31 August 2017

The Inside Story of Scotiabank's $800-million Deal to Buy the Naming Rights to the Air Canada Centre

The Globe and Mail, James Bradshaw & Susan Krashinsky Robertson, 31 August 2017

In the waning hours of Aug. 15, Bank of Nova Scotia had a decision to make: Nail down a blockbuster deal to win the coveted rights to rename Toronto's Air Canada Centre, or risk giving rivals a chance to snatch away the prize.

The $800-million agreement with arena owner Maple Leaf Sports and Entertainment (MLSE) would anchor Scotiabank's marketing strategy for the next two decades. And with the major terms of the deal agreed, neither side wanted to let the opportunity slip away.

The companies gathered their boards for separate, hastily-arranged conference calls and won approval. Lawyers from both sides then came together and locked themselves in a room, guarding against possible leaks. "The magnitude of the deal was going to attract a lot of attention," David Hopkinson, MLSE's chief commercial officer, said in an interview.

At 2:30 a.m. on Aug. 16, the agreement was signed and sealed.

The 20-year pact, announced this week, is Scotiabank's ambitious attempt to secure its front-runner status in hockey sponsorship by imprinting its name on two of the sport's crown jewels – the soon-to-be-named Scotiabank Arena and the Toronto Maple Leafs. By virtue of its size and scope, it is also a landmark in Canadian sports marketing.

When the rights to name one of Canada's premier sports venues became available, a total of eight companies kicked the tires, including other banks. A smaller number progressed to more serious talks with MLSE.

That left Scotiabank facing the prospect that a competitor might try and challenge the position it has spent years building at considerable expense, in an effort to tap into the deep emotional bond many Canadians have with the sport.

"We knew right away that there was a horse race here," said Scotiabank's chief marketing officer, John Doig, in an interview.

Royal Bank of Canada was among the most determined rivals waiting in the wings, according to sources familiar with the process. A spokesperson for the bank declined to comment.

But Scotiabank also had an important competitive edge in negotiations.

Air Canada had the first window in which to bargain exclusively, as the existing naming sponsor since the arena opened in 1999. But the two sides couldn't agree.

As part-owners of MLSE, telecommunication giants BCE Inc. and Rogers Communications Inc. had an agreement to stay out of the bidding, according to sources familiar with the process.

Instead, Scotiabank emerged as the heir apparent. After Air Canada's exit, the bank enjoyed its own 60-day window in which to negotiate exclusively, though that didn't preclude MLSE from carrying on less formal discussions with other suitors. The exclusivity clause was written into an existing sponsorship deal Scotiabank had as official bank of the Leafs.

"The deal got done within that window," Mr. Hopkinson said.

The price tag Scotiabank agreed to has raised eyebrows. The deal will pay MLSE – owner of the Leafs, Toronto Raptors and Toronto Football Club, among other properties – an average of $40-million per year, sources confirmed. The price tag in the first year is lower, and escalates thereafter.

But Scotiabank had been preparing for a moment like this for years. Some had viewed the bank's approach to sponsorship as somewhat scatter shot, and it undertook a multiyear strategy to set its sights on a narrower stable of properties.

The bank dropped its sponsorship of the Canadian Football League in 2013, then wound down partnerships with individual teams. In late 2015, it elected not to renew sponsorships with arts and culture events in Toronto: Nuit Blanche, Caribbean Carnival, BuskerFest and the CHIN International Picnic. That year, the bank had funnelled about $25-million into community events in the Toronto area.

"We knew we needed to tighten the focus on our properties, and we knew exactly which ones were performing the best for us," Mr. Doig said. "Hockey was performing the best."

Scotiabank already sponsors community hockey clubs across the country, all seven Canadian NHL teams, and is the official bank of the NHL. When the opportunity to rename the rink came up, the bank had freed up extra cash to help cover the significant cost of acquiring the naming rights.

Structurally, the deal is complex, and the name on the building's exterior is only one component. Sources said roughly one quarter of the annual cost is to renew Scotiabank's existing status the Leafs' bank for the full 20 years – albeit at a higher price. The bank has also committed to spend an unspecified eight-figure sum on philanthropic and community causes over the life of the deal. And Scotiabank has hinted that there are other considerations that have yet to be announced.

Scotiabank will dip into other areas of its existing marketing budget – such as broadcast, out-of-home or event digital ads – to help pay the tab. The bank spent $617-million on "advertising and business development" in 2016, and $144-million its last fiscal quarter, according to financial disclosures.

"There's a certain percentage that we will shift to accommodate this deal," Mr. Doig said.

There is also a competitive dynamic at play in Toronto's expanding downtown financial corridor. Toronto-Dominion Bank has nabbed rights as the financial sponsor for the bustling Union Station, and Canadian Imperial Bank of Commerce plans to move its headquarters to two new 49-storey towers to be built between the station and the current ACC. Starting next July, the renamed Scotiabank Arena will give the bank a visible presence just next door.

"This may be another leg in the push to try to grow a larger platform, and this gives them a runway of 20 years," said John Aiken, an analyst at Barclays Capital Canada Inc., in an interview.

Most analysts shrugged off the price of the arena deal when put in context with the bank's overall financial might. "It's a large chunk of change. But it's still not going to have that much of an impact on earnings," Mr. Aiken said.

Considered as a whole, marketing experts say, Scotiabank hasn't taken undue risk by signing such a large deal. Arenas of this stature are few and far between. And the bank expects to get so-called brand lift as well as new ways to attract customers and deepen ties with existing clients using hockey's magnetic draw.

In research tracking the effects of advertising during the World Cup of Hockey, conducted by Toronto-based Solutions Research Group Consultants Inc. (SRG), Scotiabank ranked first among brands that fans could recall unaided. That was ahead of other big spenders like Tim Horton's and Canadian Tire.

"So they are trying to solidify that position and ownership," said Kaan Yigit, SRG's president.

29 August 2017

Why BMO Shares Got Whacked Today Despite an Earnings Beat

The Globe and Mail, 29 August 2017

Bank of Montreal was down more than 2 per cent at midday as investors reacted negatively to the company's fiscal third-quarter earnings report.

While BMO's adjusted earnings of $2.03 a share beat the $2.01 average estimate of 14 analysts surveyed by Bloomberg, some analysts and fund managers expressed disappointment with the company's U.S. banking results.

Earnings from its U.S. operations, including Chicago-based lender BMO Harris Bank, were flat from a year earlier at $278-million, the company said.

"U.S. banking results were disappointing," said Steve Belisle, a portfolio manager with Manulife Asset Management in Montreal.

"They're facing a slowdown in commercial and industrial lending in the Midwest and a runoff of its indirect auto book."

Slowing growth in the U.S. is a particular concern for investors, as BMO's exposure to the country is among the biggest of Canada's major banks.

"Given that investors overweight on BMO shares are likely positioned as such due to its above-average exposure to U.S. banking, we expect any relative upside will be muted given the weaker loan trends," said Eight Capital analyst Steve Theriault.

The U.S. banking business had a 1 percent improvement in loan balances from the second quarter, though that total was down 1.3 per cent from a year earlier when measured in U.S. dollars, according to a financial statement. Deposits were little changed from the second quarter and fell 2.6 per cent from a year earlier adjusted for currency.

Chief Financial Officer Tom Flynn said in an interview with Bloomberg News today that expectations were high following the U.S. election. "And it looks like, given some uncertainty about the timing of the implementation of some of the policies of the new administration, there's been what feels like a spreading out of some investment decisions by companies."

That's had "a moderating impact" on U.S. bank loan growth, Flynn said, adding that he expects business to pick up on improved customer confidence and expectations of 2 percent U.S. economic growth through next year.

Canadian banking stocks have stagnated since the start of the year on concerns that previously red-hot housing markets in Toronto and Vancouver could see sharp declines and expose lenders to losses on loans.

Despite those worries, four of the country's biggest five banks in recent days have reported third-quarter profits that topped expectations. Bank of Nova Scotia also reported its latest results this morning, posting adjusted earnings of $1.68, above the concensus call of $1.64.

Shares in BMO had been down more than 3.3 per cent this morning.

26 August 2017

Which Canadian Bank Has the Right Pitch to Millennials?

The Globe and Mail, Andrew Willis, 26 August 2017

When it comes to customer satisfaction, Canada's top-ranked mid-sized bank is Tangerine Bank, according to a recent survey from consulting firm J.D. Power. The bottom-ranked Big Five bank in the same study was Bank of Nova Scotia.

Does this strike anyone else as weird? After all, Scotiabank owns Tangerine; it launched the whimsical brand in 2013 as part of a strategy aimed at delivering low-cost, digital services to customers who increasingly prefer to do their banking online.

The fact that Canadians now have a very different view of the client experience at Tangerine compared with parent Scotiabank speaks to the uncharted territory facing the country's financial institutions as they map out a strategy for what's arguably their single biggest marketing challenge: Winning the hearts and wallets of millennials.

When it comes to digital banking, a key offering to a generation born between 1981 and 2000 and permanently tethered to their cellphones, there's now a stark split in tactics among the Big Five banks.

Canadian Imperial Bank of Commerce showed its hand last week by launching Simplii Financial, a new subsidiary created by shifting two million clients from President's Choice Financial, a unit formerly run jointly with grocer Loblaw Cos. Ltd. Like Scotiabank's Tangerine, Simplii will be a brand that's distinct from the identity of parent CIBC, which currently anchors its own advertising campaigns around Percy the penguin and his pals.

In contrast, Royal Bank of Canada, Toronto-Dominion Bank and Bank of Montreal currently anchor their digital strategies on their own long-established brands. It's worth noting that RBC, TD and BMO ranked one, two and three in that J.D. Power customer satisfaction survey, which was published in July.

What's the right way to pitch to millennials?

Financially, that's an easy question to answer. RBC, TD and BMO put all their marketing muscle behind one name. In contract, every dollar spent to establish and burnish the brand at Simplii Financial and Tangerine is a dollar that's not available to advertise CIBC and Scotiabank.

But successful brands are about more than who spends the most on advertising.

Millennials represent a new consumer mindset, according to investment bank Goldman Sachs, which calls this device-loving cohort the first generation of "digital natives." In a recent report, Goldman said winning this crowd means doing business differently. Goldman's research found "with product information, reviews and price comparisons at their fingertips, millennials are turning to the brands that can offer maximum convenience at the lowest cost."

Rock-bottom fees and easy access are central to the pitch at Tangerine and Simplii. On a conference call on Thursday, CIBC CEO Victor Dodig said: "Simplii is about growth and it's about client focus. It will meet the needs of Canadians who value no fee daily banking and great rates through online, mobile and telephone channels."

When Mr. Dodig talks about growth in the mature domestic market, he's really saying he wants to lure customers from rivals. And the clients all banks covet are millennials. Right now, the demographic makes up 2.8 million Canadian households; baby boomers are the largest slice of the population at 5.6 million households, according to Environics. Look out a decade, and Environics projects millennials will make up 5.5 million households, all in their peak earning years, compared with 5.2 million aging boomers and 4.5 million members of Gen X.

The shift in demographics represents an enormous business opportunity. Over the past generation, the pecking order in Canadian retail banking was set in stone: RBC and TD led the pack.

That status quo is now in flux. The bank that gets its millennial marketing strategy right, then backs up its brand with innovative products and robust technology, is going to dominate the domestic market going forward.

24 August 2017

CIBC Q3 2017 Earnings

The Globe and Mail, James Bradshaw, 24 August 2017

Canadian Imperial Bank of Commerce is reaping the early fruits of efforts to reshape its business as its newly minted U.S. arm contributed to higher third-quarter profit.

The Toronto-based bank, which is Canada's fifth-largest by assets, emerged from its fiscal third quarter transformed, having shuffled its executive ranks just as it closed a drawn-out deal to acquire Chicago-based PrivateBancorp Inc. for $5-billion (U.S.) in late June.

The American bank chipped in $23-million (Canadian) in profit in its first 39 days under CIBC's control, while solid results across the Canadian bank's business lines and lower loan losses drove better-than-expected results. The bank also hiked its dividend by three cents to $1.30 a share – an increase of about 2.4 per cent.

With a platform in place to rebuild its U.S. presence, CIBC is expecting new growth as cross-border business picks up. That would be a welcome addition as Canada's housing market shows signs of slowing, even as CIBC continues to grow its mortgage book faster than its peers. But the outlook for U.S. banks is still cloudy, with high-stakes free-trade negotiations under way and promised American tax reform measures in limbo.

As CIBC merges PrivateBancorp with its existing business and redraws its reporting lines, chief executive officer Victor Dodig told analysts the bank's "integration efforts are proceeding very well.

"We've seen lots of early referral activity across our expanded team of private bankers," Mr. Dodig said during a Thursday conference call.

The PrivateBank, as it is commonly known, also grew its loan book by 15 per cent and its deposits by 7 per cent, compared with a year earlier. But its early contribution to overall profit "is lower than we anticipated," Gabriel Dechaine, an analyst at National Bank Financial Inc., said in a research note.

CIBC is hopeful it will see benefits from anticipated interest-rate hikes this year and next, but that's "assuming U.S. trade policy does not prove to be a major barrier to Canadian economic growth," Mr. Dodig said.

Chief financial officer Kevin Glass is "optimistic" a good update to the North American free-trade agreement can be hashed out, even after recent sabre-rattling that included U.S. President Donald Trump musing about terminating the agreement. "It is an opening salvo in a negotiation," Mr. Glass said.

CIBC has also been transforming its mortgage business, and recorded a 13-per-cent spike in its mortgage balances in the third quarter – a much faster rate of growth than at other banks.

That growth has been driven partly by CIBC's decision to build up its roster of mobile mortgage advisers. With that team now intact, and with new housing regulations dampening sales in some hot markets, the bank expects the pace of its mortgage growth to begin reverting closer to its peers. By comparison, Royal Bank of Canada's mortgage portfolio grew 6 per cent in the quarter.

"It'll be a gradual and, I would say, orderly change, an orderly convergence," Mr. Glass said.

Possible changes to the so-called B-20 guideline on mortgage underwriting, proposed by Canada's banking regulator in July, could further cool housing markets by requiring tougher stress tests on uninsured mortgages. CIBC said as many as 10 per cent of its new loans would be unlikely to qualify under the draft rules, but Mr. Dodig declined to give his opinion on the wisdom of such changes. "I'm not going to go there," he said.

CIBC earned $1.1-billion in profit in the quarter that ended July 31, or $2.60 a share. That was down from $1.44-billion, or $3.61 a share, a year ago, when the bank recorded a one-time gain of $383-million on the sale of a minority stake in American Century Investments.

Adjusting to exclude the gain and other items, CIBC earned $2.77 a share. Analysts surveyed by Bloomberg expected earnings a share of $2.65.

Even so, CIBC's share price retreated nearly 1.9 per cent to $105.57 at Thursday's close on the Toronto Stock Exchange. Analysts noted that two less reliable factors propelled earnings above expectations – lower loan losses and unusually robust profit in the small "corporate and other" division.

Revenue of $4.1-billion was flat compared with the same quarter last year. But the bank's common equity tier 1 ratio – a key measure of its health – settled at an acceptable 10.4 per cent after the PrivateBank transaction.

Provisions for credit losses, or money the bank sets aside to cover soured loans, edged up 3 per cent to $209-million, thanks to larger losses in its U.S. real estate finance portfolio.

The core Canadian retail and business banking division delivered $719-million in profit, an 8-per-cent increase from the prior year, on the strength of higher volume and fees.

Profit from Canadian wealth management fell 73 per cent year over year. But adjusting to exclude certain items such as last year's gain on sale, CIBC earned $136-million, up 10 per cent. The PrivateBank acquisition also boosted U.S. wealth management and commercial banking profit 74 per cent to $40-million.

Capital markets profit fell 10 per cent to $252-million, largely due to lower equity derivatives and interest rate trading. But that "is arguably a solid result," according to Barclays Capital Canada Inc. analyst John Aiken, in a quarter characterized by low volatility and slower trading that has been hard on capital markets activity at banks across North America.

"We're very pleased with our results," Mr. Dodig said. "And we're very pleased with the consistency of our performance."

21 August 2017

Preview of Banks' Q3 2017 Earnings

Scotia Capital, 21 August 2017

• Despite the favourable combination of strong operating performance (13% YoY EPS growth in 1H/17) and a resurgent domestic economy that underpinned the first rate hike from the BoC in seven years, Canadian bank stocks have run in place for much of 2017, with the TSX Bank Index having moved a grand total of 1% (to the downside) 7.5 months into the year. While we expect that the upcoming Q3/17 results from the sector will continue to show solid financial performance, in our view the stall of the stocks has more to do with questions regarding the health of the Canadian housing market, particularly as sales activity in Toronto has moderated in recent months.

• The group enters reporting season trading at 11.2x our 2018E, down a full-point from the 12.2x peak that was seen in early-March. With the housing conversation remaining at the forefront, we think the key area of focus for investors will be the ability of the group to demonstrate EPS offsets in other parts of the business (net interest margin [NIM] expansion, operating leverage, growth in US / International segments), an important consideration given that 2018E revisions have been limited to ~1% so far this year.

• Given that the dispersion between the individual stocks has been limited (8% band between the best-and-worst performers within the 'Big Six' YTD), the combination of relative valuation and potential inflection points in key fundamental trends has taken on greater importance in our stock selection process. Accordingly, we are upgrading our rating on TD to a SO, and balancing this move by lowering RY to a SP.

• Bank of Montreal (BMO, $91.53, SO, $103.00) – Target priced decreased from $104.00
• Canadian Imperial Bank of Commerce (CM, $106.94, SP, $120.00) – Target price increased from $118.00
• National Bank of Canada (NA, $55.29, SO, $61.00) – Target price increased from $60.00
• Royal Bank of Canada (RY, $92.25, SP, $100.00) – Rating cut from Sector Outperform and target price decreased from $102.00
• TD Bank Financial Group (TD, $63.73, SO, $73.00) – Rating raised from Sector Perform and target price increased from $71.00