22 December 2010

TD Bank to Buy Chrysler Financial

Bloomberg, Sean B. Pasternak, 22 December 2010

Toronto-Dominion Bank may continue to make acquisitions in the U.S. after increasing its bet there with the $6.3 billion purchase of Chrysler Financial Corp., capping a record quarter for U.S. takeovers by Canadian lenders.

Toronto-Dominion’s bid for the auto-finance company “doesn’t really alter” the Toronto-based bank’s appetite for smaller transactions, Chief Executive Officer Edmund Clark said.

“We’re not deal junkies, but we keep saying what we’re looking for,” Clark said yesterday in a telephone interview. “We want $10 billion (in assets) or less deals; tuck-ins that add to our franchise and meet our strategy.”

The purchase of Chrysler Financial adds to the more than C$20 billion ($19.6 billion) that Canada’s second-largest bank spent on U.S. acquisitions since 2004. Toronto-Dominion’s U.S. territory spans 16 states from Maine to Florida with 1,269 branches, the first time a Canadian bank has more locations south of the border than at home.

“These small transactions have ended up with us having a pretty significant franchise in the United States,” said Clark, 63. “We clearly have very strong market presence down the east coast of the United States; now we’ll be in the top five for bank-owned auto lending.”

Toronto-Dominion and Bank of Montreal are among Canadian banks that are taking advantage of their relative strength to add assets in the U.S. as troubled Europeans lenders pull back. Bank of Montreal last week agreed to buy Wisconsin’s biggest bank for $4.1 billion.

HSBC Holdings Plc, Britain’s biggest bank, bought U.S. subprime lender Household International Inc. in 2003 for $15.5 billion, in its biggest-ever acquisition. Following the bursting of the subprime bubble, HSBC closed the U.S. consumer finance division to new customers in 2009 after more than $53 billion of loan-loss provisions in North America. London-based HSBC also sold a $4 billion U.S. car loan portfolio this year, while Allied Irish Banks Plc sold its stake in Buffalo-based M&T Bank Corp. for $2.1 billion.

“The European banks are not in any kind of a position to compete for these assets, and the Canadian banks certainly are,” said Tony Demarin, chief investment officer at BCV Asset Management in Winnipeg, Manitoba, which manages about C$250 million, including Toronto-Dominion shares. “This is a once-in- a-decade, once-in-a-20-year opportunity.”

Canada’s banking system has been ranked the world’s soundest for three straight years by the Geneva-based World Economic Forum. Lenders including Toronto-Dominion and Royal Bank of Canada withstood the worst financial crisis since the Great Depression without taking government bailouts, and recorded only a fraction of the $1.31 trillion in writedowns taken by banks and brokers worldwide.

Toronto-Dominion’s purchase follows the bid last week by Bank of Montreal to buy Milwaukee-based Marshall & Ilsley Corp., The acquisitions mark the biggest quarter for Canadian bank deals in the U.S. in at least 12 years, according to Bloomberg data.

Toronto-Dominion, which operates south of the Canadian border as TD Bank, began its U.S. expansion in 2004, convinced that there were limited opportunities once the federal government blocked Canadian banks from buying each other.

In August 2004, Toronto-Dominion announced it would buy 51 percent of Portland, Maine-based Banknorth Group Inc. for $3.5 billion. A year later, the bank sold TD Waterhouse to TD Ameritrade Holding Corp., making it the largest shareholder in the Omaha, Nebraska-based brokerage.

By 2007, Toronto-Dominion acquired the rest of Banknorth for $3.19 billion, with Clark installing former risk officer Bharat Masrani as head of the U.S. operations. In March 2008, the bank bought Cherry Hill, New Jersey-based Commerce Bancorp for about $8.33 billion. Toronto-Dominion added South Financial Group Inc. this year for $191.6 million and now has about 200 branches in the U.S. southeast.

“We obviously have an unbelievable deposit-gathering machine,” said Clark, who joined the bank in 2000 and became CEO in 2002. “Now we need to complement it with an asset- gathering machine.”

The purchase of Chrysler Financial from Cerberus Capital Management LP will add $100 million to Toronto-Dominion’s earnings by 2012, and the bank forecasts new loan originations of about $1 billion a month the following year. The bank expects to surpass a target of $1.6 billion a year in U.S.-based profit within three years, compared with $1 billion in earnings last fiscal year.

“It gives them a big book of auto-loan business you will have gone through with a fine-toothed comb, and TD has the ability to borrow at a better rate than Cerberus would,” said Terry Shaunessy, President of Shaunessy Investment Counsel in Calgary, which manages about C$200 million. “TD has shown it has very good credit analysis.”

Chrysler Financial, based in Farmington Hills, Michigan, has about 1,850 employees and will have $7.5 billion in loans when the transaction closes. About 90 percent of the loans are in the U.S., and 10 percent in Canada. Chrysler Financial isn’t related to Chrysler Group LLC, the company that’s now controlled by managers from Fiat SpA.

“In our view, the largest risk in the transaction is that the company will be unable to hit its average loan balance targets for 2012 of $10 billion,” said Brian Klock, an analyst at Keefe, Bruyette & Woods. “We believe this target should prove manageable.”

Citigroup Inc., JPMorgan Chase & Co., and Sandler O’Neill & Partners LP are advising New York-based Cerberus on the transaction. Goldman Sachs Group Inc. advised Toronto-Dominion.
Financial Times, Bernard Simon, 21 December 2010

Toronto-Dominion Bank is set to become one of North America’s top five auto lenders after agreeing to pay $6.3bn in cash for Chrysler Financial, the vehicle finance group owned by Cerberus Capital Management.

The bank said it aimed to restore Chrysler Financial to its former strength.

“This is an opportunity for us to take advantage of a market that was clearly disrupted,” Bharat Masrani, head of the bank’s US operations, said of the deal, announced on Tuesday.

The deal also allows Cerberus to extricate itself with a modest loss from its ill-fated $7.4bn acquisition of Chrysler in 2007. Cerberus retained the financing arm when Chrysler, the smallest of Detroit’s three carmakers, was restructured under bankruptcy protection last year.

Apart from receiving the $6.3bn of cash, Cerberus is retaining about $1bn of non-auto assets.

Ed Clark, TD’s chief executive, said the car loan business had held up well during the recession: “People want to keep their cars, because if they don’t have cars, they don’t have jobs.” he said.

Chrysler Financial’s loan portfolio has shrunk from a peak of $75bn during the last economic upswing to just $7.5bn now, and it has laid off half of its workforce. “During this time our origination engine was idling but we knew we had a valuable franchise,” said Tom Gilman, Chrysler Financial’s chief executive.

The group, which will be rebranded under the TD name by next spring, aims to sign up at least $1bn a month in new loans within the next three years, expanding its portfolio to a book value of $20bn-$30bn. It will focus on prime and near-prime customers.

It has recently signed up 400 car dealers a month, and expects to have relationships with 5,000 by 2013, more than double the number before the crisis in the North American car and banking sectors. TD said that Chrysler Financial could generate a return on capital of about 20 per cent within three to four years.

Mr Gilman said the company had preserved its technology and retained critical expertise under Cerberus’s ownership. It has repaid much of its debt, including funds advanced under the US government’s Tarp programme.

TD, one of only a handful of banks worldwide that has retained a Moody’s triple-A credit rating, has been looking for some time to expand its US assets in line with the growing deposit base.

TD has more retail outlets in the US than in Canada as a result of a series of acquisitions over the past six years., including New Jersey-based Commerce Bank (subsequently rebranded TD Bank) and, most recently, four banks in the south-east put up for sale by US regulators. The carmaker is now controlled by a union healthcare fund, and the US and Canadian governments.

Mr Clark said the addition of Chrysler Financial did not signal a drive to expand the US branch network beyond the east coast: “This gives us a national asset strategy to complement our local deposit-gathering strategy.”, he told the Financial Times.
Wall Street Journal, Phred Dvorak & Caroline Van Hasselt, 21 December 2010

Toronto-Dominion Bank took another step toward its goal of becoming a top retail player in the U.S. with the $6.3 billion purchase of the former auto-lending arm of Chrysler.

TD said Tuesday the purchase of Chrysler Financial Corp. from private-equity fund Cerberus Capital Management LP gives the bank a big presence in a growing and profitable part of the consumer-loan business, as well as another place to invest some of the roughly $80 billion in U.S. deposits that exceed its loans.

The acquisition, which is slated to close before the end of April, will make Canada's No. 2 bank one of the five biggest auto lenders in the U.S., on top of the top-ten ranking the bank already has in terms of deposits, said Chief Executive Ed Clark.

The purchase is also the latest sign of how Canadian banks, which came through the downturn relatively unscathed, are using their financial strength to expand in markets like the U.S. TD earlier this year bought four small, troubled banks from the Federal Deposit Insurance Corp. to extend its footprint down the U.S. eastern seaboard from Maine to Florida. Last week, Bank of Montreal said it was buying a big Midwestern bank in a $4.1 billion share swap.

TD's auto-loan sales pitch will be, "Here's a bank that was not touched by the downturn, has more deposits than it has assets, and it wants to lend you money," said Mr. Clark, in an interview.

Mr. Clark said TD chose auto loans over other types of assets it looked at because losses in the U.S. stayed relatively low throughout the downturn, and industry watchers think volume is poised to grow quickly as the economy recovers.

"It's clear people want to have cars, because if they don't have cars, it's hard to have jobs," said Mr. Clark.

But the expansions down south, while the U.S. economy remains in a funk, are risky as well.

"Whether you're looking at Royal Bank [of Canada], Bank of Montreal or Toronto-Dominion, none of them on their U.S. banking businesses are generating adequate rates of return in the current environment," said Brad Smith, an analyst at Stonecap Securities in Toronto. "The big risk now is that the U.S. economic environment does not snap back in a sustainable way, which means that you're putting more capital in" and still getting a poor return.

Chrysler Financial, which was peeled off from its car-making parent after Chrysler filed for bankruptcy protection, hasn't made many loans since the U.S. government bailed out the car company in late 2008. It has seen its loan book shrivel to an expected $7.5 billion by the time the deal closes, from $26 billion just more than a year ago. That shrinkage could be hard to turn around, with a reduced sales force pushing car loans that last an average of three years.

"We are having trouble understanding where the loan volume growth will come from and how TD will be able to jump-start Chrysler Financial to generate exceptionally large loan growth after effectively being dormant for well over two years," wrote Barclays Capital analyst John Aiken in a comment on the deal.

Last week, Mr. Aiken lowered his target on Bank of Montreal's share price by 14% to C$60.00, saying the acquisition it announced would lower profitability for several years.

TD estimates Chrysler Financial's portfolio is worth only about $5.9 billion when liabilities are stripped out. It is paying a $400 million premium for what it believes is the value of Chrysler Financial's business, including loan-processing infrastructure, a sales force of 100, relationships with 2,000 car dealers and a million outstanding customers.

The biggest risk is "the time it's going to take us" to get that auto-loan book back up to an average of $20 billion-$30 billion, said Mr. Clark—close to the amount of business Chrysler Financial was doing at its peak. Mr. Clark said TD is planning to double the car-loan sales staff to about 200 and invest about $500 million in operating capital. It is hoping to reach a sales volume of $1 billion a month by 2013, and its targeted loan amount in three or four years, for a 20% return on invested capital. Mr. Clark said TD will offer the auto loans under the TD name and drop the "Chrysler" moniker—a move that will help the bank expand its brand beyond the East Coast, where most of its U.S. branches are based, with minimum cost and integration headaches.
Bloomberg, Cristina Alesci & Zachary R. Mider, 21 December 2010

Cerberus Capital Management LP will recoup about 90 percent of its initial investment in Chrysler after the sale of the automaker’s former lending unit to Toronto-Dominion Bank, according to two people with knowledge of the transaction.

Cerberus will get about 75 cents on the dollar in cash when the sale of Chrysler Financial Corp. closes, said the people, asking not to be identified because the New York-based firm is private. Including about $900 million of assets Cerberus is retaining as part of the deal, the company will be left with a loss of 10 percent on the initial investment in the automaker and its finance arm.

Toronto-Dominion Bank today agreed to buy Chrysler Financial for $6.3 billion in cash, adding an auto-finance company in its second-largest acquisition. The purchase includes $5.9 billion in assets and about $400 million in goodwill. Cerberus, the hedge-fund and buyout firm led by founder Stephen Feinberg, bought a majority stake in Chrysler for $7.4 billion from DaimlerChrysler AG in 2007, part of a wager on the U.S. auto industry that included the 2006 takeover of General Motors Corp.’s auto lender.

The deals preceded a decline in U.S. auto sales that sent both carmakers into bankruptcy. Feinberg, 50, subsequently lost control of both GMAC and Chrysler and held on to Chrysler Financial. The lender repaid its $1.5 billion in U.S. Treasury Department bailout funds last year and in July sought to return to large-scale lending. The automaker, known as Chrysler Group LLC, is now controlled by managers from Italy’s Fiat SpA.

Chrysler Financial, based in Farmington Hills, Michigan, has about 1,850 employees and will have about $7.5 billion in loans at the closing of the transaction, according to an investor presentation Toronto-Dominion released today. About 90 percent of the loans are in the U.S., and 10 percent in Canada.

Toronto-Dominion is recognizing the net value of the assets at $5.9 billion on its own books, more than the $5.2 billion value on Chrysler Financial’s, according to a person with knowledge of the transaction. Based on Chrysler Financial’s value, Toronto-Dominion is paying about 1.2 times the book value, the person said.

18 December 2010

BMO to Buy Marshall & Ilsley

The Wall Street Journal, David Reilly, 18 December 2010

Bank of Montreal's acquisition of Marshall & Isley may signal the start of a hoped-for wave of regional bank consolidation. But others shouldn't follow its lead when it comes to price.

BMO is buying M&I for $4.1 billion, equivalent to a 33% premium over the prior day's close for a bank hit hard by the financial crisis. M&I has yet to pay back $1.7 billion in Troubled Asset Relief Program funds and has racked up eight consecutive quarterly losses.

No wonder BMO's stock sank nearly 7% Friday. M&I shareholders, on the other hand, aren't complaining. And the announcement had investors speculating about other possible takeovers; shares of banks such as KeyCorp and Regions Financial rose smartly.

Many regional banks are seen as vulnerable because they are finding the road to recovery tough. With demand for loans still tepid, there may be few opportunities, outside mergers, to boost growth.

Deals also could allow weaker banks to be weeded out without hitting the Federal Deposit Insurance Corp.'s already strained funds. "Regulators may encourage many of the more stressed regional banks to sell to stronger regional banks," analysts at CreditSights said in a note Friday. They highlighted U.S. Bancorp, PNC Financial Services Group and BB&T among potential acquirers.

But there still is the small issue of price to consider.

BMO ostensibly is paying one times tangible book value, and with stock. That assumes, though, that M&I's loan book is worth its carrying value. It isn't. In its most recent quarterly filing, M&I shows its loan book has a market value 10% below its balance-sheet value. That tallies with BMO's own estimate of an additional 12% of loan losses.

Apply M&I's market-value estimate, tax-adjusted, and the bank's tangible common equity falls to $1.56 billion. At the adjusted level, BMO, whose own shares trade at 1.8 times book, is actually paying 2.62 times book value. If the market-value adjustment isn't tax-affected, because M&I hasn't been profitable, the multiple soars to more than 20 times.

Even the lower valuation would be rich for a pristine bank whose assets can be counted on to hold their value. That's not the case with M&I, whose loan book still is shaky.

Over the past two months, Standard & Poor's downgraded M&I, while Moody's Investors Service placed the bank on review for possible downgrade. Both firms noted weakness in M&I's commercial real-estate and construction-lending portfolios, which make up more than a third of the loan book.

In its defense, the deal makes strategic sense for BMO, which already owns Chicago-based Harris Bank and is looking to expand in the Midwest. BMO also expects to reap about $250 million in pretax cost synergies. As good as that is, it's still not justification for overpaying.
The Wall Street Journal, Caroline Van Hasselt & Randall Smith, 18 December 2010

Bank of Montreal unveiled plans to buy Milwaukee-based Marshall & Ilsley Corp. in a $4.1 billion stock swap, triggering speculation that other faltering U.S. regional banks may be snapped up as well.

Shares of SunTrust Banks Inc., KeyCorp, Regions Financial Corp., Synovus Financial Corp., and Fifth Third Bancorp, all of which have yet to repay $1 billion or more in government aid, rose as investors sought out other possible takeover targets.

"The first question is 'who's next?'" said Chris McGratty, a bank stock analyst at Keefe Bruyette & Woods, which included M&I on a list of 26 possible takeovers in June. However, Mr. McGratty cautioned that other such scenarios may take time to play out.

With the U.S. economy showing signs of life, bank takeover speculation has rarely been as active since the subprime-mortgage meltdown hit. Banks that haven't repaid government aid under the Troubled Asset Relief Program have been a focus of investors.

On Wednesday, stock of Regions, which owes $3.5 billion, surged as much as 5.6% in early trading on rumors that it might be acquired. The same day, BankAtlantic Bancorp Chief Executive Alan Levan said that while the lender has expressed intent in the past to remain independent, "we believe it is in our shareholders' best interest for us to be flexible and open to opportunities as they may be presented."

The Marshall & Ilsley acquisition, the largest U.S. bank acquisition in two years, is the latest in a string of U.S. purchases by Canadian banks, which have weathered the financial crisis and recession better than most U.S. peers.

Unlike U.S. banks, Canada's didn't require bailout funds, avoiding the subprime-mortgage crisis with the help of conservative lending practices and tight regulation.

Toronto-Dominion Bank bought Commerce Bancorp Inc. for $8.7 billion in October 2007. Earlier this year, TD acquired Greenville, S.C.-based South Financial Group Inc. among others.

The Marshall acquisition was the largest U.S. bank deal since PNC Financial Services Group acquired National City Corp. for $5.6 billion in October 2008, according to KBW.

Marshall & Ilsley became vulnerable with pricey acquisitions in Florida and overexpansion in Arizona, triggering an overexposure to construction loans and $4.8 billion in losses since 2007, Mr. McGratty said. Marshall shares had been sliding amid fears over its ability to raise funds to repay $1.7 billion in government aid.

Still, the acquisition came at a 34% premium to Marshall & Ilsley's stock price, based on where the two stocks closed on Thursday.

Alan Villalon, a bank stock analyst First American Funds in Minneapolis, which owned 824,347 Marshall shares, said the deal shows that there are still healthy banking assets, which wasn't so clear in recent weeks after Wilmington Trust was sold at a steep discount.

But the $7.75-a-share offer sparked a 6.5% slide in the stock of Bank of Montreal, commonly referred to as BMO, cut the deal's price tag and reduced the premium. One reason for Friday's slide is that BMO said it plans to write down another $4.7 billion in Marshall assets. Investors also were concerned about the bank's ability to digest Marshall.

Under a definitive agreement, BMO is offering 0.1257 of its shares for each M&I share.

To keep its capital strong after the acquisition, the bank plans to issue an additional 800 million Canadian dollars (US$795.3 million) in equity before the deal closes prior to July 31, 2011. BMO also will repay Marshall's $1.7 billion in TARP debt.

The purchase bolsters BMO's position in the Midwestern states, where it operates Chicago-based Harris Bank, and will more than double its branches in the U.S. to 695. BMO has struggled to formulate a clear growth strategy since the Canadian government nixed domestic bank mergers in 1998.

"BMO had to do something. They've been in the Midwest for a long time, and this is the time to take the plunge," said John Kinsey, who helps manage C$1 billion at Caldwell Securities Ltd. in Toronto. "Most Canadian companies have not fared well at all in the U.S., so there may some execution risk."

In Toronto Friday, BMO stock fell C$4.05, or 6.5%, to C$58 on more than 13 million shares. In New York, M&I gained US$1.06, or 18%, to US$6.85

06 December 2010

RBC Q4 2010 Earnings

Scotia Capital, 6 December 2010

• RY cash operating EPS declined 20% YOY to $0.84, significantly below expectations due to weak Wholesale and International Banking results. Operating ROE: 13.5%, RRWA: 1.85%, Tier 1 Capital: 13.0%.


• Reported cash EPS was $0.76 per share including a $116M after-tax or $0.08 per share loss on the announced sale of Liberty Life.

• Fiscal 2010 operating EPS declined 17% to $3.70 per share from $4.45 per share in 2009 due to a 33% decline in Wholesale Banking earnings. Operating ROE 2010: 15.9%, RRWA: 2.11%.

• RBC Capital Markets earnings declined 35% YOY to $374M, although recovering from the extremely low level of $202M in the previous quarter. International Banking operating loss in Q4 deteriorated to $132M versus a loss of $52M in the previous quarter.


• We are reducing our 2011E EPS to $4.20 from $4.40 and introducing 2012E EPS of $4.80. Our one-year share price target is unchanged at $60. We maintain our 2-SP rating as the premium P/E multiple remains vulnerable given RY's declining relative profitability and earnings risk.
The Globe and Mail, Eric Reguly, 26 November 2010, Friday

Nattily dressed, minus a tie, Gord Nixon saunters into the Blue Bar at The Berkeley Hotel in Knightsbridge, orders a Hendrick’s gin and tonic, reaches into his breast pocket and presents me with a folded piece of paper. I think I know what’s coming and my heart sinks.

It is a photocopy of a column I wrote in May, 2007, when Fred Goodwin, then boss of Royal Bank of Scotland, was on top of the banking heap, buying everything in sight and putting Edinburgh on the global financial services map. The headline, “Bold RBS puts our banks to shame,” suggested that another blue-blooded bank – Royal Bank of Canada – could leap into the international big leagues too if only one Gordon M. Nixon had Mr. Goodwin’s famous bravura.

Today, RBS, minus Mr. Goodwin, is 84-per-cent owned by Her Majesty’s Treasury after reporting a stunning £24.1-billion loss in the 2008 crisis year. The market value of what was once the world’s fifth-biggest bank is now the equivalent of about $38-billion (Canadian). And RBC? It’s worth $77-billion, putting it among the planet’s top 15. What’s more, it has become Canada’s corporate ambassador to the world, the textbook example of a bank that used classic Canadian caution, backed by sound regulation, to survive and thrive while many others around it toppled like dominoes.

Mr. Nixon, who became chief executive officer of RBC in 2001, chuckles and tells me not to feel bad about the article; pre-crunch, all sorts of misguided reporters and analysts were telling him to go big or go home. Some members of his own executive team heaped pressure on him to do the same.

To his credit, he resisted. Indeed, RBC’s rise can’t be down to sheer dumb luck. It was due ultimately to Mr. Nixon’s strength of personality and belief that banks shouldn’t take the easy route to growth. “A lot of CEOs who fell by the wayside lost sight of the fact that they were supposed to be growing franchises,” he says. “Instead, they were growing assets. The easiest thing to grow is a bank’s assets. We could double our balance sheet tomorrow if we went out and made a lot of loans, bought securities and businesses that don’t have good returns.”

That’s what Mr. Goodwin did and that’s why Sir Fred – he was knighted in 2004 – is now often referred to as a “villain” or the “world’s worst banker.”

Gin and tonics downed, we repair to Koffmann’s at The Berkeley, next door for dinner. It is chef Pierre Koffmann’s comeback restaurant after a decade-long absence. Koffmann’s specialty is hearty Gascon fare, supported by fine French wines, a combination that has made it the newest darling of London’s fine-cuisine scene.

Mr. Nixon orders fish soup and Dover sole on the bone. I opt for the black pudding and mackerel. In spite of his laidback, boyish air, Mr. Nixon knows a thing or two about wine and is especially fond of Italian whites from Piedmont. But this is a French restaurant and Mr. Koffmann doesn’t put Italians on the menu. Mr. Nixon picks a Domaine Alain Chavy premier cru, 2006, from the Puligny-Montrachet vineyards. I wouldn’t know until the bill arrived that it cost almost as much as my flight to London from Rome.

When he realizes that my fish comes with a cup of gorgeously plump French fries, and his doesn’t, he orders his own. “I’m a French fry fiend,” he explains. When they arrive, he goes into rapture: “That’s perfect; much better than bread.”

Mr. Nixon is in a good mood, in spite of complaining about having overindulged the previous evening. He is in town to attend the Duke of Edinburgh’s Award ceremony at Buckingham Palace – RBC is a sponsor of the award – see his daughter Jackie, who works as a Goldman Sachs investment banker in London, and visit RBC’s ever-expanding London capital markets and wealth-management operations. They were recently bolstered by the £963-million purchase of BlueBay Asset Management, a British bond trader.

Less than two months short of his 54th birthday, he is a different sort of executive than he was a decade ago, when he went from relationship manager at RBC’s investment arm to the CEO’s suite at Canada’s top bank virtually overnight. “I would say they were all surprised when I came in,” he says.

The new boy might have exuded confidence, but it was something of a show because he had a big hole in his knowledge: As a career investment banker, he knew almost nothing about RBC’s retail business, which was not without its problems at the time. “The business I was least comfortable with was [retail] banking, which was our biggest business,” he says. “It probably took a few years to get comfortable with decision making around the retail bank.”

That was one problem; another was being surrounded by Type A executives, some of whom had different views on how the bank should be run and many of whom didn’t get along with each other. “There was a lack of functionality across my executives in the early years,” he says. “It wasn’t a team. You had very different views, very different perspectives, and a lot of turf wars between various members of the executive committee.”

Two of the executives, chief financial officer Peter Currie and banking chief Jim Rager, wanted RBC to make a big splash in the United States, where RBC’s capital markets and banking assets, such as Centura, were too small, too scattered and struggling to make a buck. Mr. Nixon kept fighting them, not, he says, because he was a quivering M&A coward, but because he never liked the American banking model.

“It was a very low-return business and extremely competitive,” he says. “They all compete for retail deposits and they have to deploy these deposits, which means plowing money into the real estate market, which allowed them to grow. How do you justify paying three times book for a bank with a 9-per-cent return on equity?” (RBC’s overall returns on equity typically range from the high teens to the low 20s).

Mr. Nixon won the internal battle. RBC did not go big in the United States (though it was an open secret that it looked at Bear Stearns and Lehman Bros., among others). Mr. Currie and Mr. Rager hit the road in 2004 and chief risk officer Suzanne Labarge, who had sided with Mr. Nixon on his anti-M&A strategy, retired. In came a new senior executive team. It wasn’t until that point that Mr. Nixon was in full control of RBC. At least, that was the view of the analysts.

“It seemed from the outside, that after 2004, Gord really began to put his stamp on the company and ushered in an era of significant operating improvements across the entire bank,” says Rob Wessel, the former banking analyst turned managing partner of Toronto’s Hamilton Capital Partners. “Gord’s management changes laid the groundwork for the great performance that followed.”

The next four years were uneventful, in the sense that rising markets lifted all banks and hid a lot of mistakes. “Those were enjoyable years,” Mr. Nixon says. “All businesses were growing and gaining market share; all were doing well.”

Still, he resisted making a big U.S. acquisition, opting instead to pump capital into investment banking, insurance, wealth management and other businesses with the aim of creating a stable, diversified bank with relatively low earnings volatility. “The best decision he ever made was not making a big U.S. retail acquisition in 2006 or 2007; he would have bought at the top of the market,” Mr. Wessel says.

In spite of RBC’s caution, the stupidly inflated U.S. real estate market did bite RBC in the butt. RBC Dominion Securities took $4-billion in financial crisis-related writedowns. That wasn’t huge, compared with the damage suffered by other banks, but it wasn’t fun. Neither was going through the post-Lehman banking crisis. Mr. Nixon says there were moments when he thought RBC might collapse, not because RBC had hidden time bombs primed to explode at any moment, but because the global banking system was at risk. “There’s no such thing in financial services as the last man standing,” he says. “If the system falls apart, everyone goes down with it.”

Two years after the banking crunch, RBC and Mr. Nixon are on top of the world. Even in the meltdown year, RBC was hugely profitable – its profit was $3.86-billion in the year to the end of October, 2009. Which begs the question: Why not quit at the top?

The rumour indeed is that he will hit the links full-time when he turns 55 (Nixon loves golf and plays well, though a friend describes him as “hypercompetitive”). His answers to the retirement question are tantalizingly vague and he gives no clue about the identity of his preferred successor. “I’m only 53. I’d be very surprised if I made it to 60, but I have no intention of leaving in the near term, so it’s somewhere between now and 60,” he says.

He insists there’s a lot left to do before he’s truly happy with the bank, which was actually the worst performer of the Big Five Canadian banks in the last year. RBC’s international bank – the U.S. and Caribbean operations, plus RBC Dexia – needs fixing. That division has lost money in the past two years, though Mr. Nixon expects vast improvements under Jim Westlake, the head of international banking and insurance. Investment banking, wealth management and insurance will be pumped up and made more efficient. Each of the bank’s main businesses is capable of far greater profitability, he says.

I suggest that sticking around to squeeze another 10 or 20 per cent or so from an unbroken bank seems rather unambitious. What about something big and bold, something that would define his management of the company? Forget it, he says. “I’m very happy to stick around and build our businesses. When a CEO starts talking about his legacy, it’s time to short the stock.”


Curriculum Vitae:


Born in 1957 in Montreal

Educated at Queen’s University, graduating with an honours degree in commerce

Home life

Lives in Toronto and has holiday homes in Muskoka and Florida

Married to Janet. Three children, each of them outside Canada for work or schooling (London, Paris and North Carolina)

Sports and other passions

Golf, tennis, sailing Olympic-class Lasers, Pilates and the odd game of hockey

Drives a Mercedes S500

Likes Italian white wine from Italy’s Piedmont region


Made more money in 2001, when he spent almost half the year at RBC Dominion Securities, than he did last year ($10.4-million)

Began career in 1979 at Dominion Securities in Toronto

Worked for Dominion in Tokyo from 1986 to 1989

Became CEO of RBC Dominion Securities in 1999

Appointed president of RBC in 2001

Other interests

Chairman of MaRS, a not-for-profit organization that connects science, business and capital

Co-chairman, Toronto Region Immigrant Employment Council

Chairman of the Queen’s University Capital Campaign

Appointed a member of the Order of Canada this year



On the future of banking

“I don’t think banks any longer will be measured by size. It’s not a game to show that you’re bigger than the next guy. I think the world has changed dramatically, which is why you’re seeing very little in terms of M&A activity in financial services. If you can’t deploy capital in a way that gives you a good return, you shouldn’t be doing it.”

On the 2008 financial crisis

“We didn’t have [a backup plan]. There was nothing you could do. You were basically ensuring the bank had liquidity in the event there was a complete collapse of the global financial system, which almost happened in Europe, where the interbank lending system disappeared.”

On Lehman Brothers’ collapse

“Letting it go was way more damaging to the system. I think it could have been managed down.”

On reporters’ tape recorders

“I’m more honest when they’re off. That way I can deny it.”

03 December 2010

TD Bank Q4 2010 Earnings

Scotia Capital, 2 December 2010

TD Q4/10 Earnings Miss - Higher Expenses

• TD operating EPS declined 5% to $1.38, below expectations, due to lower-than-expected earnings from Canadian P&C (TDCT) as a result of high operating expenses including non-recurring items.


• TD recorded strong retail earnings with TDCT earnings up 24% YOY and U.S. P&C up 34%, which were offset by Wealth Management down 3% and a 42% decline in Wholesale. Although Wholesale earnings rebounded 21% from previous quarter.

• ROE, RRWA, and Tier 1 was 12.4%, 2.47%, and 12.2%, respectively.

• Fiscal 2010 operating EPS increased 8% to $5.77 from $5.35 in 2009. Operating ROE in 2010 was 13.7%, RRWA 2.63%.


• Our 2011E EPS is unchanged at $6.50. We are introducing 2012 EPS estimate of $7.20. Our one-year share price target is unchanged at $90.

• Reiterate 1-Sector Outperform rating based on valuation discount, favourable earnings mix, industry high RRWA, and U.S. retail bank earnings leverage.

CIBC Q4 2010 Earnings

TD Securities, 3 December 2010

Q4/10: Another Good Quarter; See More Upside in Retail

Yesterday before the open, the bank reported Core Cash FD-EPS of C$1.68 versus TD Newcrest at C$1.57 and Consensus at C$1.63.


Positive. The bank reported better than expected numbers on the back of good Retail and good Credit; earning through some weakness in Wholesale and elevated expenses. We are very comfortable with the earnings power here and we nudged up our estimates. The stock has had a very good run (roughly 20%+ returns on 5-months), but we think there is some more to go on our upwardly revised Target Price. Reiterate BUY.


Retail is contributing nicely, with some more to come. NI was better than we expected despite higher expenses and with less help from Treasury versus Q3. Volumes are building and the MasterCard portfolio has yet to fully contribute. We are comfortable with the earnings power here and the prospects of reaching the bank’s C$3 billion 2013 earnings objective.

No help from Wholesale, but it should be back. The quarter earned through a largely absent Wholesale segment. It should bounce back and contribute to the run rate going forward.

Further leverage from improving credit should be more modest. PCLs were surprisingly good, supported by strong underlying trends. From here, we should see modest improvement in PCL rates.

01 December 2010

National Bank Q4 2010 Earnings

Scotia Capital, 2 December 2010

Q4/10 Strong Earnings - 6.5% Dividend Increase

• NA reported a 17% increase in operating EPS to $1.63 in line with our estimate but above consensus of $1.57. NA announced a 6.5% annual dividend increase to $2.64, slightly below our 10% increase estimate.


• Earnings were driven by strong retail earnings, which increased 34% YOY and Wealth Management, which was up 27% YOY, offsetting a 19% decline in Financial Markets earnings, although Financial Markets rebounded 21% from a very weak Q3/10.

• Bank earnings growth was driven by volume growth of 5% YOY, revenue growth of 2%, with expenses declining 1% for positive operating leverage of 3%. Earnings quality was relatively high with modest reliance on security and securitization gains and trading revenue. Operating ROE was 17.5%.


• Our 2011E EPS is unchanged at $6.80. We are introducing our 2012E EPS at $7.50. We are increasing our one-year share price target to $82 from $77 as strong earnings, dividend increase, and high capital levels are supportive of higher absolute and relative valuations. We reiterate our 1-Sector Outperform rating.