

Industrial-Alliance Insurance and Financial Services Inc.

2-Sector Perform – $33 one-year target, based on 1.3x 9/30/09E BV and 10.3x 2009E EPS
• We are looking for EPS of $0.63 in Q3/08, $0.09 below consensus.
• Wealth management top line could very well continue to be weak.
• We expect credit “hits” to be $0.07 EPS and weak equity markets to hurt EPS by $0.09.
• Unless another acquisition is made, we see medium to long term growth in the 9% range.

Manulife Financial Corporation

1-Sector Outperform – $39 one-year target, based on 2.3x 6/30/09E BV and 12.6x 2009E EPS
• We are looking for EPS of $0.30 for Q3/08, $0.01 below consensus.
• We expect credit “hits” to be $0.12 EPS and weak equity markets to hurt EPS by $0.06.
• Japan could continue to be strong.
• Call should have lots of talk about capital and acquisitions. We see no need for additional capital for operating insurance subsidiaries.

Sun Life Financial Inc.

• We are currently restricted on the shares of Sun Life.

17 October 2008

S&P Says Banks Well Positioned to Manage Downturn

Financial Post, David Pett, 17 October 2008

Standard & Poors has combed over Canada's top six Canadian banks, and it appears to like what it sees.

"In general, we believe that the Canadian banks are well positioned to manage through a cyclical downturn," Lidia Pareniuk, S&P's primary credit analyst, said in a research note.

She said that while the risk in Canadian bank's U.S. businesses is increasing and investing banking revenues remain "shaky," Ms. Pareniuk was quick to recognize the significant strength in their domestic retail and commercial banking businesses, saying retail franchises will continue to be the backbone to their overall financial performance.

Canadian banks also benefit from healthy capital positions and stronger and more conservative balance sheets than their U.S. counterparts, the analyst added. which has resulted in superior credit quality to many global banks. That in turn, should provide stability despite some undoubtedly tough times ahead.

"There is no doubt that the Canadian banks are facing a more challenging business cycle with a slowing Canadian economy in concert with rising credit costs, costly funding, fewer loan originations, and sharply lower capital markets-related revenues to pressure profitability growth," Ms. Pareniuk wrote.

"Nevertheless, with what we view as substantially more robust balance sheets and capital positions and lower risk profiles, the banks' foundation appears stronger than that of U.S. and European peers."
The Globe and Mail, Tara Perkins, 17 October 2008

Canada's banks have been tossed an accounting lifeline that will give them more leeway when it comes to dealing with the complicated securities that have caused large writedowns.

Canada's Accounting Standards Board said yesterday it is speeding through new rules that will permit banks to reclassify financial assets in rare circumstances so that they don't have to be marked to market.

The changes mean banks can move some assets into an accounting bucket where they don't have to take writedowns until the assets have been permanently impaired. That means they might delay writedowns but won't avoid them, said Ian Hague, a principal with the Canadian board.

Shares of Canadian Imperial Bank of Commerce rose and Bank of Montreal rose sharply. The two banks have significant exposure to hard-to-value assets and are expected to be the largest beneficiaries of the new accounting rules.

The move follows a similar decision earlier this week by the International Accounting Standards Board (IASB). Standard setters say they are levelling the international playing field and giving banks flexibility during the financial crisis.

Many bank executives blame mark-to-market, or fair value accounting, for exacerbating the crisis. The rules require them to regularly value complicated securities, even if they plan to hold on to them. Over the past year the market for many of the securities has dried up due to lack of demand, causing massive writedowns that have walloped profits. Some bankers argue that a portion of the securities might recover in value if the markets come back to life.

The IASB brought its rules closer to U.S. generally accepted accounting principles, which have long said banks could reclassify some assets in “rare” circumstances.

But Sarah Deans and Dane Mott, accounting analysts at JPMorgan Chase & Co., said that weak accounting enforcement in European Union countries could leave the definition of “rare” circumstances open to abuse.

They also argue the new rules reduce transparency, and the hasty change “establishes an unfortunate precedent of political considerations overriding the need for high quality accounting standards, and of suspension of due process.”

Mr. Hague said the Canadian moves were made because the country is trying to harmonize its rules with those in other jurisdictions.

“What's happened here is that the current credit environment has caused some in the U.S. to say ‘whoops, we've now got some real rare circumstances and under our U.S. standards we can start to do some things under that trigger,' and the rest of the world to look at it,” he said.

Citigroup reported a loss this week of $2.8-billion (U.S.). But its results also included an unusually large increase of almost $6-billion in accumulated comprehensive loss, which would include potential mark-to-market writedowns not included in the earnings because the firm believes they might be reversed.

The standards board is now looking at requiring enhanced disclosure on liquidity risks and how the value of complex assets has been determined.
Bloomberg, Sean B. Pasternak, 17 October 2008

Canadian banks and insurers will have more flexibility to delay potential debt writedowns under new accounting rules that bring Canada in line with the U.S. and Europe. Financial stocks soared, led by Canadian Imperial Bank of Commerce.

The changes allow companies to reclassify assets such as bonds and stocks so that they aren't subject to "fair value" accounting, Canada's Accounting Standards Board said in a statement on its Web site today. The changes don't apply to derivatives, although investments such as collateralized-debt obligations may be considered, the board said.

The revision follows changes made by the International Accounting Standards Board that let companies avoid booking immediate losses as asset values plunge. Firms such as Manulife Financial Corp. have said the so-called ``fair-value'' rule exacerbates the credit crisis by forcing companies to write down assets that are hard to value and which they have no intention of selling.

"It's all about maintaining global comparability," Ian Hague, a principal with the Toronto-based Accounting Standards Board, said in a telephone interview. "We decided that we needed to level our playing field."

The new rules, effective July 1, may give Canadian banks relief as they prepare results for the fiscal year ending Oct. 31. The lenders have reported about C$11.6 billion ($9.8 billion) in pretax writedowns in the past 12 months.

"While accounting treatment has zero impact on economic reality, the move should ease concerns around prospects for further writedowns," TD Newcrest analyst Jason Bilodeau wrote in a note to investors.

Canadian banks and insurers climbed in trading on the Toronto Stock Exchange, with the nine-member Standard & Poor's/TSX Banks Index rising 2.5 percent as of 4:10 p.m. The gains were led by Canadian Imperial Bank of Commerce and Bank of Montreal, two of the banks with the most writedowns this year.

``Though further detail is required as to the type of assets that are eligible, at first glance this is clearly most beneficial to CIBC,'' said Sumit Malhotra, an analyst at Merrill Lynch & Co. in Toronto.

CIBC has written down C$7.55 billion in debt investments since the third quarter of 2007, the most of any Canadian bank. The stock surged C$3.60, or 6.6 percent, to C$58.

The U.S. Securities and Exchange Commission agreed this week to let banks in some cases delay writedowns for so-called perpetual preferred securities, which have declined in value during the collapse of the credit markets.

Canadian insurers such as Manulife and Sun Life Financial Inc. are expected to record losses this quarter on investments linked to American International Group Inc. and Lehman Brothers Holdings Inc.

Royal Bank of Canada, Bank of Montreal and Canadian Imperial are among the lenders expected to announce further writedowns on structured products, Standard & Poor's analyst Lidia Parfeniuk wrote in a research note yesterday.

"You may get a little bit of a delay" in writing down assets, said Hague, 47. "But if things stay bad, or it looks like things are going to stay bad for a long time in the future, you're going to have to take a writedown."

Companies will also be required to give investors "comprehensive disclosure," on the impact writedowns would have on earnings, Hague said. The rule changes are permanent, and can be used in the current quarter, he said.

Manulife Chief Executive Officer Dominic D'Alessandro has criticized fair-value accounting, saying it "confuses" the market.

"I think these kind of accounting practices are wrong theoretically, they're wrong operationally, they make no sense for anybody," D'Alessandro told investors last month. "It's absolutely nuts."

16 October 2008

Merrill Lynch Analyst Comments on TD Bank

Financial Post, Jonathan Ratner, 16 October 2008

While deteriorating economic conditions are weighing heavily on the beaten-up financial sector, some names are marking down their portfolios aggressively and building the reserves needed to offset future write-offs. This should make them positive outliers in terms of credit quality.

One of those companies is Toronto-Dominion Bank, according to Merrill Lynch’s Sumit Malhotra. The analyst recently upgraded the shares to a “buy” from “neutral” citing TD’s marks against its Commerce Bancorp loan and securities portfolio when the US$8.5-billion acquisition of the New Jersey-based bank closed earlier this year. TD’s reserves also continue to exceed net charge-offs, he said in a Sept. 14 note.

“In addition, the strong retail deposit franchises of both CBH and TD Canada Trust are very important attributes in this period of significantly increased funding costs,” Mr. Malhotra said.

While cutting his earnings per share estimates (EPS) by 1% for 2008 and by 5% in 2009 as a result of growth that is forecast to come in below the goal of 7% to 10%, along with a price target reduction from $73 to $68 per share, the analyst considers TD’s current price an attractive entry point for long-term investors. For the near term, the bank’s earnings power is expected to exceed that of most of its peers.

Mr. Malhotra highlights six reasons to like TD:

• Domestic retail business should continue to outperform despite a cooling housing market.
• With roughly 90% of the bank’s earnings coming from retail, 2009 EPS estimates are more sound.
• There is low risk of a major U.S. acquisition in the near term, unlike other large cap Canadian financials.
• Year-over-year EPS changes probably bottomed in the third quarter.
• Higher funding costs make TD’s strong retail deposit franchises in Canada and the U.S. all the more important.
• TD’s loan loss ratio is less worrisome than most Canadian banks.

13 October 2008

Banks Could be Due for a Short Term Rally: RBC CM

RBC Capital Markets, 13 October 2008

We believe that the recent decline in Canadian bank shares (-18% in the last seven trading days) might be overdone and there could be a short-term positive move.

• We think that the European and U.S. Governments understand the urgency in stabilizing their banking systems, and we believe there is a good chance they may succeed in the battle against the cost and availability of liquidity (which is currently frozen). If we are correct, this would be positive for Canadian bank shares.

• We think that if Governments do figure out how to stabilize the banking system's ability to fund itself in short-term markets (some Governments are starting to guarantee deposits and term funding), fears of short-term systemic risk should decline, and the pressure on near-term costs of funds in wholesale markets would also decline.

Sustainability of potential rally would be difficult

We continue to believe that the core businesses of Canadian banks will face deterioration in growth and profitability, which would put a cap on the magnitude and duration of a rally. We expect loan growth to decline, wealth management revenues to decline and loan losses to rise. Furthermore, the outlook for trading revenues is highly uncertain going into Q4/08 given the volatility experienced in many asset classes.

• In that kind of environment, we do not believe that today's median price-to-book multiple of 1.6x is particularly cheap given that that is where banks traded in the early 2000s when Canadian banks last dealt with rising loan losses, weak equity markets and slowing loan growth. We believe that, based on normalized profitability, 1.6x book value is an attractive multiple, but leading indicators in the following areas would need to turn more positive before banks can sustainably rally: credit market health, funding markets health, equity markets, housing markets, and unemployment.
Financial Post, Eoin Callan And John Greenwood, 11 October 2008

Ottawa yesterday committed to taking a sequence of escalating steps to protect Canada's banks and prevent a collapse in the financial system as part of a joint plan agreed to in Washington by the world's richest countries.

With Canada's banks caught in the grips of a worsening squeeze in global credit, the government agreed to a common international approach that could cost hundreds of billions of dollars if financial chiefs are unable to halt the downward spiral in markets.

Ottawa agreed to the plan during tense talks between the Group of Seven most-industrialized countries after unveiling a plan to buy $25-billion of mortgages from Canadian banks, which are unable to secure normal financing because of a crisis of confidence.

The scheme to buy up mortgages is expected to be extended to cover more of the $450-billion in conventional mortgages sitting on the books of Canada's top banks, if their access to international credit markets does not improve.

With the election three days away, Prime Ministger Stephen Harper said his government was "developing a series of market measures if [it's] necessary to intervene proactively."

The controversial blueprint approved in Washington by finance ministers and central bankers is designed to avoid systemic collapse, and came after a fresh rout in stock markets that pushed the TSX below the 9,000 mark for the first time in three years and saw the Dow plunge 18% this week in New York.

Amid bitter public feuding between nations, the agenda for the G7 meeting attended by Jim Flaherty, the Finance Minister, was torn up as tense negotiations edged toward a sweeping global plan to replace ad hoc interventions.

The plan would see countries agree to provide liquidity and capital as needed to financial institutions and money markets and follow a common approach to extending deposit guarantees.

The joint plan was hammered out after a series of unilateral actions by individual governments failed to halt a free fall in stock markets or restore confidence.

Under the plan, Washington agreed to buy equity stakes in a "broad" range of banks, said Henry Paulson, the U. S. Treasury Secretary.

The approach aims to learn from past mistakes and combine best practice, but goes far beyond what is seen as necessary for Canada, which would not immediately be obligated to take such steps.

"It is a matter of trying to instill some confidence on the global economy," said Maurice Greenberg, of the Peterson Institute for International Economics in Washington.

He said more limited steps would be expected of Ottawa, unless the impact on Canada's banking system continued to worsen.

A joint statement agreed to by Canada said countries would support "systemically important financial institutions and prevent their failure."

The extraordinary commitment means Ottawa has effectively agreed to save the country's top banks in the event they falter, although that was not seen as an immediate risk in Canada.

But Ottawa was reluctant to announce any major steps before election day after agreeing to buy up $25-billion worth of mortgages from Canada's banks by effectively lifting the limit on the pools of assets the Canada and Mortgage Housing Corp. is allowed to buy up. Financial institutions are having difficulty selling these loans into capital markets as mortgage-backed securities because of historically low demand from investors.

The message to Canada's banks from the government was: "Here's $25-billion now and if you need more, there is potentially a lot more behind that," said Michael Goldberg of Desjardins Securities.

"The purpose of the scheme is to put $25-billion of cash into Canada's banking system that can then be loaned out," said Andrew Fleming of Ogilvy Renault.

"This is going to make loans and mortgages more available and more affordable for ordinary Canadians and businesses," Mr. Flaherty said.

Several of Canada's leading banks responded by cutting their prime rates, passing on more of the emergency rate cut announced earlier this week by the Bank of Canada as Toronto-Dominion Bank was first out of the blocks, saying it would lower its prime rate 15 basis points to 4.35%, followed by Canadian Imperial Bank of Commerce. Bank of Montreal and Bank of Nova Scotia went further, passing on the full central bank rate cut by reducing the cost of prime lending to 4.25%.

Tim Hockey, the head of TD's retail chain, said the era when banks reduced interest rates in lock-step with the Bank of Canada was over.

"No longer is a Bank of Canada rate cut actually reflected 100% in the financial institutions' actual cost of funds," he said. "There are other forces at play, as you see, in the financial marketplace. The cost of funds generally [has] continued to increase dramatically."

09 October 2008

Canada has World's Soundest Banking System: WEF

Reuters, Rob Taylor, 9 October 2008

Canada has the world's soundest banking system, closely followed by Sweden, Luxembourg and Australia, a survey by the World Economic Forum has found as financial crisis and bank failures shake world markets.

But Britain, which once ranked in the top five, has slipped to 44th place behind El Salvador and Peru, after a £50-billion (US$86.5-billion) pledge this week by the government to bolster bank balance sheets.

The United States, where some of Wall Street's biggest financial names have collapsed in recent weeks, rated only 40, just behind Germany at 39, and smaller states such as Barbados, Estonia and even Namibia, in southern Africa.

The United States was on Thursday considering buying a slice of debt-laden banks to inject trust back into lending between financial institutions now too wary of one another to lend.

The World Economic Forum's Global Competitiveness Report based its findings on opinions of executives, and handed banks a score between 1.0 (insolvent and possibly requiring a government bailout) and 7.0 (healthy, with sound balance sheets).

Canadian banks received 6.8, just ahead of Sweden (6.7), Luxembourg (6.7), Australia (6.7) and Denmark (6.7).

U.K. banks collectively scored 6.0, narrowly behind the United States, Germany and Botswana, all with 6.1. France, in 19th place, scored 6.5 for soundness, while Switzerland's banking system scored the same in 16th place, as did Singapore (13th).

The ranking index was released as central banks in Europe, the United States, China, Canada, Sweden and Switzerland slashed interest rates in a bid to end to panic selling on markets and restore trust in the shaken banking system.

The Netherlands (6.7), Belgium (6.6), New Zealand (6.6), Malta (6.6) rounded out the WEF's banking top 10 with Ireland, whose government unilaterally pledged last week to guarantee personal and corporate deposits at its six major banks.

Also scoring well were Chile (6.5, 18th) and Spain, South Africa, Norway, Hong Kong and Finland all ending up in the top 20.

At the bottom of the list was Algeria in 134th place, with its banks scoring 3.9 to be just below Libya (4.0), Lesotho (4.1), the Kyrgyz Republic (4.1) and both Argentina and East Timor (4.2).

1. Canada
2. Sweden
3. Luxembourg
4. Australia
5. Denmark
6. Netherlands
7. Belgium
8. New Zealand
9. Ireland
10. Malta
11. Hong Kong
12. Finland
13. Singapore
14. Norway
15. South Africa
16. Switzerland
17. Namibia
18. Chile
19. France
20. Spain
124. Kazakhstan
125. Cambodia
126. Burundi
127. Chad
128. Ethiopia
129. Argentina
130. East Timor
131. Kyrgyz Republic
132. Lesotho
133. Libya
134. Algeria
Source: World Economic Forum Global Competitiveness Report 2008-2009.

Ottawa Weighs Proposals to Aid Banks if Crisis Persists

The Globe and Mail, Kevin Carmichael & Sinclair Stewart, 8 October 2008

The Canadian government is discussing ideas to help Canada's banks weather the global credit crisis by giving them access to high quality assets backed by the federal treasury, people familiar with the matter said.

While Canada's financial institutions remain in good shape, high-level officials are taking a closer look at proposals from banking executives to ease credit markets should the financial turmoil that has gripped global credit markets for the past month persist.

One plan under consideration would require the participation of Canada Mortgage and Housing Corp., the Crown agency that buys mortgages from financial institutions and resells the loans as securities with the full backing of the Canadian government.

Under the proposal, CMHC would establish something called a term lending facility, under which the agency would absorb some of the banks' mortgages. In exchange, CMHC would give the banks securities with the CHMC stamp, the sources said. That would leave the banks with assets that other lenders, including the Bank of Canada, would be willing to accept as collateral for short-term loans. That, in turn, would allow them to increase their own ability to lend. “They have to do this – they need things in place just in case,” said a top executive at one of the Big Five banks.

The executive cautioned that although the banks do not need that added support today, the government is moving quickly to ensure they can react if the financing situation continues to deteriorate.

“You have to work on this like you need it tomorrow,” he said.

The banks have also put forward requests that the Tories consider a range of options, including an increase in deposit insurance in the wake of similar moves in the United States and around world. Deposits are currently insured up to $100,000 and the United States recently boosted coverage to $250,000 (U.S.).

Finance Minister Jim Flaherty told reporters yesterday in Toronto that the government is prepared to take further steps to fight the credit crisis, although he declined to elaborate on what he might do.

“If it is necessary to take further steps to protect the stability of the financial system in Canada from spillover effects from the United States, from the United Kingdom, from other G7 countries, we will take those steps,” Mr. Flaherty said.

The Finance Minister is scheduled to meet with reporters again this morning in Ottawa.

Kory Teneycke, a spokesman for Prime Minister Stephen Harper, said the Finance Minister isn't making any announcements. Mr. Flaherty's intention is to use today's meeting to discuss this weekend's gathering of finance ministers and central bankers from the Group of Seven nations in Washington, Mr. Teneycke said.

The goal of any plan to help the banks is to lower credit costs by offering them a chance to load up their balance sheets with safe assets at a reasonable price. In the wake of the failure of U.S. investment bank Lehman Brothers Holdings Inc. last month, lenders are hoarding their cash out of concern they might lose it if they do business with the wrong counterparty.

Their fear has caused the price that banks pay for short-term loans to jump to record highs. Central banks around the world, including the Bank of Canada, have flushed the financial system with billions of dollars in loans to give financial institutions access to the cash they need to balance their accounts.

The decision by the Harper government to take bolder measures is a reversal, reflecting the persistence of financial turmoil that continues to rage even after the U.S. government approved a $700-billion (U.S.) rescue package last week.

Since the beginning of the campaign for the Oct. 14 vote, Mr. Harper and Mr. Flaherty have insisted that Canada is relatively sheltered from the credit crisis because the country's banks remain well capitalized.

That position has drawn criticism from the government's political opponents as evidence that Mr. Harper is out of touch during the worst financial crisis since the Great Depression.

The Canadian banking system is widely viewed as the healthiest in the world, easily surpassing its peers in terms of stock market performance and capital strength. Banks here tended to keep mortgages on their balance sheets, rather than package them off as complex securities, and avoided much of the toxic sub-prime lending that punished their counterparts in the United States.

Yet even this conservatism hasn't immunized them against a global credit crunch that has frozen lending between banks and made it difficult for even the healthiest companies—including financial institutions—to obtain financing.

By expanding CMHC's involvement in the securitization market, banks would be able to move mortgages off their books and get access to a cheaper form of funding. This, in turn, would free up more cash for other lending efforts and hopefully help thaw some of the frozen credit markets.

“You're taking big chunks [of loans] off of balance sheets that are sitting there as unsecured money, funded by deposits,” one senior Canadian banker said. “You're essentially freeing funds that can be used as term lending.”

Here's how it might work: A bank will pool together a group of mortgages and package them off to CMHC. This is one of the cheapest ways for the banks to fund the home loans they make—especially today, when access to credit has shrivelled and borrowing rates have climbed.

Stephanie Rubec, a spokeswoman for CMHC, declined to comment.

CMHC, through its Canada Housing Trust arm, sell bonds comprising these insured mortgages to investors, who have the comfort of investing in a security that is backed by the government of Canada.

The problem is, there's a limit—total mortgage backed securities issued by the CMHC totalled around $190-billion at the end of August, or less than 25 per cent of the overall mortgage market. Banks have been lobbying Ottawa since the spring to expand the amount of mortgages CMHC will accept for securitization to help make funding cheaper and more accessible.

“The easiest way to support the Canadian banks is to expand the CMHC securitization pie,” added another banker. “It is a cheap funding vehicle.”

In recent weeks, some Canadian banks have urged Ottawa to increase the size of the current program substantially, to a few hundred billion dollars. Indeed, sources say that in a call this week between the heads of the big banks and Bank of Canada Governor Mark Carney, it was evident that the financing problems are becoming more of a strain for some of the Big Five.

Different options to help bolster bank financing were being discussed, including an expansion of the amount of bonds the CMHC issues, or a so-called “term repo” facility, which is akin to a sale and repurchase agreement: the banks would effectively be lent money for a specified period, and then be required to pay it back.

The Canadian Press, Rita Trichur, 8 October 2008

The federal government warned "a couple" of Canadian banks that their capitalization levels were on the brink of falling below accepted standards long before the credit crunch disintegrated into an outright global financial crisis, Finance Minister Jim Flaherty disclosed today.

Speaking to reporters in Toronto, Flaherty said the government began scrutinizing Canadian banks' capital rates following the onset of the credit crunch in August 2007, adding those efforts continue to the present day.

"We monitored carefully the capitalizations of our banks. And we had a couple of financial institutions in Canada that ran the risk of falling outside of the capitalization requirements in Canada - which are among the highest in the world," Flaherty said at a press conference to discuss an upcoming G7 meeting in Washington.

"We required them, through the Office of the Superintendent of Financial Institutions, to maintain the appropriate capital requirements and to raise capital as necessary, which was done. Which was done months ago.

"We have continued, and I have been involved in making sure that the Department of Finance and the Office of the Superintendent of Financial Institutions strictly monitor the capitalization requirements which we imposed on banks. So that I can say with confidence (to) Canadians today that are our financial institutions are well-capitalized in Canada, which cannot be said in a number of another countries in the world."

When pressed for specifics, Flaherty declined to say which Canadian banks were in danger of breaching capital requirements.

In January, however, Canadian Imperial Bank of Commerce announced plans to raise $2.75 billion by selling stock, most of it to blue-chip investors, in an effort to repair its balance sheet. Last week, CIBC struck a separate $1.05 billion (U.S.) agreement with a fund arranged by American private equity group Cerberus Capital Management to lower its exposure to the U.S. residential mortgage market and shore up capital.

CIBC has taken about $7.55 billion (Canadian) in debt-related writedowns since America's subprime mortgage market imploded last year, the most of any Canadian bank. The running tally of the "big six" now stands at about $11.6 billion, a mere drop in the bucket when compared to the near $600 billion (U.S.) in losses and writedowns posted by banks and security firms worldwide.

"I can reassure Canadians that we will watch very closely and not just lately. We've been watch very closely for a long time, and monitoring our financial institutions - not just our banks but our insurance companies closely," Flaherty said.

"I can assure Canadians that they are not only solvent but that they are within the capitalization requirements that we insist upon in the government of Canada which are among highest in the world."

Flaherty's comments about Canadian banks came on the heels of a co-ordinated round of interest rate cuts from the world's major central banks. British authorities, meanwhile, announced a whopping 50 billion-pound government-backed rescue package for that country's teetering financial institutions. Those dramatic efforts to unclog credit markets come on top of last week's approval of a $700 billion (U.S.) bailout for Wall Street banks.

Flaherty, will meet Friday in Washington with finance ministers from industrial countries to co-ordinate efforts to deal with the global economic crisis.

Earlier today, the Bank of Canada and other central banks cut interest rates by half a percentage point in a co-ordinated effort to stimulate lending and economic growth.

Flaherty said an International Monetary Fund report released Tuesday shows Canada will lead G-7 economies in 2009, with growth of 1.2 per cent, though overall global growth will slow down.

Meanwhile, the U.S. is forecast to grow only 0.1 per cent and Europe 0.2 per cent.

The minister also said he believes the Bank of Canada has done a sufficient job so far in providing money – or liquidity – to the markets.

Flaherty said he wouldn't advise Canada's banking system to decide whether to pass today's interest rate cut onto consumers.

"I don't give the banks guidance on what they should do or shouldn't do," he said.

"They respond to the steps taken by the Bank of Canada as they see fit. We have a competitive banking system."

Michael Goldberg, a financial services analyst with Desjardins Securities, said the British bailout package coupled with yesterday's $10 billion common stock offering by Bank of America should help restore confidence in the financial system but also "heighten near-term uncertainty" for Canadian banks.

"These developments raise two questions for Canadian banks: will they have to raise capital and will dividends have to be reduced as a result of earnings dilution? Our answer to the first question is "yes"--the likelihood of added capital is increasing," Goldberg said in a note to clients.

".....Our answer to the second question remains that the likelihood of dividend reductions continues to be remote, even for CIBC, which in our view, needs an injection of capital the most (even after its financing/insurance arrangement with Cerberus announced earlier this week)."
The Globe and Mail, Sinclair Stewart, 8 October 2008

Jean Chrétien is smiling.

Ten years ago this fall, after his government rejected a pair of proposed bank mergers, the financial community was awash in dire prophesy: Canadian banks were too small to compete with their bulked-up neighbours to the south, the critics complained.

They were too insulated to remain relevant in a global economy characterized by lightning change and mind-bendingly complex products.

Yet today, amid the worst financial crisis in a generation, those predictions have been turned squarely on their head. While Wall Street titans succumb to a credit meltdown, spreading their contagion to Europe, the Canadian banking system has emerged as the most stable and best performing in the world.

Three Canadian banks are now in the top 10 in North America by market value, and the remaining two are not far behind.

Mr. Chrétien, who faced considerable Bay Street backlash for his stance on the banks, now credits his government's policy with helping to ward off the financial meltdown currently gripping much of the G8.

“While everybody's in turmoil, Canada is not in turmoil,” Mr. Chrétien explained in a brief interview.

“And the two big reasons are that we balanced the books in '95, and we said no to the merger of the banks.”

Of course, it's impossible to say with any certainty whether the decision to quash two mergers – one between Royal Bank of Canada and Bank of Montreal, the other between Toronto-Dominion Bank and Canadian Imperial Bank of Commerce – shielded the Canadian industry from the mortgage-fuelled fallout that has ravaged Wall Street.

One school of thought is that if the Canadian banks gained scale through mergers in 1998, they would have made bolder moves south of the border, and perhaps become entangled in the same toxic lending activities that have prompted the collapse of several major U.S. banks.

Indeed, sources said that had RBC and BMO joined forces, one of their first acquisition targets would have been Wachovia Corp., the North Carolina bank that has been hobbled by soured mortgages, and is now the subject of a takeover battle between Citigroup Inc. and Wells Fargo.

“It was a crazy race they were in,” Mr. Chrétien said of the U.S. banks, which were expanding frantically in the belief that bigger was better.

“Our guys were not in that race because they claimed they were too regulated.”

Charles Baillie, the former head of TD, believes that had the Canadian banks merged, they would have been able to resist the temptation of reckless lending that consumed Wall Street, and might be in a better position now to participate in an industry-wide buying frenzy.

Yet he acknowledges it's no sure thing, and said that the current health of the banking sector probably nullifies any appetite for industry mergers.

“If we had been allowed to merge, we might have thought that we were big characters and played more aggressively,” he said. “But I think it's more likely we would have played by the same lending standards we have now.”

RBC, TD, and BMO have each established a presence in the U.S. market, albeit not in the transformative way they may have imagined when they lobbied for mergers. And CIBC's painful experience in investment banking there in the late 1990s proved that a bank can find trouble through foreign expansion regardless of whether they first tie the knot with a domestic partner.

Yet while the impact of merger policy is debatable, the issue of culture isn't: indeed, it is one of the main reasons why the Canadian industry has remained stable in the face of a global banking mess.

Canadian banks have historically been more cautious lenders than their U.S. peers, preferring to hang on to most loans they underwrite rather than package them off in complex securities to third parties.

The numbers bear this out: As of the end of last year, only 23 per cent of mortgage loans in Canada had been securitized, with the remainder sitting on the balance sheets of federally regulated institutions. In the U.S. market, by contrast, 51 per cent of mortgage debt had been moved off balance sheets through securitization, much of it Byzantine.

Ian de Verteuil, a BMO Nesbitt Burns analyst who compiled the numbers in a recent research report, noted that there are several problems with such a heavy reliance on securitizations. Underwriting standards become less stringent (if you're not keeping a loan on your books, there's less reason to be picky); the complexity of the securities backed by these mortgages require more reliance on rating agencies, which have shown themselves to be sorely lacking; and the fact that many of these securities are held by unregulated entities like hedge funds makes central bank interventions less effective.

“We believe the fundamental difference between the Canadian and the U.S. banking systems is that Canada still effectively runs an on-balance-sheet banking system, while the U.S. does not,” Mr. de Verteuil wrote in his report.

This is not to say there haven't been problems: several of the banks have had exposure to subprime mortgages and faltering bond insurers.

CIBC, the worst hit, suffered almost $7-billion in writedowns.

Even so, the capital position of these banks remains very strong, and investors noticed have this. Although the index of Canadian banks has fallen about 10 per cent this year, that is far less than the U.S. industry (25 per cent), Europe (38 per cent) or Asia (37 per cent). And this relative strength has catapulted RBC to the number four ranking among North America's big banks – a big leap, considering its planned merger with BMO in 1998 would have made the combined company a distant 10th.

Instead of being devoured, the Canadian banks might do some devouring of their own. Chief executives of the Big Five are being pitched daily on potential acquisitions in the U.S. sector, and most believe they will find some bargains to fuel their expansion.

Financial Post, Karen Mazurkewich and Eoin Callan, 7 October 2008

In a desperate bid to help U.S. banks recapitalize, Washington is dropping its inhibitions and reaching out to Canadian financial institutions to gauge their willingness to participate in rescue operations.

The Federal Reserve has activated a back channel that puts the central bank in direct contact with chief executives at Canada's largest banks and insurers, according to a person familiar with the dialogue.

They are approaching "banks with major assets in the U.S. like [Toronto-Dominion Bank] and Royal [Bank of Canada], because when they have a bailout situation they want everyone who is a potential buyer to look at it," the source said.

The ongoing conversations between the U.S. central bank and Canadian executives reflects the challenge facing Washington as it seeks to address both short-term liquidity and permanent capital needs of financial institutions crippled by more than $500-billion in losses and limited access to financing.

The communications have included phone calls from Fed officials pitching potential sales of assets of U.S. financial companies and at least one intensive discussion of a major rescue operation, according to people familiar with the contacts.

The Fed has been steadily widening the circle of foreign institutions it is working with as the banking crisis has deepened, according to a former Fed official now on Wall Street.

The outreach to Canadian companies signals a more permissive environment in which U.S. authorities would look very favourably on an intervention by a Toronto-based institution.

It comes as Washington deploys greater reserves than initially anticipated to restore liquidity, while still facing an uphill battle to help banks recapitalize at a point in the crisis when projected losses of up to $1-trillion still ahead for the global banking system.

The engagement of Canadian institutions follows U.S. federal assent for the acquisition of assets in bankrupt Lehman Brothers by the U.K.'s Barclays, in a deal that followed intensive discussions with the Federal Reserve and U.S. Treasury.

That deal was smoothed by good relations between the London and Washington and a lower level of resistance to a deal with the U.K. on Capitol Hill, where political disquiet over foreign interventions has helped keep some buyers at bay.

"Canada is not China," said a former Fed official.

A lobbyist for a Canadian bank said the political climate in Washington had changed markedly since the passage of a $700-billion bailout and that this country is now seen as a potential source of support.

Executives and advisors in the Canadian financial services industry indicated they still saw live opportunities for their sector to help drive consolidation and recapitalization in the U.S., despite limited flexibility at a time when sinking markets were lowering all boats.

"I don't think Canadian banks want to take a lot of balance sheet risk but I don't think they are going to have to," the source said, adding that while the target banks have many subprime mortgages, the Federal Reserve will backstop these high-risk liabilities.

"We could end up in a funny situation two years from now saying this was a once in a generational opportunity for Canadian banks."

U.S. regional banks remain in deep distress and an acquisition of this scale is seen as possible in the coming months, as Canadian banks cautiously explore possible buys and after TD Bank Financial Group put its name forward during an auction of Washington Mutual.

A broad sell-off in the U.S. insurance sector has also cut into the valuations and capital positions of U.S. insurers seen as possible matches for Sun Life and Manulife, the Canadian life insurers.

Sun is actively weighing the likelihood of an intervention in the U.S., according to one person in the industry.

A foreign bank executive who participated in a recent round of rescue talks with the Fed said U.S. authorities were also keeping national regulators informed of high-stakes negotiations.

It was not clear how deeply involved Canadian authorities were in the discussions.

The Bank of Canada declined to comment.

08 October 2008

RBC Settles with SEC on Auction Rate Securities

Financial Post, Eoin Callan and Jamie Sturgeon, 8 October 2008

The Royal Bank of Canada will pay a fine and reimburse customers as part of a settlement with U.S. federal and state authorities over its role in the collapse of the auction-rate securities market that left many Americans unable to access savings they had set aside for short-term needs like college tuition and medical expenses.

The largest bank in Canada said it will buy back about US$850-million of auction rate securities from more than two thousand retail clients in the U.S. and pay a US$9.8-million fine as part of an agreement with the Securities and Exchange Commission and New York Attorney General's Office.

The settlement makes RBC one of the first banks in the country to be called to account for its conduct leading up to the credit crisis, which has dragged down the global economy and on Wednesday forced an emergency rate cut by the Bank of Canada in coordination with other countries.

The agreement being pursued by federal authorities comes amid public anger in the U.S. over a plan to bail out banks and pump cash into credit markets.

New York Attorney General Andrew Cuomo said: "In today's economic climate, it's more important than ever for investors to be able to access

their money."

The settlement follows agreements struck between U.S. authorities struck and major international banks, including Merrill Lynch, Bank of America Citigroup, and UBS, which all paid much heavier penalties.

The deal with U.S. enforcement officials and regulators does not close the door on further penalties or pay-outs by RBC over the collapse of the US$330-billion auction-rate securities market that froze in the spring.

RBC said it would participate in an arbitration process overseen by the Financial Industry Regulatory Authority where retail investors may seek further legal damages from the bank.

Canada's largest bank is also facing a class-action law suit from aggrieved clients who claim they were suddenly unable to access holdings they believed were liquid and similar to cash.

The bank also pledged to assist with "liquidity solutions" for institutional clients that were sold the securities but are not covered by the settlement.

The impact of the $850-million repurchase program on RBC's fourth quarter results is currently estimated to be approximately US$30 million on a pre-tax basis, the bank said.

RBC neither admitted nor denied allegations of wrongdoing.
The Globe and Mail, Tara Perkins, 8 October 2008

Royal Bank of Canada has agreed to buy back roughly $850-million (U.S.) worth of auction rate securities from more than 2,000 investors in a settlement reached Wednesday with the Securities and Exchange Commission.

Under the deal, individual investors, small businesses, small non-profits, charities and religious organizations will have the opportunity to sell back to RBC auction rate securities that they bought before the market for the securities collapsed in February, the SEC said.

The agreement with the regulator also requires the bank to use its best efforts to provide liquidity to larger institutional customers who were sold the securities.

RBC said it has neither admitted or denied any allegations of wrongdoing in reaching the settlement. The bank has also agreed to pay a penalty of $9.8-million to the New York Attorney General's office and state securities commissioners. It estimates the total impact of its settlement will be about $30-million (U.S.) pre-tax in the fourth quarter. The bank will hold the securities that it is forced to buy back, and more than 85 per cent of them are rated triple-A.

The proposed settlement includes charges in U.S. District Court alleging that RBC made misrepresentations to its customers when it told them that the securities were safe and highly liquid alternatives to money market investments.

In fact, the liquidity of the securities was premised on RBC providing support bids for auctions when there was not enough customer demand. RBC continued to market the securities as safe even though it knew about escalating liquidity risks in the weeks and months before the market collapsed, and when it stopped supporting the auctions in February there were widespread auction failures for RBC customers, the SEC said.

The SEC was working in co-operation with the New York Attorney General's Office, the North American Securities Administrators Association, and the Financial Industry Regulatory Authority.

“Our goal when we approached the regulators was to create liquidity for our retail clients who hold auction rate securities, and we are pleased that this has been accomplished,” an RBC spokeswoman said.

The settlement follows similar agreements that the SEC has struck with numerous other banks that were larger players in the $330-billion market for auction rate securities, including Citigroup, UBS Securities, Wachovia, Merrill Lynch and Bank of America.

In a note to clients, BMO Capital Markets analyst Ian de Verteuil said Royal Bank's settlement is towards the lower end of the range of potential costs to settle this issue, and it shouldn't have any impact on the stock price.

Bank of America also struck a settlement with the SEC Wednesday, agreeing to buy back up to $4.7-billion of securities, and to use its best efforts to provide up to $5-billion in liquidity to institutional investors.

By no later than Dec. 15, RBC must offer to buy, at par, all auction rate securities from individual investors, small business investors with accounts up to $10-million, and investors that are non-profit, charitable or religious organizations with accounts up to $25-million, that bought the securities from RBC before the market collapsed on Feb. 11. Until it buys the securities, it must offer individual investors non-recourse loans at no cost to the borrower.

RBC must use its best efforts by the end of 2009 to provide liquidity to its institutional and business auction rate securities investors with accounts of more than $10-million and non-profit, charitable and religious organizations with accounts of more than $25-million.

The SEC said that RBC faces the prospect of a financial penalty after it has completed all of these obligations. Any penalty will take into consideration the extent of the bank's alleged misconduct in marketing and selling the securities, the extent of the bank's co-operation in the investigation, and the costs incurred by the bank to agree with the provisions of this settlement.

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. A number of companies and retail clients invested in the securities because they could treat their holdings almost like cash.

But the market for them collapsed in February amid the downturn in the broader credit markets.

07 October 2008

RBC CM Lowers Earnings Estimates & Target Prices

RBC Capital Markets, 7 October 2008

RBC Capital Markets has lowered its 2008 and 2009 earnings estimates and target prices for the financial services stocks it covers to reflect the deteriorating macro environment, namely weak equity markets, increases in short term funding costs, the deterioration in the health of the U.S. financial services system and continued deterioration in the U.S. economy (which increases the odds of the Canadian economy weakening). We maintain our negative bias for potential future earnings revisions.

We are lowering our investment rating on Manulife's shares to Sector Perform from Outperform to reflect a share price that has remained relatively strong in the context of a rapidly deteriorating macro environment. We believe that the market correctly perceives Manulife as a company that is well-positioned to navigate through the turmoil in capital and equity markets relative to peers, but the valuation gap is too large to ignore, in our view.

The fallout of the global financials crisis could lead to attractive buying opportunities for financial services companies that are well capitalized, well funded, and have manageable credit exposures. We believe that Manulife, Sun Life, Scotiabank and ING Canada are best positioned to take advantage of potential acquisition opportunities.

We would not rush to buy financial services stocks in spite of attractive valuations based on historical averages. The macro environment continues to worsen, with faster deterioration being witnessed in certain areas (equity markets, funding costs, access to liquidity for corporates). Valuations have declined and are attractive compared to "normal" valuation levels, but they are not that low compared to prior troughs.

• We see more near term risk in lifecos than banks as they are more affected by equity markets than banks, and the three big ones have more exposure to U.S. credit via their investment portfolios.

• Our favourite stocks are Industrial Alliance, Sun Life and ING Canada.

• The "look through the valley" names we would hold in addition to the those three stocks are Manulife, Scotiabank and TD Bank.

• Those three companies have attractive franchises and are well positioned to make acquisitions but we do not find their valuations attractive given the difficult macro environment.
Financial Post, Eoin Callan, 7 October 2008

The likelihood of ongoing weakness in the financial sector is too great for any of the leading Canadian banks and insurers to be considered bargains at current share prices, according to RBC Capital Markets' Andre-Philippe Hardy. The analyst lowered his earnings estimates and target prices for large financial services companies across the board.

He said this reflected "the deteriorating macro environment, namely weak equity markets, increases in short term funding costs, the deterioration in the health of the U.S. financial services system and continued deterioration in the U.S. economy (which increases the odds of the Canadian economy weakening)."

In addition to lowerings his targets, Mr. Hardy said he has a "negative bias for potential future earnings revisions."

As part of the downgrade of the sector, RBC lowered its investment rating on Manulife's shares, no longer expecting the Toronto-based insurance company to outperform the sector. RBC said that even when taking into account acqusition opportunities, "the valuation gap is too large to ignore."

The fallout of the global financials crisis could lead to attractive buying opportunities for financial services companies that are well capitalized, well funded, and have manageable credit exposures, Mr. Hardy said. But he added: "We would not rush to buy financial services stocks in spite of attractive valuations based on historical averages. The macro environment continues to worsen, with faster deterioration being witnessed in certain areas (equity markets, funding costs, access to liquidity for corporates)."

It is "still too early to buy", according to RBC, though peering "across the valley" to a time when markets recover, it sees Manulife, Sun Life, Scotiabank and ING Canada emerging as winners from the ongoing consolidation in the sector.

The analyst warned of "more near term risk in (life insurance companies) than banks as they are more affected by equity markets than banks."

06 October 2008

Scotiabank Buys Sun Life's CI Financial Stake

Bloomberg, Frederic Tomesco and Sean B. Pasternak, 6 October 2008

Bank of Nova Scotia, Canada's third- biggest bank, agreed to buy Sun Life Financial Inc.'s stake in money manager CI Financial Income Fund for C$2.3 billion ($2.1 billion), the biggest acquisition in the bank's 176-year history.

Scotiabank will pay C$22 a share in cash for a 37 percent stake in CI Financial, said Chris Hodgson, head of domestic banking, in a conference call today. That's 32 percent higher than CI's closing price on Oct. 3.

With the purchase, Scotiabank will become the largest shareholder of Toronto-based CI, the second-biggest mutual-fund company in Canada with about C$63 billion in assets. Scotiabank Chief Executive Officer Richard Waugh has said building the asset management business is one of the priorities for the bank.

``It's an opportunistic pick-up for Scotia,'' said Jeffery Lusher, a fund manager at BMO Harris Private Bank in Montreal, which oversees about C$2.1 billion and holds shares of Bank of Nova Scotia and Sun Life. ``They have a lot of capital, and stock prices have been trading lower in recent weeks, so the timing is good.''

Scotiabank fell C$2.16, or 4.6 percent, to C$45 at 4:15 p.m. trading on the Toronto Stock Exchange. Sun Life fell C$1.89, or 5.3 percent, to C$34.13. CI Financial fell 44 cents, or 2.6 percent, to C$16.20.

The transaction may allow Toronto-based Scotiabank to eventually buy all of CI, analysts such as Dundee Securities Corp.'s John Aiken said. Scotiabank may also sell its mutual fund operations to CI to save costs, as the Globe and Mail reported in August.

``Scotia has a whole range of options open to them,'' Aiken said in a phone interview. ``You've got that Sun Life stake, where you can take it out at your leisure. But why waste the capital on that when you've got other opportunities -- such as U.S. retail banking -- which you can get on the cheap?''

Sun Life approached Scotiabank for the sale, which was completed over the weekend, Scotiabank said. Just last month, Sun Life executive Kevin Dougherty called CI one of Sun Life's ``growth engines,'' and said the insurer was comfortable with its stake.

Scotiabank, which owns the smallest mutual-fund business among the country's five main banks, is increasing its asset- management business through acquisitions. Last month, it purchased the Canadian operations of E*Trade Financial Corp. for about $442 million, doubling its domestic online-brokerage business. The bank bought 18 percent of Toronto-based money manager DundeeWealth Inc. last year.

The CI purchase will add about 4 cents a share to earnings in the first year, and 8 cents by the third year, Hodgson said on the call.

Sun Life, Canada's third-biggest insurer, said the sale will give it more cash to buy assets amid the turmoil in the financial markets. Toronto-based Sun Life said last month it expects to report writedowns in the third-quarter on its investments in U.S. firms including American International Group Inc. and Lehman Brothers Holdings Inc.

Sun Life CEO Donald Stewart said the sale wasn't needed to raise capital for the Toronto-based firm, which ended the second quarter with about C$1 billion in excess capital. Sun Life will post a pretax gain of C$1.1 billion from the sale.

``Unlocking CI's value now provides Sun Life with enhanced firepower to aggressively pursue our growth objectives,'' Stewart said.

Stewart said the insurer is looking to expand its U.S. annuities and group insurance business, as well as Asia.

Andre-Philippe Hardy, an analyst at RBC Capital Markets, has said that Sun Life may look at AIG's assets. AIG, the largest U.S. insurer by assets, has been forced to sell businesses to repay an $85 billion U.S. government loan. AIG may sell its U.S. life insurance and annuities units, people familiar with the situation said last week.

``There are a lot of opportunities out there,'' Stewart said. He declined to comment on AIG.

Sun Life may announce a transaction in the U.S. in the next 30 to 60 days, said Genuity Capital Markets analyst Mario Mendonca.

Financial Post, Jonathan Ratner, 6 October 2008

Bank of Nova Scotia's move to buy out Sun Life Financial Inc.'s 37% stake in mutual-fund giant CI Financial Income Fund partners Scotia with one of Canada's market leaders in wealth management and "catapults" the bank into a major player in the asset management sector, according to analysts at Dundee Capital Markets.

It could be a precursor to Scotiabank, which has already shown it intentions to grow its domestic wealth management business, increasing its stake in CI even more.

With a 37% minority interest in CI, Scotia can now arrange a "strategic transaction" with CI by either buying the income trust outright, or executing the sale of its own mutual fund operations to CI, Mr. Aiken said in a note to clients on Monday. With Sun Life out of the picture, the latter is the more likely scenario, he wrote.

Scotiabank is now able to negotiate the sale unhindered, which would likely result in Scotia owning a majority stake in CI once a second deal is done.

"We believe that an additional step not only makes sense, but is likely to happen," he wrote, allowing Scotiabank "to participate in Canadian mutual fund consolidation without injection of additional capital."

Yet the move could take some time, said Mr. Aiken who put a "neutral" rating on Scotiabank shares with a 12-month price target of $49.

"With the uncertainty in the current market place and the opportunities available to BNS, the timing is suspect and may not be as immediate as many investors assume."

Financial Post, Eoin Callan, 6 October 2008

The worsening turmoil in financial markets Monday altered the balance of power in Canada's wealth management sector, as one of the country's largest insurers was compelled to sell off a highly-prized stake in the third-biggest mutual fund company for $2.3-billion in cash to Bank of Nova Scotia.

The sale of a 37% stake in CI Financial Income Fund by Sun Life provides the insurer with a capital injection as the costs of bad bets on financial markets climb for the Canadian insurance sector as investment portfolios bleed cash.

"What it probably does reflect is Sun Life having a real need for cash. I think it is a huge win for Scotia," said John Hall, a partner with Borden Ladner Gervais who advises securities companies.

The deal positions Scotiabank to vault from the periphery of the wealth management industry to a leading role in a sector expected to benefit as Baby Boomers invest for their retirement.

The minority stake in CI gives Canada's third-largest bank a clear "path to control" to one day seize all of the fast-growing investment manager and combine it with Scotia's other asset management operations, according to a person close to the bank.

The transaction is a coup for Rick Waugh, the chief executive of Scotia, who through strategic manoeuvring and back-room talks is overcoming Scotia's weakness in a sector the bank argues represents the future of the industry.

"This announcement is a significant step forward and demonstrates Scotiabank's ongoing commitment to growing our wealth-management business," said Mr. Waugh.

Scotiabank will pay Sun Life $22 a share in cash, a significant premium over the $16.64 closing price last week for shares in CI, which oversees about $100-billion in assets.

The fast growing standalone company led by Bill Holland has risen quickly up the ranks of Canada's asset managers and may fight to keep its independence, according to analysts.

The sale of the stake by Sun Life comes after the insurer racked up losses alongside rival Manulife Financial on exposures to failed U.S. financial institutions including Lehman Brothers and Washington Mutual. The company's market value has fallen by a third since the spring amid a heavy sell-off in the financial sector as a wave of historic collapses of banks and insurance companies shake investor confidence.

The cash deal was agreed over the weekend and finalized in the early hours Monday after months of foot-dragging by Donald Stewart, chief executive of Sun Life, following an earlier approach from Scotia.

As market values plunge across the insurance sector, companies are seeking to position themselves as drivers of consolidaton even as their own investment portfolios suffer.

Leading U.S. life insurers have seen their values drop precipitously in recent days, with Prudential down 40% this month.

This is creating potential buying opportunities for insurers that can keep cash on hand and retain investor confidence while rivals sink.

"Unlocking CI's value now provides Sun Life with enhanced firepower to aggressively pursue our growth objectives," said Mr. Stewart.

The company is among a wide range of buyers interested in participating in a fire sale of assets by American International Group, the failed U.S. insurer that is auctioning off key assets in the U.S. and overseas.

One of the most sought-after assets is AIG's Asia life insurance operations that have 20 million policyholders across 13 countries.

AIG said it hopes to sell a minority stake that analysts estimate could sell for up to US$20-billion amid signs of strong demand.

The Globe and Mail, Tara Perkins, 6 October 2008

Sun Life Financial Inc. agreed Monday to sell its 37 per cent stake in mutual fund giant CI Financial Income Fund to Bank of Nova Scotia for $2.3-billion in cash.

The deal comes as Sun Life hunts for acquisition opportunities amid consolidation in the financial services industry resulting from the credit crisis.

“Sun Life is well-positioned to take advantage of unprecedented opportunities existing within the global financial services sector today,” said chief executive officer Donald Stewart. “Unlocking CI's value now provides Sun Life with enhanced firepower to aggressively pursue our growth objectives.”

CI announced in late August that it had been in discussions with a number of parties about possible strategic combinations. Last month, CI's efforts to buy Bank of Nova Scotia's mutual fund arm fell flat. That deal would have seen Scotiabank pick up a significant equity stake in CI, the No. 3 player in Canada's mutual fund business.

Now, Scotiabank is picking up the stake while retaining control of its own fund business.

“This announcement is a significant step forward and demonstrates Scotiabank's ongoing commitment to growing our wealth management business,” said Scotiabank CEO Rick Waugh.

Sun Life acquired roughly one-third of CI since mid-2002 in exchange or selling its mutual fund subsidiaries Spectrum Investment Management Ltd. and Clarica Diversico Ltd. to CI. The transaction included a distribution agreement that gave CI preferred access for its financial products among Sun Life's advisers.

The current deal is expected to close in 45 days.

CI Financial CEO Bill Holland said in an interview Monday that he expects the business relationships with Sun Life to continue, and will be talking strategy with Scotiabank in the next couple of weeks.

Asked whether CI might continue talks to buy Scotiabank's fund arm, he replied: “I think we'll sit and talk about anything that makes the combined companies better. We have had a very good relationship with Scotia. They have been our banker for many, many years.”

Sun Life spokesman Michel Leduc said that the company now anticipates “taking advantage of unprecedented opportunities existing within the global financial services sector. We are looking to deploy the proceeds towards enhancing our growth strategy, both organically and opportunistically through acquisition.”

Dundee Capital Markets analyst John Aiken said the acquisition of Sun Life's stake now transforms the bank “into a major player in the asset management sector.”

Scotiabank “can now arrange a strategic transaction, either buying CI outright or selling its mutual fund operations to CI – which we believe is more likely – without the impediment of Sun Life as a minority shareholder dictating terms,” Mr. Aiken wrote in a report.

CI Financial, which has $58.5-billion in assets, had been trying to buy Scotiabank's fund arm, which is the 12th-largest fund company with $22-billion in assets. If the purchase occurred, CI Financial would still be the third-largest player after RBC Asset Management, the fund arm of Royal Bank of Canada, and IGM Financial Inc.

“For Sun Life Financial, the deal increases capital for growth opportunities in the financial sector,” Mr. Aiken added. “While it does lose cash flows from CI's distributions [because it is an income trust], we note that not all profitability is lost as it will still earn distribution fees from funds sold.”

For CI Financial, the transaction bolsters the firm's strong product and distribution network “but continued access to Sun Life's distribution is absolutely critical to CI's near term performance, given the strength of its segregated fund sales,” Mr. Aiken said.

Scotiabank, which also owns a 20-per-cent stake in DundeeWealth Inc., has the potential to try to eventually combine its own family with CI and DundeeWealth's Dynamic funds, said Robert Almeida, a portfolio manager with AIC Ltd. and whose AIC Advantage funds own a 5-per-cent stake in CI.

“If you put them altogether, you would have a real competitor to IGM Financial and RBC,” said Mr. Almeida, referring to the two largest fund companies in Canada.
Dow Jones Newswires, 30 September 2008

The Mexican arm of Canada's Bank of Nova Scotia (BNS) plans to open about 57 new branches this year, even as it sees slower growth ahead, a top company official said Tuesday.

Nicole Reich de Polignac, chief executive of Grupo Financiero Scotiabank, said at a press conference that the recent volatility in global financial markets hasn't changed the bank's growth plans.

"We're only adapting our tactics," she said, noting that the bank's growth could be "more or less slower" in the short term.

Scotiabank opened 86 branches last year and currently has about 631 branches.

The Association of Mexican Banks expects overall bank lending to expand 15% to 20% this year, down from 24% in 2007, as the economy grows at a slower pace and as banks adopt stricter loan standards amid a surge in bad credit card debt.

Ricardo Garcia, Scotiabank's executive director of consumer lending, said demand for credit, particularly mortgages, is virtually guaranteed by the country's young and growing population.

"Babies are going to keep being born; families are going to continue to be formed," Garcia said. "(The) demand is there and guaranteed for many years."

Scotiabank, which claims a 21% market share of all the new mortgages made by banks in Mexico, on Tuesday launched a new adjustable rate home loan.

The new loan carries an interest rate of 11% to 13.5% depending on the borrower's credit history, overall indebtedness, and the size of the down payment, Scotiabank's mortgage loan director Enrique Margain said.

Starting in the fourth year, however, the interest rate might be raised or lowered every 12 months by 25 basis points depending on whether a client has paid on time.

"The client builds his or her own interest rate through punctual payment," Margain said.

Mexico has enjoyed a housing and mortgage boom in recent years, thanks to a stable economy, a shortage of around 5 million homes and easy access to financing from government and private sector lenders.

Scotiabank had MXN31.73 billion in mortgages on its balance sheet at the end of June, equivalent to 34% of its total loan book, according to the National Banking and Securities Commission.