11 December 2009

Review of Banks' Q4 2009 Earnings

Scotia Capital, 14 December 2009


• We are downgrading the Canadian banks to marketweight from overweight due to their strong absolute and relative share price performance in 2009 and increased regulatory/political risk.

• Bank stocks have doubled off their 2009 lows and are up 51% year-to-date outperforming the TSX by 23% thus far in 2009.


• Banks just finished reporting strong Q4/09 earnings ahead of street expectations, however despite these strong and better-than-expected results bank share prices weakened. We believe this is a reflection of a tired bank rally, guarded management comments, and increased regulatory uncertainty.

• Bank valuations are expected to expand over the next five years; however we believe we are in a consolidation phase with a stalled bank rally in the near term.

• We believe the market needs to see dividend increases to generate further P/E expansion to 14x to 16x as well as a comfort level that the regulator is not going to unnecessarily handicap Canadian banks.


• We recommend a marketweight position for the Canadian banks.

Strong Absolute and Relative Returns

• We are downgrading the Canadian banks to marketweight from overweight due to their strong absolute and relative share price performance in 2009 and increased regulatory/political risk. Bank stocks have doubled off their 2009 lows and are up 51% year-to-date outperforming the TSX by 23% thus far in 2009.

Share Prices Weaken Despite Strong Fourth Quarter Earnings

• Banks just finished reporting strong fourth quarter earnings ahead of Street expectations for the third straight quarter. Earnings continue to be driven by robust wholesale earnings, solid retail and rebounding wealth management. Credit trends are turning positive with lower impaired loan formations and stable loan loss provisions that appear to have peaked. The net interest margin was also stable to improving. ROE was solid at 16.9% on large capital positions with Tier 1 capital at 11.8%. This was the first year-over-year increase in operating earnings (+2%) since the financial crisis began, however despite these strong and better than expected results bank share prices weakened. We believe this is a reflection of a tired bank rally, guarded management comments and increased regulatory uncertainty.

Canadian Banks - Long Term Outperformers

• We continue to view banks as long-term overweight investments given their sound fundamentals and business models and sector structure with a history of generating superior returns. We believe the banks remain poised to continue to generate these superior returns. Bank returns have been nearly double the market's return over the past 40 years with a beta materially less than one. Bank dividends have grown at a 10% CAGR over this time, an enviable record.

Banks Stocks in Consolidation Phase

• Bank valuations are expected to expand over the next five years; however we believe we are in a consolidation phase with a stalled bank rally in the near term. Thus rapid appreciation from these levels is difficult to see given the magnitude of the 2009 rally and the fact that banks appear to have been placed on hold with respect to capital management pending clarity from the regulator. In addition, a sharp acceleration in earnings is not expected until the later part of 2010.

Origin of the Strong Canadian Banking System - Green Paper 1984

• We do not believe it is any one individual or agency that should take credit for the performance of the Canadian banks in this recent financial crisis but rather, we believe, the strength originated from the structure and the foresight launched with the "Green Paper" in 1984. The history of the development of the "Green Paper" is on the OSFI website with the pertinent history section highlighted in Exhibit 16. Canada has to manage its banking success carefully going forward and not squander the opportunity.

Historical Share Price Performance Pattern Points to Consolidation

• Our downgrade to marketweight is also based on bank share price relative performance history. In terms of bank index performance, 2009 thus far is the second best year in history next to 1968 which benefited from the 1967 Bank Act. On a relative performance basis 2009 is the fourth best year since 1967.

• Bank stocks' major outperformance years were 1968, 1971, 1982, 1988 and 1991 which were all followed by neutral to very modest outperformance. The only years where banks outperformed solidly or sustained the major rally was the 1996, 1997 string and through the tech bubble bursting in 2001, 2002 and 2003. Thus it would seem that 2010, or at least the first half, will have muted relative performance unless commodities have a major pullback.

Banks Defer to OSFI - Dividend Increases on Hold - Stalls Bank Rally

• The bank P/E multiple has rallied off of 6x (global financial collapse/systemic risk) to a recent high of 12.6x trailing (current 12.3x). However the P/E rally has stalled, we believe, in the near term due to uncertainty about the timing of dividend increases as the banks appear to have deferred to OSFI as well as a general perceived increase in regulatory and political risk. The risk is that there will be an overreaction which places Canada at a competitive disadvantage or hinders Canadian banks' ability to take advantage of the strength of their banking system and operating platforms.

Dividend Increases to Drive P/E Multiples Higher

• We believe the market needs to see dividend increases to generate further P/E expansion to 14x to 16x as well as a comfort level that the regulator is not going to unnecessarily handicap Canadian banks. Dividend increase expectations have now been pushed back to late 2010. Thus with dividend increases on hold or pushed back several quarters bank share prices are likely to continue to consolidate in the near term.

• We continue to expect strong absolute 12-month returns for the bank group but they will most likely be in the back half. On a medium to longer term basis we expect that dividend increases (when they begin - not if they begin, in our opinion) will be sustainable in the 10% range which will drive P/E multiples towards our fair value range of 16x.
Financial Post, 14 December 2009

Barclays Capital analyst John Aiken is worried that employee bonuses could weigh on the future profitability of the banks if they continue to rise at historical rates.

In the most recent quarter all of the big banks but National Bank and Bank of Nova Scotia paid out less in variable compensation, but the overall decline is probably a blip rather than a new long-term trend, Mr. Aiken said in a recent note to clients.

In 2009 the big five banks paid out variable compensation of $8.43-billion. That compares to $7.25-billion in 2008 and $8.44-billion in 2007.

As long as profits continue to rise along with bonuses, there is no reason to be concerned. The problem is that they may not. In the face of an uncertain economy and proposed regulatory changes, many analysts worry that bank profitability could take a hit in the coming years. The regulatory front is the top concern, especially regarding ballooning capital levels.

“The market is becoming aware that the vast levels of excess capital carried by the Canadian banks may not be deployed in the near term, particularly as uncertainty exists with pending regulatory changes, Mr. Aiken said.

In a world where banks are required to hold more capital, the bottom line would almost certainly be pushed down. In that context, employee bonuses would become “additional earnings headwinds,” Mr. Aiken said.
Financial Post, 11 December 2009

The relative share price weakness for National Bank of Canada may be signaling more than just disappointment to its fourth quarter earnings miss.

Given the pronounced decline in the bank’s P/E ratio, Blackmont Capital analyst Brad Smith couldn’t help but look back to September 2007, when National’s collapsing P/E represented either a unique buying opportunity or a valuation that was simply falling to a new level ahead of its larger peers.

That latter theory ended up proving correct as within four months, the Canadian bank index was trading at below 10x trailing P/E.

National saw a similar relative value decline in the fall of 2008, which was again followed by a decline in the bank index P/E, Mr. Smith noted.

The relationship appears to work the other way too as National’s January 2009 P/E expansion preceded the huge sector P/E expansion that has lifted valuations back to pre-credit crisis levels.

“While there can be no assurance that the pattern will again repeat, we would note that as the smallest of the Big Six banks, National’s relative stock illiquidity does favour more exaggerated points of inflection,” the analyst told clients.

09 December 2009

Scotiabank Q4 2009 Earnings

TD Securities, 9 December 2009

Yesterday before market open, the bank reported core cash FD-EPS of C$0.89 vs TD Newcrest of C$0.86 and Consensus of C$0.87.


Slightly positive. Not one of the strongest results this season. However, key credit trends came in well below expectations with PCLs at C$420 million (vs TD Newcrest at C$505 million). Domestic continues to perform with good margin expansion (+10bp). International remains under pressure. Capital Markets continued to moderate as expected. In our view, Scotia deserves to trade at a premium valuation for having one of the best platforms with leverage to a recovery scenario (offering higher growth/high ROEs in the medium-term).


Credit turns for the better. PCLs were materially lower than expected, and supported by an improvement in GIL trends (Exhibit 3). We expect trends to be lumpy as we reach the peak of the credit cycle in 1H10, but the trends and commentary served to increase our comfort that credit problems are unlikely to spike higher in the coming quarters. Overall, we expect the peak situation to be very manageable. We believe the stage is being set for some material declines in late 2010 and through 2011.

International working through headwinds. The segment is working through pressure from currency, elevated credit costs, ongoing investment and an easing of credit demand. All that said, the segment delivered C$283 million in earnings. To us, that is not a bad downside case in a tough environment. Moreover, we continue to base our call around the medium-term prospects for superior growth and expansion in the region which we believe remain excellent, premised on 1) faster economic recovery/growth 2) an underserved/fragmented banking market and 3) Scotia's strong track record in the region.

Premium exposure to recovery outlook. In our view Scotia offers the best exposure to a recovery in the global economy, which we expect to unfold in 2010 and into 2011. Primarily through its sizeable emerging markets business, but also via its corporate lending activities where we see prospects for good growth/profits on reduced supply/competition and wider spreads. We expect the result to be higher medium-term growth and high ROE. On this view, the stock should command the premium multiple of the Large-Cap Canadian banks.

Conference Call Highlights

• NIMs. The bank has benefitted from increased margins in Canadian banking and the Corporate lending book in Scotia Capital. In 2010, margins are expected to increase further (on higher/wider spreads and lower funding costs), but at a slower rate than in Q4.

• Credit. The bank noted their portfolios have been performing better than prior downturns and are also showing signs of some stabilization.

• Credit outlook. Management believes the bank will likely face elevated provisions into 2010, but the bank should see a downward trend (and accelerating) in 2H10. Retail provisions are expected to remain high. However, corporate and commercial books should see a gradual decline next year.

• Capital Markets. Management expects performance in 2010 will be strong, but unlikely to match the performance in 2009. Looking specifically at trading revenues the bank will likely face continued normalization in 2010.

Quarterly Highlights (growth is year on year unless noted)

• Domestic P&C - steady overall results. Revenue was up 10% helped by continued margin recovery (NIM +10bp). PCLs remain elevated, and there was a bit of an uptick in operating expenses on the quarter (+5.5%). Volume growth was mixed with good growth on the retail side (Mortgages +7%, Personal +12%), while commercial loans declined 14% (clients have reduced borrowings/sought alternative forms of financing). In Wealth, the mutual fund, brokerage and trust business continue to grow/recover nicely (mutual fund revenues were +60%).

• International – still under some pressure. Net income was down 14%, largely reflecting elevated PCLs and F/X. However, PCLs did ease from the peak levels in Q3/09. Operating expenses ticked-up sequentially and NIM was also down 8bp on the quarter. Overall, underlying volume growth was still decent at 8% ex-F/X impact.

• Wholesale - moderated as expected. Results came basically inline with our expectations as Trading revenues moderated (down some -30% from Q3 levels), helped by a strong quarter for investment-banking revenues.

Operating Outlook. The quarter was not far off the pace we expect for 2010 and management guidance is generally consistent with our thinking. We have increased our 2010 estimate slightly to C$3.60 (up from C$3.55). We have PCLs remaining elevated and also slightly lower profitability in International. We expect 1H10 to be slightly softer, with a strong 2H10. We still see 2011 to be a material recovery year as PCLs decline. We have increased our Target Price to C$55 (up from C$53).

Segments. Domestic P&C turned in a good performance and should grow moderately in 2011 on volumes and slightly firmer margins. Lower PCLs may help through the year. International is a bit weaker on slowing volumes, F/X headwinds and elevated PCLs and non-interest expenses, but should also pick-up in 2H10. Wholesale should moderate from its recent pace.

Credit. To us credit was the big surprise on the quarter with lower than expected PCLs (TD Newcrest was at C$505 million and consensus at C$525 million) and improving trends in GILs particularly with lower formations in International. Going forward we expect things to get a bit worse, and we can see some lumpy results. However, supported by management color, we do not see a material risk of a further spike upward. On balance our PCL estimates are slightly lower (down from C$2,075 million for 2010). We expect 2011 to see a material decline.

Capital. We believe Scotia is comfortably capitalized, having one of the highest TCE:Asset ratios in the group. Also, the bank did not participate in any material equity issues diluting shareholders. We expect management will continue to manage capital conservatively as new regulations evolve.

Justification of Target Price

In determining our Target Price we establish a Fair Value P/BVPS multiple based on our expectations regarding long-term sustainable ROE, growth and COE. Our expectations currently stand at 17.5%, 4.5% and 10.0% respectively implying a Fair Value P/BVPS multiple on the order of 2.60x.

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

We believe Scotia offers one of the best platforms with leverage to a recovery scenario and should command a premium valuation. Reiterate Buy.
Financial Post, 8 December 2009

Blackmont Capital analyst Brad Smith said he is "very encouraged" by signs that defaults in the Bank of Nova Scotia loan portfolio are leveling off.

Canada's third biggest bank reported fourth quarter net income of $902-million, a nearly three-fold increase from the same period last year as Scotia benefitted from near record results in investment banking that more than offset a decline in net interest margin.

Provisions for credit losses, essentially money set aside for loans that may not be repaid, were $420-million, up from $207-million last year but down $134-million from the prior quarter.

"While the shortfall in net interest margin was disappointing, we are very encouraged by the apparent stabilization in the bank's credit portfolios and view the reported results to be of above-average quality compared to peers," Mr. Smith said in a note to clients.

Andre-Philippe Hardy, an analyst at RBC Capital Markets, said the results were in line with his expectations despite lower-than-expected loan losses.

In a research note, Mr. Hardy said that aside from a few minor variations such as provisions for bad loans and better-than-expected domestic banking results, the quarter was as he expected.

He said the result would have a "neutral" impact on his view of the bank.

07 December 2009

RBC Q4 2009 Earnings

Scotia Capital, 7 December 2009

RY cash operating EPS increased 4% YOY to $1.06/share in line with our estimate and slightly above consensus. Operating ROE was 18.9%, with RRWA of 2.45% and Tier 1 Capital at 13.0%. Fiscal 2009 EPS was $4.45, an increase of 4% from $4.30 per share in 2008.


• Canadian Banking earnings increased 6% YOY. Insurance earnings declined 25% YOY with Wealth Management earnings increasing 4% and Capital Markets increasing 42% due to strong trading revenue. International Banking recorded a loss of $46M due to high loan losses.

• Our 2010E EPS remains unchanged at $4.80. We are introducing our 2011E EPS at $5.50. Our one-year share price target remains unchanged at $75 per share representing 15.6x our 2010E EPS and 13.6x our 2011E EPS.


• We maintain our 1-SO rating on the shares of Royal Bank based on its superior earnings growth given the strength of its retail and wealth management businesses and its uniquely positioned capital markets platform (U.K. and U.S. presence). In addition, the bank has significant earnings recovery potential from its U.S. retail business. RY has no meaningful premium despite its high ROE, and high capital bank.
The Globe and Mail, Tara Perkins, 4 December 2009

Royal Bank of Canada is now sitting on nearly $15-billion more than it needs to meet regulators' minimum capital requirements, and it's money that chief executive officer Gordon Nixon is in no rush to spend.

RBC is receiving more deal pitches than ever before from CEOs and investment bankers with businesses to sell, Mr. Nixon suggested Friday. But he has other ideas.

Canada's largest bank, which just posted a $3.86-billion profit for the fiscal year ended Oct. 31, has made more than two dozen acquisitions since Mr. Nixon took the top job in 2001.

But only three deals have been done since the financial crisis peaked, even though banks and other financial companies have become much cheaper – and Mr. Nixon is unlikely to increase the pace of acquisitions any time soon.

Why? Because as the banking sector moves from crisis to recovery, his strategy is to try to anticipate what regulators will demand, and stay ahead of the curve. And he knows that he could plump profits just by making more loans down the line, when conditions improve.

While he doesn't know exactly what the new capital requirements will be, he's confident RBC already exceeds them. That, he suggests, will give it an edge, because banking should become a lot more profitable in the next few years.

In fact, Mr. Nixon foresees a heyday for banking, complete with fatter lending margins. He wants to have plenty of funds to lend when that time comes, so RBC is content to sit on money that some analysts think should be put to use now.

“In the next five years, leaders in the financial services sector – in my view – will be defined by their ability to successfully manage through regulatory reform,” Mr. Nixon said Friday on a conference call with analysts after RBC reported fourth-quarter profits of $1.24-billion, topping the Street's estimates.

“Our capital strength, low leverage ratio and business mix combine to provide a great competitive advantage over other global competitors that will be required to shrink their balance sheets and change their business strategies in response to regulatory changes.”

The key measure of RBC's financial cushion, called the Tier 1 capital ratio, now sits at a whopping 13 per cent, up from 9 per cent a year ago. It's nearly double the Canadian regulator's minimum requirement of 7 per cent, and the highest of the big banks. And the proportion of RBC's capital that comes from plain vanilla common equity, the strongest form of capital, is higher than many peers.

Comparing Tier 1 ratios among banks in different countries is a bit of an apples-to-oranges issue, but Barclays Capital analyst John Aiken said he thinks RBC's capital position is arguably the strongest on a global basis as well.

“Navigating the regulatory environment over the next couple of years is going to be a major undertaking for all banks around the world, and we want to go into that in as ‘fortressed' a position as we possibly can, because we think it will provide us good opportunities to deploy capital in the future,” Mr. Nixon said, borrowing a phrase from Manulife CEO Don Guloien, whose strategy is also to build “fortress” capital levels.

Mr. Nixon expects RBC will be able to pick up new market share in Canadian, international, and investment banking down the line as a result of this strategy.

The crisis has damaged competitors, with a number of global banks exiting certain countries and businesses. Many financial institutions will be forced to shrink their loan books further to meet new capital and leverage rules, Mr. Nixon predicts, and the global flood of government stimulus money will dry up.

Prices for the bank's corporate loans have already risen significantly, with new loans being made at better prices than RBC could charge before the crisis.

The last couple of years have been characterized by aggressive pricing, “and I do think that we'll be settling into a different environment that will be very favourable going forward,” Mr. Nixon said.

That's not to say the bank isn't growing its loan portfolios right now. It holds $146.4-billion worth of mortgages, up from $136.2-billion a year ago.

And Mr. Nixon's still looking at potential wealth management acquisitions outside Canada. But he's not in any hurry.

“Our strong balance sheet and capital base will enable us to invest in key business areas, as well as explore potential acquisitions that meet our strict economic, strategic and cultural criteria,” he said.

04 December 2009

TD Bank Q4 2009 Earnings

Scotia Capital, 4 December 2009

Q4/09 - Strong Results, Better Than Expected

• Toronto-Dominion Bank (TD) fourth quarter operating earnings were strong, driven by record wholesale banking earnings, solid earnings at TDCT, partially offset by weak results from U.S. P&C and Wealth Management. Credit quality remained relatively stable.

• ROE was 14.3% with RRWA of 2.63%.

• TD’s cash operating earnings increased 20% to $1.46 per share, better than our estimate of $1.31 per share and consensus of $1.27 per share due to the unexpected strength in wholesale banking aided by resilient trading revenue and security gains versus security losses previously. Wholesale banking earnings tripled from a year earlier with TDCT earnings increasing 4%.

• Fiscal 2009 operating earnings declined 1% to $5.35 per share from $5.42 per share in fiscal 2008. Operating ROE for the year was 13.3%.

• Our 2010 earnings estimate is unchanged at $5.70 per share. We are introducing our 2011 earnings estimate at $6.50 per share.

• Our 12-month share price target is unchanged at $80, representing 14.0x our 2010 earnings estimate. We maintain our 2-Sector Perform rating.

Items of Note

• Reported cash earnings were $1.25 per share including $73 million after-tax or $0.09 per share loss on economic hedge related to reclassified AFS debt securities, $89 million after-tax or $0.10 per share restructuring charge related to Commerce Bancorp, and a $19 million after-tax or $0.02 per share loss in fair value of CDS hedging the corporate loan book.

Canadian P&C Earnings Increase 4%

• Canadian P&C (TDCT) earnings increased 4% to $622 million from $600 million a year

• TDCT’s solid performance was a result of strong volume growth in personal and business deposits and real estate secured lending, partially offset by higher provisions for credit losses and margin compression. Also, insurance earnings were weak this quarter with insurance revenue, net of claims, at $202 million versus $253 million in the previous quarter and $248 million a year earlier. Insurance weakness was due to high property and casualty insurance claims.

• Retail net interest margin declined 8 basis points (bp) sequentially and 1 bp from a year earlier to 2.88%.

• Revenues increased 6.6% year over year (YOY) to $2.4 billion, and expenses increased 2.0% to $1.2 billion.

• Card service revenue increased 7% YOY to $192 million.

• LLPs increased to $313 million from $290 million in Q3/09 and from $209 million a year earlier.

• TDCT earnings in fiscal 2009 increased a modest 2% to $2,472 million versus $2,424 million in 2008 as the bank absorbed a major spike in credit losses to $1,155 million versus $766 million as well as a 5 bp margin decline.

Total Wealth Management Earnings Decline 8%

• Wealth Management earnings, including the bank’s equity share of TD Ameritrade, declined 8% year over year in Q4/09 to $156 million.

Canadian Wealth Management Earnings Decline

• Domestic Wealth Management earnings declined 12% YOY to $97 million due to a significant decline in assets under management and administration, lower average fees earned, net interest margin compression, and lower margin loans.

• Operating leverage was negative 4.4%, with revenue declining 0.7% and expenses increasing 3.7%.

• Mutual fund revenue declined 4% to $197 million from a year earlier.

• Mutual fund assets under management (IFIC, includes PIC assets) increased 11.5% YOY to $58.2 billion.

• Canadian Wealth Management earnings in fiscal 2009 were $345 million versus $480 million in 2008.

TD Ameritrade – Earnings Decline 2%

• TD Ameritrade contributed $59 million or $0.07 per share to earnings in the quarter versus $68 million or $0.08 per share in the previous quarter and $60 million or $0.07 per share a year earlier. TD Ameritrade’s contribution represented 4% of total bank earnings.

• TD Ameritrade's contribution for fiscal 2009 was $252 million versus $289 million a year earlier.

U.S. P&C Earnings Decline 24%

• U.S. P&C earnings declined to $211 million or $0.25 per share from $276 million a year earlier, representing 16% of total bank earnings. Earnings were negatively impacted by high loan losses, a strong Canadian dollar, and relatively high expenses. Return on invested capital remains low at 4.5%.

• Loan loss provisions in the U.S. increased 18% QOQ to $216 million (includes $41 million in debt securities) or 1.33% of loans versus $183 million in the previous quarter and $78 million a year earlier.

• Net interest margin increased 6 bp from the previous quarter and declined 35 bp from a year earlier to 3.46%.

• In fiscal 2009, U.S. P&C earnings increased to $909 million versus $806 million in 2008 mainly due to the full year's inclusion of Commerce Bancorp's earnings versus two quarters a year earlier. However, the $900 million in earnings was 25% less than the banks' previous goal of $1.2 billion.

U.S. Platforms Combine to Represent 20% of Earnings

• U.S. P&C and TD Ameritrade contributed $270 million or $0.32 per share in the quarter, representing 20% of total bank earnings in the fourth quarter, down from a high of 29% in Q1/09.

Wholesale Banking Record Earnings

• Wholesale banking earnings were extremely strong at $372 million, tripling from $122 million a year earlier and increasing 14% sequentially from $327 million the previous quarter.

• Wholesale Banking earnings in fiscal 2009 more than doubled to $1,137 million from $480 million in 2008.

Trading Revenue – Resilient

• Trading revenue remains strong at $560 million versus a record of $633 million in the previous quarter and a weak $107 million a year earlier, driven by very strong fixed income trading.

• Interest rate and credit trading revenue was solid at $300 million versus a loss of $565 million a year earlier and a gain of $440 million in the previous quarter. Equity and other trading revenue increased significantly to $172 million from $1 million a year earlier and from $39 million in the previous quarter. Foreign exchange trading revenue declined to $88 million from $146 million a year earlier and $154 million in Q3/09.

• Trading revenue in fiscal 2009 more than quadrupled to $2,227 million from $544 million in 2008. We believe TD's Moody's Aaa credit rating is a major factor in the rebound in TD's trading platform.

Capital Markets Revenue

• Capital markets revenue was $343 million versus $342 million in the previous quarter and $276 million a year earlier.

• Capital Markets revenue for fiscal 2009 was $1,303 million versus $1,184 million a year earlier.

Security Gains

• Security gains were $26 million or $0.02 per share versus a loss of $90 million or $0.07 per share in the previous quarter and a gain of $55 million or $0.04 per share a year earlier.

Unrealized Surplus – $207 million

• Unrealized surplus was $207 million at quarter end versus $177 million in the previous quarter and $310 million a year earlier.

Securitization Revenue and Economic Impact

• Loan securitization revenue increased to $135 million in the quarter versus $92 million in the previous quarter.

• Securitization economic impact was a positive $74 million pre-tax, or an estimated $0.06 per share after-tax, versus $0.04 per share in the previous quarter. Securitization activity is recorded in the Corporate segment.

Loan Loss Provisions

• Specific LLPs increased to $521 million or 0.79% of loans versus $492 million or 0.76% of loans the previous quarter. The $521 million Q4/09 LLPs included $41 million related to debt securities. LLPs related to loans this quarter were $480 million, slightly lower than the $492 million in the previous quarter. Loan loss provisions have been restated for 2009 to included these debt securities provisions.

• Specific loan loss provisions in fiscal 2009 were $2,225 million or 0.85% of loans, including $250 million for debt securities, versus $1,063 million or 0.46% of loans in 2008. Total LLPs in fiscal 2009 were $2,480 million or 0.94% of loans including $255 million in general provisions.

• Our 2010 LLP forecast is unchanged at $2,100 million or 0.75% of loans. We are introducing our 2011 LLP forecast at $1,600 million or 0.54% of loans.

Loan Formations Stable

• Gross impaired loan formations before debt securities were stable at $974 million versus $969 million in the previous quarter. U.S. gross impaired loan formations increased moderately to US$412 million from US$387 million in the previous quarter. Gross impaired formations were $1,215 million in the quarter including $241 million in debt securities classified as loans versus $969 in the previous quarter.

• This quarter the bank reclassified $10.8 billion in securities (AFS & HTM) to loans in accordance with the CICA Handbook Section 3855. The August 2009 amendment changed the definition of a loan such that certain debt securities may be classified as loans if they do not have a quoted price in an active market and it is not the banks intent to sell the securities immediately or in the near term.

• Gross impaired loans increased to $2,311 million or 0.88% of loans from $1,947 million or 0.76% of loans in the previous quarter due primarily to debt securities classified as loans. Net impaired loans were negative $328 million.

Tier 1 Capital – 11.3%
• Tier 1 ratio was 11.3% versus 11.1% in the previous quarter. Total capital ratio was 14.9% versus 14.7% in the previous quarter.

• Tangible common equity to risk-weighted assets (TCE/RWA) was 9.9% versus 9.5% in the
previous quarter, while common equity to RWA increased to 18.6% from the previous

• Book value per share increased 12% from a year earlier to $41.13.

• Risk-weighted assets declined 10% from a year earlier to $189.6 billion.
Financial Post, 4 December 2009

Picking through the aftermath of a big earnings day on Thursday for Canadian banks, the markets seemed decidedly more enthused with CIBC's results compared with those of TD Bank and National Bank.

Shares in CIBC rose 2.22% yesterday as the company beat market expectations, while both TD (-2.52%) and National Bank (-5.85%) tumbled.

However, while TD Bank actually put out better-than-expected numbers it also made some very cautious outlook statements, Peter Rozenberg, analyst with UBS, noted.

"TD had a better than expected quarter, but management remained cautious regarding its 2010 outlook with U.S. PCLs (provisions for credit losses) expected to remain extended longer till the end of 2010," he said. "The current outlook is dependent on lower U.S. PCLs and higher returns which will take some time."

Mr. Rozenberg maintains a Neutral rating for TD while nudging the target price to $71 from $70.

This is still more bullish than Brad Smith with Blackmont, who is negative on the bank's U.S. business, noting its income fell 13% to $211-million.

"Given our less optimistic view with respect to the return potential of the U.S. strategy, we are maintaining our Underperform rating and $58 target price," he said in a note.

Meanwhile, both analysts are ambivalent on National Bank, which slightly missed consensus expectations.

"The bulk of the miss from our estimate ($1.40 versus $1.45) came from the net of increased minority interest and decreased taxes, while provisions for credit losses of $54-million were up 18% from last quarter and $4-million ahead of our estimate," Mr. Smith said.

"National Bank has done a good job of managing credit, driving good Capital Markets results, and managing expenses. While valuation is attractive, we think there is better leverage in other banks with trading profits expected to normalize, and credit leverage also higher at other banks," Mr. Rozenberg said.

Mr. Smith maintains a Sector Perform and $65 target price for National Bank, while Mr. Rozenberg has a Neutral rating while upping the target price to $65 from $63.

CIBC Q4 2009 Earnings

TD Securities, 4 December 2009

Yesterday, the bank reported core cash FD-EPS of C$1.41 vs. TD Newcrest at C$1.25 and consensus at C$1.33.


Positive. The bank turned in a solid quarter as credit trends improved, which helped to deliver strong retail profits. One quarter is not a trend, but it is consistent with our suspicion that operating trends could start to build through 2010 as credit eases. We raised our 2010 estimates, but more importantly our standing C$6.90 number for 2011 looks more achievable. Our Target Price increases to C$75. The stock has already moved nicely, and we need to build a stronger fundamental case for 2010/2011 to argue that the stock is materially undervalued here. Maintain HOLD.


Card trends topping out. Following several quarters of material acceleration, losses in the cards portfolio turned down in Q4/09. This is consistent with 1) previous color from management 2) early delinquency trends and 3) our expectation that unsecured personal credit would be early to recover. It is too early to sound the all clear, but this underscores the potential for material earnings leverage from declining PCLs through 2010. Overall, commentary suggests that aggregate PCLs should be flat to down in 2010 (see below).

Retail still needs to accelerate. Reported NI was helped by the improvement in PCLs, and a modest lift in revenues. The expected decline in PCLs should help lift 2010. However, volume growth remains fairly modest at around 5%. We noted some slight lift quarter-on-quarter which is encouraging, and consistent with management commentary that they will accelerate businesses, but trends will need to strengthen further in 2010 to build the case that CM has a solid, competitive retail franchise; this will be difficult to do amid expected modest industry growth.

Structured products holding steady; may hold future promise. The bank's run-off portfolio of structured products turned in a modest net gain again this quarter and overall remain fairly steady (relative to the turmoil of 2008).

Over the coming 2-3 years, we see potential recoveries as these positions mature and/or credit markets continue to improve. Combined with the release of related RWAs, this dynamic can be materially favorable for the bank's capital position.

Results validate stock's recent move. The stock has recovered nicely in anticipation of a potential favorable turn in credit. We think it is warranted. We moved our estimates and Target Price up and we see some moderate upside, but we need a stronger case around the bank's core retail business to argue for materially higher levels.

Conference Call Highlights

• Acquisition strategy. The bank's primary opportunity at this time is to gain a top three standing in each of its core Canadian business lines. The bank continues to look at opportunities outside of Canada. The bank’s criteria include: 1) familiarity with the region potentially gained through an initial partnership 2) new pools of management talent 3) exposure to a different cycle/market. The bank has not, at this point in time, found any acquisitions that fit this criteria. This would appear to rule out the potential that they have identified and expressed an interest in AIB.

• PCL trends. U.S. CRE - PCLs expected to be below those of 2009 (C$102 million), U.S. leveraged finance - PCLs expected to be below those of 2009 (C$36 million), European leveraged finance - no material PCLs expected, Cards - PCLs are expected to be better than the elevated level of 2H09, Other Personal and Wholesale - should be better than 2009.

Quarterly Highlights (growth is year on year unless noted)

• Retail - better than expected bottom-line. Revenue was flat year-on-year, but improved sequentially on stronger Personal Banking volumes, flat margins and higher fees. Wealth Revenues also improved from Q3. NIE remain well controlled, but the biggest driver was the decline in PCLs related to improvements in the Cards book. NI was still down from Q4/08 on higher PCLs, but improved materially from Q3 levels. Volume trends remain relatively modest at +4.8%, but we note some lift from Q3 levels (+1.5%).

• Wholesale - moderating as expected. NI was down to C$124 million from C$179 million in Q3. Trading remained healthy, actually up slightly from Q3 on an adjusted basis, while advisory was down materially.

Operating Outlook. We have raised our 2010 estimates. The change reflects primarily a lower estimate for peak 1H10 credit costs consistent with the Q4 results and guidance. We continue to assume modest underlying volume growth, flat to slightly higher margins and moderating capital markets trends. Significant recovery/improvement in the bank's Retail and Wealth management revenues is likely the biggest potential upside relative to our numbers.
Financial Post, 4 December 2009

CIBC appears to be on an upswing coming out of a robust earnings week for Canada's big banks.

James Bantis, analyst with Credit Suisse, has upped his ratings and estimates for the bank, which has been one of the hardest hit during the recession.

"Assuming no further surprises, it appears that the worst has been largely priced into CIBC's valuation. Specific issues such as the oversized credit card portfolio, run-off loan portfolios, CRA tax dispute have been largely addressed and discounted by investors," Mr. Bantis said in a note to clients. "Turning around its struggling retail banking franchise (against larger and surging peers) remains management's number one priority and biggest challenge."

Retail Markets posted earnings of $474-million, an improvement after two quarters of disappointing results. Mr. Bantis also has concerns about the bank's "outsized" credit card portfolio of $14-billion and the fact that loan losses have risen 57% year-over-year.

"When the economy eventually recovers, it's not clear how easy it will be for CIBC to turn on the credit tap for growth as retail customers may have looked elsewhere during this cautious period," he said.

Still, loan loss provisions of $424-million were below Credit Suisse's forecasts ($475-million) Mr. Bantis noted the bank did see its gross impaired loans rise 15% sequentially to $1.91-billion.

Meanwhile, CIBC's operating EPS of $1.41 is also ahead of Mr. Bantis's forecast of $1.32.

Mr. Bantis has raised CIBC to Neutral from Underperform, while bumping his target price to $66 from $52. 2010 EPS estimates have also nudged higher, to $6 from $5.60.

National Bank Q4 2009 Earnings

Scotia Capital, 4 December 2009

• National Bank of Canada (NA) fourth quarter operating earnings increased 3% YOY to $1.40 per share, below expectations. Operating earnings were lower than expected due to negative sequential swing of $0.18 per share from securitization, lower security gains of $0.04 per share, and other charges of $0.12 per share as well as higher-than-expected salaries & benefits (including variable compensation). Underlying earnings were relatively strong. Operating ROE was 16.9%.


• Financial Markets earnings doubled to $140 million from a year earlier but declined from the record $167 million in the previous quarter. Trading revenue was extremely strong at $197 million versus $168 million in the previous quarter.

• Retail earnings disappointed, declining 8% YOY and 16% QOQ mainly due to higher operating expenses and credit costs. Wealth Management earnings were $26 million up slightly QOQ but down 42% YOY.


• Our 2010E EPS is unchanged at $6.40. We are introducing our 2011E EPS at $7.00. Share price target is unchanged at $75.