28 November 2008

Blackmont Capital's Brad Smith is One Tough Analyst to Surprise

• Brad Smith (BS) on National Bank's $237 million writedown for Q4 2008, as reported by Bloomberg on 26 November 2008

“The ABCP writedown comes as no surprise given recent credit market deterioration,” Blackmont Capital Inc. analyst Brad Smith wrote in a note to investors. Smith, who rates National Bank shares a “hold,” said that the preliminary results are 5 cents a share higher than he was expecting.

• BS on TD Bank's $500+ million writedown for Q4 2008, as reported by Bloomberg on 20 November 2008

"We're not surprised by any of this, and we think there's more to come from TD," said Blackmont Capital analyst Brad Smith.

• BS on Scotiabank's $890 million writedown for Q4 2008, as reported by Dow Jones Newswires on 18 November 2008

Brad Smith at Blackmont Capital said Scotia's fourth-quarter write-downs were "a relatively small amount of money" that probably will shave about 60 Canadian cents a share off its earnings in the period. "If that's all there is, then there's nothing to worry about."

He said he wasn't surprised to see the write-downs, as he expects Canadian banks to view 2008 as a "lost year' and enter 2009 with a cleaner slate.

• BS on CIBC's possible writedown from its exposure to SCA, as reported by Financial Post on 18 November 2008

CIBC has a net fair value exposure of US$1.2-billion to the bond insurer and a net notional exposure (excluding subprime) of US$2.6-billion, according to Blackmont Capital analyst Brad Smith.

He is not surprised by the recent developments at SCA despite the US$1.8-billion capital injection it got from Bermuda-based insurance firm XL Capital Ltd. in July. Mr. Smith said management’s concession that the future of SCA is in doubt will likely pressure other monoline credit default swap spreads and increase writedowns at CIBC.

27 November 2008

National Bank's $237 Million Writedown for Q4 2008

Scotia Capital, 27 November 2008

• NA pre-released operating earnings of $1.09 per share below our estimate of $1.35 per share and consensus of $1.31 per share.

What It Means

• Reported earnings are expected to be $0.37 per share including a moderate $237M (0.99 per share) in net charges. Net charges include a $117M ($0.49 per share) charge against ABCP, a $66M ($0.27 per share) restructuring charge related to the transformation plan announced in September and $54M ($0.23 per share) writedown of tangible assets.

• Reported earnings also include a $65M ($0.27 per share) gain on sale of AMF Corp. to Credit Suisse previously announced on August 26, 2008.

• The charge against ABCP includes a valuation adjustment bringing total writedowns to 32% of the original notional value up from 25%.

• Tier 1 ratio is expected to remain solid at 9.4% versus 10.0% in Q3/08.

• We are reducing our 2008 earnings estimate to $5.48 per share from $5.74 per share due to lower fourth quarter results. We are reducing our target price to $55 from $65 due to investors' fears, not underlying value or earnings and dividend sustainability.
Bloomberg, Sean B Pasternak, 26 November 2008

National Bank of Canada, the country’s sixth-largest bank, reported fourth-quarter profit of about C$70 million ($56.6 million) after posting C$237 million in pretax writedowns for asset-backed commercial paper and other investments.

Excluding the costs, profit was C$1.36 a share, the Montreal-based bank said today in a statement releasing preliminary results. That compares with the C$1.34-a-share average estimate of 13 analysts surveyed by Bloomberg News. National Bank reported a net loss a year earlier.

The costs, which add to C$685 million in debt writedowns taken in the last five quarters, include C$117 million related to frozen commercial paper that hasn’t traded since August 2007.

“The ABCP writedown comes as no surprise given recent credit market deterioration,” Blackmont Capital Inc. analyst Brad Smith wrote in a note to investors. Smith, who rates National Bank shares a “hold”, said that the preliminary results are 5 cents a share higher than he was expecting.

There will also be C$54 million in charges to write down assets, and C$44 million in costs related to a business plan announced by Chief Executive Officer Louis Vachon in September aimed at trimming expenses, the bank said.

As part of that plan, 120 jobs have been cut since September, spokesman Denis Dube said in a telephone interview. About half of those positions are in the bank’s financial markets unit, which includes investment banking.

National Bank plans to add a “few hundred” employees to its consumer-banking unit over the next 12 to 24 months, Dube said. The bank has about 17,000 employees.

National Bank is the fourth Canadian lender to report preliminary results before their scheduled earnings date to reflect rising writedowns and credit losses. The bank will provide full results on Dec. 4.

Royal Bank of Canada, the biggest lender, said this week that profit probably fell 15 percent to C$1.1 billion, driven down by C$360 million in trading losses and writedowns.

Last week, Toronto-Dominion Bank reported preliminary results that missed analysts’ estimates after incurring a C$350 million trading loss. Bank of Nova Scotia said it had a C$890 million pretax writedown tied to trading and declining investments.

National Bank fell C$1.40, or 3.5 percent, to C$39.04 at 4:10 p.m. in trading on the Toronto Stock Exchange. The stock has fallen 25 percent this year, compared with a 33 percent drop for the nine-member S&P/TSX Banks Index.

26 November 2008

BMO Q4 2008 Earnings

TD Securities, 26 November 2008


Yesterday BMO reported core cash FD-EPS of C$1.00 (including C$0.19 increase in General Allowances) versus TD estimate at C$1.10 and consensus of C$1.07.


Slightly Positive. BMO delivered a decent bottom-line number (relative to recent fears) with a steady result in its domestic P&C operations, but was helped by lower taxes and strong trading results offsetting a material pick-up in credit costs. The bank remains well capitalized, and maintains a healthy dividend. Going forward the bank continues to face slippage in its credit book/mix and managing down some specific exposures. We see upside across the group, but think there are stronger names than BMO.


Domestic holding in reasonably well. BMO’s domestic P&C operations continue to make progress and delivered a steady quarter amid a challenging environment. We continue to believe the worst is behind us, but building on the progress will be a challenge as the environment slows and competition tightens. In particular, we believe the bank has much work to do in accelerating its residential mortgage business.

No longer the clean credit bank. BMO has historically been viewed as a high quality credit bank. That image appears to be diminishing with continued sizeable growth in impaired loans (largely in the bank's U.S. credit book). Further, despite rising PCLs, the bank’s reserve levels are eroding, setting up the risk of higher costs in the coming quarters. Finally, credit cards, commercial and wholesale loans (typically higher risk credits) are leading the bank's loan book growth, suggesting a potentially higher risk mix going forward.

Ongoing risks/exposures. BMO was forced to take another mark on its Apex/Sitka exposure this quarter and current values seem to suggest the bank is underwater on its loans in support of its SIVs. Management maintains that the risk of realized losses is remote on both fronts. Nonetheless, they remain lingering issues for us in an unsettled market, fixated on capital levels.

Conference Call Highlights

Guidance. On the back of uncertain market conditions, management did not provide an outlook for 2009, but provided medium term guidance of +10% average EPS growth per year, ROE between 17-20%, cash operating leverage of at least 2% and maintaining a strong regulatory capital position.

Dividends. Dividends were unchanged at C$0.70 per share and management indicated future dividend growth near term is unlikely given market conditions and that BMO is currently operating above their dividend payout ratio target of 45-55%

Apex/Sitka. The bank recorded pre-tax losses of C$170 million on two exposures to the restructured conduits on MTM, however management views the chance of actual losses as remote given the performance of the underlying credits and structure/subordination in the structure.

SIVs. In Links, total senior notes outstanding and BMO's liquidity outstanding total US$7.6 billion while underlying asset fair values equal US$6.8 billion implying that at today's prices the protection from capital notes has been eroded. Over the coming 6 months, the bank's exposure is expected to grow to C$6.7 billion (effectively replacing the remaining senior notes). Management maintains that the underlying assets are sufficient to repay their loans at maturity and has not taken any marks or reserves against the bank's exposures.

Q4/08 Segment Highlights

Canadian P&C. A steady quarter with good revenue growth offsetting investment driven expense growth and higher credit costs. Margins were up 8bps year over year driven largely by interest collected on a tax refund. Volume growth was good (AIEA +6% year over year). However, growth is being driven by cards (+14%) and personal loans (+21%) and commercial lines in lieu of residential mortgages where growth was nominal. This is helping a higher margin mix, but should carry higher credit costs. In our view, invigorating the mortgage portfolio remains a key focus for 2009.

Private Client Group (PCG). Ex-items the group was down marginally year over year on softer revenues with total assets down 3% year over year and AUM down 6% with ongoing investment driven expense growth. U.S. P&C. Struggles continue here with modest Net Income of C$25 million. Recent acquisitions are helping to offset margin pressure in driving revenue growth, but NIX rose materially (even ex-items). A small portion of the overall earnings picture, it remains difficult to see how the bank's U.S. retail platform (inclusive of PCG and portions of Capital Markets) can be a meaningful driver.

Capital Markets. Another strong trading quarter (totaling C$496 million versus a Q4/07 loss of C$150 million) helped offset the expected weakness in some core wholesale businesses along with higher NIX and PCLs. We continue to note strong loan growth with balances +17% year over year and almost 9% asset growth (reflecting in part the weaker C$). While potentially profitable given the opportunity for wider margins, it does suggest heightened credit risk given the challenges the bank is facing in its U.S. credit book.

Credit. We are concerned about the deterioration in BMO's credit profile. Impaired loans jumped materially, while reserve builds were relatively modest, driving a decline in coverage ratios. Combined with what we view as a slightly higher risk loan growth mix (cards, personal loans, commercial and corporate) we continue to expect elevated PCLs through the coming year.

Capital. Notwithstanding some hits on the quarter, the bank remains well capitalized in our view at 9.77% at the end of Q4/08 (Exhibit 2) and BMO maintained its healthy dividend payout.


We have revised our 2009 estimate down to C$4.25 (from C$4.60) reflecting primarily increased PCL costs and inline operating results from P&C.

Justification of Target Price

Our target price reflects our estimate of equity fair value 12 months forward based on our views regarding sustainable ROE, growth and cost of equity (implying a P/BV of 1.7x).

Key Risks to Target Price

1) Additional losses or write-downs from key risk exposures 2) significant competition in the Chicagoland market and 3) adverse changes in the credit markets, interest rates, economic growth or the competitive landscape.

Investment Conclusion

We see upside across the group, but in our view, we believe there are stronger names than BMO.
Financial Post, David Pett, 26 November 2008

Bank of Montreal says its dividend is safe for now, but the Street isn't 100% sure that investors can count on the current payout down the road.

"BMO has a higher dividend payout ratio than peers and, if the economic slowdown proves deeper and longer than we expect, BMO has less flexibility, in our view, to maintain its dividend," said RBC Capital Markets analyst Andre-Phillipe Hardy in a note to clients, following Bank of Montreal's fourth quarter results.

In addition to reporting a 24% year-over-year increase in profit during the quarter, the bank reaffirmed to shareholders its 70¢ quarterly dividend, but also said it is unlikely they will see a dividend increase any time soon.

Mr. Hardy noted that Bank of Montreal's capital ratios are high, and it may need to strengthen capital. If it does, the analyst said he believes the bank would prefer to continue raising non-common equity as opposed to cutting the dividend or raising common equity.

"The bank's high dividend payout target of 45% to 55% means that its dividend burden would be higher than other banks if it issued more common shares," he wrote.

"For BMO to cut dividends, we believe that its earnings power would have to be threatened and/or equity capital would be needed to a degree that the increase in shares outstanding would make the quarterly dividend payment too large to support from income."

John Aiken, analyst at Dundee Capital Markets, echoed some of these thoughts, also telling clients in a note that he doesn't anticipate a dividend cut in the coming quarters. That is unless "the domestic economy deteriorates to a significantly greater degree than we forecast."

The Dundee analyst said Bank of Montreal's capital remains strong. While the bank will not likely need to raise additional common equity, he added that a dividend increase is out of the question for now, given the earnings headwinds facing the company.
Financial Post, Eoin Callan, 25 November 2008

Bank chiefs on Bay Street are urging Ottawa to commit to making a major injection of cash into the economy to help stem a rising tide of bad loans, after internal bank figures showed Canadians were increasingly struggling to make payments on money they've borrowed.

Bill Downe, chief executive of BMO Financial, said strong and timely fiscal stimulus was needed from government, arguing it would be "positive for employment" and facilitate "constructive investment," while reviving growth for banks.

The appeal came as BMO Tuesday provided the first granular picture of Canadians' borrowing habits since the credit crisis developed into a full-blown economic crisis, revealing a sudden spike in credit defaults.

Figures from the bank's own books showed bad loans had already exceeded the peak reached in 2001 after the dot-com crash and were on the way to hitting levels not seen since the last recession almost two decades ago.

BMO said the amount of loans that had become impaired had jumped to $2.4-billion this year from $720-million last year, as it Tuesday jacked up the stash of cash it sets aside to cover credit losses to $1.1-billion.

Mr. Downe said he expected the value of loans sought by Canadians to drop "in the first half of 2009" amid rising borrowing costs, undermining one of the last areas of profit growth for banks buffeted by market turmoil.

While the executive expects the business environment to worsen after Christmas, he said in an interview that the economy, and banks' fortunes, could be turned around by the second half of next year if Ottawa and Washington acted decisively.

The demand for government intervention underlines the extent to which the banking system is counting on policymakers to jump start growth at a time when many financial institutions are being forced to conserve cash and scale back their ambitions.

The success of policymakers in halting an economic decline and staving off an unprecedented increase in consumer and corporate loan defaults is of great financial importance to BMO.

The bank is enmeshed in a complex web of investment vehicles with more than $35-billion in exposure to credit markets that are largely held off-balance sheet.

The investment portfolios are under duress because there is no appetite in the current environment to trade the holdings -- which include corporate bonds and mortgage backed securities -- thereby forcing BMO to commit to providing tens of billions in liquidity.

Executives argued Tuesday that their strategy of keeping the vehicles on life support with bank cash was proving manageable and that they could shield the bank from major losses and recover value for their clients by holding the assets until maturity.

But this strategy depends on repayments of the underlying loans to corporations, credit card holders, and homeowners in the U.S. and Canada holding up at a level roughly in line with other downturns in history.

By taking this approach, BMO has slowing won back a measure of confidence from investors that were initially spooked by the exposures, easing they way for the bank on Tuesday to seek up to $250-million in capital in the form of recallable preferred shares.

The bank sought to raise the funds even after it showed Tuesday it had managed to preserve capital and maintain earnings in the fourth quarter. The bank's pool of reserves dipped only slightly as it delivered a steadier performance than its larger rivals on Bay Street, despite recording a $500-million loss on investments in international credit markets.

"Capital remains strong," said John Aiken, an analyst at Dundee Capital Markets, adding that a 24% rise in quarterly earnings to $560-million was "much stronger than we had anticipated."

BMO's core capital held at a level above TD and Royal Bank of Canada, despite a slip to 9.7% from 9.9%, meaning the bank holds just under $19-billion of reserves to back up about $190-billion of assets judged to face varying degrees of risk.

TD Bank Financial Group on Tuesday finalized an emergency move to top up its reserves, raising an initial $1.2-billion from a mix of institutional and retail investors.

The sale of deeply-discounted shares by TD pulled down its stock price, but will help push its core capital reserves back up to a level of about 9%.
The Globe and Mail, Tara Perkins, 25 November 2008

Bank of Montreal has stopped setting annual profit goals for the time being because the outlook for the coming year is too uncertain, but executives hope that government spending will lift the economy.

“I think there will be co-ordinated stimulus, and it makes sense. Canada is integrated into the North American economy to a very large extent,” BMO chief executive officer Bill Downe said in an interview Tuesday. “It is very sound economic policy.”

The bank's personal and commercial lending business in Canada is still seeing good numbers, but there is a lag effect, he said. “I think we do have the benefit of a delay in the slowdown, and the slowdown will come I think through the course of 2009 in Canada.”

The level of losses from bad loans will be an issue next year, chief risk officer Tom Flynn said on a conference call.

“Loss performance in the industry and for our bank will depend on how the economy does, what happens to unemployment, what happens to U.S. housing,” he said. “And the environment is a weak one and appears to be getting weaker. We are hopeful that the fiscal stimulus programs that governments are talking about introducing will be introduced and will have some positive impact in mitigating the downward economic trend late next year.”

The U.S. economy is sliding into a deeper recession, and Canada's has fared only modestly better because it has been supported by continued growth in consumer spending, Mr. Downe said.

“It too will face a downturn in coming quarters. Potential for a modest recovery in the second half of 2009 in response to aggressive monetary and fiscal stimulus and some stabilization in the U.S. housing markets could well be delayed until the end of next year,” he said.

BMO met one of its five performance targets for fiscal 2008, obtaining a strong capital ratio. It missed its goals for profit, return on equity, provisions for bad loans, and leverage, as it had cautioned earlier this year that it might.

While some of the bank's rivals have disclosed they will take writedowns in the fourth quarter, BMO was the first to give a full performance picture.

Fourth-quarter profit of $560-million was up 24 per cent from a year ago, and was much stronger than anticipated, said Dundee Securities Corp. analyst John Aiken.

The bank still has risky exposure to areas such as structured investment vehicles, but those have been previously disclosed and did not cause surprises. What was most concerning about the bank's results was a significant increase in its provisions for bad loans, which rose by $314-million from a year ago to $465-million. Less than $200-million of that related to Canada, while $269-million related to the U.S.

“Evidence of credit deterioration is clear,” said RBC Dominion Securities analyst André-Philippe Hardy.

Mr. Downe said the bank is aggressively managing the “watch lists” it keeps on loans that could potentially cause trouble, and is focused on maximizing its recoveries.

Royal Bank of Canada said Monday its provision for credit losses nearly doubled from the previous quarter, to about $620-million, and that its profit had fallen about 15 per cent from a year ago to $1.1-billion.

BMO issued $150-million of preferred shares Tuesday, a move that will help pad its already-strong capital levels.

In an interview Monday, Toronto-Dominion Bank CEO Ed Clark said he thinks the market is too focused on capital levels and it would be better for banks to put some of that money to work by lending.

Mr. Downe appeared to disagree. “In this environment, strong capital ratios give you the ability to be the decision maker about what happens next,” he said.

25 November 2008

RBC & TD Bank New Equity Issue

Dow Jones Newswires, 2 December 2008

TD Ameritrade is looking to grow its business through its relationship with Toronto-Dominion , which has 45% stake in the company. In comments made at FBR Capital Markets fall investor conference, AMTD CFO Bill Gerber says the online broker is looking for different ways to get new clients and assets from TD branches, specifically in the US where the Canadian bank has recently rebranded its Commerce Bancorp, retail subsidiaries.
Financial Post, Zena Olijnyk, 25 November 2008

TD Bank’s announcement that it will issue common equity to enhance its capital position is a “pragmatic move,” says Credit Suisse analyst James Bantis, given the current market conditions.

By entering into an agreement with a syndicate of underwriters to issue 30.4 million common shares at $39.50 – for gross proceeds of $1.2-billion, TD’s pro-forma Tier-1 capital ratio has been boosted to about 9%, compared with 8.3% on Nov. 1, while the issuance will be about 4% dilutive to common shareholders.

Given the bank’s pre-announced fourth quarter credit trading losses, and the effects of Basel II on its investment in TD Ameritrade, TD Bank “was in an unfavourable position to deal with unexpected credit market or counterparty shocks going forward.” Now, however, Mr. Bantis says TD is “no longer a noticeable outlier to its Canadian banking peers.”

UBS analyst Peter Rozenberg said he expects the stock will respond favourably, due to reduced capital concerns which should narrow its current valuation discount.. “We think that a 9% Tier 1 is the new standard by which other banks will now be judged,” he said, maintaining his “buy” rating but lowering his target price to $65 from $67. The stock current trades at about $40.

Meanwhile, BMO Capital Markets analyst John Reucassel says that TD’s move to issue equity could “break the ice” for Manuife Financial Corp. “We believe that this could provide Manulife with an opportunity to also raise equity and strengthen its capital position in the face of volatile equity markets and a difficult credit environment in 2009,” he said in a note to clients. A $3-billion equity issue would be about 7% dilutive to earnings per share at Manulife.

A combination of new regulatory capital rules on segregated fund guarantees, a $3-billion bank loan, plus a $3-billion equity issue would provide Manulife with a strong capital position to meet anticipated challenges in 2009 and could help maintain valuation on the shares. He rates Manulife shares a “market perform” and a target price of $30. The stock now trades in the $20 range.
Bloomberg, Andrew Harris, 25 November 2008

A Royal Bank of Canada home-mortgage unit will pay $11 million to resolve U.S. government claims it gave false information about borrowers’ creditworthiness to the Department of Housing and Urban Development.

RBC Mortgage Co.’s accord avoids litigation in the case, said Randall Samborn, spokesman for Chicago U.S. Attorney Patrick Fitzgerald. The government alleged that from 2001 to 2004, RBC Mortgage, formerly known Prism Mortgage, made 219 loans based on false statements, all resulting in foreclosure.

“Mortgage lenders should know that they must maintain the integrity of the lending process so that federally insured mortgages will be available to worthy borrowers,” Fitzgerald said today in a statement. The questionable loans were made in the Rockford and Freeport, Illinois, areas, he said.

Royal Bank of Canada, the biggest Canadian bank, has denied liability, Fitzgerald said. The Toronto-based institution acquired RBC Mortgage in April 2000. RBC Mortgage stopped originating loans in September 2005, the prosecutor said.

RBC spokesman Kevin Foster didn’t immediately return calls seeking comment.

Twenty-five people, including three RBC Mortgage loan officers, have been convicted on criminal charges related to the government’s civil case, Fitzgerald said.
The Globe and Mail, Tara Perkins, 24 November 2008

Canada's two largest banks moved to boost their capital levels yesterday after revealing that they had dipped substantially.

The capital ratios at Toronto-Dominion Bank and Royal Bank of Canada remained well above the minimum amount required by regulators, but the market is demanding larger financial cushions because banks continue to take a pounding from the financial crisis.

TD chief executive officer Ed Clark said he thinks it's the wrong thing to do, but he decided to capitulate. The bank issued $1.2-billion of common equity late yesterday to increase its capital ratios.

High capital levels are the flavour of the day, Mr. Clark said in an interview.

“When the world settles down and people have more certainty, as they look out they will say ‘well, this is kind of ridiculous, we're trying to set too high a target, and frankly it would be better to have the industry lend out more money, even if that meant that the ratios came down,'” he said. “But that's not the current mood. And so, you can try to fight the market, but I would say in these times it's not a good idea to try fighting the market.

“So we said rather than fight, why don't we just do this so we can go back to running the company.”

The announcement came after Citigroup received a rescue package from the U.S. government that included a $20-billion (U.S.) capital injection.

Meanwhile, Bloomberg reported that Goldman Sachs Group plans to sell notes in the first offering of debt backed by the Federal Deposit Insurance Corp.

Handouts from the U.S. government to American financial institutions are inflating capital ratios and market expectations, Mr. Clark suggested.

TD's capital ratio fell significantly on Nov. 1 under global banking rules, Basel II, that require it to change the way it counts its stake in TD Ameritrade. The decision to issue equity is a dramatic about-face for Mr. Clark, who told analysts on a conference call just Thursday that “raising common equity would be extremely difficult” at the moment. He signalled that the bank would rather increase its capital levels using other methods, such as issuing preferred shares.

That's what RBC did yesterday, announcing a $225-million offering of five-year preferred shares. RBC issued $300-million of preferred shares earlier in the quarter, and the two offerings will add $525-million to its Tier 1 capital. The Tier 1 ratio measures a bank's capital against its assets, weighted by the risk they pose, and is the main capital measure used by analysts and regulators.

Canada's banking regulator requires that the ratio stay above 7 per cent, but investors have begun to demand more of a buffer. Capital ratios are a gauge of the financial cushion that banks have.

The new “well capitalized” cutoff point might well be 9 per cent as far as the market is concerned, CIBC World Markets analyst Darko Mihelic suggested in a note to clients.

Canada's regulator recently gave banks new leeway to count more preferred shares and other innovative securities as capital, raising the limit to 40 per cent from 30 per cent.

Earlier yesterday, RBC disclosed that its Tier 1 ratio had fallen to about 9 per cent from 9.5 per cent in the last quarter. The new level was “surprisingly low,” said Mario Mendonca of Genuity Capital Markets.

Rating agency DBRS said that while the level is reasonable for RBC, “it is prudent for the industry, as a whole, to maintain capital levels that are higher than historical levels, given the expectation of deteriorating credit quality and the potential for further writedowns to occur as capital markets remain uncertain.”

The other large banks have not yet disclosed their fourth-quarter Tier 1 ratios.

RBC's ratio for the period which ended Oct. 31 was affected by the sudden and extreme drop in the value of the Canadian dollar. Much of the bank's risk-weighted assets are denominated in U.S. dollars.

TD's capital ratio fell from 9.8 per cent on Oct. 31 to 8.3 per cent on Nov. 1 when new global banking rules that were issued long ago finally took effect. As a result, the bank had to count 50 per cent of its $4.6-billion stake in TD Ameritrade in its ratio. “That meant we immediately lost $2.3-billion of Tier 1 capital, and that's what brought our Tier 1 capital ratio down,” Mr. Clark said. TD had already raised $1.25-billion of Tier 1 capital during the quarter, Mr. Mihelic noted.

TD still has room to issue “more than a couple billion dollars of preferred shares under the rules,” Mr. Clark said.

The decision to issue common shares was made yesterday afternoon, because markets improved since Thursday and investors were signalling they wanted a higher capital ratio, he said.

TD last week disclosed a surprising $350-million after-tax writedown from credit losses and further investment declines that will not show up in results because of new accounting rules.

RBC's $670 Million Writedown for Q4 2008

TD Securities, 24 November 2008


Slightly negative. Royal reported adjusted earnings of approximately C$0.90 +/- per share compared to TD’s estimate at C$0.90 and consensus at C$1.02. The bank had several market related charges which reflect the extremely challenging market conditions and the size and breadth of the bank’s Wholesale business. We also saw a significant uptick in PCLs which exceeded both TD and consensus expectations. From current levels, we see upside across the group, but note that Royal trades at a premium.


Write-downs reflect business mix. The bank reported C$670 million in pre-tax write-downs (net of a C$330 million pre-tax gain on the Mark to Market (MTM) of the bank's own debt), mitigated by a C$540 million pre-tax release of Enron related reserves. The bank also took advantage of more relaxed accounting rules to shift securities to Available For Sale to shield earnings and regulatory capital from additional MTM. Overall, while undoubtedly reflective of an exceptionally challenging market, the losses highlight for us the ongoing risks associated with the size and breadth of the bank's wholesale operations.

Rising credit provisions. PCLs came in at approximately C$620 million including C$135 million in general reserve building materially above our expectations at C$445 million and consensus of C$388 million. The increase reflects primarily the weakening market conditions in the bank's U.S. loan exposure (approximately C$150 million). We had been hoping for some sign of stabilization here, but we believe ongoing deterioration, and some reserve building, continues to drive higher expenses.

Signs of decent operating trends. The release offered few details, but an adjusted number of C$0.90 (near our expectations) notwithstanding much higher PCLs suggests some help from other parts of the business (potentially trading again this quarter) but overall decent performance in the bank's retail operations. We will look for clarification in the bank’s full release on December 5.

Absolute upside, but still relatively expensive. We will update our outlook following the full release of quarterly results for the group, but from current levels, we see attractive 12-month returns across our names. Against that back drop, we continue to note that Royal trades at a premium to the group notwithstanding a larger mix of wholesale operations and below average capital levels.

Capital. Inclusive of the pre-announced charges and earnings, the bank expects a Tier 1 ratio of 9.0% (down 50bp from Q3/08). Yesterday after market close, the bank also announced a 9 million preferred share issue at C$25 per share totaling C$225 million. The Underwriters were granted the option to purchase an additional 4 million preferred shares at the same offering price.

Adjustments. The bank reported net earnings of C$1,100 million or approximately C$0.82 per share.

Market related adjustments of C$670 million pre-tax (C$360 million after tax) included:
- Losses on Held for Trading securities: C$645 million pre-tax
- Impairment on Available for Sale securities: C$355 million pre-tax
- Gain on RBC liabilities (where wider credit spreads reduce the value of the bank’s debt): C$330 million pretax
- Royal also reported an increase to earnings from a reduction in the estimated provision for Enron: C$540 million pre-tax (C$250 million after tax).

Accounting for these items, our adjusted net earnings increases to C$1,210 million or approximately C$0.90 per share.


We will revisit our estimates and Target Price when the bank reports their full results on December 5, 2008.

Justification of Target Price

Using fair value estimates in a Gordon Growth model, our target price reflects 2.7x P/BV.

Key Risks to Target Price

1) Increased competition and tighter margins in the U.S. banking environment, 2) integration challenges associated with recent acquisitions and 3) adverse changes in the credit markets, interest rates, economic growth or the competitive landscape.

Investment Conclusion

The bank reported market related charges amid the extremely challenging market conditions and highlights for us the risk from the size and breadth of the bank’s wholesale operations. PCLs remain a concern and increased significantly during the quarter. Despite these events, the bank was able to meet our arguably conservative estimates suggesting the bank’s operating performance was decent, or potentially lifted by other parts of the business like Trading. We will be looking for more clarity around the bank’s earnings when they report full results on December 5, 2008.
Financial Post, Jonathan Ratner, 24 November 2008

Nobody was surprised by the fact that Royal Bank pre-announced fourth quarter earnings after Toronto-Dominion Bank and Bank of Nova Scotia did so last week. But what is raising some eyebrows is the lack of pre-announcements by the remaining the of Canada’s Big Six banks.

“We cannot believe that arguably three strongest banks operationally incurred significant charges in the fourth quarter while Bank of Montreal, CIBC and National Bank of Canada were unscathed,” Dundee Securities analyst John Aiken told clients.

He noted that the deterioration in credit quality Royal is feeling from its U.S. operations is quite negative for the other banks, including BMO, TD and Scotia. As a result, the analyst recommends investors take shelter in those banks that have already pre-announced. He said, “we do not believe that no news is good news in this environment.”

Mr. Aiken said a few key points stick out for Royal. The bad news is that credit is deteriorating faster than expected, with an increase in provisions blamed on the bank’s U.S. portfolio. On the positive side, Royal appears to have been able to earn through this and will likely post core earnings that will beat the Street, he told clients.

When it comes to valuations in the current market environment, that fact is better than the unknown for Royal, he added, upgrading the stock to “neutral” from “sell.”

Mr. Aiken said core earnings look like they will be around 91¢ for the quarter, below consensus at 97¢. But until the full financials are released on December 5, the market won’t know what Royal’s true earnings strength and quality really are.
Financial Post, Eoin Callan, 24 Novemeber 2008

The Royal Bank of Canada warned it would be forced to take a $1.6-billion hit as market losses mounted and loans started to go sour.

The largest bank in the country cited "extreme volatility" as executives said they would writedown $1-billion in investments and set aside $620-million to cover credit losses.

The heavy blow underlines the damage being inflicted on Canadian financial institutions by the worst financial crisis since the Great Depression, as market turmoil and an economic downturn take their toll.

Gord Nixon, chief executive, warned of an "uncertain outlook" as political leaders acknowledged the country was sliding into recession and U.S. banks fell back on the government to prevent collapse.

The prospect of further losses and a slowdown in revenues has severely weakened bank shares in recent weeks, while RBC's peers have also registered writedowns, including Scotiabank and TD Bank Financial Group.

The investment losses and charges mean RBC's net income in the fourth quarter will fall 15 per cent to $1.1-billion, the bank said in a preliminary statement of results due out next week.

The charges will deplete reserves at RBC, which said its capital base would fall to a level of "approximately 9.0 per cent".

The bank said $645-million of losses were concentrated in its capital markets division, while a separate portfolio of securities saw a $355-million fall in value that was expected to be lasting.

Rob Sedran, any analyst at National Bank Financial, said RBC's "greater exposure to the capital markets" than its peers meant the months ahead were likely to prove particularly challenging for the country's largest bank.

John Aiken, an analyst at Dundee Capital, said: credit was "deteriorating faster than we had anticipated".

But he added that knowing the extent of the credit losses for RBC so far increased his confidence the bank would be able to sustain core earnings.

RBC said it was avoiding even bigger charges by taking advantage of new looser accounting standards to re-classify impaired assets so the losses would not have to be acknowledged.

RBC said it was retroactively shifting troubled portfolios of U.S. auction rate securities and mortgage-backed securities off its trading books, thereby avoiding bigger writedowns on these holdings.
Financial Post, Eoin Callan, 23 November 2008

If it seems as if the VIP boxes at the Air Canada Centre are a little roomier these days, it is probably because the guest list has been whittled down, along with the wine selection, by the suite's blue-chip hosts.

"They are inviting fewer people, ordering less food, or telling people to eat before they get here," says a staff member who has been catering for Bay Street clients since opening night at the Toronto arena.

Dozens of others who earn a living providing for the city's 220,000-strong financial workforce also testify to early signs of belt-tightening. Barbers say they have more time to sweep floors and maître d's admit they've learned to smile even for those without reservations.

But the starkest evidence leaner times are coming to Bay Street can be seen on the scrolling tickers found in bank tower lobbies, which these days show the share price of each of Canada's top five banks are - despite frenetic competition, expansion and hundreds of millions in executive compensation - back at the same level at which they were trading five years ago.

Indeed, from here onward, the path appears to slope downward.

Financial analysts who have spent the past five years encouraging clients to buy bank shares now say there is "poor visibility," and demur when asked to pick a bottom.

Instead, they prefer to talk about looking "across the valley" to a time when growth will start picking up again.

When might that be? It could be next year. But investors will more likely have to wait until 2011, according to Michael Goldberg, an analyst at Desjardins Securities.

It took dramatic plunges in recent weeks to bring bank shares back down to ground zero after years of steady climbing. These tumbles were driven by two main factors: concern about the immediate fall out from the financial crisis; and worry about the impact of a prolonged economic slowdown.

Together, these interrelated forces are creating what is probably the worst climate for Canada's banks in at least two decades, possibly longer.

As Prime Minister Stephen Harper put it this weekend: "The world is entering an economic period unlike, and potentially as dangerous as, anything we have faced since 1929."

For Bay Street, this slowdown has a range of negative implications, including lower revenues from managing investment portfolios and retirement savings, and less profits from capital markets operations. It will also impact banks' core business model: borrowing money at one rate and lending it out a higher rate.

But next up is a more fundamental challenge that policymakers are not as well equipped to assist with: the worry people will not pay back the money they borrow.

It takes only a modest increase in defaults by consumers and small businesses, or a thin slice of corporate loans to go sour, to see bank profits wiped out as cash is set aside for bad debts. Research by Rob Sedran at National Bank Financial shows that banks are more exposed to personal loans and credit card lending than in previous cycles.

Bay Street has also depended for much of its growth in recent years on financing a domestic property bubble that is now deflating, and from bankrolling corporate deals laden with risks that probably seemed like a good idea at the time.

What has become increasingly clear in recent days is that the country's top banks are heading into this downturn significantly weakened by the systemic shock that has hit credit markets in the last nine weeks.

On Friday, ratings agencies said TD Bank Financial Group was being added to their negative watch-list for a potential downgrade after a $10-billion credit portfolio started to bleed losses.

Canada's second-largest bank had been the last big institution standing not to have made significant writedowns, but overnight saw its capital reserves pared to the lowest level of any bank in the country.

Ratings agencies have also identified key weaknesses at each of the other major banks, including BMO, which will tomorrow address concerns over its credit exposures, including more than $12-billion in potential liabilities related to two structured investment vehicles.

Structured credit products have also been a source of losses for Royal Bank of Canada, which reports next week after already incurring $1.8-billion in writedowns this year.

CIBC was the hardest hit of the banks during a first round of writedowns on subprime mortgages, but now has plenty of company as it counts the cost of a second wave of losses on complex credit products.

Close attention will be paid when it updates the market next week on the state of a $25-billion portfolio of impaired assets, while auto loans remain a potential oil slick for Scotibank.

Given this risk and the serious economic consequences of the banking crisis, it may be viewed as appropriate that premiere events at the Air Canada Centre are becoming notable for the scarcity of bank executives, who earn up to 500 times more than staff at the arena.

Mark Carney, governor of the Bank of Canada, said Sunday he had been somewhat troubled by the nature of his conversations with chief executives during the last five years. The central banker suggested in an interview with the British Broadcasting Corporation that bank chiefs should perhaps have spent more time reviewing their loan portfolios and less time thinking about the "opera or the ski slopes."

21 November 2008

TD Bank's $500+ Million Writedown for Q4 2008

Dow Jones Newswires, 21 November 2008

RBC Capital Markets downgrades TD Bank to underperform following disclosure yesterday it'll take 4Q charge of C$503M (U$391M) in losses on its credit and securities trading portfolios. RBC expects TD's exposure to US banking will lead to higher loss provisions in 2009 than in 2008, and several overhangs in TD's Alt-A securities and other areas that could affect TD's valuation multiple. TD's Tier 1 capital ratio of 8.3% was also 0.4% lower than RBC expected, and TD has the lowest capital ratios among Canadian banks, RBC says.
RBC Capital Markets, 21 November 2008

We are downgrading TD's shares to Underperform because:

• Capital ratios are lowest among Canadian banks, and the pro-forma Tier 1 ratio of 8.3% was 0.4% lower than we expected.

• We expect 2009 U.S. loan losses to be higher than they have been in 2008 and have been guided by management. TD has the second-highest exposure to U.S. lending among the Canadian banks.

• Overhangs related to Alt-A securities and the bank's "basis trade" remain, which could have further negative implications for other comprehensive income.

• The stock is cheaper than Canadian bank peers on a P/B basis but that is partly due to a lower expected ROE given the goodwill associated with Banknorth and Commerce. On a P/TB basis, the bank still trades at the highest multiple of the six Canadian banks (although that is partly justified in our view by the goodwill and intangibles related to the Canada Trust acquisition).

We have also lowered our 12-month price target from $53 to $49 to reflect a lower P/B multiple given the lower than expected Tier 1 capital ratio. As is the case for other Canadian banks, our 12-month target is higher than the current trading price but we don't believe a sustained rally in bank shares is likely until economic and credit indicators strengthen.

TD Bank pre-released some segments of its Q4/08 results, ahead of its December 4th reporting date. While GAAP EPS were ahead of our estimate, the underlying results were weaker than we had anticipated and capital ratios were below what we expected.

• The pro-forma Tier 1 ratio of 8.3% was 0.4% lower than we expected.
• GAAP EPS of $1.22 is better than our previous estimate of $1.12, but it had a lot of moving parts and EPS would have been approximately $0.70 lower had the bank not reclassified some securities into its available for sale portfolio.
• Retail businesses earned $1.05 billion, which was 8% short of our estimate.
• The bank's credit trading group incurred mark to market losses of $911 million after tax in Q4/08, of which $561 million did not affect income as $7.4 billion in securities were reclassified as available for sale.
Scotia Capital, 21 November 2008

Pre-Released Earnings Below Expectations

• TD pre-released cash operating earnings of $1.22 per share, below our estimate of $1.43 per share and below consensus estimates of $1.38 per share. Earnings were less than expected due to a larger loss in the corporate segment due to losses on securitization and negative carry on corporate investments as well as weaker results at TD Securities. The bank indicated its retail earnings were relatively strong. Overall, underlying earnings were relatively solid in the context of the market and the expected AFS equity writedowns, BCE, and performance in the corporate segment.

• Reported cash earnings were $1.38 per share including the following items of note: a $350 million after-tax or $0.43 per share credit trading loss, a $323 million or $0.40 per share reversal of Enron litigation charge, $118 million or $0.15 per share gain from changes in fair value of derivatives hedging, $25 million or $0.03 per share in restructuring charges from the Commerce Bancorp transaction, and a gain $59 million or $0.07 per share on credit default swaps. Earnings were $0.79 per share including the credit trading losses.

Restructuring Proprietary Credit Trading

• The $350 million in credit trading losses has caused TD to refocus and reduce the size of its proprietary credit trading business. This business has a product set of Bonds, Credit Default Swaps (CDS), and Standard Credit Indices/Tranches. The trading strategies were Relative Value, Directional Trading, and Special Situations. The three key risks were credit (managed with CDS, internal credit review), other market risks (managed with derivatives) and liquidity risks (widening bond basis, bid/ask spread).

• The restructuring of this business has caused the bank to move $7.4 billion in trading financial assets as at August 1, 2008 from Trading to Available-for-Sale (AFS). In accordance with amendments to AcSB section 3855 the bank was allowed to move these assets with mark-to-market changes now being applied to Other Comprehensive Income (OCI) and not the income statement. The change in fair value of this portfolio was $561 million after-tax which will flow through OCI in Q4/08. The $7.4 billion in Bonds is largely CDS protected with 70% investment grade and 70% with term less than 5 years.

• The bank retains $2.5 billion in credit trading assets (bonds) in its trading book including $1.3 billion (non-North American) which is in a wind down mode. The trading book is 75% investment grade with 60% of the portfolio having a term of less than five years.

Tier 1 of 8.3% Expected in Q1/09

• TD management provided an update on pro forma Tier 1 ratio based on the quarter's result and the Innovative Tier 1 issue of $1.3 billion the bank completed in the quarter. The Tier 1 ratio is expected to be 9.8% at the end of the fourth quarter and 8.3% in Q1/09 after deducting 50% of the bank's investment in TD Ameritrade (November 1, 2008) from Tier 1 capital as required under Basel II.

• OSFI recently increased the limit for Qualified Preferred Shares and Innovative Tier 1 to 40% of Tier 1 capital from 30% to bring Canadian banks' capital composition closer to the U.S., U.K., and Europe, which allow 45% to 50% in Preferred Shares and other leverage type financing (as indicated by TD management). TD Qualified Preferred Shares and Innovative Tier 1 represent 30% of total Tier 1, with capacity to increase capital other than from equity.


• We are reducing our 2008 earnings estimate to $5.42 per share from $5.63 per share based on the bank's pre-release of fourth quarter earnings. Our 2009 and 2010 earnings estimates remain unchanged at $6.00 per share and $6.50 per share, respectively.

• We are reducing our 12-month share price target to $72 per share from $88 per share representing 12.0x our 2009 earnings estimate and 11.1x our 2010 earnings estimate. Our target price reduction reflects investors' fears and not underlying value or earnings or dividend sustainability.

• TD - 2-Sector Perform.
Financial Post, David Pett, 21 November 2008

Shock and disappointment is the mood on the Street one day after Toronto-Dominion Bank announced it will report weaker-than-expected fourth quarter earnings next month.

TD said adjusted earnings per share will be 79¢ in the quarter compared with $1.44 this time last year, due largely to a $350-million writedown on credit trading losses. TD said its corporate segment will also record a $153-million loss due to securitization and funding hits.

"While we had expected several banks to incur year-end charges, it is surprising that TD had problems of this scale," said BMO Capital analyst Ian de Verteuil in note to clients, leaving his "market perform" rating and $70 price target unchanged until the end of earnings season.

UBS analyst Peter Rozenberg reduced his fiscal 2009 earnings per share estimate by 2% from $5.78 to $5.67 and cut his price target on the stock from $69 to $67. He maintained his "buy" rating.

"While we expected trading losses, the announcement was disappointing and underlined broader systematic risks for all banks, concern regarding the economic outlook, and for TD, a lack of diversification in Wholesale," Mr. Rozenberg wrote in a research note.

He added that TD's retail division remains solid, but growth "is expected to moderate due to the recession.

Blackmont Capital analyst Brad Smith, said TD's credit losses could have been worse if not for some recent accounting amendments that allowed TD to reclassify retroactively $7.5-billion in credit related trading assets from "trading" to "available for sale" on the books.

"Through this action, $561-million (70¢ per share) of net unrealized valuation losses were effectively diverted directly to shareholders equity without being reported in the quarterly profit and loss statement," Mr. Smith told clients.

In addition to TD's credit trading losses, the Blackmont analyst was also concerned with unrealized losses at TD's U.S. affiliate, TD Bank N.A. that rose $868-million ($1.08 per share) in the quarter "due to price erosion in its mortgage-backed security portfolio,"

He maintained his "hold" rating and left his $63 price target unchanged.
The Globe and Mail, Tara Perkins, 20 November 2008

Ed Clark has spent months boasting about Toronto-Dominion Bank's ability to steer clear of the financial missteps that have caused his peers around the world to write down nearly $1-trillion (U.S.).

Yesterday, the chief executive officer acknowledged TD is no longer immune, suggesting that he spent so much time avoiding the individual threats that he lost sight of the bigger picture, allowing TD to be hit with $350-million (Canadian), after tax, in credit losses this quarter.

Steering a bank through a credit crunch is no easy task, Mr. Clark suggested in an interview.

“It's like running down, and people are shooting at you, and you miss this bullet and miss that bullet, and you say, ‘How do I make sure where the next bullet's coming from?'

TD's executives focused almost exclusively on eliminating credit risk, he told analysts on a conference call. They ensured that the bank had plenty of cash on hand, but didn't focus on the possibility that the rest of the world would run out of cash, he said. “I think that turned out to be a mistake.”

Mr. Clark's mea culpa came two days after Bank of Nova Scotia revealed that it will take a $595-million after-tax charge in the fourth quarter, which ended Oct. 31.

Of the Big Five banks, TD and Scotiabank have been viewed as the least exposed to the turmoil in credit markets. Investors are now watching for more pain on Bay Street when the remaining institutions show their hands.

Canadian financial stocks plunged yesterday. TD's shares ended down 12.74 per cent, or $6.36, at $43.57. Each of the Big Five saw their shares drop more than 12 per cent.

TD's pain is the result of a total lack of liquidity in the financial system during September and October, Mr. Clark said. The $350-million hit comes from the bank's credit product group, a proprietary trading business that was profitable the past seven years.

“Despite holding what we consider quality assets – not subprime mortgages, not structured products, not toxic assets, but rather assets that continue to perform – we find ourselves in a position of having to take some mark-to-market losses,” Mr. Clark said.

“Even though we tried, it was just not possible to build a wholesale bank that could withstand a world with no buyers, only sellers.”

The bank will wind down part of the portfolio that caused its headaches, and Genuity Capital Markets analyst Mario Mendonca expects it to incur several hundred million dollars in additional losses.

TD is also taking advantage of new flexibility in accounting rules by shifting $7.4-billion of bonds from its trading business into an accounting basket where writedowns to market value are recorded on the balance sheet rather than in earnings. The move is retroactive to Aug. 1. The fair value of the bonds has dropped by $561-million (after tax), but thanks to the recent accounting changes, that mark-to-market loss will not hit the bank's bottom line.

Bonuses for TD's investment banking employees and executives will be affected this year, with the investment banking division posting a fourth-quarter loss of $228-million, Mr. Clark said. Twenty to 30 jobs will be cut.

The bank's corporate segment will report a loss of $153-million, which is higher than its normal loss of about $40-million, partly because of losses on securitization.

Some of TD's financial pain will be offset by its decision to release a pot of money ($477-million before tax) that it had put aside to cover potential legal claims related to Enron.

Over all, fourth-quarter profit was $1.22 a share, while analysts had expected more than $1.30 a share. Adjusted profit is $642-million, compared with $1.021-billion a year ago.

Mr. Clark said he's counting on TD's core lending business to pull it through this environment. Contrary to public perception, TD and other Canadian banks have not curtailed their loans, he said.

TD's personal lending volumes have been growing by about 10 or 11 per cent, year over year, each month for the past couple of years and there has been no change to that pattern so far, Mr. Clark said. “The commercial and small-business area, it used to grow at 10 to 11 per cent, and has now stepped up and is growing closer to 15, 16 per cent.”

The Canadian Bankers Association said yesterday that business credit from the six largest banks was up 11.3 per cent in October from a year ago.

“What's happening, to some extent, is the banks are replacing other lenders,” Mr. Clark said. “Foreign lenders are withdrawing, securitization as a way of borrowing money has disappeared, and really the world is becoming actually more dependent on banks lending.

“So far, I would say the Canadian banking system has stepped up and said ‘we will absorb this.' But it does mean that you'll have increasing capital needs and funding needs as you grow that.”

Mr. Clark plans to keep TD's Tier 1 capital ratio, which will be 8.3 per cent on Nov. 1, above 8 per cent. That will likely be done by making use of new leeway that regulators have granted the banks when it comes to measuring their core capital, such as the ability to include a greater proportion of preferred shares.

TD does not plan to boost its capital levels right now by issuing common equity, Mr. Clark suggested. “At today's availability and price tag, raising common equity would be extremely difficult.”
Bloomberg, Doug Alexander, 20 November 2008

Toronto-Dominion Bank Chief Executive Officer Edmund Clark said he doesn't plan to follow the lead of executives at Goldman Sachs Group Inc. and forgo his annual bonus after a C$350 million ($273 million) trading loss.

"To be frank, no," Clark said, when asked in an interview about giving up his bonus. "Obviously I feel badly about it, but you don't exaggerate the situation."

The Toronto-based bank today reported fourth-quarter profit that missed analysts' estimates after taking a loss in its credit trading business. Toronto-Dominion, which has avoided significant debt writedowns until now, posted a C$228 million loss for its TD Securities investment bank, and a C$153 million loss in its corporate unit. The bank reports complete results on Dec. 4.

"We run a very performance-driven culture here. When something bad happens, it falls on the areas affected and the higher you are the more you're going to get affected," Clark, 61, said.

Barclays Plc CEO John Varley, investment banking head Robert Diamond, 57, and others will forgo their 2008 bonuses, the London-based bank said Nov. 18. Goldman Sachs CEO Lloyd Blankfein, 54, said this week he'd forgo his bonus, while UBS AG scrapped bonuses for CEO Marcel Rohner and 11 other top executives.

"When you run a big financial institution -- a C$500 billion balance sheet -- I think it's unrealistic to assume you'll never have a bump in the road," Clark said.

Toronto-Dominion's credit trading business was "probably too large a bet" and the bank didn't contemplate a crisis that extended 15 months, Clark said. The bank also failed to shed its investments quickly enough as the markets seized up, he said.

"We just never though the world would go from bad to terrible," Clark said, adding that other lenders may face similar problems. "When you look around the world, anybody that's sitting on inventories today is going to be marking those inventories down dramatically, because there are no bids out there."
Reuters, Lynne Olver, 20 November 2008

Toronto-Dominion Bank is cutting a small number of staff in its wholesale banking unit, which has been shrinking in proportion to the bank's bustling retail operations, TD Bank President and Chief Executive Ed Clark said on Thursday.

The bank warned earlier in the day that charges of C$350 million ($273 million) for credit-trading losses will produce a C$228 million quarterly loss in TD Securities, its corporate and investment banking unit.

The losses came in its credit products group, which trades bonds, credit default swaps and credit indexes. Bond values plunged in recent months as market liquidity dried up.

The bank is trimming staff at TD Securities by between 20 and 40 jobs as it seeks to ensure that all business areas make the most money with the least risk, Clark said in an interview.

"There are definitely job losses going on there as we speak," he said. "They're not huge numbers. Twenty, thirty, maybe 40 people," he said.

The wholesale banking unit had about 3,000 employees at the end of July.

On a conference call, TD executives said they will wind down C$1.3 billion in non-North American bonds in the credit trading book, and will also reduce a C$7.4 billion bond portfolio that is now classified as available for sale.

There will be no effect on bank operations outside of TD Securities from the trading losses, Clark said.

In fiscal 2008, which ended October 31, almost all of TD Bank's profits came from its TD Canada Trust retail bank in Canada and its TD Bank retail operations in the United States, comprising the old TD Banknorth name and the recently acquired Commerce Bank network.

"In the end, TD Securities will earn just under C$70 million and our retail business will earn C$4 billion," Clark said of full-year results.

Mathematically, it would be hard for the corporate bank's contribution to shrink further, he noted.

"It will be in the 5 to 10 percent of our earnings (range) for a while."

That proportion is down from 2006 and 2007, when wholesale bank profits made up 19 percent and 20 percent of TD Bank earnings, respectively.

Despite TD Securities' C$228 million loss in the fourth quarter, the unit has been profitable since the financial crisis began, Clark noted.

"There aren't a whole lot of corporate banks who made money all the way through."

On the Toronto Stock Exchange, TD Bank shares were down 11.5 percent on Thursday afternoon at C$44.20, while the S&P/TSX financial index was down 9.6 percent.

Analysts expect that slumping financial markets in September and October will bring similar market-related write-downs at other Canadian banks, which report fourth-quarter results over the next two weeks.
Dow Jones Newswires, 20 November 2008

Canadian bank valuations are now at "unprecedented" levels, UBS says, at a 37% discount to normalized values. That appears to discount a severe global economic downturn, firm suggests. Using 1991 recession as an acid test, firm says bank-share prices now factor in 29% decline in EPS, higher than 1991 numbers would suggest. Also notes bank loan mix better, so provisions unlikely to rise to 1991 levels. Overall, UBS says, valuations attractive at 8.4 times FY09 estimated EPS, compared to 10-year average of 11.8.
Dow Jones Newswires, Monica Gutschi, 20 November 2008

While the U.S. economy is likely to go into a "fairly sharp downturn," the lower Canadian dollar is likely to provide an upside for Toronto-Dominion Bank's operations in the U.S., Ed Clark said Thursday.

"I do think that the risk of having a greater-than-normal downturn are higher rather than lower," the bank's chief executive said in an interview, noting that consumers and investors have been "terrified" by recent events.

But even though that is likely to lead to higher loan-loss provisions at its U.S. retail bank, Clark said the weaker currency would provide a strong positive offset.

He noted the Canadian dollar is now 25% weaker today than it was a year ago, giving a 25% "lift" to the bank's U.S. earnings. And given the bank's conservative lending practices, Clark said it isn't likely to report a 25% increase in loan losses.

Toronto-based TD has a nearly 45% stake in online broker TD Ameritrade Holding Corp., and operates a 575-branch retail bank built from its acquisitions of the former Commerce and BankNorth banks.

With more than 90% of TD's overall earnings derived from retail businesses, the bank has largely sidestepped the credit-related problems that have plagued its peers over the past 18 months.

However, earlier Thursday TD announced it would take C$350 million in write-downs on its credit trading book, and would also report higher-than-normal losses of C$153 million on other investments. Some of the impact was offset by a gain of C$323 million as it reversed a litigation reserve related to Enron.

Clark said he was "disappointed" at the losses, but noted its wholesale bank would still report positive earnings, while its retail-banking operations were strong. The bank said it would report adjusted earnings of C$642 million or 79 Canadian cents a share in the fiscal fourth quarter. On a GAAP basis, net income is expected to be C$1.22 a share.

That compares with the Thomson Reuters mean analyst estimate of C$1.39 a share for the quarter, which ended Oct. 31, and the C$1.40 a share earned a year earlier.

While the bank's emphasis on retail banking has been a boon during the difficult times, the flip side of being retail-oriented is that TD is more vulnerable to a slowdown in consumer spending. Clark said that in the U.S. the bank is more vulnerable to slowing U.S. commercial lending, while in Canada it is more exposed to unsecured lending.

However, he said the bank has good earnings momentum and the ability to absorb any potential losses. It's also bracing for a significant economic slowdown.

"We're entering into a downturn with consumer confidence at the lowest level it's ever been before we have the downturn," Clark said.

In the earlier call, he said there would likely be a "buyer's strike" in the U.S. as the average American has seen both his or her home equity and its investment equity disappear.
Financial Post, Jonathan Ratner, 20 November 2008

Toronto-Dominion Bank may be taking a $500-million charge in the fourth quarter but it remains the safest bet among Canadian banks heading into the credit storm, Dundee Securities analyst John Aiken said.

He does not think TD’s announcement on Thursday will be the last capital market-related charges we see in the quarter. Bank of Nova Scotia also pre-announced similar charges this week.

“While additional losses for TD cannot be discounted at this stage (although accounting changes help on that front), we believe that the core earnings at the bank, particularly the success in its retail banking operations, will hold its earnings and valuations in good stead relative to its competitors,” he told clients.

Mr. Aiken expects core cash earnings for TD will be slightly above $1.30 per share, which is below the consensus. This could be a result of company-specific issues, which should be revealed when its full financials come out on December 4, or could signal weaker-than-expected earnings for the sector as a whole.

Banks typically clean up their balance sheets at the end of the year. So while charges are never good news, Mr. Aiken said they could moderate going forward if banks are conservative enough and capital markets show some signs of stabilization.
Financial Post, Eoin Callan, 20 November 2008

Ed Clark is battening down the hatches at TD Bank Financial Group, chucking business units overboard and cutting bonuses after being caught out by a storm in credit markets that continued to wreak havoc on the financial system on Thursday.

The chief executive said the bank expected to pull back from key overseas markets and top up its capital reserves after suffering a blow of more than $500-million in the fourth quarter amid choppy trading conditions that saw the Toronto stock market fall on Thursday by the most in 21 years.

The losses disclosed by TD will certainly not be the last for Bay Street, which is still counting the cost of the crisis in the banking system and has yet to feel the full effects of an economic downturn.

Financial stocks led a plunge in the TSX index, which dropped 9% to 7,724.76, the lowest in five years, with Manulife Financial sliding 15% after drawing down a $3-billion credit line. The challenges facing the financial sector also prompted a fresh flight by investors on Thursday from Citigroup, which saw its stock fall 26% in an alarming rout that prompted calls for authorities to bring back emergency measures to halt runs on shares.

While forecasters are already looking ahead to a prolonged period of rising defaults on bad loans and falling revenues, the head of Canada's second-largest bank warned on Thursday that the market institutions rely on for medium-term financing was only barely functioning.

"Is there any bank in the world that can actually do a significant amount of term financing in today's market? No," said Mr. Clark, adding: "Nobody is buying assets, they are only selling assets."

Mr. Clark said the toll on Canadian banks would have been much worse if Ottawa had not stepped in to ease accounting rules and provide affordable financing by agreeing to buy up to $75-billion worth of mortgages.

The losses revealed on Thursday by TD were concentrated in an obscure unit of the bank known as the Credit Products Group, which invested in two large portfolios that became distressed following a string of bank failures.

TD booked a $350-million loss on a $2.5-billion portfolio that included complex instruments such as credit default swaps. But it took advantage of new looser accounting rules to duck a charge of $561-million on a bigger portfolio of about $7.4-billion in bonds, such as mortgage-backed securities.

Executives said they were using the looser rules to re-classify this larger portfolio and avoid taking a hit that would have further weakened TD's base of required capital, which has fallen to a level of 8.3% from a previous peak of closer to 10%.

Mr. Clark indicated the bank would also take advantage of new flexible rules from Canada's top banking regulator that allow financial institutions to top up their reserves by issuing more "preferred shares," a hybrid of debt and equity once frowned upon.

TD has already raised $1.25-billion in capital this way, with analysts predicting imminent moves to raise fresh cash after the fall in its required reserves to what appeared to be the lowest level of any of the country's big five banks.

The disclosures by TD challenge the view Canada's top banks would sidestep the worst financial crisis since the Great Depression, suggesting instead that government relief has played a decisive role in mitigating the impact.

TD said it would wind down its credit products operation outside of North America and indicated bonuses would be cut at TD Securities and among top management. But in an internal video broadcast to TD staff, the chief executive signalled confidence the bank would outperform its peers thanks to government flexibility and cash flows from its successful retail operation.

Executives also said the bank had hit its target of generating more than $4-billion in annual retail profits, helping to support earnings per share of $1.22 for the quarter ended Oct. 31, which will work out to 79 cents after "adjustments."

Mr. Clark acknowledged earnings from U.S. operations were likely to be less than expected, but expressed hope the Canadian dollar would remain low enough to offset this shortfall by making the American profits worth more when they were transferred back to Bay Street. The executive added in an interview that TD would continue increasing its overall total of new loans to personal and business customers of its U.S. branch network.

The executive said it would be possible to emerge from the downturn with a significantly larger market share in the U.S. by concentrating on its core franchise in the northeast and targeting more affluent customers and businesses. TD shares fell 13%.
Dow Jones Newswires, Monica Gutschi, 20 November 2008

Toronto-Dominion Bank, which had avoided many of the problems that have battered its peers, shocked the market Thursday with the news that it would take a series of fourth-quarter charges on credit and securities losses.

The bank said it would take an after-tax loss of C$350 million on its credit trading book, and another C$153 million loss on securities trading, because of the illiquid and volatile markets.

The news follows hard on the heels of Bank of Nova Scotia's announcement that it would take C$595 million in after-tax write-downs in the fourth quarter, and foreshadows similar announcements from the other Canadian lenders.

"On the theory that you should be trying to dump everything into the quarter, you have nothing to lose," said Bruce Campbell, a principal at Campbell-Lee Investment Management, who counts TD as his largest bank holding.

And Sumit Malhotra, Canadian bank analyst at Merrill Lynch, suggested earlier Thursday that he expects fourth-quarter write-downs from all the banks to total C$5.3 billion.

Canadian Imperial Bank of Commerce, the bank most exposed to U.S. subprime housing and structured credit, is expected to report a charge of up to C$2 billion.

The growing realization that no bank is immune from the impact of volatile equity markets and the wide credit spreads, hit bank shares like a hammer.

In Toronto Thursday, TD is down C$4.45 to C$45.48 and Bank of Nova Scotia is off C$1.90 to C$33.34.

Leading the decline is CIBC, off C$4.94 to C$43.35. Royal Bank of Canada is down C$3.96 to C$37.23 and Bank of Montreal is off C$2.13 to C$35.87.

"At this juncture, everybody is kind of sitting here and really wondering what other shoes are there in the bank portfolios to drop," said Ross Healy, portfolio manager at Strategic Analysis. "You can't kind of help but feel that with the economic contraction (now), there are probably more kinds of bad news to come from banks, and you just don't know where."

Now, he noted, the bad news is coming from the banks that most observers had thought "had kept their noses clean," indicating that the global credit problems are widespread.

Healy, who owns no Canadian banks in his portfolio, said he began shying away from financial services once the credit problems in the U.S. began. "When the problem is debt, you better avoid the banks," he said. "That's always been the case, as long as I've been in the business."

Still, investors said they were comforted by the strong capital positions of Canadian banks. Even with the write-downs, TD is expected to have a Tier 1 capital ratio of 9.8% at the end of the fourth quarter.

DBRS reaffirmed its ratings on the bank, and said trends were stable.

As well, the bank said Thursday that its strategic positioning in wholesale banking and its strong retail-banking platform would stand it in good stead.

It expects to report adjusted earnings of C$642 million or 79 Canadian cents a share in the fiscal fourth quarter.

That compares with the Thomson Reuters mean analyst estimate of C$1.39 a share for the quarter, which ended Oct. 31.

In the year-earlier fourth quarter, the Canadian chartered bank earned C$1.40 a share on an adjusted basis.

Toronto Dominion expects to report GAAP net income of C$1.22 a share in the quarter.

Helping offset the impact of the write-downs, the bank reported a gain from the reversal of a litigation reserve it held related to failed energy trader Enron. As a result, it has recorded a positive adjustment of C$323 million on an after-tax basis.

Due to global liquidity issues, the widening in the pricing relationship between asset and credit protection markets, or basis, hurt credit trading-related revenue for the first three quarters of 2008. The "dramatic" absence of liquidity in credit markets in September and October produced an unprecedented widening of the basis, causing larger losses in Wholesale Banking in the fourth quarter, TD said.

To address the continuing deterioration, the bank has refocused its credit-trading business, including continuing to reduce this book of business, and reclassified certain trading financial assets into the available-for-sale category during the quarter. It said after-tax credit-trading losses of about C$350 million in the Wholesale Banking segment will result in an adjusted loss of C$228 million in this segment in the fourth quarter.

The bank also said its Corporate segment will record an adjusted loss of C$153 million for the quarter, compared to its usual loss of about C$40 million. The higher loss reflects illiquid markets.

However, it said its retail business remains strong, and it projects adjusted earnings of C$1.046 billion from its Retail segment in the fourth quarter.
Bloomberg, Doug Alexander and Sean B. Pasternak, November 2008

Toronto-Dominion Bank, Canada's second-largest lender by assets, reported fourth-quarter profit that was below analysts' estimates after posting about C$350 million ($274 million) in trading losses. The stock had its biggest drop in 25 years, and dragged other bank shares lower.

Profit was C$1.22 a share for the quarter ended Oct. 31, the bank said in preliminary results released today in a statement. The bank was expected to earn C$1.30 a share, the average estimate of seven analysts polled by Bloomberg. The bank said ``adjusted'' profit, before some one-time gains, will be C$642 million, or 79 cents a share.

``We're not surprised by any of this, and we think there's more to come from TD,'' said Blackmont Capital analyst Brad Smith, who expected C$1.45 a share excluding one-time items.

The Toronto-based bank is the second Canadian lender this week to report partial results ahead of schedule to reflect writedowns and other losses from the global credit crisis. Bank of Nova Scotia said on Nov. 18 it will record pretax charges of C$890 million tied to the bankruptcy of Lehman Brothers Holdings Inc. and eroding values for securities and debt investments.

Toronto-Dominion, which has avoided significant debt writedowns until now, said it expects to report C$350 million in credit trading losses, leading to a C$228 million loss for its investment-banking unit. The bank will also have a C$153 million loss in its corporate unit from eroding investments.

Toronto-Dominion's mistake was failing to anticipate a financial system ``meltdown'' and not getting out of some debt- related investments quickly enough, Chief Executive Officer Edmund Clark said in a conference call.

``I am struck by how dramatically and rapidly the global financial markets have changed, and how difficult it is to anticipate every risk,'' Clark said.

Toronto-Dominion fell C$6.36, or 13 percent, to C$43.57 at 4:10 p.m. trading on the Toronto Stock Exchange, its lowest since Aug. 12, 2004. All Canadian banks and insurers plunged, led by National Bank of Canada and Manulife Financial Corp.

``It was a bit optimistic to think TD would escape the problems completely,'' said Laura Wallace, who helps oversee about $300 million as managing director at Coleford Investment Management Ltd. in Toronto, including Toronto-Dominion.

Toronto-Dominion recorded a reversal, or gain, of C$323 million from money originally set aside for claims related to failed energy trader Enron Corp., and a C$177 million gain on hedging of derivatives and credit-default swaps. Other gains added C$151 million to earnings.

The costs from what Clark calls ``a bump in the road'' will have ``consequences'' for the annual bonuses at the TD Securities investment bank, he said.

Prior to the quarter that ended Oct. 31, Canadian banks had recorded C$11.6 billion in losses related to debt investments since 2007. Clark said as recently as this month that the bank avoided risky investments by focusing on consumer banking and unloading a structured products business in 2005.

``What this underscores is how deep this current crisis really is,'' Clark said in an interview. ``The fact that TD is hurt tells you how deep it is.''

Toronto-Dominion will exit its credit trading business outside of North America, winding down C$1.3 billion in bonds, the bank said in a presentation on its Web site. The lender has earmarked another C$7.4 billion in bonds for sale.

Toronto-Dominion is scheduled to release complete results Dec. 4.

19 November 2008

Scotiabank's $890 Million Writedown for Q4 2008

TD Securities, 19 November 2008


Yesterday after market close, Scotiabank pre-announced Q4/08 write-downs totaling C$890 million pre-tax.


A disappointing (early) start to earnings season, given that Scotiabank has been relatively clean through the downturn. A portion of the mark is purely accounting, and none of the exposures reflect an excessive concentration or material breakdown in the bank's risk management discipline in our view. For the group, we continue to see heightened risk of Q4 surprises given the incredible volatility and we look for write-downs across the group.


Not a breakdown in risk control. C$160 million pre-tax relates purely to hedge accounting issues (which occur every quarter although not on this magnitude) and C$170 million pre-tax relates to the failure of Lehman Brothers, while another C$410 million pre-tax represents MTM (mark to market) adjustments, which could conceivably come back over time. Scotia would like to have it back, but in the context of a C$462 billion balance sheet, the number does not suggest to us a systematic breakdown.

Ongoing exposures manageable. In our opinion, Scotiabank continues to have among the smallest exposure to problem assets of any Canadian bank. If challenging markets persist we expect to see losses across a range of exposures, but Scotia's positions remain manageable in our view. Likely more to come from peers. Visibility is extremely poor heading into Q4 given the tremendous volatility. Combined with year-end clean up, the risk of surprises remains high in our view. We expect more issues across the group, with write-downs on the order of a few hundred million each (except CIBC estimated at C$1.5-2.0 billion).

Little impact on Scotiabank's ongoing model. The hit to capital is in our view, manageable ($0.60 to BVPS and 30bp to Tier 1) and we expect Scotiabank to remain exceptionally well capitalized (Tier 1 estimate at 9.4%). Any silver lining to the announcement was the lack of any significant issues related to the International platform, where current investor concerns are focused.

There are three buckets of write-downs in total:

1. Lehman C$170 million pre-tax. Heading into the bankruptcy of Lehman Brothers, Scotia was in the process of re-hedging a position and became exposed to the underlying securities (blue chip Canadian equities). The bank subsequently decided to liquidate the portfolio given the deteriorating market conditions. The loss of C$170 million pre-tax represented a 10% decline in value. This resulting loss is permanent, but not a recurring item in our view. Scotiabank has submitted a bankruptcy claim for losses, but not reflected any expected recovery. Also, Scotia has no remaining exposure to Lehman.

2. Valuations adjustments. These include several positions.

a) U.S. Conduit (Liberty). This was a C$245 million pre-tax MTM adjustment with the potential for recovery.

The bank operates an ABCP conduit in the U.S. (Liberty). The conduit contained approximately C$400 million in CDO securities (as disclosed in Q3) and spreads widened dramatically on the securities during the quarter. Scotia bought the securities out of the conduit as a condition of their existing liquidity agreements (similar to actions taken by BMO in 1H08). The bank immediately marked the securities to 20 cents on the dollar. The securities remain highly rated and have not experienced any defaults. The remaining assets in the conduit (approximately US$7 billion) are credit receivables and the conduit continues to function normally. The bank does not own any of the Asset Backed Commercial Paper of the conduit (a strong signal that the existing paper continues to function).

b) Other CDOs. This was a C$165 million pre-tax MTM adjustment with the potential for recovery. The bank owns approximately C$700 million worth of direct exposures. During the quarter, CDO spreads widened dramatically on the securities and the bank has recognized a MTM loss. All the securities remain investment grade and have not experienced any defaults.

c) AFS (Available For Sale) Securities. This was an other than temporary impairment charge of C$150 million pre-tax.

The bank has a portfolio of approximately C$35 billion worth of AFS Securities. The charge reflects a range of smaller marks, the largest being in the C$30-40 million range. The securities are spread across the bank’s businesses and regions and we suspect they represent investments/securities in some of the fairly public corporate downfalls we have seen during the quarter.

3. ALM hedging. Scotiabank expects a MTM loss of C$160 million pre-tax, but this is 100% accounting related. The bank hedges fixed rate loans with interest rate swaps. The swaps are MTM while the loans are recorded on an accrual basis. When interest rates decline, the hedges reflect losses on the swaps, but the loans are unchanged (despite the obvious economic offset). This process occurs every quarter, across all the banks as normal business operations. However, it was notable this quarter given the strong movement in rates. This MTM reverses 100% over the life of the loan since it is a true economic hedge.


We have made no changes to our estimates or Target Price.

Justification of Target Price

Using fair value estimates in a Gordon Growth model, our target price reflects 2.7x P/BV.

Key Risks to Target Price

1) The continued weakening of the U.S. dollar, 2) country and political risk in its international markets such as Mexico, 3) integration challenges associated with its recent and future acquisitions and 4) adverse changes in the credit markets, interest rates, economic growth or the competitive landscape.

Investment Conclusion

In our view, despite these write-downs being a disappointing start to earnings season, we see little impact on Scotia’s ongoing model and do not view the write-downs as a breakdown in the bank’s risk control. Scotiabank’s ongoing exposures look manageable. We continue to see heightened risk of Q4 surprises across the group given the volatility in markets.
Financial Post, David Pett, 19 November 2008

Shares in the Bank of Nova Scotia were down more than 2% Wednesday as investors react poorly to the news that Scotia will take another writedown, this one worth $595-million after tax.

The remaining five big banks, including Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Montreal and National Bank of Canada, were also trading lower, on anticipation that more writedowns are in the cards. The latest rumour forecasts CIBC writing down another $1-billion or more in the very near future.

For those keeping count, here are the total after tax charges suffered by the banks since the third quarter of 2007:

• CIBC has written down $4.969-billion representing 46% of its common equity.
• Royal Bank has written down $1.086-billion representing 4% of its common equity.
• Scotiabank has written down $899-million representing 4.8% of its common equity.
• Bank of Montreal has written down $638-million representing 4.2% of its common equity.
• National Bank has written down $484-million representing 10.3% of its common equity.
• TD Bank has written down $65-million representing 0.2% of its common equity.
Dow Jones Newswires, Monica Gutschi, 18 November 2008

The upheaval in the global financial system and the meltdown of equity markets in October have hurt Bank of Nova Scotia, which announced Tuesday it will take after-tax write-downs in the fourth quarter of C$595 million.

The write-downs are primarily related to trading activities, and the valuation adjustments on derivatives and structured credit instruments.

The charges arose "as a result of recent challenging market conditions and unprecedented volatility in global financial markets," the bank said in a press release.

Bank of Nova Scotia has already taken C$171 million in charges since the credit crisis began in August 2007, although it hadn't taken any in the past two quarters.

And even with the latest writedowns, its charges are only a small portion of the total C$12 billion in pre-tax write-downs taken by Canadian banks as a whole.

Banks globally have taken about US$500 billion in pre-tax charges since the crisis began.

Brad Smith at Blackmont Capital said Scotia's fourth-quarter write-downs were "a relatively small amount of money" that probably will shave about 60 Canadian cents a share off its earnings in the period. "If that's all there is, then there's nothing to worry about."

He said he wasn't surprised to see the write-downs, as he expects Canadian banks to view 2008 as a "lost year' and enter 2009 with a cleaner slate.

John Aiken at Dundee Securities said in a recent earnings preview report that the fourth quarter is likely to be a "kitchen sink" quarter for the banks.

"We believe the banks are likely to carry on the tradition of cleaning up their balance sheets with a myriad of write-downs in the fourth quarter," he wrote.

Aiken estimated Scotia could take a maximum write-down of C$3.1 billion without affecting its capital position. He estimated Scotia has about C$1.7 billion in excess common equity.

Aiken or an associate involved in writing the report owns Bank of Nova Scotia stock but his firm doesn't have an investment-banking relationship with the company.

Bank of Nova Scotia said a charge of about C$115 million in trading revenue is related to the bankruptcy of Lehman Brothers Holdings Inc. in September. It said this loss occurred mainly as a result of a failed settlement and the unwinding of trades in rapidly declining equity markets shortly after the bankruptcy. The bank said it has submitted a bankruptcy claim for losses.

It will also take valuation adjustments of about C$370 million. This includes writedowns of about C$105 million in available-for-sale securities based on current estimates of fair value, largely reflecting ongoing deterioration of economic conditions and volatility in debt and equity markets. It said the other C$265 million relates to mark-to-market adjustments on collateralized debt obligations.

Included in the C$265 million will be a net fair-value loss of about C$135 million on the purchase of certain CDOs from the bank's U.S. multi-seller conduit, pursuant to the terms of a liquidity asset-purchase agreement. It said the widening of credit spreads coupled with recent credit events in certain previously highly-rated reference assets have resulted in a substantial decline in the market value of structured instruments. If these spreads improve, a portion of the valuation adjustments would reverse and be recorded as income. The bank said its remaining exposure to CDOs will now be about US$348 million.

The bank said it will take a mark-to-market loss of about C$110 million relating to derivatives used for asset/liability management purposes that don't qualify for hedge accounting. This was driven by continuing declines in interest rates and is expected to reverse over the average three-year life of the hedges such that no economic loss should occur, it said.

The bank said about C$305 million relates to Scotia Capital, about C$90 million to International Banking and about C$200 million to the Other business segment, which includes Group Treasury and Executive Offices.

Bank of Nova Scotia will report its fourth-quarter earnings on Dec. 4.

In Toronto Tuesday, the bank's shares rose C$1.07 to C$37.17. They have declined 26% so far this year.