31 October 2012

Who’s In Line to Run Canada’s Banks

The Globe and Mail, Boyd Erman, 31 October 2012

Go for lunch with a bank analyst or any major investor, and odds are one big question will come up: Who is in line to run each of Canada’s major banks when the current boss steps aside?

The job of bank CEO fascinates, because of its high profile at the centre of the Canadian economy, and quite frankly, its huge paycheque.

Bank of Nova Scotia answered the succession question on Wednesday by naming Brian Porter president, with the bank’s key operations reporting to him. It seems very clear that Mr. Porter, long expected to be the heir to chief executive officer Rick Waugh, has officially assumed the title.

But what about the other big four banks? None of them are nearly as obvious as Scotia — or even as clear as Scotia was before Mr. Porter’s promotion.

TD Bank

The background

The bank has been expanding in the United States, and is a major player in the U.S. northeast. It has long focused on retail banking, over and above areas such as wealth management and securities. That means that the likely winner in the CEO race will come from a strong retail banking background. But will it be Canada or the United States?

The incumbent

Ed Clark signalled earlier this year that he was in no hurry to leave. However, at 65, he is not going to be in the chair for another decade.

The candidates

Bharat Masrani

• Mr. Masrani been with TD since 1987, when he joined as a trainee. He has had key roles in risk and wealth management, but it his job running the bank’s huge U.S. operations that makes him a leading candidate for CEO.

Tim Hockey

• Mr. Hockey has come up through the Canadian consumer side of TD, where it is one of the dominant players. He currently runs Canadian banking. Lately, the buzz has been more around Mr. Masrani, but if the U.S. operations stumble, Mr. Hockey could become the leader.


The background

Canada’s largest bank has been on an expansion tear, adding wealth management and growing its securities and investment banking businesses. But at its heart, it’s still a retail bank. After a long period with an investment banker at the helm, there is a sense that the next person to get the CEO job may be a return to those roots in retail banking.

The incumbent

Gord Nixon has been CEO of RBC for a decade, and is only in his 50s. Like Mr. Clark, he has signalled he is no rush to leave. When he does, there are a number of potential replacements, though of late, just one has set himself apart.

The candidates

David McKay

• Mr. McKay is the head of Canadian banking for RBC, and has emerged lately as the leading candidate to replace Mr. Nixon, both in the view of those outside the bank and many inside it. His business is RBC’s biggest. He hasn’t run many other businesses, but with Mr. Nixon not likely to leave soon, the bank has time to groom Mr. McKay by adding other responsibilities to his CV.

Doug McGregor

• Mr. McGregor is one of the two co-heads of RBC’s investment banking and securities division, which has in recent years expanded from a dominant player in Canada to one that can credibly play with much larger firms in the U.S. market.

Mark Standish

• Mr. Standish is the other half of the co-head tandem in investment banking and securities. He oversees the business from New York, where most of the growth has been. The two investment bankers can take credit for turning a platform that was less than the sum of its parts into something more.

George Lewis

• As head of RBC’s wealth management business, Mr. Lewis has been at the centre of what has been a strategic focus for the bank.


The background

CIBC has spent the past five years building a bank that could avoid the kind of mistakes that CIBC made in the credit crisis, which cost the bank billions. That included changing over many senior names in the executive suite, meaning that this is a race that could be won by someone without a long history at the company.

The incumbent

Gerry McCaughey — Mr. McCaughey was given one big job as CEO of CIBC — de-risk the bank. And he has done that admirably. The bank is now a safe, cash-generating company that is very unlikely to end up in big trouble as it has in past. But what’s next? The next person in the top job at CIBC will be charged with finding a way to grow while remaining true to the new safety-first ethos at the bank.

The candidates

Richard Nesbitt

• Mr. Nesbitt has to be considered the leading candidate. He hasn’t been with the bank long in a senior executive role, having come from exchange operator TMX Group Inc. in 2008. But he does have the advantage of having run a large financial company thanks to his role at TMX. At CIBC, he was brought in to run the securities business, but he has been progressively handed more responsibility, including being put in charge of strategy. Inside the bank, he has steadily won over doubters. He is the front-runner.

David Williamson

• Mr. Williamson is another relative newcomer to the banking business, having come from outside CIBC in the post-crisis shakeup. He first worked as chief financial officer before being named head of Canadian retail banking in March 2011.


The background

BMO is the bank that you don’t hear a lot of succession speculation about. Of the big five banks, its CEO has been in his job the fewest years, so this race has time to develop.

The incumbent

Bill Downe

Mr. Downe has made a big bet on the U.S., building up BMO’s investment banking capabilities there and paying $4-billion to buy a large bank in the midwest. So far, it’s a work in progress, but if it works, he will have differentiated his bank’s strategy and given it a growth engine that it has not had for years.

The candidates

Frank Techar

• Mr. Techar is head of Canadian personal and commercial banking, a business where BMO is not dominant but increasingly seen as more competitive.

Tom Flynn

• Mr. Flynn is the bank’s chief financial officer. The knock on him at this point is he needs experience running a business rather than just overseeing the books. But there’s time in Mr. Downe’s tenure to make that happen.

29 October 2012

Scotia Capital Introduces Guesstimates for Banks' 2014 Earnings

Scotia Capital, 29 October 2012

Introducing 2014 Earnings Estimates for Canadian Banks - 9.0% Growth

• We are introducing our 2014 earnings estimates for Canadian banks with expected earnings growth of 9.0% versus 7.6% earnings growth in 2013.

• We believe the bank group's profitability will remain strong in 2014 with ROE expected at 17.5%, down slightly from 18.0% in 2013. CM is expected to lead in terms of ROE at 21.0%, followed by RY and NA at 18.8% and 18.3%, respectively. We estimate RRWA to be very strong at 2.45%, up from 2.35% in 2013, with CM leading the bank group at 3.02% followed by TD and RY at 2.76% and 2.44%, respectively.

• Earnings growth is expected to be led by Wholesale banking earnings as capital markets activity normalizes and Canadian banks gain market share. Wealth Management earnings growth is also expected to be solid.

• We expect domestic Retail banking earnings growth to be 7%-8%, with moderate loan growth and stabilizing retail net interest margins. We believe cost controls will be a major focus for the banks in this segment.

• Banks with International exposure are expected to have higher earnings growth relative to domestically focused banks in 2014.

• We believe share repurchase announcements will accelerate in 2014 as the banks continue to generate excess capital at a high rate. Earnings accretion from share repurchase is expected to offset the potential for weaker-than-expected operating environment.

Increasing Our Share Price Targets for BNS, CM and RY

• We are increasing our share price targets for BNS, CM, and RY to $65, $95 and $70 from $62, $93, and $68, respectively.

Valuation Compelling - Remain Overweight

• Bank valuations remain compelling with P/E multiples very attractive at 11.4x, 10.2x, and 9.4x trailing 2013E and 2014E.

• We maintain 1-Sector Outperform ratings on TD, RY, and CM, with 2-Sector Perform ratings on CWB, BNS, and LB, and 3-Sector Underperform ratings on BMO and NA.