28 September 2018

CIBC CEO Victor Dodig

The Globe and Mail, James Bradshaw, 28 September 2018

It’s client appreciation day at Canadian Imperial Bank of Commerce in Montreal, and chief executive Victor Dodig is in his element.

Stepping into a wood-panelled boardroom one morning in March, the energetic Mr. Dodig is slightly behind schedule, and he apologizes to two dozen private-wealth managers and investment advisers who’ve gathered to meet the boss. Before the day is done, he’ll also visit three bank branches and a call centre. Wealth management, in particular, is near and dear to him – he led the division before he was named CEO in 2014.

In shirtsleeves, having shed the jacket of his grey suit, Mr. Dodig leans against a counter set with pastries. Cradling a paper coffee cup, he paints a picture of an institution that is picking up steam. “I think our bank is on the right track,” he says, while acknowledging there are things that still need fixing. "When you look at where we’ve come from, from the financial crisis nine years ago, I’m not so sure that anybody would have predicted that we’d be where we are today.”

The bank Mr. Dodig inherited was still picking itself up from that crisis. CIBC was the only Canadian bank to suffer such huge writedowns on soured U.S. debt that it fell into the red, losing $2.1-billion in 2008. That solidified its reputation as Bay Street’s most error-prone bank, and management grew ever more insular, risk averse and focused on its fortress in Canada. Once one of the largest of the Big Six banks, it was mired in fifth place without a clear plan to regain its momentum.

“We were the bank that ran into sharp objects, we were the bank that had all kinds of losses, we were the bank that seemed to make a lot of mistakes,” he reminds his Montreal audience.

It’s been Mr. Dodig’s job to change that perception, and it’s still an uphill battle. When he emerged as a dark-horse candidate to win the top job in 2014, Bay Street greeted him as a breath of fresh air. With a leadership shuffle that moved more than 40 executives to new roles, plans under way to build new Toronto headquarters and other initiatives, he’s put his stamp on the bank and revitalized its culture.

Early in his tenure, however, Mr. Dodig sent mixed messages about the bank’s strategy to re-establish itself in the United States. He then pursued a drawn-out acquisition of Chicago-based PrivateBancorp Inc. last year for US$5-billion – an ambitious gambit at a price that alarmed investors and analysts.

CIBC is still No. 5, trailing its peers on important measures such as its efficiency ratio and five-year total shareholder return. After four years under Mr. Dodig’s watch, a crucial question remains: When will his strategy move the needle for CIBC’s weary shareholders?

At the morning gathering in Montreal, one of the wealth managers soon zeroes in on a sore spot: Why does the bank’s price-to-earnings multiple – which has hovered around 10 times trailing 12-month earnings this year – still lag behind the other Big Five banks? “It’s the thing I lose the most sleep over!” Mr. Dodig replies, his voice instantly rising. "It really bugs me.”

He rattles off a list of accomplishments: CIBC has grown year-over-year earnings a share for 14 straight fiscal quarters (the streak is now at 16), closed the PrivateBancorp deal and maintained a strong capital buffer, with room to make more acquisitions and weather a downturn. "And the market’s like, well, that’s not good enough,” he says. "I don’t know what is good enough.”

"One of the things that an investor told me, he said, 'Victor, the real problem is you want to forget your past, but your past doesn’t want to forget you,’ ” Mr. Dodig says. "And I said, 'Okay, when does that stop?’ ”

It’s easy to forget that CIBC was briefly the biggest bank in Canada in the late 1990s.

For a fleeting moment in 1998, it had greater assets than Royal Bank of Canada (RBC), and an aggressive plan to consolidate its advantage. Under then-CEO Al Flood, CIBC engineered a proposed merger with Toronto-Dominion Bank (TD) in which TD would have been very much the junior partner. But the federal government blocked the deal, as well as RBC’s attempted tie-up with Bank of Montreal (BMO).

Over the next decade, CIBC suffered through several bouts of turmoil. After failing to secure a merger, Mr. Flood gave way in 1999 to John Hunkin, a star investment banker who embarked on a series of ill-considered gambits that included the launch of Amicus, a U.S. electronic bank that CIBC shuttered after just two years because of heavy losses, and a push into Wall Street investment banking.

In the early 2000s, the capital markets division was CIBC’s centre of power, led by hard-driving David Kassie. Under Mr. Hunkin and Mr. Kassie, the bank amassed more than $5-billion in loans to telecommunications and cable companies. But when the sector imploded in 2001 and 2002, banks around the world suffered heavy loan losses. Among Canadian lenders, only TD had greater exposure to bad loans.

The excesses didn’t end there. CIBC soon became ensnared in the Enron accounting scandal – accused of helping executives move billions of dollars off the energy company’s balance sheet using elaborate financial engineering.

By 2004, CIBC had squandered enough capital that one analyst memorably described it as the bank "most likely to walk into a sharp object.”

The following year, Mr. Hunkin sailed into the sunset – somewhat literally – spending part of his last summer as CEO steering his 48-foot-yacht up the Atlantic coast. Stepping into his shoes was Gerry McCaughey, a detail-oriented financial engineer whom Bay Street considered withdrawn and eccentric.

Mr. McCaughey set about trying to change the bank’s personality, ushering in an era of retrenchment and aggressive “derisking.” On his first day on the job, the bank agreed to pay US$2.4-billion to settle a class-action lawsuit brought on behalf of Enron investors – eclipsing CIBC’s entire 2004 profit of $2.2-billion.

The year 2005 was also when CIBC hired Mr. Dodig to lead its wealth management arm. He’d spent the previous three years as CEO of UBS Global Asset Management Inc.’s Canadian outpost, and had experience in the United States and the United Kingdom with Merrill Lynch & Co. Inc.

Under Mr. McCaughey’s derisking mantra, CIBC largely retreated from the United States back to the safe harbour of Canadian retail banking. But that didn’t save it from being hit hard by the U.S. subprime mortgage crisis in 2007.

Once again, CIBC had to book massive writedowns – more than $9-billion over two years – delivering another shock to investors who took Mr. McCaughey at his word that he had made the bank safer.

“We were not so pleased with it and Gerry was not so pleased with it,” says Charles Sirois, a telecom executive and long-time CIBC director who served as chair from 2009 to 2015. "That was something [that fell through] the cracks.” Through the bank, Mr. McCaughey declined an interview.

By 2014, CIBC was back on firmer footing, but still highly risk-averse. Board members wanted to see renewed growth, and pushed Mr. McCaughey to announce his impending retirement.

The board had been quietly scouting for candidates inside and outside the bank for years, Mr. Sirois says. Even so, there was no clear succession plan.

The most obvious internal candidate was Richard Nesbitt, who was then the bank’s chief operating officer and had been CEO of the Toronto Stock Exchange. But he was a polarizing figure, a disciple of Mr. McCaughey and his roots were in the high-flying investment banking arm that had landed CIBC in hot water. With no path to the CEO’s office, Mr. Nesbitt left the bank in 2014.

“We were looking for somebody that would change the direction,” says John Manley, who joined CIBC’s board in 2005, and succeeded Mr. Sirois as chair in 2014.

Mr. Dodig was not a leading contender early on, according to sources familiar with the process, but he emerged as a strong one to change the bank’s course. While running wealth management, he had a front-row seat during a difficult decade.

At the time, the risk management department’s role "was really to say no,” says Laura Dottori-Attanasio, CIBC’s current chief risk officer.

The rigour was necessary, but demoralizing. In some ways, it was “like applying chemotherapy,” Mr. Dodig recalls. "The bad cells get killed, but the normal cells get damaged.”

After he was named CEO and took charge in September, 2014, the bank’s stance started changing. “We worked on building up a high degree of trust,” says Ms. Dottori-Attanasio, restoring "a balance between risk and return.”

Somewhere between a plate of veal Parmesan and a digestive glass of chamomile grappa, Mr. Dodig, 53, expounds on his philosophy for building a team of bankers: "No mercenaries, just missionaries,” he says.

We’re eating dinner at an unfussy Italian restaurant in west-end Toronto, not far from where Mr. Dodig grew up. For the evening, he’s traded in his suit and tie for khakis and an open-necked shirt, and brought his wife, Maureen, who nibbles at a salad before excusing herself to take the couple’s youngest son to a soccer match.

The eatery is a regular haunt, and one of many lasting connections he has to Toronto’s west side.

Over three hours and three courses, Mr. Dodig espouses a low-profile, workmanlike ideal for banking. Missionaries, he says, want to build long-term value for the bank and its clients. Mercenaries, by contrast, are only “in for the transaction.” In his estimation, short-term decisions affect only about 10 per cent of a bank’s earnings, which is why Mr. Dodig eschews "star bankers,” who "want to basically have their name encrusted in diamonds.”
The seeds of his philosophy were planted in childhood. Mr. Dodig’s late father, Veselko "Bill” Dodig, was a refugee from Croatia who settled in west-end Toronto with his wife, Janja, in the early 1960s. Bill worked in factories that made gaskets, industrial wire and cable, even chocolate, while Janja cleaned houses. The couple rented out three floors in Mr. Dodig’s childhood home on MacDonnell Avenue for extra income.

The family’s Croatian heritage is at the core of Mr. Dodig’s identity. He visits the country often, and owns a vacation property there that produces lavender and olive oil.

But he describes his upbringing in Toronto most vividly. He remembers visiting the Canadian National Exhibition in summer, though he wasn’t always allowed to spend money on rides.

Other times, he’d line up for the public swimming pool at Sunnyside Beach on Toronto’s lakeshore and wonder who belonged to the upscale Boulevard Club next door, where he’s now a member.

When he suffered from high fevers, he was treated at St. Joseph’s Health Centre, where he was born, and where he’s now co-chair of a fundraising campaign that has raised $90-million.

After high school, Mr. Dodig studied commerce at the University of Toronto, and had a part-time job as a teller at a suburban CIBC branch, starting in 1985. Two years later, he interned at accounting firm Arthur Andersen, where a partner encouraged him to pursue an MBA at Harvard Business School. He did, and graduated in the top 5 per cent of his class in 1994. He also met Maureen while in Boston: The couple got engaged after eight months, married six months later and now have four children.

Friends and colleagues praise Mr. Dodig’s consistency of character. At work and in private, he’s animated and funny, with an encyclopedic memory for names, faces and personal details. He also has a formidable intellect and a deep curiosity about many subjects, including politics, technology and sport.

From time to time, he reveals an endearing, youthful streak. For a while, he was transfixed by HQ, an online trivia game, though he’s fallen out of the habit of playing daily. He’s also a self-described "Disney aficionado,” visiting its theme parks regularly. He spent part of March break with Maureen and two of their children in Florida, braving lineups to ride Space Mountain. He posted a family photo wearing Mickey Mouse ears on his blog, praising the park’s "client first attitude.”

CIBC’s client appreciation days, held at least three times yearly, play to Mr. Dodig’s people skills and preoccupation with the bank’s culture. Over two days in Montreal in March, he meets with investors, dines with small business clients and quizzes staff at every turn.

At a CIBC call centre, he strides through rows of cubicles, asking employees about their jobs and families. He also gently probes for problems: "What can we do better?” and "Any advice for me? C’monnn…”

At every turn, he snaps selfies, some of which appear on the bank’s internal blog. "What a good-looking group, excellent,” he says after one shot, then exclaims to a colleague with a similarly balding pate: "No shine off our two heads!”

If Mr. Dodig has an Achilles heel, it’s operations – the nuts-and-bolts processes that make banking work. Over his career, he’s rarely held intense operational roles with large staffs or the most complex moving parts.

His affinity for making connections is also strategic. Investments, deposit accounts and mortgages are commodities that can be copied by rivals, he says. "The only way you can differentiate yourself is by the relationships we can build with our clients.”

Any bank will say it puts clients first, and all CEOs meet with stakeholders. But Mr. Dodig devotes more effort to it than most. In his first year as CEO, Mr. Dodig met one-on-one with 165 CEOs and business owners, hosted 22,000 clients at 145 events and met more than half of the bank’s institutional investors.

He has also begun forging closer ties to the technology sector. Earlier this year, the bank acquired specialty-finance firm Wellington Financial LP for an undisclosed sum and made it the core of a new niche unit dubbed CIBC Innovation Banking, launched to finance early- and mid-stage technology firms.

But CIBC faces an uphill battle in trying to snatch business from sector rivals such as Silicon Valley Bank Inc. and Comerica Inc. And CIBC will have to be creative to keep pace with rival Canadian banks in upgrading its own technology. RBC and Scotiabank are each spending more than $3-billion annually – largesse that CIBC simply can’t match.

Still, the Wellington deal has helped revive a halo of innovation around CIBC, which has a history of being early to new technologies, such as ATMs and telephone banking.

John Ruffolo, adviser to OMERS Ventures, has known Mr. Dodig since they were summer students at Arthur Andersen in the late 1980s, and says his firm has moved business to CIBC. "They are all over us and all over our investments in trying to service them very aggressively,” Mr. Ruffolo says.

Mr. Dodig’s tireless bridge-building with clients made him a darling of Bay Street early in his tenure. But the honeymoon ended when he elected to spend top dollar to establish beachhead in the hyper-competitive U.S. banking market.

Chicago’s financial core is a monument to banking’s power and influence. To stroll through it is to wonder that there was enough stone, marble and steel left over to build the rest of the city.

The headquarters of the former PrivateBancorp on LaSalle Street, now adorned with CIBC logos after being renamed CIBC Bank USA, is no exception. Its opulent main level is ringed with marble columns reaching to an ornate ceiling, where commercial bankers sit at rows of dark-wood desks.

From here, Mr. Dodig intends to build out a U.S. bank that can work seamlessly across the U.S.-Canadian border. But directly across the street is a steel-beamed tower that houses the U.S. headquarters of BMO, which has been firmly established in the Midwest since 1984. CIBC has a lot of catching up to do.

With a backpack slung over his shoulder, Mr. Dodig arrives with Larry Richman, who was CEO of PrivateBancorp and has stayed on with his executive team since last year’s acquisition.

The two men sit on opposite sides of a table in a small boardroom adorned with Chicago sports memorabilia, including a football signed by legendary Bears running back Walter Payton. Mr. Richman, 66, is polished, with the swept-back hair and bright smile of a man whose handshake has sealed countless deals.

Mr. Richman says he and Mr. Dodig hit it off from the start of CIBC’s courtship: "If you don’t like each other, or if you don’t have the respect and the culture, life’s too short.”

But their alliance didn’t come easily, nor was it cheap.

PrivateBancorp wasn’t Mr. Dodig’s initial target. Early on, he had clearly telegraphed that he was hunting for a U.S. wealth manager, expecting to pay between US$1-billion and US$2-billion. But prices soon climbed too high for wealth management firms, which wouldn’t add deposits – a priority for CIBC. At a 2015 investor day, Mr. Dodig upped his price range to as much as US$4-billion.

Two months later, CIBC dumped the 41-per-cent stake in wealth manager American Century Investment Management Inc. that it acquired in 2011. When leading CIBC’s wealth-management unit, Mr. Dodig had nurtured American Century, but as CEO he saw no clear path to own the firm, and sold it for US$1-billion.

Even so, Bay Street was caught off guard in June, 2016, when CIBC offered US$3.8-billion for PrivateBancorp, which is primarily a commercial lender. The abrupt shift in direction confused investors and analysts.

At US$47 a share, the offer was 24-per-cent higher than PrivateBancorp’s average share price over the prior 10 days. Already there were concerns CIBC was overpaying, and those voices grew louder.

And then Donald Trump was elected President.

By late 2016, U.S. stock markets were soaring, fuelled by expectations of tax cuts and regulatory reform after Mr. Trump’s surprise win. By early December, the KBW Regional Bank index, a benchmark for PrivateBancorp shares, had risen by 44 per cent since the deal with CIBC was announced in June. CIBC’s offer suddenly looked cheap.

In the week before a scheduled Dec. 8 vote by PrivateBancorp shareholders, two influential proxy advisory firms, Institutional Shareholder Services Inc. and Glass Lewis & Co., recommended that they reject CIBC’s offer. PrivateBancorp had to postpone the vote, and CIBC set a new summer deadline. In the meantime, Mr. Dodig hoped U.S. bank valuations would come back down to earth.

They didn’t, but he was determined not to let the deal slip away.

PrivateBancorp rescheduled the vote for May, CIBC sweetened its bid in March, then tabled its "best and final offer” a week before shareholders met: US$60.43 a share. That won shareholders over, but the US$5.0-billion price tag made it one of the largest post-crisis acquisitions of an American bank.

Analysts and investors harboured serious concerns that CIBC had overpaid for a mid-market commercial bank that offered no real cost savings because it had little overlap with CIBC’s existing business.

“There’s still upside and we’re seeing that in the results. But the upside was nowhere near as significant as it would have been,” says John Aiken, an analyst at Barclays Capital Canada Inc. “They were a month away from timing it brilliantly.”

The Chicago-based bank’s rising profits since the acquisition – boosted by U.S. tax reform and interest-rate hikes – have quieted many doubters, at least for now.

"The valuation they paid was looking a bit expensive at the time, but I was wrong,” says Steve Belisle, senior portfolio manager for Canadian equities at Manulife Asset Management Ltd., which owns a large block of CIBC shares. "If you look at the [U.S. bank] transactions that happened after that, I don’t think it was unreasonable.”

But CIBC faced another nagging question: Had it landed the prize it truly wanted, or simply the best bank available in an expensive market?

“[It wasn’t] about, let's go find something to buy,” Mr. Dodig says. CIBC had a large base of Canadian commercial customers that do business in the United States. To them, he says, “we were the one-armed bank.” Rivals TD and BMO both had large U.S. networks.

Mr. Dodig is encouraged by CIBC Bank USA’s results so far. For the quarter ending July 31, the division chipped in $121-million, and U.S. operations accounted for nearly 16 per cent of CIBC’s total profit. "I think we’re on track and we’re ahead of track,” he says.

But Mr. Dodig has also moved the goalposts. The day the deal was announced, he set an “audacious” goal that U.S. operations would contribute 25 per cent of CIBC’s earnings in five to seven years. Analysts worried that meeting such a tight timeline would require another large acquisition too soon, and Mr. Dodig had to calm their nerves. He now cites a “five- to 10-year” horizon.

“It’s doing more with our existing clients. It’s growing new clients,” Mr. Richman says. “Plus, it’s such a big market. You can grow significantly and you don’t have to win every deal.”

For all the progress CIBC has made under Mr. Dodig, the bank has yet to close the valuation gap to its peers. That suggests that some investors still fear the next sharp object could be just around the corner.

One of the biggest worries is CIBC’s exposure to Canadian real estate. Residential mortgages and home-equity loans still make up about three fifths of CIBC’s loan book, compared with an industry average of 46 per cent. That’s a red flag for many investors, including U.S. short sellers who are bearish on Canada’s housing markets.

Since 2012, CIBC has wound down its FirstLine Mortgage business, which sold mortgages through outside brokers. In its place, the bank built a roster of in-house mobile mortgage advisers, and tasked them with adding mortgages at a rapid rate. As recently as last year, CIBC’s mortgage book was growing by 12 to 13 per cent annually, double the rate at the other Big Six banks.

“The real question is, if we end up in a situation where housing sales are flat to down, and the mortgage growth goes with it, is CIBC still going to be able to grow earnings in their Canadian business?” says Sumit Malhotra, an analyst at Scotia Capital Inc. "They’re clearly the most exposed from a lending perspective.”

Mr. Dodig sees mortgages as a tool to acquire new clients, then sell them other products to cement the bond. About 85 per cent of clients who had a mortgage with CIBC through the old broker business had no other link to the bank. By contrast, three quarters of newer mortgage clients acquired in-house have at least one other CIBC product, and 55 per cent have a deposit or investment account.

When investors fret about the bank’s mortgage exposure, Mr. Dodig tells them: "It’s a good exposure. Get enamoured with the fact that we can actually grow those relationships over time.”

This year, CIBC has hit the brakes on its mortgage growth amid tightening federal regulations on borrowers, and is trying to diversify its Canadian lending. Mr. Dodig is keen to expand the bank’s commercial lending – he often talks about "putting the commerce back in CIBC.”

The bank is also pushing to grab back market share in credit cards, where it was once a clear front-runner. It had a monopoly on the Aerogold Visa card tied to Air Canada’s Aeroplan loyalty program until 2013.

But the U.S. expansion plan is another question mark. To reach CIBC’s U.S. profit goals, Mr. Dodig will eventually need to make further deals. Analysts and investors are nervous about how CIBC allocates capital, given the mixed messages the bank has sent in the past and the hefty price PrivateBancorp commanded.

“Hopefully they don’t do any other big deals,” says Mr. Belisle of Manulife. "That’s another concern that’s impacting the stock: People assume they will blow their brains out and do another one.”

Mr. Dodig has tried to assuage those fears, repeatedly saying he would consider a smaller deal for $400-million or less, but that larger deals are off the table for now.

He also prefers not to judge CIBC’s progress by its size. “If I look at some of the best financial institutions in the world, they're not the biggest, they're highest performing on a number of different metrics.”

Those yardsticks include return on equity, efficiency and total shareholder return. On each, CIBC has made strides under Mr. Dodig and he’s brought the bank out of its shell. But it still needs to do more to outrun its past and can ill afford many setbacks.

All Mr. Dodig asks is for a little patience. “As [we] transform our bank, it’s a journey, right?” he says. "It’s not like it’s a straight line up.”

21 September 2018

Manulife Offers to Pay People to Leave IncomePlus

The Globe and Mail, Rob Carrick, 21 September 2018

If you’re part of the crowd who put money in Manulife Financial Corp.’s IncomePlus guaranteed retirement income product after it debuted in 2006, watch your mail for a surprising offer.

You can continue to hold IncomePlus, or move without penalties into the company’s GIF Series 75 segregated (seg) funds with some money thrown in as a sweetener by Manulife. Yes, a major financial company is offering a bonus to get clients out of one of its products.

The knock on IncomePlus has always been unusually high fees and a lack of flexibility. But there’s no question that its core mandate speaks to a primal need that some people have for assurances that their retirement savings won’t run out. In its heyday, IncomePlus guaranteed that you could withdraw 5 per cent of your investment annually for life starting at the age of 65.

IncomePlus was designed for people who put a high value on guaranteed income, but also have conventional retirement savings that could be used to cover large, unexpected expenses. Rona Birenbaum, a financial planner with Caring For Clients, said IncomePlus is still appropriate for this type of investor. “If the product was sold properly in the first place, it should only be sold now if the client’s situation has changed.”

In 20 years of covering personal finance, I have rarely seen a buzz over a new investing product like there was with IncomePlus. Deposits surged past $6-billion within two years, and other insurers quickly introduced similar products of their own.

Then came the global financial crisis and its aftermath. Manulife found itself having to commit significant funds to backstop guarantees that clients would never run out of income. Subsequent versions of IncomePlus became less attractive, and clients began pulling money out of the product.

“We know that some of our customers feel the product doesn’t meet their needs any more,” said Marie Gauthier, associate vice-president of segregated funds at Manulife Financial.

Manulife stopped offering IncomePlus in 2013. Now, it's trying to entice clients who bought the early version of the product, sold between 2006 and 2009, to head for the exit. The company says this version accounts for about half of current IncomePlus assets.

Manulife began mailing letters to eligible clients this week, which means they should start arriving any day now. If you get one of these letters, be sure you understand the difference between IncomePlus and GIF Select 75. Both involve investments in segregated funds, which are a type of mutual fund offering a degree of principal protection and estate planning features. IncomePlus adds the guaranteed income for life feature, at an extra cost.

Something to consider if you get the letter is whether you have additional retirement savings to draw from. This may not be the case because in the initial excitement over IncomePlus, both clients and advisers got carried away with its promise of guaranteed income. “I know from stuff we’ve seen that a lot of times, everything [the client] had was put into this vehicle,” said Daryl Diamond, a Winnipeg-based certified financial planner (CFP) and author of Your Retirement Income Blueprint.
IncomePlus can work well to generate reliable income at the promised rate. But you can negatively affect your guarantees if you withdraw a block of your original investment or increase the amount of income you draw.

High fees are another issue with IncomePlus. There are two fees to understand – those charged by the seg funds used in IncomePlus and the fee associated with the guarantees of the product, which ranged from 0.55 per cent to 1.25 per cent. An example provided by Manulife uses a global neutral balanced fund with a management-expense ratio of 2.91 per cent and an IncomePlus fee of 1.25 per cent, for an astronomically high total of 4.16 per cent.

“Some [clients] are still happy with the guarantees in IncomePlus, but some of them find the fees are too high,” Manulife’s Ms. Gauthier said.

Here’s some context that shows just how high those fees are: Guidelines produced for Canadian financial planners suggest using 4.48 per cent as a gross return in projecting long-term investing results for conservative clients.

The money Manulife is offering clients who switch out of IncomePlus can be considered compensation for those hefty guarantee fees paid in the past. The payments are calculated according to factors such as the market value of the client’s IncomePlus holding, the guaranteed payment amount, and the client’s age. Expect payments to average 13 per cent to 15 per cent of the market value of an IncomePlus contract. The payments are taxable when deposited into non-registered accounts.

Clients are encouraged to discuss the change with the selling adviser, who will in most cases receive a $500 payment from Manulife as compensation for the work involved.

The fees charged on IncomePlus look particularly high in light of the fact that the product doesn’t allow you to stretch for higher returns by using all equity funds. This option is open to you if you accept Manulife’s offer to move out of IncomePlus and into its GIF Select 75 series of seg funds.

These funds are comparatively expensive in today’s fund universe, as seg funds tend to be, but they have some advantages. Notably, seg fund holdings can be passed to a named beneficiary after you die without probate fees.

There are two notable takeaways when you switch to GIF Select 75 from IncomePlus. The first is a reset feature whereby the pool of money you have available to withdraw from in retirement is adjusted higher every three years to reflect increases in the market value of your account.

The second takeaway is the loss of a 5-per-cent bonus paid every year an IncomePlus client doesn’t make a withdrawal. These bonuses add to the amount used to calculate your guaranteed withdrawals.

Ms. Birenbaum described the terms of the original version of IncomePlus as “generous.” But the product has a flaw as a retirement income tool – those guaranteed 5-per-cent payments assume you won’t need to dig into your principal. “The majority of Canadians in my view are going to spend down their capital,” she said. “Also, that 5 per cent [annual income] is not inflation indexed.”

Mr. Diamond said the appropriate use of IncomePlus would be to combine it with the Canada Pension Plan, Old Age Security and any personal pension benefits to cover what he calls “hell-or-high-water expenses” – heating, property taxes and so on. He suggests having other investments to add flexibility to your retirement income so you can make a large withdrawal if required.

All investors, whether they bought IncomePlus or not, should remember it for the lesson it teaches about not buying hot new investment products on hype. “As many of these new things are, IncomePlus was oversold, missold and not properly understood by advisers and investors,” Ms. Birenbaum said. “And I even think Manulife didn’t quite know what it was creating.”

Q&A: Manulife’s offer to IncomePlus clients

What’s the deal?

Switch out of IncomePlus into Manulife’s GIF Select 75 segregated (seg) funds and receive a bonus to be deposited in your seg fund account.

What is IncomePlus?

The technical term is guaranteed minimum withdrawal benefit. In exchange for investing a lump sum with Manulife, you get a guaranteed flow of income in retirement.

Who is eligible for the offer?

Owners of the original series of IncomePlus, sold in the mid to late 2000s. Different versions of IncomePlus were offered in later years.

How and when will I hear about the offer?

Manulife began mailing out notifications to eligible IncomePlus customers starting in mid-September.

How much might the bonus be worth?

An average 13 per cent to 15 per cent of the market value of your IncomePlus account.

Why is Manulife making this offer?

IncomePlus has become increasingly expensive to offer in a cost-effective way. The bonus is a way of compensating clients for fees they paid to have their retirement income guaranteed through IncomePlus.

If I’m happy with IncomePlus, can I pass on the offer?

Yes, it’s up to clients.

Can I do a partial transfer and get the bonus?

No, only full transfers are eligible.

What about tax?

There are no tax consequences if you move from IncomePlus to GIF Select 75 while keeping your money in the same segregated funds; moving into different funds in a non-registered account would be a taxable disposition. The bonus amount is taxable in a non-registered account.

What is the deadline for deciding?

Manulife must receive documentation that you want to switch by Friday, Dec. 14. If you do nothing, you will remain in IncomePlus. You can still switch out of IncomePlus after the deadline, but without a bonus.

12 September 2018

Aggressive Acquisition Strategy Hits Scotiabank’s Stock Price as Investor Skepticism Mounts

The Globe and Mail, Tim Kiladze, 12 September 2018

After a stunning run of acquisitions, Bank of Nova Scotia is feeling the heat. Shares of Canada’s third-largest lender are suffering relative to rival Big Six banks, and the pressure is on management to prove its recent spate of deals was worth it.

In the past 10 months, Scotiabank has spent nearly $7-billion on acquisitions, including $2.6-billion on its purchase of asset manager MD Financial in May and nearly $1-billion for storied money manager Jarislowsky Fraser in February.

As Scotiabank acquired, its stock has struggled. Over the past year, shares of Canada’s Big Six banks have delivered an average return of 14 per cent, while Scotiabank’s stock is down 2.7 per cent.

This underperformance can be traced back to multiple issues. North American free-trade agreement negotiations weigh on Scotiabank more than its rivals because it has a large Mexican operation. Investors' recent fears about emerging markets also hurt the lender more than usual, because it is Canada’s most international bank – with a particular focus beyond Canada’s borders on what it calls the Pacific Alliance countries: Mexico, Colombia, Peru and Chile.

However, against this macroeconomic backdrop, Scotiabank decided to go buying, and that strategy “has triggered a variety of investor concerns,” National Bank Financial analyst Gabriel Dechaine wrote in a research report.

“Successful integration (i.e. execution) of recent acquisitions is arguably the most important driver of Scotiabank’s long-term upside potential,” he added.

Scotiabank could not be reached for comment, but chief executive Brian Porter has acknowledged in the past that buying is always the easy part. Making deals profitable, especially after paying hefty takeover premiums, is much harder work.

Canada’s banks have been big buyers in the wake of the 2008 financial crisis, spending a collective $40-billion on deals since, according to National Bank Financial. During this run, Scotiabank has been the most acquisitive lender, shelling out $13-billion, or 30 per cent of the sector’s total – and close to double the second-most active buyer, Royal Bank of Canada.

Scotiabank’s notable deals during this time frame include the purchases of DundeeWealth and ING Bank Canada, inked by former CEO Rick Waugh in 2011 and 2012, respectively. Mr. Porter spent the first few years of his tenure, which started in 2013, focused on cutting costs and reducing overlap in the bank’s international arm after a string of acquisitions overseas by Mr. Waugh. “I knew when I got this position, the first thing we had to do was something in the international bank, given that we’d been very acquisitive,” he told The Globe and Mail in 2016.

But now Mr. Porter must integrate his own deals, and investors seem skeptical of success. Using a price-earnings ratio, Scotiabank’s shares are now valued at their lowest level relative to its peers since the height of the recent oil and gas crash in 2016, which hurt the bank more than most rivals because it has a large energy-lending business in the United States. It hasn’t helped that Scotiabank issued a large amount of equity to help pay for one of the recent deals.

Despite the recent pressure, Scotiabank has argued in the past these deals will pay off in the long-run, and there is some acknowledgment they could pay enormous dividends.

In an August research note, CIBC World Markets analyst Rob Sedran noted the recent deals will increase Scotiabank’s scale and improved its market positioning in the Pacific Alliance, thanks to the acquisition of BBVA Chile, and its recent wealth-management deals at home will help the bank target richer clients, who offer the most profit margin.

“There is lots of work to be done and the easy part (cutting the cheque) is now in the past. To the extent the bank can execute as it has in the past, we think its strategic positioning has been advanced,” Mr. Sedran wrote.

11 September 2018

CIBC’s Victor Dodig Warns About Global Debt Levels; Urges Canada to Prepare

The Globe and Mail, James Bradshaw, 11 September 2018

The chief executive officer of Canadian Imperial Bank of Commerce is sounding an alarm over rising global debt levels, warning that Canada needs to start preparing now for the next economic shock.

After a decade of “tremendous growth” in debt markets fuelled by ultra low interest rates, “cracks are starting to appear in certain areas,” according to CIBC CEO Victor Dodig, who issued a call to action on issues ranging from foreign direct investment to immigration in a speech to the Empire Club in Toronto on Tuesday.

Low interest rates introduced to speed the recovery from the last global financial crisis have remained low, and Mr. Dodig thinks economic historians will ultimately decide they were “too low for way too long.” As those rates rise, emerging economies in Turkey, Argentina and Indonesia are struggling with weakened currencies, making it increasingly difficult to pay back their foreign debts. And even as economic conditions in Canada remain strong, giving Mr. Dodig reason to be optimistic, he worries that developing problems could ripple through interwoven financial markets around the world.

“It sounds counterintuitive, but that same debt that helped the world recover is actually infusing risk into the global financial system today," Mr. Dodig said. “I think there’s a real serious global challenge of this low-interest-rate party developing a big hangover."

Sitting at the helm of Canada’s fifth-largest bank, which has more than $377-billion in loans outstanding and an expanding U.S. banking division, Mr. Dodig frets over the outcome. He used his speech to propose some remedies that he believes would make Canada’s economy more resilient in the face of a downturn.

The first is to clarify rules around foreign direct investment, which is falling in Canada. The main culprit, he argues, is the uncertainty plaguing large business deals that require approval from Ottawa under opaque foreign-investment rules – and he cites the turmoil surrounding the Trans Mountain pipeline expansion as an example. Foreign investors “need confidence. They need an element of certainty. They need to know the rules. They need a clear understanding of how things get approved," Mr. Dodig said. “We need our approval systems to work better, and to work more predictably, because they have other choices.”

Mr. Dodig also called for more immigration to Canada, asking the government – which has already set higher immigration targets for the coming years – to open its arms even wider. In particular, he highlighted pilot projects such as the Global Talent Stream, which helps speed the process when companies hire highly skilled workers from abroad, as worthy of being made permanent.

“I think we need to increase the number of people that we welcome to our country," he said. “We need to lean in at this moment in time. This is not a policy that can wait.”

And he called on governments and employers to work more closely with universities and colleges to match the skills graduates have to employers' needs, promoting what are known as the STEM disciplines – science, technology, engineering and math – as well as skilled trades. “There’s a gap today. We know there’s a gap," he said. “There’s a war for talent going on out there.”

Mr. Dodig also took aim at inter-provincial trade barriers he hopes to see removed, and which he called “an embarrassment to our country." And he urged the federal government to allow companies to expense capital investments within one year to be more competitive with U.S. rules.

Mr. Dodig acknowledged that some of the most acute threats to the global economy are beyond this country’s control, but cautioned Canadians not to get too comfortable while times are good. “We need to use this sunny time to enjoy our success, but to prepare for the future,” he said.

09 September 2018

Banks Have An Obsession with Cutting Costs Amid Record Profits

The Globe and Mail, Tim Kiladze, 9 September 2018

The extended bull market and booming economy is the stuff investors used to dream of. But for some, it's just not enough.

Coming off a quarter in which they collectively earned an eye-watering $11.6-billion, Canada's largest banks participated in a Bay Street conference last week where the main focus was, of all things, cost control.

It has been this way for a few years now. Whenever banks report earnings, or their leaders appear at investment conferences, they are grilled about expenses. What started as an obsession with restructuring charges, when the banks were booking ones worth hundreds of millions of dollars around 2014, has morphed into a fixation on so-called "operating leverage."

The term is a fancy one for measuring costs. If a bank has "positive operating leverage," its revenues are growing faster than expenses. “The operating leverage focus … has become a big part of the quarterly process,” Bank of Nova Scotia analyst Sumit Malhotra said at the conference, which was hosted by his employer.

Canada’s banks are riding a bull run for the ages. Since the start of 2010, the sector has delivered investors a total return – that is, one including dividends – of 157 per cent. Canadian energy companies have delivered just 7 per cent over the same time frame.
That impressive return is built on strong earnings growth. The economy has been improving for most of that eight-year period, save for an oil shock that rattled Western Canada starting in 2014. Loan growth has been good and credit losses low. Strong equity markets are also good for fees in the banks' large wealth-management businesses. And yes, part of the healthy profit picture is also a result of cost-cutting.

In 2014, four of the Big Six – Scotiabank, Royal Bank of Canada, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce – had just named new leaders. There is a tendency for new chief executives to restructure, to trim the fat that builds up under their predecessors.

But the slashing continued from there, with the banks justifying their cost-cutting by warning of coming threats. The lending wave spurred by record low interest rates was waning, and tech giants such as Alphabet Inc.'s Google and Amazon.com Inc. are starting to wade into financial services. Because the banks have a lot of legacy staff, such as branch tellers, and because their back offices were horribly outdated after years of under investment, restructuring was necessary. Those efforts have trained analysts and investors to study the expense lines.

Cost control, of course, is important. With tens of thousands of employees each, the Big Six lenders can grow bloated. Nothing kills creativity like bureaucracy. But the banks have already racked up $2.6-billion in restructuring charges combined over the last five years. This May, Bank of Montreal announced its fourth restructuring charge in as many years – this time for $260-million. How much is enough?

Some senior bankers are starting to push back. Asked about Royal Bank of Canada's operating leverage at the conference, CEO Dave McKay argued this is not the time to be worried about expenses. For one, there's a shortage of expensive talent in areas such as artificial intelligence that must be hired to prepare for the next technological wave and build what he called the "bank of the future."

"I'd rather build it now with these tailwinds than when you don't have the interest rate tailwind, you don't have the credit risk tailwind, you don't have a strong economy," Mr. McKay said. "So I'm resisting the pressure from the sell side [analysts and investors] to say, 'Hey, what about last month's operating leverage?' "

Another important point: Banking is very much a people business, a fact that is sometimes lost in all the examination of expenses.

National Bank of Canada CEO Louis Vachon, when asked if he'd consider another restructuring charge, said: "You have to remember: These charges, some of them involve firing people, [and that] has a social and human cost to it." Refreshing, and true.

Take it from Tim Hockey, TD's former head of personal and commercial banking and now CEO of TD Ameritrade Holding Corp., who helped build one of the most respected retail banking franchises in North America. "In 10 years of meetings with analysts and stockholders at TD ... I would talk about the importance of what I used to call a 'caring performance culture,' and eyes would glaze over," he told me last year. But he swore by this focus. "Large organizations tend to drive the humanity out. When you're talking about workplaces of more than 1,000 employees, it's the soft stuff" that matters most.